Why Does Global Capital Still Favor China? The Structural Shift in Foreign Investment Attraction Strategies

Subtitle: Insights from the Transition from "World Factory" to "Innovation Hub"

Introduction

Global geopolitical tensions and economic slowdown have dampened the growth of cross-border direct investment (FDI). While most economies are under pressure from declining foreign investment, China presents a different picture: in 2024, the number of FDI projects grew against the trend, with the investment structure tilting toward high-tech industries. This is no coincidence, but rather a typical example of the global logic of investment promotion shifting from "cost-driven" to "innovation-driven." By analyzing China's practices, this article explores how investment promotion agencies should adapt to this trend and build a future-oriented methodology for attracting investment.

Part One: The Failure of the Old Model

For a long time, the investment attraction strategies of many countries and regions relied on three key factors: cheap labor, land supply, and tax incentives. This model of "race to the bottom" was effective during the era of global supply chain expansion, but today it is encountering diminishing marginal returns. When choosing locations, multinational corporations no longer focus solely on cost; instead, they place greater emphasis on the strategic position of the market, the resilience of supply chains, the concentration of innovation resources, and the predictability of the policy environment.

China's recent evolution in foreign investment provides a clear case study. Traditionally, foreign investment in China was concentrated in labor-intensive assembly manufacturing. Today, however, investment in areas such as auto parts and apparel has leveled off, replaced by large-scale entry into high-tech industries such as new energy vehicles, biomedicine, and artificial intelligence. This shift is not because China has lost its cost advantage, but because its industrial ecosystem has undergone a qualitative leap. For investment promotion agencies still stuck at the stage of "selling land and selling tax breaks," this means the old playbook is losing its effectiveness.

Part Two: Trend Signals in China's Practice

China's data show that foreign investment is not "retreating" but "switching tracks." According to relevant statistics, the number of newly established foreign-invested enterprises in China grew by nearly 10% year-on-year in 2024, and the share of actually utilized foreign capital in high-tech manufacturing continued to rise. Foreign investment in medical equipment, professional technical services, computers and office equipment, and other fields grew significantly. In the first quarter of 2025, growth was particularly prominent in industries such as biopharmaceuticals, electronics, and aerospace equipment.

More importantly, the role of foreign investment in China is shifting from "producer" to "innovator." Volkswagen established its largest R&D center outside Germany in Hefei and made additional investments; Siemens set up an innovation center in Shenzhen to develop new technologies for the global market; BASF opened its Asia-Pacific application center in Guangdong, connecting local manufacturing with global R&D. What these cases have in common is that multinational corporations are incorporating China's innovation infrastructure, engineering talent, and rapid iteration capabilities into the core of their global value chains.This trend is supported by three key factors: first, China has the world's largest pool of STEM (science, technology, engineering, and mathematics) talent, and the research capabilities of its universities are rising rapidly; second, a complete supply chain system has greatly shortened the cycle from concept to product; third, the vast domestic market and rich application scenarios provide companies with a testing ground for product validation and iteration. As a senior executive of a multinational company put it, if a product can win out in China's competitive market, it usually has global competitiveness.

Part Three: From "Attracting Investment" to "Building an Ecosystem": A Replicable Methodological Framework

China's experience reveals the underlying logic of attracting high-quality foreign investment, which can be summarized as a "three-stage evolution model":

• Stage 1: Cost and Market Driven. Attract foreign investors to establish production bases with low-cost production factors and accessible markets. This is the starting point for most developing economies.
• Stage 2: Supporting Industries and Efficiency Driven. Improve upstream and downstream industrial chains, logistics, and public services to enhance the production efficiency of foreign enterprises, moving them from "setting foot" to "taking root".
• Stage 3: Innovation and Ecosystem Driven. Attract multinational companies to set up R&D centers and regional headquarters with talent, research institutions, application scenarios, and an innovation culture, making foreign investment an organic part of the innovation ecosystem.

Each stage does not automatically upgrade to the next; it requires proactive guidance from public policy. Many regional governments in China have driven this evolution precisely through industrial policies of "building, strengthening, and extending the chain," as well as sustained investment in education and research infrastructure.

For investment promotion agencies, the following five key factors are worth learning from:

1. Depth of industrial supporting infrastructure: Investment promotion should not target individual enterprises, but rather the entire industrial chain. A mature supply of components and a localized service network can significantly reduce investment risk.
2. Thickness of the talent ecosystem: Lack of talent is the biggest obstacle to innovation projects. Joint talent training and collaborative R&D mechanisms with universities and vocational colleges are important ways to enhance attractiveness.
3. Openness of application scenarios: Providing foreign enterprises with opportunities for testing and demonstration, especially in fields such as new energy and digital technology, is more attractive than tax incentives.
4. Policy continuity and transparency: What foreign investors fear most is uncertainty. A long-term, predictable policy environment often wins investor trust more than short-term subsidies.
5. Precision investment attraction through digitalization: Using big data to identify companies with expansion potential in global niche industries and tailoring communication strategies to their needs can improve investment promotion efficiency.

It should be emphasized that this framework is not universally applicable. China's success owes much to its super-large market, strong administrative coordination capacity, and substantial investment in scientific research. For small and medium-sized economies, full replication is unrealistic, but they can select specific industrial segments to build specialized, differentiated innovation nodes.

Part Four: The Next VariableCurrently, the global investment promotion field faces several new variables. First, artificial intelligence is reshaping investment attraction work, from investment lead mining to virtual inspections; the use of digital tools will reduce cross-border communication costs. Second, supply chain restructuring triggered by geopolitics is prompting multinational companies to adopt a "China+1" strategy, which brings both challenges and opportunities—regions that can provide alternative nodes are expected to receive relocated investment. Third, tightening sustainable development standards mean green investment and ESG (Environmental, Social, and Governance) performance are increasingly becoming hard constraints in project approval. Fourth, deepening technology security reviews mean investments involving key technologies need to handle compliance issues more carefully.

These variables require investment promotion agencies to possess not only traditional marketing capabilities but also professional expertise in industry research, policy analysis, and international communication. China's practice shows that regions capable of continuously attracting high-quality foreign investment are often those that can deeply understand industrial logic and proactively adapt to changes in global rules.

Conclusion

Global investment flows are undergoing structural adjustment, and China remains one of the options for foreign capital seeking long-term value. But its appeal no longer relies on "cheapness," but rather stems from "efficiency" and "innovation." For investment promotion agencies in various countries, the question that truly needs to be considered is not "what incentives do we have," but "what capabilities can we provide." When global capital shifts from pursuing cost to pursuing ecosystem, whoever can complete the mindset transformation first will take the initiative in the next round of international investment competition.