FDI trend and future policy orientation in 2006
FDI trend in 2006
The data Ministry of Commerce of the PRC released on September 15 shows that 26,227 foreign invested enterprises were newly established in Chinese mainland during the period from January to August, decreased by 7.63%; and in the same period, the actually used foreign capital reached USD37.192 billion, a decrease of 2.11% on a year-on-year basis, of which USD4,486 million was actually used in August, down by 8.49% on a year-on-year basis, the fourth month in a row.
All these evidences show that foreign investment in China enters a ??stage of adjustment??.
1. Foreign investment continuously focuses attentions upon China. Coastal area is still the best investment destination.
The statistics data shows that during the 10th Five Year Plan Period only, the total import and export of China increased by three times and the actually used FDI added up to USD274.08 billion. Although the lured foreign investment this year was decreasing, China remains the most attractive investment destination from 2006 to 2008, according to the World Conference of Trade Promotion Organization.
Currently, in the Most Preferred Investment Destination in China in 2006 by Multinational Enterprises cosponsored by the Institute of Industrial Economics of the Chinese Academy of Social Sciences, the TOP 20 Preferred Investment Destinations, except Wuhan, are lo9cated in the eastern area. And the Top 5 cities are Suzhou of Jiangsu Province, Shanghai, Qingdao of Shandon Province, Shenzhen of Guangdong Province, and Dalian of Liaoning Province, nearly consistent with the common impression. In southeast coastal cities, although the costs on land and labors and increasing, the boast better industrial matching capability and outstanding investment luring advantage.
The appeal of the central and western cities is also tapped in this appraisal. In the Top 20 Best Investment Potential City, most of them are located in the central area, for example, Nanchang, Jiujiang and Shangrao of Jianxi Province, Changsha and Chenzhou of Hunan Province, Hefei and Fuyang of Anhui Province and Zhengzhou, Luoyang and Zhumadian of Henan Province. Correspondingly, the cities that enjoyed the fastest growth of foreign investment were also in the central area in the past three years. The analysis shows that it was because the central cities had relative low cost, compared with the coastal cities, and the infrastructure and industrial matching capability were improving gradually.
2. Investment in the service industry increases remarkably. Investment mode diversified.
In addition to the regional transfer of investment in manufacturing, foreign investors also remarkably increased investment in the service industry.
According to experts, China has diversified channels of utilizing foreign investment. However, the statistics mode has not been adjusted accordingly. It is learned that the foreign investment lured last year, if only calculating investment in the manufacturing, was declining. However, the total investment including those in the services fields such as financial industry was increased by near 20%.
By the end of this year, the financial industry will be opened completely to the foreign investors and by then it is predicted the foreign investment in this field will increase further. At the same time, foreign investors, especially the large-scale multinational enterprises showed new characters and changed from direct investment in factories or joint ventures to acquiring Chinese enterprises, especially industrial leading enterprises, changing from direct investment to indirect investment.
In early September, the Chinese government formally implemented Provisions for Foreign Investors to Merge Domestic Enterprises to regulate such kinds of operations of foreign investment. It is said that the automobile industry is adjusting and will promulgate the new Automobile Industrial Policies in middle October, and will make in-depth investigation to ??how to utilize foreign investment better.??
The fast development of service outsourcing is the result of the following elements. Firstly, the fast development of information industry remarkably reduced the cost of cross-border information transmission and enabled many computer-based services implemented globally with a low cost; secondly, the progresses of information industry also drove the modularization operation of internal service activities of the transnational enterprises and different service junctures could maintain independent with each other spatially. Thirdly, services offered by the developing countries boasted huge cost advantage. For example, the salary of a software engineer in India is only one sixth of his American counterpart. Outsourcing part of their services to the developing countries may reduce the cost remarkably and forced their rivals to outsource their services accordingly. The last but not the least, the developing countries constantly enhance the investment liberalization in terms of policies and laws and regulations and regulate and urge development of service outsourcing. It is also an important reason for the development.
