Circling around China’s Dual Circulation Policy, part II-Implications for Inward FDI

Dr. Jean-Marc F. Blanchard's picture

In my December blog, I overviewed China’s Dual Circulation System (DCS). To reiterate, foreign multinational corporations (MNCs) are concerned about the DCS’s emphasis on self-sufficiency, indigenous technology, and insulating China against the international market’s vagaries. Foreign MNCs, though, also see opportunities to satiate anticipated growth in domestic demand and the needs of a presumptively wealthier population, facilitate China’s efforts to promote high-quality development through inter alia the provision of “technology-focused products and services” (as one Michelin China CEO put it), and to supply the materials needed for China’s ramped up domestic infrastructure and production.

They further are excited, per the President of Dow Asia-Pacific, by the sectoral opportunities (e-commerce, IoT, alternative energy, new materials, and health care) flowing from Beijing’s quest to move China up the value-added chain as well as opportunities to facilitate Chinese exports and outward foreign direct investment (FDI), the latter two part of an “East to Rest” strategy in the words of Honeywell China’s President. Lastly, foreign MNCs look positively on China’s efforts to improve intellectual property rights protections, ease domestic flows, and increase market access. Like many other Chinese policies, the DCS is not entirely new and incorporates existing policy directions (e.g., technological indigenization). A big question is if it will exacerbate existing policy pathologies or create new ones. To illustrate the former, China’s drive for technological indigenization and quest to upgrade technologically will generate continuing pressures for technology transfer. Regarding the latter, the DCS’s focus on all things domestic will color economic policymaking with a more nationalistic hue. Ultimately, the DCS likely will be neither hell nor heaven for foreign MNCs. To maximize its benefits while minimizing its risks, MNCs need to be cognizant of the latter, prepare themselves to target new consumer and market segments in China, and “diversify” to enhance their options.