By Paul Hannon and Eun-young Jeong
China overtook the U.S. as the world's top destination for new
foreign direct investment last year, as the Covid-19 pandemic
amplifies an eastward shift in the center of gravity of the global
economy.
New investments by overseas businesses into the U.S., which for
decades held the No. 1 spot, fell 49% in 2020, according to U.N.
figures released Sunday, as the country struggled to curb the
spread of the new coronavirus and economic output slumped.
China, long ranked No. 2, saw direct investments by foreign
companies climb 4%, the United Nations Conference on Trade and
Development said. Beijing used strict lockdowns to largely contain
Covid-19 after the disease first emerged in a central Chinese city,
and China's gross domestic product grew even as most other major
economies contracted last year.
The 2020 investment numbers underline China's move toward the
center of a global economy long dominated by the U.S. -- a shift
accelerated during the pandemic as China has cemented its position
as the world's factory floor and expanded its share of global
trade.
While China attracted more new inflows last year, the total
stock of foreign investment in the U.S. remains much larger,
reflecting the decades it has spent as the most attractive location
for foreign businesses looking to expand outside their home
markets.
Foreign investment in the U.S. peaked in 2016 at $472 billion,
when foreign investment in China was $134 billion. Since then,
investment in China has continued to rise, while in the U.S. it has
fallen each year since 2017.
The Trump administration encouraged American companies to leave
China and re-establish operations in the U.S. It also put Chinese
investors on notice that acquisitions in the U.S. would face new
scrutiny on national security grounds -- cooling Chinese interest
in American deal making.
The sharper drop in foreign investment in the U.S. last year
reflects the broader economic downturn due to the effects of the
coronavirus pandemic, said Daniel Rosen, founding partner of
Rhodium Group, an independent research firm in New York, who has
long analyzed the U.S.-China economic relationship.
"I don't think one can say anything confidently about the impact
of the FDI downturn in the U.S., compared to all the other hits on
the U.S. economy," he said.
It is natural that foreign investment would decline sharply in
the U.S. under the circumstances because it has an open, market
economy, while China doesn't, Mr. Rosen said. Looking ahead, he
said, "There is no reason to be concerned about the outlook for the
FDI in the United States providing that the U.S. is sticking with
its basic open-market competitive system."
Foreign direct investment captures things like foreign
companies' building new factories or expanding existing operations
in a country or their acquisitions of local companies.
In China, the flow of investments by multinational companies
continued despite the upheavals of the pandemic, with companies
from U.S. industrial giant Honeywell International Inc. and German
sportswear maker Adidas AG expanding their operations there.
Unctad doesn't expect to see a significant revival of foreign
direct investment this year, globally or in countries that saw
falls in 2020.
"Investors are likely to remain cautious in committing capital,"
said James Zhan, Unctad's director of investment and enterprise. He
doesn't expect a real rebound to come until 2022. Even then, he
said, "the road to full FDI recovery will be bumpy."
While the sharp drop in foreign investment in the U.S. was due
to the pandemic, it also is making companies rethink future
investments, said Joseph Joyce, assistant professor of
international relations and economics at Wellesley College.
"Companies are reassessing their policies about global supply
chains, about foreign markets, about their own use of technology,"
Mr. Joyce said. "The pandemic is making all these companies rethink
the most basic assumption about where they are located."
The Unctad numbers show a stark divide between East and West in
the global economy. In 2020, East Asia attracted a third of all
foreign investment globally, its largest share since records began
in the 1980s. India saw a 13% increase, driven largely by rising
demand for digital services.
In the West, the European Union suffered a 71% drop. The U.K.
and Italy, which have suffered high mortality rates and deep
economic contractions, attracted no new investment. Germany, which
has fared better on both counts, saw a 61% drop.
When the pandemic first struck at the beginning of last year,
Unctad expected China to experience a large drop in foreign
investment and the U.S. to be largely unscathed. But China's
economy reopened in April just as the U.S. and Europe started a
series of continuing lockdowns and disruptions.
Beijing's ability to quickly control the coronavirus within its
borders helped its economy rebound relatively quickly and
reinforced China's appeal -- even before President Biden's
inauguration, which some investors hope could usher in a new period
of less tempestuous U.S.-China ties.
After FDI into China plunged in the first few months of 2020,
Chinese officials scrambled to reassure foreign investors and
accommodate any concerns they might have. "We must implement
targeted policies to arrest the slide in foreign trade and foreign
investment," China's premier, Li Keqiang, told the country's
cabinet in March.
Some foreign companies put their China expansion plans on hold
and in some cases began withdrawing their investments. But as
China's recovery gained steam and the rest of the world began to
look increasingly rocky, foreign companies moved to pour more money
into China, viewing the country as a production base and as a
critical growth market for its products.
Walmart Inc. said at an investment conference hosted by the city
government in Wuhan, the city that was the first center of the
pandemic, that it would invest 3 billion yuan, equivalent to $460
million, in Wuhan over the next five years. Starbucks Corp. is
investing $150 million to build a roasting plant and innovation
park in the eastern Chinese city of Kunshan.
Tesla Inc., meanwhile, is expanding capacity at its plant in
Shanghai and adding a research facility, while Walt Disney Co. is
continuing construction of a new theme area for its Shanghai
Disneyland park -- despite a second straight year of lower
attendance at the park.
Medical and pharmaceutical investments have been especially
active as the coronavirus hit the global economy. Chinese state
broadcaster Chinese Central Television reported in April that
several global pharmaceutical companies are pushing ahead with
their expansion in China, including AstraZeneca PLC, which is in
the midst of setting up regional headquarters in at least five
Chinese cities.
The resilience of foreign investment in China is contrary to
earlier expectations that foreign businesses would seek to reduce
their heavy reliance on the country as a key part of their supply
chains, having seen some disruption as the results of new tariffs
on trade between the country and the U.S.
Seoul Semiconductor Co., a South Korean chip maker with
extensive operations in China, illustrates the difficulty of
exiting China, despite numerous incentives to do so. The company in
2017 began looking at moving some production of its light-emitting
components to Vietnam.
"We were very dependent on China," said Hong Myeong-ki, the
company's co-chief executive officer. But though the company
manufactures roughly half of its products in Vietnam, Mr. Hong now
has no plans to move out of China.
The same trend can be seen among Japanese companies operating in
China, just 9.2% of which said they were moving or considering
moving production out of China in a September survey by the Japan
External Trade Organization, the lowest such level in five
years.
"They need to reduce overreliance on supply chains in one single
market, " said Ding Ke, a Tokyo-based researcher with Jetro. "But
the bigger risk they identified is losing the China market."
--Stella Yifan Xie and James T. Areddy contributed to this
article.
Write to Paul Hannon at paul.hannon@wsj.com and Eun-young Jeong
at Eun-Young.Jeong@wsj.com
(END) Dow Jones Newswires
January 24, 2021 16:52 ET (21:52 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.