China boasts huge potential in offering service outsourcing services, including the stable political situation, favorable investment environment, well-established infrastructure and rich but cheap human resources. In March 2005, CIO Insight of the US publicized the Global Outsourcing Report of 2005, which indicated India ranked the fist position in 2005 global outsourcing indicators after assessing the cost and risk elements of outsourcing service host nations. The second was China. And China ranked the first in terms of the future outsourcing indicator (2015) and will become the outsourcing service provider with the best appeal in the world.
3. Foreign investors extend R&D activities to China.
According to the Ministry of Commerce, the number of independent R&D institutions invested by foreign investors exceeded 700. The research of United Nations Conference on Trade and Development showed that China has replaced US to become the first choice of oversea R&D activities of multinational enterprises and up to 61.8% transnational enterprises would make China as the top choice for the overseas R&D activities during 2005 to 2009, followed by the US with 41.2% and India with 29.4%.
Mainly for the following reasons, the foreign investors extend their R&D activities to China: Firstly, close to their manufacturing platform. The transnational enterprises have transferred a great deal of manufacturing capacity to China. Secondly, close to the Chinese market. It is convenient for carrying out adaptability development targeting the Chinese market. Thirdly, take advantage of the cheap R&D human resources of China. Currently there is still a gap on the high-end talent between China and the developed economies. However, the cost of medium and low-end research and development staff of China is only one tenth to one sixth of the counterparts in the developed countries. Some transnational enterprises have started to establish their global R&D center in China to develop new technologies and new products targeting the global market. Fourthly, improve relationship with the Chinese government. The Chinese government urges foreign invested enterprises to make R&D in China with preferential policies and some large-scale transnational enterprises show their support to the host nation with this opportunity so as to improve relationship with the government. However, the R&D institutions in China mainly carry out adaptability development especially targeting the Chinese market, featuring lower technical level and less cooperation with local enterprises and R&D institutions. The spillover effect is to be tapped.
4. M&A becomes an increasingly important new mode for foreign investment access to China.
In terms of the cross-border investment mode globally, M&A has been a major means of cross-border investment for quite a long time. However, as China lacked well-established laws and regulations on foreign investors?? M&A in the long term and the policies on foreign investment laid particular stress on the new projects, M&A has not come to maturity yet. In recent years, the central government has gradually improved the laws and regulations on foreign investors?? M&A in China and the domestic market potential was fully brought out, showing increasing appeal to the international investors, in addition to the redundant production capacity making more and more industrial leading enterprises to show the investment value. In such a situation, M&A is increasingly becoming an important means for the foreign investment to access China. For example, the largest beer enterprise in the world, AB, acquired Harbin Beer, Newcastle from Scotland acquired Chongqing Beer, Interbrew of Belgium acquired Fujian Xuejin Beer with 5.886 billion yuan and New Bridge from the US acquired shares of Shenzhen Development Bank. Although the M&A investment volume only accounted for a small part of FDI in China, such a case involved more stakeholders that that of the investment in the new projects. What??s more, many M&A objectives of foreign investors are leading enterprises of industry in China. Thus quite a number of M&A cases of foreign investors had attracted the attention of the media and all circles. Six ministries and departments, including the Ministry of Commerce, promulgated Provisions for Foreign Investors to Merge Domestic Enterprises on August 9, 2006, which allowed foreign investors to acquire Chinese enterprises with stock equity.
5. Capital and technology-intensive industries such as heavy chemical industry become new hotspots of foreign investment.
Generally speaking, the enterprises in the iron and steel industry and the petroleum and chemical industry characterize a large economic scale and intensive capital and technologies, and foreign investors normally would not enter into the sector in a hurry. In recent years, foreign investors gradually turned their attentions to these industries. The largest iron and steel group of the world Mittal acquired stock equity of Hualing Iron and Steel with USD317 million, BP cooperated with the Chinese party to build a large-scale petroleum and chemical enterprise. Foreign investment in the heavy industries involved in new projects and M&A projects as well. The reasons that foreign investors entered into the heavy industries of China are first because the consolidated foreign investors?? confidence in the long-term economic prosperity and investment environment of China in the future. Such a project will need hundr4eds of millions of US dollars and the investors will not make such an investment without long-term confidence. Second, China has developed into a stage of heavy chemical industrialization and the downstream industries generate strong derived demand on the heavy chemical industry. The heavy chemical industry enjoys a promising development prospect. Third, further improvement of the legal environment such as laws on the M&A.
