ABSTRACT

China became the world’s largest foreign direct investment (FDI) recipient in 2003 and has since then maintained this status (Gu 2008). With the rapid economic development and the mounting concern over the possibility of ‘foreign domination’ in its national economy, China has reached a new phase of utilizing foreign capital. On 10 November 2006, the National Development and Reform Commission (NDRC) of the People’s Republic of China (PRC) issued the 11th Five-Year Plan on Foreign Capital, marking a signifi cant reorientation of China’s policy towards foreign investment. This document states that priority will be given to quality rather than quantity of foreign investment, putting emphasis on introduction of advanced technologies, management experiences and high quality talents. It sets forth a clear industrial policy that prioritizes geographical areas, industrial sectors, levels of technology, environmental protection and effi cient use of natural resources, with a view to upgrading and optimizing China’s domestic industrial structure and technological level. This has had far-reaching implications for foreign investment in China. FDI can be made in two main ways. The fi rst one is mergers and acquisitions (M&A). At the international level, M&A has been the preferred mode of FDI. M&A transactions worldwide account for a high percentage of global FDI, ranging from 62 per cent to 82 per cent in recent years (Li 2007). However, for a variety of reasons, M&A has not yet found favour with foreign investors in China. According to research conducted by the Development Research Centre of the State Council, M&A makes up only an average of 5 per cent of FDI in China (Zhao 2009). But M&A is becoming increasingly attractive for foreign investors, particularly the leading players in their fi elds, because it offers foreign investors immediate market access with minimal business risk. A more detailed discussion of foreign M&A in China is beyond the scope of this chapter which focuses on the second mode of FDI, namely ‘greenfi eld investment’. There are three principal forms of greenfi eld investment in China, including

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wholly foreign-owned enterprise (WFOE). Traditionally, they represent the overwhelming majority of total FDI in China, and can be collectively referred to as foreign investment enterprises or foreign-invested enterprises (FIE). The chapter seeks to illustrate the central features of each of the three FIEs, and analyse the legal and regulatory framework for them. As discussed later, the laws for FIEs have undergone signifi cant changes since China joined the World Trade Organization (WTO) in 2001. As a prerequisite for WTO accession, China carried out major revision of the FIE laws and regulations to make them WTO-compliant in the period of 2000-01. In more recent years, there have been calls from both foreign investors and Chinese investors for further reforms – particularly over FIEs being governed by two parallel systems – the ‘general company law’1 and the ‘specifi c FIE law’. Practical problems have arisen as a consequence of the parallel operations of these laws. By examining the political economy surrounding the FIEs in China, this chapter illuminates how the regulatory regime for FIEs has evolved, and whether or not the parallel systems of FIE regulation are likely to converge in the future.