FDI in china

Foreign direct investment (FDI), which refers to the inflow of foreign capital into a country, also entail investments through cross-border mergers, and "greenfield investments" – such as the setting up of a completely new factory by a foreign company. There are some problems with the FDI data that have to be kept in mind when interpreting them, as noted by UNCTAD in its latest World Investment Report. FDI is an investment involving a lasting interest by a home-economy entity in an enterprise in a host economy. For data collection purposes, FDI has been defined as involving an equity stake of 10% or more in a foreign enterprise. FDI has three components: equity capital, intra-company loans and reinvested earnings. Different countries have different recording practices relating to these three components. Some countries deviate from the suggested 10% threshold value for foreign equity ownership. Most countries report long-term intra-company loans, but not all countries record short-term loans and trade credits. Some countries are still not able to report reinvested earnings, as the data are not easily available from company reports or balance-of payments surveys; those that report often do so with a considerable time lag. UNCTAD stressed that FDI figures are very volatile, and they can easily give a distorted picture by the impact of single transactions or by statistical effects. Differences in how countries measure and report FDI complicate the interpretation of FDI trends for the following reasons:

• Bilateral discrepancies between FDI flows as reported by home and host countries can be quite large. The following table on FDI flows to China as reported by China (the host) and by a number of the investing (home) countries highlights this problem and thus claimed by the country are far in excess of those reported by investors (see table). Thus global FDI inflows and outflows differ. In 2004 for example, global FDI outflows were 13% higher than global FDI inflows. This imbalance is due to various factors such as: different methods of data collection by host and home countries, different data coverage of FDI (i.e. all three components of FDI may not be included), different time periods used for recording FDI transactions, and different treatment of round-trip investments and of FDI in special-purpose entities.

• As recording practices change over time, time series data on FDI flows have structural breaks. For example, Japanese data on FDI flows started to include reinvested earnings (in addition to the other components) only in 1996, the same year German FDI flows began to cover short-term, intra-company loans. Furthermore, to facilitate a comparative analysis of worldwide FDI, data on flows in various currencies are converted into a single currency, the United States dollar, and growth rates of dollar denominated FDI flows may diverge from growth rates of FDI flows in national currencies. In 2004 for instance, the United States dollar depreciated against most currencies of the developed countries. Therefore the 9% decline in the dollar value of FDI inflows into developed countries using constant exchange rates was smaller than the decline in FDI inflows calculated with current exchange rates. Similarly, as FDI flows are expressed in nominal or current prices of a country, the conversion of these flows into constant prices yields different results.

The recent paper by Benoît Mercereau is also important in this regard.