China, the FDI question

Brian Mudumi and Takudzwanashe Mundenga
Foreign direct investment (FDI) is one of the avenues that China used to develop its economy. It represents capital invested in a country that provides manufacturing and service capabilities for both native consumers and world markets.

FDI is instrumental in bringing goods and services to the global marketplace, and the influx of foreign investment not only displays investor confidence in the business and the geopolitical climate of the host country, such capital also links national economies.

The benefits of FDI flow to both the supplier of capital as well as to the host region. China is one country that has stepped up to capitalise on these benefits. According to China’s commerce ministry, FDI in 2010 surpassed $100 billion for the first time. Over the entire year ending December 2010 inbound FDI increased 17,4 percent to $105.74 billion.

International investors need to be aware of the staggering correlation between tax rates and economic performance.

Several factors that affect the amount of FDI that pours into China are capital availability, regulatory environment, political and economic stability, local Chinese market and business climate, openness to regional and international trade.

In the early 2000s, China overtook the United States as the world’s largest recipient of foreign capital.

FDI comprises capital that an outside investor is willing to risk within a local region.

Conditions in the global capital markets and general economic environment play a role in determining the flow of FDI into China.

A thriving global economy, capital markets and business environment create large swathes of investable capital, a portion of which is converted to FDI. Large amounts of investable capital that proportionately overwhelm the number of sound local investment ideas can cause institutional, company and individual investors to invest their wealth in emerging and developing markets.

Excessive regulations tend to hinder entrepreneurial and commercial activities, as managers and employees must spend more time and money to comply with rules and regulations.

If an investor wants to set up a manufacturing facility, high start-up costs, legal exposure and other cumbersome compliance items may encourage that investor to set up the facility elsewhere, where the business climate is more conducive to industry, therefore national government should consider that as a pertinent issue.

Alternatively, some scholars attribute China’s success to better governance of the Chinese government.

Dambisa Moyo, economist and recipient of the Presidential Medal of Freedom, regards China as “new idol for emerging economies.” Thomas Friedman also gave significant credit to the Chinese government for its ability to get things done quickly by stating “what if we could just be China for one day?”

It is true that the Chinese government has done an extraordinary job in managing a difficult transition from an isolated communist nation to a largely open, economic driven nation without falling into turmoil.

The Chinese government has also successfully implemented many pro-development policies such as Special Economic Zones and industrial development guidelines.

Among the major drivers of China’s success are the Chinese people, the true creator of China’s economic success and the great culture that shapes their characteristics: ambitious, hardworking, thrifty, caring for their families and relentlessly pursuing good education and success.

The country would not have achieved it without a highly motivated and competitive workforce.

As we all know the American Dream, a symbol of American ambition, people are largely unaware that there are more than 40 Chinese phrases (Chengyu) to encourage children and adults to have big dreams for their future.

These motivate Chinese people to study diligently and work hard.

Age of Ambition: Chasing Fortune, Truth, and Faith in the New China, authored by New Yorker reporter Evan Osnos, echoes this untold secret of China’s success: Ambition, which is called Zhixiang in Chinese.