CEOs have rated China as the world's top destination for foreign investment, according to a global survey by Pricewaterhouse Coopers and the China Development Research Foundation.
According to the survey report, "Choosing China: Improving the Investment Environment for Multinationals," more than half (56%) of CEOs surveyed chose China above other major and emerging economies including Brazil, Russia, India and the US.
CEOs say they were attracted to China's expanding consumer markets, skilled talent pool and government incentives.
"A major factor in China's economic success has been its ability to attract foreign investment," says Dennis Nally, Chairman, PricewaterhouseCoopers International Ltd.
"In 2012, China attracted US$111.7 billion of global FDI. And we predict that China will overtake the US as the world's largest economy in purchasing parity terms in four years time."
"But China will face new challenges, as emerging markets become more competitive in attracting foreign investment, widening the breadth of choice for enterprises globally," he says.
According to the survey, China offers the best prospects for investment among CEOs of consumer, industrial product and service companies (58%). But Brazil is favoured over China by technology businesses (80% and 64% respectively) and the financial services sector (55% and 48% respectively).
Policy paying dividends on foreign investment
Nally says, "China is facing intense competition in some industries it is targeting. But the government is investing in measures to increase China's long-term attractiveness as an investment destination."
CEOs highlighted a drive to increase domestic consumption (48%), deepen financial reforms on foreign exchange and interest rates (43%), and doubling per capita incomes by 2020 (41%) as the top three policy commitments that would have the greatest impact on their businesses.
"These measures are paying dividends, with 70% of CEOs that have operations in China planning to increase their investments here over the coming five years," Mr Nally says.
When asked about further measures to improve China's competitiveness, CEOs highlighted improving government transparency and anti-corruption (73%), reducing economic intervention (53%), and speeding capital market reforms (30%) as areas for further improvement.
Nally adds, "Greater transparency and enhanced accountability would strengthen China's attractiveness and make it easier for foreign enterprises to plan ahead. They would also be a helpful step towards providing investors with greater certainty and a more level playing field to do business."
"By relaxing some restrictions on foreign investors, China could ensure a reciprocal opening-up of markets, creating a win-win scenario for both Chinese outbound and multinational inbound investors."
Strategies for growth
M&A (43%) and greenfield (44%) investments were the strategies most favoured by CEOs for growing their businesses in China over the next five years.
"While transactions and organic growth are the preferred modes of expansion, more collaborative approaches such as alliances, joint ventures and licensed production will become increasingly important to succeeding in the China market," says Nally.
Smaller presence, big opportunities
Companies with a limited global footprint (with operations in fewer than five countries) could offer a major opportunity to China in terms of attracting innovation as well as financial capital.
"As China shifts to become a more knowledge-oriented economy, it could win new investment from smaller and specialist foreign companies. Firms such as specialist technology and media enterprises are currently underrepresented," he says.
Talent perennial challenge
Talent remains a key area of concern, with only one in four CEOs (27%) indicating the availability of skilled talent having influenced their decision to invest in China.
"The war for talent has been well discussed and documented. However, as some CEOs in our survey have highlighted, China's challenge is about capacity, not capability. Many foreign companies have already established alliances with local universities and institutions to help develop a ready pool of talent," Nally says.
"As local Chinese companies mature and expand – often into other markets – inbound investors are facing growing competition for the best Chinese candidates, reflected by high staff turnover rates."