Beijing revisits FDI as country prepares to fully open market

PUBLISHED : Monday, 21 February, 2005, 12:00am
UPDATED : Monday, 21 February, 2005, 12:00am

Mainland has not gained as much as it hoped for from opening to foreign firms, report finds

Letting foreigners into the domestic market has always been controversial in a country with a history of unequal treaties and foreign concessions. From the merits of setting up special economic zones in the 1980s to joining the World Trade Organisation (WTO) in 2001, there have always been critics shouting about a sell-out to foreigners.

Now, as China moves close to fully opening its market in 2007, as required by the WTO, the Ministry of Commerce has published a report that has focused domestic attention on this sensitive subject. The ensuing debate will shape policies on tax and other privileges enjoyed by foreign investors.

The report by a ministry think-tank concluded that, although the flood of investment since 1980 had improved China's technological prowess, it had not brought about all that the country had hoped for.

'The increase of investment by multinational companies [MNC] has not brought to China the benefits it should have and not entirely fulfilled the original promise of 'exchanging market for technology',' said a summary of the report on the ministry's website.

'The negative impact on the technical progress of domestic firms is becoming evident, with MNCs using their superior market position to create monopolies and limiting competition in some sectors.'

While foreign investment was a major driver of gross national product growth, this was not matched by a commensurate growth in national income, the report said, noting about US$12 billion in profits from foreign ventures left China each year between 1993 and 2003.

The report was published at the end of last month, just one month after the third anniversary of China's entry into the WTO and the date on which the government further opened the markets, especially in sales and distribution.

Domestic retailers are alarmed by the expansion plans of Wal-Mart Stores, Carrefour, Metro and other foreign giants.

Chinese firms across the board are calling for an elimination of the tax privileges accorded to foreign-invested companies, saying they are outdated and unfair to them now that the domestic market is open.

More positive than negative, the report does not indicate any major change in policy and Chinese leaders continue to stress inward investment is vital to maintaining a high level of growth and keeping unemployment at a tolerable level. Rather than eliminating the privileges, Beijing is more likely to fine-tune them to attract investment that brings more benefits. Pressure is rising on Beijing to equalise business taxes paid by domestic and foreign firms, which enjoy a substantially lower rate.

For their part, MNCs are deepening their involvement in China, diversifying from simple manufacturing into replicating their foreign supply networks, as well as research and development, marketing, distribution and after-sales. By the end of last year, foreign coompanies had set up more than 750 research and development centres in the mainland.

Since the late 1970s, China has attracted more than US$550 billion in foreign investment, which accounts for 10 per cent of its fixed-asset investment, more than half of its trade and 20 per cent of taxes. It has also brought 22 million jobs.

Wang Zhile, director of an MNC research centre and the report's main author, said the flood of foreign investment had been very beneficial to China overall and the country must continue to work hard to attract it.

Chinese companies must accept much of the blame for their lack of technological progress, Mr Wang said.

'Chinese firms do not want to spend on R&D. They buy equipment and technology and make a product and then buy another one. We should not criticise the foreigners for this. This is our problem.'

Chinese firms should learn from Japanese counterparts that invest in technology and absorb it to create their own.

'You can buy technology but you cannot buy the ability to create. Some people in China do not understand this,' Mr Wang said.

He said that China must keep incentives for foreign investment but use them more selectively to attract funds into chosen industries and geographical areas.

Competition for foreign investment was global and China's neighbours were especially eager for it, Mr Wang pointed out.

Xu Xiaotian, secretary-general of the China Semiconductor Industry Association, said the massive injection of foreign investment had greatly accelerated the development of the chip industry in China.

The industry had moved beyond mere assembly and had begun to develop its own intellectual property, he said.

'How you use this foreign investment is a measure of the success of exchanging market for technology,' Mr Xu said.

Other economists were not so sanguine about MNCs.

MNCs only used China as a base for making low-cost products and jealously guarded their key technologies, they said.