I've seen it discussed in a number of places recently. There are some basic truths about Foreign direct investment that seem to get covered up, misinterpreted, distorted - pick your adjective...

When we talk about American investment in China, many Americans spit and cuss and start saying things that sound like the come from the script of Mel Gibson's movie, Conspiracy Theory. They seem to think that greedy American companies have moved American jobs to China. But the truth is that the vast majority of American companies operating in China are there because they want to sell something to the Chinese consumer. Like, say, a Buick. The American companies are really very involved in producing thing in China that can be exported to America.

"Hasn't China become the world's factory?" you ask. Sure it has. But it's our friends in countries like Japan and Korea who are financing that. The Japanese stock market trembles so much at the thought of a US recession partly because it's a double whammy for them. If we stop buying Japanese products it hurts Japan, and if we stop buying Chinese made goods it hurts Japan.

But don't U.S. firms have huge sums of money tied up in China that could have been used someplace else? The short answer to that question is, well, no. If you want a point of comparison so that you can see just how much money we have tied up in China, here's a tidbit from the U.S. State Department's page of Background Note on Ireland...

As of year-end 2006, the stock of U.S. foreign direct investment in Ireland stood at $84 billion, more than double the U.S. total for China and India combined ($31.2 billion). Currently, there are approximately 620 U.S. subsidiaries in Ireland, employing roughly 100,000 people and spanning activities from manufacturing of high-tech electronics, computer products, medical supplies, and pharmaceuticals to retailing, banking, finance, and other services. In more recent years, Ireland has also become an important research and development (R&D) center for U.S. firms in Europe.

In other words, American investment in China is between one-half and one-third as much as American investment in Ireland. But nobody seems to sit around and worry about home vulnerable we are because of all the capital we have tied up in Ireland, or about what the Irish are doing with all our money...

What about Chinese investment in America? Aren't the Chinese basically trying to buy our country? There's at least two ways to look at that. In terms of foreign direct investment by Chinese companies into the U.S. economy, Chinese investment in America has been relatively small compared to American investment in China. According to one source, total US investment in China at the end of 2006 was about $22 billion, while total Chinese investment in the US was only $600 million at that time. The shape of the US economy, particularly losses in the subprime mortgage fiasco, has has allowed China to catch up a little with deal like the recent $5 billion investment the Chinese made in Morgan Stanley. But America still has considerably more invested in China than China has invested in America.

The other perspective has less to do with tradition foreign investment in commercial enterprise. The Chinese are our second biggest market for US Treasury Bonds...

Lee Branstetter & Fritz Foley have a good analysis of the situation available online: Have MNCs hollowed out their domestic economies to China?