Foreign direct investment (FDI) was a cornerstone of China’s rapid economic ascent over the past five decades, but recent years have seen a sharp decline. While sluggish post-COVID recovery is often cited as the primary cause, equally important are the Chinese government’s assertive domestic and foreign policies. Artificially subsidized local competition, national security laws, and retaliatory diplomatic actions have collectively chilled investor sentiment. Although Chinese leadership has recently begun to ease some of these policies, a meaningful resurgence in foreign investment is unlikely without a more fundamental shift in mindset and approach.

In 1978, the coastal city of Shenzhen was a small fishing village of 25,000, with a meagre average yearly income of 606 yuan (~$1700 in 2025 USD). Then, the central government did something special: in 1979, it opened Shenzhen to foreign investment as one of its seven “special economic zones.” In 40 years, this small village grew to a metropolis of 13 million people, its GDP growing at an astounding average of 22% yearly between 1978 to 2017. In 2018, Shenzhen’s economic output surpassed Hong Kong’s, once a fifth of China’s entire economy. 

Shenzhen tells a story of incredible growth in China since its opening to private markets and foreign investment. Yet times have changed. Foreign investment has declined since 2023, with Western businesses expressing pessimistic attitudes. China’s increasing national confidence has led to a slew of aggressive diplomatic and domestic policies, killing foreign interest in Chinese investment. Chinese leadership clearly recognizes the damage, but the effectiveness of its recent efforts to encourage foreign investors remains to be seen. 

Biting the Helping Hand

Foreign investment has played a transformative role in China’s economic wonder story. Foreign-invested enterprises contributed a third to China’s GDP and a quarter to its employment in 2013, while accounting for more than 50% of China’s exports by value from 1996 to 2010. They have also transferred technology, expertise and managerial experience, contributing everything from house paint to high-speed trains to semiconductors. The World Bank suggests that foreign investment was a major contributor to China’s sustained double-digit growth during most of the 1980-2010 period.

But as its economy strengthened, China gained a willingness to use trade barriers as a tool in pursuing its geopolitical priorities. The 2020s saw a peak in Chinese uses of trade restrictions and state-issued threats toward foreign actors, with the Australian Strategic Policy Institute, a think tank, reporting 152 counts of Chinese “coercive diplomacy” on foreign companies or governments. H&M, a Swedish clothing retailer, saw its online retail in China temporarily blocked after ending the use of Xinjiang cotton. Lotte, a Korean food manufacturer, saw half their stores closed by health authorities after the 2017 installation of US missile defences in South Korea. Norwegian salmon exports were blocked from 2011 to 2013 after a Nobel Prize was awarded to a Chinese dissident activist. 

The influence of geopolitical priorities on FDI continues to solidify legislatively. The 2021 Anti-Foreign Sanctions Law allows the Chinese government to seize assets from companies that comply with foreign sanctions on China and take action against managers and their families. The 2023 Anti-Espionage Law requires companies to allow government access to their data and forces Chinese data to be stored on domestic soil. This law was used to justify sudden raids on the China offices of Capvision, Bain & Company, and Mintz Group, all American headquartered companies. Chinese law also often forces the sharing of foreign technology, while weak protection of intellectual property has cost multinational firms an estimated billions of dollars in lost revenues.

On trade, the story of institutional headwinds to FDI remains, as national security priorities translate into industrial policy. The “Made in China 2025” plan—backed up by the 14th 5-year plan — aims for self-sufficiency and the domestic displacement of foreign firms through subsidies, foreign asset acquisitions, forceful joint ventures with domestic firms, and preferential access to government contracts for domestic firms. These policies can crowd out foreign firms, who face fierce artificial price competition, and give investors the impression that politics come before economic efficiency and free competition. 

Around the same time, Chinese crackdowns on big tech, finance, real estate, and other sectors occurred in the name of “common prosperity,” an ideological pursuit of wealth equality. A slew of regulatory actions have resulted in stringent antitrust, data, and labour regulations, which alongside the arrest of high-profile finance, banking, and tech bosses, sparked fear in foreign business leaders. Many are starting to believe Beijing is increasingly putting politics above economic performance, evidenced by Chinese equity performance on the Hong Kong stock exchange and the weakening of the Chinese yuan after Xi Jinping’s replacement of Western-oriented, free-market reformers with more personalist and statist candidates. 

All of these have spooked foreign investors. 87% of respondents to a 2023 American Chamber of Commerce in China survey were pessimistic about US-China bilateral relations, and two-thirds of European businesses said doing business in China was “more political” than before. This pessimism has had a marked effect on Chinese foreign investment. Inbound Chinese foreign direct investment (FDI) declined by 14% in 2023, slumping another 27.1% in 2024. High-profile foreign companies have either withdrawn their manufacturing or services entirely from the Chinese market. Yahoo, an American search engine, exited in 2021 due to “a significantly more challenging operating environment,” likely related to suspected regulator worries over platform censorship and national security concerns. 

Wooing Back the Ex

Recent times have seen immense efforts to woo back investors. China softened its Anti-Espionage laws in October 2023 to allow foreign firms greater freedom with Chinese data, alongside lifting the restrictions on foreign investment in manufacturing. The number of restricted industries was also relaxed from 31 to 29, qualifications for long-term foreign investors were lowered, and visa-free entry expanded. The passage of the Foreign Investment Law in February 2025 released an action plan to improve market access and encourage foreign investment, a message being pushed to global business. At a meeting with foreign executives in March, President Xi stated, “China’s door will only open wider. The policy of welcoming foreign investment has not changed and will not change,” reiterating government plans to “reform the regulatory framework for inbound and outbound investment.”

These measures have been aided by recent turmoil in US markets, as the Trump Administration’s policy incites investor panic. In March, the Economist suggested America’s economic confusion could coax investor interest back to China. But this interest is conditional on a major change of attitude: until China seriously commits to prioritizing economic performance over politics, investors will remain hesitant. 

Whether China can win back the confidence of foreign investors remains to be seen. But one thing is for sure. Foreign investment helped make China great; let’s see if it can keep it.

Image credits: Francois Carlet-Soulages / NOI Pictures