QINGDAO, Oct. 20 (Gwadar Pro) – Foreign-invested enterprises (FIEs) account for less than 3 percent of China’s total enterprises, but they contribute nearly half of the foreign trade volume, one-quarter of the output value and profits of all the industrial enterprises (with annual sales over RMB yuan 20 million), one-fifth of tax revenue and about 13 percent of the urban employment, according to a report newly released by the Ministry of Commerce at the ongoing first Qingdao Multinationals Summit in China’s Shandong Province.

Here we present some excerpts of the report, Multinationals In China: 40 Years of Investment.

Growing: Investment History by Multinationals in China

On December 18, 1978, the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China (the Party) was held and decided to shift the major duties the Party and the country to economic development.

The fundamental national policy of reform and opening-up was established.

In the following four decades, China has undergone tremendous changes, and FDI in China has had a sharp increase.

I. Initial Stage (1979-1991)

The reform and opening-up enables multinationals to enter China.

In October 1978, a technology delegation of the Chinese government made a visit to the United States.

During its negotiation with GM on introducing heavy-duty vehicle technology into China, GM proposed to establish a joint venture with Chinese companies in addition to technical cooperation.

The Chinese delegates did not understand the very meaning of the joint venture until their American counterparts made an explanation.

Although it sounds reasonable that two parties work together to invest, operate and share risks, the Chinese side doubted that how could capitalists and communists work together to invest and operate.

The delegation submitted this proposal to the Party leaders after coming back from the U.S. Deng Xiaoping, then Vice Premier of the State Council accepted this proposal, by saying, "A joint venture is acceptable," and that "the joint-venture scheme may be applied to both sedans and heavyduty vehicles."

The Chinese side then started to consider joint ventures during its negotiations with General Motors of the United States and Volkswagen of Germany.

In March 1979, the Chinese delegation made another visit to the U.S. to talk about investment cooperation with GM. Unfortunately, the board of directors of GM made a final decision to reject this proposal.

However, Volkswagen showed great interest in direct investment and operation, and beat GM to the draw by establishing the very first automobile joint venture in China—SAIC Volkswagen Automotive Co., Ltd.

II. Rapid Entry Stage (1992-2001)

In 1992, China's opening-up was brought to a climax after Deng Xiaoping, chief architect of China's reform and opening-up, made his famous speeches in South China. Multinationals' investment in China entered a stage of rapid development.

China gradually opened its market to the world from its coastal cities to cities along major rivers, to inland cities, and to border cities, including 6 port cities along rivers such as Wuhu, 13 inland border cities such as Heihe, and 18 inland provincial capital cities such as Hefei.

As the multi-level and comprehensive opening-up took shape, multinationals expanded from the coastal to the inland regions.

III. An Important Destination (2002-2012)

China's accession to the World Trade Organization (WTO) on December 11, 2001 marked a new development stage of China's opening-up when its market further opened up, rules became further in line with international regulations, and the economy rapidly integrated into the global economy.

Multinationals, by taking advantage of those opportunities and a better environment, steadily increased their investment in China.

In an 11-year period from 2002 to 2012, a total of 373,000 new FIEs were established in China, bringing an actual FDI of nearly US$ 960 billion and an average annual realized FDI of US$ 87.1 billion, 2.4 times that of the previous period.

The number of newly established FIEs was 34,000 in 2002, more than 40,000 each year from 2003 to 2006, averagely 27,000 per year from 2008 to 2011 and 25,000 in 2012, a decrease of 10.1% over the same period of last year.

The capital intensity increased significantly, and the amount of enterprises' investment in single project increased from US$ 1.544 million in 2002 to US$ 4.482 million in 2012, 2.8 times as much as that in the previous period.

IV. High quality development in the New Normal (since 2013)

Since 2012, when China's economy started its New Normal period, investment by multinationals in China has undergone an overall steady development, with their investment quality continuously improved.

During 2013-2018, the compound annual growth rate of FDI in China fell from 7.8% to 2.8%, compared with years between 2002 and 2012.

Against the background of the domestic economic transformation and the increased risk of the international market, despite the slowdown of FDI in China, it has maintained a steady growth momentum.

In 2018, 60,533 FIEs were newly established nationwide, a year-on-year increase of 69.8%; the actual use of FDI was US$ 134.97 billion, a year-on-year increase of 3%.

In 2018, China was still the developing country attracting the largest FDI, ranking second in global cross-border investment, share of which increased from 7.6% in 2012 to 10.7% in 2018.

