Subtle Adjustments Of Foreign Enterprises’ China Strategy And Investment Layout – Analysis


By Li Lantao*

Foreign investment is one of the important windows to observe the vitality of China’s economic development. According to data from China’s Ministry of Commerce, the amount of foreign capital absorbed by the country maintained steady growth in 2022, and the actual use of foreign capital exceeded RMB 1.2 trillion for the first time, a record high and a year-on-year increase of 6.3%. The increase in foreign capital absorption is mainly due to the substantial increase in investment in China’s manufacturing industry and the continued growth of high-tech industries. In 2022, the actual use of foreign capital in China’s manufacturing industry was RMB 323.7 billion, a year-on-year increase of 46.1%. Among them, foreign investment in the automobile manufacturing industry increased by 263.8%. In addition, investment in computer communication and pharmaceutical manufacturing increased by 67.3% and 57.9% respectively. The actual use of foreign capital in high-tech industries in 2022 was RMB 444.95 billion, a rise of 28.3%.

Under the backdrop of China’s GDP growth rate being only 3% in 2022, the actual foreign investment attracted during the same period increased by 6.3% year-on-year, this makes it appears to be a satisfactory figure. However, statistics do not necessarily reflect real changes in the market. Judging from the actual changes in foreign enterprises in the Chinese market, the views of foreign capital on the Chinese market, and their layout in China and other markets, many foreign enterprises in the Chinese market are undergoing subtle changes.

For a long time, foreign investment in China has maintained overall growth. The country’s cheap labor force and market space with a relatively complete supply chain system are the basics for it to attract foreign investment. Take Apple as an example, the company’s iPhones were assembled in China for quite a long time. This singular supply chain structure can be regarded as typical in the era of globalization.

However, the situation is changing in recent years. China’s human resource, energy, and environmental costs are all increasing. Affected by waves of anti-globalization, foreign enterprises have begun to adjust their investment layout. The increase in geopolitical friction has also pushed foreign companies to relocate out of China. This is especially true since the outbreak of the COVID-19 pandemic three years ago, the country has implemented measures that restrict the operation of foreign enterprises and foreign exchanges.

Now, such changes may have reached a critical point. Through continuous follow-up and observation, the consulting firm McKinsey recently pointed out that in the face of China’s relaxation of COVID-19 policies, all multinational companies, including foreign banks, need to re-evaluate and introduce new China strategies, rather than an extension and fine-tuning of the previous ones. The important driving factor is that foreign enterprises’ policy expectations for China have been affected. In recent years, the changes in the Chinese business environment have become worrying for these foreign firms. For instance, there are multiple policy changes, and random actions of some local governments, in addition to certain so-called “opinion leaders” in the country who voiced their doubts on the market economy and private enterprises, all of which make the capital, including foreign capital to be anxious about the uncertainty regarding the policies.

At present, governments around the country are showing a positive attitude toward developing the economy, proposing several measures such as investing in large projects, promoting consumption, and providing subsidies. McKinsey pointed out through its research that these measures will certainly affect the investment decisions of foreign companies, but for the leadership of these companies, between introducing intensive incentives and providing a sense of stability, foreign investors place more importance if China can give multinational companies a sense of stability and maintain confidence in its policy framework. When foreign-funded enterprises make major investment decisions, especially long-term ones, the biggest concern is the stability of China’s policy framework, including supervision, whether the policy will change in the future, and whether the policy environment will remain stable.

In addition to the country’s domestic policy factors, researchers at ANBOUND also pointed out that changes in international geopolitical factors often have a major impact on how foreign enterprises view the Chinese market. The thirty years since the end of the Cold War was the golden age of traditional globalization. Multinational corporations could conduct business globally without worrying about geopolitical obstacles. However, past experiences are not completely applicable to the current world now, and multinational companies must adapt to new changes. This is particularly true when the United States has adjusted its China-related strategy and listed it as the foremost long-term strategic competitor, making geopolitical friction an obvious long-term trend.

These changes complicate the development environment for foreign companies in China, and foreign enterprises are becoming more and more uneasy about their business prospects in the country, with an ambivalence towards the Chinese market. As China has successfully integrated into the global production system, it has not only becomes the world’s most important production center, but also a single consumer market with great potential. According to McKinsey’s analysis, given this situation, one of the most important considerations for multinational company CEOs is not deglobalization, but how to decentralize. What they are looking for is not to reduce transnational supply chains, but to increase global supply chains. Considering that China’s economic growth is still larger than that of most economies, a large part of the global supply chain in China will remain in the country.

This judgment has been verified by facts. In recent years, the “China Plus One” supply chain restructuring strategy has been widely discussed in the business circles of Europe, the United States, and Japan. The key point of this strategy is that foreign enterprises would look for another place to establish a production base on the basis of setting up factories in China and gradually forming a “backup” for Chinese production. At present, Vietnam, Cambodia, Thailand, and Indonesia in Southeast Asia, and Mexico in South America have all become popular options for such a strategy, and they are substantially promoting the layout adjustment of the global industrial chain and supply chain. During this period, if China does not actively respond to the situation, it might experience a loss of foreign capital that will exceed the expected level.

Governments at all levels in China should pay attention to the fact that foreign enterprises’ views on the Chinese market are undergoing subtle changes. As things stand, foreign companies are less proactive in China now and less aggressive in their attempts to penetrate the Chinese market as in the past. It is worth noting that in the restructuring of the global supply chain, many foreign capitals have set up the Chinese supply chain separately, i.e., establishing a localized supply chain for the Chinese market, and a global supply chain outside of China. Under the separation of the supply chains, the transfer of high-quality factors like technology, important products, and knowledge (such as setting up R&D institutions in China) by foreign enterprises to the Chinese market will become less and less in the future.

After a recent survey, researchers at ANBOUND believe that there is still room for improvement in China’s policy of attracting foreign investment, and it is even more necessary to provide a friendly development environment for foreign investment in terms of the policy. In particular, various regulatory policies and industrial policies need to be coordinated to form a unified and transparent open policy system. Such a high level of market regulation is not only crucial for attracting foreign investment but also for domestic development. An open market that is attractive, dynamic, market-oriented, and ruled by law will be competitive for foreign capital to come in and domestic capital to go out, thereby making the market more dynamic.

Final analysis conclusion:

Subtle changes are taking place in the views and investment strategies of foreign enterprises toward the Chinese market, reflecting the impact of changes in the country’s internal and external environment on foreign capital. China’s government departments at all levels and the market should pay greater attention to the changes in foreign investment expectations. It would then be indispensable for China to provide higher-level services and maintain a more stable long-term policy framework so that foreign enterprises can have a greater sense of stability and security to invest in the country.

Li Lantao is a researcher at ANBOUND


Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

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