WDP- 130

World Bank Discussion PapersChina and Mongolia Department Series

Patterns of DirectForelgn

Investmentin Ch'ina

Zafar Shah Khan

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Patterns of DirectForeign Investmentin China

China and Mongolia Department Series

Patterns of Direct Foreign Investment in China, Zafar Shah Khan, September 1991

World Bank Discussion PapersChina and Mongolia Department Series

Patterns of DirectForeignInvestmentin China

Zafar Shah Khan

The World BankWashington, D.C.

Copyright C 1991The International Bank for Reconstructionand Development/THE WORLD BANK

1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

All rights reservedManufactured in the United States of AmericaFirst printing September 1991

Discussion Papers present results of country analysis or research that is circulated to encourage discussionand comment within the development community. To present these results with the least possible delay, thetypescript of this paper has not been prepared in accordance with the procedures appropriate to formalprinted texts, and the World Bank accepts no responsibility for errors.

The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) andshould not be attributed in any manner to the World Bank, to its affiliated organizations, or to members ofits Board of Executive Directors or the countries they represent. The World Bank does not guarantee theaccuracy of the data included in this publication and accepts no responsibility whatsoever for anyconsequence of their use. Any maps that accompany the text have been prepared solely for the convenienceof readers; the designations and presentation of material in them do not imply the expression of any opinionwhatsoever on the part of the World Bank, its affiliates, or its Board or member countries concerning thelegal status of any country, territory, city, or area or of the authorities thereof or concerning the delimitationof its boundaries or its national affliation.

The material in this publication is copyrighted. Requests for pernission to reproduce portions of it shouldbe sent to Director, Publications Department, at the address shown in the copyright notice above. TheWorld Bank encourages dissemination of its work and will normally give permnission prompdy and, when thereproduction is for noncommercial purposes, without asking a fee. Permission to photocopy portions forclassroom use is not required, though notification of such use having been made will be appreciated.

The complete backlist of publications from the World Bank is shown in the annual Index of Publications,which contains an alphabetical title list (w,ith full ordering infornation) and indexes of subjects, authors, andcountries and regions. The latest edition is available free of charge from the Publications Sales Unit,Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or fromPublications, The World Bank, 66, avenue d'Iena, 75116 Paris, France.

ISSN: 0259-210X

Zafar Shah Khan is senior operations ofaicer in the World Bank's China and Mongolia Department.

Library of Congress Cataloging-in-Publication Data

Khan, Zafar Shah.Patterns of direct foreign investment in China / Zafar Shah Khan.

p. cm. - (World Bank discussion papers; 130)ISBN 0-8213-1911-61. Investments, Foreign-China. 2. Investments, Foreign-

-Government policy-China. I. Title. II. Series.HG5782.K43 1991332.6'73'0951-dc2O 91-31122

CIP

v

ABSTRACT

China attaches considerable importance to the direct foreign invest-ment (DFI) as a tool of economic development. With the start of the "open-door" policy in 1979, the government has provided various incentives and takenspecial measures to attract DFI. This paper reviews the growth of DFI inChina and identifies various constraints which need to be removed to furtherimprove China's attractiveness to foreign investors. The paper draws exten-sively on reports, papers and other material available on DFI in China as wellas on Bank's own experience in China and other developing countries, particu-larly those in the East Asia region.

As a background, a brief global overview of DFI is presented inChapter I, followed by a review of the experience in East Asian countries inChapter II. Chapter III reviews the recent history and developments of DFI inChina including data on its distribution by source, region, and sector. Chap-ter IV provides information on gains from DFI to China and an assessment oftrends and patterns from the perspective of China's development goals. Chap-ter V sums up various issues in the area of policies, procedures and infra-structure and suggests necessary actions.

- vi -

OFFICIAL EXCHANGE RATE(As of December 1990)

Currency unit = Yuan (Y) = 100 FenY 1.00 = $ 0.19$ 1.00 = Y 5.22

FISCAL YEAR

January 1 - December 31

WEIGHTS AND MEASURES

Metric system

ABBREVIATIONS

ASEAN = Association of South East Asian NationsCV = Cooperative VenturesDFI = Direct Foreign InvestmentFIE = Foreign Invested EnterpriseJV = Joint VentureLAMIC = Low.- and Middle-Income CountriesMOF = Ministry of FinanceMOFERT = Ministry of Foreign Economic Relations and TradeMNC = Mulitnational CompanyNIC = Newly Industrialized CountryNIE = NewLy Industrialized EconomiesSEZ = Special Economic ZoneSOE = State Owned EnterpriseUNCTC = United Nations Center on Transnational CooperationsWOV W WhoLly Owned Ventures

- vii -

Foreword

The World Bank's economic and sector work program in China is a veryactive one ranging over a wide spectrum of topics from macroeconomics tohealth and education. Each year we publish a handful of our formal studies,but thus far most of the background papers and informal reports, many of themcontaining valuable analysis and information, have remained outside the publicdomain. Through the China Department Working Paper Series, we hope to makeavailable to a broad readership among the China watchers and developmentcommunities a few of the papers which can contribute to a better understandingof China's modernization. Mr. Zafar Khan's paper on Direct Foreign Investmentprovides an auspicious launch to the series and will be followed in the comingmonths by papers on price reform, rural industry, Sino-Japanese relations andprovincial development. We hope to publish six to eight papers each yeardrawn from the entire cross-section of fields in which the Bank is engaged.

We wish our readers bon appetit,

Shahid Javed BurkiDirector

China and Mongolia DepartmentAsia Region

I

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Table of Contents

Page No.

Sunmnary .*.*.. . . . . . . . . . . . . . . . . . . . . . .*. xi

I. GLOBAL OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . 1

A. General Trends . . . . . . . . . . . . . . . . . . . . . 1B. Impact of DFI on Host Country Economy . . . . . . . . . . 2

II. EXPERIENCE IN THE EAST ASIA REGION . . . . . . . . . . . . . 3

A. Overall Pattern . . . . . . . . . . . . . . . . . . . . . 3B. Policies, Regulations, and Inst.tutional Environment . . 5C. Lessons Learned . . . . . . . . . . . . . . . . . . . . . 6

III. CURRENT STATUS OF DFI IN CHINA . . . . . . . . . . . . . . . 7

A. Background . . . . . . . . . . . . . . . . . . . . . . . 7B. Performance Analysis . . . . . . . . . . . . . . . . . . 9C. Post-Tiananmen Developments . . . . . . . . . . . . . . . 12

IV. IMPACT OF DFI ON CHINA . . . . . . . . . . . . . . . . . . . 13

A. Gains from DFI . . . . . . . . . . . . . . . . . . . . . 13B. Assessment of Trends and Patterns from the Perspective

of China's Development Goals . . . . . . . . . . . . . . 15

V. DFI ISSUES RELEVANT TO CHINA . . . . . . . . . . . . . . . . 21

A. Government Objectives . . . . . . . . . . . . . . . . . . 21B. Key Issues in the Areas of Policies, Procedures and

Infrastructure . . . . . . . . . . . . . . . . . . . . . 22

REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

ANNEXES

1. Flow of Direct Foreign Investment by Region . . . . . . . . . . 30-342. Investment Incentives on DFI in China and ASEAN Region . . . . 353. Types of DFI . .............. 36-384. Overview of Investment Incentives and Taxes . . . . . . . . . . 39-425. Total Contracted Direct Foreign Investment in China . . . . . . 436. Utilized DFI and Share by Source . . . . . . . . . . . . . . . 447. Direct Foreign Investment in Zones and Special Cities . . . . . 458. Utilized DFI and Share by Province . . . . . . . . . . . . . . 46

x

Page No.

BOX IN SUMMARY

Proposed Action Program to Promote Direct Foreign Investment in China

TABLES IN TEXT

1.1 Global DFI Inflow . . . . . . . . . . . . . . . . . . . . . . 12.1 Direct Foreign Investment in Selected East Asian Countries . 43.1 Contracted and Actual DFI in China: 1988, 1989 and 1990 . . 12

- xi -

SUMMARY

i. Global direct foreign investment (DFI) has had tremendous growthsince the 1960s. During 1985-89 alone, the gross annual inflow of DFIincreased from $47 billion to $185 billion and the stock increased from $713billion to about $1,000 billion. Most foreign investment comes from theindustrialized countries, and also more than three-fourths of such investmentis channeled to the industrialized countries. According to an estimate, by1995, the global annual inflow of DFI is expected to increase to $230 billionin real terms and the global stock to more than double of the 1988 level.

ii. The share of low- and middle-income countries (LAMIC) in global DFIhas not only declined in the 1980s, their actual capital inflows have alsodecreased in real terms. A small number of LAMIC, mostly located in the EastAsia region, have seen an upsurge in foreign investment. The annual inflow ofDFI to China doubled (from $1.7 billion to $3.4 billion) in 1985-89 butSingapore, Malaysia, Thailand, Indonesia, the Philippines and Korea have doneeven better.

iii. All Association of South East Asian Nations (ASEAN) countries offergenerally similar incentive schemes. The relative attractiveness of indivi-dual countries is therefore influenced by the macroeconomic and politicalstability, physical infrastructure, labor skills and wages, local supportindustries, level of government controls, and availability of information oninvestment opportunities. Almost all ASEAN countries and NIEs in Asia haveassigned a prominent role to the private sector; liberally opened fields ofinvestments to foreign and domestic companies; lowered, simplified, and/orremoved tariffs and surcharges; relaxed/deregulated the capacity-licensingsystem; relaxed foreign investment regulations; and introduced liberal foreignexchange policies. The above policies have proved to be a boon for foreigninvestment.

iv. Due to historical and ideological reasons, DFI was very limited inChina before the 1979 economic reforms. The Government's development programthat was introduced at the end of 1978 called for high investment in the econ-omy and DFI was to be used to accelerate the process of technology transfer,to promote exports and to provide foreign exchange. In order to attract DFI,a number of laws and regulations--providing incentives and safeguardinginvestment--were introduced over time. In fact, China's present package ofincentives is quite similar to that of ASEAN countries. China also estab-lished special economic zones (SEZs) and opened up many coastal cities withspecial incentives for foreign investment. The above incentives and facili-ties resulted in the approval of about 25,000 contracts for a total amount of$36 billion from 1979 to June 1990. The actual utilized amount was $17 bil-lion or 48 percent of the committed amount.

v. China has achieved reasonable success in meeting its DFI objectives.It has received new technology which is generally appropriate considering theabundant supply of cheap labor in China. Hong Kong and Taiwan (which accountfor about 70 percent of DFI in China) themselves have relatively less devel-

- xii -

oped technology and have taken advantage of cheaper labor in China. They haveinvested mainly in simple labor-intensive assembly or packaging operations forexport markets. China has also desired to use DFI as a source of modern tech-nology 1/ for large and heavy industries. The import of such technology,which is generally available in developed countries, has been limited underDFI.

vi. Along with new technology, foreign-invested enterprises have adoptedthe management systems introduced by their foreign partners and most of themhave reported major improvements in productivity and efficiency although bene-fits were slow to come in joint ventures formed with existing state-ownedenterprises (SOEs). The lessons learned from foreign-invested enterpriseswith respect to ownership, management, organization, systems, policies andprocedures can be very useful for China and are reflected to some extent inthe enterprise reforms already under way.

vii. Another major objective of DFI in China has been the promotion ofexports. Up to the end of the 1980s, the impact of DFI on China's foreigntrade remained relatively small, but it was growing rapidly; exports by for-eign-invested enterprises amounted to about 13 percent of total exports in1989. It is not possible to estimate the net impact on the balance of pay-ments because data on imports by foreign-invested enterprises and import sub-stitution are not available. It does appear, however, that the DFI sector isa net earner of foreign exchange if, as it should be, the service industry isincluded.

viii. While the preference of the Chinese government for export-orientedor foreign exchange-earning ventures is fully supported by various tax holi-days and import-duty exemptions, the preference for technology-transfer ven-tures is not reflected in the package of investment incentives offered toforeign investors. Among the wide range of such incentives, only a few arerelated to high-technology industries and incentives for R&D in China arevirtually absent.

ix. China will continue to welcome DFI in the future but, as in thepast, the emphasis will remain on technology transfer and exports. In addi-tion to labor-intensive technology, China will seek modern technology fromdeveloped countries to narrow the technology gap, to increase the value addedin domestic manufacturing, and to remove existing inefficiencies in produc-tion. This is understandable because in many industrial subsectors, particu-larly in heavy industry and electronics, highly sophisticated technology isneeded at least for the manufacture of certain important components. In manycases, the import of even a few--years-old technology would be a big step for-ward for China and perhaps appropriate in its present stage of development.China should not have major problems in continuing to attract simple labor-intensive technologies from Hong Kong, Taiwan and South Korea. However, inorder to attract multinational companies (MNCs) from developed countries to

1/ In this paper, "modern technology" refers to the latest state-of-the-arttechnology available in inclustrialized countries.

- xiii -

invest in more technology-intensive heavy industries, China will have torespond to their special concerns and motivations. MNCs' investment deci-sions, particularly in industries with long gestation and payback periods, areinfluenced to a greater extent (compared to relatively smaller investors fromHong Kong and Taiwan) by the macroeconomic environment and political situa-tion, local and third-country markets, government controls and restrictions onDFI operations, foreign exchange constraints on imports and dividend remit-tances, supply and prices of local raw materials and other inputs, regulationsgoverning intellectual property rights, availability of skilled workers, andthe condition of infrastructure in host countries. They also minimize theirfinancial risks by diversifying investments in different countries. Therecent liberalization in East European economies has opened new investmentopportunities for MNCs and, at the same time, developed countries (e.g., US,Germany, Britain) and the fast-growing East Asian countries continue to offersound investment propositions. While China still remains attractive becauseof its large domestic market, provided foreign investors perceive that theywill have access to it, it will need to make greater efforts in future topresent itself as a comparatively safe and rewarding investment avenue fromthe perspective of MNCs and, thus, to obtain modern technology.

x. The export objective of DFI is somewhat inconsistent with theadvanced technology objective. Advanced technology is generally availablefrom developed countries that would like to transfer it only if they can caterto domestic market needs; exports would follow after several years of opera-tion when international levels of efficiency and scale have been achieved and,in many cases, exports may not be possible at all.

xi. In the future, China will need to broaden the scope for DFI bygiving greater attention and emphasis to the following four areas. First,foreign investment should also be encouraged in the service sector such asbanking, insurance, shipping, aviation, and consultancy services. DFI isincreasing very rapidly in these fields worldwide and can bring many directand indirect benefits to China. The experience of developed countries showsthat the existence of an efficient service sector is crucial to the overalleconomic development. Second, China should open up onshore exploration of oiland gas for DFI, notably in Tarim Basin, which, among others, needs moderntechnology. Third, the Chinese government should explicitly recognize theimportance of backward and forward linkages that can be created by foreigninvestment in large industrial projects, and make them an integral part of itspolicy and strategy for DFI. Such linkages would not only promote the devel-opment of feeder and downstream industries, but would also help to improve thecost efficiency and quality of products of such industries and, thus, promotetheir exports. Fourth, China should shift its emphasis on DFI from SEZs to anationwide basis. The focus on SEZs was perhaps justified in the early periodof attracting DFI and the related experimentation. However, China has nowgained significant experience in DFI and, considering the cost of developingand maintaining SEZs on the one hand, and the general confinement of benefitsto a few locations on the other, it would be desirable that attention nowshift to the broader economy.

- xiv -

xii. Given more conducive policies, procedures and infrastructure, Chinawill be able to attract larger amounts of DFI, particularly in high-technologyindustries. In this context, a major issue that needs to be addressed issubstantial bureaucratic controls and involvement leading to difficulties ininvestment decisions and impairment of enterprise profits. An excessive num-ber of government agencies are involved in DFI; there is lack of readilyavailable information on all rules, regulations, directives, etc. applicableto a particular DFI and many of these rules and regulations are vague andsubject to different interpretations; municipal and provincial governmentsfrequently issue new rules and permit new incentives which vary from place toplace; ad hoc changes are made in government regulations which are oftendetrimental to the interest of foreign-invested enterprises; additional con-cessions, which are outside the agreements already reached, are asked for fromforeign investors; compliance with central government guidelines and direc-tives at local levels is not properly monitored; and there is the absence of agenuine "one-stop" foreign investment promotion agency in China.

xiii. Another major issue is the availability of foreign exchange tononexporting enterprises. While the government has allowed, since 1986,foreign-invested "advanced-teclnology enterprises" to sell their products inthe domestic market, they are still expected to balance their foreign exchangeneeds. A number of laws and regulations have been issued and "foreign cur-rency adjustment centers" have been established to help nonexporting enter-prises acquire foreign exchange for the above purpose. While these measureshave helped to mitigate some oif the problems faced by foreign investors inmeeting their foreign exchange needs, they do not completely offset theeffects of nonconvertibility of the Yuan and continuing emphasis on the for-eign exchange balance requirement. As long as the foreign investors are notassured of a reliable and efficient system for acquiring foreign exchange toimport raw materials and spare parts and to remit profits, they will continueto be reluctant to invest in projects that are not export-oriented (at leastin the early years of operation) but could result in significant transfer ofmodern technology. The absence of such a system also prevents the developmentof effective backward and forward linkages.

xiv. Other issues that need to be addressed are inadequate foreigninvestment promotion; the absence of a well-designed system of export finan-cing; nonavailability of imported inputs at international prices; shortages,higher cost and inferior quality of domestic inputs; restricted authority ofmanagers to hire, fire and reward workers; inadequate legal framework; andweak transport and communicatioln links and shortages of water and energy inmany locations. Of course, most of the above-mentioned issues are equallyapplicable to domestic investments in, China.

xv. A proposed action program to address the above-mentioned issues issummarized in the following box. While a majority of these actions will bethe responsibility of Ministry of Foreign Economic Relations and Trade(MOFERT), other government agencies including State Planning Commission, Min-istry of Finance, and People's ]Bank of China, and various provincial and muni-cipal bodies will also be responsible for implementing many of the recommenda-tions.

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Box: PROPOSED ACTION PROGRAM TO PROMOTE DIRECT FOREIGN INVESTMENT IN CHINA

Timeframe [vea S

1-3 4-7 aboveMinimization and Simplification of Administrative ControlsIntroduce clear and transparent rules and regulations from the entryto the exit of foreign investments x x

- The approval process (including the timeframe) and incentives acrossSEZs, open cities and the rest of China to be uniform x

- All investment incentives to be automatic and nondiscretionary x- Avoid frequent changes in policies and procedures x x x- Avoid renegotiating of contracts with foreign investors x x x- Replace the present positive list system of industries open to for-eign investment by a negative list system x

- Consider establishment of a 5one-stop' foreign investment promotionagency. Chinese officials to visit such agencies in other countriesto gain first-hand information which may help in their decision-making x x

- Monitor compliance of DFI laws, regulations, guidelines at all levels x x x

Foreign Exchange Availability to FIEs-Fromote an efficient nationwide market in foreign exchange where FlEsand local enterprises can freely trade foreign exchange x

- Until the above market starts functioning smoothly and taking care ofthe needs of FIEs, the government should allocate foreign exchange ata realistic exchange rate to FIEs that need it x

Concerted Promotion of DFIRegularly analyze trends in world industry, adjust own policy accord-ingly, and formulate industrial development strategy including tar-geting of priority industries and identification of key individualinvestment opportunities x x x

- Encourage DFI in service industries such as banking, insurance,shipping, aviation and consultancy x x x

- Promote backward and forward linkages in conjunction with FIEs x x x- Publicize China's favorable investment conditions x x x- Actively seek out foreign investors x x x- Establish investment promotion offices in major source countries x- Allow onshore oil/gas exploration and development to foreign

investors x x x- Shift focus on DFI from SEZs to the country at large x

Financin, of FIEsIntroduce a well-designed system of export financing, particularly tofinance working capital needs and financing of accounts receivable onexport sales x

-Provide insurance for some of the risks of financing export sales xRecent relaxation of credit policies to be equally applicable to FIEs x x x

- Encourage general competition in the banking sector x x x

International Competitiveness of Export-Oriented Enterprises- Allow export-oriented enterprises to import duty-free (or with simpleduty-drawback arrangement) necessary inputs if domestic producerscannot match the international quality and price x x x

- Encourage local producers to improve quality and price through compe-tition x x x

LaborAllow FIE managers full authority to exercise their powers to hire,fire and set wages and incentives x

Irovement of Legal FrameworkIntroduce company law x

- Issue implementing regulations for laws governing foreign contracts,wholly foreign-owned ventures, and copyrights x

- Introduce legal structure that will grant collateral through mort-gaes, reoulate bankruptcies, etc xMake all Taws and regulations to be clear and precise and thus easyto interpret x x xDo away with not-so-publicized winternal rules" imposed by regionaland local authorities x

Development of Infrastructure- D-velop efficient RAD organizations, training institutes, insurancecompanies and banks, consultancy services, etc. x x x

- Develop transport and communications facilities and improve power andwater supply x x x

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Direct Foreign Investment

I. GLOBAL OVERVIEW

A. General Trends

1.1 The volume of global direct foreign investment (DFI) has increased morethan tenfold since 1960. During 1983-88 alone, DFI increased by 24 percentannually as shown in Table 1.1 (details in Annex 1).

