Falling FDI: Implications for Chinese Companies and Multinationals

Understanding Falling FDI and Its Implications

Foreign direct investment (FDI) in actual use in China totalled 580.2 billion yuan (US$82 billion) in the first eight months of 2024, down 31.5 per cent year on year.

Notably, this downward trend in China’s FDI inflow has shown no sign of changing since 2023, when there was an 8 per cent fall. The withdrawal of foreign investment has become an extensively-discussed issue, accompanied by pessimism about China’s economy.

The Shift in Market Dynamics

For a long time, foreign investment has been a key driving force of China’s economic development. China has been working to attract such investments since the late 1970s. Given the circumstances, should we be worried that the recent decline will cause China’s economy to slow further?

First, it’s worth pointing out that focusing solely on the withdrawal of foreign investments could be misleading. China is still a net importer of investment. In the past three decades, the value of China’s net FDI – that is, investments minus outflows – has always been positive. Moreover, China, with a total FDI inflow of US$163 billion, was still the world’s second-largest FDI recipient in 2023.

Competition and Market Share

• Even if foreign investment is really retreating, a more critical point is the extent to which such investments still affect China’s economy today.
• In 2014, Chinese companies gained the largest share in only six industries.
• Chinese companies have become much more competitive, putting pressure on their foreign counterparts.

Technological Independence

Advancements in indigenous technologies also limit the market space for foreign companies. The ratio of patents granted to foreign residents compared to local residents has dropped significantly over the past two decades, from over 100 per cent to less than 15 per cent. Foreign technology no longer plays a dominant role in China’s economy.

Emerging Domestic Capabilities

1. The absence of foreign companies could accelerate China’s self-sufficiency drive.
2. China launched new home-grown lithography machines, showcasing advancements despite limited access to foreign expertise.

In summary, the withdrawal of foreign investment reflects the market mechanism of survival of the fittest. The latest round of selection and elimination in business competition has allowed Chinese companies to capture a larger market share.