Jack Molloy Econ 311

12/1/12 Dr. Wu

The relationship between the United States and China is complex to say the least. Having been allies and enemies in previous conflicts the United States and China are very familiar with each other. During the last half century China has risen from a few steps above a subsistence agriculture economy to becoming an economic powerhouse in the world. The U.S. and China are now numbers one and two respectively in the world based on GDP and GDP per capita. Investment between the United States and China is important for several reasons. First, the relationship affects the economic interests of the United States. China, with a population of a little over 2 billion is the largest and fastest growing emerging market. Direct investment is critical so that U.S. firms can serve and gain better access to that market. Products produced by U.S. firms in China are sold in the Chinese market. Likewise, China has a lot to gain by investing in such a highly developed country such as the United States. Both sides can benefit from mutual economic cooperation. Foreign direct investment in China has been one of the most successful aspects of Chinas economic reform and opening up to the outside world. The gradual liberalization of restrictions on FDI since 1979, the governments commitments for further opening up, particularly the commitments to the World Trade Organization in trade and investment liberalization have greatly improved the overall investment

environment in China. Foreign firms have been attracted by the huge domestic market and pool of relatively well-educated low cost labor which has made China one of the most attractive destinations for FDI in the world.

Over the course of the past three decades, FDI became well established in Chinas economy, and the activities of multinational enterprises came to assume increasing importance in capital formation, labor training, technology transfer, international trade, and in accelerating the transition of China from a planned economy to a market economy. As a result FDI has increasingly integrated the Chinese economy into the world economy.

Since the 1985, world FDI inows have experienced two massive waves of ups and downs. As shown in the graph above, the rst large increase of world FDI inows started in the mid-19905. World FDI inows increased from US$331 billion in 1995 to USSI393 billion in 2000. Following a sharp decline in 2001 to 2003, due to the dotcom bubble burst, world FDI increased and experienced a period of high growth during 2003 to 2007, reaching a historical record of $2.l0 trillion in 2007. However, the growing trend of world FDI inows came to an end in 2008 . This was caused by the global nancial crisis, which was in turn triggered by the USA's sub prime crisis which began in summer 2007 and led to a rapid deterioration of the global investment environment. Compared to the large fluctuations in world FDI inows, FDI inows into China have been relatively stable. However, in the 1990s Chinas share in FDI inows in the world and in developing countries increased dramatically, reaching 7.5 per cent and 23 per cent respectively. In the 2005 China's share in FDI inows in the world and in developing countries declined slightly due to the massive increase in world FDI inows during the period of 2004 to 2007. However, during the period from 2000 to 2009 China still accounted for 6 per cent of total world FDI inows and 17 per cent of total FDI inflows into developing countries. Since FDI is the major driving force contributing to the globalization of the international economy, with the continuing rapid growth of Chinese outward FDI, the increasing global integration of financial markets and internationalization of investment

portfolios, the Chinese transitional economy is set to become integrated irreversibly into the global economy. First, there has been a cluster of motives associated with access to technology. Industrialized countries have been crucial for China's access to new technology and patent information through joint ventures. China requires high tech and information because of a limited transfer of technology from foreign joint ventures in China. Although the contribution of foreign investment to China's social and economic growth has been regarded a positive overall, the actual levels of technology transfer have been limited: market and technical information have largely been controlled by foreign TNCs (Transnational Corporations). Foreign firms and corporations often control market information and refuse to transfer technology. It is therefore often argued that to catch up with the world 's advanced industrial nations, China needs to expand its international market, to raise money, and, more importantly, to gain access to patents and technology information.

One especially curious characteristic of China's development path is a recent surge in its outward foreign direct investment (FDI). As shown in the graph below Chinas outward investment has started to gain momentum in the recent years. Excluding the global financial crisis, Chinas outward FDI was on the upward swing. It is expected to bounce back in the upcoming years and it is imperative that the U.S. gets on the receiving end of a good percentage of it and we have in the first half of 2012 alone U.S. companies have received over 3.5 billion from Chinese companies. This, along with positive upward trends, signals only good news for American and Chinese businesses. With over a trillion dollars in foreign reserves and increasing economic clout, China can send flagship companies abroad to acquire technologies, brands, resources, and better access to international markets. In some industries, at least, rising capacity and intensifying domestic price competition are cutting profit margins,

and Chinese managers see FDI as a way to upgrade technology and augment earnings. While these are all legitimate strategies under broad ranges of circumstances, we believe it is important to identify specific drivers of the current surge in Chinese outward FDI, and to evaluate its broader implications with economic theories. Rising Chinese investment interest presents myriad opportunities for America. Surging investment from China makes up for diminished inflows from traditional sources, re-ignites growth by providing fresh capital to troubled firms, increases competition and consumer welfare, and expands American access to one of the biggest and fastest-growing markets in the world.

