Since the early 1990s, more foreign direct investment (FDI) has flowed into China than to any country except America. Of this vast capital inflow, overseas Chinese – from Hong Kong, Taiwan, Macao and Southeast Asia – delivered the lion’s share. Investments from Hong Kong and Macao claimed 70% of Chinese FDI in the early 90s; since then their share has decreased, yet it still accounts for 50% of China’s total FDI.
That China receives so much capital from expatriates is a global source of envy. Indian officials bemoan the fact that overseas Indians lack both the wealth and the propensity to invest back home. Economists and China-watchers celebrate this ready supply of capital, know-how, and marketing channels which enabled China to become – in a short period of time – Asia’s manufacturing base and export power-house.
Lavish praise for this stream of expatriate FDI, however, misses its deep flaws. Yes, expatriate-invested firms produce many Chinese exports, but they often do it by seizing control of export-oriented businesses from indigenous Chinese. Two ratios tell the story. One is the export/GDP ratio, which rose from 15% in 1990 to 20% in 1999, an increase of 5%. The other is the share of exports by foreign firms of total Chinese exports: this rose from 15% to almost 40% during the same period. So, foreign firms may create exports for China, but they also divert a big slice of the export pie away from indigenous Chinese entrepreneurs.
Expatriate control of so much export-oriented businesses reflects a fundamental failing in China’s financial system. China may have the second highest savings rate in the world, lagging behind only Singapore, but these funds are usually wasted on inefficient state-owned enterprises (SOEs). These investments have failed to increase the competitiveness of Chinese SOEs, yet have starved efficient local entrepreneurs of the credits they need.