Table 1.1: GLOBAL DFI INFLOW($ billion)

1983 1985 1987 1988Value Z Value % Value Z Value %

World Total 47.82 100.0 47.50 100.0 110.08 100.0 141.53 100.0

High-incomeeconomies 38.94 81.4 36.66 77.2 96.28 87.5 121.41 85.8Europe 21.67 45.3 16.21 34.1 42.14 38.3 50.05 35.4United States 11.96 25.0 19.03 40.1 46.89 42.6 58.45 41.3Japan 0.41 0.9 0.64 1.3 1.17 1.1 -0.52 -0.4

Low- and middle-incomeeconomies 8.88 18.6 10.84 22.8 13.80 12.5 20.11 14.2Latin America 3.58 7.5 4.28 9.0 5.64 5.1 7.92 5.6Asia 2.96 6.2 3.34 7.0 4.74 4.3 7.79 5.5Africa 1.18 2.5 0.74 1.6 1.34 1.3 0.84 0.6Others 1.16 2.4 2.48 5.2 2.08 1.9 3.56 2.5

Source: IMF, Balance of Payment Statistics.

1.2 According to the United Nations Center on Transnational Corporations(UNCTC) (1988), the global DFI stock was $713 billion at the end of 1985 (thelatest year for which data are available). Allowing for DFI flows in subse-quent years, the DFI stock would have increased to about $1,000 billion at theend of 1989. The scale of investments reflects the phenomenal growth of mul-tinational corporations which have been enhancing their competitiveness andseeking new markets by setting up subsidiaries to serve consumers in differentlocations. Most foreign investment has come from the industrialized coun-tries, and also more than three-fourths of such investment has gone to theindustrialized countries--mainly to the US, Britain, Germany, and France. Thelow- and middle-income countries, as a group, have not only failed to share inthe boom of the 1980s, but have actually experienced a drop in inflows ofcapital if measured in real terms. ASEAN countries, Hong Kong, Taiwan, and

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South Korea have by contrast, sieen sharp increases mainly due to Japaneseinvestment in the area, but the rest of Asia has lagged behind.

1.3 Not only is foreign investment growing fast, its character is alsochanging. By the 1980s, the US had become a large recipient of this money,while Japan and Britain were investing overseas at an even faster pace thanthe United States. At the same time, services were accounting for a biggershare than manufacturing though the actual situation varied from country tocountry depending upon investment opportunities. For example, the share ofservice sector in Japanese DFI is increasing but the share of manufacturing inits US investments remains at around 40 percent. Another new development inthe 1980s is the acceleration in foreign investment by the newly industrial-ized economies (NIEs). Total recorded direct foreign investment by NIEs indeveloping countries was about $16 billion in the 1980s, though actual flows,much of which go unreported, were much larger.

1.4 A recently published study on multinational investment by the RoyalInstitute of International Affairs in London, expects the above-mentionedtrends in DFI to continue in the 1990s. The study indicates that the globalstock of DFI will more than double in real terms between 1988 and 1995 and theannual flow of such investment will have grown to $230 billion in real terms.As in the past, much of this investment will flow to the industrialized coun-tries.

B. Impact of DFI on Host Country Economy

1.5 A number of benefits accrue to the country receiving DFI. Itinvolves a capital flow into the host country and thus supplements other formsof foreign transfer of savings. In the case of joint ventures, DFI alsoresults in the mobilization of clomestic savings for productive purposes. Itis normally expected that DFI would bring in production and process technologythat are often new for the host country. In some cases, multinationals wouldnot be prepared to transfer this technology unless it was for one of their ownsubsidiaries. Another benefit of DFI is that it helps to promote exports asthe foreign investor would normally be more conversant with foreign marketsand would have its own well-established market networks. Sometimes exportsare made to the home country (i.e., the country where the DFI originated).'The DFI also results in additional employment and training. Generally, multi-nationals will try to upgrade the technical skills of the local staff byexposing them to international practices and applying their well-establishedtraining methods. Multinationals also bring some management and organiza-tional know-how which includes organization, accounting, marketing, etc. Inmany countries, DFI may result in the promotion of subcontracting as the homecountry's manufacturers would like to supply various parts and components tothe foreign-invested enterprise. In turn, this may also lead to better Rual-ity control in the local industry. Most of the above-mentioned benefits ofDFI would have a demonstration efEfect as the new technology, productionmethods, and management techniqutes would be replicated in other industries inthe host country.

1.6 Direct foreign investmuent has also been criticized for severalshortcomings. For example, in some cases, it results in the import of raw

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materials and spare parts and thus causes a recurring constraint on the limi-ted foreign exchange resources of host countries. At the same time, it doesnot result in significant exports to offset the import burden. In some cases,used machinery has been shipped from the headquarters plant, which does notresult in any technological gain to the host country. It is also argued thatoften import protection, and export subsidies have to be provided to a foreigninvested enterprise to keep it financially viable. This causes further dis-tortions, and often bias against domestic manufacturers. Also, politicaltrouble has followed private investment where it has come predominantly fromone home country and the host country has been merely the recipient of foreigninvestment without any other major benefits.

II. EXPERIENCE IN THE EAST ASIA REGION

A. Overall Pattern

2.1 Trends. As mentioned in para. 1.2 above, the share of developingcountries in global DFI has declined in the 1980s. However, a small number ofdeveloping countries, mostly located in the East Asia region, has seen anupsurge in foreign investment, as shown in Table 2.1.

2.2 Thailand and the Philippines had the most rapid increase in DFIthough the Philippines saw a decline in 1989 mainly due to political and eco-nomic instability. The DFI in Malaysia and Indonesia has more than doubled(about +150 percent) in the five-year period. As regards Singapore, DFI hastripled mainly because of its growing importance as a financial center inAsia. The DFI in South Korea increased more than threefold during 1985-89because of the greater opening of the economy for foreign investment in late1980s. In China, the DFI doubled during the same period. During 1985-89, DFIhas accounted for between 1.5 percent and 6.5 percent of gross domesticinvestment in Thailand, 1.2 percent and 3.5 percent in Indonesia, 5.7 percentand 17.0 percent in Malaysia, 0.3 percent and 12.3 percent in the Philippines,and 1.5 percent and 2.8 percent in China.

2.3 Sources. During 1987 (the latest year for which data is available),Japan was the leading source of DFI in ASEAN countries with a share of about35 percent of the total, followed by 21 percent by NIEs of Asia. The UnitedStates provided only 7 percent of the tot~al DPI in ASEAN countries. Japan'sshare in East Asian countries is increasing in absolute numbers.

2.4 Indonesia, the site of large-scale natural resource projects, hasbeen the leading recipient of Japanese DFI in Asia. In the 19708, Indonesiacaptured almost half of all Japanese DFI flows to Asia, and its share in glo-bal flows (13 percent) ranked it second after the United States. Indonesia'sinflow of DFI has remained significant in the 1980s, though no longer predomi-nant in Asia. Japan!s shift from natural resource-oriented DPI toward tech-nology-intensive manufacturing and services resulted in a greater proportionof flows to the NIEs in Asia, particularly in the 19809. Japanese DFI flowsto Hong Kong more than doubled from the 19708 to the 19808. In 1987, HongKong received over $1 billion in flows, or roughly 3 percent of the world

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Table 2.1: DIRECT FOREIGN INVESTMENT IN SELECTED EAST ASIAN COUNTRIES($ million)

1985 1986 1987 1988 1989/a

ASEAN CountriesMalaysia 694.7 488.9 422.7 719.4 1,845.8Thailand 163.2 262.5 351.9 1,105.7 1,699.4Indonesia 310.0 258.0 446.0 542.0 735.0Philippines 12.0 127.0 307.0 936.0 482.0Singapore 1,046.8 1,714.4 2,902.2 2,785.7 4,041.5

Total ASEAN 2,226.7 2,923.9 4,429.8 6,088.8 8,803.7

Total as Z of global inflowin developing countries 18.9 16.5 21.2 26.7 38.2

China 1,659.0 1,875.0 2,314.0 3,194.0 3,393.0

Korea 234.0 435.0 601.0 871.0 758.0

/a Preliminary figures.

Source: IFS, August 1990.

total. Flows to Singapore also increased sharply over the two decades.Japanese DFI to Korea grew by almost 50 percent between the 1970s and 1980s,with flows more than quadrupling between 1985 and 1987.

2.5 Japanese DFI flows to Thailand more than doubled over the twodecades, attracted by a fast-growing economy and a rapidly diversifying indus-trial base. Malaysia had slow but positive growth between the 1970s and1980s. Flows to the Philippines dropped by 31 percent, mainly due to politi-cal and economic instability. An important new recipient of Japanese DFI wasChina. Flows to China began in 1984; by 1987 China had 4 percent of theJapanese global DFI, about $1.2 billion out of $33.4 billion.

2.6 Application. The composition of DFI in key Asian countries hasvaried according to the economic strengths of the host country. In general,there is a shift from investments; in mining and oil and gas explorationtowards manufacturing and service industries. Again, Japanese DFI in keyAsian countries (for which more detailed data is available) is a good indica-tor of overall trends. About 90 percent of Japanese subsidiaries set up inKorea in the 1970s were in the manufacturing sector. The share dropped toabout 80 percent in the 1980s, but manufacturing was still dominant. InThailand, the manufacturing sector has absorbed about half of Japanese DFI inthat country, and the combined share of commerce and trade sector has been

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20 percent. Some 10 percent of investment has gone to mining, agriculture andconstruction. Malaysia showed a similar pattern to Thailand but is notablefor the increasing share of DFI in its construction sector (from 3.9 percentin the 1970s to 15.1 percent in the 1980s) and for the decreasing share in itsmanufacturing sector.

2.7 Hong Kong has had dominance in the commerce, trade and financialsectors (about 60 percent) with a share of 16 percent to 22 percent of theJapanese DFI in the manufacturing sector. Singapore also has had dominance incommerce, trade and finance (about 30 percent to 50 percent). Compared withHong Kong, Singapore has received a larger share of manufacturing (30 percentto 48 percent) and construction (12 percent) DFI. Singapore is also signifi-cant for the financial sector's increase in share (from 6.4 percent in the1970s to 15.4 percent in the 1980s) and the sharp decrease in DFI in the manu-facturing sector (from 48 percent to 34 percent). In Indonesia, the leadingsector has been the manufacturing sector (about 60 percent). Mining, agricul-ture and construction sectors together have had a relatively large share(about 20 percent). In China, beginning in the 1980s, the main sectors forJapanese DFI have been manufacturing (51 percent) and construction (13 per-cent).

2.8 Leading manufacturing subsectors for Japanese DFI in most Asiancountries in the 1970s were electrical machinery (including electronics), tex-tiles and chemicals. In Korea, Taiwan, Hong Kong and Malaysia these were thetop three sectors, but Asian countries, in general, had comparative advantagein these sectors in the 1970s. The only exception is Singapore, whose negli-gible textile share indicated a lack of comparative advantage in textiles. Inthe 1980s, the textile industry dropped from among the top subsectors inalmost every country except China. In Korea, Taiwan, Singapore and Thailand,more capital- and technology-intensive subsectors such as transport equipmentand general machinery replaced textiles and chemicals. The direction ofJapanese DFI toward electrical machinery could be observed in two broadgroups: its share dropped in Korea, Taiwan and Singapore but increased inThailand, Malaysia and Indonesia. Chemical products and other basic materialindustries, including metals, decreased in share in the 1980s but were stillsignificant in many Asian countries.l/

B. Policies, Regulations, and Institutional Environment

2.9 A comparison of DFI incentives across ASEAN countries indicates thattheir incentive schemes are generally similar in important respects and offerroughly equal inducements (Annex 2). In addition to general incentives interms of tax holiday, duty drawback in case of exports, etc., specific incen-tives and guarantees are provided to, foreign investors in such matters asrepatriation of profits, dividends and capital expropriation, nationalizationand so on. The relative attractiveness of individual countries is notaffected by their incentive schemes because of similarity of such schemes; anychange in one country is matched by similar incentives by other countries.

11 See Hyun and Whitmore, 1989.

2.10 There are certain common features in ASEAN and other NIEs in Asiawhich have made them attractive to foreign investors by distinguishing themfrom other countries. These include: prominent role of the private sector,liberal opening of fields of investments to foreign and domestic companies;lowering, simplification, and/or removal of tariffs and surcharges; relaxa-tion/deregulation of investment and capacity licensing system; relaxation offoreign investment regulations; and liberal foreign exchange policies. Inaddition, these countries are continuously contemplating further simplifica-tion, streamlining and relaxation of regulations covering DFI. For example,in the Philippines, during 1988, foreign investors were permitted to avail ofdebt-to-equity swap facilities whereby they could purchase Philippine externaldebt at a discount and use it to convert their peso investment needs. Thegovernment is also considering replacing the present negative list that con-tains the business areas from which the foreign investment is prohibited by ashorter and transparent negatives list. Also, consideration is being given torelaxing the upper limit of 40 percent which is presently applicable to for-eign investments in many areas. A similar relaxation which may allow majorityownership (51 percent) to foreign investors in all but extractive and strate-gic industries is under consideration in Indonesia.

C. Lessons Learned

2.11 Throughout the world, most of the foreign investment is made by MNCswhich respond to two basic factors: (a) safety of investment, and(b) opportunity for profit. Macroeconomic and political stability is centralto a country's attractiveness as a DFI location because it is considered cri-tically important by foreign investors for both the safety of the investmentand the realization of opportunities for profits. Sound macroeconomic andsectoral policies and well-prepared sectoral development programs can providean effective and efficient framework for DFI and help to avoid many of itsnegative aspects. Such policies and programs, together with a smoothly work-ing investment approval mechanism are often more important than financialincentives and regulatory policies.

2.12 There are five other main areas in which developing countries couldimprove the general operating environment and attract more foreign investment.First, many countries could benefit from improvements in their physical infra-structure. A functioning infrastructure, including roads, ports and telecom-munications facilities, would greatly increase a developing country's chancesof attracting DFI.

2.13 A second area, closely related to infrastructure, is training andhuman resource development. Many foreign investors experience the scarcity ofmiddle level technical workers, and generally low levels of productivity amongunskilled or semiskilled workers. As production processes in many industriesbecome more sophisticated, the ability to provide relatively low cost labor,with narrow or limited skills, will not necessarily ensure the future successof many developing countries as sites for assembly or manufacturing foreigninvestors. Countries should evaluate their educational and vocational train-ing policies, in collaboration with local and foreign firms, to make sure thatadequate training programs are designed to meet industry's current and futurelabor requirements.

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2.14 Third, developing countries should encourage the development of nec-essary support industries that provide basic machinery and parts, materialinputs, components, and testing services to foreign investors. Most foreignfirms would be willing to use more local inputs if these were available andcompetitive on a quality and cost basis.

2.15 Fourth, an area which could be improved in many developing countriesis administration and overall bureaucracy. Bureaucratic red tape and import-export bottlenecks are considered by foreign investors as the chief problemsin their DFI operations.

2.16 Fifth, most developing countries would greatly improve their chancesof capturing DFI by providing better information on investment opportunitiesin their economies. A major reason for most riCs decision to invest in EastAsia was availability of information on the quality of the workforce, infra-structure, and incentives offered by the host country.21

III. CURRENT STATUS OF DFI IN CHINA

A. Background

3.1 Due to historical and ideological reasons, direct foreign investment(DFI) in China 3/ was very limited before the 1979 economic reform. Duringthe 1950s, DFI was restricted to some technology transfer type of cooperationwith the Soviet Union and other Eastern European countries. After the with-drawal of Soviet economic assistance in 1960, China allowed similar coopera-tion with MNCs from Western Europe and Japan. Total DFI was $6.4 billion asof end-1978.

3.2 In order to achieve the objective of raising the living standard ofits people through economic development, the Chinese realized that they had tohave greater access to Western science and technology. China announced itsambitious program for economic cooperation in the Fifth Ten-Year Plan at theend of 1978. This program called for high investment in the economy and DFIwas to be used to accelerate the process of technology transfer as well as toprovide foreign exchange in addition to loans from international agencies.China's main objective in attracting DFI is to supplement domestic sources of

2/ See Whitmore, Lall and Hyun, 1989.

3/ The definition of DFI here is broader than the conventional understandingof DFI. It includes not only investment in equity joint ventures (JVs)and wholly foreign-owned ventures (WOVs) but also foreign-funded coopera-tive ventures (CVs), cooperative development of natural resources, com-pensation trade and even processing and assembly arrangements. Fordetails, see Annex 3.

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capital, to have greater access to administrative science, technology, manage-ment skills and international distribution channels.4/

3.3 In order to attract DFI, the government has taken measures todevelop the institutional infrastructure and to adopt laws to regulate thelegislative, administrative and judicial organs since 1978. For example, theJoint Venture Law was promulgated in mid-1979 and gave an unprecedentedencouragement to DFI generally. The Joint Venture Income Tax Law, the ForeignEnterprise Income Tax Law offering tax incentives to encourage foreign trans-fer of advanced technology on preferential terms, and the Civil Procedure Lawfor resolving disputes involving foreigners were promulgated between 1980 and1982. Additional incentives and safeguards were provided through "22 Arti-cles" of October 1986 (see para. 3.15). The Foreign Economic Contract Law of1985 offered guidance for virtually all kinds of contracts between foreigncompanies and Chinese legal persons including foreign-invested ventures. Reg-ulations governing the licensing for importation into China of various typesof technology were also promulgated. A comprehensive system regarding patentprotection and trademarks was established and, more recently (October 1990),the copyrights law was adopted. Two sets of implementing rules regardingimport substitution were established in 1987, and regulations on the contribu-tion of capital for JVs and CVs were drawn in 1988. Bilateral agreements onthe avoidance of double taxation and bilateral agreements for the mutual pro-motion and protection of investments against political risks such as thoserelating to repatriation of funds and compensation for expropriation weresigned with more than 18 countries by the end of 1987. An updated summary ofinvestment incentives offered by various laws is given in Annex 4. It wouldbe observed that while the preference for investment in export-oriented orforeign exchange earning ventures is fully supported by various tax holidaysand import duty exemptions, the preference for technology-transfer ventures isnot reflected in the package of investment incentives offered to foreigninvestors. Among the wide range of such incentives, only a few are related tohigh technology industries and incentives for R&D in China are virtuallyabsent.

3.4 The "open-door policy' introduced in China in 1978 did create greatenthusiasm among potential investors. However, the overall pattern of commit-ments of DFI has been irregular. There have been periods of rapid increasesand slowdowns, reflecting adjustments in the government policy and changes inpriorities from time to time. More recently, the events of June 4, 1989affected the confidence of foreign investors, and caused a decline in foreigninvestments.

