China’s Foreign Investment

Ellen R. McGrattan, Consultant

July 2016 | Federal Reserve Bank of Minneapolis Economic Policy Paper 16-9

Foreign investment into China has surged since the 1990s and become a topic of keen interest for both scholars and the media. While China has encouraged this investment with the goal of catching up technologically, close analysis reveals that only a small share of its foreign investment comes from the United States and other nations with the technology China seeks.

Instead, inward foreign direct investment flows predominantly from Hong Kong and a few Caribbean nations. Two key factors behind this: China’s tax policy toward foreign investment and its “industrial” policies to encourage development and growth. Specifically, preferential tax treatment for foreign investment leads many Chinese businesses and households to “round-trip” investments; and policies requiring joint ventures between Chinese and foreign high-tech companies—while benefiting China enormously—discourage investment by multinationals from advanced countries.