Foreign investment in China

December 13, 2005

Free Market Foundation

While foreign investors clearly are smitten with China, it appears that this infatuation has not lessened their affection for many other developing countries, contrary to conventional wisdom. In fact, China’s alluring qualities may be making certain other nations, particularly China’s Asian neighbours, more attractive than ever, say researchers Barry Eichengreen and Hui Tong.

Indeed, the growing amount of foreign direct investment (FDI) in China encourages greater investment in other countries, to the extent that they are part of the same interconnected global production network, say the authors. They find that this complementary relationship is particularly evident in Asia, where China’s economic explosion seems to be driving investors to support a regional supply chain for feeding China’s burgeoning and varied enterprises.

Consider:

As direct investment led by Japan in China has gone up, it also has increased in places like Singapore, a major supplier of goods used in Chinese manufacturing, and Indonesia, which provides raw materials and energy to China.

For example, the authors observed that in order “to reap the full benefits of building assembly plants in China, firms may also need to invest in component production” such as electronic components used in Chinese manufacturing plants “in Singapore or Malaysia.”

The positive effects of China’s expansion may also extend beyond Asia, explain the authors:

Eichengreen and Tong point out there “there has been much discussion” that increased investment in Latin America is being fuelled in part by China’s growing demand for that region’s raw materials.

“The increase in FDI in China thus may be encouraging additional FDI in other countries rather than crowding it out,” they write.

Source: Matthew Davis, Foreign Investment in China, NBER Digest, October 2005; based upon: Barry Eichengreen and Hui Tong, Is China’s FDI Coming at the Expense of Other Countries? National Bureau of Economic Research, Working Paper No. 11335, May 2005.

For text: http://nber.org/digest/oct05/w11335.html

For abstract: http://papers.nber.org/papers/w11335

For more on International: http://www.ncpa.org/pi/internat/intdex1.html

FMF Policy Bulletin/ 06 December 2005