Nothing earth-shatteringly new in these posts from China Economics Blog and The China Game on a recent NBER paper dealing with U.S. FDI in China. However, I'm weak and can't resist contributing my pointless commentary on this subject whenever I get the chance. Moreover, I am currently preparing to teach a class on FDI law (starting this Thursday – yikes) and have the issue rattling around in my brain.

One problem, though. The NBER paper, which is the underlying topic of discussion, is not freely available, so I haven't read it. So yeah, I'm gonna comment on something I haven't read yet.

Going by the topics as listed by Paul Midler's post at The China Game, here goes:

Myth 1: U.S. FDI into China is Huge

The NBER paper authors apparently point to FDI data to show why the U.S. contribution is not as large as some people think. Leaves me with a lot of questions on methodology, unfortunately, which is pretty lame of me since (again) I haven't read the paper itself. For what it's worth, I wonder how they determined country of origin for FDI. For many years, for example, the perennial largest investor into China was Hong Kong, but that didn't mean all that much since this was a big mix of funds from HK itself, from other jurisdictions using HK as an offshore jurisdiction, and from PRC money that was round tripping. In this instance, was U.S. FDI channelled through HK or another offshore jurisdiction counted as U.S. FDI or not?

Myth 2: American FDI is Export-oriented

Definitely a myth. U.S. (and EU) FDI has been China-market-oriented to a large degree, while local/Asia FDI, and PRC investment, has been focused on the export sector. On the other hand, I think this myth was probably chosen because of the recent furor over QC problems from PRC exports. When you have locally-owned factories producing stuff based on foreign designs and specs that are sold to foreign distributors and sold abroad, it's really hard, as we have seen, to place blame on one link in the chain. Not sure if this "myth busting" helps in that regard, but it's a good try.

Myth 3: China FDI Displaces Other FDI or Domestic Employment

I would be very interested in seeing the underlying data on this. I have been doing the FDI thing since 1999, and the vast majority of my clients have been setting up over here to either expand existing home country operations or to start entire new lines of business, generally related to the China market. There have been many exceptions, of course, but from an anecdotal standpoint, this conclusion on employment does not surprise me at all.

Myth 4: American Companies are Making the Most of Chinese Tech

To be honest, I'm not so sure what this means. If the point is that a lot of folks erroneously think that China is a high-tech hub with a lot of local talent and domestic innovation, then of course, this makes sense. There is a lot of local talent, but this does not directly translate to domestic innovation. MNCs have not invested a great deal in China R&D thus far, although the numbers of facilities opened by MNCs has shot up in the past couple of years, so I would expect to see the numbers move at some point. In addition to a shortage of qualified talent, another roadblock for MNCs is the fear that IP developed over here will be infringed upon.

I'm impressed with any paper that purports to bust FDI myths, particularly when it comes to U.S. perceptions of China trade. I just wish I had read the paper, but to paraphrase one of America's great military leaders, you blog with the knowledge you have at the time, not the knowledge you wish you had. Or perhaps that's a myth as well.

FYI, just added The China Game to my blogroll. The FDI discussion and all the great testimonials helped, but what sealed the deal for me was this post, which appealed to my inner geek.