A Chinese remedy for US jobs?

Chinese investment in the US has grown rapidly in the past few years. Despite concerns of an adverse affect on employment, the potential for job creation is tremendous.

Chinese foreign direct investment in the United States has reached an inflection point. Since 2009, FDI flows have increased rapidly, growing from an annual average of around 30 deals worth less than $500 million before 2009, to almost 100 deals worth about $5 billion in 2010 and 2011.

Cumulative investment from 2000 to 2011 totalled more than $16 billion, and 2012 is on track to be another record year for Chinese investment.

As newcomers to the United States, there are suspicions as to the motives and behaviour of Chinese firms, just as there were for Japanese firms in the 1980s. In light of the unique characteristics of the Chinese state and economy, Americans are wondering whether or not Chinese investment will have the same positive impacts as FDI from other countries. One of the most important questions is how Chinese investment affects US employment. Will Chinese investment have the same positive impacts on job growth as capital from other countries? Or are Chinese firms incentivised to move jobs back to China because of patriotic doctrine, as a quid-pro-quo for state support to go abroad, or industrial policy designs?

Analysis of almost 600 Chinese direct investment transactions in the United States between 2000 and 2012 shows that the employment impacts are largely positive. The number of Americans employed by Chinese-owned subsidiaries has risen in tandem with recent growth in China’s US investment. Chinese firms were negligible employers before 2008, but since 2009 the number of jobs provided has increased substantially on the back of greater annual investment flows and an increase in large-scale acquisitions. The number of US jobs associated with majority Chinese-owned subsidiaries in the United States grew from fewer than 2,000 12 years ago to more than 27,000 today. This figure does do not include employment provided by firms in which Chinese investors hold a minority interest. It also does not account for hourly employees or indirect jobs created at suppliers or during the construction phase. If we added those jobs, the employment figure would be higher by several thousands.

While greenfield projects (projects commenced where no prior work existed) create the most new jobs, acquisitions have also helped support employment. Chinese investors have rescued numerous firms from bankruptcy, and there is no evidence of asset-stripping behaviour. Chinese buyers usually increase staff after acquiring a US business, as key assets – human talent, experience and know how – are rooted locally and not prone to transfer abroad. Those few acquisitions that have resulted in job losses have generally not been driven by asset-stripping behaviour on the part of Chinese firms, but rather structural adjustment and reorganisation of value chains to react to changes in costs or demand.

Today China is a minor US employer compared to long-time foreign investors such as Germany or Japan: the 27,000 jobs currently associated with Chinese firms account for less than 1 per cent of the 6 million jobs provided by US-based foreign affiliates. But the potential for Chinese investment-led job creation is tremendous. If investment from China remains on track, Chinese firms will employ 200,000 – 400,000 Americans by 2020.

The promise of hundreds of thousands of jobs is based on the assumption that a significant portion of China’s global outward FDI flows to America. However that is not guaranteed, and both countries must work hard to sustain the recent upward trend in Chinese FDI in the United States.

Chinese firms come to the United States for the same commercial reasons as other foreign investors: its large consumer market, its good business environment, its creative and diverse workforce, its innovative and experienced firms and its strong global brands. They will only continue to invest in America if the US manages to sustain its attractiveness to foreign investors by fixing its structural problems. The US must also work to prevent its reputation from being tarnished through politicised high-profile deals, such as those that have taken place in the past. It is critical that leaders stand up and make sure that the public debate about the risks and benefits of Chinese investment is based on facts, not fear. If fear mongering and populism gain the upper hand, Chinese firms may choose more hospitable investment destinations in Europe or Asia to expand their overseas business and generate jobs there.

China must contribute its share too to ensure a healthy US – China investment relationship. Instead of blaming protectionism on host countries, China’s leaders might consider the domestic roots of the problems that many Chinese firms face when investing abroad. Reforms that improve corporate governance and transparency, more freedom for firms to make their overseas investment decisions without government interference, and credible steps to level the playing field for foreign firms in China would go a long way to dispelling existing concerns about Chinese investment in the United States and elsewhere.

Thilo Hanemann is Research Director at Rhodium Group . This article first appeared on www.eastasiaforum.org on 30 October 2012. Republished with permission.

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