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Can Emerging Markets Follow China's FDI Growth Recipe?

Article Overview: China's ability to attract massive amounts of foreign investment does not derive entirely from its economic growth rate or the size of its population, observed Stephen J. Kobrin, Professor of Multinational Management, The Wharton School, University of Pennsylvania, USA. Rather, China leads the developing world in liberalizing its foreign investment policies, he noted. Felipe Larra Bascu Professor of Economics, Catholic University of Chile, Chile, challenged this view, saying he believed that it was China's large marketplace, high growth rate and low costs rather than its investment policies driving FDI. Between these extremes, Paul A. Laudicina, Managing Director, A.T. Kearney, USA, said that interviews with his firm's clients revealed that it was both the size of China's marketplace and its policies that were luring investment.

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Can Emerging Markets Follow China's FDI Growth Recipe?

22.01.2004

Annual Meeting 2004

China's ability to attract massive amounts of foreign investment does not derive entirely from its economic growth rate or the size of its population, observed Stephen J. Kobrin, Professor of Multinational Management, The Wharton School, University of Pennsylvania, USA. Rather, China leads the developing world in liberalizing its foreign investment policies, he noted. Felipe Larra Bascu Professor of Economics, Catholic University of Chile, Chile, challenged this view, saying he believed that it was China's large marketplace, high growth rate and low costs rather than its investment policies driving FDI. Between these extremes, Paul A. Laudicina, Managing Director, A.T. Kearney, USA, said that interviews with his firm's clients revealed that it was both the size of China's marketplace and its policies that were luring investment.

It is, however, misleading to consider China a single investment destination in any case, remarked Robert Greenhill, President and Chief Operating Officer, Bombardier International, Canada. From an investor's perspective, there are several Chinas: there is a south eastern China that is booming, a western China that is taking off and a north eastern China that is decaying.

The flood of FDI into China also needs to be considered relative to its size, said Fernando Canales Clariond, Secretary of Economy of Mexico. On a per capita basis, FDI into China was actually lower last year than FDI into Mexico. According to Laudicina, China's per capita FDI is the lowest of any emerging market but India. And much of that FDI is actually Chinese money being recycled through Taiwan or Hong Kong and not really foreign at all.

Be that as it may, poorer nations need an increasing amount of FDI to fund development and have to compete globally to get it, said Canales. Costs, political stability and tax incentives are natural inducements to foreign investors, though participants agreed that tax holidays are counterproductive. Canales said many governments fail to undertake the reforms needed to lure FDI because they would be politically unpopular.

On the other hand, FDI can also serve as an excuse for government inaction, thereby retarding development, declared Ethan B. Kapstein, Professor, Department of Economics and Political Science, European Institute of Business Administration (INSEAD). As a result, some economists are now debating whether FDI necessarily translates into sustained economic growth. Greenhill also noted that not all FDI contributes to long term growth. The best type of FDI, he said, involves not just dollars, but also investment in policy development, enhancing corporate know how and stimulating the use of postgraduate degree holders.

Indeed, it is such new skills in corporate management and access to new markets that make FDI such an important ingredient in development, suggested Alan P. Larson, US Undersecretary of State for Economic, Business and Agricultural Affairs. Considered against the relatively low volume of China's FDI on a per capita basis, the new management practices that foreign investors bring have a much greater impact than the sheer volume of investment.

Govindasamy Rajasaharan, Secretary General, Malaysian Trade Union Congress, Malaysia, said that China's success in attracting foreign investment appeared to depend on the absence of labour unions and the ability of an authoritarian government to impose investment regulations with little regard for workers' rights. In South East Asia, he said, companies have begun to use China as a bogeyman to extract concessions from local officials. "China is being used as an excuse," he said. If governments fail to concede, companies threaten to relocate to China. One of the biggest consequences of this pressure is an increasing tendency to replace full time employees with short term contract labour or subcontracted labour, providing companies with greater flexibility and lower costs, but making workers uncertain about their future.

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Article Tags: chile chile, chinese money, eastern china, economic growth rate, fdi, fernando canales clariond, foreign investors, international canada, investment destination, investment policies, kobrin, larra, laudicina, multinational management, robert greenhill, tax holidays, tax incentives, university of chile, western china, wharton school university of pennsylvania

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