Some General Characteristics of Foreign Direct Investment in PRC

One of the most important elements of PRC's economic reform has been the promotion of foreign direct investment inflow. FDI in PRC has grown dramatically over the past two decades, since PRC initiated its 'open-door' policy in 1978 (Table 1 [PDF 77KB | 1 page]). When PRC initiated its 'open-door' policy, the amount of FDI inflow was very little. It was not until the mid-1980s when FDI in PRC surged and marked the beginning of PRC's ride on the wave of globalization. In the early 1990s, it once again gained momentum. After it achieved an unprecedented growth between 1991 and 1993 however, both the number of projects and the contracted value began to go down in 1994. This downturn continued until the next big wave of FDI inflow hit PRC in 2000. In 2002, despite the widespread decline in FDI in the world, PRC experienced an increase in FDI inflow and overtook the United States to become the world's second largest destination of FDI.

Tables 2a [PDF 79KB | 1 page] and 2b [PDF 78KB | 1 page] present the contracted value and the realized value of FDI from 15 leading investing territories, respectively. One of the features of the inflow of FDI in PRC is the large contribution of investment from Hong Kong, China, Taipei,China and Macau, especially during the late 1980s and the early 1990s. One of PRC’s reform strategies is to first open up Special Economic Zones (SEZs) in the southeast part of PRC in an attempt to attract foreign capital from its neighbors. Four SEZs were established in two southeast coastal provinces, Guangdong and Fujian. In Guangdong province, three SEZs are established in Shenzhen, Zhuhai, and Shantou. Shenzhen was a small town sharing a border with the then British colony, Hong Kong. Zhuhai is located next to Macao. Shantou is another coastal town that lies near the border between Guangdong and Fujian. The fourth SEZ, Xiamen in Fujian province is a relatively industrialized city, located near Taipei,China.

Hong Kong, China has by far been the biggest investor in PRC throughout the years. The investment from Hong Kong, China to PRC has increased dramatically since the early 1980s. Between 1983 and 2002, the contracted amount and the realized amount of FDI from Hong Kong, China amount to more than US$375 billion and US$204 billion respectively. These figures account for 45.4% and 45.8% of the total respective contracted amount and realized amount of FDI from the world. However, it has been frequently estimated that a significant portion of investment from Hong Kong, China to PRC originates from PRC itself or from countries outside Hong Kong, China (Fung, 1997). A large amount of PRC’s capital outflow is channeled to Chinese firms located in Hong Kong, China and finds its way back to PRC as FDI. This type of "round tripping" of funds is mostly used to escape regulations such as barriers to trade or to gain eligibility to incentives available to only foreign investors (e.g. tax concessions). According to the World Bank (2002), round tripping accounts for twenty to thirty percent of FDI in PRC.

Between 1983 and 2002, Singapore and Macao ranked 6th and 12th in total contracted FDI in PRC, and they ranked 6th and 11th respectively in total realized FDI. The presence of both economies appears to have been stronger in the beginning of the 1990's.

While several East and Southeast Asian economies are among the top investors in PRC, none of the Latin American economies is among the top fifteen foreign investors in PRC. In the last few years, prices of commodities and raw materials such as copper, aluminum, cement, steel, petroleum and soybeans have soared partly due to the breakneck pace of PRC's industrialization. This seems to have benefited countries such as Brazil, Argentina and Venezuela as PRC became one of their largest export markets. But overall, the economic relationship between PRC and Latin America, in contrast to that between PRC and East and Southeast Asia is still at a very low stage. Another difference between the Asian and Latin American economies is that there is increasing evidence that a vertical production and business network is thriving among the Asian economies (including PRC) but not among the Latin American economies (Ando and Kimura 2003, Fukao and Okubo 2003).²

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