Why FDI flows into nation's services, high-end mfg

Is China a prized destination for foreign investment? That's a no-brainer, I know.

Yet, a closer look at FDI data might prompt some to argue that unlike in the past, China's manufacturing sector no longer holds a strong pull for foreign investors.

The sector's share of China's FDI in recent years has been declining. Some foreign enterprises are relocating their production capacities from China to neighboring economies.

But, crucially, China's high-end manufacturing has been attracting significant FDI inflows in recent years. And FDI in the services sector, especially its producer services segment, has also been seeing rapid growth. (Producer services are intermediate services such as financial services, logistics and information services delivered to final producers of goods.)

Latest data from the Ministry of Commerce showed actual use of FDI in China's high-tech industry surged more than 28.3 percent year-on-year last year. FDI in electronic and communication equipment manufacturing and scientific and technological achievements transformation services rose 56.8 percent and 35 percent, respectively, while that in information services climbed 21.3 percent.

According to International Business Daily, FDI in China's producer services increased from $73.94 billion in 2017 to $101.22 billion in 2021, up nearly 37 percent.

Besides, FDI in producer services as a portion of the overall FDI also increased by around 2 percentage points to nearly 56 percent.

Experts said the changes in China's FDI structure are underpinned by the country's ongoing economic upgrade, which is characterized by the increasing share of the services sector in GDP.

Xu Qiyuan, deputy director of the Institute of World Economics and Politics, which is part of the Chinese Academy of Social Sciences, said that as the Chinese economy develops and its humongous domestic market grows, foreign enterprises in China are participating more in the domestic circulation, unlike in the past when they used to export China-made products to other countries.

So, multinational corporations' sales in China have surged, and so have their investments in services, he wrote in a research note.

The rising share of services FDI has promoted the transformation and upgrade of related manufacturing segments in China, he wrote.

He suggested China should take more initiatives to facilitate the development of producer services and include modern services like scientific research and technical services, which enable traditional manufacturing sectors, in official statistics on manufacturing.

Sang Baichuan, dean of the Institute of International Economy, which is part of the University of International Business and Economics in Beijing, said the integration of manufacturing with other industries is a global trend.

Since the development of producer services is closely intertwined with that of manufacturing, it is important for China to further enhance the foundation upon which services can develop further, he said.

The annual Central Economic Work Conference in mid-December said China will make greater efforts to attract and utilize foreign capital, widen market access, promote the opening-up of modern services and ensure a level playing field for both domestic and foreign enterprises.

Consensus is fast emerging among experts that China's pursuit of high-quality development, combined with its prosperous and expanding market, will make the country even more attractive to foreign investors.

Besides, China's unwavering commitment to expanding high-standard opening-up will boost foreign investors' confidence, which will in turn increase FDI inflows into the world's second-largest economy.