Charles Stevens, an American lawyer, with a Chinese official at the China Council for the Promotion of International Trade, Beijing 1979. The two men discussed how to structure joint venture investment agreements. Portraits of Chairman Mao and Chairman Hua Guofeng (who held that post briefly), hang above the black board. PHOTO BY JOAN LEBOLD COHEN.
Prior to joining the World Trade Organization (WTO) in 2001, but especially in the first decade of the economic opening beginning in 1979, China generally emphasized joint-venture forms of investment and restricted foreign firms from using corporate takeovers to enter the Chinese market. Today foreign investors face few ownership and location restrictions and can employ more systemic investment strategies in China.
China is a major destination of international investment. Approximately 80 percent of the total realized foreign investment was direct investment, of which most came from Hong Kong, Japan, the United States, Taiwan, Singapore, and the Republic of Korea. Foreign direct investment in China concentrates in manufacturing, especially in garment, textile, electronic, electrical, and chemical industries. Most of the foreign manufacturing investments in China are export producers. Together they contributed about 57 percent of the value of China’s merchandise exports in 2007. In non-manufacturing activities foreign investment in China concentrates in real estate, retail trade, hotels and restaurants, and business services.
China provides foreign firms three major modes of direct entry—the wholly foreign-owned enterprise, the equity joint venture, and the contractual joint venture. Wholly foreign-owned enterprises are investments solely controlled by foreign firms, whereas equity joint ventures and contractual joint ventures are Chinese-foreign collaborations with control rights defined by equity proportions and by contractual terms, respectively. The establishment and operation of these three major modes of investment are governed by specific Chinese laws. These laws include the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises, the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures, and the Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures. Together these three laws constitute the mainstay of China’s policy framework for foreign investment. Other major Chinese laws and regulations for foreign investment include the Enterprise Income Tax Law of the People’s Republic of China, the Labor Contract Law of the People’s Republic of China, and the Catalogue for the Guidance of Foreign Investment Industries.
China’s policy framework for foreign investment has undergone necessary evolution and has become relatively liberalized in recent years. Prior to entry to the World Trade Organization (WTO) in 2001 but especially in the first decade of the economic opening beginning in 1979, China generally emphasized joint venture forms of investment and restricted corporate takeovers as a means of entry for foreign firms. China targeted for joint venture status primarily foreign firms oriented to China markets or industries with technology transfer potential. But such firms were not permitted to acquire or merge with Chinese enterprises. During the first decade China also restricted foreign investments to selected industries and designated locations. Foreign firms were not allowed to invest in industries such as banking and wholesaling-retailing that could have an impact on immediate national economic stability. They were not allowed to establish ventures in places outside the special economic zones (SEZs) in south China and the open cities along the coast, except for those locations in which their Chinese venture partners were already situated. Today foreign firms can invest in China through acquisition and merger. They can invest in most industries in China without ownership and location restrictions. In 2007 approximately 77 percent of the realized amount of foreign direct investment (a 66 percent increase compared with 1989) was wholly foreign-owned investment, and about one-third of that amount (a 15 percent increase compared with 1989) agglomerated beyond Guangdong in Shanghai and Jiangsu Province.
Ownership and Location Choices
Foreign firms exploit the recent liberty of full ownership in China for exclusive control of their investments there. They can better relate their wholly owned subsidiaries in China to their corporate networks there and elsewhere in the world. Full ownership is generally viable for investments that cater to the home or third markets of foreign firms. They are applicable for investments that involve only the assets of foreign firms. Full ownership, however, is usually less viable for investments that focus on such China markets as automotive and real estate, which have restricted access to certain business channels. Foreign firms penetrating these markets in China may require participation of local partners possessing relevant access privileges. Under these circumstances foreign firms may face business goals and management practices that diverge from those of their local partners. They may have greater difficulties in aligning their joint ventures in China with the rest of their corporate activities.
On the other hand, since the early 1990s foreign firms can opt to locate in regions beyond the special economic zones and the open cities and extend their corporate networks and market reach in China. Numerous designated areas for foreign investment across China have come into existence to facilitate this development. These areas are of many types, including economic and technology development, free trade, and export processing zones of varied focus: economic and technology development zones concentrate on manufacturing investments, for example, and free trade zones on nonmanufacturing activities. These designated areas also vary in providing local incentives for competing foreign investors. Foreign firms can therefore negotiate with the authorities of their preferred zones to obtain optimal incentives. The major local incentives for which foreign investors can negotiate include a tax-holiday extension beyond the national standard of full exemption of enterprise income tax (25 percent for most enterprises and 15 percent for advanced technology enterprises by 2012) for the first two years after an investment becomes profitable, and half exemption of the tax for the next three years. The incentives also include fee reductions, of which those for land use and public utility are most common. In general, the more important an investment is to a zone, the larger is the extent of local incentives to that investment.
