In the 25 years since Deng Xiaoping famously proclaimed that it is "glorious to get rich," multinational companies have invested more than $400 billion in China. Its once-closed economy has become a textbook case of exportled growth, expanding at a furious pace and increasing per capita income fivefold (Exhibit 1). In 2003, foreign direct investment in China topped $53 billion, and despite the government's attempts to cool off the red-hot economy, it shows no signs of slowing.
Who benefits most from this phenomenal wave of foreign investment? In some industries, such as consumer electronics, it has sharpened the competitiveness of Chinese companies and delivered vastly lower prices to local consumers. In others, such as automotive, the main winners have been multinational companies and their Chinese joint-venture partners. General Motors, for instance, earned more than $2,300 (before taxes) for each vehicle sold in China in 2003, compared with a mere $145 in the United States. Automotive joint ventures are only now beginning to share these gains.
Research by the McKinsey Global Institute1 shows that these outcomes are shaped largely by government policies. In the consumer electronics sector, rules on...