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4.2.2 China: State-Led Strategic Foreign Investment Policies

Deng's policies, which began in 1978, opened the country to trade and lifted the ban on direct investment from foreign countries. The following year the Joint Management Law (the Sino-Foreign Mutual Corporate Investment Law) was passed, creating institutional foundations for enticing foreign firms through the introduction of foreign capital, transfer of technology, and promotion of exports. In addition, in 1980, the Chinese government established four economic zones— Shenzhen, Zhuhai, Shantou, and Xiamen—to experiment with economic development models to attract foreign firms. The government developed infrastructure to lure foreign firms to these zones and implemented preferential policies such as tax breaks for these firms. In 1984, the country opened 14 coastal cities to foreign investment, including Shanghai, Tianjin, and Dalian, and in 1986, regional restrictions on independent investments by foreign firms were lifted through the passage of the Foreign Enterprise Law. In 1988, almost all coastal regions became a part of the coastal economic liberalization zone through the government's implementation of a coastal zone economic development strategy.

Market reforms accelerated as a result of Deng's 1992 southern tour speech, and the investment of foreign capital into the country began in earnest. Between 1995 and 1997, the Chinese government began opening up domestic markets with the goal of acquiring WTO membership, and also started liberalizing trade by implementing measures such as reducing tariffs. In the latter half of the 1990s, China attracted foreign capital with abundant preferential policies and cheap labor as weapons, thereby establishing itself as the “factory of the world.” A plan to develop western China kicked off in 1999, and the opening up of China to foreign markets moved from coastal regions to the country's interior. In 2001, China became a member of the WTO, and with further loosening of foreign capital restrictions in the service industries, China saw a dramatic rise in the amount of direct investment.

The methods of capitalization in China include independent foreign capitalization (wholly owned firms) and joint capitalization in the form of a joint venture with a Chinese firm. Until the 1990s, direct investment in China was often done at the request of local governments, and many of those investments were made as joint ventures with local firms. However, with China joining the WTO in 2001, the country gradually eliminated restrictions on foreign capital. This relaxation applied not only to the manufacturing industry but also to service industries such as distribution and finance, with many industries freely able to decide whether to create a wholly owned subsidiary or joint venture. However, it is important to note that industries such as the automotive industry, which are viewed as strategically critical by the Chinese government, have their own rules. For example, in the automotive industry, foreign firms are not allowed to establish a wholly owned subsidiary, and are restricted to less than 50 % ownership in joint ventures.

In the 11th 5-year plan that began in 2006, the Chinese government clarified its stance on the selection of investments by foreign firms and outlined its goal for becoming a “technology nation” with heightened competitiveness of Chinese firms. In January 2008, the government enacted a labor contract law that improved worker compensation, as well as a new corporate income tax law that eliminated preferential income tax breaks on foreign firms. Currently, the Chinese government hopes to bring in high-tech companies and environmental firms that will contribute to the development of the country, rather than simple manufacturers and assemblers that have, to date, dominated China's landscape. Given the reductions in preferential policies for foreign capital, the rise in labor costs, and a stronger Chinese currency, foreign firms are beginning to change their investment strategies in China. Some foreign firms are examining a setup of bases in nearby countries such as Vietnam to distribute their risk, in what is known as a “China Plus One” strategy.

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