During this period, 33,000 FIEs were newly established each year, slightly lower than the average of the previous stage.

The actual use of FDI increased from US$ 111.7 billion in 2012 to 138.31 billion in 2018.

The average annual actual use of FDI was US$ 132.7 billion, an increase of 52% over the previous period.

In 2018, the actual use of FDI was about 150 times that of the initial period of reform and opening-up.

The service industry further increased its share of total FDI.

In 2018, among the total number of newly established FIEs, the service industry accounted for 88.7%, and the manufacturing industry accounted for 10.2%.

Among the total actual use of FDI, the service industry and manufacturing industry accounted for 68.1% and 30.5%, respectively.

However, the actual use of FDI in the manufacturing industry rebounded, with a year-on-year increase of 20.1%, and its share increased by 4.8 percentage points over the previous year.

Among them, high-tech manufacturing increased by 35.1% year-on-year.

According to the statistics of the Torch Center of China's Ministry of Science and Technology, at the end of 2018, there were 181,000 high-tech enterprises in the country, including 11,931 foreign-invested high-tech enterprises, accounting for 6.6%.

Foreign investors set up 3,124 FIEs by M&A, and the actual use of FDI was US$ 17.81 billion, up by 51.2% and 18.7% respectively, accounting for 5.2% and 13.2% of the total FDI.

The proportion of FDI actually used by M&A increased by 9 percentage points over 2011.

By the end of 2018, China had established a total of 961,000 FIEs, with the actual use of FDI of US$ 2.1 trillion.

The number of existing FIEs accounts for about 3% of the total number of enterprises in the country.

In 2018, FIEs realized a total import and export volume of US$ 1.9861 trillion, accounting for 42.6% of the national total, of which US$ 1,036 billion for export, and US$ 932.1 billion for import, accounting for 41.7% and 43.7% of the national total.

The tax payment exceeded RMB yuan 3 trillion, accounting for 17.9% of the national tax revenue.

Foreign-invested industrial enterprises achieved profits of nearly RMB yuan 1.7 trillion, accounting for 25.3% of the total profits of industrial enterprises.  

Harvesting: Investment Benefits of Multinational Corporations in China

China's reform and opening-up provides a "China opportunity" for the global layout and growth of multinationals.

Multinationals have witnessed the historical achievements of China's reform and opening-up, made important contributions to China's economic and social progress, and also enjoyed the dividends brought about, and gained a vast market and considerable profits in China.

I. China is a major revenue source of multinationals

In the past 40 years of reform and opening-up, multinationals have spread all over China's geographical regions and industries.

For multinationals, China has become one of their fastest growing sources of income.

Foreign-invested industrial enterprises have a strong growth in operating income.

According to the "China Statistical Yearbook", among industrial enterprises, the owners' rights of Hong Kong, Macao and Taiwan-invested and FIEs (hereinafter jointly referred to as FIEs) increased from RMB yuan 973.041 billion in 1999 to RMB yuan 9,729.667 billion in 2016, an increase of nearly 10 times, achieving an average annual growth rate of 15%.

Income generated by the main business increased from RMB yuan 1,796.655 billion in 1999 to RMB yuan 24,761.969 billion in 2017, an increase of nearly 13 times, achieving an average annual growth rate of 16%.

The average income of a single enterprise's main business increased from RMB yuan 67.0394 million to RMB yuan 504.8246 billion, an increase of 6.5 times, and the average annual increase hit 13.2%.

Thanks to the continuous improvement of labor efficiency in China, the productivity of per capita labor input by FIEs has been greatly improved, and the per capita income of the main business has increased by nearly 10% per year.

In 2017, it reached a per capita income of US$ 1.2066 million, 4 times higher than the US$ 226,900 level in 1999.

The main business income realized by per RMB yuan 100 of assets increased from RMB yuan 78.05 in 1999 to RMB yuan 130.74 in 2008, an increase of 67.5%.

After 2008, despite the impact of the financial crisis, it remained at a relatively high level, reaching RMB yuan 114.04 in 2017, which is still 46.7% higher than that of 1999, and higher than the overall level of all industrial enterprises in China.

Revenue on the Chinese market accounts for a big share of multi nationals.

According to public information, in 2017, the top 20 US integrated circuit companies harvested revenue of US$ 75 billion from the Chinese market, accounting for 35% of their total revenue.

The top 10 US chip companies have a much larger dependence on the Chinese market, with a dependency ratio ranging from 23 % to 80%.

The examples of some renowned multinationals also attest to such findings.

