Foreign Direct Investment in China's High‐technology Manufacturing Industries

• DOI: http://doi.org/10.1111/cwe.12258
• Author: Mary E. Lovely,Zixuan Huang
• Published date: 01 September 2018
• Date: 01 September 2018

©Peterson Institute for International Economics, reproduced by permission from PIIE

China & World Economy / 104–126, Vol. 26, No. 5, 2018

104

Foreign Direct Investment in China’s High-technology

Manufacturing Industries

Mary E. Lovely, Zixuan Huang*

Abstract

This paper provides a survey of foreign investment activity in China’s high-technology

manufacturing industry. In addition, we closely examine the relationship between

industrial policy, foreign investment and China’s high-technology export success using

the development of an indigenous integrated circuits industry as a case study. This paper

nds that China’s efforts to raise the productivity and innovative capacity of indigenous

enterprises is consistent with rising domestic shares of high-technology assets and prots.

Nevertheless, foreign-funded enterprises remain the source of most high-technology

manufactured exports, primarily from wholly foreign-owned firms. In sum, despite

indigenous development, Chinese high-technology manufacturing and exports remain

deeply tied to foreign investment.

Key words: China, exports, foreign investment, high-technology manufacturing

JEL codes: F10, F14, O25

I. Introduction

Since 1990, inward foreign direct investment (FDI) has been a key driver of China’s

export expansion.1 The share of China’s total exports sourced from wholly foreign-

owned enterprises (WFOEs) operating in China and Sino–foreign joint ventures (JVs)

has risen steadily over time, from about 31 percent in 1995 to 58 percent in 2005

(Wang and Wei, 2010). By 2015, the share of Chinese exports originating from foreign-

invested enterprises had fallen but remained high at 46 percent, with wide variation

across sectors.2 While noting that the contribution of exports and FDI to growth can

be overstated, Branstetter and Lardy argued, “there is no question that expanding trade

and FDI have contributed to Chinese living standards… China has been able to alter its

*Mary E. Lovely, Professor of Economics, Maxwell School of Citizenship and Public Affairs, Syracuse

University, USA. Email: melovely@syr.edu; Zixuan Huang, Research Analyst, Peterson Institute for

International Economics, USA. Email: zhuang@piie.com.

1China refers to the Chinese mainland throughout the paper.

2Source: Authors’ analysis of Chinese Customs data.

©Peterson Institute for International Economics, reproduced by permission from PIIE

FDI in China’s High-tech Industries 105

pattern of trade to conform to its comparative advantage” (2008, p. 648).

Over the past two decades, however, foreign investment into China has perhaps

clouded our understanding of how much and how rapidly China’s comparative

advantage has changed. Shifts toward more technologically sophisticated and higher

value products suggest that indigenous innovation capabilities have progressed rapidly.3

Given the extent of foreign engagement in China’s high-technology sectors, however,

shifts in export composition may be misleading indicators of domestic development.

This paper provides a survey of foreign investment activity in China’s high-

technology manufacturing industry. We begin with an overview of foreign investment

trends and their relationship to China’s involvement in global value chains. We then

examine trends in the share of assets and profits held by foreign-funded enterprises

compared to Chinese domestic (refering to the mainland) firms in high-technology

manufacturing industries to assess the latter’s progress. Exports reveal productive

capabilities as well as global connections; therefore, we examine the share of exports

originating in foreign-invested enterprises in some detail. We closely examine the

relationship between industrial policy, foreign investment and China’s high-technology

export success using the development of an indigenous integrated circuits industry

as a case study. This paper nds that while the value of foreign investment in high-

technology manufacturing in China has grown, the share of assets in foreign-invested

firms in the sector declined between 2011 and 2016. Nevertheless, foreign-funded

enterprises remain the source of most high-technology manufactured exports, primarily

from wholly foreign-owned rms. In sum, despite indigenous development, Chinese

high-technology manufacturing and exports remain deeply tied to foreign investment.

II. FDI and the Growth in Chinese High-technology Exports

Inward foreign investment benefits the Chinese economy in many ways. Foreign

investors provide access to innovative technology, advanced management practices,

connections to global supply chains, and employment. Chinese industrial policies reect

a clear understanding of these advantages. From the “22 Regulations” in the late 1980s,

a major regulatory change in FDI applied throughout China (Branstetter and Lardy,

2008), to the current reduced negative list of sectors off limits to foreign investors,

China has progressively eased restrictions on inward foreign investment. Most recently,

at the 2018 Boao Forum, Chinese President Xi Jinping promised foreign companies

3See Wang and Wei (2010) for an extensive decomposition of Chinese trade patterns and the role of foreign

investment, processing trade, human capital development and high-technology zones.