Zhang Monan

Benefits of direct investment

By Zhang Monan (China Daily)
Updated: 2011-05-18 07:46

Opening the door to China's growing overseas investment could help US job creation and infrastructure renewal

China's foreign investment was a hot topic at the third US-China Strategic and Economic Dialogue (S&ED).

Just before the S&ED meeting, some think tanks in the US actively suggested the US government welcome investments from China, arguing such investments would benefit the United States by creating jobs and boosting infrastructure renewal.

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According to a study commissioned by the Asia Society in New York and The Kissinger Institute on China and the United States at the Woodrow Wilson International Center for Scholars in Washington, China's investment in the US has increased approximately 25 times in the past five years.

As the Chinese economy grows, its foreign investment will increase. The report forecasts that China could invest as much as $2 trillion overseas over the next decade, according to the report.

But, even so, China's total foreign direst investment (FDI) in the US is just $2.3 billion, which is 0.1 percent of the total FDI in the US.

According to John Harry Dunning's theory of the foreign investment development cycle, a country's outward foreign direct investment (OFDI) is the function of its economic development.

On reaching a certain development stage ($2,000 to $4,750 per capita), transforming a country's investment becomes inevitable. The key to advancing this transformation is to improve the yield rate of OFDI, which can then form the competitive advantage of domestic capital.

The US-China economic imbalance, with China's tremendous trade surplus, reflects the relationship between the US, as a global financial center, and China, as a global manufacturing center, in terms of the international division of labor and the distribution of benefits.

In order to address this imbalance China should change the structure of its assets and liabilities and acquire more equity investment instead of debt investments.