China Foreign Direct Investment Forecast - Example

China FDI Forecast Foreign direct investment (FDI) relates to the of controlling ownership of a specific business entity within a country by an alien based nation. FDI is imperative for developing countries as it fosters economic development through globalization, technological advancements, inflow of foreign capital, and provision of employment opportunities. Within the past 30 years, China experienced a surge in FDI mainly from developed countries, which resulted into increase in annual GDP growth rate. Increased FDI from developed countries mainly resulted from China’s ability attract investors through availability of resources including inexpensive labor and stable economy. China’s success in attracting investors remained as its millennium economic reform and opening policy. Consequently, China’s success in attracting FDI resulted into enormous inflow of foreign investment and capital, which effectively eased the financial condition of China’s economic development. It is indispensable that the constant flow of foreign capital in China resulted rapid expansion of its economy through opening of international market, advancement in technology, and provision of employment opportunities. FDI was also invaluable in generation significant number of employment, paid huge amount of taxes, and brought in the most cutting-edge technology as well as managerial experience. Economist believes that FDI has been a fundamental determinant of China’s economic growth. However, there has recently been increasing speculation about a possible slowdown of FDI into China. In 2012, FDI fell for the first time since it dropped in 2009 when the financial crisis had its impact. Even though there is huge potential for investment in inner cities in China, recent developments in China might cause investment to decrease. The paper aims at exploring the possibility of forecast FDI in China for the years 2013-2015, using FDI data as well as determinants of FDI. In explaining China’s FDI forecast, the paper elaborates the correlation between GDP and FDI, provides rationale about slowdown of FDI in China. In addition, the paper explores recent data that depicts China’s FDI forecast, explains China’s flow of investment and determines the effects of free trade on China’s forecasted FDI. Moreover, the paper elaborates Chinese foreign investment and the undermining factors and then provides a detailed evaluation and limitation to China’s FDI forecast before giving a comprehensive conclusion. Correlation between GDP growth and FDI. There exist a direct correlation between economic growth of a country and foreign direct investment. First, inflow of private capital mainly derived from FDI have a direct influence on globalization of the host country. Inflow of private capital directly contributes to opening of international relations between the host country and the investing nation resulting into increased global interactions. With increased foreign investors, a country directly engages in trade relations within the international community, which consequently result into globalization of its economy (Lankauskienė and Tvaronavičienė 548). Globalization of the economy due to inflow of capital from FDI directly results into opening of new market opportunities for the host country in other international regions. It is imperative to note that increased market opportunities within the international community is essential for sale of locally produced goods and services. Consequently, the country, experiences an increase in its economy due to increasing financial returns from international investments. The increased financial returns directly contributes to the improvement of GDP of the host country. Besides inflow of capital and fostering of globalization, FDI directly contributes to development financing and productivity gains by establishing new investment opportunities. Establishing of new investment opportunities is essential in development of an economy and consequent improvement in a country’s GDP. It is vital to comprehend that one of the potential indicators of improved GDP remains investment of a country in various sectors as infrastructure and technology. The ability FDI to promote economic growth by improving volume of investment and efficiency directly results into increase in GDP and the economy. Due to the abovementioned benefits of FDI and its ability to increase GDP of the host country, most nations initiates strategies that would attract foreign investors. China as a developing country have been a center for FDI for decades. Due to constant inflow of foreign capital coupled with benefits of FDI, China have experienced constant growth of its economy and increase in GDP. With increased growth of domestic product, China began investing in infrastructure, technology and education. As the country’s investment continued, China investors opted to begin outward foreign investment in other foreign countries in Africa, Asia, and the West. With increased opportunity for continued investment in foreign countries due to developing economy, China remains forecasted to act as the main source of FDI rather than destination. China Forecast to become Source of FDI Rather than Destination Based on China’s FDI outflows, the economy of the country has a formidable potential to grow into a source of FDI rather than a destination. It is essential to comprehend that FDI outflows define the amount of money acquired by China from outward direct investment done among the residents of reporting economy mostly to external economies. According to Donnan, 2014 while focusing on United Conference on Trade and Development (UNCTAD) data, China shows a potential to grow into a potential FDI source rather than a destination for foreign investors. The forecast remains economically sound due to the observed decrease in FDI net flows earned by foreign investing economies in China. According to the aforementioned UNCTAD statistics and China’s FDI analysis, the country’s overseas investment assets reached unimaginable 100 billion dollars in 2013 compared to the approximate 80 billion dollars in 2012. Based on the data, China’s economy growth remains poised to grow mainly from FDI in other countries rather than being the destination of other foreign investors. (Adapted from Donnan, 2014, pg. 1) According to Donnan, 2014, the main rationale for change of China from being a destination of FDI to source relies on the inherent change in investment priorities in the country. Most of Chinese companies have prioritized to secure great assets in developed and developing economies including Africa, Cambodia, and Myanmar. The Chinese companies have decided to move production processes in other developing and developed economies mainly for lower costs and the inherent preferential trade deals offered in foreign countries. Moreover, the economy of China seems to grow spontaneously increasing the cost of production and competition. The forecast that China would become a source of FDI remains clearly indicated by the current surge in China’s elite professionals