US FDI in China

by

Lee Branstetter & C. Fritz Foley on “Facts and Fallacies about U.S. FDI in China“:

Fallacy Number 1. U.S. FDI in China is large

FIE investment in fixed assets accounts for only about 10% of total fixed asset investment in China… American investment in China accounts for a relatively small portion of total U.S. multinational activity around the world…[Gravity model] results point out that levels of U.S. MNE activity in China are lower than would be predicted by a simple model in which levels of MNE activity vary with distance and country size…

Fallacy Number 2. U.S. FDI in China is Export-Oriented

The data illustrate that in 2004, about $39.7 billion of local affiliate sales were directed to the local market and only $3.7 billion were directed to the U.S. market. In that year, U.S. exports to affiliates and U.S. imports from affiliates comprised less than 5% of affiliate sales. These patterns are not consistent with the hypothesis that U.S. affiliates operating in China are contributing to the large U.S. trade deficit by producing there and selling back to the U.S… Wal-Mart and other large-scale U.S. retailers typically procure their goods from China-based export-oriented manufacturing plants that are not U.S.-owned to any significant degree…

Fallacy Number 3. U.S. multinational investment in China displaces investment elsewhere.

[F]irms that expand in China are almost as likely to expand employment domestically as they are to cut it. This evidence is not what one would expect if growth in China were strictly displacing activity in the U.S…

Fallacy Number 4: U.S. multinationals are aggressively exploiting China’s growing technological prowess

In the U.S., China is often perceived as being an emerging technological superpower. Industrialists, economists, and policy makers believe that China is becoming an attractive location to perform innovative activity… Several considerations suggest these views are overblown… Only $622 million was spent by U.S. MNEs on R&D in China, an amount that is about 3 tenths of one percent of the total R&D undertaken globally by U.S. MNEs… From the beginning of 2000 to the end of 2006, the U.S. PTO granted 3,447 patents to inventors based in China or teams of inventors that included at least one member with a Chinese address. Over the same period, inventors with ties to Japan received nearly 241,000 patents… Interestingly, the leading patent-generating firm in China, with more than four times Microsoft’s cumulated patent stock and a commanding lead over any indigenous mainland Chinese firm, is the Taiwanese contract manufacturing firm, Hon Hai, also known by its English trade name, Foxconn… it appears the Taiwanese firms are more aggressively exploiting the opportunities to conduct research in China, such as they are, than are their U.S. counterparts… Despite impressive progress and spectacular growth in human capital, China’s transition to status as a significant net exporter of innovative goods and services almost certainly lies many years in the future.

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