Article at a glance:
In 2003, foreign direct investment in China topped $53 billion and it shows no signs of slowing in 2004, despite the government's attempts to cool off the red-hot economy. Since China first opened its doors to foreign investment, in 1978, multinational companies have sunk more than $400 billion into the country. The beneficiaries of this phenomenal wave vary sharply among industries. In some, such as consumer electronics, foreign money has sharpened the competitiveness of Chinese companies and delivered lower prices to local consumers. In others, such as automotive, the main winners have been multinational companies and their Chinese joint-venture partners, which have only recently begun to share the gains. Research by the McKinsey Global Institute shows that government policies largely determine these outcomes.
The take-away
Foreign direct investment can spark growth and create national wealth, but competition is needed to diffuse the benefits. Government policies that protect incumbents—such as high tariffs, joint-venture requirements, and local-content restrictions—also shield them from the pressure to improve. Consumers pay the price.
This article includes the following exhibits:
- Exhibit 1: Foreign direct investment and GDP in China, 1979–2003
- Exhibit 2: Degree of government control in China by sector
- Exhibit 3: Pricing evolution in China's consumer electronics sector
- Exhibit 4: Capital productivity of Chinese joint ventures vs US equivalent