LegiStorm

Summary:

This report provides an overview of global Foreign Direct Investment in the People's Republic of China, examines its effects on the Chinese economy, surveys U.S. FDI in China, and includes a discussion of policy implications for the United States. China, by far, is the largest recipient of FDI among emerging economies with an inflow of $52.7 billion in 2002 and 424,196 foreign-affiliated firms operating in China representing paid-in foreign investment of $448.0 billion. These firms account for about half of China's exports and imports. Nearly 1,500 U.S. companies from 41 states have direct investments of $10 to $34 billion in China. For the U.S. Congress, foreign direct investment in China entails both oversight and regulatory issues. Some questions with respect to this investment are: (1) the extent to which FDI is contributing to China's economic growth and technology development, (2) the extent to which U.S. FDI in China is contributing to the U.S. trade deficit, (3) whether FDI inflows into China come at the expense of flows into other countries, (4) how FDI is affecting security concerns, and (5) whether FDI affects the export of sensitive technology to China. Foreign direct investment has contributed about 13 % to China's economic growth, and most of China's modern technology, particularly in electronics, has been imported. With respect to trade, there is little doubt that the large surplus in China's trade has been generated largely by the surge in its exports of foreign brand-name manufactures often made in foreign-affiliated factories. As much as 80 to 90% of certain high technology exports originate from foreign affiliated firms there. In terms of the U.S. trade deficit with China, American companies there do export some of their output back to the American market, but most is sold in China. China has been attracting some FDI flows that otherwise could have gone to other developing countries. In essence, China's gain may be their loss. In terms of security, the $20 to $34 billion in U.S. FDI in China combined with $68 billion from Taiwan, and some $300 billion from elsewhere is changing the calculus for hostilities and creating groups with a strong interest in stability both within China and between China and the United States, Taiwan, and other potential adversaries. Foreign direct investment in China affects security primarily through three avenues: its contribution to economic power, economic interests, and technology transfers. The more China grows, the more funds it is able to provide to its military and attain big-power status in the world. With respect to economic interests, foreign companies in China can serve both as hostages for Beijing and important pressure groups that can pursue their interests in maintaining stability with both Beijing and their home governments. With respect to sensitive technologies, in the U.S. case, it does not appear that prohibited U.S. technologies have been transferred through foreign affiliated companies, although the technologies in the electronics and aviation industries that have been transferred do have dual civilian and military uses. Such transfers are controlled by export control regimes. The highly publicized cases of satellite technology being allegedly illegally transferred to China involved direct transfers from U.S. corporations to Chinese companies. This report will be updated as circumstances warrant.