Paper Example on FDI: Investing Across Borders to Establish Long-Term Interest

Introduction

Foreign Direct Investment (FDI) refers to investment from an entity in one country into a business in another country to establish a long-term interest in the investee economy. It occurs when an investor acquires more than 10% of business assets in a foreign company (Buckley, Clegg, & Cross, 2015). A 10% ownership does not give an investor a controlling interest (Buckley et al., 2015). Instead, it allows influence over the operations, management, and policies of the company. FDI commonly occurs in open economies that provide a skilled workforce and increased growth prospects for the investors. It is worth noting that FDI not only involves capital investment, but it also includes provisions of technology and management. The primary feature of the FDI is that it establishes an effective control of the foreign business. Today, FDI is becoming a growing global trend undertaken by firms to expand their operations in various countries. Why and how companies utilize external opportunities through FDI has been increasingly documented. As a primary developing market, China has attracted multiple flows of foreign direct investment to become the second most substantial receipt HOOO. This report examines the FDI in China and emphasizes the possible determinants of FDI in China. It then evaluates responses from various companies operating in China on the factors that influenced to start of FDI. Results indicate that market size is a primary factor for FDI, particularly for US firms. Low labor costs are the primary factor for local, export-oriented, Asian enterprises.

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Analysis

It is well known that the economy of China has generated over the last decade, both in per capita and absolute terms. From the 1990s to 2015, China experienced an increase in per capita GDP from under 5% to 25% of US per capita GDP (Fetscherin, Voss, & Gugler, 2010). Direct investments dominate foreign investments in China. This case implies that the investor has management control of the business. According to Buckley et al. (2015), the relationship between foreign investment and economic growth is based on China's advancement in science and technology. China state council recently stated that the country should vigorously develop the high-tech firms that can improve the economy and put innovation at the center of economic restructuring. To speed up this development, China has recommended foreign investment in high-tech manufacturing (Fetscherin et al., 2010).

China has recorded a growth of FDI over the past years. This growth has extended global trade and world output. By far, China is the largest recipient and outshined the US 2004 as a host destination. It has frequently attracted the attention of multinational firms (Fetscherin et al., 2010). Since the 1970s, when China implemented the reform and opening-up policy, FDI has contributed significantly to the country's economy (Yingji, 2006). The 2004 world investment report delivered by the United Nations Conference on Trade and Development stated that absorbed approximately $53.5 billion worth of the FDI in 2003 (Taube & Ogutcu, 2012). Citing the National Development Reform Commission, Xinhua News Agency reported that foreign investment in 2004 increased to about $ 60 billion representing a 13% rise over 2003 (Mah, 2010). Other statistics also indicate the benefits of foreign capital in the economic development of China. Presently, making further economic growth in China relies on constant FDI and policy-making that will enhance investment.

Additionally, entry of China to the World Trade Organization (WTO) shows that trade plays a central role in the economic development of the country (Taube & Ogutcu, 2012). The emerging question under this new global environment is whether multinational firms move to China to exploit some conventional benefits like inexpensive labor or whether they have other reasons to meet new international competition challenges (Chen, 2011). Research conducted by Ali & Guo (2015) shows that foreign businesses account for up to 28% of the industrial added value of China and a fifth of taxation. These enterprises export around 57% of China's total goods and services and account for about 11% of local employment (Buckley et al., 2015). China's inexpensive labor, preferential foreign investment policies, improving the investment environment, and rising purchasing power has attracted foreign investment.

Several factors have motivated multinational firms to invest in China, with the primary antecedent being the potential large market size and economic growth of the country. According to Yingji (2006), host nations with large market size and increased economic growth attract more market-oriented FDI. Ali & Guo 2(015), in their studies, reported that market size, measured by Gross Domestic Product (GDP) and Gross National Product (GNP), is sufficient for the inward FDI. The rapid growth of the economy creates business opportunities and large domestic markets for foreign enterprises to invest in China.

The second determinant of FDI in China is labor costs. Foreign investors often aim to take advantage of inexpensive labor with production intensive. With the largest population in the world, China has abundant labor resources and has focused on educating its people. As such, Chinese workers are productive in the job market. However, the country has employees in the technical field that earn average salaries at low levels. Chen (2011) argued that transportation costs and low productivity might exceed labor costs in developing economies. In this context, Mah (2010) found a positive correlation between China's relatively cheap labor and inward FDI. Yingji (2006) also admitted that the low rates of labor wages are one of the fundamental economic determinants for FDI.

The third determinant is the proximity of the host to the investor's home country. According to Ali & Guo (2015), this factor reduces managerial and informational uncertainty, lowers transportation and monitoring costs, and minimizes exposure of multinationals to hazards. Theoretically, the proximity of the investor's home to the host country increases the likelihood of FDI.

Another vital factor is the incentive policies. China has favorable policies related to land use, taxation, and foreign currency exchange in coastal regions (Taube & Ogutcu, 2012). So far, studies have found that preferential FDI policies overwhelmingly attract FDI in China. As WTO obligations of China become due, many sectors such as banking and financial service s are opening up to FDI (Taube & Ogutcu, 2012). This incentive can promote a new wave of FDI in China.

Synthesis and Conclusion

This report has evaluated the factors that influence multinational firms to invest in China and the growing trends of FDI in the country. Among the critical determinants of FDI in China include market size and economic growth, labor cost, incentive policies, and proximity of the host to the investor's home country. Of these factors, the huge potential market size of China is the major factor for the FDI. The report has also determined that China's fast-growing economy and large population combined with WTO membership are an indomitable blend for international firms. One of the new findings from the study is that worldwide integration, influenced by WTO membership, also attracts foreign companies investing in China. It implies that China is an essential market, and investing in the country is part of the company's global strategy. Undoubtedly, foreign direct investment has proved to be the driving force for China's economic development.

References

Ali, S., & Guo, W. (2015). Determinants of FDI in China. Journal of Global Business and Technology, 1(2), 21-33. https://www.researchgate.net/publication/252703493_Determinants_of_FDI_in_China

Buckley, P. J., Clegg, L. J., & Cross, A. R. (2015). The determinants of Chinese outward foreign direct investment. International Business Strategy, 588-614. https://www.taylorfrancis.com/books/e/9781315848365/chapters/10.4324/9781315848365-46

Chen, C. (2011). Foreign direct investment in China. Cheltenham: Cheltenham: Elgar. https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&as_ylo=2010&as_yhi=2019&q=Chen%2C+C.+%282011%29.+Foreign+direct+investment+in+China.+Cheltenham%3A+Cheltenham%3A+

Elgar.&btnG=Fetscherin, M., Voss, H., & Gugler, P. (2010). 30 Years of foreign direct investment to China: An interdisciplinary literature review. International Business Review, 19(3), 235-246. https://www.sciencedirect.com/science/article/abs/pii/S0969593109001462

Mah, J. S. (2010). Foreign direct investment inflows and Economic Growth of China. Journal of Policy Modeling, 32(1), 155-158. https://www.sciencedirect.com/science/article/pii/S0161893809000787

Taube, M., & Ogutcu, M. (2012). Main issues on foreign investment in China's regional development: prospects and policy challenges. Foreign Direct Investment in China https://www.oecd.org/investment/investmentfordevelopment/1939560.pdf

Yingji, J. X. (2006). Foreign Direct Investment Location Determinants in China: Urban Data. Nankai Economic Studies. http://en.cnki.com.cn/Article_en/CJFDTotal-NKJJ200602003.html