Economic Globalization and Foreign Direct Investment in Shanghai XIE Kang 1 Shanghai Academy of Social Sciences & WANG Shouzhen PhD candidate, Xi an Jiaotong University ABSTRACT Economic globalization is a process of developing closer economic linkages and interconnections among most of the states and regions of the world and explains the widening scale and degree of cooperation in the world economy. The major economic characteristics of globalization are trade liberalization, financial securitization and production integration, the latter being the most fundamental. By means of Foreign Direct Investment (FDI), multinational corporations (MNCs) have merged the national economies into the world market, thus becoming the main body, the carrier and the organizer of integrated international production. 1 Correspondence to: XIE Kang Professor and Senior Research Fellow Institute of World Economy Shanghai Academy of Social Sciences 622/7 Huaihai Rd (M) Shanghai 200020 P. R. China Tel: 86 21 5306 0606 Ext 2471 Fax: 86 21 5306 3814 Email: xiesh-c@online.sh.cn WANG Shouzhen PhD candidate, Xi an Jiaotong University General Manager, Shenzhen Konsai Industrial Co., Ltd. Zhong Shen International Mansion, Level 19 2068 Hongling Rd (M), Luohu District Shenzhen 518008 P. R. China Tel: 86 755 2586 9399 Fax: 86 755 2586 9933 Email: szwang@konsai.com Xie, K., & Wang, S., Economic Globalization and Foreign Direct Investment in Shanghai. - 1 -
With the strategy of global production integration, more and more multinational corporations have entered the Chinese market - particularly after China s entry to the WTO. This economic watershed is resulting in fierce competition among and between both domestic and international enterprises. However, this increased competition in the local market is also helping local enterprises to improve their competitiveness in international markets. This paper makes a general survey of multinational corporations penetration into Shanghai since China started its reform drive and open-door policy. The trends reveal that Shanghai will develop into a global manufacturing base. Foreign enterprises in China will significantly enhance their economic efficiency given that the localization of MNC operations in China is going on steadily and surely. Xie, K., & Wang, S., Economic Globalization and Foreign Direct Investment in Shanghai. - 2 -
Economic Globalization and Foreign Direct Investment in Shanghai I. Introduction Economic globalization has become an inexorable and irreversible trend since the end of last century. It is an iterative process that results in increasingly closer economic linkages and interconnections among most of the states and regions of the world, and towards the widening scale and cooperation in the world economy. The major economic characteristics of globalization are: trade liberalization, production integration and financial securitization, among which production integration is fundamental (ZHANG, 1999). By means of FDI, MNCs have merged national economies into the world market, thus becoming the main carriers and organizers of international production integration. With the strategy of integrating global production, MNCs have played an increasingly important role in China s economy. After China s accession to WTO, even more MNCs will enter the Chinese market.(wang, 1996) This economic watershed is resulting in fierce competition among and between both domestic and international enterprises. As Shanghai is a popular city to begin FDI in China, this paper first makes a general survey of MNCs penetration into Shanghai since China adopted its reform and opening-up policy more than 20 years ago. Second, the trend is revealed that under the strategy of MNC localization, Shanghai will develop into a global manufacturing base. Third, the paper analyzes the reasons why the export competitiveness of foreign enterprises in Shanghai is increasing. Finally, the conclusion is reached that within the framework of the MNCs global network, the economic efficiency of foreign enterprises in China will be significantly enhanced. II. The Status and Characteristics of Foreign Enterprises in Shanghai Since the reform and opening-up of China over 20 years ago, the coastal city of Shanghai has been a leading city for FDI absorption and a strategic location for overseas investors when they enter China or expand investment in China. According to a survey, 400 MNCs of the Global 500 have entered China, 256 of which chose Shanghai. Of those in Shanghai, 145 MNCs are located in Pudong and a further 25 well-established MNCs have their Chinese or regional office set up in Pudong. More than 92 % of the MNCs are planning to set up regional offices in China in the near future and 30 % of them consider Shanghai as their first choice, while Beijing (15%) and Shenzhen (11%) rank second and the third (SFIC, 2002). According to the statistics of the Industrial and Commercial Bureau of Shanghai Municipality (2000), there are 365,000 industrial and commercial enterprises in Shanghai, among which 17,100 are Xie, K., & Wang, S., Economic Globalization and Foreign Direct Investment in Shanghai. - 3 -
