· FDI in the service sector overtook FDI into the manufacturing sector in 2008, marking a structural shift
· The new emphasis on services exposes a skills gap in the Chinese workforce – FDI now needs higher skills and more training
· Intense urbanisation will drive FDI towards central provinces, with EIU forecasts showing a 50% decline in the share of FDI at the eastern seaboard by 2015
30th January 2012, London: Sales to Chinese consumers are the primary driver of foreign investment as rapid urbanisation and income growth increase the population’s spending power, according to a report by Economist Intelligence Unit.
The report, Serve the people: The new landscape of foreign investment into China”, highlights the shift towards the services sector but exposes a skills gap in the labour force.
A shift towards services
Rising wages, in addition to the changing policy landscape, have cooled inward investment in the manufacturing sector. Monthly wages in China have risen by an average of nearly 12% a year in real terms over the past five years, pushing investors into higher-end sectors requiring more capital and less labour.
In 2008, in a reversal of a trend spanning two decades, FDI into the service sector surpassed FDI in the manufacturing sector. FDI in manufacturing grew by an average of 5.5% a year in 2006-10, slower than the overall growth rate of 9.8%.
The coastal city of Xiamen, in southern Fujian province, illustrates the shift towards services. In 2010, the services sector secured approximately 60% of Xiamen’s contracted foreign investment, up from around 53% in 2009.
China’s inbound FDI is increasingly oriented towards services. It thrives off the dense populations of consumers created by increased urbanisation. Moreover, productivity gains in the services sector depend less on advanced technologies and more on the availability of adequately skilled labour. The success of an investment in an accounting firm, for example, relies more on the quality of its staff than would be the case for a shoe factory. As companies begin to invest into the tertiary sector, the quality, not the cost, of the labour force will become increasingly an issue.
FDI moves to central provinces
The Economist Intelligence Unit forecasts that by 2015 the share of the eastern seaboard in total FDI will fall below one-half.
The fastest growth will be seen in areas away from the eastern coast, as investors continue to pursue domestic demand. Provinces such as Yunnan and Henan will see particularly impressive gains as they rise from a low base. Utilised foreign investment in the central, western and north-eastern provinces will grow by 19-21% in 2011-15, whereas growth in the eastern seaboard will slow to around 11%. The western municipality of Chongqing is set for the biggest gains.
Even though investment is spreading further away from the developed coast, we expect FDI to remain largely in urban areas. The development of China’s new nerve centres, or future megacities, will act as a particularly strong draw. The EIU forecasts that China’s urbanisation rate will reach nearly 60% by 2020. The greatest expansion in the urban population will be seen in the central provinces, where the average urbanisation rate will leap from around 44% in 2010 to nearly 55% in 2020
About the Economist Intelligence Unit
The Economist Intelligence Unit (EIU) is the world's leading resource for economic and business research, forecasting and analysis. It provides accurate and impartial intelligence for companies, government agencies, financial institutions and academic organisations around the globe, inspiring business leaders to act with confidence since 1946. EIU products include its flagship Country Reports service, providing political and economic analysis for 195 countries, and a portfolio of subscription-based data and forecasting services. The company also undertakes bespoke research and analysis projects on individual markets and business sectors. More information is available at www.eiu.com
The EIU is headquartered in London, UK, with offices in more than 40 cities and a network of some 650 country experts and analysts worldwide. It operates independently as the business-to-business arm of The Economist Group, the leading source of analysis on international business and world affairs.
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