6. Transnational enterprises?? regional headquarters surfaced in China.
The foreign invested enterprises in the early days in China were dispersive factories or branches or subsidiaries. With increasing subsidiaries in China, the transnational enterprises need to set up a regional headquarters to coordinate these operations. Generally speaking, the regional headquarters of a transnational enterprise in mainly responsible for the investment planning, market study, governmental relationship, management, coordination, overall planning and financing of the enterprise in the regional and has higher requirement on the infrastructure facilities such as the human resources, traffic, and communications facilities. A regional headquarters is normally located in the central business cities. Attracting transnational enterprises?? regional headquarters is conducive to improving the economic structure of the city, increase the income of local laborers, and enhance development of modern service industry to strengthen the economic energy and foster a central economic city. The transnational enterprises mainly assess political situation, infrastructure (traffic and communication facilities), geographic location (central city), policy and system environment (market access threshold, foreign exchange management and flexibility of capital dispatching, personnel entry-exit management, convenience of goods import and export, taxation, law and judiciary system and governmental efficiency), modern service industry (finance, securities, insurance, advertising, consulting, accounting, law, and information service industries, ) and human resources which establishing a regional headquarters. In recent years, some famous transnational enterprises such as Mitsubishi, Motorola, and Nokia have established their regional headquarters in China. With improvement of the investment environment, there will be more transnational enterprises moving their regional headquarters to the Chinese mainland.
!!. Future policy orientation
1. The central government focuses on the industrial adjustment. Policy effect on energy consumption and environment protection showed.
Foreign investment advancing from the eastern cities to the central area and reduction of the total foreign investment in China share some common inducements. One is that the central government and local governments are continuously improving the quality of foreign investment and optimizing the structure of lured foreign investment. The effect of requirements and policies on land, energy consumption reduction, and environmental protection has gradually showed, which made the total foreign investment reducing temporarily and regional transfer.
In Shanghai, in order to fulfill the control objective of total pollutant discharge volume in the 11th Five Year Plan Period, the municipal government has signed a ??Pledge of Environmental Protection?? with the local governments of districts, counties, and key units. Some sources revealed that an environmental protection investigation conducted not long ago showed that about 4,000 enterprises could hardly pass the assessment of environmental protection, including some foreign invested enterprises.
Similarly, Shenzhen, which also ranked on the top list of the Best Investment Potential City in the eyes of transnational enterprises, recently promulgated an ordinance to support the industrial transformation of Hong Kong and Taiwan-based processing enterprises so as to enhance development of hind-tech industry. The ordinance put forward some mandatory requirements on the pollution and energy consumption of the enterprises, which are simplified by some local enterprises into ??either upgrade or transfer.?? Experts predicted many foreign invested enterprises would choose to move to the central and western areas, forming a new turn of capital flow of foreign investment.
2. Maintain the policy orientation of absorbing foreign investment.
In the time of globalization, transnational enterprises brought development opportunities not only to the host nations. Most countries in the world are further enhancing the investment liberalization and improving the investment environment. The reason that China became one of the few winners of globalization in the past two decades has close relation with the right strategy on utilizing foreign investment the Chinese government adopted. The contribution of FDI to the economic development of China is there for all to see. In the process of luring foreign investment, in addition to sticking to the policy orientation of absorbing foreign investment continuously, China will reflect upon the issues of labor force, environment and monopolization of some foreign invested enterprises to further improve the relevant laws and regulations and administration practices.