B. Performance Analysis

3.5 From 1979 to June 1990, China has approved 24,565 contracts withtotal foreign investment commitments of $36.1 billion. The actual utilizedamount as of June 1990 was only $16.7 billion, i.e., a 48 percent utilizationrate. Total DFI in China grew at an average rate of 34 percent per annum from1983 to 1989. As shown in Annex 5, the volume of contracted DFI has varied

4/ See Cohen and Valentine, 1987.

from year to year, but the actual utilized amount has increased steadily. Theausterity measures imposed by the central government in 1985 and 1988 haddefinite impact on DFI flow to China. For instance, the contracted DFI in1986 was only half of the value in 1985 and reflected China's increasinglyselective policy of screening out many nonproductive projects as well as thecentral authorities' tightening of credits and foreign exchange in mid-1980s.The austerity program introduced in late 1988 resulted in a significantdecrease in the growth rate of DFI. In 1989, the growth rate of contractedDFI was only 5.7 percent, compared to 30.9 percent and 42.8 percent in thepreceding years.

3.6 Despite a slowdown after the June 4, 1989 events, total approvals ofDFI for the whole of 1989 were $5.6 billion (5,784 contracts) compared to$5.3 billion in 1988. The DFI amounted to $6.6 billion (7,276 contracts)during 1990. The average size of an approved DFI in the 1988-90 period wasnearly $1.0 million. DFI in China is predominantly in equity joint venturesand cooperative operations.5/ These two types of foreign investments con-stituted 89 percent of total DFI between 1984 and 1989. Towards late 1980s,the share of total DFI in JVs has gradually increased to more than 50 percent,while the share in CVs has decreased to less than 30 percent. The decreasingshare in CVs was filled by the increasing investment in WOVs. This type ofinvestment was not given much preferential treatment in early 1980s because itwas considered to have limited ability to transfer technology or managementskills. In 1986, as part of China's major effort to attract foreign invest-ment, the central authorities promulgated legislation offering tax incentivesto attract this type of investment. The result was a surge of DFI in WOVsfrom $20 million (0.7 percent of total DFI) in 1986 to $471 million (12.7 per-cent) in 1987 and, since then, WOVs have remained a significant part of DFI.

3.7 China has also been the major source of DFI among low- and middle-income countries. The total outflow of DFI from China was $3.35 billion in1985-89. While the specific destination and purpose of this investment is notavailable, it is believed that the bulk of Chinese DFI has gone to investmentin properties and businesses in Hong Kong. Other investment has been in basicmaterial and technological industries in developed countries such as forestryand paper in Canada, iron ore mining and aluminum in Australia, and petrochem-icals and high-tech ventures in the US.

3.8 Distribution by Source of Investment. More than 40 countries fromall over the world have direct investment in China, but more than three-quarters of the amount has come from China's neighboring economies. Hong Kong(including Macao) ranks first in its share in China's total DFI from 1985-89(61.5 percent), Japan ranks second (12.8 percent), and the United States ranksthird (11.2 percent), followed by Taiwan (7.6 percent), Britain (1.1 percent),France (0.9 percent) and Italy (0.7 percent) (Annex 6). Most other countrieshave an insignificant share in China's total DFI. However, the actual Westerninvestment in China is probably much higher than the recorded statistics sincea number of the Hong Kong investors represent a combination of Western compa-

5/ See Annex 3 for definition.

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nies and local investors. Also, a part of the total investment from Hong Kongmight have been indirect investment from Taiwan.

3.9 During the 1980s, more than half of Hong Kong's overseas investmentwent to China. China's ability to attract investment from Hong Kong wasmostly due to geographic and cultural proximity and not entirely because ofthe incentives offered by the Chinese authorities. In fact, the incentivesoffered by the Chinese are quite comparable to those offered by the neighbor-ing economies such as Indonesia and Malaysia (see Annex 2).

3.10 Hong Kong firms in China are predominately involved in highly labor-intensive assembly and subcontracting operations, producing mainly travelgoods, handbags, toys, and footwear. It is estimated that over 80 percent ofthe output by the Hong Kong-invested enterprises was shipped back to Hong Kongas reexports. Most of the plants are located in SEZs in neighboring Guangdongand Fujian provinces.

3.11 Japan is the second most important source of China's DFI inflow.Japanese DFI in China, which was insignificant until 1984, consistently laggedbehind that of Hong Kong and Macao. It ranged from a low of $220 million(9.5 percent of the total) in 1987 to $515 million (16.1 percent of the totaland 4 percent of Japanese total :DFI abroad) in 1988.

3.12 Mainland China is the second largest recipient of Taiwan's DFI flowsto Asia. According to official statistics, by the end of 1989, there was $1billion Taiwanese investment in the mainland concentrating in light manufac-turing sector. There is an increasing emphasis on heavy industry recently,but it appears to also include the transfer of some polluting chemical plantsfrom Taiwan to the mainland. The official figures are the low end estimate ofTaiwanese investment. In the past 10 years, enterprises from Taiwan have beenrerouting their investment to China via Hong Kong, Singapore, the UnitedStates, and the Philippines in order to protect themselves from the local banon direct links to the mainland. Consequently, a significant share of invest-ment from these countries is actually money from Taiwan, although the magni-tude of such share is unknown.

3.13 Since mid-1988, Taiwan's investment in the mainland has been offi-cially recognized by the government, and the environment for Taiwanese DFI hasbeen greatly improved. In July 1988, the central government promulgated pref-erential treatment to Taiwan investors by passing the "National Regulations onEncouraging Taiwan Compatriots' Investment." This legislation allowsTaiwanese investors special privileges not available to other foreign inves-tors. Following the central government's lead, local and provincial authori-ties sometimes offer even greater preferences to the Taiwanese investors.SEZs like Xiamen, Shantou, Zhuha:L, and coastal cities like Guangzhou andFuzhou all offer longer tax holidays (3-4 years instead of 2 years commonlyoffered to other investors) and lower land-use fees, etc. The Taiwaneseinvolvement in the mainland is expected to rise as a result of both the offi-cial recognition of Taiwanese investment in China by both governments, and thenew wide range of incentives offered exclusively to Taiwanese investors bylocal governments.

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3.14 Distribution by Region. The distribution of DFI in China is highlyuneven among regions. China initially extended incentives to foreign inves-tors in the four coastal SEZs that were established in 1979 (Annex 7). Itgradually expanded such incentives to the 14 open cities, and trade develop-ment zones. As a result, DFI is highly concentrated in the traditional indus-trial centers among the 14 coastal cities and the five SEZs.6/ These 19cities received 48 percent of total DFI in 1989. Guangdong province, contain-ing the coastal cities of Guangzhou, Zhangjiang, the Shenzhen, Zhuhai, ShantouSEZs and the Pearl River Delta open economic zone received the largest portion(41.1 percent) of the accumulative total as end of 1989 (Annex 8).

3.15 Distribution by Sector. China has always given general preferencefor investment in high technical and export-oriented fields. It has identi-fied transportation, communication, energy, metallurgy, construction materi-als, machinery, chemical, pharmaceutics and medical equipment, and electron-ics, as the key sectors for foreign investment. Despite such a priority list,decisions at the provincial level have favored investment in fast-earning ven-tures such as hotels and production of consumer goods. As a result, it isbelieved that the service sector has received the largest portion of total DFIinflow. Unfortunately, official statistics by sector are not available. How-ever, it has been reported that between 1978 and 1988, over $4 billion in DFIfunds were actually invested in luxury hotels, taxi services and other touristfacilities. Between 1979 and 1984, 69 percent of the investment by Hong Kongand Macao and 59 percent of those by Japanese were in service industry. Theenergy sector received $2.17 billion of foreign capital in 1980-87.

3.16 DFI flow to the manufacturing sector was nominal in the early 1980s.In order to promote DFI in export or advanced-technology sectors and to dis-courage investment in hotels and other service enterprises, the Provisions ofthe State Council of the People's Republic of China for the Encouragement ofForeign Investment, (commonly known as the "22 Articles"), were enacted in1986. These "22 Articles' basically recognized two basic categories of DFI,regardless of the types of ownership. The two categories are: the productiveventures entitled to maximum incentive if they qualify as either "exportenterprises" or "technologically advanced enterprise" and other foreign-invested enterprise, which are allowed to enjoy only some of the benefits thenew legislation makes available to enterprises in the first category. Thenonproduction ventures, such as hotels and other services, do not receive allthe benefits enjoyed by other enterprises in the second category. In 1986,induced by the new incentives offered by the 22 Articles, 76 percent of thetotal DFI was for productive projects in fields such as industry, transportand telecommunication. Moreover, with an increase in investment from Japanand Taiwan which tend to emphasize manufacturing industries over the service'industries, the rate of growth of investment in the manufacturing sector wasaccelerating towards the end of the decade.

6/ The 14 coastal cities are: Dalian, Qinghuangdao, Tianjian, Qingdao,Yantai, Shanghai, Nantong, Lianyungang, Ningbo, Wenzhou, Fuzhou,Guangzhou, Zhangjiang, and Beihai. The five SEZs are: Shenzhen, Zhuhaiand Shantou in Guangdong province, Xiamen in Fujian province and Hainanprovince.

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C. Post-Tiananmen Developments

3.17 New DFI flow to China began to slow in the third quarter of 1989after the Tiananmen events. Total contracted DFI in 1989 was $5.6 billion,5.5 percent increase from 1988 compared to a 43 percent increase from 1987 to1988. As shown in Table 3.1, contracted DFI in the fourth quarter of 1989decreased by 43 percent compared to the same quarter in 1988 and 22 percentcompared to the third quarter of 1989. The contracted DFI fell another23 percent in the first quarter of 1990 over the previous quarter, but itstarted picking up in the later part of the year and recorded an increase of17.9 percent for the whole year. Actual DFI did not decrease as much as thecontracted DFI in the last quarter of 1989 indicating that foreign investorscontinued to honor earlier commitments. Total utilized DFI was $3.34 billionin 1989, a 4.4 percent growth from 1988 following a 38 percent growth from1987 to 1988. The utilization rate remains at around 60 percent since 1986.

Table 3.1: CONTRACTED AND ACTUAL DFI IN CHINA: 1988, 1989, AND 1990($ billion)

% Change % Change1988 1989 1988/89 1990 1989/90

ContractedJanuary-June 2.09 3.01 +44.02 2.35 -21.93July-September 1.23 1.45 +17.89 4.25 1 +64.73October-December 1.98 1.13 -42.93

ActualJanuary-June 0.99 1.20 +21.21 1.23 +2.50July-September 0.61 0.80 +19.00 -

October-December 1.60 1.32 -17.50 -

Source: East Asian Executive Reports, April 1990, and China Economic News,May 1990.

3.18 Although the Tiananmen incident did have a negative impact on Taiwaninvestment, it was not as severe as the impact on Japan and the West. Forinstance, the growth rate of Taiwan's investment in the mainland slowed downfrom 40.9 percent in the first six months to 22.6 percent in August and4.24 percent in September 1989; 'US investment levels, by contrast, were nega-tive for the same period. The Japanese DFI in China was accelerating in thefirst six months of 1989, but it dropped by 63 percent in the second half ofthe year compared to the same period in 1988.

3.19 Even though most foreigners are still slow in resuming investment,Taiwan's investment in the mainland in 1990 was expected to double that of1989. In fact, in July 1990, the Taiwanese government issued a preliminarylist of 2,000 product categories for investment in the mainland. These are

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mainly labor-intensive products and low-technology electrical consumer goodsin which Taiwan is no longer competitive. As a matter of further liberaliza-tion, only projects in excess of $1 million will now require prior approval ofthe Taiwanese government.

3.20 With regard to sectoral preference, the central government has reas-serted authority since the Tiananmen incident and DFI proposals are expectedto be more carefully screened in favor of high-technology development proj-ects.

IV. IMPACT OF DFI IN CHINA

A. Gains from DFI

4.1 A full assessment of gains from DFI in China is difficult at thisstage because it is of a relatively recent origin and many of its long-termeffects have not yet materialized. Moreover, complete information needed foran overall assessment is unavailable due to the limited access to data. How-ever, a preliminary assessment of DFI performance in China is still possible.There are seven areas in which DFI is believed to have most directly affectedChina's economy. These are: technological progress, enterprise management,foreign trade, capital contribution, government revenue, local employment, andincome distribution. Although there were limits and costs, initial DFI per-formance has made a significant contribution to China's economic developmentas explained in the following paragraphs.7/

4.2 Technological Progress. DFI has contributed to China's technologi-cal progress. Several aspects of technology transfer through DFI are worthparticular attention. First, the transfers tended to be pragmatic and toemphasize the economic result. Compared to the state enterprises, the foreigninvested enterprises (FIEs) were more conscious of cost-benefit calculations,and were therefore more careful in selecting the appropriate technology. MostFIEs actively adopted technology if it would improve the quality and varietyof their products. On the other hand, if the technology developed abroad wasmore labor saving in nature, many FIEs chose not to use it. For instance, inGuangdong province, where DFI was concentrated in the processing and assembl-ing industry, FIEs often operated with local facilities or secondhand equip-ment from Hong Kong. In the early stages of joint venture formation, theinsistence of foreign partners on using the most pragmatic production meanswas often a source of friction as the Chinese partners were anxious to adopt"the most advanced technology." In most cases, however, the partners eventu-ally agreed that the method that produced the best economic result for thefirm should be adopted. Second, obtaining technology through DFI appeared tobe more effective than other forms of technology transfer, such as machineryimport or licensing arrangements. This seemed particularly true in thoseindustries where high-tech transfer was involved and the technology involvedwas often of an exclusive nature. DFI in the form of Sino-foreign joint ven-

71 See Shen, 1990.

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tures offered a common interest and an institutional framework that encouragedand facilitated normally difficult technology transfers. Third, the technol-ogy in these fields was more complicated and often required an intensive humaninteraction. Technology obtained through DFI was typically packaged with man-agement know-how, personnel training, and on-the-spot cooperation between for-eign and Chinese technicians, all of which are crucial to the successful adap-tation of complicated technology. Fourth, FIEs sometimes allowed dynamictechnology transfer, which was particularly useful in those industries wheretechnological progress and replacement were rapid. Many Sino-foreign jointventures concluded technology transfer agreements that enabled the recipientsto follow closely technological developments abroad.

4.3 Enterprise Management. The success of technology transfer was oftenclosely related to improvements in enterprise management. FIEs typicallyadopted either partially or entirely the management system introduced by theirforeign partners. As a result, most of them reported major improvements inproductivity and efficiency though they were slow to come in joint venturesformed on the base of original SOEs.

4.4 Foreign Trade. The impact of DFI on China's exports remained rela-tively small up to the end of the decade, but it was growing rapidly. Accord-ing to official sources, exports by foreign invested enterprises (FIEs) inChina as a whole almost doubled every year between 1984 and 1988, to reach$2.4 billion in 1988. Their share of the country's total exports steadilyincreased--from less than half a percent in 1984 to about 6 percent in 1988and about 13 percent in 1989. The impact of DFI on exports was most prominentin Guangdong, the province known for using such investments primarily todevelop its export industries. Guangdong doubled its total exports between1984 and 1986. FIEs accounted fEor a large proportion of the total: in 1984,the absolute value of exports by the FIEs in the province was $115 million, or5.3 percent of the province's total exports; in 1986, it was $750 million, or17.9 percent of total exports.

4.5 Capital Contribution. One measure of what DFI has contributed tothe Chinese economy is the absolute amount of capital attracted through thisparticular channel. A successful solicitation of $36 billion in DFI commit-ments, or $17 billion actually utilized, within a period of one decade pro-vided a powerful supplement to the limited domestic supply of capital.Although DFI capital actually utilized constituted only about 2 percent of thetotal national gross investment during the decade, it had a much greater rela-tive impact in the coastal regions, where DFI was concentrated. For example,during the first six months of 1988, actual DFI inflow--measured at the offi-cial exchange rate of $1 = Y 3.71--amounted to 13 percent of the total invest-ment of fixed assets in the 14 open cities and over 60 percent of the grossinvestment in the five SEZs. Measured at a more realistic exchange rate of$1 = Y 5, the share of DFI in total investment in the 15 open cities and thefive SEZs would be 17 percent and 82 percent respectively. DFI as a supple-ment to available supplies of capital was all the more essential because thecapital it provided was in hard currency.

4.6 Government Revenue. The contribution of DFI to China's state reve-nues has only recently attracted attention. Like most other developing coun-

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tries seeking to attract DFI, China granted special tax incentives and licenseprivileges to foreign companies. In the early stages of the practice, there-fore, tax income collected by the government was limited.

4.7 However, as time went on and as more and more FIEs in the countrybecame profitable, and therefore taxable, government revenue increased signi-ficantly. According to one official source, the Chinese government receivedin 1986 a total revenue of Y 840 million from the 1,178 FIEs operating thatyear in China, Y 270 million in the form of corporate and income taxes andY 570 million in customs duties. This was about half of the total profitsgenerated by the FIEs. If one adds the profits shared by the Chinese part-ners, who by and large represented the government in a different form, China'stotal gain was three-fourths of all profit yielded by the FIEs that year.

4.8 Local Employment. The impact of DFI on local employment is a com-plex matter; it may have reduced employment in some over-staffed joint ventureenterprises while created jobs in others. Overall, as the activities of FIEs,especially those in export-oriented manufacturing, expanded rapidly, theyhired increasingly large numbers of local employees. According to one prelim-inary estimate, some 300,000-500,000 Chinese men and women were working forthe 6,000 or so FIEs in operation in the country by early 1988. If oneincludes the offshore processing and assembling enterprises, the workersinvolved numbered between 1.5 million and 2.0 million.

4.9 Income Distribution. DFI activities unquestionably contributed toan overall increase in incomes, but the distribution of the benefit tended tobe uneven, both by regions and locality. In Guangdong province, where one-third of the local labor force was involved in such activities, the improve-ment in living standards was quite remarkable. In 1978, the province rankedtenth in the country in per capita income; by 1987, it ranked first.

4.10 The above analysis of DFI's impact on China's economy, though preli-minary and often unquantifiable, demonstrates that the benefits to China ofDFI were quite significant. Especially in the areas of capital contribution,technological progress, balance of payment and enterprise management, DFIappeared to have contributed very positively to China's economy.

B. Assessment of Trends and Patterns from the Perspective ofChina's Development Goals

4.11 Size of DFI. China has received increasing amounts of direct for-eign investment. It doubled from $1,659 million to $3,393 million during1985-89. However, compared to many other East Asian countries, the growth wasless spectacular, particularly considering that China being a newly openedcountry had a greater potential for DFI. Singapore, Malaysia, Thailand,Indonesia, the Philippines and Korea experienced much faster growth in DFIduring the same period and the absolute amounts were also quite large consid-ering the relative size of their economies. In retrospect, China could havereceived even larger investments if it had followed a more stable and well-articulated policy on DFI and had taken prompt measures to alleviate the con-straints and problems faced by FIEs in China. (See Chapter V.)

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4.12 Development Impact. The two main development objectives of Chinafor opening up to DFI are technology transfer and export earnings; other bene-fits of DFI, e.g., resource mobilization, employment, backward and forwardlinkages are not considered of prime importance in China.

4.13 A dominant reason for, and objective of, DFI has been the transferof technology to China to modernize the economy and to make it more efficient.The above objective has been achieved with reasonable success, particularlywith respect to labor-intensive technology needed for small and medium-sizedindustrial enterprises. Investors in SEZs and other coastal areas are largelyfrom Hong Kong which is not an original innovator and its technology lagsbehind that of Western industrialized nations. Furthermore, most enterprisesin Hong Kong are small in size and adaptable to market changes by employinglabor-intensive techniques. A great majority of these enterprises dependmainly on cheap labor, with operations generally confined to technically sim-ple assembly or packaging work. The technology thus transferred from HongKong (and also from Taiwan) is not the most modern, but, generally, it isstill new for China and appropriate considering the abundant supply of cheaplabor.