Also shown in the graph above are the top 20 recipients of Chinese FDI. After the Caribbean tax havens there is a drop off in the amount of Money that the Chinese are investing in certain countries. But the numbers are rising it is projects that outward FDI from China will top 1 Trillion Dollars by the year 2020. Inward foreign investment into China has been staggering. Foreign companies have poured close to 250 Billion dollars into China in the year 2010 alone . Since 1982 the numbers are well into the Trillions of dollars. The coming years China undoubtedly be seeking investment opportunities outside of its own borders. The United States of America has the chance to capitalize on a huge influx of capital that will be dispersed into the global economy. As China has changed over to a more capitalistic society the

people and its companies are beginning to look to make a larger profit. It is absolutely imperative that America forms a mutual relationship with China . The coming decade will bring an unprecedented boom in Chinese capital seeking investment opportunities abroad, and will require Americans to respond to those flows. Based on U.S. government statistics, the bulk of U.S. direct investment in China occurs in the manufacturing sector. In 2002, 59.9 percent of the total cumulative stock of U.S. direct investment, valued at historical cost, was in manufacturing, and 20 percent in mining and utilities. Among the manufacturing industries, electronic and other electrical equipment accounted for almost 25 percent. That sector has been the manufacturing industry with the most U.S. direct investment since 1995. Among the service industries,

wholesale trade claimed the highest share of investment, with about 5 percent in 2002.Foreign direct investment into Chinamergers, acquisitions and Greenfield investment in new facilitiesplayed a major role in Chinas economic boom, and U.S. firms today account for $50 billion of nearly $1 trillion in such investment in China. Chinese direct investment abroad, on the other hand, has been slow to take off and, to date, mostly has been focused on securing raw materials. In past decades, few Chinese firms dreamed of direct investment in the United States: with their home market taking off and the challenges of operating in the United States daunting, they had little reason to do so. U.S. firms invest in China primarily to establish a beachhead to penetrate the large and rapidly growing Chinese domestic market. In 2005, U.S. invested rms in China sold 84.5 percent of their output to customers in China and exported only 8 .4 percent of their outputs back to the United States. The concentration of most U.S. direct investment in regions where per-capita incomes, retail sales, and wage rates are relatively high by Chinese standards suggests that the focus of U.S. direct investment is the potential size of the local markets rather than the level of the local wage rates. Other reasons cited for investment" include the abundant labor sup- ply, preferential tax and tariff treatment given to foreign direct investors. avoidance of transport costs and tariff and nontariff barriers to trade, exploitation of China's natural resources, and establishment of a low-cost production base to supply Asian and other markets.

The Positives America has to gain from the FDI between itself and China far outweighs any cons that could possibly arise. China needs America more than America needs China and we need to realize that. The fear mongering by the media here in America has led to a highly misinformed public about China as a whole . American Business has prospered due to the low labor costs in China. The investment ties

between the United States and China generate signicant and growing mutual economic benets to both countries on an overall basis. They should be further encouraged. The United States and China are economically complementary. The two countries seldom compete in the same world markets. China cannot produce what the United States exports. The United States long ago generally stopped producing what China exports. China needs U.S. capital goods and technology. The United States needs a reliable source of low-cost yet high-quality consumer goods. The two countries can provide markets for each other. U.S. firms invest in China fundamentally to implement a strategy for acquiring potential market shares in goods, services, and technology. U.S. direct investment in China is basically good for both the United States and China and is likely to increase trade between the two countries in both the short and the long run. So it is not a zero sum game that we have between the two countries because both countries have and will continue to benefit from each other.

References Hricourt Jrme and Sandra Poncet, (2007). FDI and credit constraints: firm level evidence in China, CES working paper. Universit Paris 1. Berthlemy, J-C. and S. Dmurger, (2000). Foreign Direct Investment and Economic Growth: Theory and Application to China", Review of Development Economics, 4(2), 140155. Davies, Ken (2010), Outward and Inward FDI from China and its policy context, Transnational Corporations Review, Volume 2, Number 4, December 2010. Sauvant, Karl, ed. (2010), Investing in the United States: Is the US Ready for FDI from China? Cheltenham: Edward Elgar, 2010. ^ "Foreign direct investment, net inflows (BoP, current US$) | Data | Table". Data.worldbank.org. Retrieved 2012-11-17.