Putting it to Work in Developing Countries - Nathan Associates

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countries or the Morocco–U.S. FTA with its special apparel provisions, could reinforce the attractions of diversification. 12 Ultimately, largescale, low-cost producers other than China could attract much of future FDI for such manufacturing away from countries like Kenya, Haiti, Jamaica, Mongolia, and Lesotho. 13 Even before quotas were eliminated, production and related investment had begun shifting to such producers, including India, where wages average $0.70 per hour versus $0.92 in China. And Vietnam, where factory wages are reported to be half as much as in manufacturing centers along China’s coast, will be a strong competitor for this FDI. 14 CHINA, THE FDI MAGNET China has been the developing world’s largest recipient of FDI continuously since 1992, and in 2003 was the top FDI destination, thanks to a dip in U.S. receipts. The number of FDI source countries for China is wide and deep, led by Hong Kong and others from the Newly Industrialized Economies (NIE). Japan, the United States, and other OECD investors are also important. The array of industry destinations for China’s FDI is also impressive. The manufacturing sector still dominates, claiming 74 percent of inflows in 2003. Relatively laborintensive industries (e.g., food processing, clothing, sports goods) make up half of China’s FDI, China’s FDI History and Characteristics 1949–1978. Expropriation of foreign assets to China. FDI dips in 1989 because of politat Communist assumption of power in ical events in Tiananmen Square. 1949. Very limited foreign investment, 1990s–Present. To restore investor confimainly from Hong Kong and Macao. No dence in the continuation of China’s ecocompany law; no law on foreign investment. nomic reform and opening policies, 1978–1990. China begins economic reform Paramount leader Deng Xiaoping, despite and opening up policy. Four Special ailing health, travels to largest Special Economic Zones near Hong Kong and Economic Zone. FDI flows recover quickly. Macao are permitted to host foreign invest- China privatizes some state-owned enterment, using preferential tax, employment, prises, allows sale of stock, including in and other incentives. Laws on foreign Hong Kong stock market, of others. investment, together with implementing Initiatives encouraging FDI in the interior regulations, enacted. Many requirements provinces are launched, though investors are imposed on foreign companies to transfer slow to respond because of infrastructure, technology, balance imports with exports, worker, and managerial difficulties. China meet minimum local content and export accedes to the World Trade Organization in obligations. Fourteen coastal cities and 10 2001 and pledges to open up sectors to forprovinces present opportunities and Western eign investment, including majority foreign European, Japanese, and American compa- equity, and to dismantle export and foreign nies recognize potential, though overseas exchange balancing/local content require- Chinese still account for majority of FDI ments long imposed on foreign investors. inflows. Many large multinational corpora- Annual FDI inflows soar to $72.4 billion in tions whose assets were seized in 1949 return 2005. 50
oth for the host market and for export. Global firms such as Ericsson, Intel, Philips, and Toshiba have substantial investments in capitaland technology-intensive production in information and communication technology (ICT) activities. China attracted $13 billion in service sector inward FDI in 2002. Most FDI in services is still market-seeking—finance, telecommunications, and wholesale and retail commerce— and is expected to grow. Why does China attract so much investment First, its vast and increasingly prosperous domestic market promises high rates of return even on long-term investments. Second, it has an enormous, low-cost, well-trained, and highly productive workforce and universities capable of honing the technical skills necessary for industrial activities such as research and development. China’s labor resources are difficult for other countries to match at competitive prices. Third, China’s accession to the WTO in 2001 enhanced the competitiveness of its foreign and domestic companies in overseas markets. This competitiveness has been reinforced (at least for now) by China’s decision to revalue its fixed exchange rate against the U.S. dollar only very modestly despite pressure from competitors to do more. Finally, China promotes investment in sectors strategically important to its economy and its investment climate is welcoming to FDI, featuring tax rules that favor FDI and formal government endorsement of special economic zones, including 15 export processing zones now operating. Consequently, China will continue to be the developing world’s premier investment destination, with a powerful pull for both market-seeking and efficiency-seeking FDI. Future opportunities for both kinds of FDI will continue to unfold. China’s FDI inflows now amount to $56 per capita, far less than OECD countries and many developing countries, and those inflows are not evenly distributed by region. FDI in the Western provinces continues to lag far behind the coastal regions, and while the government’s Xibu Da Kaifa (Great Westward Development) campaign has built up infrastructure, growth in FDI to that region has not yet materialized. The state-owned enterprise sector has also had some inward FDI, but not a dramatic amount. China’s success in attracting FDI has provoked some