FDI: Where to Go

By Wang Ting

According to the statistics for the first five months in 2009, the FDI represented a downtrend for eight months in China continuously, leading to a forecast that the decrease margin of FDI around the world in the whole 2009 would exceed 30%, while that in China would reach above 20%.

State quo in China

Since last October, each index of FDI, such as the actual utilization of FDI, the newly approved foreign-invested enterprises, represented a decrease sharply continuously. Moreover, the decrease margin of each index still shows an increasing trend in the coming times.

According to the Ministry of Commerce, in the first five months of 2009, the newly approved foreign-invested enterprises reached a total number of 7,890, a decreased 33.78% as compared with that of the same period last year, while the actual utilization of foreign investment arrived at 34.05 billion USD, down by 20.41% comparing with the corresponding time of last year.

In May 2009, the newly approved foreign-invested enterprises reached 1,649, descending by 32%, while the actual utilization of foreign investment arrived at 6.38 billion USD, decreasing by 17.81% comparing with the corresponding time of last year.

According to the statistics, in 2008, the foreign-invested enterprises accounted for 3% of the total enterprises in China, of which, the industrial production, the tax revenue, the export, import took a proportion of 29.7%, 21%, 55.3%, 54.7% of the total respectively, with nearly 45 million employees in China.  
 
Sheet 1 Statistics about Utilization of Foreign Investment in China from Jan. to May .2009

Unit: 100 million USD

(Source: Foreign Investment Department of the Ministry of Commerce)

From January to May from the US, the number of newly established enterprises in China witnessed a decreased of 32.95% and actual use of foreign investment decreased by 23.49% respectively; And from Europe, the number of newly established enterprises in China witnessed a decreased of 23.39% and actual use of foreign investment decreased by 8.87% respectively.

In the first five months, the top ten nations and regions with investment in China (as per the actual input of foreign capital) are as follows: Hong Kong (15.726 billion USD), Virgin Island (4.687 billion USD), Japan (1.652 billion USD), Singapore (1.64 billion USD), Cayman Islands (1.345 billion USD), the USA (1.092 billion USD), South Korea (1.072 billion USD), West Samoa (0.961 billion USD), Taiwan (0.636 billion USD) and  Mauritius (0.476 billion USD), total of which accounted for 86.02% of total actual use of foreign investment in the country.

Furthermore, the unbalance of FDI in the Middle/Western and Eastern part of China also represented an uptrend during these five months. According to the statistics, since the beginning of 2009, the decrease margin in the Middle and Western part of China was higher than that in the Eastern part of China, which is also higher than the average level around the whole nation. In the first five months, the FDI in the Middle and Western part went down by 35.7%, 30.2%, respectively, and that of the national average level was 20.4%.  
　
Reason for the downturn

Generally speaking, the investment plans of transnational corporations matters much.

"Global foreign direct investment (FDI) inflows and cross-border mergers and acquisitions (M&As) - the main mode of FDI - drastically declined in the last quarter of 2008, and the fall has continued into 2009", United Nations Conference on Trade and Development (UNCTAD) data reveal.

According to UNCTAD, the data on FDI flows available for the first quarter of 2009 reveal a drastic plummet. The 54% decline was apparent among the 57 countries for which quarterly data on FDI inflows were available as of mid-June 2009 (which account for roughly 60% of global inflows). Forty-three countries, including major host countries such as Brazil, China, and the Russian Federation, recorded declines.

Figure1. FDI Flows by Quarter (2008-2009)

Unit: Billions of dollars
Global Inflows

Note: Total for 57 countries which accounted for about 60% of world inflows in 2007-2008.

FDI outflows for the same period fell by 57% for 47 countries (accounting also for about 60% of global FDI outflows) for which such data are available. Thus, the majority of these countries (37 out of 47), including major investors such as France, Germany, Japan, and the United States, experienced declines in FDI outflows in the first quarter of 2009.

Figure2. FDI Flows by Quarter (2008-2009)

Unit: Billions of dollars
Global outflows

Note: Total for 47 countries which accounted for about 60% of world outflows in 2007-2008.
Source: UNCTAD, FDI/TNC database

If the first quarter trend continues, projections for the whole of 2009 are for global FDI inflows to drop by close to half. While developed countries are mainly responsible for the fall of FDI in 2009 - they have experienced a nearly 60% decline - unlike in 2008, developing countries and transition economies are also this time experiencing declines. For developing nations, the reduction is expected to be as much as 25%, and for transition economies as much as 40%.

Transnational corporations have been hit by the consequences of the global economic slowdown (which is officially a recession in a number of major economies), leading to failing market expectations, tighter credit conditions, reduced value of assets following stock market declines, and falls in corporate profits. At the same time, they have been confronted by major uncertainties about the evolution of the economic situation in the short term. As a result, companies anticipate a sharp decrease in their FDI expenditures for 2009. Many have announced plans to curtail output, lay off workers and cut capital expenditure, all of which have implications for FDI.