Introduction
The global geopolitical landscape, international division of labor, and economic cycle are undergoing profound adjustments. The normalization of strategic competition and cooperation between China and the United States, sluggish global economic growth, and the accelerating restructuring of regional industrial chains have prompted multinational enterprises (MNEs) worldwide to undertake a new round of strategic reviews of their investments in China. A broad industry consensus has emerged that traditional, one-dimensional investment strategies can no longer accommodate today’s complex global market environment.
Foreign investment in China is showing pronounced structural divergence. While certain labor-intensive and standardized low-end production capacity is gradually being relocated abroad, leading global technology firms, high-end manufacturers, and international capital continue to invest in China’s technology and innovation sectors and higher-end segments of its domestic market. Drawing on surveys by overseas chambers of commerce, assessments by international think tanks, and data reported by leading international media, this article examines the drivers behind these adjustments and the long-term trends in foreign investment in China from four perspectives: the new global industrial landscape, key concerns of foreign enterprises in China, the core competitive advantages of the Chinese market, and the global strategies of MNEs.
I. The New Global Macroeconomic Landscape: Normalized Competition, Slower Growth, and Greater Industrial Diversification
Based on medium- and long-term assessments by leading overseas think tanks, international investment banks, and institutions specializing in MNE strategy, the global industrial and economic landscape is expected to exhibit three core trends over the next five years. These trends will underpin MNEs’ adjustments to their global capacity allocation and investment strategies.
First, China-U.S. strategic competition will remain a long-term, structural feature, with limited cooperation and differentiated competition becoming the new normal. Research by international investment banks and major European and American chambers of commerce broadly suggests that full-scale industrial decoupling is highly unlikely in the short term. Nevertheless, high-tech export controls, supply-chain compliance reviews, and geopolitical trade barriers are likely to persist over the long term. Major-power competition has evolved from a source of periodic market volatility into a persistent operating variable that MNEs must incorporate into strategic planning, risk-management systems, and capacity allocation.
Second, the global economy is expected to remain on a low-growth trajectory. Assessments by major global financial institutions suggest that weak end-consumer demand, recurring inflation in commodity prices, and reduced fiscal room for stimulus across economies have brought the era of rapid global growth to an end. Against this backdrop, global capital is shifting away from the pursuit of short-term high growth and toward market stability, industrial-chain completeness, long-term compound returns, and supply-chain security.
Third, global industrial chains are shifting from one-way regional relocation toward diversified, networked restructuring. In recent years, most MNEs have adopted a “China + N” global capacity strategy, gradually shifting standardized, low-value-added, labor-intensive incremental capacity to lower-cost regions closer to end markets, including Southeast Asia, Central Asia, and Mexico. Meanwhile, leading Chinese enterprises are accelerating their global expansion, bringing supporting supply chains into emerging markets and further reshaping the global division of labor. Overall, this shift goes beyond simple capacity relocation and is giving rise to a new networked industrial structure with China as a core hub, supported by multi-regional coordination and risk diversification.
Against the backdrop of these changes in the global landscape, the rationale underlying foreign investment in China has undergone structural adjustment. Foreign investors are placing greater emphasis on China’s long-term strategic value, its value as a platform for technological innovation, and its role in global industrial synergies, resulting in more rational, refined, and layered investment strategies.
II. Key Concerns of Foreign Enterprises Investing in China
Based on 2025–2026 surveys by overseas chambers of commerce, research reports from international consulting institutions, and authoritative overseas financial data, MNEs show a high degree of convergence in their concerns regarding operations and new investment in China. These concerns reflect considerations relating to market-based operations, global compliance management, and long-term strategic planning, and they are key drivers behind foreign investors’ efforts to adjust their capacity structures and optimize their global industrial footprints.
1. Geopolitical Tail Risks
The latest survey by the U.S.-China Business Council (USCBC) shows that 58% of surveyed MNEs regard uncertainty in major-power relations as their top operational risk. Their principal concern centers on extreme tail risks arising from geopolitical fluctuations, including potential disruptions to cross-border currency conversion and fund transfers, restrictions on access to high-end technologies, cross-border compliance reviews, and uncertainty surrounding the security of assets in China. To satisfy global compliance requirements and shareholder risk-management standards, and to enhance the resilience of their global operations, most MNEs are diversifying production capacity across regions to hedge these potential risks. These adjustments primarily reflect global risk-management considerations and do not negate the core value of the Chinese market. Surveys by the German Chamber of Commerce in China further indicate that many German enterprises operating in China are caught between Chinese and U.S. regulatory requirements, must continuously assess compliance risks in both jurisdictions, and have accordingly become more cautious in their investment decisions.
