6 factors driving China’s investment

Foreign direct investment (FDI) refers to capital invested in countries that provide manufacturing and service capabilities for local consumers and the world market. This kind of capital not only shows investors’ confidence in the specific business and the geopolitical climate of the host country, but also connects the national economy and benefits both the capital provider and the host country. This phenomenon is most obvious in China. In 2019, China’s FDI was 137 billion U.S. dollars, an increase of 5.8% over the previous year. China is the world’s second largest recipient of foreign direct investment.

Many factors promote foreign investment in China, whether positive or negative. Here are some of the biggest impacts:

Key points

  • Foreign direct investment (FDI) refers to capital invested in countries that provide manufacturing and service capabilities for local consumers and the world market.
  • In 2019, China’s FDI was 137 billion U.S. dollars.
  • Many factors affect China’s FDI, such as stability, the availability of world investment capital, and government regulatory policies.

1. Capital availability

FDI mainly depends on the available investment capital that may be put into circulation. In the early 2000s, the booming global economy generated large amounts of investable capital in many countries, which to some extent exceeded the number of viable local investment ideas in a given country. Therefore, institutional and individual investors are setting their sights on emerging and developing markets to find investment opportunities, and China happens to benefit a lot from this surplus of global investment capital.

2. Competitiveness

China has surpassed India and many other emerging countries in terms of the elements needed to cultivate business growth. The development of infrastructure has always been the main driving force in this field. After all, roads, highways and bridges are essential for employee commuting and cargo transportation. China also has a strong labor force, both in quantity and ability. Advances in these areas have greatly reduced transaction costs and increased profits, allowing investors to obtain generous returns.

3. Regulatory environment

The policies of the national government may be a double-edged sword, especially those policies that favor state-owned entities at the expense of private enterprises. This is a Chinese tradition. This has historically made China a less favorable investment destination, and investors hoping to build manufacturing facilities there have encountered high start-up costs, heavy legal risks and other compliance issues.

On the other hand, the Chinese government provides attractive financial incentives in the form of tax breaks, grants, low-cost government loans and subsidies to promote investment in business and entrepreneurial activities. This kind of government-funded incentives can ultimately improve profitability and help companies achieve faster success.

4. Stability

Political and economic stability can promote the inflow of foreign direct investment. Unstable behaviors such as extortion, kidnapping, riots, rebellion, and social unrest are bad for companies and can lead to hyperinflation, making a country’s currency almost obsolete. Therefore, in order to encourage foreign direct investment, citizens, workers, and entrepreneurs should strive to respect Chinese laws, and the Chinese judicial system should adopt effective mechanisms to reduce crime and corruption.

5. China’s domestic market and business environment

China’s huge population size makes it an attractive country for investors to invest in high-end industries such as healthcare, information technology, engineering, and luxury goods. In addition, economic growth and foreign direct investment can trigger a “successful domino effect.” In essence, the more FDI a region attracts, the greater its growth, which in turn stimulates more FDI, thereby creating overall sustained growth.

6. Opening up to regional and international trade

Foreign direct investment tends to flow to countries where goods can be sold to local and foreign consumers. Trade barriers such as tariffs discourage investors, who realize that artificially higher prices will curb foreign demand. In addition, such actions may prompt the United States to impose retaliatory tariffs on Chinese products or trigger a complete ban on certain products. Export-friendly policies such as regional and international free trade agreements encourage direct investment in China, especially for companies that have a large market share outside of China’s domestic market.

Bottom line

For a country like China, foreign direct investment is essential to stimulate development and maintain the country’s economy’s competitiveness in the global market. Since joining the World Trade Organization in 2001, foreign direct investment has helped China’s economy grow substantially, becoming the world’s second largest economy. If the right factors are in place, foreign direct investment will continue to play an important role in the Chinese economy.

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