in developing countries including Africa. China’s elite professionals and companies begun establishing investments in Africa in main economic sections including construction and health sectors. It is important that the continued investment of China elite professionals and other large corporations have led to increased FDI outflows and consequently improved GDP of the developing country. As the FDI outflow and foreign investment GDP continually inclined to rise, other Chinese investors remain encouraged to explore more investment opportunities overseas. Consequently, the country remains forecasted to being a source of FDI in foreign countries that being a destination for investment by other developed countries including United States. FDI in China Forecasted to Slowdown For the past decades, China have acted as the main center for FDI by other developed countries. China provided the cheapest raw materials, labor, and a favorable economy for direct growth of foreign countries. Consequently, direct foreign investment in the country heightened resulting into unimaginable growth in the economy of the country. However, economists forecast that FDI I china remains forecasted to change stall. According to UNCTAD, the changes would result from a shift in investment flows mainly due to recovery of the global economy. In addition, the changes in FDI in China would shift due to the forecasted tremendous growth of investment out of China. The surge in China’s investment in foreign countries would consequently end the more than two decades of net flows within the country. Based on economic analysis, developed countries FDI inflows into foreign developing countries including China would greatly decrease by 2015. As the FDI inflow of developed economies remains forecasted to decrease by 2015, the developing economies FDI inflows from foreign investments would constantly rise. (Adapted from Donnan, 2014, pg.1) The above diagram indicates the forecasted growth in developing and transition economies growth in FDI inflows. From the diagram, it is evident that FDI inflows of developed countries in China would consequently drop. Consequently, the drop in FDI inflows in China would ignite local FDI in other countries. Flow of Inward investment and FDI forecast It is domineering to understand that the inherent flow of inward investment specifically those in association with FDI to a particular country directly results into great potential benefits. It is imperative that the inward flow of investment results into strengthening of the economy, improvement in both quality and quantity of local based employment opportunities and advancements in technological base. In addition, the inherent flow of inward investment directly contributes to enhancement in supplier base and improvement in capacity of the host nation in responding to given opportunities available by global investment, production, and integration. Based on the aforementioned benefits of inward flow of investment especially in the host countries, development normally remains guaranteed. China have acted as a center for FDI for developed countries including United States. Consequently, the country have realized a surge in development of its economy including expansion of infrastructure, improvement in global investment, production, and enhancement in technological development. It is vital to state that the continuous investment in China by foreign developed countries directly contributed to its economic development. Consequently, the country’s economy began growing outwardly, as local economy began to flood. With continuous growth of the local economy, the country shifted to investment in foreign countries a factor that remains forecasted to result into China being a source of FDI rather than destination. Developed countries have had the highest inflow of foreign investment for the past decade. However, after economic meltdown in 2008, the global economic landscape greatly changed in favour of the developing or transitional economies. It is imperative that according to UNICTAD China’s economy as a developing country would consequently rise. Free trade agreements with ASEAN and FDI forecast Association of Southeast Asian Nations (ASEAN) defines a political and economic organization of countries found in Southeast Asia. The association that started in August 8, 1967 have had greater economic impact in Asian countries in consideration of trade related issues. It is essential that China’s involvement in free trade amongst Asian countries after joining ASEAN would result into the greatest bilateral trade by 2015 (Tai, and Jenn-Jaw Soong 30). Free trade agreement between China and ASEAN members is crucial in the development of the former’s economy coupled with the forecasted FDI. It is imperative to understand that continued increase in trade agreement between neighboring countries within the same region directly leads to open market for trade. Consequently, the most developed country in partnership directly benefits due to large volume of exports and constant increase in GDP. It is vital that China’s manufacturing sector have greatly grown compared to the ASEAN member countries. Consequently, China would greatly benefit from the inherent trade agreement between it and the ASEAN countries. Economic improvement in free trade zones directly relates to availability of large market that exists between the countries in agreement. In addition, free trade agreements remain indispensable in provision of potential opportunity for China to act as source of FDI due to its high GDP compared to the ASEAN members. It is domineering to understand that ASEAN would have a direct impact in Asian trade flows especially in shaping China’s FDI. The Chinese economy continues to rise with consequent increase in costs of labor. The constant rise in Chinese labor costs coupled with increase in production costs directly contributes to the forecasted decline in China being as an FDI destination. Other Asian nations following the free trade agreement remains constantly rising in terms of economic development in infrastructure. Currently, the Asian countries provide an alternative market to China mainly for FDI. Consequently, investors aim at establishing companies and other economic organizations in the member state of ASEAN rather than China. It is imperious to understand that the existing high number of manufacturing plants coupled with financial demographics directly contributes to China’s drop in FDI attraction. The financial demographics and the already developing economy in China directly provide for alternative investment in other Asian countries (Keller, Ben Li and Shiue, 340). Apparently, China’s involvement in the Asian free trade agreement would greatly contribute to the forecasted FDI. China remains as one of the most developed nations amongst the ASEAN member states. A free trade agreement would directly provide a formidable opportunity for China to act as a source of FDI by investing in the Asian countries. Chinese investors would directly engage in investment in the Asian countries to mainly to avoid the