The role of BRICs in the absorption of FDI – the case of China (II)

china12.1. China as the recipient of FDI.

In the recent years China has been considered as the fastest growing economy in the world with the average annual GDP growth of 9%. The main cause of the economic growth is seen in the huge amount of export recorded every year, which results from the development strategy. However, the closer look in the export sources points out FDI as the main engine of the economic growth, as recently more than 70% of the Chinese export comes from foreign direct investments. Hence, the tight linkage between export and FDI earned China the name “Factory of the World”. [Lau and Burton, 2008] Chinese model of economic development currently is being implemented also in other developing countries, like for example in Korea, where initially only a small amount of FDI inflows were allowed in order to develop domestic brands and companies.

Foreign capital can flow to a country in various forms, which can be classified in three major categories: joint ventures, acquisition of assets and greenfield investments. Forms of FDI inflows to China have changed over years together with governmental standpoint addressing the absorption of foreign capital. Initially, before 1950 the amount of FDI inflows to the country was highly limited. However, the cooperation with the Soviet Union resulted in some large Sino-Soviet joint ventures. After the collapse of the Soviet Union inflows of FDI to China were insignificant, mainly because of the political and economic turmoil. The reintegration in the global economy began in the mid-1970s with the shift of the political approach initiated by Deng Xiaoping. He implemented a model of economic development based on investment and export. In this way foreign capital could flow again into formerly isolated country, however, under numerous restrictions. Initially, the Chinese government allowed only a specific type of joint-ventures in the chosen locations. At that time, the government by itself was choosing the partners for an international firm, which was willing to establish joint-venture in China. Numerous restrictions on the capital flow resulted in a very slow growth of FDI inflows. This situation persisted till the 1990s, when the Chinese government applied more liberalized approach to joint-ventures, which boosted the annual value of received FDI. Finally, China became a member of the World Trade Organization (WTO) in 2001, which additionally can serve as an encouraging factor for investors, since it determines for example reduction of trade barriers and favorable business environment.

Figure 7. FDI inflows to China in 1984-2008 (billions of US dollars).


Source: China Ministry of Commerce and China Statistical Yearbook 1984-2008.

From the corporate point of view the liberalization of the capital flows was very important, because it allowed other forms of investment than joint-venture and easier repatriation of profits. Recently, foreign companies investing in China face no restrictions on repatriation of before-tax profits through commercial banks. However, inconvertibility of the Chinese currency might create additional problems in operating on this market.

Since regulations were no longer restricting the FDI inflows, the other forms occurred like for example wholly owned foreign investments, which can be formed through acquisitions of Chinese assets or greenfield investments, where a company builds its own units. The gradual shift towards the other forms of FDI with the current dominance of the wholly owned foreign investments is presented in the table below.

Table 5. Forms of FDI in China in chosen years (non-financial sector).


of Projects

Amount Realized

(billions of US dollars)

Equity joint venture



















Contractual joint venture



















Wholly foreign owned

























































Source: China Ministry of Foreign Affairs and China Statistical Yearbook 2000-2008.

Distribution of the foreign capital among the sectors of the Chinese economy is highly dependent on its development strategy. Since export of manufactured goods produced in foreign units remains the core factor of the economic growth, it is clear that this sector absorbs the majority of FDI inflows. Besides, relatively low labor costs additionally encourage companies to invest there. The data presented below confirm the dominance of manufacturing in FDI absorption both in the value and in the number of projects. In spite of the declining trend since 2005, manufacturing still accounts for more than 40% in the number and more than 45% in the value of the total FDI inflows.

Figure 8. Number and value of projects in the manufacturing sector as a percentage of FDI inflows to China in 2001-2008.
Source: China Statistical Yearbook 2001-2008.

During the period of 2001-2008, despite the decreased number of projects, the value of FDI was increasing steadily and reached the peak of USD 108,31 billion in 2008. Hence, the declining trend in FDI flowing into manufacturing sector does not result from the decreased total inflows, but rather suggests changes in the distribution among sectors.