2. Intensifying Market Competition and Erosion of Traditional Cost Advantages
USCBC survey data indicate that 65% of foreign enterprises identify intensifying competition from domestic Chinese firms as the primary factor squeezing their profit margins and constraining new investment in China, with an impact greater than that of geopolitical risks. As China accelerates industrial upgrading, domestic enterprises have strengthened their capabilities in R&D, product iteration, distribution-channel development, and cost control, gradually eroding the traditional advantages enjoyed by foreign firms in brand premium and technological barriers.
Meanwhile, rising overall costs, including labor, land, and supporting supply-chain resources, have weakened China’s traditional cost advantages in labor-intensive industries compared with Southeast Asia, Central Asia, and other regions. For lower-end foreign-invested industries that lack core technological barriers and rely on low-cost advantages, the margins available under an extensive, cost-driven growth model continue to narrow, making capacity relocation and strategic adjustment a market-driven choice.
3. Differences in Regulatory Implementation and Concerns over Policy Predictability
According to the annual Business Confidence Survey of the European Union Chamber of Commerce in China, foreign enterprises generally recognize the continuing improvement of China’s legal system and business environment, while remaining concerned about the consistency and predictability of policy implementation. Key concerns include differences in enforcement standards across regions, dynamic adjustments to regulatory policies in specific industries, and uneven implementation of protections for the rights and interests of foreign investors.
MNEs’ global risk-management and compliance systems rely heavily on standardized, transparent, and predictable institutional environments. Policy adjustments in specific areas and inconsistent enforcement standards can directly lengthen decision-making cycles for large-scale foreign investment and reduce appetite for medium- and long-term investment. Research by the American Chamber of Commerce in China (AmCham China) further indicates that ongoing updates to compliance rules in data regulation, export controls, government procurement, and antitrust review have increased the day-to-day compliance costs of foreign enterprises.
4. Significant Cross-Border Dual-Compliance Barriers and Greater Long-Term Operating Uncertainty
Beyond external concerns such as geopolitical volatility, market competition, and policy fluctuations, differences and conflicts between domestic and overseas regulatory systems have become a key internal constraint on MNEs’ medium- and long-term investment strategies in China and have made them more cautious toward capital-intensive expansion and cross-border cooperation. PwC’s 2026 survey of MNE executives and in-depth interviews conducted by the European Union Chamber of Commerce in China indicate that foreign enterprises face distinct dual-compliance challenges in China. Operational uncertainty arising from differences between domestic and overseas regulatory standards has become an important constraint on foreign investment decisions.
On the one hand, multiple overseas regulatory regimes impose binding constraints. Forty-one percent of surveyed MNEs state that overseas sanctions, sectoral regulations, environmental, social and governance (ESG) reviews, and cross-border investment review rules adopted by the United States and European countries differ significantly from China’s domestic regulatory frameworks for market regulation, data compliance, and sectoral supervision. These differences create substantial dual-compliance pressure on operations in China, cross-border R&D, technological cooperation, and supply-chain collaboration. To avoid cross-border compliance breaches and satisfy global headquarters’ risk-management requirements, many enterprises have slowed high-end technological cooperation, reduced the scale of new investment, and scaled back cross-border collaborative activities.
On the other hand, long-term uncertainty surrounding dual compliance has directly weakened foreign enterprises’ confidence in medium- and long-term investment. Fourteen percent of surveyed European enterprises explicitly stated that they had put new capital-intensive investment plans in China on hold. According to the survey, this decision was driven by long-term compliance-risk considerations rather than insufficient profitability in the Chinese market. Ongoing changes in the two regulatory systems and differences in compliance standards make it difficult for enterprises to develop stable long-term expectations for their operations. Capital-intensive, long-cycle investment projects face risks that are difficult to control, ultimately dampening foreign investment appetite and encouraging more conservative investment strategies.
