FDI in China

1. FDI in China Ing. Tomáš Dudáš, PhD.

2. China – Basic Information • 1,33 billion inhabitants • GDP – 8,78 billion USD (PPP) • GDP/c – 6600 USD (PPP) • GDP growth in 2009 – 8,7 % • Labor force – 812 million • Sector employment – 40-27-33 • Unemployment – 9,8 %???? • Poverty – 2,8 % of the population live below the poverty line

4. China – important milestones • 1949 – The creation of People’s Republic of China • 1946-1976 The reign of Mao Zedong, which could be described by very strict communist policies • 1978 – The start of economic reforms • 1989 – Tienammen square massacre • 2001 – China’s WTO accession

5. FDI in China after 1978 • 1978 – bad economic conditions (dual society, where the urban population had 3x higher income than the rural population) • Economic pragmatism – the ideological background was not important • Gradualism – slow and gradual changes • 1978 – law about joint ventures

6. FDI in China after 1978 • 1980 – the creation of 4 special economic zones – Shenzen, Zhuhai, Shantou and Xiamen • 1984 – 14 coastal cities were opened to the foreign investors • The government continued to add more special economic zones, export processing zones and technological parks • Main problem – the Tienammen square massacre, but the FDI begun to grow dynamically in 90s • Up to 2000 China received FDI in amount of 395 billion USD in more than 363 thousand projects • From 1985 – 85 % of the FDI received came into the special economic zones

10. FDI in China after 1978 • Before 1990 the major part of the FDI originated from Chinese living abroad (Between 1976 and 1996 57 % of the FDI inflow originated from Hong Kong and Macao) • Current estimates - HK a Macao 40%, USA 11%, EU 11%, Japan 8%, ASEAN 8%, Taiwan 6%, Other 16% • Some problems with the identification of the origins of the FDI • Problem – the dominant position of eastern China that received up to 2000 around 87 % of the total FDI

11. Sektoral structure of FDI inflows between 1976 and 2000 Agriculture – 1,5 % Industry– 58,7 % Services– 39,8 %

12. The main factors of the FDI inflows • Large internal market with growing purchasing power • Low cost labor force (approx. 1/3 of the costs in Mexico and 1/20 of the costs in USA) • Growing labor productivity • Generous state support of FDI inflows (financial incentives, infrastructure, special economic zones)

13. Table 1: Annual Foreign Direct Investment in China, 1979 – 2002 YearFDI, utilized*  (US $billion)Number of Projects 1979-82                                   $1.77                                                                       920 1983                                            .92                                                                       638 1984                                          1.42                                                                       2166 1985                                          1.96                                                                       3073 1986                                         2.24                                                                        1498 1987                                          2.31                                                                       2233 1988                                          3.19                                                                       5945 1989                                          3.39                                                                       5779 1990                                          3.49                                                                       7273 1991                                          4.37                                                                       12978 1992                                        11.01                                                                       48764 1993                                        27.52                                                                       83437 1994                                        33.77                                                                       47549 1995                                        37.52                                                                       37011 1996                                        41.73                                                                       24556 1997                                        45.26                                                                       21001 1998                                        45.46                                                                       19799 1999                                        40.32                                                                       16918 2000                                        40.72                                                                       22347 Total                                       $395.3                                                                   363,885

15. Impact of the FDI inflows on the Chinese economy • FDI inflow supports GDP growth – 1 % increase in the FDI inflows leads to 0,05 % of GDP growth • Economic analyses show that currently FDI inflows contribute to the GDP growth by more than 20 % • Export growth – from 10 bln. USD in 1978 to 125 bln. in 2000 • Companies with foreign ownership have a 50 % share on the total exports • The export structure of the companies in foreign ownership is more modern than the export structure of the domestic corporations

16. Impact of the FDI inflows on the Chinese economy • In 1995 corporations with foreign ownership employed around 10 million employees • In 1998 it was already 17,5 millions and current estimates are around 25-30 millions • Analyses say that every 10 000 USD invested created a new workplace • FDI inflows had a huge positive impact on China’s trade balance and currency reserves • New technologies and managerial know-how • The regions opened to foreign investors develop very rapidly • FDI played an important role in the fight against poverty

20. Volkswagen in China – case study • VW wanted to globalize the company, so they begun the talks with the Chinese government in 1978 • State owned enterprises dominated the Chinese automotive industry those times (ex. FAW) – but low production • 1978 – 55 assembly lines with an annual capacity of 150 thousand cars • In the early 80s the government made a decision – automotive industry should be one of the main pillars of the economy • 1984 – Joint venture between VW and Shanghai Automobile Industry Corporation (SAIC) • VW invested 40 million USD in 1984 and 85 million USD more in 1985

22. Volkswagen in China – case study • VW needed China because it had a weak position outside Europe • In 1985 the joint venture produced only 5 200 cars (model Santana) – build from imported components • The JV was profitable also for the Chinese partner – SAIC was paying 18 800 USD for one car and was selling it for 37 600 USD on the market • 1987 – the start of a new phase with more and more local subcontractors • 1993 – production surpassed 100 000 cars per year • Currently the competition on the market is very strong – VW has to fight for its position on the market