4.14 The investment originating from the United States, Japan and otherindustrialized countries forms about 30 percent of the total DFI in China. Amajor portion of this investment has gone to offshore oil and gas drilling,construction and service industry with limited technology transfer impact.The remaining investment which has been channelled to the manufacturing indus-try, particularly aimed at the domestic market, has brought modern technologyto China. US firms have been in the forefront of modern technology transfer,particularly in the fields of transportation (locomotives, airplanes, jeeps),satellite telecommunications networks, and computers and electronics. Over-all, while the DFI has not contributed significantly to the introduction of"modern technology' to large and heavy industries in China--at least to theextent desired by the government---it has helped to reinforce the importance of"appropriate technology" in the minds of the Chinese authorities and counter-parts by learning from foreign investors that sound investment decisions areguided by considerations of maximnizing benefits and minimizing costs and "themost advanced technology" is not necessarily the only solution in all cases.

4.15 Along with the transfer of technology, the Chinese managers andstaff working for FIEs have learned modern management techniques and have alsoreceived necessary training. However, the use of their newly acquired know-ledge is confined to FIEs because if and when they move to Chinese enter-prises, they have to follow local regulations and practices. The impact ofthis knowledge on Chinese enterprises would only be felt in the long term whenthe government's policies and procedures towards SOEs will change and theywill start functioning in a more market-oriented environment. In fact, thelessons learned from FIEs with respect to ownership, management, organiza-tions, systems, policies and procedures, can be well reflected in the enter-prise reforms already underway in China. Many features of FIEs (e.g. separa-tion of ownership from management, joint-stock system, greater freedom to hireand fire the labor, profit centers in factories, incentive systems for manag-ers and workers, etc.) which have amply demonstrated their benefits can be

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adopted in China in general and help to accelerate the enterprise reform pro-cess.

4.16 Export promotion is the other important objective of the government.This objective is to be achieved in two ways: direct export by FIEs andlearning of proper marketing strategies, methods, procedures and channels ofdistribution by the Chinese counterparts and employees of FIEs. In 1989, thetotal exports of FIEs located in Guangdong, Hainan and Fujian and the SEZswere $6.3 billion and were about double that of 1988. If exports of FIEs inJiangsu and other provinces are included, the total exports would be wellabove $7.0 billion or at least 13 percent of total exports from China. How-ever, import figures of FIEs are not available and therefore it is difficultto estimate net foreign exchange earnings and thus to assess the real impacton the balance of payment. Also, an estimate of the net foreign exchangeimpact has to take into account direct and indirect costs of SEZs that havebeen developed and operated by government agencies but such data is not avail-able.

4.17 Overall, the investment from developed countries is in more capital-intensive and less export-oriented projects. Even in the case of this invest-ment which is generally in high technology, the long-term prospects forexports by many projects are good as economic levels of operation are achieved(resulting in a decrease in the marginal cost of production), and overallimprovements are brought in production methods, management skills, workerefficiency and product quality.

4.18 As regards the knowledge of foreign markets, experience through FIEshas been useful but of limited relevance. So far, FIE exports from China havecomprised mainly textiles, garments, electronics, leather goods and otherlight industry products. In the future, China plans to diversify its exportsby promoting high-tech and heavy industry products and needs to gain the nec-essary marketing know-how and skills in this area. FIEs in China have yet tomake significant exports of the above-mentioned products, and thus, to impartrelevant experience to the Chinese side.

4.19 DFI's contribution to capital investment was particularly salient incertain sectors of the economy (Shen Xiaofang). The sector that absorbed thelargest proportion of DFI, and also the one that caused the most controversy,was the tourist industry. Between 1979 and 1988, over $4 billion in DFI fundswere actually invested in luxury hotels and other tourist facilities in themetropolitan cities. The rapid growth of China's tourist industry contributedsignificantly to the national economy in the last decade, and that such growthwould not have been possible without DFI. In 1988, for example, the countryreceived a total of more than 31 million tourists from overseas, and therebygained $2.22 billion gross income in hard currency. Moreover, the building ofhotels might be a net gain to China as many of the tourist facilities actuallycost the Chinese partner little cash during their construction and the owner-ship of most will pass completely to China within 15 years. Foreign invest-ment in hotels and other tourist facilities also resulted in the transfer ofrelated technology and management skills and the development of certain localsupport services.

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4.20 Another major beneficiary of DFI was the energy sector, especiallyoffshore oil development. In 1980-87, the country signed 33 joint explorationand exploitation contracts with 12 countries, attracting $2.17 billion offoreign capital, a substantial part of the total investment in the energysector. By the end of 1987, 162 exploratory wells had been drilled alongChina's continental shelf. They helped China discover a few valuable fieldsof oil and natural gas, establish a primary offshore oil base, and, moreimportant, compile valuable firsthand information in its offshore oil depos-its. DFI participation clearly relieved the Chinese government of a sizablefinancial burden in accomplishing these tasks.

4.21 The foreign investment in offshore oil and gas exploration wouldhave been much higher if the foreign exchange balancing requirement for indi-vidual projects (see para. 5.5) had not precluded the entry of many potentialinvestors. Even in those cases where foreign investment has resulted in gasdiscovery, the development of gas fields has not been possible because the gascan only be used for domestic purposes and its export is not feasible to earnforeign exchange needed for debt--serving and payments to foreign oil/gas com-panies.

4.22 The government's restrictive policy on foreign investment inonshore exploration of oil and gas has also hampered the efficiency and effec-tiveness of the country's energy development program. Specifically, prospec-tive underexplored onshore areas, notably in Tarim Basin, need to be opened upfor DFI participation. The investment of foreign investors would provide aninfusion of much needed investment: capital, share some of the risks of explo-ration with the host country, and most importantly, facilitate the transfer ofmodern technology needed for exploration in the prospective areas.

4.23 Although the contribution of DFI to the industrial manufacturingsector has been relatively small, it was accelerating toward the end of thedecade. In 1988, for instance, over 80 percent of the DFI projects approvedwere reportedly related to manufacturing activities. Moreover, the benefit toChina from use of DFI in this sector might be greater than it at firstappears, considering the fact that many Chinese partners used existing plantsand facilities as their major conitribution to the joint ventures formed inthis field. The practice not only saved the Chinese cash inputs but alsohelped them renovate their old plants, which otherwise would have required alarge amount of their own capital investment.

4.24 The Chinese government's objectives for DFI do not explicitlyrecognize the importance of backward and forward linkages that can be createdas a result of foreign investment in large industrial projects. Such linkagesnot only promote the development of feeder and downstream industries but alsohelp to improve the cost-efficiency and quality of products of such indus-tries, which in turn, could also enhance their potential for increasingexports. Other East Asian countries have placed high importance on the devel-opment of backward and forward linkages in relation to FIEs and China alsoneeds to move in this direction by adopting appropriate policies and strate-gies.

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4.25 As mentioned in para. 1.3, DFI in the service sector has grownworldwide in recent years. The investment has been channeled mainly to bank-ing, insurance, advertising, consultancy, communications and transportation.The experience of developed countries has shown that the efficient growth ofthe above services is crucial to the development of economy, particularly theindustrial sector. In China, these services, especially banking, insurance,consultancy, shipping and aviation, are still in a rudimentary stage of devel-opment and virtually closed to foreign investment. China should reconsiderthis policy and open up the service sector for DFI. It would help to improvethe quality and efficiency of various services to international standards. Asa result, the development of the real sector will be accelerated and foreigninvestment therein from developed countries will also be facilitated.

4.26 Regional Impact. The geographical pattern of DFI in China islargely reflective of the government's open-door policy which has been imple-mented gradually. In the early years of reform (i.e., 1979-82), the govern-ment solicited DFI in the four SEZs (later expanded to five) which wereregarded as "experimental labs" as well as windows for obtaining capital andmodern technology and promoting exports. SEZs offered a more developed infra-structure, minimal controls by the government and tax incentives which made abig difference, compared to the rest of the country. During 1983-85, 14coastal cities and three deltas along the east coast were also opened up forDFI, and the government issued new regulations in 1986/87 to encourage DFI.This was followed by the "gold coast" development campaign of 1988. At thesame time, the bulk of the investment that came from Hong Kong and Taiwan wasdirected mainly to Fujian and Guangdong provinces because of proximity andethnic ties; although in later years other coastal cities were also signifi-cant beneficiaries of such investment. All the above factors led to DFI'sconcentration in the SEZs, and coastal cities. Such investment also had aspillover effect as adjacent non-SEZs learned from SEZs, and created attrac-tive investment atmosphere for contractual joint ventures.

4.27 The status of economic infrastructure also had a significant impacton attracting DFI. For example, Fujian was granted similar status asGuangdong in 1979, but its extremely poor infrastructure failed to attracteven the most enthusiastic overseas Chinese investors. Given the special eco-nomic zone status, and other preferential terms, only one wholly foreign-ownedenterprise and a few joint ventures contracts were concluded in 1979-83. Theimprovement of infrastructure (such as air and sea transport linkages, waterand electric supply), the expansion of SEZ to the whole Xiamen Island, andless bureaucratic control in later years improved Fujian's competitive posi-tion. Another example of the rapid increase in DFI is the Jiangsu province.Up to 1986, DFI was centered mainly in Nantong and Lianyungang, which in April1984, had been designated open coastal cities. The investment was limited andconfined mainly to small service businesses such as taxi companies, dry clean-ers and restaurants. Only a few manufacturing projects received DFI and thesetoo were aimed at the domestic market. The provincial incentives announced inNovember 1986, which went beyond the national incentives introduced in October1986 ("22 Articles for Foreign Investment"), together with, perhaps moreimportantly, simplified and decentralized approval process for DFI changed theinvestment environment significantly. Jiangsu already offered other advan-tages including a well-developed industrial base, the best internal transport

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network in China, major ports, proximity to Shanghai, lower wages thanGuangdong, and a well trained labor force. As a result, approval of DFI inJiangsu increased from $33 million (33 projects) in 1985 to $302 million (247projects) in 1988. This growth rate was faster than even that of Guangdongprovince. Furthermore, more than 90 percent of investment went to citiesother than the two open cities of' Jiangsu. The province has been able toattract some large industrial pricjects for domestic market, as well as a largenumber of smaller export-oriented projects. The growth trend in DFI inJiangsu is expected to continue in the near future.

4.28 Inland provinces, on the whole, are less attractive for foreigninvestment mainly due to inadequate infrastructure, absence of direct trans-port to the outside world, underdeveloped industrial base, shortage of trainedand skilled work force, and lack of social and ethnic ties with overseasChinese investors. While the above-mentioned geographical pattern of DFI hasnot contributed to a balanced regional development of China, it has been con-sistent with the government's strategy of promoting the eastern region as anengine of growth and the inland provinces to develop and prosper through back-ward linkages.

4.29 SEZs or similar other facilities (often called export-processingzones) are typically established by less developed countries in the earlyyears of their industrial development to attract foreign investment in export-oriented manufacturing activities, Foreign investors are expected to bringtechnical, marketing and managerial know-how; links to world markets; andcapital goods--all lacking locally. The "zones" help to ensure free trade orfree-trade status for export activities and provide sufficient institutionaland physical infrastructure to support exports; two key factors required toinduce foreign and domestic enterprises into export activities. The develop-ment of these zones entails signif'icant capital and operating costs as well assubstantial administrative responsibilities for the government. The benefitsaccruing in the early years of industrial development can justify theseexpenses. However, as soon as the country has acquired adequate know-how andexposure to foreign markets and succeeded in attracting reasonable amounts offoreign investment, it should shiEt its focus of DFI and exports from specialzones to the whole country. This shift should be supported by appropriateforeign trade policies and overall development of infrastructure. China hasnow reached the above stage of development where DFI and development ofexport-oriented industries should now be promoted throughout the country andthe special privileges granted to the SEZs progressively deemphasized.Already, Jiangsu province has taken a lead in this respect and achieved con-siderable success (para. 4.27). T'he Jiangsu experience should be extended tothe whole country, or at least to the entire Eastern Region in the beginning.

V. DFI ISSUES RELEVANT TO CHINA

A. Govearnment Objectives

5.1 The Chinese government has reconfirmed many times in the past yearits commitment to the "open-door" policy. This implies that DFI will continue

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to be welcomed, but, as in the past, the emphasis will remain on technologytransfer and exports. In fact, there will be greater emphasis on the importof modern technology to supplement the flow of labor-intensive technology fromneighboring economies including Hong Kong, Taiwan and Korea. The governmentwill also continue its policy (introduced after 1986) of discouraging invest-ment in the tourism industry which in the past was the largest beneficiary ofDFI. In the future, the manufacturing industry is expected to receive themajor share of DFI.

5.2 China's objectives for DFI in the 1990s should be seen in the con-text of the following key worldwide trends in foreign investment.

(a) the global DFI is increasing rapidly; the present upsurge in oilprices may somewhat slow down the phenomenal growth rate of thepast years, but still the increase would be significant;

(b) DFI is generated mostly by multinationals which are looking forreasonable profits. At least in the project development stage,they would like to be assured of the profit;

(c) the pattern of investment from developed countries has changed fromlabor-intensive and natural resource-related projects to technol-ogy-intensive industries and services aimed at local markets; and

(d) newly industrialized countries (NICs) are investing mainly inlabor-intensive and low-technology industries in other countriesfor export purposes because their own comparative advantage inthese industries has eroded over the years.

5.3 The basic objectives of MNCs continue to be profit maximization,cost minimization and risk distribution or diversification; investment inforeign countries is one of the means to achieve these objectives. However,MNCs' strategy for foreign investment has been changing with new developmentsat home and abroad. Beginning in the late 1960s, several multinationals beganrationalizing their global production. Whereas before most foreign subsidiar-ies had produced finished products, often with technological and intermediateinputs from the parent company, now all the subsidiaries were increasinglylinked into a unified production process. Each performed only those aspectsof the manufacturing process in which it had a comparative advantage. Thissystem is not always confined to transactions among subsidiaries of the sameMNC. Sometimes the arrangements are made between locally-owned companies andforeign-owned companies. Another major shift in the 1970s and 1980s was lessemphasis on investment in primary natural resources (dictated earlier byimportance attached to the safeguarding of supplies of raw materials) andgreater emphasis on maintaining and/or enlarging foreign markets. Anotherarea of increasing investments by MNCs is banking, insurance and other serviceactivities because of their rapid growth and enhanced importance for economicdevelopment. MNCs have also shown a significant shift towards investing indeveloped countries; DFI in developing countries has decreased in real termsin the 1980s. MNCs continue to invest in countries with relatively low laborcosts and other favorable conditions of production, mainly through export-oriented manufacturing and tourism, but NICs are becoming more active in this

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area. The main source of advancied technology is still MNCs from developedcountries.

5.4 The expected rapid increase in global DFI provides possibilitiesfor China to capture a greater share in the future. However, the other keyfeatures of global DFI pose two major conflicts with the Chinese objectivesbecause of the policies and general environment for DFI in China. First, dueto traditional misgivings about foreign businesses, prolonged history of thecentral planning system and the modus operandi of SOEs, the concept of profitas understood in market economies, is still not fully recognized or apprecia-ted in China. Consequently, while foreign investors are motivated by profitconsiderations, Chinese agencies and counterparts have other priorities andconditions which sometimes do not ensure profitable operations of FIEs. Thisproblem would be much more serious for MNCs from developed countries comparedto smaller investors from Hong Kong, Taiwan and Korea who seem to have an edgebecause of geographical closeness, ethnic and cultural ties and/or absence oflanguage barriers.

5.5 The second major conflict arises from the inconsistency in high-technology and export objectives. Advanced technology is generally availablefrom developed countries who would like to transfer it only if they can caterto domestic market needs; exports would follow after several years of opera-tions when international levels of efficiency and economy have been achievedand in many cases exports may not be possible at all. For a project to beexport-oriented from the beginning, its overall production cost would have tobe comparable to that in neighboring Asian countries. China's present compar-ative advantage is likely to be in simple, labor-intensive technologies. Eventhe low wages do not often offset relatively low production efficiency, poorproduct quality, inefficient infrastructure and other unexpected operationalproblems in China. In order to remove the above conflicts, and thus to real-ize DFI objectives fully, further improvements are needed in policies, proce-dures, and infrastructure.

B. Key Issues in the Areas of Policies, Procedures and Infrastructure

5.6 Administrative Controls. The foremost issue for DFI in China isthe excessive involvement of various government agencies on one hand and thelack of readily available information on all rules, regulations, directives,etc. applicable to a particular DFI, on the other. As mentioned in para. 2.10above, the East Asian economies that have been most successful in attractinglarge amounts of DFI have simplified and made transparent all procedures--fromentry to exit--of DFI with minimal government interference. In addition, theyhave provided comprehensive and up-to-date information that may be useful toDFI enterprises in their investment decisions. A reasonable progress has alsobeen made in this regard in China, but still much more needs to be done in thearea of screening and approval of investments and supervision of operations ofDFI enterprises.

5.7 One pervasive characteristic of the environment for setting up ajoint venture is the complexity and the many changes over time of the rules,procedures, incentive structure, etc. (and large number of institutions thatare involved in screening and approval). Ventures of different sizes are sub-

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ject to approval by municipal, provincial, or central authority. Differentministries (or their municipal or provincial equivalents) enter the picture,depending on the sector of the proposed venture. Each special economic zonehas its own set of procedures and incentives. Municipal and provincial gov-ernments frequently issue new rules and permit new incentives, which of coursediffer from place to place. Moreover, these are often not collected in anyone published document, and in some cases are not published/publicized at all.

5.8 To make things easier for the foreign investors, the Chinese gov-ernment in recent years has tried to restructure the system of foreign eco-nomic relations. The steps taken, however, stopped short of fundamentalchange of the domestic system and yielded only limited results. For instance,the attempt to maintain "one window to the outside," i.e., to authorize MOFERTas the sole government agency granting approval to DFI projects, simplyshifted the burden of obtaining individual approvals from the foreign inves-tors to MOFERT.

5.9 As to the screening and approval process, considerable progress hasbeen made in delegating authority to approve DFI ventures below certain sizelimits to provincial and municipal authorities--although these lower levelauthorities may also require difficult and lengthy negotiations. Sometimes,they are much more rigorous in their negotiations than the central governmentwould desire.

5.10 During operation of DFI enterprises, Chinese partners often demandadditional concessions from their foreign partner. These demands are outsidethe agreements already reached. Government officials use occasions whenenterprises need help because of unforeseen problems (sometimes caused bygovernment policy) to extract additional concessions from the joint venture orfrom the foreign partner. Also, ad hoc changes are made in government regula-tions which are often detrimental to the interest of DFI enterprises. Forexample, in February 1990, the government decided to allow enterprises in SEZsto retain 80 percent of foreign exchange earned through export; this limitused to be 100 percent before the austerity program in 1988. In addition, theexchange rate at foreign exchange swap centers was deflated because of thegovernment controls on imports. These two developments reduced Yuan earningsof SEZ enterprises and their export viability.

5.11 The whole area of incentives, screening and approval, and super-vision procedures, a sore point with foreign investors in many countries, hasbeen a matter of more frequent and severe frictions and troubles in China,particularly compared to its East Asian neighbors. Consequently, more effortsare needed in China to eliminate unproductive delays, unjustified demands, andthe proliferation of different agencies that must be dealt with. While thedecentralization of approval powers to provincial and municipal governments isjustified, and probably unavoidable in so vast a country, more stability overtime and more assurance that local authorities practice the general principlesand laws adopted by the central government would also be useful.

