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Understanding China’s High Investment Rate and FDI Levels: A Comparative Analysis of the Return to Capital in China, the United States, and Japan

Author(s)

Wenkai Sun, Xiuke Yang, Gene Xiao


Abstract

This paper analyzes aggregate return to capital statistics for China, the United States, and Japan in order to investigate the causes of an unusually high investment rate and increasing foreign direct investment (FDI) inflows to China. We also analyze labor’s share of output and capital-output ratio statistics to predict future trends in the return to capital in China. Our findings allow us to come to four conclusions: (1) China’s high investment rate corresponds to a high return to capital in the country, just as high investment rates in the United States and Japan historically correspond to a high return to capital. (2) A comparatively higher return to capital attracted FDI to China. (3) Investment rates among these three countries show no signs of convergence so far. These differences will likely persist, encouraging FDI to continue to flow into China in near future. (4) The return to capital in China will likely decrease in the long run, as the experiences of Japan and the United States indicate, but will only decrease and become stable after a certain level of capital stock and development is reached.