In 2017, Apple's revenue in the Chinese market reached US$ 44.7 billion, accounting for 19% of its global revenue.

Boeing's revenue in China was US$ 11.9 billion, accounting for 13% of its global revenue.

Intel and Qualcomm's revenue in China reached US$ 14.8 billion and US$ 14.6 billion respectively, accounting for 24% and 65% of their total revenue.

II. Significant return on investment

Maximizing profits is the fundamental purpose of multinationals to operate globally.

For 40 years, multinationals have leveraged on China's comparative advantages to arrange production and sales networks, and have succeeded in making huge profits. Most multinationals have an ROI in China higher than their global average.

According to the BEA statistics of the US Department of Commerce, US companies' return on investment (ROI) in China in 2000 exceeded their global average.

In 2014, the ROI in China reached 16.5%, which was 5.5 percentage points higher than its global average.

Despite the global economic downturn, in 2018, when Sino-US trade frictions escalated, the ROI of US companies in China still reached 11.2%, which was 2.2 percentage points higher than the 8.9% ROI in the world.

According to the US Chamber of Commerce's White Paper 2019, despite the uncertainties in the global political and economic environment and the slowdown of China's economy, in 2018, 69% of the companies surveyed said they were profitable, and another 21% reaching break-even.

The American Chamber of Commerce in South China's 2019 White Paper on Business Environment in China shows that although China's economic growth rate is slowing down, the Chinese market is still in a period of sustained growth, so most US companies can achieve profitability in China and have confidence in the market.

The ROI of 40% of European companies in China is higher than their global average.

According to a survey of the European Union Chamber of Commerce, in 2018, despite the overall slowdown trend of income growth, 40% of European companies still said that the profit level of their operations in China is higher than their global average, which is also the highest level since 2012.

Since 2009, more than 60% of European companies have maintained a positive rate of return in China, and such proportion has increased year by year, reaching 75% in 2018, and another 16% of surveyed companies have shown that they have broken even.

More and more Japanese-invested enterprises have positive ROI in China.

According to a survey conducted by the Japan External Trade Organization (JETRO) for Japanese invested enterprises in China, since 2006, the proportion of Japanese-invested enterprises that forecast "profitable" has remained above 50%, and it basically shows a steady and rising trend.

By 2017, the proportion of Japanese-invested companies that are expected to make profits has exceeded 70%, and the figure remained at 71% in 2018.

III. Multinationals reduce production cost by investing in China

Reducing costs is a strategic goal of cost-seeking multinationals.

Cost-seeking multinationals, also known as efficiency-seeking multinationals, carry out efficiency-driven FDI to reduce the cost of producing labor-intensive processes, products or value chains.

The main reason behind their investment in China is that capital, technology and information-intensive value-added activities are concentrated in developed countries, while labor and resource-intensive activities are concentrated in developing countries.

Processing trade is a typical cost-seeking FDI.

This kind of investment first entered China with China's reform and opening-up, and used China's population and policy dividends to successfully reduce production costs and make huge profits.

After the reform and opening-up, China has adopted an export-oriented economic development strategy, established export processing zones in coastal areas, and provided incentives for FIEs with fiscal, tax, capital, and land concessions.

At the same time, the country had a large amount of cheap labor, sound infrastructure and low-cost energy resources.

Multinational companies place low-value-added, low-profit assembly and processing lines in China to reduce production costs, especially labor costs.

More than 50% of China's exports in the processing trade category are produced by FIEs.

In 2000, the import and export volume of processing trade of FIEs was US$ 165.77 billion, accounting for 72% of the total processing trade in the country, and the export volume was US$ 97.227 billion, accounting for 70.6% of the country's processing trade exports.

Taking the most typical global value chain of Apple phones as an example, according to a research report written by three professors at the University of California and Syracuse University, "Capturing Apple 's Profit in the Global Supply Network", Apple takes 60% of the profit for each iPhone it sells while China only takes 1.8%, despite contributing Apple with huge benefit in labor cost.

IV. Multinationals have gained enormous market in China

Investing in China helps multinationals find emerging market. "Occupying the market" is the strategic goal of market-seeking FDI, and this type of multinational has also achieved great success in China.

Market-seeking FDI occurs mostly in the manufacturing and service industries, such as retail, catering, chemical, automotive, and service industries.

Most of the products or services in these industries are directly produced and sold locally for the purpose of serving the local market.

Based on China's huge consumer market and human resources, market-seeking multinationals have good profitability, achieve revenue growth, and are optimistic about future profit prospects.