5.12 Specific actions needed to minimize and simplify the administrativecontrols would include the following: (a) the government involvement in theapproval/screening of DFI proposals and subsequent affairs of FIEs should be

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significantly reduced through the introduction of clear and transparent rulesand regulations from the entry to the exit of foreign investment; (b) theapproval process (including its timeframe) and incentives should be made uni-form across SEZs, open cities and the rest of China; (c) all investment incen-tives should be made automatic and nondiscretionary; (d) frequent changes inpolicies and procedures should be avoided; (e) contracts between foreigninvestors and local authorities/partners should not be renegotiated unlessabsolutely necessary and unavoidable; and (f) the positive list system ofindustries open to foreign investment should be replaced by a negative listsystem to specify only those industries in which foreign investment is pro-hibited or restricted and immediate approval should be granted to projectssatisfying certain criteria concerning factors such as share and size of for-eign equity in a project.

5.13 In addition to the above actions, a serious consideration should begiven to the establishment of a separate and independent "one-stop" foreigninvestment promotion agency in China. Certain countries (e.g., Malaysia andSingapore in East Asia) had particular success in attracting foreign invest-ment through such agencies. They are responsible for policy formulation andregulation and aggressively seek out new foreign investment. They centralizeall relations with potential project investors, "fathering" each proposal,coordinating bureaucratic action, and ensuring speedy processing. Their stafffollows a project through from its initial promotion to final implementationand also provides post-investment consultancy services. Of course, such indi-vidual relationship depends on the! nature and size of an investment. It wouldbe desirable that the Chinese officials should visit some investment promotionagencies in other countries to gain firsthand knowledge of their organiza-tions, operations, achievements and costs. This would help in the basic deci-sion-making on the establishment of such an agency in China and would alsoassist, subsequently, in the formulation of its structure, responsibilities,staffing plan, etc. The above agency should also monitor the decisions takenat the regional level to ensure that laws, regulations and general guidelinesare being followed invariably.

5.14 Foreign Exchange Availability. Chinese planners recognized in themid-1980s that unless they were willing to allow FIEs some access to domesticmarkets, it would be impossible tc' attract substantial amounts of foreigncapital and technology. Consequently, since 1986, several hundred FIEs,transferring new technology to China for import substitution have been certi-fied as "advanced technology enterprises" which entitles them to sell theirproducts in the domestic market. Hiowever, due to nonconvertibility of theYuan, the enterprises are still expected to balance their foreign exchangeneeds. The government has issued various laws and regulations to help nonex-porting enterprises to acquire foreign exchange for this purpose. For exam-ple, local enterprises buying FIEs' products may be required to pay in foreigncurrency; FIES may reinvest their Yuan profits in Chinese foreign-exchangegenerating enterprises open to foreigners; FIEs may export products made byother Chinese enterprises; and foresign exchange may be purchased in newlyestablished "foreign currency adjustment centers". Also, in exceptional casesand subject to certain conditions, the government may provide the necessaryforeign exchange to some technolog:Lcally advanced enterprises that are havingtemporary difficulties balancing foreign exchange in the early years of pro-

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duction. While all the above measures help to mitigate the problems faced byforeign investors in meeting their foreign exchange needs, they do not com-pletely offset the effects of nonconvertibility of the Yuan and continuingemphasis on the foreign exchange balance requirement. There are only a fewcountries (Egypt, Mexico and Yugoslavia) that allowed DFI but imposed a bal-ancing requirement for foreign exchange. The requirement has worked verybadly in these countries, having been abandoned in Egypt and Mexico and fre-quently modified, without success, in Yugoslavia.

5.15 The best solution of the above-mentioned problems is the free con-vertibility of the Yuan. Until such time as that can be done, the second bestapproach is to have an efficient nationwide market in foreign exchange. FDIventures (and local enterprises as well) should be permitted to freely tradeforeign exchange among themselves and also with other local enterprises withforeign exchange retention rights. As the development of above-mentioned mar-ket would take time until it can adequately meet the requirements of allenterprises, the government should also consider developing a more regular,and longer-term system of allocating foreign exchange to FIEs that need anddeserve it so that potential new investors in China, particularly those trans-ferring modern technology mainly for import substitution, are not driven awaybecause of foreign exchange balancing problems. The allocation system can bephased out once the foreign currency market has started functioning satisfac-torily.

5.16 Promotion of DFI. While the Chinese government has introduced var-ious laws and regulations and developed certain facilities for attractingforeign investment, it has not sought such investment aggressively. Its over-all approach has been somewhat passive, basically waiting for investors tocome up with their proposals for approval. The experience of countries suchas Brazil, Korea, Malaysia, Singapore and Spain and also that of Taiwan showthat a more outgoing policy for the promotion of DFI brings better results.Following their example, China should regularly analyze changes in the struc-ture of world industry and its probable future evolution, and should makecorresponding adjustments in its own policies. It should then formulate anindustrial development strategy including targeting of priority industries forinvestment and identification of key individual investment opportunities. Thestrategy should also focus on backward and forward linkages that should bedeveloped in conjunction with foreign invested projects. The "one-stop"investment promotion agency should make an active search for prospectiveinvestors to finance priority industries and key identified projects. Thissearch should include efforts to publicize conditions that are favorable toinvestment in China and to identify and seek out foreign investors. The aboveapproach is more important in the competitive market for outward-orientedforeign investments. In order to facilitate the promotional work, China(through its "one-stop" agency) should establish investment offices in keysource countries. All European Economic Community countries and many develop-ing countries have offices in major capital exporting countries to identifyprospective investors and to provide information about their countries.

5.17 Financing of DFI Enterprises. Overall, good progress has been madein providing local and foreign currency loans to FIEs in China. Nevertheless,improvements are still needed in certain areas. The main issue is the absence

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of a well-designed system of export financing. This would include (a) finan-cing of working capital needs involved in the manufacture of goods for export:(b) financing accounts receivable on export sales or export credits; and(c) insurance for some of the risks of financing export sales. The presentexport finance arrangements in China are inadequate and vary from place toplace. In order to compete with other industrialized countries with large andgrowing exports, China will need to adopt appropriate policies and to developinstitutions that would ensure the availability of efficient export financingfacilities to FIEs (as well as toD local enterprises).

5.18 In the recent past, NIEs, like all other enterprises in China, havesuffered from the credit squeeze policy of the government. The relaxation ofcredit control in the second half of 1989 was of little help to these enter-prises as funding went mainly to large- and medium-sized state enterprises inthe heavy industry sector. This reflects the broader financial sector issueof credit allocations principally by administrative decisions based on govern-ment priorities. A sound financial system should allow the banks and otherfinancial institutions to operate in a competitive environment and to takeinvestment decisions based on their own analysis of credit and project risks.

5.19 Product Supply and Pricing. In order to have an efficient coststructure that enables a FIE to compete effectively in foreign markets, it isnecessary that (a) inputs are available to the enterprise at world marketprices, and (b) price and quality of domestic inputs are comparable to inter-national levels. In China, at present, the ability to import is limited andsome imports are prohibited. As regards the local inputs, costs are oftenmuch higher and quality is below standard. More recently, many FIEs havefaced serious shortages of domestic raw materials. The best solution to thisproblem is a free trade policy. However, until this is achieved, all export-oriented FIEs should be allowed to import the necessary inputs without dutiesand taxes but at a more realistic exchange rate. At the same time, localenterprises should be encouraged to keep the costs of domestic inputs as lowas possible by promoting competition through increased domestic productionand/or gradual removal of the tariff protection.

5.20 Labor. The government regulations (Articles 22 of October 11,1986) allow considerable freedom to FIEs managers in hiring, firing and set-ting wages. However, in real lifie, the managers' ability to select workers toreward them for good performance, and to fire them, if necessary, remainsrestricted. Overstaffing is common even in FIEs. More recently, in someareas, the FIEs are facing the shortage of trained and skilled workers. Theroot cause of these problems is the lack of labor mobility and the absence ofa national social security system., This issue, which affects Chinese enter-prises more seriously, would have to be resolved in the context of overalllabor and wage reforms in China. Meantime, FIE managers should be given fullauthority to exercise powers bestowed upon them by the government regulations.

5.21 Another issue is the shortage of skilled workers in certain partsof China which have been the recipients of significant DFI, e.g., Guangdongprovince. Vocational training schools and other technical institutes shouldbe strengthened to improve the supply of skilled workers.

- 27 -

5.22 Legal Framework. Many national and local laws and regulations havebeen promulgation in order to provide a more stable and predictable businessenvironment in China for both domestic and foreign investors. However, manyof the laws and regulations are couched in broad, ambiguous and sometimes con-flicting terms, leaving local or central implementing agencies a wide scopefor interpretation and leading to inconsistent treatment. Reliable Englishlanguage translations of many implementing rules, and sometimes even of lawsthemselves, are slow in appearing, compounding the foreign investors' uncer-tainty about what is required. Moreover, the promulgation of such basic leg-islation as company law is still awaited. Furthermore, implementing regula-tions have yet to appear for laws governing foreign contracts, wholly foreign-owned ventures and copyrights. A major impediment to the effective function-ing of local financing of enterprises in China is the absence of a nationwide,comprehensive legal structure that would facilitate widespread granting ofcollateral through mortgages, effective regulation of bankruptcies of differ-ent types of firms, etc. Development of the above laws, regulations and sup-porting institutions will, of course, take time and is an integral part of theentire economic reform now in process in China. They are necessary for thegreater and more efficient functioning of DFI as well.

5.23 Infrastructure. A developed infrastructure--both institutional andphysical--is essential for attracting DFI. The institutional infrastructurewill include: banks, insurance companies, research and development organiza-tions, training institutes, legal institutions, investment advisory centers,etc., and the physical infrastructure will include: ports, airports, rail-ways, roads, communication facilities, power and water supply, basic indus-tries, etc. As mentioned in para. 4.27, while Guangdong and Fujian offeredsimilar incentives from the beginning, investment in Fujian picked up severalyears later because, among other reasons, it did not have an adequate infra-structure in the early period of the open door policy. Similarly, Jiangsu hasbeen able to attract rapidly increasing DFI because it offers, besides otherincentives, relatively more developed infrastructure. A developed physicalinfrastructure is a high priority, particularly for inland provinces, if theyhave to attract large amounts of DFI.

- 28 -

References

Cohen, Jerome A. and Stuart Valentine, (1987). "Foreign Direct Investment inthe PRC: Progress, Problems and Proposals," Journal of Chinese Law,Vol. 1, No. 2

Hallberg, Kristin, (1986). 'Foreign Investment Incentives and Restrictionsin Developing Countries: An Analysis of the World Bank PolicyRecommendations, A CPD Discussion Paper No. 1986-41, The World Bank

Hyun, J and Whitmore, K, (1989). "Japanese Direct Foreign Investment:Patterns and Implications for Developing Countries,' Industry SeriesPaper No. 1, Industry and Energy Department, The World Bank, 1989

Kwon, Yul 0., (1979). "An Analysis of China's Taxation of Foreign DirectInvestment,' The Developing Economies, September 1990

Ng, Yen-Tak, Kwan-Yiu Wong, David K.Y. Chu and Yee Leung. "Foreign DirectInvestment in China--With Special Reference to Guangdong Province,"The Chinese University of Hong Kong

Pomfret, Richard, (1989). "Jiangsu's New Wave in Foreign Investment,' TheChina Business Review, November-December

Shah, Anwar and Joel Shemrod, (1990). "The Sensitivity of Foreign DirectInvestment--An Empirical Assessment,' Working Paper, CountryEconomics Department, The World Bank

Shen, Xiaofang, (1990). 'A Decade of Direct Foreign Investment in China,'Problems of Communism, March-April

Whitmore, K., Lall, S., and Hyun J. (1989). "Foreign Direct Investment fromthe Newly Industrialized Economies," Industry's Series Paper No. 22,Industry & Energy Department, The World Bank, 1989

Business China, (1990). March

China Economic News, (1990). "Statistics on Economic Performance of CoastalCities and Special Economic Zones, April

China Trade Report, (1990). April

Case Studies. 'The Role of the United States in Technology Transfer toChina,' Technology Transfer to China.

International Monetary Fund, Balance of Payment Statistics, IMF

International Monetary Fund, (1990). International Financial Statistics,August, IMF

- 29 -

The World Bank, (1979). "Private Direct Foreign Investment in DevelopingCountries," Staff Working Paper No. 348, The World Bank

The World Bank, (1987). "China's External Trade and Capital Reform," TheWorld Bank

The World Bank, (1987). "World Development Report 1987. Barriers to Adjust-ment and Growth in the World Economy--Industrialization and ForeignTrade," The World Bank.

The World Bank, (1988). 'Foreign Direct Investment in China: ForeignExchange Balance and Joint Venture Finance," FIAS, The World BankThe World Bank, (1989). "Thailand: Country Economic Memorandum:Building on the Recent Success--A Policy Framework," The World Bank

The World Bank, (1989). "The Role of Foreign Direct Investment in FinancingDeveloping Countries," a Board paper No. SecM89-998, The World Bank

The World Bank, (1990). "Technology Strategy and Policy for Industrial Com-petitiveness: A Case Study in Thailand," Industry Series Paper No.24, Industry and Energy Department, The World Bank

The World Bank, (1990). "China--Between Plan and Market," The World Bank

The World Bank, (1990). "Malaysia: Growth, Poverty Alleviation and ImprovedIncome Distribution," The World Bank

The World Bank, (1990). 'The Philippines: Country Economic Memorandum;Issues in Adjustment and Competitiveness," The World Bank

The World Bank, (1990). 'Indonesia: Foundations for Industrial Growth," TheWorld Bank

CHINA: DIRECT FOREIGN INVESTMENT

Flow of Direct Foreign Investment by Region (USS million)

1983 1984 1985 1986 1987 1988 1989Abroad In Abroad In Abroad In Abroad In Abroad In Abroad In Abroad In

World Total -39701.1 47820.6 -48447.6 52963.4 -57147.7 47502.2 -89522.5 75687.4 -134766.8 110084.1 -157980.9 141529.3 -138984.0 185118.3High Income Countries -38944.1 38943.8 -47915.9 43629.6 -56299.3 36663.3 -88224.4 65946.6 -133406.0 96282.0 -156441.5 121410.7 -137515.4 163914.7

United States -6700.0 11960.0 -11590.0 25390.0 -13160.0 19030.0 -18690.0 34090.0 -31040.0 46890.0 -16210.0 58450.0 -31730.0 72229.9Japan -3610.0 410.0 -5960.0 -10.0 -6450.0 640.0 -14480.0 230.0 -19520.0 1170.0 -34210.0 -520.0 -- --

LAMIC 'I -757.0 8876.8 -531.7 9333.9 -848.4 10839.0 -1298.1 9740.7 -1360.7 13802.1 -1539.4 20118.6 -1468.7 21203.6Africa -195.6 1182.3 -223.0 1089.9 -77.6 737.9 -96.9 475.8 -57.6 1340.6 -44.1 844.1 -22.4 2582.2Asia -221.7 2956.9 -169.7 3033.5 -636.4 3340.5 -530.3 3682.7 -979.2 4738.4 -1048.7 7787.7 -1129.2 9340.6China -93.0 636.0 -134.0 1258.0 -628.0 1659.0 -450.0 1875.0 -645.0 2314.0 -850.0 3194.0 -780.0 3393.0India 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -- -- -- --Indonesia 0.0 292.0 0.0 222.0 0.0 310.0 0.0 258.0 0.0 446.0 0.0 542.0 0.0 735.0Korea -126.0 69.0 -37.0 110.0 -34.0 234.0 -110.0 435.0 -183.0 601.0 -151.0 871.0 -305.0 758.0

" laysia 0.0 1260.5 0.0 797.5 0.0 694.7 0.0 488.9 0.0 422.7 0.0 719.4 0.0 1845.8Phi ppines 0.0 105.0 0.0 9.0 0.0 12.0 0.0 127.0 0.0 307.0 0.0 936.0 0.0 482.0Thailand -1.4 349.6 -0.6 401.0 -0.9 163.2 -1.1 262.5 -169.9 351.9 -24.1 1105.7 -49.7 1699.4

Europe -19.2 734.9 -22.3 901.2 -23.3 892.5 -21.7 919.0 -7.6 1199.2 -75.4 2253.4 -92.7 3116.5Niddle East -24.3 424.7 -18.7 1095.1 -2.7 1591.0 -10.7 1177.0 -134.7 882.2 -68.2 1311.6 -45.n 1613.5Western Hemispher -296.2 3577.9 -98.0 3214.2 -108.4 4277.0 -638.4 3486.2 -181.7 5641.7 -303.0 7921.8 -178.5 4550.8Brazil -187.0 i560.0 -42.0 1598.0 -81.0 1348.0 -143.0 320.0 -138.0 1225.0 -175.0 2969.0 -- --Nexico 0.0 461.0 0.0 390.0 0.0 491.0 0.0 1523.0 0.0 3246.0 0.0 2594.0 0.0 2741.0 0

(Percentage Share %)World Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

"hInoeCountries 98.1 81:4 98.9 82.4 98:5 77.2 98:6 87.1 99:0 87:5 99:0 85:8 98.9 88.5H b In/one Countries 98 1 18. 6 98 9 8127.6 98 5 22.8 981.4 12.9 1.0 12.5 1.0 .14.2 1.1 11.5

LAUIC */ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Africa 25.8 13.3 41.9 11.7 9.1 6.8 7.5 4.9 4.2 9.7 2.9 4.2 1.5 12.2Asia 29.3 33.3 31.9 32.5 75.0 30.8 40.9 37.8 72.0 34.3 68.1 38.7 76.9 44.1

China 12.3 7.2 25.2 13.5 74.0 15.3 34.7 19.2 47.4 16.8 55.2 15.9 53.1 16.0India 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Indonesia 0.0 3.3 0.0 2.4 0.0 2.9 0.0 2.6 0.0 3.2 0.0 2.7 0.0 3.5Korea 16.6 0.8 7.0 1.2 4.0 2.2 8.5 4.5 13.4 4.4 9.8 4.3 20.8 3.6Nalaysia 0.0 14.2 0.0 8.5 0.0 6.4 0.0 5.0 0.0 3.1 0.0 3.6 0.0 8.7Philippines 0.0 1.2 0.0 0.1 0.0 0.1 0.0 1.3 0.0 2.2 0.0 4.7 0.0 2.3Thailan 0.2 3.9 0.1 4.3 0.1 1.5 0.1 2.7 12.5 2.5 1.6 5.5 3.4 8.0

Europe 2.5 8.3 4.2 9.7 2.7 8.2 1.7 9.4 0.6 8.7 4.9 11.2 6.3 14.7Middle East 3.2 4.8 3.5 11.7 0.3 14.7 0.8 12.1 9.9 6.4 4.4 6.5 3.1 7.6Western Memispher 39.1 40.3 18.4 34.4 12.8 39.5 49.2 35.8 13.4 40.9 19.7 39.4 12.2 21.5Brazil 24.7 17.6 7.9 17.1 9.5 12.4 11.0 3.3 10.1 8.9 11.4 14.8 0.0 0.0Mexico 0.0 5.2 0.0 4.2 0.0 4.5 0.0 15.6 0.0 23.5 0.0 12.9 0.0 10.6

Source: INF Balance of Payment, staff tabulation based on data from BESD, World Bank, 9/14/90.Note: 'J LANIC represents Low and Middle Income Countries

0 -

,Flow of Direct Foreign Investment by Country (USS million)

1983 1984 1985 1986 1987 1988 1989Abroad In Abroad In Abroad In Abroad In Abroad In Abroad In Abroad In

High Income Countries:

