	Background

China, as any other developing country, has needed foreign technology for its economicdevelopment. Sources of FDI Inflow into China

Most FDI into China comes from either "Greater China" or from the three major industrializedmarkets: the United States, Japan, and the European Union. Singapore provided 4.6%. (SeeTable 1). Table 1. Foreign Direct Investment in China by Type, 1979-2002 (in percentage)
Source: China. Table 2. Table 3. The differences between the two sets of figures have not been reconciled, but they likely can be traced to: differences in reporting criteria; U.S. investments originating in or going throughoffshore U.S. affiliated companies (particularly in Hong Kong); investments that fell under the U.S.threshold for counting; more complete data gathered by the U.S. Department of Commerce on repaidloans and other data internal to companies that are not generally accounted for by the Chineseministry that approves foreign investments; changes in exchange rates; and overstatements ofinvestment amounts by local Chinese officials and foreign investors. The United States has been the second largest source of FDI for China (next only to Hong Kong) and during 1999-2001 accounted for an average of about 10.5% of China's total inflows(using China's figures). The U.S. companies with affiliates in China include many of the large multinational corporations in the United States. (23)

		U.S. FDI Position by Industrial Sector

According to U.S. data, as much as two-thirds of the stock of U.S. FDI in China is invested in manufacturing - more than 50% of which is in the electronic and electrical equipment sector. (24)

		Effects of U.S. FDI in China on U.S. Trade

One of the criticisms of foreign investment in China and other countries is that it "exports U.S. jobs" and worsens the U.S. balance of trade. (25) U.S. companies in China do export some oftheir output back to the American market, but most is sold in China. (See Table 6)
In terms of the question of how much U.S. and foreign firms in China are contributing to the growing U.S. merchandise trade deficit with that country, this deficit has grown from $10 billionin 1990 to $61 billion in 1998 and to $83 billion in 2001 (a projected $100 billion in 2002 based onJanuary-November data). As noted earlier in this report, foreign affiliated firms account for the vast proportion of electronics-related and other high-technology exports from China. U.S. majority owned firms there,however, do not appear to have contributed directly to this rising bilateral trade deficit through theirproduction. Some of the rising U.S. trade deficit with China also is being transferred from other economies in Asia. (33)
Foreign affiliates are, by far, the largest source of China's exports of high-technology products. (36) FDIcontributed both to China's surplus in investmentinflows and to its surplus in trade. (39)

	Security Concerns

Foreign direct investment in China affects security primarily through three avenues: itscontribution to economic growth which funds China's military, technology transfers, and economicinterests. With FDI contributing to rising economic power, China can devote more resources to its military, although in view of growing domestic needs, military spending has been taking secondplace to economic expansion and modernization. In the case of China, the questionis whether foreign direct investment is enhancing the competitiveness of Chinese exports to the pointwhere U.S. firms and American security are being threatened. U.S. exports of satellite technology, as is the case withother sensitive, dual-use technologies, are controlled by U.S. export laws. The foreign affiliated firms also can become a strong interest group that maypressure Beijing and their respective home governments to avoid political or military actions thatcould disrupt their businesses. FDI contributes to economic growth. These groups have directfinancial interest in maintaining stability, amicable Sino-foreign relations, and liberalized trade. FDIby Taiwan's businesses, in particular, may be changing the calculus for hostilities along the TaiwanStrait.
This report provides an overview of global Foreign Direct Investment in the People's Republic of China, examines its effects on the Chinese economy, surveys U.S. FDI in China, and includes adiscussion of policy implications for the United States. China, by far, is the largest recipient of FDIamong emerging economies with an inflow of $52.7 billion in 2002 and 424,196 foreign-affiliatedfirms operating in China representing paid-in foreign investment of $448.0 billion. These firmsaccount for about half of China's exports and imports. Nearly 1,500 U.S. companies from 41 stateshave direct investments of $10 to $34 billion in China.
For the U.S. Congress, foreign direct investment in China entails both oversight and regulatory issues. Some questions with respect to this investment are: (1) the extent to which FDI iscontributing to China's economic growth and technology development, (2) the extent to which U.S.FDI in China is contributing to the U.S. trade deficit, (3) whether FDI inflows into China come atthe expense of flows into other countries, (4) how FDI is affecting security concerns, and (5) whetherFDI affects the export of sensitive technology to China.
Foreign direct investment has contributed about 13 % to China's economic growth, and most of China's modern technology, particularly in electronics, has been imported. With respect to trade,there is little doubt that the large surplus in China's trade has been generated largely by the surge inits exports of foreign brand-name manufactures often made in foreign-affiliated factories. As muchas 80 to 90% of certain high technology exports originate from foreign affiliated firms there. Interms of the U.S. trade deficit with China, American companies there do export some of their outputback to the American market, but most is sold in China. China has been attracting some FDI flowsthat otherwise could have gone to other developing countries. In essence, China's gain may be theirloss.
In terms of security, the $20 to $34 billion in U.S. FDI in China combined with $68 billion from Taiwan, and some $300 billion from elsewhere is changing the calculus for hostilities and creatinggroups with a strong interest in stability both within China and between China and the United States,Taiwan, and other potential adversaries. Foreign direct investment in China affects securityprimarily through three avenues: its contribution to economic power, economic interests, and technology transfers. The more China grows, the more funds it is able to provide to its military andattain big-power status in the world. With respect to economic interests, foreign companies in Chinacan serve both as hostages for Beijing and important pressure groups that can pursue their interestsin maintaining stability with both Beijing and their home governments. With respect to sensitivetechnologies, in the U.S. case, it does not appear that prohibited U.S. technologies have beentransferred through foreign affiliated companies, although the technologies in the electronics andaviation industries that have been transferred do have dual civilian and military uses. Such transfersare controlled by export control regimes. The highly publicized cases of satellite technology beingallegedly illegally transferred to China involved direct transfers from U.S. corporations to Chinesecompanies. This report will be updated as circumstances warrant.