THE GLOBAL FINANCIAL CRISIS AFFECTS FOREIGN DIRECT INVESTMENT (FDI) INTO RUSSIA AND CHINA

FOR IMMEDIATE RELEASE
(Free-Press-Release.com) September 10, 2009 --

Moscow, September 10 2009. - Both China and Russia are still among the top five most attractive markets for FDI, others being the United States, India and Brazil, concludes the August research brief by the SKOLKOVO Institute of Emerging Market Studies (SIEMS) entitled MNC Operations in Emerging Markets: Post- Crisis Adjustments of FDI Inflows in China and Russia. Interestingly, the research notes that while the crisis negatively affected FDI inflows into emerging markets, including China and Russia, both of which have experienced a decline in FDI inflows, some multinational corporations (MNCs) are actually increasing their investment to capture opportunities created by the global financial crisis.

The report concludes that the current crisis, which resulted in tighter credit and slowed down overall investment activity worldwide, has been the driving force behind the falling FDI into emerging markets, including into both Russia and China. The decline of FDI inflows into China can be attributed to three factors. First, tight credit caused by the global crisis. Second, part of the profits or cash reserves generated by MNCs in China has been redirected to support troubled parent companies, instead of being reinvested in the country. Third, the once-guaranteed appreciation of Chinese currency, yuan, has slowed down since the start of the crisis, which, as a result, has removed one of the key incentives of FDI by MNCs in China. The decline of FDI inflows into Russia can be largely attributed to the sharp decrease of commodity prices and personal wealth.

To counteract the negative effects of the crisis, some countries tried to boost FDI inflows via government policies. In China, for instance, the government instituted FDI-enhancing measures on both local and regional level. In addition, in November, 2008 the government unveiled a $586 billion stimulus package meant to stimulate the economy and adjusted policies to attract foreign investment, which included relaxing and decentralizing the regulations on foreign investment. In Russia, where the government’s behavior towards FDI inflows has always been an ambivalent mix of protectionist mistrust and willingness to attract more investment, the government instituted various incentives meant to attract FDI into certain sectors, such as energy generation and automotive manufacturing. Going forward, the government, at both federal and regional levels, will continue to play a key role in driving FDI dynamics in Russia. More recently, both President Medvedev and Prime Minister Putin stated their support for FDI-enhancing policies. It is yet to be seen, however, whether it proves true in practice.

More detailed information can be found in SKOLKOVO's survey.