United States -6700.0 11960.0 -11590.0 25390.0 -13160.0 19030.0 -18690.0 34090.0 -31040.0 46890.0 -16210.0 58450.0 -31730.0 72229.9anada -5487.2 1712.2 -3332.9 2497.4 -3072.0 -1773.3 -2942.3 1292.7 -5919.7 3867.5 -7141.8 4053.9 -3658.6 2848.2Australia -521.3 2985.1 -1407.4 374.6 -1654.7 2051.5 -3032.9 3140.1 -5482.1 3382.9 -5734.9 7303.4 -3709.2 7543.4Japan -3610.0 410.0 -5960.0 -10.0 -6450.0 640.0 -14480.0 230.0 -19520.0 1170.0 -34210.0 -520.0 -- --New Zealand -163.5 209.3 -74.8 302.2 -70.0 262.7 -102.6 218.8 -373.0 170.4 -433.0 155.6 -464.5 231.3Austria -183.1 287.3 -93.6 185.7 -45.9 241.2 -323.0 284.2 -341.7 486.3 -320.3 510.7 -954.8 879.5Belgium -354.7 1289.7 -292.9 389.4 -296.5 1051.5 -1723.0 729.9 -2782.2 2354.9 -3784.2 5212.5 -6812.4 7057.4Denmark -161.0 64.4 -96.9 8.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Finland -265.0 16.2 -422.7 52.3 -345.7 65.8 -759.1 328.9 -902.8 95.9 -1978.8 279.2 -2915.0 317.4France -1713.2 1725.7 -2119.2 2398.0 -2242.8 2595.5 -5403.2 3255.9 -9210.4 5139.7 -14497.7 8484.6 -19048.3 10287.9Germany -3165.5 1580.5 -4305.2 545.4 -4968.6 518.1 -10063.1 1055.3 -9179.0 1917.5 -11235.7 1319.6 -13551.5 6561.9Iceland 0.0 -23.4 0.0 13.7 0.0 23.6 -2.1 8.5 -0.7 2.4 -1.1 -14.8 -8.2 -27.4Ireland 0.0 169.7 0.0 121.4 0.0 163.7 0.0 -43.1 0.0 89.2 0.0 91.5 0.0 85.1Israel -120.0 89.0 -34.0 53.0 -50.0 98.0 -119.0 167.0 -77.0 242.0 -77.0 241.0 -72.0 174.0Itlax -2129.6 1184.5 -1961.9 1274.8 -1872.0 999.0 -2702.4 -145.4 -2349.1 4102.0 -5474.9 6745.1 -2008.9 2538.0Kuwait -240.2 0.0 -94.6 0.0 -69.8 0.0 -247.8 0.0 -114.8 0.0 -254.5 0.0 -507.2 0.0Netherlands -3753.1 1378.1 -5082.0 1703.7 -3245.4 1456.9 -4447.6 4133.9 -8724.5 3092.9 -3585.1 3883.9 -9979.7 6162.1Norway -355.4 328.3 -600.7 -180.5 -1304.1 -426.5 -1599.9 1017.4 -873.3 186.8 -514.0 264.7 -1376.4 1372.1Saudi Arabia 0.0 4943.9 0.0 4849.9 0.0 491.4 0.0 966.7 0.0 -1174.9 0.0 -2606.1 -- --Singapore -49.2 1133.9 -92.4 1301.9 -237.7 1046.8 -181.4 1714.4 -206.1 2902.2 -76.0 2785.7 -78.5 4041.5Spain -243.2 1622.4 -248.4 1771.8 -250.2 1967.8 -377.6 3450.6 -745.3 4570.7 -1234.7 7020.6 -1473.4 8428.4Sweden -1052.7 55.6 -1038.8 156.3 -1292.7 264.6 -3077.1 828.3 -3165.7 332.4 -5298.5 899.6 -7210.0 999.2Switzerland -492.1 642.6 -1139.3 777.1 -4572.8 1267.3 -1460.3 2122.4 -1273.5 2320.3 -7293.1 380.0 -- --United Kingdom -8184.1 5178.8 -7928.3 -347.3 -11098.3 4627.8 -16490.1 7100.1 -31125.1 14140.9 -37086.4 16469.8 -31957.0 32184.8

Ib .

00

H

0

Flow ot utrect woreign Investment by Country (US$ million)

1983 1984 1985 1986 1987 1988 1989Abroad In Abroad In Abroad In Abroad In Abroad In Abroad In Abroad In

LAMIC *1:

Africa:Algeria -14.6 0.4 -14.6 0.8 -2.4 0.4 5.3. 5.3 -15.1 3.7 -4.9 13.0 -- --Benin -0.5 0.0 -0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -- --Botswana 1.3 23.8 0.2 62.2 -1.5 53.6 0.0 70.4 0.0 113.6 0.0 39.9 -- --Burkina Faso 0.0 2.0 0.0 1.7 0.0 -1.4 0.0 3.1 -- -- -- -- -- --0urundi -- -- --- - 0.0 0.5 0.0 1.5 0.0 1.4 0.0 1.2 -0.1 06Cameroon -5.2 213.8 -10.1 17.7 -10.6 316.2 -15.7 19.0 -11.5 12.0 -- -- -- --Central African Rep -0.4 4.5 -0.3 5.1 -0.6 3.0 -1.3 8.2 -2.6 11.9 -- -- -- --Chad -0.1 0.0 0.0 9.2 -0.3 53.7 -0.4 28.2 -8.0 8.2 -13.8 1.3 0.0 0.oCongo, People's Rep 0.0 56.1 0.0 34.9 0.0 12.7 0.0 22.4 0.0 43.4 0.0 9.1 -- --Cote D'lvoire 0.0 37.5 0.0 21.7 0.0 29.2 0.0 70.7 0.0 87.5 0.0 22.2 0.0 25.4Gabon -5.7 111.8 -3.4 8.1 -4.1 15.1 -6.6 110.3 -7.7 89.8 -11.1 132.5 -- --Gambia, The 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.5 0.0 1.2 0.0 14.8Ghana 0.0 2.4 0.0 2.0 0.0 5.6 0.0 4.3 0.0 4.7 0.0 5.0 0.0 15.0Kenya -14.5 23.7 -6.9 10.8 -5.4 18.1 -4.9 32.7 2.1 42.8 -2.2 -17.2 -1.4 70.2Lesotho 0.0 4.8 0.0 2.3 0.0 4.8 0.0 2.1 0.0 5.7 -0.1 21.0 -- --Liberia 0.0 49.1 0.0 36.2 0.0 -16.2 0.0 -16.5 0.0 38.5 -- -- -- --Madagascar 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.4Malawi 0.0 2.6 0.0 0.0 0.0 0.5 0.0 0.0 0.0 0.1 0.0 0.0 -- --Mali 0.0 3.1 0.0 4.1 0.0 2.9 0.0 -8.4 0.0 -6.0 0 0 -1.3 0.0 8.iMauritania O.0 1.4 0.0 8.; 0.0 7.0 -1.4 4.5 -0.2 1.7 -0.9 1.9 -- --Hauritius 0.0 1.6 0.0 4.9 0.0 8.0 0.0 7.4 0.0 17.1 -0.1 23.7 -0.6 26.2Morocco 0.0 46.1 0.0 47.0 0.0 20.0 0.0 0.5 0.0 59.6 0.0 84.5 0.0 167.1Niger 1.0 1.2 2.5 1.4 0.2 -9.4 0.0 0.0 0.0 0.0 0.0 0.0 -- --Nigeria 0.0 344.5 0.0 199.8 0.0 478.3 0.0 166.8 0.0 602.7 0.0 376.9 0.0 2082.0Rwanda 0.0 11.1 0.0 15.1 0.0 14.6 0.0 17.6 0.0 17.5 0.0 21.0 0.0 18.7 tSenegal 1.6 -34.7 -1.9 29.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -- --Seychelles -3.2 9.1 -3.9 9.8 -10.6 11.6 -5.8 14.2 -5.4 19.4 -5.7 23.2 -8.0 21.8Sierra Leone 0.0 1.7 0.0 5.9 0.0 -31.0 0.0 -140.3 0.0 39.4 0.0 -23.1 -- --Somalia 0.0 -8.2 0.0 -14.9 0.0 -0.7 0.0 -0.1 0.0 -11.4 0.0 0.0 -- --South Africa -156.6 69.2 -183.5 434.7 -47.4 -449.5 -62.6 -53.4 0.0 28.8 0.4 4.3 1.6 8.4Sudan 0.0 0.0 0.0 9.1 0.0 - -3.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.5Swaziland 0.0 -5.7 -2.0 4.7 -1.1 14.5 -2.4 28.2 -8.1 45.9 -6.8 44.4 -9.8 35.8Tanzania 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Togo 0.0 1.5 0.0 -9.9 0.0 16.6 0.0 6.5 0.0 0.0 0.0 0.0 0.0 0.0Tunisia 1.5 184.2 1.3 113.3 6.0 107.9 -1.3 63.0 -1.2 91.7 1.2 59.5 -4.2 78.0Uganda 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -- --Zaire 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - 0.0 0.0 0.0 0.0 0.0 0.0 0.0Zambia 0.0 25.7 0.0 17.2 0.0 51.5 0.0 0.0 0.0 0.0 0.0 0.0 -- --Zimbabwe 0.0 -2.1 0.0 -2.5 0.0 2.9 0.0 7.5 0.0 -30.5 -- -- -- --

iote: ' LAMIC represents Low and Middle Income Countries

,.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

I-

Flow of Direct Foreign Investment by Country (USS million)

1983 1984 1985 1986 1987 1988 1989Abroad In Abroad In Abroad In Abroad In Abroad In Abroad In Abroad In

Asia:Bangladesh 0.0 0.4 0.0 -0.6 0.0 0.0 0.0 2.4 0.0 3.2 0.0 1.8 0.0 1.1China -93.0 636.0 -134.0 1258.0 -628.0 1659.0 -450.0 1875.0 -645.0 2314.0 -850.0 3194.0 -780.0 3393.0Fiji -0.1 32.1 -0.5 23.6 20.9 21.8 22.0 8.0 17.0 -10.8 25.1 19.6 28.1 4.3India 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -- -- -- --

Indonesia 0.0 292.0 0.0 222.0 0.0 310.0 0.0 258.0 0.0 446.0 0.0 542.0 0.0 735.0Korea -126.0 69.0 -37.0 110.0 -34.0 234.0 -110.0 435.0 -183.0 601.0 -151.0 871.0 -305.0 758.0Malaysia 0.0 1260.5 0.0 797.5 0.0 694.7 0.0 488.9 0.0 422.7 0.0 719.4 0.0 1845.8Maldives 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -- -

Myanmar 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -- -- ° -- -- --

Nepal 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Pakistan 0.0 29.3 4.7 55.2 7.8 130.8 0.6 105.2 -19.1 128.8 -12.7 185.6 -38.6 193.0Papua New Guinea -1.1 138.9 -2.3 115.7 -0.9 83.3 8.7 90.8 22.2 93.2 -33.8 152.7 18.0 203.8Philippines 0.0 105.0 0.0 9.0 0.0 12.0 0.0 127.0 0.0 307.0 0.0 936.0 0.0 482.0Solomon Islands 0.0 0.4 0.0 2.0 0.0 0.9 0.0 -2.0 0.0 8.8 0.0 3.4 0.0 5.7Sri Lanka 0.0 37.8 0.0 32.6 -1.4 26.2 -0.5 29.7 -1.3 59.5 -2.1 45.6 -2.1 19.6Thailand -1.4 349.6 -0.6 401.0 -0.9 163.2 -1.1 262.5 -169.9 351.9 -24.1 1105.7 -49.7 1699.4Tonga 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.2 0.0 0.1 -- --Vanuatu 0.0 5.9 0.0 7.4 0.0 4.6 0.0 2.0 0.0 12.9 0.0 10.8 -- --Western Samoa 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Europe:Cyprus 0.0 68.4 0.0 52.7 0.0 58.0 0.0 46.3 0.0 52.0 0.0 62.1 0.0 69.9Greece 0.0 439.0 0.0 485.0 0.0 447.0 0.0 471.0 0.0 683.0 0 0 907.0 0.0 752.0Hungary -- -- -- -- -- -- -- -- -- -- -- -- -- --Malta 0.0 24.5 0.0 26.2 0.0 19.0 0.0 21.9 0.0 19.4 0.0 40.8 -- --Poland -1.0 16.0 -12.0 28.0 -1.0 15.0 -22.0 16.0 -8.0 12.0 -22.0 15.0 -18.0 11.0Portugal -18.2 141.1 -10.3 196.3 -22.3 254.6 0.3 238.8 9.4 317.9 -53.4 874.5 -74.7 1620.6Romania 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -- -- -- -- -- --

Turkey 0.0 46.0 0.0 113.0 0.0 99.0 0.0 125.0 -9.0 115.0 0.0 354.0 0.0 . 663.0Yugoslavia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Middle East:Bahrain 0.0 64.1 0.0 140.7 0.0 104.8 0.0 -31.9 0.0 -40.7 -- -- -- --Egypt, Arab Republi -19.3 490.0 -16.0 729.1 -3.0 1177.6 -6.3 1217.4 -19.1 947.7 -12.4 1190.0 -29.2 1614.8Iran 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -- -- -- -

Iraq -- -- -- -- -- -- -- -- -- -- -. -- --

Jordan -4.8 34.9 -2.7 77.5 0.7 24.9 -3.9 22.8 -1.2 39.5 0.1 23.7 -16.7 -1.Lebanon -- -- -- -- -- -- -- -- --Libya 0.0 -326.6 0.0 -16.9 0.0 119.2 0.0 -177.1 -114.4 -98.4 -55.9 97.8 -- --

Oman ,. 0.0 154.6 0.0 158.1 0.0 161.3 0.0 140.3 0.0 33.0 0.0 -- -- --

Qatar -- -- -- -- -- -- -- -- --Syrian Arab Republi 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Syrian Arab Emirate -- -- -- -- -- -- -- -- -- -- -- -- -- --

Yemen Arab Republic -0.2 7.8 0.0 6.6 -0.5 3.2 -0.5 5.5 0.0 1.1 0.0 0.0 0.0 0.(Yemen P.O. Rep. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 °°CYemen Republic of -- -- -- -- -- -- -- -- -- -- -- -- -- --

., q(DCD

0

U,l

Flow of Direct Foreign Investment by Country (USS million)--- -- -- -- --- -- -- -- -- --- -- -- -- --- -- -- -- - _

1983 1984 1985 1986 1987 1988 1989Abroad In Abroad In Abroad In Abroad In Abroad In Abroad In Abroad In

Western Hemis here:Antigua and Barbuda 5.0 5.0 4.4 4.4 15.6 15.6 17.7 17.7 29.2 29.2 -- -- -- --Argentina -2.0 183.0 0.0 268.0 0.0 919.0 0.0 574.0 0.0 -19.0 0.0 1147.0 0.0 1028.0Baha, s, the 0.0 -6.0 0.0 -4.9 0.0 -30.2 0.0 -13.2 0.0 10.8 0.0 36.7 0.0 25.0Barbados -1.4 3.6 -1.5 0.0 -2.2 4.8 -2.7 7.7 -2.4 7.0 -0.9 11.5 -- --Belize -- - 0.0 -3.7 0.0 3.7 0.0 4.6 0.0 6.9 0.0 14.0 0.0 18.7Bolivia -0.1 7.0 0.0 7.0 0.0 10.0 0.0 10.0 -1.7 38.1 -1.9 -10.1 -1.0 -24.4Brazil -187.0 1560.0 -42.0 1598.0 -81.0 1348.0 -143.0 320.0 -138.0 1225.0 -175.0 2969.0 -- --Chile -3.0 135.0 -11.0 78.0 -2.0 64.0 -3.0 60.0 -8.0 105.0 -16.0 125.0 -10.0 269.0Colombia -104.3 618.0 -23.0 584.0 -7.0 1023.0 -32.0 674.0 -26.0 319.0 -38.0 203.0 -30.0 576.0Costa Rica -5.4 60.7 -3.9 55.9 -4.7 69.9 -3.6 61.0 -4.5 80.3 -0.9 122.3 -1.5 116.4Dominican Republic 0.0 48.2 0.0 68.5 0.0 36.2 0.0 50.0 0.0 89.0 0.0 106.1 -- --Ecuador 0.0 50.0 0.0 50.0 0.0 62.0 0.0 70.0 0.0 75.0 0.0 80.0 0.0 80.0El Salvador -- -- -- -- -- -- -- -- -- -- -- - --Grenada 0.0 2.5 0.0 2.8 0.0 4.1 0.0 5.0 0.0 12.7 0.0 17.0 -- --Guatemala 0.0 45.0 0.0 38.0 0.0 61.8 0.0 68.8 0.0 150.2 0.0 329.7 -- --Guyana 0.0 4.7 0.0 4.5 0.0 1.8 -- -- -- -- -- -- -- --Haiti 0.0 8.4 0.0 4.5 0.0 4.9 0.0 4.8 0.0 4.7 0.0 10.1 0.0 9.4Honduras 0.0 21.0 0.0 20.5 0.0 27.5 0.0 30.0 0.0 38.8 0.0 46.8 0.0 37.4Jamaica 0.0 -18.7 0.0 12.2 0.0 -9.0 0.0 -4.6 0.0 53.4 0.0 -12.0 0.0 28.1Mexico 0.0 461.0 0.0 390.0 0.0 491.0 0.0 1523.0 0.0 3246.0 0.0 2594.0 0.0 2241.0Nicaragua 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -- --Pana a 0.0 71.6 0.0 9.5 0.0 59.2 0.0 -62.2 0.0 57.9 0.0 -36.2 0.0 12.1Paraguay 0.0 4.9 0.0 5.2 0.0 0.7 0.0 31.5 0.0 13.8 0.0 11.2 0.0 11.7Peru 0.0 38.0 0.0 -89.0 0.0 1.0 0.0 22.0 0.0 32.0 0.0 26.0 0.0 59.0St. Kitts and Nevis 0.0 13.5 0.0 6.0 0.0 8.0 0.0 6.0 0.0 8.7 0.0 8.2 - --St. Lucia 0.0 10.0 0.0 12.0 0.0 17.0 0.0 18.5 0.0 22.0 0.0 16.0 0.0 18.0St. Vincent 0.0 2.1 0.0 1.4 0.0 1.8 0.0 3.0 0.0 3.6 0.0 3.6 -- --Suriname 0.0 45.7 0.0 -39.7 0.0 11.9 0.0 -33.8 0.0 -72.6 0.0 -95.8 0.0 -167.5Trinidad and Tobago -3.6 117.7 -3.5 113.2 -8.2 1.2 -7.3 -14.5 1.9 33.1 0.0 62.9 -- --Uruguay 5.6 0.0 3.4 0.0 -7.9 0.0 -4.5 37.0 4.9 50.1 -2.3 46.8 0.0 0.0Venezuela 0.0 86.0 -21.0 18.0 -11.0 68.0 -460.0 16.0 -37.0 21.0 -68.0 89.0 -136.0 213.0

Source: IHF Balance of Payment, extracted from BESD, World Bank. 9/14/90.

..