III. China’s Irreplaceable Advantages in the Established Market and Forward-Looking Opportunities in Technological Innovation
Overseas capital, international think tanks, and leading investment banks have broadly converged on the view that, while China’s traditional cost advantages are weakening, its strengths in technological innovation, industrial ecosystems, and real-world applications continue to expand. China is one of the few economies worldwide with a vast domestic market, comprehensive industrial support systems, extensive application scenarios, and sustained capacity for technological iteration. Its combined advantages are difficult for emerging markets in Southeast Asia, Central Asia, and other regions to replicate in the short term. Foreign investment in China is undergoing a clear structural upgrade: lower-end production capacity is being relocated in an orderly manner, while high-end manufacturing, technology R&D, and digital services continue to attract net capital inflows.
1. Irreplaceable Strategic Advantages of China’s Established Market Base
1.1 A Vast Domestic Consumer Market with Diverse and Stable Demand
Survey data from overseas chambers of commerce show that 95% of surveyed foreign enterprises regard the Chinese market as a core revenue base for their global businesses. Its stable market scale and multi-tiered consumption structure provide enterprises with sustained cash-flow support and operational resilience. Withdrawing from the Chinese market would mean permanently giving up access to the world’s largest and most resilient consumer market. Meanwhile, nearly half of foreign enterprises are applying the operational, marketing, and product-iteration experience accumulated in China to other emerging markets, thereby supporting the growth of their global businesses.
Case Study: As a leading German company with decades of operations in China, Volkswagen has maintained a long-term commitment to the Chinese market while continuously adapting its strategy. In response to competition from domestic new-energy vehicle manufacturers, Volkswagen has continued to invest in, rather than reduce, its production capacity in China, focusing on new-energy vehicles, intelligent cockpits, and autonomous driving. During 2025–2026, Volkswagen continued to establish new-energy R&D centers and intelligent production lines in China. Drawing on China’s large automotive consumer market and the extensive user feedback it generates, the group has rapidly improved product-market fit, while revenue from its China operations has continued to rank first among its global markets, underscoring the irreplaceable value of China’s domestic market.
1.2 Complete and Highly Responsive Industrial Clusters Across the Full Supply Chain
McKinsey’s global manufacturing research and industry reports from the European Union Chamber of Commerce in China indicate that China has the world’s most complete manufacturing supply-chain ecosystem, with exceptional responsiveness and rapid iteration. An integrated industrial system spanning core components, basic raw materials, final assembly, and after-sales support substantially reduces enterprises’ production, R&D, and trial-and-error costs and enables rapid mass production and product iteration in response to market demand.
Many foreign enterprises that have relocated part of their production capacity overseas have found that Southeast Asia, Mexico, and other regions can primarily take on final assembly, while core precision components and high-end supporting materials still need to be sourced from Chinese suppliers. This indicates that foreign capacity relocation often involves the transfer of selected production stages while the core links remain embedded in China’s industrial ecosystem.
Case Study: Samsung has transferred part of its low-end mobile-phone assembly capacity to Vietnam, while retaining and continuing to expand its presence in higher-end segments of the industrial chain in China. Samsung’s operations in China currently focus on high-end chip packaging, key display components, and semiconductor materials. More than 70% of the core components used by its Vietnamese assembly lines are sourced from Chinese supply chains. Samsung’s financial reports indicate that the high responsiveness of China’s industrial supply chain supports the quality and production efficiency of its global end products and is a key reason the company has remained closely integrated with China’s industrial ecosystem.
2. High-Potential Growth Opportunities in Technological Innovation
According to recent assessments by Goldman Sachs and Morgan Stanley, China’s core growth drivers have shifted fundamentally. The large-scale commercialization of artificial intelligence, high-end new materials, advanced manufacturing, and digital services has become a major source of new growth, attracting global high-end capital and technology companies to expand in China and forming a key long-term rationale for foreign enterprises to deepen their local presence.
2.1 Artificial Intelligence Across Diverse Application Scenarios
International technology-focused investment banks and research institutions consider China’s differentiated advantage in AI to lie in its extensive application scenarios, deep pool of engineering talent, and comprehensive hardware supply chain, rather than solely in isolated breakthroughs in foundation models. Intelligent manufacturing, smart cities, consumer electronics, smart homes, and other scenarios provide low-cost, large-scale testing and iteration environments for AI technologies, substantially shortening commercialization cycles—an advantage less readily available in European and U.S. markets. Morgan Stanley identifies AI applications in China as one of the major structural investment opportunities globally over the next decade.
