This brief is part of the Insights @ Center for Emerging Markets, a publication focused on cutting edge ideas and advice for global leaders about emerging markets.
By Michael J. Enright (Northeastern University)
In recent years, we have seen the apparent contradictory trends toward developing what appears to be a more liberal legal environment for [Inward Foreign Direct Investment] combined with highly publicized examples of pushback against [Foreign Invested Firms] in China.”
China's opening to inward foreign direct investment (IFDI) has been gradual in terms of industries, geographies, and corporate form, but its primary goal of enhancing the competitiveness of Chinese companies while maintaining control over the economy has been remarkably consistent. Unlike most other economies, enhancing economic development has been a secondary priority when it comes to IFDI in China.
Opening to IFDI has been enormously successful for China. By 2014, approximately one-third of China's GDP and over one-fourth of employment could be traced to the operations of foreign invested enterprises (FIEs), their supply chains, and the resulting ripple effects through the economy. FIEs have also brought advanced business practices (accounting standards and management training, for example), created entire industries, imported advanced environmental practices, generated exports (FIEs account for nearly half of China's exports), performed R&D (with spillovers into local companies), served as training grounds for Chinese managers and professionals, and introduced CSR and ESG standards. FIEs like Procter & Gamble, Unilever, Coca-Cola, Kodak, Walmart, the “Big Four” accounting firms, and certification company SGS helped create or modernize entire industries in China.
Despite the challenges that FIEs face in China, many have done extremely well. FIEs and their joint ventures have developed strong positions in many sophisticated industries, including computers, electronics, automobiles, chemicals, machinery, and a range of professional services. For some, China is their largest or most profitable market.
Since China has always viewed IFDI primarily as a way to introduce capabilities to make Chinese companies more competitive, as Chinese companies improve, the space for FIEs in some industries has narrowed, and will narrow in others.
To maintain their access, many FIEs will have to demonstrate their full positive impact on China's economy. Our research has developed many of the tools necessary to do so, tools that few FIEs have at present. Remedying this shortcoming will be crucial to maintaining access to the world's second largest economy.
M. J. Enright. 2019. China's inward investment: Approach and impact, in J. C. (Ed.), China's International Investment Strategy: Bilateral, Regional, and Global Law and Policy: 23-40. Oxford University Press; and M. J. Enright. 2017. Developing China: The Remarkable Impact of Foreign Direct Investment. Routledge.
If you are interested in learning more about this work, contact Professor Enright.