increasing competition and rise in labor costs within China’s economy. Free trade agreement is important for the forecasted China’s FDI because of the free customs and tariffs that would associate with the foreign market. Because of the increased production in China, the country would readily export its manufactured products into the ASEAN member countries. Increased exportation coupled with the free trade associations would directly result into improvement in China’s economy and realization of rising GDP. It is imperative that as China’s foreign market constantly rises, Chinese investors would remain convinced to initiate investment in the ASEAN countries. Consequently, the rise in investment in foreign countries would directly result into growth of the Chinese economy and improvement in GDP. Chinese foreign investment Chinese government have initiated various trade structures that have resulted into the continuous surge in international trade and consequent foreign investment. The constant negotiations between the Chinese government and foreign economies in Africa, west countries, and Asian countries have greatly contributed to opening market for trade by Chinese government and investors. Lifting of free trade barriers remains vital for a country’s competitiveness in the global economy (Drysdale, East Asia Forum and Shang-Jin Wei 1). As aforementioned, China has constantly engaged in international trade negotiations including joining of ASEAN and forming trade partnership with America and other African states. International trade negotiations initiated by the Chinese government has directly contributed to increased foreign investment. In addition, proximity of China to international organizations including direct involvement in World trade organization (WTO) has directly contributed in opening of new investment opportunities for the Chinese government and its potential investors. It is imperative to understand that having free trade barriers within the international community is essential in encouraging foreign investment and improvement of diplomatic associations with foreign countries. China’s direct involvement in international trade affairs have consequently made it a potential international foreign investor in among developing countries. Based on the structure of international trade, increased opening of trade barriers including reduced domestic taxations, tariffs, and customs duties directly influences investment surge. The aforementioned China’s strategies in fostering international trade relations have directly contributed to increase in foreign investment. Consequently, China’s international market have greatly expanded. Expansion of international market have contribute to increased availability of foreign-based export opportunities for China’s largest producing companies. Currently, China directly exports various goods from textiles products, technology, constructions services, and agricultural products to foreign countries in the West, Africa and Asia. Moreover, ability of Chinese government to foster free trade relationships with the international community have resulted into emergence of multinational corporations in foreign countries. Presently, various Chinese multinational corporations dealing in construction and technological industry remains directly engaged in various foreign countries. It is important to note that as direct foreign investment in the international community increases, Chinese annual GDP improves mainly from the rising foreign investment returns. The surge in international investment by Chinese government and its citizens have directly resulted into a change in FDI. With the aforementioned foreign investment opportunities propelled by increased China’s free trade within the international community, the country remains at a justifiable position to act as FDI source. Furthermore, ability of Chinese government to upgrade its manufacturing industry through development of labour-intensive exports strategy have directly contributed to increased Chinese foreign investment. In addition, opening of product market has resulted into encouraged large flows mainly of inward foreign direct investment. Export-oriented growth strategy resulting from mobilized low-cost labor, and foreign capital and technology have been indispensable in increasing China’s foreign direct investment. Moreover, Chinese government’s decision to encourage its local companies to globalize have resulted into the emergence of Chinese state-owned enterprises (SOEs) within the international community. The SOEs have increasingly secured the largest share of international market mainly in investment. Encouragement of SOEs to globalize have increased China’s outward direct investment in mostly in technological and global commodities sectors. Evaluation and Limitations of China’s forecasted FDI China’s direct in World trade organizations treaties including GATT would directly help in reduction of tariffs for its locally produced products. Elimination of preferences and reduction of trade barriers would consequently enable China to improve constantly its economy by focusing on international trade and investment. In addition, Success of Uruguay round in enabling developing countries to export tropical products at reduced import duties would enable the industries economy of China to grow tremendously (WTO 1). With reduced international barriers and improved economy sectors, China remains in the best formidable position to venture in FDI throughout the world economy. However, China’s forecasted FDI may face various challenges relating to international politics, other trade barriers and economic recession issues. Various politics of supremacy exist between East and West countries, an emerging issue that may hinder the China’s forecasted foreign investment. China’s dominance of global economy especially in Africa have raised several political issues mostly from the colonial powers and superior nations including United States. Besides political issues, global economic recession may hinder China’s stability and industry. However, with stable leadership and fostering of international relationships, China would definitely become a major FDI investor by 2015. Conclusion In conclusion, there exists a direct correlation between FDI and growth of domestic product of the host country. The decades that China acted as a destination for FDI resulted into the growth of its economy. Due to the expanding economy, Chinese government and potential investors begun exploring new investment opportunities in foreign countries. With increased productivity and formidable international trade relations, China have developed into one of the most economically stable countries with outrageous exports and investments in foreign countries. Withstanding political issues and economic recession, the surge in forecasted China’s FDI remains poised to continue and soon the nation would dominate the World economy Bibliography Donnan, Shawn. FDI into developing economies forecast to stall. Financial Times. June 24, 2014. Web. 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