Case Study: Microsoft continues to deepen its presence in China’s AI market, drawing on China’s extensive application scenarios and industrial resources to build an AI application ecosystem tailored to the domestic market. Its R&D team in China focuses on enterprise digital transformation, AI-enabled industrial applications, and smart workplace applications, iterating products in response to the digital-transformation needs of Chinese small and medium-sized enterprises. Microsoft also refines its technologies within China’s innovation ecosystem and exports mature, lightweight AI solutions to emerging markets in Southeast Asia, Latin America, and elsewhere, pursuing a model of “innovation in China and commercialization worldwide.”
2.2 High-End New Materials and Supporting Industries for Advanced Processes
Goldman Sachs reports identify several Chinese sub-sectors—including materials supporting computing infrastructure, energy-storage materials, power-semiconductor substrates, and key materials for new energy—as areas with rapid industrialization and substantial market demand. Although geopolitical factors constrain the procurement of certain equipment and some forms of technological cooperation, strong downstream demand and a well-developed industrialization ecosystem continue to make the market attractive to overseas producers of high-end materials and precision-manufacturing companies.
Case Study: As a global leader in advanced chemical materials, BASF continues to expand its investment in China’s high-end materials sector. In 2026, BASF continued to expand its Zhanjiang integrated base, focusing on high-value-added products such as battery materials for new-energy applications, biodegradable materials, and high-end industrial coatings. BASF’s financial reports indicate that the rapid growth of China’s new-energy and high-end manufacturing industries has provided stable sources of incremental demand for its advanced materials business, with revenue from its high-end materials business in China growing markedly faster than in other regions.
2.3 China’s Distinct Industrial Advantage in Rapid Technology Commercialization
Overseas industrial research institutions point to China’s integrated system spanning prototype R&D, pilot testing, large-scale production, deployment in real-world scenarios, and commercial iteration as a distinctive market advantage, with commercialization efficiency and iteration speed substantially higher than in European and U.S. markets. Technology companies in Europe and the United States face constraints including high R&D costs, limited application scenarios, and long industrialization cycles. By contrast, China provides a favorable industrial environment for foreign technologies to undergo rapid testing, iteration, and commercialization, accelerating technological maturity.
Taken together, assessments by overseas institutions indicate that China is at a critical stage in the transition of its growth drivers. While traditional low-cost advantages are weakening, new strengths in technological innovation, application scenarios, industrial ecosystems, and large-scale domestic demand continue to emerge. The structural differentiation of foreign investment in China largely reflects global industrial upgrading: lower-value-added capacity is being reallocated in an orderly manner, while foreign investment in high-end technological innovation, intelligent manufacturing, and digital services continues to deepen.
IV. Global Balancing Strategies for Multinational Enterprises: Strengthening Core Businesses, Diversifying Risks, and Capturing New Opportunities
Against the backdrop of global industrial restructuring and the transformation of China’s economic growth drivers, leading global consulting firms including McKinsey and PwC have converged on a broad strategic approach for MNEs: moving away from the extremes of “withdrawing from China” and “relying solely on China” and adopting layered operations, global risk diversification, deeper investment in technology and innovation, and proactive compliance to balance value creation in the Chinese market with global risk management.
1. Layered Strategy: Distinguishing Core Existing Businesses from Incremental Capacity
MNEs are developing more granular, tiered strategies for their assets in China to balance value creation and risk reduction. Core assets—such as global R&D centers, high-end intelligent manufacturing, local market operations, and technology-iteration activities—continue to be expanded in China. Drawing on China’s integrated industrial ecosystem and innovation scenarios, enterprises are establishing global innovation hubs in China. Standardized, low-value-added, labor-intensive incremental capacity is selectively allocated under a “China + N” framework, with portions shifted to Southeast Asia, Central Asia, Mexico, and other regions to diversify geographically concentrated geopolitical risks.
Case Study: Sony has adopted a layered strategy. It retains core businesses in China, including image-sensor R&D, high-end precision-component manufacturing, and its Greater China regional headquarters, drawing on China’s industrial capabilities and high-end consumer market to maintain core competitiveness. Meanwhile, it has shifted part of its low-end digital-product assembly capacity to Thailand and Vietnam. This model preserves China as a core strategic base while diversifying global risks, offering a balanced approach to foreign investment.
