Investment environment in China energy

Investment environment

Among developing countries, China receives the largest amount of inward foreign direct investment (FDI). Inward FDI often comes in the form of foreign companies establishing themselves in China and serving the needs of Chinese consumers. The government also promotes investment into domestic companies and jointly owned domestic-foreign enterprises to encourage the proliferation of Chinese-run businesses. Regulations of investment are still fairly restrictive. China’s 2010 OECD FDI Regulatory Index Score hovered around 0.5 (higher scores indicate a country less open to foreign investment); this is second only to Iceland in restrictiveness. Although the system for government approval and regulation is restrictive, it his highly decentralized. This promotes healthy competition for FDI among enterprises. The Chinese government is also implementing policies that encourage investment into domestically-owned SMEs. This goal is outlined in the current FYP.


Thanks in part to government policy, the share of service-sector investment grew from 30.5% in 2000 to 52.3% in 2008, a growth rate faster than that of investment in manufacturing. Traditionally, the manufacturing industry has been the main destination of inward FDI. However, as the economy has matured and the Chinese middle class has grown, foreign investors have become more and more interested in domestic industries rather than export-based industries. This was reinforced by a change in government policies in the early 2000s; policy now focuses on balanced economic growth and development rather than overall economic growth that is dependent on exports. Regulations are the most lax in Hong Kong. Consequently, it is China’s prime destination for inward FDI.


China’s investment policy is geared towards protecting the interests of domestic industry. Protectionist practices are less stringent now, but still present. Equity joint ventures and contractual joint ventures have been promoted by the Chinese government as a means for promoting foreign investment while allowing Chinese businesses to retain a large degree of control over the market.


Currently, China has high inward FDI but growth is stagnating. Investor confidence is still very high thanks to China’s strong economy, but is weakening due to increases in labor costs, shortages of skilled labor, competition between Chinese and foreign-owned businesses, and changes in regulatory policy that investors view as negative.