Investing Profitably in China: is it Getting Harder?

Abstract

Using information from the Toyo Keizai, this article studies the performance of 2,962 foreign subsidiaries across the period 1985–1999 to show a picture of declining profitability from foreign direct investment by MNE’s in China. Despite the influence of macro-level factors, such as the historically fluctuating performance of the Chinese economy, we observed that of the many factors that may affect profitability, subsidiary-specific factors had the greater influence. The findings suggest that there are significant benefits for early entrants into the market, but caution against the use of high majority ownership control. Other evidence showed that larger subsidiaries tended to perform better. Managerial implications for MNEs and the future prospects of foreign direct investment in China are discussed.Since China opened up to the outside world in 1979, it has been attracting increasing amounts of foreign direct investment (FDI), and after 1993 became the second largest recipient of FDI flows in the world. Meanwhile, a major participant in the upsurge in global foreign direct investment in the 1990s was Japan. By the mid-1990s, Japan became the second largest FDI source country in the world behind the United States. China, in particular, has become a major destination for Japan’s direct investments, absorbing one-ninth of all Japanese foreign investments at the end of 1996.1Studying Japan’s worldwide direct foreign investment, we found that the proportion of profitable Japanese subsidiaries in China has been declining. In fact, this was the only part of the world where this was the case. While over 71 percent of Japanese subsidiaries in China claimed profits in 1992, the percentage steadily slipped to around 50 percent by 1999 (see Table 1Table 1Performance of Japanese subsidiaries in China (% profitable)1992 (%)1994 (%)1997 (%)1999 (%)Loss11 (13.3%)27 (16.1%)99 (21.7%)201 (24.3%)Break-even13 (15.7%)35 (20.8%)114 (25%)205 (24.8%)Gain59 (71.1%)106 (63.1%)243 (53.3%)421 (50.9%)Total # Reporting83168456827Source: Toyo Keizai, 1999.). This poses two interesting questions. Is it really getting harder to invest profitably in China? And what could have influenced the profit performance of foreign subsidiaries in China?