They intend to expand their business in China or transfer to China their production bases and high value-added or high-tech products and technology.

At present, more than 70% of the world's 50 largest retail companies are landing in China.

Almost all major international auto companies have joint ventures in China.

Multinationals constantly improve their positions in the Chinese market.

With the growth of FDI, the market share of FIEs in some fields has continuously increased.

In the electronics, automotive, machinery, instrumentation and other industries, the products produced by FIEs have occupied more than one-third of the domestic market.

In the auto parts market, the market share of FIEs reached 49.25% in 2017, with a small number of companies but a large market share.

In the mobile phone CPU market, Qualcomm's market share reached 53% in 2018.In the printer market, HP has almost 50% market share.More and more multinationals target the Chinese market.

According to a survey from chambers of commerce of various countries, 80% of Korean companies investing in China in 2016 are directly targeting the Chinese market.

One-third of US companies in China have over half revenues generated from local design, development or customized services and products.

Among all US enterprises planning to invest additional money in China, 36% of them plan to target the Chinese market.

And 71% of EU companies in China say they will continue to stay in China for the purpose of serving the Chinese market.

Two-thirds of EU companies say China's middle class has expanded in size and the income levels have increased, which represents the biggest opportunity.

According to the American Chamber of Commerce in South China's 2019 White Paper on Business Environment in China , 72% of the surveyed companies believe that "China's market growth potential" is the first reason among such reasons as their investment in 2018 outperformed 2017 and they shifted investment from other markets to China.

FDI in the service industry mainly targets the Chinese market.

In terms of industrial structure, the service industry has become the mainstay of China's use of FDI, which mainly serves the Chinese market.

According to the statistics of the Ministry of Commerce, the proportion of FDI in the service industry has increased from 40.57% in 2009 to 85.83% in 2018.

In 2018, the number of FIEs in the service industry increased by 78.94% year on year, and the contracted FDI increased by 18.85% year on year.

In the future, the use of FDI in services will continue to be at a high level in China 's investment structure.

V. Innovative asset-seeking multinationals benefited from investment in China

Innovative-asset seeking multinationals aim at innovating production.

In a globalized economy, multinationals engage in innovative asset-seeking FDI as the primary means of improving the company's competitiveness.

In recent years, with the improvement of China's innovation capability and the optimization of its innovation environment, more and more innovative asset-seeking FDI has either expanded investment in China or entered the Chinese market.

According to the statistics of the Ministry of Commerce, the number of FIEs in high-tech service industry increased by 108.17% year on year in 2018, the contracted FDI increased by 32.74% year on year.

The number of high-tech manufacturing enterprises increased by 43.22% year on year, and the contracted FDI increased by 16.59% year on year.

From January to June 2019, FDI accelerated its concentration on China's high-tech industries.

The actual use of FDI in the high-tech industry increased by 44.3% year on year, accounting for 28.8%.

The actual use of FDI in high-tech manufacturing was RMB yuan 50.28 billion, an increase of 13.4% year on year.

Among them, the actual use of FDI in the pharmaceutical manufacturing, electronics and communications equipment manufacturing industries increased by 12.8% and 25% year on year respectively.

The actual use of FDI in the high-tech service industry was RMB yuan 87.56 billion, an increase of 71.1% year on year. 

Among them, information services, R&D and design services, and scientific and technological achievements transformation services increased by 68.1%, 77.7% and 62.7% year on year respectively.

Multinationals constantly add more R&D centers in China.

In the 1980s, the trend of R&D globalization for multinationals became more obvious.

Since the mid-1990s, multinationals have accelerated the setup of R&D institutions in China, and after entering the 21st century, there has been more rapid development.

On the one hand, this allows multinationals to directly use China's brainpower to serve their global strategy, and engage in global R&D with the vast number of Chinese high-tech talents. 

On the other hand, it can capture growth opportunities in new consumer sectors and gain market share quickly.

Innovation-related output of multinationals has grown rapidly in China.

For multinationals, the R&D of new technologies and products and the absolute control of core patents are important means to maintain competitiveness and can guarantee long-term profit sources in fierce international competition, which also constitute the most important innovation output.

On the one hand, new products and services are an important innovation output of multinationals.

By applying innovative knowledge, new technologies, and new processes, multinationals develop and produce new products and new services to occupy the market and realize market value.

On the other hand, with these resources, multinationals continue to increase R&D investment in China, focusing on the application of invention patents.

At the same time, multinationals gain control of the highend market by building technical barriers to ensure their long-term profit sources.