I0Li

CNINA DIRECT FOREICN INVfESTMVT

INVESTMENT INCENTIVES ON FDI IN CHINA AND ASEAN COMTRIES

Corporate ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~State/Reii onalCountry Goyrneent Attitud Ts Incenties Tariff Inc.ntines Esport Inc.ntives fro. Port.. Zones Capital Incentive. h RD Incentivs Inentives

China Coarneant fost.r. Tla holidays and Cartain products Eaports .xceet Additional incen- Local inv.stors in None 14 coastal citie

ega1 and in.tito- reduction for long -and L_t.ril Can crude oil finished tines are offered a joint ventur d 5 special Ic-

tionel infreetruc- t-rs in..stment and be ieport.d duty oil products and in the special co- op-ration eay b, no si con.. off.r a

twre with a side inveatent in tech- fre. others atipulat.d nosic one aat up granted spsc,.l e;de range of in-

range of incontew-s nologicalli ad- by the -tat a're in 1980 pr,ierily credt. vetment ncintiv-

to foreig in- aned etors. a...pt, to attract foreign s. An... 4)

tots. (S. Ann: ne...teent.4)

Indonsi Jakarta introduced None Import duty end Ecport-oriented No ieports/..port Local -nvstor None Nonsan.ral incentives val-..-added tLa fir.. can buy sate- duties or VAT in rights for some

to eon foreign cap- (VAT) drswb-ck- on rials at interna- bonded (100% eeport joint vntore

ital in 1986 inved- goods ad locally tional prices and processing) ones. (e.g in dist-ibo-toLe a'. requird by anvesteLnt board quality for VAT eher fire not re- tion and in.estment

to forA joint van- approved ventures drawbacks or .p- atricted by in.ast- in other project)turs with local Li os. en iprtdpartners. 1005 foreign equity cap:ta g"od. sy

available. ha paid i9n instell-wents over fiv

Malaycia Noel. Luepor offers Fiv*- 1... r .uemption Waivers of import Tat abate..nta for Eight .. port pro- Th. K.laysian Fires can deduct Various stats

a rich assort_nt fros inco . devel- duties and vorious a firs's valu*- ceasing zones o- Industrial 133% of R&D .epac- operat.L several

of incentvet to oent tanes. and teas. on chin-ry added nports are cated aInly along D.evloeexent diturs fror thair popular industrial

foreign inv-tors dcidnds ta fre and ra aterial availabl. Euport- tha est co -t of Authority helps corporate tac astte.during this ti_-i for approved proj- ers quality for peninsular investor obtainor up to a IOOllin- ects are coon. secial deprecia- laysi Offer loans fro- govern-vestment-tan allos- *tin schedules: t.nant a tari ff mnt spon.orad

ance on capital *ls eupanss r- as-istance. Li- banks.saending over a lated to the export ceneed menufactur-five-yar span operation are de- ing taer phoosin

duct;ble. Specific facIii-ie provide

Philipp... HManila eatends a Fiv- to sight year Post op.retiva Eeporters my - Euport proce.aing Non. ln thi agIiceltcrvl Firs locatin i

..id r.ng of tac holiday accal- tariff protection port parts tea- and votes in gatan sctor 25% of RID les-dv..livpad

incentives to crated depr.cia- of up to SXl of duty-fr. Ta. t- Mactan, and Baguiu costs are tue- ures rtcaive tat L

foreign invstors. tion other dedut- ieortp e dutiable eaptions. accle- City offer .s.eP- ded,ictik up to ded.ctions for i'-

t ons for labor- value, no duty or sued depreciatiot, tion froe various IOS of taasieL frastructur. e p.n-

related capan.. tee on capital dedvctions for tnes and other no dit..tat crdit for cap- goods ivport. training costs and perks.itl equipe_nt pur- aainr of localchased locality, .a.z and lic nc ing

fur firs. in uportprocs*sing Zones.

Singapore Con_rnent fosters five to tet year Nearly all goods Partial ta. .e..p- Singspor is a free Conacs .o.al lot.. Tla hiliday op to ot pplicabla

industrial. coasar- t.u holiday (three- enter Singapore tion on eport port aith sin free in ncrtain indus- 505 instrent ta.

cil and technolog- year xtension pus- doty free rnings for up to trda zone, tris grnts and credit on capitLl

ical de..lopse-nt ibla). dividnds 15 yars, double loans to fond e-- outlays diubl. dx-

eith a coapeshan- tdo-euempt during ta deduction for ployea developmvt ductioi oneepensetsine investment holidey. Profits eSport related ar- financial aid for for RhD vccelroted

incentive package erisin from sepan- p n..s profit de- lo'IC partners of depreciation.ions quality for need from. .port.d foreign firm *rnt loser . thholding

holiday. Alo- ervices tee - ribntes -dalble tt on royalties,ante. ddutiona sePt. in .ell developed tech fees. R&D

for so indus- in-es stipendstr ies/srvi ces.

Thxil.nd Whil 1Bangkok of- Inco-- from royal- Iaport duty waiver- No duty or b.sin.s. Tee xport prorees- No loans grants or None Ta credi Ls for

far. vario -. ncan- tis. goodwil l on cinery. eon- tax on eoprted in- ing cons provide subsidi.. .vi . fit x; i Il.cg to

tines to attract atc eay be taC- struotioi ate puts ued in Ca locate outside tha

forgn .co..anies evept: three- to rials tc.. pos- ports. w ch are Port datiip i port grn t vro dp i- 64nogok vicivity

offic als aintain fiv-yar tax holi- sible for select also tas- *nd duty- tariff, and bksi- frastructr. sup-a atchful ee o-r day. dividands paid industr;e: t-arff ;...pt: tax brea ness taae on new port for large

uch nterpriss by eeptxd fires pro.tction free i- for eport in- plan, quipent and projctsnot ..aed. port ceepatition. cre doubl ra matrils also

lo.er dutis on deduction for e- fullI repatriationo eatrials not port ralated cos; of preofit.

tax credit on rae

taxi for ucersof itreir.for aaport sector.

Sourc.. Doing better Busin... in Asia, uine nrntol.China Business fieie..w.. aiov i. ses China Trade Report. -aious issue...

-36 -ANNEX 3Page 1

CHINA

DIRECT FOREIGN INVESTMENT

Types of DFI

Equity Joint Ventures (JVs)

1. A JV is a limited liability company organized in China by PRC andforeign investors in accordance with a the Joint Venture Law and implementingregulations. The contract and articles of association are agreed upon by theparties. It is jointly managed under the direction of a board of directorsthat is usually selected by the investors in rough proportion to theirrespective shares of the investment. Profits are distributed in proportion tosuch shares (Cohen and Valentine 1987).

2. JV has been the single most important achievement in attracting DFI.As shown on page 3 of this Annex, JVs account for 49 percent of total DFI from1984 to 1989 and registered a 40 percent average annual growth. By the end of1988, 8,340 JV contracts had beerL signed with almost half of them in 1988. Inthat one year, about 3,900 contracts were approved and $3.2 billion investment(a 60.7 percent increase from the previous year) was committed. Total valueof JV contracts amounted to $12.7 billion by the end of 1989.

3. The prominence of JVs was induced by a range of incentives offeredto foreign investors in the early 1980s. A Joint Venture Income Tax Law(JVITL) was promulgated in 1980 to offer certain incentives to encourage theestablishment of JVs over the other forms of cooperation. For example,normally a combined national and local tax of 33 percent is levied on a netincome and a flat 10 percent tax levied on the foreign investors' repatriatedprofits. The JVITL allows a new JV that is scheduled to exist for a period often years or more to apply for a full exemption from income tax in its firsttwo profit-making years and a 50 percent reduction in the following threeyears. Other tax incentives are also allowed (see Annex 4). The JVs aredesirable because of their ability to transfer technology and managementskills. They are found in virtually every province and region and in mostindustries.

Cooperative Operation (CVs)

4. CV is the name given by China to a collection of arrangements thatare not designated as JVs but that nonetheless have as their common threadlong-run investment cooperation in joint projects in China by Chinese andforeign parties in accordance with a contract between them that sets forththeir responsibilities and rights. In some instances the CV is a legal entitywith its own articles of association and board of directors, and occasionallyeven limited liability, so that the distinctions between CVs and JVs becomeblurred (Cohen and Valentine 1987)

5. CV has been the second most important type of DFI in China. Itaccounted for 41 percent of total DFI from 1984 to 1989 and registered a

-37 -ANNEX 3Page 2

24 percent average annual growth rate. There were 5,692 contracts by the endof 1988, and at the end of 1989, total value of CVs was $1.5 billion. Thistype of DFI accounted for a large share of total DFI in the first half of the1980s (56 percent in 1984 and 59 percent in 1985) and since then it hasdeclined in its importance.

Wholly-Owned Ventures (WOVs)

6. The WOV is a company organized in China solely by a foreign companythat contributes the entire equity required, receives the entire profit andindependently manages the enterprise.

7. WOV was at first experimented on a limited basis. This type of DFIhas not been as attractive as JVs and CVs to the Chinese because it does nottransfer to China much technology or management skills. WOVs are offeredsimilar but slightly less favorable tax incentives than the JVs (see Annex 4).WOV commitments until June 1990 were $1.8 billion which is about 5 percent oftotal contracted DFI. The legislation authorizing WOVs and offering taxincentives did not appear until April 1986. Before then, less than a hundredcontracts were signed and less than $160 million was committed by foreigninvestors. The number of contracts by the end of 1988 was 546 with 410 ofthem approved in 1988. Most WOVs have been organized in the Special EconomicZones (SEZs) while a small number have been established in other placesincluding Shanghai, Beijing, Fujian, and Hunan province and the Guangxi ZhuangAutonomous Region (Cohen and Valentine 1987).

Cooperative Development Ventures (CDVs)

8. CDVs are few in number. This kind of DFI provides for explorationand development of mineral resources, particularly offshore oil which haveaccounted for a substantial proportion of such kind of DFI to date. By theend of 1989, $726 million worth of projects have been approved with most ofthem contracted in two years: $360 million in 1985 and $222 million in 1988.

lot,l Contracted oi.-.t Foreign In. .nt b. Inv-0t-L 13p--

1984 195 1986 1987 1988 1989. 1990.. 1984-1989

ltlal V.1e of FDI (crr..nt nr. USS) 2651 5932 2834 3709 5297 5600 2350 26023eqwity Joint V.nu.,r 1067 2030 1375 1950 3133 3184 -- 12739Co-ap-;eti;. p..r.tion 1484 3496 1358 1283 1624 1537 -- 10782Ubel Iy-O.n.d FDI 100 46 20 411 461 659 966 1777CoIlp.r.ti. DO.,. o.nt 0 360 01 6 59 222 -. 726

A,.r.g. Ann..

1984-1989Crosth R.tes in Toe.l V.1. of FDI (c.rr.nt n S U5$) -- 123.8 -52.2 30.0 42.8 5.7 __ 36.3

Eq.it,y oi.t Ventr -- 90.3 -32.3 41.8 60.7 1.6 -- 40.1Co-up-bti.r Operation -- 135.6 -61.2 -5.5 26.6 -5.3 _ 23.9Wholly-ODn.d FDI -- -54.0 -56.5 2255.0 2 1 36.9 __ 536 7

Co-Op.rati.v 0-1..opaent -- -77.5 -94.3 1168.8 275.9 __ 249.3

1984-9809Sh.r. of

Typ.* of FWl (X) 100 0 100.0 100.0 100.0 100.0 100.0 -- 100.0

Equity Joint Venur. 40.2 34.2 48.5 52 6 59.1 56.9 -- 49.0Co-op...tin. Oere,etion 56.0 58.9 47.9 34.6 30 7 27.5 -- 41.4WholIy-O-ned FDI 3.8 0.6 0.7 12.7 9.1 11.8 __ 6.8Co-e.r.t;.. D0.elopeent 0.0 6.1 2.9 0.1 1 1 4.0 -- 2

N.mber of Sined ContrectU 2166 3073 1498 2233 5945 -- -- 14915Equity Joint. V.n tr. 741 1412 692 1395 3900 -- __ 8340 COCo-Og.rst;- Operation 1089 1611 582 789 1621 -- -- 5692wholIy-Onnd FOI 26 46 1i 46 410 __ __ 546Co-Oprati,* Development 0 4 6 3 5 -- -- 18

* The 1919 bres&&ln is appro.iustd by *ho 1990' first qu.-ter's br.ehdoan as reported in Chin. Econosi. N....*. Val" for 1990 i. for lam..y to J.n-.

Sogr;.n China Ststit.igl Y'erbook, 1909; China Eonoaie N-as (C84), M.y 1990.

I) I fiOQ :3M M

{ I X~t.

CHINA: DIRECT FOREIGN INVESTMENT

OVEtVIEM OF IHVESI.T INCEWIVES AND) TAXIES

Foreign Enterpriao Joint Venture Consolidated Industrial R#al Entate Te./Income To. Laow (FEITL) Incoee Tsa La. (JVfTL) and Comercial Tao (CICT) Land US. Fees Additional foret.o,a

Ob b&imn;.: Proiwnces.iwetemomo. regione. med ape.,C;tieParmll have loalsam Si1;, of 1h S Ioe-r= me otherwise n*otd.

The i;l1d citioo otChoegmiag, lbrbin, Jiem.hmymag, Vatan md Xi'mm Say*Ia approe projectn valvedpp to 85mllio. Indepeadent

ef revinces in whichthey arm located

Technology transfer a 215 witholding tax on China imorter my p-y.gross ftei . thou.gh *eseption potentially

5Certais t'ypem .f technology a.milehle.way receive 105 reduction.aitI, local tea officeapproval. or exemption iftechnoloy advanced andpreferantial tarma; with-holding tea reduced to 10.

Lending 205 withholding ta. on JV bank.s ubject to ta on JV banks subject to tea on a JV pays on b. i din-g con- US-China To. Treaty reduce.groe E ntarort; 101 for interest and ounar incoma intr-st and other r-nu trib.tad to he JV by FQE withholding tea forcontracts hetecen 1503-90. China... party. American landa- to L01.* Eamption poissi ble if rate a 1.25 of original -aI..,end borroer qualify, ith 1.4. then a araedulal oflocal to. office approval. 10-301

Leaing 205 withholding tea on pure JV l--eing companies subject JV leasing companies ubject Sa- as bob-.rente I; to ta, to ta..

* for lemee-alee principalexmapt. interast ta~s t at105 for 1903-91).interact ax ept if ratequalifies. aith local teaoffice approval;

* service chargee t aes et105.

Consignment mal" and Service 30-501 progreeiva tin if Servic center organized a. To. on .aIas and ervmc S.ae ac ebov.canters independent plac- set up equity joint ventur.. subject income if independent plac.

solely or rimarily to *-11 to tea. end consignment good soldor sereice foreign conpe- at fotrign cooponaS., priceny's produte.s parte. atc or price agread aithNo ta. it no independent Chineso.place. * No to. if goods purchlaad

by Chin..e and resold atChina., ovn prica

Compnenation trade a Interest axopt sith local Chin e. subject on import buttae office appr-oal. .. aptions may b avilableTechnology fees paid inkind my ha apt if tech-nolosy advantced andpfrefer-ential terms.

Contracte projects (e.g.. * Prog,4asi;s tae up to W0S If project done as equity * Import tenable. Some a. bon.. US-Chinv Taa Treaty raquirmssubcontractors) te. on neat income, joint venture. aubjct to a Revenue teeable--3.03S projectt to continua for aora

* Eseptions and reductions tea, typical rate for service than i onthb before .. b-end local toa ... ption as revenue including 1 local jnCt to tn..for cooperative venturs. urta,.

OQ 1) m

Page 2

Foreign Exntrprias Joint V.ntu-. Conmolid.td Industrial R.al Estate Tax/Income To. Law (FErTL) Income To. L.. (JVTL) and Commercial Tan (CICT) Land U.. Faso Additional information

1. atislids- (cont'd)

Coopeartive anturee (con- * Progrsia. t. rmte up to * Imports taxable but e..p-tractual joint oneturo-) 50h plu a 10 local ar- tion. for iarmou .ita

tax. e.. . cartain petroleum-* Inv,ators in low-profit related equipmant; uuIes

sectors for more than 10 taeeble.yar ay be exeapted for * All export. *e-cpt crudethe first profit-aeklin oil, finish.d oil product.year ond a 50W tox r.duc- and others stipulated bytion in tha neat tao year. the Stt. are ..xapt.and a iS-05 reduction forup to 10 year. thereaftr.Local aurtx my bh .. eap-ted.

* iEport enterpriss with 70Sof the value of product ex-ported aay enjoy a 50 tagreduction; mut pay 101 iftheir tu ia lower th.n 102aftar tho reduction.

Equity joint ventur-e 331 rate including local * I porta ta.abll but ex.ap- Sam a abov.eurtax. tion. for ite.- import.d a.

* Additional tan of 1001 on intestment, later importsraeitted profit, but exeap- of itee, of which .upplytid for dxport and tcn- not guarantaed in FPC. withlogically aveer..d ntr- opprvftl. and Waxria,l forPriawp - production of exports.Preferentia tax provi- *All oxport. except crude

eaone. o~~~~~il. flilieed oil product..iV. to op-rat for eore and othera atipulated bythan 10 year. my be aneap- the state are x.saopt.tad in the firat tao parf- *For doawatic "I.a.. mayit-aking y..ra. and a 50% apply for r-duction or ax-reduction in the next thre- aption fo, fixed Period. >year.. CD

* JV. in low-profit aextor&or in reeote/underdev.lopedarea. -y be exeapted forthe first five year. and a15-30% tax reduction forthe next 10 year..

* Rebat, of 401 of tax of therinveet.d v-lue if sorathen fivo year..

* Lws... invurred by JV inany one tax y..r may bwcarried o-r to the nextfor not ore than fire

* Export ent.rprieca -ith 701of th- valu, of product a-ported y enjoy a 501 tanreduction; muat pay 101 iftheir ten ret. is low.rthan 101 after the r.doc-tion.*50 reduction for thradditional ye. i'e; f tehn-lopic.lly ad-xoced enter-

R.inv,stsant of profit. forfine yver. if an export ortechnologically advanced*xt-vprie. g.et. 1001 tenrefund.

0QQID I4U

Page 3

Forei,n Ent.rpri;e Joint Venture Con-.lid.ted Industrial Real Est.te I../

Income Toe L.. (FEITL) Icowie Ta. La. (JVITL) and Come.rc1l T.. (CICT) Land U.. F.es Add,t,ional infor-maton

1. ltiongide (cont'd)

Wholly foripgn-owned enter- * Progre -sive t. rate up to * No specific e.eeptions for * Enterprise may pay on

pries WS0 plus a I05 local sur- sports. buildingsrs te * All exports e.cept crude * 1.2% on original value

tIn:s ors n low-profit oil finished oil products, ess a .r.. dua1- of

sectors for -or than 10 and others etipuleted by 10-30%

year. ay be .sespt.d for the State are eept.th, first profit-sakingyear and a 50 tax reduc-tion ;n the next two year.,end . 15-30% reduction forup to 10 y.... thereafter.Local *urt.u as, be .. eep-ted.

* Eeport enterpr;ses with 702of the value of product eu-ported cay .njoy a 507 taereduction; sut p;ay 105 iftheir tax rate isowethan 105 after the reduc-tion.

*50% redaction for threeadditional years if techno-logically edv.nced nter-

* Forgn invs-tors eho rein-n-et profits in Chin. 1;-gible for 100I refund oftee Paid on rein..e.tedamount if Profits reinves-

ted in technologicallIy.dcenc.d enterprises.

zi. Comatil citif Main * For ost industris., 20% reduction ON IMPORTS: CUSTOS DUTIES: Imports of Prodac-

1 Sh Cji4 and Pbini n( 3 0 of regular ret. for specified * Production quipent, busines, fa- tion equip..nt, bu,iding ateriele.

OTT.'on); Oslian nd Cangahou (830 period rilities. nd building teriele r atwrln, pert. end fittings.

sillion); Hin.n Island (t5 c.i- * 155 toa rwte say be granted to: imported a. pert of inte-tdyot, as coipon nt. . stor -whilea, a pd

ion). In April 1956, the cexitret - technology-inten..ic- enterprises. cell as .icast be .ced by. en-l fa f.. . . .. t

gonerneent rescinded the approval - enterpri..s involving m30 sil- terprise are . 11 e.xept.

ce;ling of 55 *illion for the ret lion foreign ins-t-ent * Ra. eatorials spare pert. co-po-

of the original 14 c;ties-- - projects in energy d-vlopen.t nents or p-cking sateriels ispor-

Q;inhuengda. Yanti. Qingd.o. (.cluding oi;l) transportation tad for producing exOrt product.

Lieny..g.ng. PN.ntong, Ningbo, port construfctio fr e elI c...Pt. (WiIl bn tuend if

Wen..hou. Faxlna, Zheniieng, and eppro-1 veies eith each city) goods are sold do..e.tically

be ijai-aIthough som of thesecities atill clbis this right. For- ON EXPORTS: With the e.ception of a

*;gn in.estxeent in these 10 cities small n. ber of products controlled

suet now e officieily approned by by the Stete. a11 other export prod-

their r-epective provinciel govern- acts are .n- pt.

anteON DOlfESTIC SALES: Products old inChina are t.eed according to ratsset by l...

