ABSTRACT
As a momentous signifier of China’s reform and opening-up, the introduction and utilization of foreign capital have played an active role in China’s economic growth and development in the past three decades. In the early stages of China’s reform and opening-up, the main purposes of foreign capital utilization were to address the shortage of domestic capital and foreign exchange, to accelerate the system transition and to initiate economic development; at present, China’s attraction to foreign direct investment (FDI) is primarily aimed at introducing external competitors as well as cultivating and improving its market economic environment. China’s huge market demand and rapid economic growth have accelerated the global FDI inflow into China. The main factors attracting foreign companies’ investment are the Chinese market’s further opening-up, as well as China’s huge market potential and cheap labor supply. FDI is exerting an increasingly important influence on China’s economic growth, industrial and technical development and market competition environment. China’s utilization of FDI can generally be divided into five stages (Figure 7.1).
1979–1986: the initial stage. In July 1979, the second plenary meeting of the Fifth National People’s Congress passed and issued the “Law of the People’s Republic of China on Chinese–Foreign Equity Joint Ventures”. Between 1979 and 1980 the central government approved the establishment of four special economic zones. In May 1983, the State Council held the first national working conference on the use of foreign capital and further relaxed the policies on foreign investment utilization. Since 1984, the state had opened 14 coastal port cities and 13 coastal economic development zones, in which preferential policies for foreign capital utilization were issued and local authority’s rights on foreign investment approval were expanded. These policies and approaches helped to gradually develop FDI in China.
1987–1991: steady development stage. In October 1986, the State Council issued the “Provisions to Encourage Foreign Investment” to promote the improvement of the foreign investment environment and to provide preferential treatments in terms of taxation, etc., to FDI in export and advanced technology enterprises. In December 1987, relevant ministries issued provisions to guide the foreign investment direction, in order to create a good FDI environment and to improve the structure of foreign investment. In this stage, FDI continued its steady development in China.
1992–1996: rapid growth stage. Since Deng Xiaoping’s southern talks in 1992, the State Council had opened six port cities along the Yangtze River, 13 inland border cities and 18 inland provincial capitals, giving FDI a greater increase over the previous stage and further diversifying FDI’s fields. Since 1993, China had become the world’s second largest FDI host country and the developing country with the most FDI inflow. China became one of the world’s hot FDI inflow areas, although its overall FDI size was still relatively limited.
1997–2001: adjustment stage of FDI utilization. In this stage, on the one hand, the Asian financial crisis broke out, which compelled European and American investors to shift their capital to developed countries and regions beyond Asia with relatively lower risks; on the other, the crisis-affected Asian countries and China’s neighboring countries regarded FDI attraction as their focus of foreign capital utilization. In addition, Chinese state-owned commercial banks’ huge non-performing assets and capital outflow had a negative impact on foreign investment. Therefore, China’s utilization of FDI in this stage started to slow down and decline. However, as the government developed corresponding policies to address existing problems, technological innovation had been encouraged in FDI enterprises through the aspect of taxation; in addition, because of the requirements of World Trade Organization (WTO) accession, the commercial, financial, insurance, telecommunications, tourism (and so on) departments had enjoyed the national treatment to some extent, so the scale of foreign investment remained stable.
2002–present: accelerated growth stage. First, since China’s accession to the WTO, the country has revised the “Catalogue for Industry Guidance of Foreign Investment”, issued laws and regulations such as the “Enterprise Income Tax Law”, “Management Methods on Foreign Investment Commercial Field”, “Provisional Management Methods on Approval of Foreign Investment Projects” and “Regulations on Foreign Investors’ M&A of Domestic Enterprises”, and opened up some service trade sectors in accordance with WTO commitments in order to attract foreign investors to wider areas. Second, the structure of FDI has been experiencing adjustments when compared with the past. As the cost of China’s labor and natural resources increased, FDI which had focused on the processing and manufacturing industries began to withdraw in the Chinese market while FDI increased in the service industry, such as the financial field. Since 2006, data from the financial sector have been included in China’s FDI attraction statistics: 69.468, 82.658 and 92.395 billion US$ in 2007, 2008 and 2009 respectively. When compared with data that does not include the financial sector, which was 63.021 billion US$ in 2006 and 74.768 billion US$ in 2007, the annual growth rate increased, meaning that the foreign investment growth rate of the financial sector was greater than the annual growth rate. Finally, multinational corporations (MNCs) have been playing an active role in China, while the number of foreign-owned enterprises has been increasing, and mergers and acquisitions (M&A) has become the main investment form of MNCs in China.
