Main Foreign Direct Investment (FDI) Trends and Prospects in China

By John Dudovskiy

FDI Total inward and outward FDI flows

Inward FDI – Since after the economic reformation of China, the country moved towards more market oriented economy, it has received a very large part of international direct investment flows.China has become the second largest host country to FDI in the world afterUnited States, and the largest FDI recipient among the developing countries. In fact, as stated by OECD report (2000), for period of twenty years, actual amount of FDI inflows from 1979 to 1999 totaled to 306 billion US dollar, which is equal to 10 percent of direct investments worldwide and around 30 percent of investment amount for all the developing countries.

Furthermore,China consistently continued to receive a large share of direct investments in developing countries in the first decade of 21st century. This argument backed up with figures published by OECD (2005) with the inward FDI into mainland China rising to amount of $55billion in 2004 from $47 billion in 2003. However, there is significant concern among experts in China about possible overheating of the investment cycle as much of this investments accounted toHong Kongbased investors.

Outward FDI – While China continues to be largest FDI recipient, it is also gaining importance in world stage as outward investor as well. Many large companies operating in China appear to developing into truly international corporate networks through investments.

Moreover, Chinese enterprises are increasingly trying to do “strategic” investments abroad, not least to gain access to raw material. However, the process has been uneven. Figures released by China’s State Administration for Foreign Exchange (OECD Observer, 2005) shows that net outward FDI declined from a peak of $6,9 billion in 2001 to £152,3 million in 2003, then slightly recovered to $1,8 billion in 2004. Nevertheless, OECD figures suggest that these figures may understate the position.


Main countries of origin and destination of investment

By almost all accounts, foreign direct investment (FDI) in China has been one of the major success stories of the past 10 years. Starting from a base of less than $19 billion in 1990, the stock of FDI in China rose to over $300 billion at the end of 1999.

China might receive more benefit than expected from FDI that is concentrated in export-processing activities that still constitute the majority of foreign-invested operations in China. But these results do not differentiate among this type of FDI and import-substituting FDI (IMF, 2000).

Japan and United States have seen as the most important and the largest investors among the developed countries in China. It confirms continuing strong interest among US and Japanese companies in acquiring Chinese corporate assets. Though other developed countries such as Germany and UK have shown increasing interest in China over the last ten years, they still appear to account for rather small amount of foreign direct investments made in China.

The majority of FDI in China has originated from elsewhere in developing Asia (i.e., not includingJapan). Hong Kong, now a largely self-governing “special autonomous region” of China itself, has been the largest source of record. The dominance of Hong Kong, however, is somewhat illusory in that much FDI nominally from Hong Kong in reality is from elsewhere. Some of what is listed as Hong Kong-source FDI in China is, in fact, investment by domestic Chinese that is Hong Kong.

Other FDI in China listed as Hong Kong in origin is in reality from various western nations andTaiwanthat is placed into China via Hong Kong intermediaries. Alas, no published records exist to indicate exactly how much FDI inChinathat is nominally fromHong Kongis in fact attributable to other nations (World Bank, 2005).


  • International Monetary Fund, 1997, “People’s Republic of China – Selected issues”, IMF Staff Country Reports, no. 97/72
  • International Monetary Fund, 2009, “Global Shifts in Demand: Making Up for Weaker Consumption in the United States,” Box 1.8 in October 2009 Asia and Pacific Regional Economic Outlook, pp. 36–37.
  • Organization of Economic Cooperation and Development, 2000, “Main Determinants and Impacts of Foreign Direct Investment in China’s Economy”, Working Papers on International Investment, No. 2000/4


Category: Finance