Although Hong Kong and Taiwan represent some 80 percent of the foreign investment in China and share a common language and culture with the mainland, American and Japanese foreign investments are much more profitable, according to a Cornell University study.

And companies that manufacture in China and then sell to Chinese consumers rather than heavily export are the most profitable, says Peter Chi, Cornell professor of consumer economics and housing, who leads the study.

Chi, with Yigang Pan, associate professor of marketing at the Lundquist College of Business, University of Oregon, Eugene, Ore., and Charng Kao, research fellow at the First Institute of Chung-Hua Institution for Economic Research in Taiwan, have collected information on the 22,744 foreign manufacturing companies from 40 countries that were registered in China in 1991. After identifying a representative sample of 1,066 of those companies, the researchers have and will continue to interview senior executives from the companies every year for five years, beginning in 1993; the researchers also have analyzed questionnaires from the executives.

The findings from the first phase of the research have been published in the China Economic Review, in the monograph, "The East, the West, and China's Growth: Challenge and Response," in a forthcoming issue of the Journal of International Business Studies and have been presented at the annual meeting of the Academy of International Business.

"Since China opened its doors to outside investment in 1978, direct foreign investments have expanded dramatically in recent years, up to some $4.37 billion in 1991. We're seeking to determine who invests in China, how well they do and why, and in the near future, to assess how these foreign investments impact the Chinese economy and the well-being of the Chinese people," explained Chi, who teaches in Cornell's College of Human Ecology.

Other findings so far:

• Companies that focus on developing Chinese markets do substantially better than companies that primarily export Chinese-produced products.
• By 1993, more than half of the American, Japanese and Hong Kong businesses in China had made a profit compared to only about one-third of the Taiwanese companies.
• Some 22 percent of the Japanese and 18 percent of the American companies had profits of more than 15 percent of revenues, compared with almost 8 percent and less than 2 percent of the Hong Kong and Taiwanese companies, respectively.
• Hong Kong (Macao), Taiwan and other Asian countries and the United States have a competitive advantage in receiving investment permits much faster than Japan and European union countries. However, once the initial stage is past, all the enterprises have to face the same competition in the rest of the manufacturing process. Further, the research indicates that the advantages of receiving permits in a shorter duration may not necessarily speed up the process of starting production, but speedy start of production will significantly shorten the duration needed to earn a profit.
• Compared with foreign enterprises established between 1984 and 1989, those established prior to 1984 tend to use more time to receive permits and to start production whereas those established after 1989 tend to use less time to do so.
• Nevertheless, companies that established a hold in China before 1984 tend to be more profitable than firms that established a Chinese connection in the later 1980s. This finding not only suggests the value of experience but also may be a reflection of the earlier favorable treatment foreign enterprises received in the early 1980s.
• Between 1993 and 1994, about 15 percent of sampled companies failed.

Chi suspects that American and Japanese companies have generally done better because they tend to have more experience in cross-national operations and because political tensions between China and Taiwan could undermine their business relationships.

Further, Chi points out that companies that actively sell to Chinese consumers realize a higher level of profit despite the low per capita income in China of $254 (American dollars). Since China is the most populous nation in the world, even the small top income group would create a viable market. Furthermore, Chinese workers often receive economic rewards in addition to salaries so their official income probably underestimates their purchasing power.

Chi says that studies like his might not only help potential foreign investors decide whether to do business in China, but could help boost the Chinese economy. Doing so, he hopes, could be a key to resolving the human rights problems in China.

"If you improve the economic status of the people, human rights will follow," he says.

Next, Chi and his collaborators will further look at the impact of foreign investments on the economy and Chinese consumers.