by Theodore H. Moran, Peterson Institute for International Economics
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China has been remarkably successful in designing industrial policies, joint venture requirements, and technology transfer pressures to use foreign direct investment (FDI) to create indigenous national champions in a handful of prominent sectors: high speed rail transport, information technology, auto assembly, and an emerging civil aviation sector. However, the aggregate data show relatively small horizontal and vertical spillovers from foreign manufacturing multinationals to indigenous Chinese firms. Despite the large size of manufacturing FDI inflows, the impact of multinational corporate investment in China has been largely confined to building plants that incorporate capital, technology, and managerial expertise controlled by the foreigner. As the skill-intensity of exports increases, the percentage of the value of the final product that derives from imported components rises sharply. China has remained a low value-added assembler of more sophisticated inputs imported from abroad—a "workbench" economy.
Where do the gains from FDI in China end up? While foreign manufacturing MNCs may build plants in China, the largest impact from deployment of worldwide earnings is to bolster production, employment, R&D, and local purchases in their home markets. For example, the most recent data show that US-headquartered MNCs have 70 percent of their operations, make 89 percent of their purchases, spend 87 percent of their R&D dollars, and locate more than half of their workforce within the US economy. Home markets are where most of the earnings from FDI in China are delivered.
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