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RESEARCH THINKTANK


The China problem SUBJECT GEOPOLITICS


DESPITE THE ONGOING TRADE WAR, FOREIGN FIRMS ARE RESOLUTE ON STAYING IN THE COUNTRY, WRITE URI DADUSH AND PAULINE WEIL


China holds a paradox: Western policy-makers and many firms decry discriminatory business practices — concerns that have culminated in a trade war between the US and China — yet foreign direct investment (FDI) in China continues to thrive. In the first quarter of this year, FDI into China soared by 40% compared to the same period a year prior and, as reported by Unctad, the country overtook the US as the top destination for overall foreign investment in 2020. China’s trade in goods and services, in which value chains animated by foreign investors play a crucial role, is also as buoyant as ever.


Investing in China In a recent paper, we tried to reconcile these contrasting realities. Although tensions over human rights, security and geopolitics clearly play a big role in relations with China, we focused solely on the economic and business aspects of the situation. To do so, we first examined


surveys of EU, US and Japanese businesses operating in China to understand why they continue to operate there, despite the trade war. Unsurprisingly, businesses point to the size and dynamism of China’s market as key to their presence. However, they also mention several threats and concerns that give them pause. We focus specifically on those concerns to compare China with other countries that attract large amounts of FDI. We only used trusted sources, such as the OECD, the World Bank, the World Economic Forum and the World Trade Organization. In a highly politicised debate, our aim was to arrive at an appraisal of business conditions in China that is as fact-


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based and objective as possible. Drawing on company surveys


and international comparisons, we show that some of the concerns expressed by Western policy-makers about operating in China are real, and that a particular weakness is the uneven and difficult-to-predict application of laws and regulations, as distinct from the laws themselves. However, we also show that,


along many important dimensions (such as protection of intellectual property [IP] rights, for example), China compares well with other countries at similar levels of development, while in others (such as overall ease of doing business), China outranks nearly all developing countries and even some advanced countries. The implication is that, while China’s size and dynamism are clearly very important for foreign investors, they provide only one part of the explanation of the country’s attractiveness. Moreover, contrary to the prevailing narrative, conditions for doing business in China have improved considerably over the past few years.


Macro fundamentals help


explain the attractiveness of China. The country is now the world’s largest market for many products, from automobiles to some luxury products. According to a McKinsey study, top global brands now have a higher penetration in China than in the US. Chinese consumer goods markets — and those for machinery, parts and equipment — are growing three times as fast as their Western counterparts. Meanwhile, per capita incomes in


China (a good proxy for labour cost), are about one-fifth of those in the West. Accounting for productivity, the cost of labour in China in many sectors, though rising rapidly, remains internationally competitive. It is not surprising, therefore, that many international companies place China among their three top strategic priorities as a market and production base and, despite political pressures of various kinds, very few firms say they plan to leave the country. However, China’s market size


and growth trends are not the whole story.


www.fDiIntelligence.com August/September 2021


Illustration by John Holcroft


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