New Normal in China’s FDI

As a response to growing public concerns over the surge in investments from China, we seek to understand the motivation behind these financial inflows from the Chinese point of view. We call for a more rational understanding of the nature of China’s foreign direct investment (FDI) as we believe there is a more systematic and educated explanation on this topic. We first explore the global patterns in China’s FDI, followed by an analysis of the industries in Malaysia where China’s investments dominate.

First, we found that the surge in China’s overall FDI coincides with the change in policies, notably the Belt and Road Initiative (BRI) and also the “new normal” policy goals to transform the Chinese economy from a resource driven to a service-based economy that is on par with advanced nations by 2050. Secondly, we observed a rising trend in China’s FDI outflows for the past 20 years and that the outflow gap between China and Western countries, especially the United States has narrowed rapidly since the Great Recession of 2007-08. A regional breakdown of China’s FDI shows that countries in Asia receive the largest pie of the FDI. Also, China has now contributed more in investments to the rest of the world than it received, with a greater focus on greenfield investments compared to merger and acquisition (M&A) investments. Thirdly, the increase of China’s accumulated investments in Malaysia – the second largest greenfield FDI recipient among ASEAN countries, also coincides with the introduction of BRI.

This working paper concludes by raising the glaring absence of China’s service-oriented FDI in Malaysia and questions if this is a sign of incompatibility in the innovation ecosystem between the two countries. There are also important issues that should be considered such as the potential financial contagion effect from China’s FDI and also negative spill-over effects.