CEOs put China at top of investment wish list

China has been rated the world’s top destination for foreign investment in a survey of global chief executives.

Fifty-six per cent of CEOs chose China as one of three markets they would invest in, followed by Brazil (52%), India (37%) and the US (34%), according to the PwC and China Development Research Foundation report Choosing China: Insights From Multinationals on the Investment Environment, which surveyed the CEOs of 227 multinational companies.

The report’s findings are backed up by foreign direct investment (FDI) figures. Last year, China overtook the US for the first time as the leading FDI destination. In the first three quarters of 2012, China attracted $170 billion, compared with the US’s $104 billion, according to an Organisation for Economic Co-operation and Development statement released in January.

North America is fuelling Chinese investment with the highest proportion of companies (57%) that have investments in the world’s most populous nation.

Consumer shift

China’s transformation from a low-cost labour market into the world’s largest middle-class consumer market makes it an attractive proposition for foreign investors. The main reason businesses are targeting China as a top FDI destination is its “expanding domestic market and demand”, chosen by 34% of the CEOs who nominated China as a market they would invest in.

“We predict that China will overtake the US as the world’s largest economy in purchasing parity terms in four years’ time,” PwC International Chairman Dennis Nally said in a news release. “As the country moves up the value chain, shifting from ‘made in China’ to ‘designed in China’ and, finally, to ‘innovated in China’ will lead to significant opportunities for all parties.”

China’s economic potential is underpinned by government commitments to deepen reform and open up the economy, as outlined at the 18th National Congress of the Communist Party in November 2012. The commitments that would have the greatest impact on business are a drive to increase domestic consumption (selected by 48% of CEOs), deepen financial reforms on foreign exchange and interest rates (43%) and double per capita incomes by 2020 (41%).

Other reasons China is attractive to foreign companies are that it provides a level playing field with local competitors (selected by 30% of CEOs) and it has government incentives (27%) and a skilled talent pool (27%). China’s low labour costs (26%) is still a significant reason, despite government plans to improve per capita incomes.

FDI by sector

China offers the best investment prospects to CEOs of consumer, industrial products and service companies, reflecting China’s well-developed manufacturing base, the report said. When asked to choose four target markets for investment, 58% of CEOs from these sectors nominated China, compared with 48% for Brazil and 37% for India and the US.

However, China is also facing increased competition from other emerging economies, particularly Brazil and India, to be the most attractive destination in other sectors.

Technology company CEOs favoured Brazil (80%) over China (64%), followed by India (40%) and the US (28%). Financial services chiefs also preferred Brazil (55%) to China (48%), with India and Turkey both selected by 33% of CEOs, respectively.

Intellectual property concerns

To sustain its attractiveness, China needs to improve government transparency and anti-corruption measures (73%), reduce economic intervention (53%) and accelerate capital market reforms (30%), the report says.

Of particular concern is intellectual property (IP) security, with 16% of CEOs indicating that IP regulation and enforcement had deteriorated over the past three years, compared with 14% who said it had improved. In the Economist Intelligence Unit report Multinational Companies and China: What Future?, 52% of respondents from large countries were concerned they would be expected to give up their IP in return for market access.

In the PwC report, Siemens President and CEO Peter Löscher says that to embrace knowledge and innovation, public authorities need to “recognise the efforts of innovators and inventors, to effectively protect intellectual property rights, notably through enhanced transparency, and to place greater emphasis on the quality of innovation rather than the quantity of patents.”

Eurasia Group President Ian Bremmer warned that China’s lack of more effective protection for IP could impede the ability of Chinese companies to enter foreign markets.

Signs of improvement

Regulation on capital markets (28% improvement vs. 4% deterioration) and foreign investment (25% vs. 10%) and foreign exchange controls (22% vs. 7%) are the areas that have shown the most improvement, according to CEOs.

Meanwhile, taxation and fiscal regulation showed a mild upturn, with 11% of CEOs indicating improvement, compared with 7% who believe it has become worse.

“By relaxing some restrictions on foreign investors, China could ensure a reciprocal opening up of markets, creating a win-win scenario for both Chinese outbound and multinational inbound investors,” Nally said.

Additional findings

Strategies for growth. M&A (43%) and greenfield (44%) investments were the strategies most favoured by CEOs for growing their businesses in China over the next five years. “While transactions and organic growth are the preferred modes of expansion, more collaborative approaches such as alliances, joint ventures and licensed production will become increasingly important to succeeding in the China market,” Nally said.

Smaller presence, big opportunities. In the study, only 10% of companies with operations in fewer than five countries have operations in China. This presents an opportunity to attract investment from smaller, specialist technology companies that are underrepresented. To do this, the report recommends a relaxation of conditions set out in the government’s Catalogue for the Guidance of Foreign-Investor Industries, and cutting red tape in licensing and work permit approval.

“If you want a vibrant business environment, you want the companies to seize opportunities right away, not have them say, ‘My business licence does not cover this venture, and I need six months to apply for a new one’,” Jeremy Burks, Greater China president of Dow Corning, said in the report. “This is where you will find many missed opportunities.”

Talent is a perennial challenge. Talent remains a key area of concern, with only 27% of CEOs indicating the availability of skilled talent having influenced their decision to invest in China. This places China ahead of Brazil (18%), but well behind South Africa (38%) and India (35%).

“We’re even beginning to hear from operators that they are sometimes having a hard time taking delivery of the new airplanes … because they don’t have sufficient pilot and other resources on hand to put the plane into operation,” Marc Allen, president of Boeing China, said in the report.

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