foreign enterprises, 184,000 are state-owned, and 164,000 private. Of the 17,100 foreign enterprises, the number of newly-established ones and their registered capital in the first half of this year increased by 44.7% and 106.1% respectively over the same period of last year. The number of enterprises with investment amount s over USD10 million reached 73, a 97.3% increase over the last year, and those with investment amounts over USD 30 million was 9. Most of the foreign enterprises have invested in such hi-tech areas as electronics, integrated circuitry and computers. Foreign enterprises in Shanghai have participated in the urban construction of Shanghai and made a great contribution to its export-oriented economy. They have not only expanded the volume of export in Shanghai, but also accelerated the optimization process of export commodity composition. In 1990, the export volume of foreign enterprises was only USD 299 million, sharing 5.62% of the city s total export volume. In 2000, the figure reached USD14.26 billion, accounting for 56.27% of the City s total (Xue, 2003). The foreign enterprises have become the largest exporters in Shanghai, as compared with the state-owned and private enterprises. More importantly, of the hi-tech exports, 90% are produced by foreign enterprises, which have become the main driver of Shanghai s international competitiveness. The fact that the IT industry has become Shanghai s No.1 industry is inseparable from foreign investment. With China s accession to the WTO, the trade volume of foreign enterprises in Shanghai will increase faster. According to the statistics of Shanghai Customs, the import and export value of foreign enterprises through the port of Shanghai was USD 57.97 billion in 2000, a 49.2% increase over the last year and accounting for 53% of the total import and export value of the port of Shanghai. The import value was USD 30.16 billion (a 54.7% increase) and the export value was USD27.81 billion (a 43.6% increase), 5% higher than the national average (Shanghai Customs, 2001). The characteristics of the import and export business conducted by foreign enterprises through the port of Shanghai in 2000 are as follows: 1. The growth rate of original trade was the largest and the percentage share increased further. 2. The growth of processing trade accelerated, accounting for over 60% of the total import and export value. 3. The trade conducted by cooperative enterprises, joint ventures and foreign-owned enterprises all grew rapidly. 4. The exports to major foreign markets kept rising. 5. The export of textiles and apparels grew with a fast pace and the import of industrial raw materials also increased fast. 6. The import and export of electrical and mechanical products accounted for over 60% of the total trade volume. Xie, K., & Wang, S., Economic Globalization and Foreign Direct Investment in Shanghai. - 4 -
III. Consequences of the MNC Localization Strategy With a view to enhancing economic efficiency and international competitiveness in the process of globalization, MNCs should not only consider the rational use and arrangement of their assets with ownership advantage and the managerial skill with internalized advantage, but also the geographic arrangement of assets (Xie, 1999). Under the circumstance of the increase and internationalization of competition, the asset efficiency resulting from location advantages has become an important aspect in MNC FDI strategy, particularly for the products at maturity stage of the product life cycle and those hi-tech products to penetrate into the local market or peripheral markets of the host country. The immediate consequence MNC localization strategy is the formation of its global manufacturing network. This is a new type of integrated production system built by the MNC to raise its global competitiveness, as well as to help the host country to establish a production base and increase employment, government revenue and market sales. Chinese enterprises engaging into the MNC global manufacturing network means that through tactically establishing joint ventures with well-established MNCs, Chinese enterprises can join the MNC global manufacturing network, from which it can obtain such resources as product, technology, export markets and management expertise. While working for the MNCs, Chinese enterprises can join the international division of labour in the process of China s economic transition and industrial reconstruction so as to enhance their own international competitiveness and operational capability. With a market share of 10%, Ericsson is the third largest mobile phone manufacturer in the world, next to Nokia and Motorola. Besides mobile phone, Ericsson also produces telecommunications network equipment, which account for over 80% of its business (Chai, 1999). With a staff of 4000 in China, Ericsson has set up 24 representative offices and 10 joint