3. Highlight the industrial and regional orientation of utilizing foreign investment.
The foreign investors in China mainly centered in the manufacturing and the investment in the service industry was inadequate, and in terms of the spatial distribution of foreign investment, about 90% FDI centered in the coastal area and the investment in the hinterland was short. The realization of integrating the corporate income tax systems of domestic enterprises and foreign invested enterprises (i.e. two taxes combined into one) indicated termination of the common preferential policies to the foreign invested enterprises of China, which is the requirement of adjusting the relationship between the domestic investment and foreign investment and establishing a unified market for fair competition. During the 11th Five Year Plan Period, efforts will be made to strengthen guidance to the foreign investors on the investment industries and regional layout.
The catalogue for the guidance of foreign investment industries will be subdivided from the aspect of industrial value chain to urge foreign investors to invest in the junctures featuring high added value, for example the modern service industry serving the production industry, economic activities, research an development, capital and technology intensive manufacturing, instead of the simple classification such as high-tech industry.
The foreign invested projects with high energy consumption and high pollution will be strictly banned. The central and western areas will not copy the mode of the coastal area because the hinterland is not suitable for developing the processing trade in as large a scale as that in the coastal area. Therefore, some areas with relatively well-established infrastructure, good traffic location and rich human resources or natural resources will be selected to set up special economic zones. In these zones, encouragement policies for foreign investors will be continuously implemented to guide foreign investors to invest in the manufacturing or develop service outsourcing.
4. Further improve policy on M&A investment
On August 8, 2006, National Development and Reform Commission and the Ministry of Commerce jointly drafted and promulgated ??Provisions for Foreign Investors to Merge Domestic Enterprises.?? At the time of granting legal protection to foreign investors?? taking over of domestic enterprises, the Provisions stipulate the obligations.
According to the Provisions, foreign investors shall obey Chinese laws, administrative regulations and rules in taking over domestic enterprises, follow the principles of fairness and rationality, making compensation for equal value, honesty, and credibility. Over-concentration, elimination or restriction of competition and loss of state-owned assets shall not occur and the social economic order and public interests shall not be harmed. Foreign investors shall meet the qualifi8cation requirements of Chinese laws, administrative regulations, and rules and policy in industry, land, and environmental protection. We can see the new Provisions not only are conducive to specifying the legal basis for M&A and regularizing the examination and approval of M&A projects, but to standardizing the M&A, preventing monopolization, undermining public interest, and impeding market competition of some enterprise by taking the advantage of M&A. The Provisions are sure to have great positive influence on improving China??s investment environment.
From international experiences, we can know that the process of the improvement of laws and regulations on foreign investment utilization is the reflection of the maturing of the policy system. According to the report of United Nations Conference on Trade and Development (UNCTAD), since 2006, the policy for attracting the investment of MNCs has seen new changes. Firstly, 20% of countries tend to intensify the management over MNCs and the investment promotion policy changes from a free policy into a moderately managed one, e.g. the protection of public interest. This is an improvement. Secondly, pay attention to the protection of sensitive industries. Thirdly, attach importance to absorbing the investment of domestic enterprises at the time of attracting foreign investment. For example, the corporate income tax for contra flow investment has dropped from 20% to 5%. Fourthly governments of all countries urge enterprise to improve governance. Fifthly, all countries have an all-round cognition of the importance of promoting domestic investment and try to upgrade the effect of utilizing foreign investment. As a result, we can see that all countries attach importance to further standardizing investment behaviors and safeguarding public interests and normal market competition.
All in all, preventing possible monopoly is one of the policy objectives for the promulgation of regulations relating to M&A investment. These types of regulations are conducive to improving the market economy system, maintaining normal market competition order and establishing an investment competition law and policy system meeting international criteria. Some overseas investment analysts worry that this is a regression of China??s foreign investment utilization policy, and that the investment environment may deteriorate. The key is the ??Anti-Monopoly Law?? and investment competition policy systems are now formulated or not improved in most countries, misleading people into thinking that China??s anti-monopoly measures in M&A investment are restrictions to MNCs. Therefore, the ??Anti-Monopoly Law?? and investment competition policy shall be promulgated and improved in the shortest possible time to include the M&A of MNCs and domestic enterprises within the same legal framework for unified standardization and supervision. This has great significance for improving the investment environment and safeguarding the normal market competition order and regularizing the competition of enterprises.