domestic reactions. The All China Federation of Industry and Commerce has called for restrictions on FDI to enhance “national economic security,” and domestic business regularly protests the tax treatment accorded foreign investors, whose income is taxed at about one half the rate faced by Chinese firms. Perhaps partly in response, China’s National Development and Reform Commission, a key economic policymaking body, has established “quality, rather than quantity” as the guiding principle for future FDI. The new policy is built into the 11th Five Year Program (2006–2010), and gives priority to channeling FDI in higher value-added sectors with advanced technology and R&D components rather than low-cost labor-based manufacturing or assembly. It also discourages imprudent promotion of FDI by local governments, and requires legislation for “supervision of sensitive acquisitions and takeovers to ensure that critical industries and enterprises remain under Chinese control.” 15 Whatever the new policy, the roughly 7 percent annual average rate of increase in FDI that China has enjoyed over the last decade may well extend into the future given the country’s assets, opportunities, and robust growth, and assuming a healthy world economy. As noted earlier, growth in China’s FDI does not necessarily mean diversion from other locations. In fact, China’s new emphasis on the “quality not quantity” of FDI may allow other developing economies to pick up FDI for lower value-added activities as China moves up the technological ladder. 51
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FOREIGN DIRECT INVESTMENT PUTTING I
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Sponsored by USAID’s Bureau of Ec
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5. Attracting FDI 55 What Foreign I
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PREFACE Trade and foreign direct in
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• Strengthening competition and e
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15 years is mixed at the industry l
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Page 18 and 19: esources, including Internet addres
Page 20 and 21: Figure 1-1 Net Total Resource Flows
Page 22 and 23: Singapore’s Rise and FDI Througho
Page 24 and 25: FDI BY FINANCIAL COMPONENT A foreig
Page 27 and 28: 2. THE CASE FOR FDI International b
Page 29 and 30: The Global Factory—Catalyst for E
Page 31 and 32: countries through mergers and acqui
Page 33 and 34: conditions and policies in host cou
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Page 39 and 40: 3. TRENDS AND PATTERNS IN FDI FLOW
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Page 45 and 46: Table 3-2 Top Developing Country Re
Page 47 and 48: Three Global Variables in FDI Flows
Page 49 and 50: help maintain and perhaps even add
Page 51 and 52: shot up to almost $16 billion in 20
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Page 56 and 57: Table 4-1 Sector Distribution of Es
Page 58 and 59: Table 4-2 Estimated Developing Coun
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Page 62 and 63: traditional clients more cost-effec
Page 64 and 65: Figure 4-5 Selected Manufacturing I
Page 68 and 69: PRIVATE INFRASTRUCTURE DEMAND Robus
Page 70 and 71: eported to be a source of FDI throu
Page 72 and 73: But, in addition to these commercia
Page 74 and 75: Exhibit 5-1 Selected Investment Sco
Page 76 and 77: Exhibit 5-2 Selected Investment Cli
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Page 80 and 81: expedite approvals. Otherwise the a
Page 82 and 83: Where governments deem incentives n
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Page 87 and 88: 6. INTERNATIONAL AGREEMENTS AND INS
Page 89 and 90: FREE TRADE AND REGIONAL INTEGRATION
Page 91 and 92: 1998. 11 But many advocates, partic
Page 93 and 94: Encouraging Local Supply Links: Car
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Page 97: specific decisions to invest but do
Page 100 and 101: 4. Some FDI already flows to every
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Page 104 and 105: on creating regulatory systems that
Page 107 and 108: ENDNOTES CHAPTER 1 1 United Nations
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Page 111 and 112: 25 See Koji Miyamoto, “Human Capi
Page 113 and 114: 5 WIR 2004, p. 150, for a descripti
Page 115 and 116: Countries—The Importance of ICT a
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equirement to export a certain prop
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APPENDIX A Data on FDI Flows and St
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Table A-2 Estimated Value of Inward
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Table A-3 Estimated Distribution of
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Table A-4 Developing Countries' Sha
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Resource and Availability UNCTAD. 2
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Resource and Availability Descripti
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Resource and Availability UNCTAD. 2
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Resource and Availability Moran, Th
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Resource and Availability World Ban
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Business linkages. Supplier-produce
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Investment promotion agency (IPA).
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Subnational investment promotion. A
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