ventures. In its global expansion strategy, Ericsson has actively brought the advantages of Chinese production, market and talents into its global production and development programs. Their localization in China is a component of its globalization. According to Mr. Xu Shi-ming, president of Ericsson Asia- Pacific Co., Ltd., in the next 5 years Ericsson plans to raise its investment in China from USD 2.4 billion to USD 5.1 billion, its annual export from USD 1.49 billion to USD 4.5 billion and its R&D and human resource development expenditure from USD 290 million to over USD 572 million. Ericsson has become one of the major partners to support China s telecom industry in the field of R&D, purchasing, manufacturing and sales (Shima, 2002). IV. Export Competitiveness of Foreign Enterprises in Shanghai One of the important characteristics of foreign enterprises in Shanghai is hi-tech intensiveness. The technological import by those from the U.S., Japan and Germany has kept rising (Table 1). Xie, K., & Wang, S., Economic Globalization and Foreign Direct Investment in Shanghai. - 5 -
Table 1 Country Technical Import in Main Years ( in 10 thousand USD) Contracted Value (Region) 1985 1990 1999 Total by the end of 1999 Executed Value 1985 1990 1999 Total by the end of 1999 Total 26370 14848 179912 981368 23628 15063 840296 Hong Kong 4619 1311 6865 70522 2263 1688 6767 51268 Japan 8883 3861 36181 246919 8165 2868 61956 265262 Germany 4540 893 32001 211301 4632 2925 45920 167074 Italy 1611 1003 2052 38033 924 1755 2547 28121 U.S. 3424 4448 56550 202542 3742 2226 60775 179544 Switzerland 526 638 2133 19339 1383 1060 2187 15836 U.K. 669 632 3240 19643 1214 667 3476 14182 Sweden 632 46 304 11862 262 576 496 7294 Austria 204 1322 686 21639 119 603 5970 17397 France 274 159 25073 43937 82 70 3907 20532 Note: 12664 projects of technique and equipment were imported during 1983-99, among which 1634 were imported in 1999. Source: Shanghai Statistics Yearbook, 2000. Take the U.S. for an example, the investment by their large companies in Shanghai are capital- and technology-intensive, concentrating on the manufacturing industries in which the U.S. enjoys the comparative advantage, such as computers, automobile, aircraft, chemical and pharmaceutical (Table 2) and on service industries such as commercial banking, investment banking, insurance, legal service, film and TV. Table 2 U.S. MNCs in Shanghai MNCs Subsidiaries in Shanghai Types of Investment Registered Place Business Area Intel Intel Technology (China) Co. Ltd. Joint Venture Waigaoqiao Computer chip Rostmont Motorola HP Shanghai Rostmont Instruments Co. Ltd. Shanghai Motorola Ragen Products Co. Ltd. China HP Golden Bridge computer Co. Ltd. Joint Venture Jingqiao Automatic Joint Venture Zhangjiang Pager controlling system Joint Venture Jingqiao Computer GM Shanghai GM Motor Co. Ltd. Joint Venture Jingqiao Automobile Ford Shanghai Ford Hua glass Co. Ltd. Joint Venture Jingqiao Auto component United Tech Shanghai United Turbine Supercharger Co. Ltd. Solely-owned Zhangjiang Turbine supercharger Westinghouse Shanghai Turbine Generator Co. Ltd. Joint Venture Minghang Power generating equipment Source: Foreign Economic Cooperation Division, Shanghai Municipal Economic Committee, 2000. Xie, K., & Wang, S., Economic Globalization and Foreign Direct Investment in Shanghai. - 6 -
Combining hi-tech with the local industry of Shanghai, the foreign enterprises have helped to promote industrial re-construction in China and the export of hi-tech products. The foreign enterprises have become the main driver of hi-tech product exports from China. From January through July of 2000, the export value reached USD 19.571 billion, a 31.72% rise over the same period of the last year and accounting for 80.89% of the total export value of hi-tech products of the country. During January and May 2001, the export value of hi-tech products of Shanghai was USD 1.792 billion, a 30% increase over the same period of the last year (SFETC, 2001). At the moment, the major export markets of China s hi-tech products are Hong Kong and the U.S., with electronic and information products being the main exports. The East coastal provinces and cities are the main export areas, with Guangdong and Shanghai taking the lead. Located in Waigaoqiao Bonded Area of Pudong New Area, Shanghai, Intel Technology (China) Co. Ltd. is the first manufacturing enterprise invested by Intel in China. With total registered capital of USD 68 million, it is one of the largest foreign investment projects in the area (SHIMA Li-ying, 2002). Intel Technology (China) Co., Ltd. is a processing enterprise with supplied materials, mainly engaging in assembling and testing of Terattertg Transistors, supplied to global purchasers. The company has become Intel s production base of Terattertg Transistors. The product achieved ISO9002 quality certification in September 1998, only 6 months after investment, and ranked first in export among those produced by foreign enterprises in Shanghai during 1999 and 2000 (Liang, 2001). According to the GM of the company, the company s export value reached USD 264 million during the first nine months in 2003, a 58.1% increase over the same period of 2002. The reasons why the company has made such achievements are as follows: 1. Establishing a complete technical training system to train quality staff; 2. Setting up a precise reproduction mechanism to guarantee product quality; 3. Lowering cost, raising output, and enhancing competitiveness; 4. Introducing advanced planning management and responding to the market quickly. By transferring their leading technical advantages within the company through integrated production, the well-known MNCs have brought their technological capability into effective use in the host country, thus gaining larger market share and raising their own competitiveness (Michael, 2002). Foreign enterprises in Shanghai therefore have gained more advantages than the local ones. Table 3 makes a comparison. Xie, K., & Wang, S., Economic Globalization and Foreign Direct Investment in Shanghai. - 7 -
Table 3 The Comparison of Export Competitiveness Between Foreign and Local Enterprises Foreign Enterprises Local Enterprises Types Technology- and capital-intensive Labor-intensive Market and Government Market competition first, government motivation second Government motivation first, market competition second Manufacturing High level Medium and low level Brand Possessing own brand Creating brand through export Purchasing and marketing network Having global purchasing and marketing network processing Lacking global purchasing and marketing network International trade Integrated intraindustry trade Traditional interindustry trade Intellectual property rights Many products with intellectual property rights Few products with intellectual property rights Entrepreneurs With global strategy Based on the Chinese market, lacking global vision Cultural value Western style Eastern style R & D Large expenditure Small expenditure Source: Center for Multinational Business, SASS. V. Economic Efficiency of Foreign Enterprises in Shanghai With the information revolution driven by computing and communication engineering, and with the economic globalization based on international integration of production, foreign enterprises have historically been the main exporters from Shanghai. Their total export revenue amounted to USD 14.261 billion in 2000, a 37.83% increase over the previous year and accounting for 56.2% the city s total export sales (SFIC, 2001). Not only have the foreign enterprises exceeded state-owned and local private enterprises in terms of export scale and value, but also in economic efficiency. According to the Annual Survey Report of Foreign Enterprises in Shanghai year 2000, by the end of 1999, 991 large enterprises (with investment exceeding USD 10 million) had been approved for establishment. Now 827 enterprises are in operation, of which 463 have made profit, sharing 56% and accounting for 6.68% of total 6934 foreign enterprises. But the combined profit of those 463 enterprises in 2000 was RMB23.3 billion, accounting for 97% of the total profit of RMB 24.08 billion of all foreign enterprises. In addition, 278 enterprises were at loss because of short investment time, bad operation and other reasons, and 86 enterprises were still under construction (see Table 4A and Table 4B). Xie, K., & Wang, S., Economic Globalization and Foreign Direct Investment in Shanghai. - 8 -
Table 4A Annual Survey of Foreign Enterprises in Shanghai Year 2000 (1) Enterprises in normal operation Number Amount of profit in 2000 (billion RMB) Total 827 Enterprises in the black 463 23.3 Enterprises in the red 278 5.6 Enterprises under construction 86 Source: The Annual Survey Report of Foreign Enterprises in Shanghai 2000, Shanghai Municipal Government. Table 4B Annual Survey of Foreign Enterprises in Shanghai Year 2000 (2) Number of Enterprises Investmen t Amount (bn USD) Accumulated Registered Capital (bn Sales (bn USD) Profit (bn USD) Total Capital (bn USD) USD) Enterprises in 6934 37.574 21.815 377.94 24.08 457.75 operation 1 Large enterprises 463 21.1 11.383 237.23 23.36 277.35 (investment over USD 10 bn) in the black 2 1/2 (%) 6.7 56.3 52.2 62.8 97 60.1 Source: The Annual Survey Report of Foreign Enterprises in Shanghai 2000, Shanghai Municipal Government. Table 5 analyzes the FDI structure in Shanghai based on industry and country/region. Categorized by industry, of the 463 profit-making enterprises, 107 enterprises are consumer goods manufacturers, accounting for 23.1%; 126 are manufacturers of raw materials and products, accounting for 27.2%; 118 enterprises are equipment producers, accounting for 25.5%; 112 enterprises are vehicle and IT producers, accounting for 24.2%. Categorized by country/region, these companies come from Hong Kong, Japan, the U.S., Singapore, Germany, Virgin Islands, the U.K., and Taiwan. Xie, K., & Wang, S., Economic Globalization and Foreign Direct Investment in Shanghai. - 9 -