Table 6. Total number and value of FDI in China in 2001-2008.

Total FDI inflows









Number of projects









Realized Value

(billions of USD)









Source: own elaboration on the basis of China Statistical Yearbook 2001-2008.

Analysis of the sectors with the minor share in total FDI inflows can indicate changes in the absorption of FDI like also suggest new business opportunities in China. In the first step, if we take the number of projects as a pattern of analysis, four sectors emerge as the dominant ones: wholesale and retailing, real estate, scientific research, lease and business service. However, the analysis of the number of projects does not indicate the actual capital flows, that is why it should be completed by the value analysis in the second step.

Figure 9. Sectors with the highest share in the number of FDI in China in 2001-2008.
Source: own elaboration on the basis of China Statistical Yearbook 2001-2008.

Figure 10. Sectors with the highest share in the value of FDI in China in 2001-2008.
Source: own elaboration of the basis of China Statistical Yearbook 2001-2008.

The value analysis identified the same sectors with the exception of the scientific research, which was replaced by the financial sector. It brought new insight into former findings and pointed out few conclusions about recent FDI inflows that can be characteristic also for the other developing economies. Despite manufacturing, currently developing China received a huge amount of investment in the real estate sector, which dominates in the terms of value. Moreover, the trend of investing in decreased in the number, but more valuable projects is occurring. Wholesale and retailing, which dominate in the number, suggest the increasing penetration of the Chinese market by foreign investors. The high number of projects and their relatively lower value is characteristic for this sector. But still, if compared to the others, wholesale and retailing have a substantial share in the utilization of foreign capital. Since 2005 the significant increase in the absorption of FDI occurred also in the financial sector showing few, but valuable investments. It is vital to mention that for example in 2008 the share in the value of FDI inflows to this sector accounted to 15,22%, but in the number it reached only 0,17%.

It is vital to point out that because of the economic development, rising domestic consumption and increasing importance of China in the global economy, FDI are targeting other sectors, which previously were not even included in the national statistics. Lease and Business Service exemplify these kinds of sectors. China barely since 2004 started to publish statistics for this sector, which is now one of the major receivers of foreign capital. The same situation occurs in the example of computer software, hotels and restaurants. Recently, these sectors have received a higher FDI inflow in terms of value than for example mining.

An interesting point of discussion appears with the example of the scientific research. Although its share in the number of projects is high (6,68% in 2008), the realized value of these projects is relatively low (1,39% in 2008). This rise the question about knowledge acquisition through FDI. As previous researches found out, the process of knowledge acquisition in China usually is formed in two dimensions. Foreign companies bring their own technology and know-how and acquire the knowledge about the country from domestic partners. On the other hand, Chinese companies benefit from this process by gaining the knowledge about business practices in developed economies and technological solutions. [Hitt, et al., 2004]

The utilization of the foreign capital analyzed by sector gave the snapshot of the contemporary Chinese economy and points out the currently changing targets of investments. However, the former discussion should be completed by the analysis of the major investors in China.

During the period from 2001 till June 2009 the majority of FDI flows, both in the number and the value of projects, originated from Asia. This fact is in opposition to the popular opinion that the main FDI in China flows from developed economies. [Lau and Bruton, 2008] What is more, this trend was stable during the analyzed period with no substantial changes.

Figure 11. The share of main investing countries in the value of FDI inflows to China from 2001 till June 2009.
Source: own elaboration on the basis of China Statistical Yearbook 2001-2008.

The more detailed analysis on the country basis could identify the main sources of FDI in China. Bearing in mind that the structure of the major investors has not changed significantly, even if we analyze the data from June 2009, we will get the similar results as for 2001.