The designated areas further vary in administration level and the quality of support they provide. Zones that are designated at a national level generally adhere more strictly to state-established policies, are better connected to central government authorities, and provide superior physical infrastructures for foreign firms. They are more suitable for foreign investments that demand formal institutional governance, high-level bureaucratic relations, or industry-standardized facilities. These national-level zones are therefore preferred by Japanese, U.S., and European firms for major undertakings, especially those that are technology- or knowledge-intensive or are oriented to China markets. As such these investments usually assemble in major cities where national-level zones are concentrated. They are drawn to the greater Shanghai area and the greater Beijing-Tianjin area, where highly skilled worker
s and major markets congregate. Japanese investments flock especially to the greater Beijing-Tianjin area because of shorter distances and the existing locations of networked firms from home. Investments from the United States are nevertheless geographically more dispersed. U.S. firms are more active than their Japanese and European peers in exploring investment opportunities beyond the major coastal areas in China.
By comparison, zones that are designated at a provincial or local level are generally preferred by investors from Hong Kong and Taiwan. Unlike their advanced-economy counterparts, firms from these two places demand mainly good local relations and usable infrastructures because they undertake primarily small and medium investments in labor-intensive export production. Hong Kong and Taiwan investors therefore usually rely on their personal and kinship ties (guanxi) in China to navigate in these more relations-based settings. They utilize their social and cultural heritages to operate in these more informally governed environments. As a result, investments from Hong Kong and Taiwan concentrate in many former county areas (now cities) in Guangdong and Fujian Provinces where their ties are most strong. They concentrate especially in the Pearl River Delta, where communications with their Hong Kong offices are convenient and where major container ports are located. But as wages and other operating costs in the delta have continued to rise in recent years, Hong Kong firms have begun to relocate some of their investments to the inland areas in Guangdong and to the provinces in central and southwestern China. Taiwan firms have also begun to relocate some of their investments, especially to southern Jiangsu and northern Zhejiang provinces where they similarly have close personal and kinship ties. In 2007 the average monthly base wage of a manufacturing- plant worker in the Pearl River Delta reached approximately $200, which nearly doubled that of central or southwestern China. The major expenditures for benefits, which amount to at least 30 percent of the total payroll of an enterprise, cover mandated insurance (old age, medical, unemployment, work-related injury, and child bearing), housing, and employee meals.
Information on most major designated zones and on regional economic conditions in China is readily available today through the development corporations and management commissions of the zones and through the foreign investment and trade organs of municipal governments. Most of these organizational entities have an Internet presence, and some of them have representative offices overseas. Information on individual investment opportunities, on the other hand, is more readily available at fairs for foreign investors and in consulting services that cater to them. Data and advice are also increasingly available through the customers, suppliers, and other affiliated businesses of the investing firms that have local business knowledge in China. In recent years, foreign firms, especially those from Japan, North America, and western Europe, usually conduct detailed portfolio analyses when considering major investments in China. They assess the suitability of a zone before finally deciding to locate their business there. In general, the founding of a foreign-invested enterprise in China requires approval from relevant authorities on a project proposal, a feasibility study report, a contract (for joint ventures), articles of association, and a certificate for establishment. A foreign-invested enterprise, along with all local enterprises in China, further requires a license to operate a business.
Personnel Management and Sales and Purchases Operations
Foreign firms usually operate their investments in China with overseas personnel in key management positions there. These overseas personnel normally comprise the native nationals or native residents of their respective home countries or territories, but the expatriates in North American and European investments can include naturalized nationals, especially those of Chinese descent, from home or third countries or both. The use of foreign nationals of Chinese descent enables North American and European firms to better adapt their operations and cultivate their relations in China. The number of overseas personnel can range from several to more than a dozen in the first years of operation, but it usually declines when an investment is firmly established. The hiring of Chinese nationals to replace expatriate personnel in key management positions is common in established foreign-invested enterprises. Nevertheless, for major joint-venture investments where Chinese partner(s) actively exercise their equity rights, foreign firms may need to maintain a stable expatriate presence beyond the first years of operation. Today foreign investments in China can recruit Chinese workers through company web pages, local advertisements, and employment fairs. They can also recruit Chinese workers through local government employment service organizations, public employment agents, and private human resources firms. The white-collar workers in foreign investments in China have generally come from local urban areas and other cities, whereas the blue-collar workers usually have come from nearby rural places and neighboring provinces. Foreign firms in China can fire workers of their own accord, but they need to inform relevant local authorities of their actions and to compensate for the affected workers in accordance with China’s labor laws. The Labor Contract Law, which came into effect in 2008, requires all firms in China to have written contracts with their workers and to provide severance pay to dismissed workers.
