Differences in foreign direct investment between China and the United States

In 2021, the dispatches were filled with stories about the China-US dynamic. While the majority of these articles focus on trade retaliation and blame for COVID, another story emerged in January. Media sources reported that last year, China overtook the United States as the world’s top destination for new foreign direct investment projects, as the COVID-19 pandemic shifted the epicenter of the world. world economy to the east. While some experts suggest China’s earlier recovery from the pandemic shutdown explains the new development, there are other more systemic explanations.

Contrary to public opinion, liberal democracies do not always have a competitive advantage when it comes to attracting inward investment from foreign companies. Many people assume that the nexus between liberal democracies and open markets is the best platform for cross-border investments. Although there are certain advantages to implementing direct investments in capitalist economies, the political economy of authoritarian countries also offers advantages.

Since China’s post-Mao opening to foreign investment in 1978, China has experienced significant economic growth. As a country with an authoritarian government, its economic policies are one of the main reasons for its success.

Special Economic Zones: China vs. United States

Special economic zones are geographic areas subject to economic regulations that are different from those in other regions of the same country. These zones offer economic advantages to domestic and foreign companies that invest in them. For example, host governments often attract foreign investors by releasing them from corporate and other tax obligations when establishing a presence in one of these areas. There is a stark contrast between the ways in which liberal democracies and authoritarian governments have established such zones in different parts of the country.

The absence of elections in authoritarian countries like China allows government officials to make decisions based on the long-term benefits of the global economy, while representatives of liberal democracies like the United States target key factions of the electorate when making decisions with the short-term goal of winning reelection.

U.S. policymakers are more likely to place special economic zones in poverty-stricken areas to boost the financial activity of impoverished voters – and gain votes – but although these areas help local people, the potential for growth is limited. and they do not benefit the nation as a whole. Meanwhile, Chinese policymakers are placing these areas along the coasts to spur export-led growth that strengthens the economy of the entire country. Foreign direct investors are often forced to invest in countries with a strong coastal economy in order to better facilitate trade with companies in neighboring countries. This has helped advance China beyond the United States in terms of new foreign direct investment.

Moving forward: on a case-by-case basis

As we enter the post-COVID era and the United States and China battle for foreign investment from foreign companies, the form and type of government will clearly be an important factor. When considering potential venues for direct outward investment, it is important to examine host countries on a case-by-case basis rather than making assumptions based on conventional ideas.

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