Considering in the first place the Asian investors, the overseas Chinese communities like Hong Kong, Taiwan and Singapore have the highest share in the realized value and the number of projects. According to the previous studies, high share of the Asian investors can results from several factors. Firstly, the cultural proximity between countries may play a significant role, for example the same dialect in Hong Kong and Guangdong province determined the FDI inflows to this region. [Child, Chung and Davies, 2003]. Secondly, Hong Kong is a special administrative zone of China, but is independent to the high extent for example in imposing its own regulations in areas like profit repatriation or taxation policy. This results in the differences in the tax rates between the mainland China and Hong Kong, which in fact imposes much lower taxes. In this way, foreign capital can enter China from Hong Kong and benefit from the tax breaks. However, the real source of the foreign capital can be located in developed economies or even in China, if the Chinese business environment is more favorable for the foreign investors than for the domestic ones.

Figure 12. The share of main Asian investors in the value and number of projects in Jan – Jun 2009 [%].
Number of projects
Realized value
Source: own elaboration on the basis of

Similar situation occurs in the example of tax heavens, like the Cayman Islands or the British Virgin Islands. This group of investors is classified as the second largest in the value of FDI inflows. However, the share in the number of projects is the lowest among the major investors. This may indicate that investors from free ports are involved in few, but valuable investments. As in the example of Hong Kong, it is difficult to identify the real source of the capital flowing from tax heavens. Due to a relatively favorable taxation policy, companies decide to headquarter in tax heavens and enter Chinese market. The analysis of the realized value of projects indicated that most of the capital in the period from January till June 2009 originated from the British Virgin Islands (13,61%) and the Cayman Islands (3,63%). It is vital to point out, that according to the China Statistical Yearbooks, in the analyzed period the British Virgin Islands alone invested more than the European Union and the North America together. The Chinese statistics report also the share of other investors with minor share, whose cumulated share accounts to 5,33% in the value and 8,17 % in the number of projects.

Figure 13. The share of Free Ports and other investors in the value and number of projects in Jan – Jun 2009 [%].
Number of projects<
Realized value
Source: own elaboration of the basis of

Considering FDI flows from developed economies, their share is lower than it can be expected. For the year 2009 the share of FDI from the European Union accounted only for 5,83% of the total value and 6,83% of the number of projects. The United Kingdom, Germany and France are considered as the major European investors, but none of them have the share exceeding 2%, both in the value and the number of projects.

Figure 14. The share of chosen developed economies in the value and number of projects in Jan – Jun 2009 [%].
Number of projects
Realized value
Source: own elaboration on the basis of

The analysis of the major investors in the mainland China indicated the substantial share of the Asian investors and the minor share of developed economies, which previously have been not expected. That points out the need for more detailed analysis of the differences in the investment motives between the investors from developed economies and Asia.

2.2. Differences in the pattern of FDI in China between the Asian investors and developed economies.

The structure of the major investors in the mainland China may seem unusual considering the fact that countries called Triad (the United States, the European Union and Japan) are the major sources of FDI on the global scale. More specifically, in the recent years more than 80% of the world FDI outflows came from the Triad countries. On the other hand, China after the United States is the second largest recipient of FDI. Surprisingly, the majority of these inflows originated from Hong Kong and the other overseas communities. [WIR 2009] This situation is making an interesting starting point to further explanation of the differences in the patterns of FDI between the Asian investors and the Triad.

It is vital to mention the research of Kevin Honglin Zhang, who previously examined this issue, however, only Hong Kong and Taiwan were representing the Asian investors. [Zhang, 2005] In this study the need of understanding location characteristic of the mainland China and differences between the character of FDI originated from Triad and Hong Kong is highlighted in the first place. According to Zhang, the high share of Hong Kong in FDI inflows is determined by the four following factors: China’s export-oriented strategy, large pool of labor available at low cost in the host country, specific advantage of Hong Kong and Taiwan in export-oriented FDI, like also their close cultural connections with China. Using the empirical research, he confirms that the inflows of FDI from Hong-Kong and Taiwan were motivated by the low labor costs, while countries from the Triad were more market-oriented in their FDI. The closer look at the factors lying behind this conclusion can give a broader insight into the specifications FDI inflows to the mainland China and provide better understanding of its economy.