The localization of key and other management personnel is a strategic measure used by foreign firms to better develop or penetrate the markets in China. Today foreign firms can establish extensive networks of licensed agents, sales outlets, and service centers in China. They can foster relations with Chinese firms whose privately owned distributors and marketers reach out to the national market. Foreign investments that focus on China markets are therefore generally autonomous in managing their China sales (i.e., host sales) activities, and their China marketing departments can be sizeable. The host sales relations of foreign investments in China can nevertheless be volatile. Foreign investments targeting final consumable markets in China have faced increasing price pressures in recent years, while those focusing on durable industrial-goods markets must look for new customers on a constant basis. Foreign investments may also encounter various transaction issues with local Chinese clients when simplified contractual terms, which are usually preferred by the latter, are used. These investments may suffer from accounts receivable problems because of the differing business practices of local customer firms. By contrast, foreign investments that focus on intermediate goods markets in China can have relatively stable host sales relations. The affiliations that foreign supplier firms have with networked foreign lead firms promote such stability. Foreign investments that focus on world markets similarly have stable export sales relations. These investments sell mainly to their home headquarters, Hong Kong offices, or other Asia-Pacific offices for global accounts management and transfer-pricing reasons. In particular, most Japanese investments sell almost exclusively to their home headquarters.
The investments of foreign intermediate-goods producers have made available many sophisticated materials, parts, and components that would otherwise not exist in China. They complement the growing number of Chinese enterprises providing a broad range of general supplies to local firms. Foreign firms can therefore procure most of their intermediate inputs and supplies in China. They generally have autonomy in identifying local suppliers and in purchasing from those suppliers who meet the
quality-control standards of their home headquarters. The level of China or host purchases is high for investments in such industries as automotives, which have local regulations about the parts used in manufacturing, and for investments that focus on China markets using local quality-control standards. Foreign investments usually purchase from suppliers located in the same region for logistical efficiency. They sign annual or long-term contracts to ensure the supply of their major intermediate inputs from Chinese sources. The increasing competence of local Chinese suppliers further enhances the overall stability of host purchases relations, although quality and delivery reliability can still raise issues of occasional concern. The relative stability of host purchases relations allows foreign firms to transfer more systematically to their local suppliers certain technical and management know-how. It facilitates the research-and-development (R&D) relationships between foreign investments and their local suppliers as they seek to improve certain product and processes. The import-purchases relations of foreign investments, which entail primarily core intermediate inputs from home headquarters or sister units or from overseas networked firms, are stable. Such purchases are managed mainly by home headquarters. They can be integral parts of the global supply chains of the multinational corporations.
Local Authority Relations and China Market Development Strategies
The localization of many areas of operations, including strategic management and key purchases, generally enables foreign investments to establish harmonious relations with the local authorities with whom they interact in China. Such harmonious relations can help foreign firms to receive expedited services, including customs clearance and utility provision when needed. They can also help foreign investments to acquire some flexibility when complying with local workplace safety and other regulations. To maintain harmonious relations foreign firms usually participate in the activities held or sponsored by local authorities. These activities include business meetings with local officials, investment seminars by zone and municipality authorities, and ceremonies of government organizations. Foreign investments can further develop their relationships with local authorities by partaking in community events, including local celebrations, social services programs, and fundraising gatherings. With increasing salary and anticorruption awareness of government officials, foreign investments in China generally allocate expenditures for developing and maintaining these relationships, the cost of which might be higher in local-level zones and rural areas.
