China’s Changing Pattern of FDI

But if China’s market expansion is the world’s fastest, there is no doubt that competition among companies engaged in FDI is becoming tougher in certain respects. In its earlier stages of development China so badly needed FDI that it offered formal tax concessions and regulatory enforcement was sometimes lax. Tax concessions are already largely abolished, and lax enforcement is being tightened.

The latter includes dealing with criminality – in 2010 RTZ employees in China admitted taking kickbacks and recently GlaxoSmithKline was fined US $490 million after it was found to have bribed doctors to increase sales of its pharmaceuticals. Anti-competitive behaviour is also being clamped down on. This year six infant milk formula companies were convicted of price fixing, and fined US $110 million, while 12 Japanese auto parts makers were also fined US $200 million for the same offence.

Foreign companies investing in China continue to enjoy clear advantages in key sectors. These include advanced technology industries, apart from defense – for example high-end computer services and civil aircraft production; highly concentrated global industries dominated by global producers such as automobiles, and non-financial services in general – for example supermarkets and fastfood chains. But in medium technology, or many rapidly growing industries, Chinese companies are increasingly tough competitors. Lenovo not only dominates China’s domestic computer market but has become the number one PC producer globally, while China’s smartphone manufacturers, such as Xiaomi, Lenovo and Huawei, are increasingly effective in domestic competition with Apple and Samsung.

Given the size and growth of China’s market, inward FDI will remain at very high levels. But the days of China as a cheap labor export base are ended, and China’s domestic market is increasingly the main attraction for foreign companies. Foreign companies have to get into what is already the world’s most rapidly growing market, which within a decade will also be the world’s largest, but the full range of their competitive skills are increasingly required for this.


JOHN ROSS is a senior research fellow at Chongyang Institute for Financial Studies, Renmin University of China. From 2000 to 2008 he was director of economic and business policy in the administration of Mayor of London Ken Livingstone. He previously served as adviser to several major international mining, finance and equipment manufacturing companies.

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