Karl P. Sauvant, PhD
Resident Senior Fellow

Columbia Center on Sustainable Investment
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
p(212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
wwww.ccsi.columbia.edu | t: @CCSI_Columbia

"Emerging Markets and the International Investment Law and Policy Regime", "Sustainable FDI for Sustainable Development", "Towards an Investment Facilitation Framework: Why? What? When?", "Beware of FDI Statistics!", "Towards an Indicative List of FDI Sustainability Characteristics", “The Importance of Negotiating Good Contracts", "A New Challenge for Emerging Markets: the Need to Develop an Outward FDI Policy”, "China Moves the G20 toward an International Investment Framework and Investment Facilitation", "The Next Step in Governance: The Need for Global Micro-regulatory Frameworks", and "The Evolving International Investment Law and Policy Regime: Ways Forward" are available at https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=2461782 and http://www.works.bepress.com/karl_sauvant/.


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Columbia FDI Perspectives

Perspectives on topical foreign direct investment issues
No. 225  May 7, 2018

Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Marion A. Creach ([log in to unmask])

FDI has been a major factor in China’s development. Its impact and ripple effects through the economy in recent years have been estimated to reach one-third of China’s GDP.[1] In 2017, China ranked third in inward FDI stock according to UNCTAD[2] and third in A.T. Kearney’s FDI Confidence Index.[3] China is increasingly important to major MNEs. In some years, the China profits of companies like GM and Volkswagen have exceeded those in all other countries combined.

However, China’s FDI regime remains highly restrictive. China ranked 59th of 62 economies in the 2016 OECD FDI Restrictiveness Index, having the lowest scores in transportation equipment, radio and TV broadcasting, media, telecommunications, and fisheries; and it is in the bottom 10 scores in 30 of the 42 sectors assessed.[4] Given this background, it is useful to ask how China will approach FDI, given statements by President Xi Jinping (at the recent 19th Party Congress) that China will encourage more inbound and outbound FDI.

While China’s policies toward FDI have evolved substantially since the onset of the country’s economic opening, the underlying approach has remained remarkably consistent. It is best described as opening to the extent necessary to promote national development, including the development of indigenous firms, while limiting the influence of foreign entities. It is a targeted, “interests” approach that focuses on China’s immediate needs and concerns, sector-by-sector and region-by-region. Trying to understand China’s position using a rules-based[5] approach or asking whether China is “opening” or “closing” misses the point. China can open some sectors more, while closing others, and while making life more difficult for foreign affiliates in general.     

This approach could be seen during President Xi Jinping’s first term. Sectors related to finance, some services, advanced machinery, and the environment were further opened. Special “Open Areas” were designated in the belief that doing so would accelerate China’s development. China also showed itself willing to trade access in sectors that it considered non-strategic in order to obtain better access for its own companies in investment negotiations.

On the other hand, China has pushed back against foreign affiliates in other sectors, or when it perceived foreign influence as too strong. This was done through a selective enforcement of antitrust rules,[6] limiting license payments, increasing difficulties of repatriating earnings, and forcing technology transfer. China continues to limit foreign internet firms; has called foreign technology companies “guardian warriors infiltrating China;”[7] has tightened restrictions in the cultural, media and education sectors; has adopted cybersecurity regulations that limit the integration of China activities into global information systems; and has increased the influence of Party cells in foreign affiliates. Industrial policy initiatives, like Manufacturing 2025 and Internet Plus, include specific plans to displace foreign companies. In addition, China has increasingly sought to purchase foreign technology, expertise and brands rather than obtaining them through FDI.

The implication for many foreign affiliates in China has been greater uncertainty, an unlevel playing field as Chinese companies are favored at home and supported internationally and, for some, a rethinking of China operations.

President Xi’s consolidation of power at the 19th Party Congress likely means a continuation of the trend observed during his first term. It likely means China will continue to be suspicious of foreign interests, Chinese companies will be more aggressively favored and supported in domestic and international markets, Chinese firms will become more active acquirers abroad in targeted industries, foreign affiliates will be subject to increased scrutiny, and foreign hopes that the market will be decisive when it comes to the overall direction of China’s economy will not be realized.