The increasingly normal business environments in China have allowed foreign firms to employ more systemic investment strategies there. Foreign firms, especially large firms, have gradually established their wholly owned head offices primarily in Beijing or Shanghai to facilitate their relations with high-level government offices and to service their investments in China. A growing number of foreign firms also use their China head offices to centrally manage the marketing and sales activities of their investments or to plan and finance new investments, including R&D centers, in China. Most of the foreign-invested R&D centers in China perform applied activities, that is they improve upon the designs and specifications developed by home headquarters or overseas sister units for the markets in China. Nevertheless, some of these centers are the sole R&D facilities of divisions of multinational corporations that produce exclusively or almost exclusively in China. Foreign firms further gradually optimize their corporate configurations in China by converting joint ventures to wholly owned subsidiaries, consolidating existing operations, and by acquiring and merging with other foreign investments and Chinese enterprises. They adopt specific positions, corporate functions, and global value-chain practices in their investments in China wherever appropriate.
Foreign investment has played a pivotal role in the technological and economic transformations of China since 1979. Joint-venture investments, especially those established during the first two decades of the economic opening, have been a primary vehicle in the transfer of contemporary technologies and related know-how to partnering Chinese enterprises. These and other foreign investments have also been crucial in the diffusion of the latest product ideas, advanced management techniques, and international business practices to local Chinese managers and practitioners. The accumulation of such knowledge and the subsequent application of it by local entrepreneurs have partly helped the rise of new state and Chinese private firms, of which some have become multinational companies themselves in recent years. Together these Chinese firms augment the many choices that foreign firms can pursue in providing products for consumers and the many channels through which they can operate their enterprises in China.
Foreign investment heightens price competition in the markets and enhance consumption welfare of society in China and has further sustained the demand for various goods and services in China by employing tens of millions of local workers at attractive salaries. It has financed in part the economic development efforts of local and national governments in China through tax contribution and a consistent foreign trade surplus. The joint forces of foreign firms and the Chinese state have created a new economic landscape and contemporary social culture in China’s cities and coastal areas. The force of foreign investment in shaping society, including that of the inland areas of China, will continue in the future. Foreign investment will continue to play an indispensable role in China’s quest for world economic and political leadership in the “China century.”
Biography of Sir Robert Hart
SIR ROBERT HART, Bart. (1835-), Anglo-Chinese statesman, was born at Milltown, Co. Armagh, on the 10th of February 1835 . . . From the first Mr. Hart gained the entire confidence of the members of the Chinese government, who were wise enough to recognize his loyal and able assistance. Of all their numerous sources of revenue, the money furnished by Mr. Hart was the only certain asset which could be offered as security for Chinese loans… Thrice only did he visit Europe between 1863 and 1902, the result of this long comparative isolation, and of his constant intercourse with the Peking officials, being that he learnt to look at events through Chinese spectacles; and his work, These from the Land of Sinim, shows how far this affected his outlook. The faith which he put in the Chinese made him turn a deaf ear to the warnings which he received of the threatening Boxer movement in 1900. To the last he believed that the attacking force would at least have spared his house, which contained official records of priceless value, but he was doomed to see his faith falsified. The building was burnt to the ground with all that it contained, including his private diary for forty years. When the stress came, and he retreated to the British legation, he took an active part in the defense, and spared neither risk nor toil in his exertions. In addition to the administration of the foreign customs service, the establishment of a postal service in the provinces devolved upon him, and after the signing of the protocol of 1901 he was called upon to organize a native customs service at the treaty ports.
Source: Hart, Sir Robert. (1910). In The encyclopedia Britannica. (Vol. 13, pp. 30– 31). New York: Encyclopedia Britannica.
Chen Chunlai. (2007). Foreign direct investment in China: Trends and characteristics after WTO accession. In R. Garnaut & Ligang Song (Eds.), China: Linking markets for growth (pp. 197–224). Canberra: Australia National University Press.
Ministry of Commerce of the People’s Republic of China. (2008). National-level economic and technology development zones. Retrieved September 1, 2008, from http://www.mofcom.gov.cn/xglj/kaifaqu.shtml
Source: Leung, Chi Kin. (2009). Foreign Investment. In Linsun Cheng, et al. (Eds.), Berkshire Encyclopedia of China, pp. 852–859. Great Barrington, MA: Berkshire Publishing.
Pepsi signs line this street in Beijing. Pearl Tower is visible in the background. PHOTO BY TOM CHRISTENSEN.
A little girl sips her first can of Coca-Cola through a straw. The two big cola companies fight for the hearts of Chinese consumers now as heartily as they fought for the loyalty of American consumers. PHOTO BY JOAN LEBOLD COHEN.
Beauty pageants are a common site in Chinese malls. This one is sponsored by the Avon company. PHOTO BY TOM CHRISTENSEN.
Foreign Investment (Wàish?ng tóuz? ????)|Wàish?ng tóuz? ???? (Foreign Investment)