Beijing’s efforts to shift the focus of China’s economy from basic industries, construction and exports to domestic consumption, services and higher value added appear to be showing up in data on foreign investment.
In a recent study by fDi Magazine analysing the investment competitiveness of 131 cities worldwide, Chinese cities took six of the top 10 slots in emerging markets, with Shanghai and Beijing placed fourth and 12th respectively in the overall global ranking.
The study ranked cities on an assessment of their economic potential, business friendliness, human capital and lifestyle, cost-effectiveness and connectivity.
China’s strong showing at the city level appears to contradict country-level data from the same source showing that China is no longer the world’s most attractive destination for greenfield investment, having lost that title to India. Foreign investors announced greenfield projects in India worth a total of $32.7bn in capital expenditure in the 12 months to December 2015. In the same period, China attracted announced investments of $20.8bn.
Yet a drill down into the city-level data explains the discrepancy.
Shanghai, which ranked first among EM cities, has experienced a shift in the type of FDI it attracts in recent years, from manufacturing investments to more services-led operations. Manufacturing projects, which in 2011 made up nearly 18 per cent of all Shanghai’s announced investments, made up just 7.5 per cent in 2015.
While business services and headquarter operations held relatively steady, sales, marketing and support investments became a more prominent investment activity. Such operations accounted for 40 per cent of Shanghai’s announced investments in 2015 compared with 25 per cent in 2011.
This suggests not only that China’s economic transition is taking place at the city level, but also that Shanghai and other Chinese cities now offer a more sophisticated and developed environment for investors. Between 2011 and 2015, Tianjin attracted 184 investments, Suzhou 182 and Guangzhou 178. In this time, manufacturing operations as a share of total investment decreased, while R&D, headquarters and education investments increased.
Driven by intensional government policy as well as China’s decreasing cost competitiveness in manufacturing, the country is in the midst of a transition away from being the world’s factory and towards a more services-led economy. Manufacturing still leads the list of activities undertaken by greenfield investors in China, according to fDi Markets, but the sector split is tilting away from heavy industry to services and technology.
Between 2011 and 2015, business services was China’s top FDI sector when counted by announced inbound greenfield projects, surpassing industrial machinery, with financial services ranking fourth and software and IT services sixth. As China’s commercial capital it is natural that Shanghai would be leading this transition. More Chinese cities look to be following suit.
Cathy Mullan is head of research for FDI rankings at fDi Intelligence, an FT data division
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