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Exploring the Math Behind China’s Astounding FDI Numbers

This month’s Harvard Business Review did a focus on China, and among the articles there was a tidbit on foreign direct investment (FDI) I found most interesting.

From my notes, “The Forgotten strategy” by Pankaj Ghemawat, HBR Nov 2003, p. 81.

“Few managers ever explicitly treat tax or other strategic arbitrages as a strategic tool, despite their potential. That’s partly because executives are reluctant to draw attention to such arrangements for fear that they might be outlawed. For instance, many Chinese businesspeople channel investment funds through foreign third parties and then back into China to secure better legal protection, tax concession, or otherwise favorable treatment. In fact, about half the foreign direct investment flowing into China is estimated to have originated in China. Similar considerations explain why Mauritius is one of the top two sources of FDI flowing into India.” (emphasis added)

We know we’re pouring a lot of FDI in, but if this really is the case that the participation of the rest of the world is matched by what is essentially money laundering (don’t know if expat investment is included in the tally of round tripping). This means that, instead of net inflows of ~$53B, we’re really talking ~$27B. That paints a different picture of the gold rush, with all its implied opportunities.
In writing this, I did the first part of followup research on this - this seems a pretty bold statement and was without citation in the article. With just a bit of googling, I found an IMF report, (google can have whatever monopoly it wants as long a 1 simple search leads me to such finds) that actually compares China and India.
Interesting stuff… interesting to probe what lies behind the numbers. Doesn’t invalidate the trend, just puts a more realistic face on it.