Following the Zhang’s study, the political and structural factors of the Hong Kong and Taiwan economy determined their major share in the FDI inflows to the mainland China. Looking back to the 1960s, when the labor costs increased in Hong Kong and Taiwan, their economies lost the competitive advantage in the labor-intensive manufacturing and had to transform to the more capital-intensive industries. When in 1979 China imposed the more liberalized policy and the export-oriented development strategy, companies from Hong Kong transferred their labor-intensive export industries there. At that time, FDI from Taiwan were prohibited, due to political conflicts with China, but after 1987 the amount increased substantially. Both investors focused on the labor-intensive industries like for example textiles or footwear. Moreover, the Chinese policy was concentrated on attracting export-oriented FDI and providing incentives for investors, like for example tax breaks or lowering land-use fees. These factors made China a more attractive FDI destination. Furthermore, already mentioned cultural proximity also played a significant role and determined FDI flows from Hong-Kong and Taiwan to the coastal areas of the mainland China.

If all of the favorable factors mentioned before attracted FDI from Hong Kong and Taiwan, why they did not influence inflows from the Triad? The answer for this question is determined by two factors: preferences for export-oriented FDI of the Chinese government and the specifications of FDI from the Triad. Firstly, when the Chinese government implemented liberalized policy for FDI inflows, it gave preference to the export-oriented investment and in the same time restricted the market-oriented inflows. Moreover, the additional difficulties, like for example lack of currency convertibility or existing red tape, decreased the interest of the potential investors. Secondly, investors from the Triad countries primarily were focused on entering the growing Chinese market with the market-oriented character of their FDI. As Zhang points out, the export-oriented regime discouraging the Triad investors was continued till 1992 when China started opening the internal market and improving the investment environment. By this time, FDI from Hong Kong and Taiwan had been growing steadily gaining the dominant share in the total FDI inflows. After 1992 the improvement imposed by the Chinese government resulted in a rapid increase of the total FDI inflows also from the Triad countries.

According to Zhang, also several differences in the specifications of FDI should be highlighted. First of all, companies from Hong Kong and Taiwan differ to the high extent from Triad’s MNEs. They do not own well-known brands and their ability to handle costs of doing business abroad is limited. But still, the production of these firms was exported to the markets of developed economies. That is why, they were using China as an export-platform to serve for example the Triad market. Thus, linkages between the mainland China, Hong Kong and Triad are tightened and the actual relations become clearer. Secondly, the ethic proximity to China gives Hong Kong and Taiwan a certain kind of competitive advantage, which facilitates organization of operation in the host country. From the other side, FDI from Triad were usually targeting the more capital-intensive sectors, like electronics, machinery or aircrafts, due to their competitive advantage in technology and managerial skills. Furthermore, even the entry mode differs between the Asian investors and the Triad. Hong Kong and Taiwan usually choose contractual joint-ventures, which include small projects with a short duration. Oppositely, the Triad countries were inved in the equity joint ventures and the contractual joint ventures, to develop long-term relations with the Chinese partners and to explore the host market. Finally, even the choice of location differs. For example, Hong-Kong and Taiwan chose coastal areas with the cultural linkages, while Triad placed its investments in the biggest cities of China, like Beijing or Shanghai.

Zhang pointed out the differences in the patterns of FDI occurring from the 1980s till 2001. It is vital to further explore the determinants of FDI in China, since as the analysis in the previous section suggests, numerous changes in the Chinese economy have occurred. Rapid development of the Chinese economy implemented emergence of the new sectors, which now attract more FDI inflows than they used to ten years ago. Thus, the changes in China raise the question about the factors which determine investments nowadays.


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The role of BRICs in the absorption of FDI – the case of China (II) Reviewed by on 13 marca 2011 .

2.1. China as the recipient of FDI. In the recent years China has been considered as the fastest growing economy in the world with the average annual GDP growth of 9%. The main cause of the economic growth is seen in the huge amount of export recorded every year, which results from the development strategy.




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