2. Operational Upgrading: Deeper Localization and a Focus on High-Value-Added Sectors
Foreign enterprises are shifting the focus of their operations in China away from traditional low-end manufacturing and homogeneous consumer markets and toward high-value-added fields including AI applications, high-end new materials, precision equipment, and enterprise digital services. At the same time, they are accelerating the localization of senior management, R&D, and compliance teams to better align with the pace of China’s industrial upgrading. Enterprises refine technologies using China’s extensive application scenarios and then deploy mature technologies and operating models in global markets, creating a mutually reinforcing relationship between their China operations and global businesses.
3. Systems Upgrade: Building Global Compliance and Risk-Management Frameworks
To address multiple uncertainties in cross-border operations, foreign enterprises continue to improve their global compliance frameworks and comprehensive risk-management systems to manage geopolitical, policy, and cross-border operational risks. At the corporate-structure level, enterprises are building cross-border holding structures that draw on the common-law system of the Hong Kong SAR and international arbitration mechanisms and are strengthening protections for their overseas rights and interests through bilateral investment treaties. At the operational level, enterprises are establishing end-to-end, front-loaded internal controls covering data compliance, sectoral regulation, and intellectual property protection. Standardized compliance management helps reduce operational uncertainty arising from policy fluctuations.
4. Global Collaboration: Building a Mutually Reinforcing Industrial Network
A clearer model of global coordination is emerging among leading foreign enterprises: China serves as a core global hub for technology R&D, scenario testing, and high-end manufacturing, while emerging markets in Southeast Asia, the Middle East, and Africa serve as locations for incremental capacity and expansion into end markets. Technologies and solutions refined in China—including AI applications, new-material technologies, and high-end manufacturing systems—are deployed across emerging markets, creating a virtuous cycle of “innovation deepened in China, risks diversified globally, and profits generated through coordinated global operations.”
5. Reshaping Expectations: Aligning with the New Pace of China’s Industrial Upgrading
Foreign enterprises are moving away from an extensive investment model built on low costs and high growth. They are establishing a new investment approach aligned with China’s industrial upgrading, focusing on long-term, stable returns from high-value-added technology and innovation. They are repositioning the Chinese market as a global innovation-incubation base and a strategic core market rather than a traditional low-cost processing base.
V. Conclusion
Viewed from a global perspective, China’s traditional demographic and cost advantages are gradually weakening, while new strengths—including its vast domestic market, integrated industrial ecosystem, extensive technology application scenarios, and efficient commercialization and product-iteration capabilities—are becoming increasingly prominent and supporting more sustainable, higher-value long-term investment opportunities.
Geopolitical competition, sluggish global growth, and intensifying regional industrial competition are common macroeconomic challenges facing MNEs globally and are not unique to the Chinese market. Amid the deep restructuring of global industrial chains, the optimal strategic approach for MNEs is a balanced one: maintaining core high-end existing businesses in China, deepening investment in growth sectors in technology and innovation, diversifying regional operating risks across global markets, and strengthening cross-border industrial coordination.
According to ongoing assessments by overseas think tanks, investment banks, and chambers of commerce, China—as its industrial upgrading continues and its technological capabilities strengthen—remains an irreplaceable core strategic investment destination for global MNEs, warranting long-term attention and sustained investment.
References
1. The U.S.-China Business Council, 2026 Member Survey, June 2026.
2. AmCham China, 2026 White Paper: American Business in China, April 2026.
3. European Union Chamber of Commerce in China, Business Confidence Survey 2026, May 2026.
4. McKinsey & Company, Reshaping manufacturing supply chains between China and the world, 2026.
5. McKinsey & Company, Managing geopolitical value at stake, April 2026.
6. Morgan Stanley, China AI capital expenditure outlook, 2026‑2030, September 2026.
7. PwC, 2026 In-depth Survey Report on Multinational Enterprise Executives in China, 2026.
8. German Chamber of Commerce in China, 2026 Business Confidence Survey for German Enterprises in China, 2026.
9. Bloomberg and Reuters, news coverage of multinational corporations’ Asia-Pacific supply-chain adjustments, 2025–2026.
Authors:
Eagle Yang, Managing Partner
eagleyang@zhhlaw.com
+86 158 0189 9966
James Li, Partner
james.li@zhhlaw.com
+86 158 0233 2710
Leslie Hu, Associate
leslie.hu@zhhlaw.com
+86 178 3036 5126
ZHH Law Firm
https://en.zhhlaw.com/
Chongqing, China
