Is China Really a Threat to Western Economies?

Voxeu.org published a very interesting piece questioning the claim that American multinational corporations are investing massively in China and increasingly moving their R&D there, thereby contributing to the American trade deficit and digging their own grave. Here are some excerpts:

“Many otherwise well-informed experts on international economics believe that US FDI [foreign direct investment] in China is large, that US multinational enterprises (MNEs) have significantly enlarged the US-China trade deficit by shifting production aimed at the US market to Chinese affiliates, and that this production shift has undermined investment at home and in other countries. Current conventional wisdom also suggests that US MNEs are moving cutting edge R&D to China, in order to take advantage of vast legions of low cost technologically skilled workers. Our recent research, based on comprehensive surveys of US multinational activity in China, suggests that each one of these suppositions is largely false.

First, US FDI in China is surprisingly small relative to nearly any relevant benchmark. US firms account for a small component of total FDI inflows into China. US affiliates have contributed very little to Chinese fixed asset investment or employment growth. Moreover, in 2004 the Chinese operations of US firms accounted for only 1.9% of total foreign affiliate sales and 0.7% of total foreign affiliate assets. (…)

Second, US affiliates in China have played very little role in China’s export growth. (…)

Third, there is little evidence that increased US MNE investment in China is associated with less investment elsewhere. (…)

Finally, our review of US multinational R&D data and US patent data convinces us that China has not yet emerged as a major technological power, nor is the level of US R&D activity in that country large enough to contribute significantly to such an emergence. (…) the real extent of innovative activity performed in China by US multinationals is quite modest. In 2004, US firms spent $622 million on R&D in China; an amount that was about 0.3% of the total R&D undertaken globally by these firms. China even accounted for less than 13% of total R&D undertaken by US firms within the Asian region. It is hard to reconcile these small numbers with the view that US firms are shifting the locus of their R&D activities to China. (…)

Has China become an important R&D center for a small number of US companies, even if it remains less significant in aggregate terms? Not yet. By far, the leading US firm in terms of China-generated patents is Microsoft. Yet even Microsoft’s China-generated patents amount to less than 4% of its total cumulative patents as of the end of 2006. And if we restrict ourselves to patents with only mainland Chinese inventors, the fraction drops to about 1.5%.

How can we reconcile this low level of innovation with findings that indicate a high level of sophistication among China’s exports? China has become an important exporter of goods that are technology-intensive, but relatively little of the technology embodied in these goods has been created in China or by Chinese companies. Instead, China continues to import much of the high value-added parts and components that go into these goods.”