Fdi in china
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China has experienced significant growth in foreign direct investment (FDI) since opening up its economy in the late 1970s. It has been the top FDI destination globally for 16 years, receiving $52.39 billion in the first half of 2008 alone. Foreign-invested enterprises now account for 58% of China's imports and exports and are concentrated in manufacturing and real estate. While FDI was initially restricted and tightly controlled, China gradually reformed its laws and regulations to promote greater investment, including establishing special economic zones and allowing wholly foreign-owned enterprises. This helped transform China into the second largest FDI recipient worldwide and supported its rapid economic growth and development.
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Fdi in china
- 1. Group 5 Kushagra Sharma [057] Mohit Jain [067] Prodyot Parashar [083] Raj Kumar Singh [089]
- 2. • Top destination for FDI for sixteen years. • US $52.39 B in FDI to China in the first half of 2008 – a 45.6% increase over the same period in 2007. • Foreign invested enterprises (“FIEs”) play a major role in China’s economy – 58% of imports and exports. • Top foreign investors: HK first; US sixth. • Top FDI destination: eastern region – 81.9%. • Hot sectors: manufacturing (57.7%) and real estate (11.9%).
- 3. • Before 1978, China’s economy was one of the most autarkic in the world. • 1950s : Only four joint ventures with the government of the Soviet Union. • Between mid 1950s and late 1970s : China turned inward and pursued an economic development strategy that prohibited any foreign investment. • 1980 : First joint venture in China was established in Beijing.
- 4. • Inward FDI permitted • Equity Joint Venture Law (EJV Law) by the National People’s Congress in 1979. • Instead of Equity Ceilings, it imposed Equity Floors. • Only central government approved wholly owned subsidiaries of foreign firms. • Long approval delays; eg: 3M (1981-1984) • 4 SEZ established in southern China in 1980, in Shenzhen, Zhuhai, Xiamen, and Shantou.
- 5. • Treatment of FIEs became further codified • “Wholly Foreign-Owned Enterprise Law” in 1986 and the “Sino-Foreign Cooperative Joint Venture Law” in 1988 • Legal infrastructure governing 3 main forms of FIEs- Equity Joint Ventures, Cooperative Joint Ventures & Wholly Foreign- Owned Subsidiaries. • 1986 Regulations separated FIEs in 2 kinds- Qualifying for favorable policy and regulatory treatments and Qualifying for normal policy and regulatory treatments. • “WFIE Law” in 1986 & Hainan Island in 1988
- 7. • This phase removed a large number of the sectorial restrictions on FDI. • Business scope and geographic coverage of foreign banks was expanded • Joint ventures in transportation, port development, oil exploration, and financial services were permitted. • By 1992, China had signed bilateral investment treaties with 27 countries. • 1992: Chinese and U.S. governments signed a MOU on a range of issues ranging from market access to IPR protection.
- 8. • 2nd largest recipient of FDI in the world, following the US • 1995: Policy measures aimed at “leveling the playing field” between FIEs and domestic firms • Removal of the tariff exemption on FIEs’ imports of equipment and raw materials • 1998: Renewed across-the-board tariff exemption treatment of FIEs • Tariff exemption granted to FIEs in product segments promoted by government. • Same capital equipment and raw material tariff exemption to domestic firms in high-tech sectors • Unified corporate income tax rates • 33% for all firms
- 9. • 1999: China and U.S. concluded negotiations over China’s accession terms into the WTO • 2001: WTO Ministerial Conference in Doha, Qatar formally adopted China's terms of membership of the WTO • Concessions made on the Chinese side: • Eliminate all import quotas by 2006 • Reduce tariffs on industrial products from an average of 24.6% to 9.4% • Reduce tariffs on motor vehicles from 80-100% to 25% by 2006 • Allow Foreign firms to own up to 50% of FIEs in the telecom and insurance industries
- 11. FDI inflows to China, 1990-2005 1979-2002: A total of $446billion
- 12. Saving Rate grew from 36% to 42% with growth of FDI
- 13. • Due to large FDI inflow China accumulated huge foreign reserve. • US $300 Billion in 2003 • 3% of GDP • Investment in US Treasury Bond • Reserve Surplus helps in controlling domestic currency.
- 16. Millions of US dollars - 100 000 200 000 300 000 400 000 500 000 600 000 700 000 800 000 900 000 1 000 000 2001 2002 2003 2004 2005 World United States Developing economies China Percent of China in Developing Economies 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00 2001 2002 2003 2004 2005 Source- UNCTAD
- 18. • Hong Kong, Macao And Taiwan account for more than 68% of total FDI inflow in China between 1979-1996. • Hong Kong, Macao And Taiwan are politically same country but separate economic entity. • In 2001 three states together have a share of 42%.
- 19. Northern : 11.02% Coastal : 71.28% Southeastern : 4.76% Northeastern : 6.42% Southern : 4.54% Western : 1.98% Source: World Factbook Taiwan Hong Kong Macao
- 20. To enter any market abroad need huge capital, advance technology, scale economy, organizational expertise. All these act as a entry barrier for SME to invest as FDI. Still China have a significant SME base FDI investors mainly due to the three inter states - Hong Kong, Macao And Taiwan
- 22. • General FDI trend – congregate around few industries with high concentration ratio. • FDI in China was contrary to this trend, even for the Ethnically Chinese Economies(ECG) investing firms. • FDI distribution in China was: • More Fragmented. • Evenly distributed across various industries. • For example; the Std. Deviation of FDI across industries was 11.3 for Taiwan; but 4.08 for China. • FDI distribution spread across traditional industries like: • Herbal industries • Handicraft industries – Silk engraving, ivory casting etc.
- 23. • FDI from ECEs financed China’s labor intensive and export oriented goods production. • FIE’s – responsible for tremendous Chinese manufacturing export : • 25% from ECEs funded FIE’s • 47.1% total manufacturing export from altogether • FIEs – strong dominant position in telecom, garments, plastics ,leather products etc. • However; two more trends impacted by FIE’s : • Replacing of exports produced by Chinese entrepreneurs. • Substantial decline in contractual alliances with foreign alliances. • Consequently; rise in Equity Alliances. • This trend was further reversed in the beginning of 1997.
- 24. • To Protect Domestic Chinese Firms after China Joined WTO • To Prepare Domestic Firms for FDI , Govt. Changed Regulatory , Legal and Financial treatment of Domestic Firms
- 25. • Grasping The Big – 120 out of 512 SOEs • Strengthening the Asset Base and Upgrading Technology of SOEs • Reconstructing , Consolidating and supporting Largest SOEs to Compete with MNCs
- 26. • Converting SOE’s into Modern Enterprise System – with shareholding Enterprises , Board of Directors , Accounting Standard , Financial Reporting • Reorganizing SOE Asset: Efficiency from Upstream/ Downstream Production , Benefit from Economies of Scale
- 27. • Govt. Retains Monopolies in Petroleum and Banking • Discrimination Against Private Enterprises • Did not allowed to enter in industries where they can threat SOE • Property Right protection in favor of SOE • Lending Bias by Commercial Banks • Foreign Exchange Allocation ( Technology ) Favored SOE • Licensing Policy Against Private Firms