Table 5 Annual Survey of Foreign Enterprises in Shanghai Year 2000 (3) Categorized by industry Number of Enterprises Share (%) Investment Amount (bn USD) Share (%) Registered Capital (bn USD) Consumer Goods 107 23.1 3.918 18.6 2.105 18.5 Raw Material and Products Share (%) 126 27.2 4.022 19.1 2.372 20.8 Equipments 118 25.5 4.193 19.9 2.44 21.4 Vehicles and IT Products Categorized by country and region 112 24.2 8.968 42.5 4.467 39.2 Hong Kong 106 22.9 3.24 15.4 2.12 18.6 Japan 94 20.3 4.78 22.7 2.6 22.8 U.S. 68 14.7 4.27 20.2 2.12 18.6 Singapore 28 6.05 0.517 2.47 0.307 2.7 Germany 27 5.83 2.38 11.3 1.25 11 Virgin 25 5.4 1.19 5.64 0.275 8.57 U.K. 19 4.1 0.384 1.82 0.218 1.91 Taiwan 12 2.59 0.401 1.9 0.21 1.84 Others 84 18.1 3.94 18.7 1.58 13.9 Source: The Annual Survey Report of Foreign Enterprises in Shanghai 2000, Shanghai Municipal Government. The business efficiency of these enterprises was quite good in 2000. Their average sales profit margin reached 9.85%, 50% higher than the average level of all the foreign enterprises in Shanghai. Their average return on investment was 24.73%, nearly 100% higher than the average level of all the foreign enterprises. The average return on assets was 150.32%, higher than the average level of 108.4% (Table 6). Xie, K., & Wang, S., Economic Globalization and Foreign Direct Investment in Shanghai. - 10 -
Table 6 Categories The Efficiency of Profit-making Foreign Enterprises in Shanghai Number of Enterprises Categorized by Investment (USD million ) Average Sales Profit (%) Average Return on Investment (%) 10 30 327 6.62 18.1 117.1 30 100 102 11.1 28.5 173.7 Over 100 34 11.7 27 176.5 Categorized by year Before 1992 203 10.3 31.4 175.6 Between 1993 1996 201 11.2 23.1 135.1 After 1997 50 5.97 12.7 120.2 Categorized by Industry Consumer Goods 107 9.99 25.7 138.9 Raw Material and Products 126 6.98 12.1 107.2 Equipments 118 9.95 21.8 154.7 Vehicles and IT Products 112 10.6 32.6 176.2 Categorized by country/region Hong Kong 106 8.98 22.2 171.6 Japan 94 10.7 18.2 112.7 U.S. 68 12.2 20.7 130.4 Singapore 28 8.58 15.1 117.6 Germany 27 9.97 51.2 191.2 Virgin 25 8.87 21.3 151.1 U.K. 19 9.63 13.9 101.1 Taiwan 12 12.8 19.9 1264 Others 84 / / / Average Return on Assets (%) Note: Considering the preferential tax treatment to foreign enterprises, gross profit is used instead of net profit Source: The Annual Survey Report of Foreign Enterprises in Shanghai 2000, Shanghai Municipal Government. The high efficiency of foreign enterprises in Shanghai is inseparable from their prudent investment decisions, advanced technical input, strict management, and successful partnerships. Of course, the investment environment, agent service, human resources, and logistic service provided by Shanghai are all the external conditions essential to the enhancement of economic efficiency. Theoretically, it is justified that under the MNC network, FDI promotes the international division of labor and raises business efficiency. As indicated in World Investment Report 1995: Transnational Corporations and Competitiveness, international production is an important means for transnational corporations (TNCs) to secure and expand markets for their products as well as to internalize crossborder transactions based on an intra-firm division of labor, with a view towards minimizing transaction costs. Securing access to markets - be they domestic on international affects the competitiveness of TNCs in several ways: it allows firms to benefit from economies of scale; it Xie, K., & Wang, S., Economic Globalization and Foreign Direct Investment in Shanghai. - 11 -
allows locational specialization of activities along the value-added chain, leading to improved efficiency and lower costs; it increases the financial base of firms, and it forces them to respond to the more competitive environment and the nature of demand in international markets (UNCTAD, 1995). MNCs FDI in China give them more access to such resources as market, capital and R&D, provide them with more export channels, product advantages and technological transfer, and help them to lower transaction costs. Undoubtedly, the advantages brought by FDI will raise the efficiency of foreign enterprises in China and Shanghai. VI. Conclusion China officially joined the WTO on December 11 2002. Under the framework of the WTO, China will open more to the outside world and Chinese enterprises will enter the world market with fewer restrictions. While gaining more opportunities, they will, of course, meet more challenges and competitors, for example, in the financial service sector. So, the Chinese enterprises should, based on its own conditions and requirements and following a unified strategy, form joint ventures and cooperative enterprises with MNCs of different types and from different countries to bring the Chinese industries and enterprises into the international division of labor. This is surely a win-win solution. Xie, K., & Wang, S., Economic Globalization and Foreign Direct Investment in Shanghai. - 12 -
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