Foreign investors will find their best opportunities in industries that China’s leaders do not view as strategic (like consumer-packaged goods, personal care products, luxury goods, mid-tech manufacturing), and in those that contribute to such initiatives as One Belt-One-Road, Go Global, Manufacturing 2025, and Internet Plus. Industries with foreign affiliates with capabilities beyond Chinese firms (like environmental technologies, some service sectors, advanced machinery) will also be favored. Firms are also trading support for China’s initiatives outside of China (like One Belt-One Road) for better treatment inside of China.

Crucial for how most foreign companies will be treated in China will be for them to demonstrate the clear economic value they bring to China and how specifically they will support China’s major initiatives in ways domestic companies cannot—as opposed to appeals to rules or investment agreements.
* The Columbia FDI Perspectives are a forum for public debate. The views expressed by the author(s) do not reflect the opinions of CCSI or Columbia University or our partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
** Michael J. Enright ([log in to unmask]com) is Professor at the School of Business of the University of Hong Kong and Director of Enright, Scott & Associates.  This Perspective draws on the author’s Developing China: The Remarkable Impact of Foreign Investment (London: Routledge, 2017). The author is grateful to Sophie Meunier, Huaichuan Rui and an anonymous reviewer for their helpful peer reviews.
[1] Enright, op cit.
[4] http://stats.oecd.org/Index.aspx?datasetcode=FDIINDEX#. In comparison, the US ranked 38th as most open overall, and was in the bottom 10 in 5 of 42 sectors.
[5] A senior EU negotiator recently told the author: “We don’t negotiate from interests, we negotiate from rules.” Of course, all governments negotiate based on their interests, but the difference is still significant.
[6] Samson Yuen, “Taming the ‘Foreign Tigers’: China’s anti-trust crusade against multinational companies, China Perspectives, 4/2014, pp. 53-59.
[7] “Investigation into America’s eight guardian warriors infiltrating China,” China Economic Weekly, vol. 24 (2013), http://paper.people.com.cn/zgjjzk/html/2013-06/24/content_1259857.htm
The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Michael J. Enright, ‘To succeed in China, focus on interests rather than rules,’ Columbia FDI Perspectives, No. 225, May 7, 2018. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Marion A. Creach, [log in to unmask].
  • No. 224, Axel Berger, ‘What’s next for the investment facilitation agenda?’ Columbia FDI Perspectives, No. 224, April 23, 2018.
  • No. 223, David Chriki, “Investment arbitration liability insurance: a possible solution for concerns of a regulatory chill?” April 9, 2018.
  • No. 222, Makane Moïse Mbengue, “Facilitating investment for sustainable development: it matters for Africa,” March 26, 2018.
All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/

Other relevant CCSI news and announcements
  • Save the Date: September 27-28, 2018: This year, CCSI’s Annual Columbia International Investment Conference (CIIC) is on “Multinationals in the Age of Sustainable Development: New Thinking on the Role of International Investment Agreements.” The Conference, taking place alongside the 73rd Session of the UN General Assembly in New York, will build on a multi-year effort to identify guiding principles and practical approaches for aligning international investment treaties with the Sustainable Development Goals (SDGs). Additional information will be posted shortly on our website here.
  • CCSI has released its 2016-2017 Annual Report. The full report is available here.
  • In January 2018, The Yearbook on International Investment Law and Policy 2015-2016 was released. The Yearbook monitors current developments in international investment law and policy, focusing (in Part One) on trends in foreign direct investment (FDI), international investment agreements, and investment disputes. Part Two, then, looks at central issues in the contemporary discussions on international investment law and policy. This volume includes a chapter by CCSI's Lisa Sachs, Lise Johnson and Jesse Coleman, with CCSI Fellow Kanika Gupta. For more information, please see our website here.
Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
(212) 854-0689
Fax: (212) 854-7946
Copyright © 2018 Columbia Center on Sustainable Investment (CCSI), All rights reserved.
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