III., Ecin and TMnIn ica I 155 in.o- tee on inco-i obtained aEligibility for reductions or w- nEceaptio.. undar certain coodi-

I n s in IA through sanuf.crtorin°g. *eption in wy ing9 CIC te..s under tion* . fros hbaIdi-9ng property* Additional incoce tan eptions carious conditions (eg import- t.exs.

and reductions, of lited dara- ing saterials for factory con- * Priority Ilnding for inveatecottion for technologically atruction. enporting noncoweodity fron financal- institutionsadvencad. export-orientd. infra- products).atrecture-enhancing; or with a * Eneeption from seport duties h.ncontractual tars of 10 years or et least 207 of nelee is added byor" an ETOZ-ba-ed foreign innecteent

* Eesption *ro. 105 rwsitted incoe to noncosatl cone teriels priortea ah.c profits are remitted to exportabrod.

IQ ii

q i4

* 4S

Pa.e 4

fETiTL/JVITL CICT Real Estate Tan/Lend tI.. Fees Add,tionul ,nforw.tion

IV. SaseCal Erono i,c Zren..: sf.. * The pref .o... tor fT0Zs apply to ON 1IMPORTS: * for Shench. SEZ: projects ;- Ea.ept fron 10% pro.fit r.itt.n..Shntou, Shnhen. Xvawn, Zhuhai; SEZs but son of the ta pro.i- * With appro-al, the fol-losing re volin.g adnanced t.chnology ny be ta..hea-Y ;ndustry: Y So silion; non- eons ar significantly brod-nd. .ept: exeopted froe local .. nd-u S fe. * 50% d.prec.atio, on -achinery andindeetrial (g.., hotel.): Y 100 * Inco- ta redation. *r- .. tended - cl.ine-y. equ,pent, copo- * For Xiann SEZ: contracts of 10 *auip nt dur,ig frit year ofmillion; light industry: Y 30 *il- toe ari.ty of non-nutatur ng nants. parts, r.w and s... fin- year. or more ,nnolnng upgrading u.elion enterprise. (serice nterprises ished aterials, fuel, and auto- of aporl-oriented enterprises * Customs duties: ,nentmes

including hotel., co-odity b-ok- mobils for o ,e in -onstruct-on .,.ept during c-nstruct i- period off-red urn sieler to ICCT importera, div.rsiifid traders). and production in SEZ; and first fine years of -peration guid.lin .Inv-eteent. with Taiwan capital - foodstuffs and tableware for use Broad rights to. lnd one may be - Sh-ntou SEZ: ptroch.. ical.ere eligible for income reductions in hotels, catering trade, tour- trnsferred by auction or negctoa- electron cs, teetilas, plastics,for op to the first nim profit- sn. and food industries; tinn for a na-i,u tern of 70 toys, building materials. stalaking years. - achin ry. y quipent, and ace.s- years products. aariculturw, tourism,

aor,s imported for offshor oil In foreign trade, domestic and rea I state, ectr icity. trana-enplnitation. foreign-innented enterprises are portation;

50% reduction on mines, liquors. ereoptd fros crtain HOFERI - .a.en SEZ electronics. sicro-tob.cco, and dailyeecsitias espnrt-licens,ngreaoreentn coepaters, precision eachinery,other th.n tho.e restricted for * In finance, SEZc -rd SEZ-based inetru.ents and meter. buildingimport by HWFENT. enterprises hv enjoyed authority eaterias, fine cheicals, ten-

to raise unds diretly fiLitil-, fod processing, tu,.ON EXPORTS: Product. produc.d in abo d th rspons ibility for re tilrasoti roesaunicatioui;SEZ are ... pt (note: goode pr- pay.ent of soch loans, SfEZ also - Zh.h.i SEZf building materialschased fro inlend but .npo,rtd vie per-it the mstablishe-t of for- lectronics, daily-us ci-SFZs are subject to applicable c- ign bank branches. Sino-foreigo caIl, food. achinery, p.tro-port duti..). joict-capitul banks, and fin,ncial leu..

corporatin innes...ted with f-rian. eF.rig. each.ngn reeu btainedON DOMESTIC SALES IN SE2.: capitalt by doa .stic nt.rpri sill bs

SOS redaction on item such n shared between the contral andi,nsra. I oil, liquors and cig a9-local gonernent at th ratio of

rettes produced in SEZs.. 2 to H1OLoclg.r. .n a apoesductiorn or exemption on certaicproducts.

ON DONESTIC SALES IN THE INTHIOR:All item trnpre to an- od inthe inttr dor of Chinaa ta * edsccording to ratn set by tsa las

V. P,ud,n Now Area in Shonshei n Pudong' preferenc. eaplicitly CIC for ban;ing and insurance entab- 70-ye.r land-ae. ight. transfer. A designated bonded ra of Pudonginclude the ETDZ pxefsr.n..s, liehnent ;. sentioned but no tan ill be offred. n.e are eill engage in sntrpatta.cept the ne nner in *enmption rat i pecifed. trade. In this are.. MOFERT lincns-fro kbs'-S% rewitted incoe tee in reqoirecnt. for imports nd en-for profit r-ittd brosd. port ill hb simplifi.d and malti-

a Pudorg's prafer Jncas do not coer pi. entry and .. it nisse mill bes broadly as the SEZ. prferenc.s issud for . anagwrial personnel.do. Importantly, ercice busi-nesses -ill not auto sticallyenjoy prtferenc.s but eat firstsubmit to an approval procedur.

IOw.XD

_-43 -Annex 5

0-

N aag _ n 0~~~

e g *<3

_- c

- o

Z p a 2 S

se p 5 0 * S aU

. I i

a e g f

= I -S.s u 2

_ S _ i

e u S d* i

- .44 -CHINA: DIRECT FOREIGN INVESTNT Annex 6Utilized DFI uni Sh.e. by Sorte.

1965 t9a6 1987 1988 1969 Cv.ulvti,o 65-689Value she'. value Sher. V.I.. Sh r. VSIlU Shu.. Value Shrg Vul-v Share

roho I Uti; I; ed rbI

(cu tet , USl) 19S7.14 100.00 2243.73 1000.0 2313.50 1O00.0 3193.57 100.00 3393.00 100.00 13101.04 t00 00

Asi./PaCifie 1306.52 66.86 1697.02 7'5. 3 164 714 60.60 2653.21 83 06 2393.00 70.53 9916.49 63.33

"Horg Krst and PtMac 955.68 48.83 1328.71 59 22 159a.21 69.08 7095.20 65.60 2037.00 60.04 6014.80 5t.18Japan 315.07 15.10 263.35 11.74 219.70 0.S0 S14.52 15.11 356.00 10.49 1668.64 12.74Toi.e.n -- -- -- -- LOO.00 4.32 500.00 L5.56 400.00 11.79 1000.00 7.63

A.etul.. 14.38 0.73 78.77 31.51 4.96 0.21 4.16 0.13 - -- 102.25 0.76S;.Oapot, 10.13 0.52 13.62 C 1St 21.63 0.93 27.82 0.87 -- 73.20 0.56

Thails.d 6.6,41 0.45 9.10 0.41 11.24 0.49 6.10 0.19 -- 35.28 0.27ftWoio;.a; 3.11 0.16 1.08 0 05 3.80 0.16 3.63 0.11 -- -- 11.62 0 09

No. Zealand t.00 0.05 L.49 0.07 5.07 0 22 0.L3 0.00 -- -- 7.69 0.06"alwyuis 0.25 0.01 0.41 0.22 0 13 0.01 1.30 0. 04 -- __ 2.09 0.02Indornsia 0.06 0.00 0.49 0.22 0.00 0 00 0.32 0.0t -- -- 0.89 0.01N.al 0.00 0.00 0.00 0.00 0.00 0.00 0.03 0.00 -- -- 0.03 0 00

Morth America 366.59 16.73 325.72 14 ti5 273.02 11.80 241.95 7.58 -- -- 1210.31 11.41

Lkited States 357.19 18.25 326.17 14. S4 262.50 It.36 235.96 7.39 264.00 8.37 1466.12 11.19Canud. 0.40 0.48 2.55 0.11 10.22 0.44 6.02 0.19 -- -- 26 19 0.22

tutwu. 173.76 6.8" 1t0.56 3.05 75.91 3.28 195.93 6.13 -- -- 626.16 4.76

United Ki,odea 71.35 3.65 35.26 1.57 A 55 0.20 34.15 1.07 -- __ 145.32 1.t1Ft...ncg 32.54 1.66 43.63 l.94 15.55 0.67 22.67 0.71 __ __ 114.39 0.87Italy 19.38 0.99 29.40 1.31 16.26 0.70 30.54 0.96 95.58 0.73West Car-any 24.14 1.23 26.1t .:20 3 22 0.14 14.90 0.47 -- -- 69.17 0.53.pos-y 0.00 0.00 0.00 0.00 1.50 0.06 32.01 1.00 -- -- 33.51 0.26

0ze.nett 6.40 0.33 1.41 0.111 2.42 0.10 19.60 0.62 -- -- 30.09 0.23PFlad 0.00 0.00 0.00 0.00l 21.30 0.92 0.50 0.02 -- 21.80 0.1?Netherland 0.13 0.01 2.49 0. .1. 0.21 0.01 20.62 0.65 -- - -- 23.45 0.18Belgium 7.69 0.40 8.82 0. 11 7 54 0.33 3.69 0.12 -- -- 28.14 0.21FPiland 0.00 0.00 5.9t 0 26 0.00 0.00 10.3i 0.32 -- -- 16.25 0.12

AusteIa 0.00 0.00 21.74 0.97 0.00 0.04 0.35 0.01 - -- 22.99 0.16Sa;taatlnd 0.00 0.00 2.04 0.09 0.00 0.00 S.15 0.19 -- -- 6.19 0.06Romaania 5.65 0.29 0.00 0.00 0.00 0.00 0.00 0.00 -- 5.65 0.04S.0..n 3.57 0.18 0.02 0.00 1.61 0.08 0.00 0.00 -- 5.40 0.04Spain 2.55 0.14 2.16 0.10 0.25 0.01 0.00 0.00 -- 5.06 0.04

Ot*"* 0.00 0.00 0.76 0.03 0.00 0.00 0.00 0.00 -- -- 0.76 0.01

LUechtanstai 0.00 0.00 0.00 0.00 0.40 0.02 0.00 0.00 -- -- 0.40 0.00L.u.ebure 0.00 0.00 0.01 0 00 0.00 0.00 0.00 0 00 -- -- 0.01 0.00

middle east nd Aferic 2.04 0.10 0.99 0.041 0.25 0.01 6.77 0 21 -- -- 10.05 0.05

Xvuaib 0.00 0.00 0.99 0.04. 0.00 0.00 3.37 0.11 -- -- 4.36 0.03Tuinsis 0.00 0.00 0.00 0.00 0.00 0.00 3.37 0.11 3.37 0 03Jordan 2.00 0.10 0.00 0.00 0.00 0.00 0.00 0.00 2.00 0.02lMuritius 0.00 0.00 0.00 0.00 0.15 0.01 0.00 0.00 -- -- 0.15 0.00ruerI.y 0.00 0.00 0.00 0.00 0.10 0.00 0.03 0.00 -- -- 0.13 0.00

L*banon 0.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 04 0 00

Lib-ri 0.00 0.00 0.00 0.00 0.03 0.00 0 00 0 00 -- 0.03 0.00

Latim Amorics 7.93 0.41 0.00 0.00 2.05 0.09 0.00 0.00 -- -- 9.98 0.08

Bniil 7.93 0.41 0.00 0.00 0.00 0.00 0.00 0.00 -- -- 7.93 0.06Chile 0.00 0.00 0.00 0.00 1.49 0.09 0.00 0.00 L.9q 0.02Panaa 0.00 0.00 0.00 0 .00 0.06 0.00 0.00 0.00 0.06 0.00

0otter. 96.30 5.02 36.43 1.62 97.53 4.22 95.70 3.00 -- 32m 04 2.50

Pi*tmrcs for Tailwa invaat-atas are generally ;neluded in figures for thirdcoumt,la. paruticularly thi. forr ong Kong a4 tsh. U.S.

Seourc,: Ching Statistical Y*arbohe, nurtelu years.

CHINA: DIRECT FOREIGN INVESTMENT

DIRECT FOREIJC INVESTKf-'NT IN THE ZONEcS Ia SPECIAL CITIc5

Shonxhan Zhuha, Shntcou Xis_ee Cung*ho Sbhanghe V.l-n T......

ToteD Jiact. for- 6292.5 Mlion 6 52.3 3i ll o 1 93 7 .,l i ion m29s .l.on 5134.3 .illion 1422.1 m,llion S 66 4 l,lion 1 16 7 .,ll ionn inst_nt

ut I .sl, 19fd9

Muabar of for.iin- 647 (.9.5S) 225 (-10.7S) 285 (.29S) 225 (.251) 292 (1 01) 199 (-9.1S) 29 21insrtad enter-priuse, 1989 (1chng- over 1908)

Eea.plis of proj- * 5 Sn 0O1 (US, lu- * Cbpi- Ar (US). Ws,h.ng (HK). * Conic Inv...t-.nt * .tr.c. Co Xar. Corp. (US), * Aric.an Con-er,- * Otl, El-antor.cts, -th princi- brtcante bioycls L.ra. nylon zippers. (HK), TV.. co- (US), food and copy .ach.ne. i.g (US) apple (US). .1 ... orsput forai- n nna-st- * Alcon Nihi.i * S5C (Canada), button. aette r.cord.rs becDragas * hOC (UK). g.s proc.sing * .Osu6k Pharecqc-or and product China (C.nada./ alctronic cir- * Fil1 Happy (HK), * RJ R.ynold. To- * Paugeot (F.an..), * WR C.ac (Us), H Ni..hin Oil t,c.l (Ja.Pn),

Japan), alo-inu cuite PVC decorati.. bacco-Intern- .u o. . .sealant. Hill., Nit-ub-,. intrav-nou infu-aatru..on. * Jufensing (HK). film tioval (US) * Orlndo el.icop- Fxbhoro (US), in- (J.pa..) edibl. eon

* Sanyo (Japan) br * Pca C.aning cig.r.ttes tsr Arays (US), stru,.nts oils Ra.Sy Hsrt'calculator .nd * Cl dho.ar (HK), (Thailand). egri- * Intrhilx CorP h.l.copter. * Volk..ag.ng.r. * kspponkok O..no (Franc), sin.

e.tch -*eSahly port con.Iruct.on cultural and (US). por-Cl.in * Sco-il V.I. (US), (V CG.aany). Valv- (J&p.n) * lc.1ll (W..t Or-Phi,lip" (NHthar- aquatic good. lock. solo. alactric -a1-a ecy), hair andlnda). l.ser op- Skin csootitcati c

Spcisl incentivas * Corporat to. ' Corporat ta * Credit c.rtifi- f L nd-ua f..s n .50S r.dxction in * Eseption fro- * Land-use fa- o* * Corporals tanrats of 10 for rat of 10 for cats. for psyant Ituli indoatrial corporate t.a for lncsl ta, for Y0 5--15 par a2 ret of 10S for

Snterpr,ss ax- export ntor- of custom. tar- distr ct of Y 5 fi- y-ar. after prod-cti-vvan- per yar. ath Lhtura in ETDZporting 70% or pr.... iff. on itame o p.r , par y.ar .. p;ry of tao- tura. .n ETDZ- fic.-y.ar -. p exporting 70S orsore of product. * 501 radoction of portad or sapor- * 10% di.coxnt on y..r La. holiday until 1995 tion for high- ura of produ..

a 401 ino., t. corporate tax tad in procs- g pric' of pur- for kigh-tsch and *F..s-y..r ..a p- tach Lntur.n and * Further thr,-rafund for prof- after sapiry of operation chaed or rantad export Lnture. lion fro propnr- thoa.. aporting yar 50i rado-it* inc-atCd in stat t.. holiday *Ra.ponne .thin generl-purpos * Taraff cuts for Cy ta for nsa 60% or ors of Lion on corporastother JVs * L*nd-us fsa. of 24 hoor. to in- f.ctori.s, in- jstariels asad in kuildang. built produca ti. ft.,r aupirySix-y.r corpo- Y °S-I p.r n2 quari. of for- mtallasnt pay- production of i- or bought by for- * S....-Ye..r ...ap- of ntional trats tea r-d-,c- par yaar, skth sign-anneed ents. all-ed port sobstatutas ei gn-an...ted tion from local bol.day for high- ItLon t .r.-yea P eap- firs- to goc-rn- -oer on. yaxr liks tho.. for antur t n tba. a. tb longer tach antor- in

a L4nd-a fe* of Lion and 501 r- a..t off caa after 301 inittal etarials usad in 0ETD. .... ption. for ETOZ ,Y 0.20-1.6 par .2 ductoon for fol- * Local teP scap- doan paynt production of a- hiab-t*ch and * Ile.phon and Cn

per yr, sith loeing thre. tione/raduttion ports seport -ntures laetor f.s.30% raduction for years corrasponding to En-ption fro I,ft.d and elc- Ithre yer. *or a Local to. ss- stat-gr.ntad a- urban construe- tr-city and eterlend der-lopnt, tione/reduccions eeptions/rsdac- tion te for cbargas reducedend fine-yr . s- folIos stat.- tion- of corpo- high-tach *nd in ET0Z fr- Fb-caption for eatrb granted -asp_ rate t.a .uport .ntures. ruary 1986high-teth rea toerduin nd 51 ret. fortare. of corpor-t ta. nther .StL-r.

* Local tea ea*cp-tion. reductionfollo st .t.-grantedexeaptione/a--duetions of cor-porate tea

Additional Investe nt. .r. The US is noS theinforaetion Sainly in *nport- biggest in...tor in

procaeiavg opera- Shanghai: 40S oft on, funded by thLe .tLys jointonarsaas Chineas nentursa aracithcompanies 25 of US fir-s, 281 prothe con's praea- - eitb gong Kongt-onal foreign-in- fir-srested ant*rprii5Sere eholly foreign-onand, 201 ofChan.'s total

S_urc. China Economic Nas.. April 30. 1990. 0usnmas Chin.. Merch 2d, 198.

1!

- 46-CHINA: DIRECT FOREIGN INVESTMENT Annex 8Uti l; X* OFT 0nd Shp'. by Dro*i ac

19853 1OW 1987 1988 1986 C.vfIt;I' 1665-66Y.w.q ShaF. V*ue Shxre v0l| Sher* valu Sh e, Valuo She's yalu Shers

rltal uI I U i t*4 POI (. US 1316.O4 100.00 1741.65 100.00 1449.65 100.00 2616.34 100.00 3335.00 -- 5386.03 *00 00

C.&"Vdang 651 31 49 '2 862.71 s6953 602.69 41.60 957 86 36.56 673.76 -- 2212.16 '1.07Nj ;J 88.82 6.74 146.71 6.60 05.34 6.58 502.76 16.20 -- - 666.4 12 75Sho.ohmi 107.54 6.16 148 60 8.55 213.66 14 74 233.17 8.91 *22.12 -- S5A.37 '0 32

118.60 1.00 62.50 3.59 51.36 3.54 130.17 4 I7 -- __ 300.16 5.5755.87 * 24 51.3' 2.6S 127.41 8.79 31.65 1.22 -- -- 215.13 3.99

Ll.c.i.q 24.58 1.96 48.18 2.17 64.50 A.45 115.25 4.40 - - 204 33 3.79she...; 15.55 1.18 37.16 2.13 72.76 5.02 111.73 4.27 -- 200.06 3.71Jis.gou 33.47 2.54 33.76 1.64 46.51 3.21 103.03 3.93 -- -- 183.01 3 40Hainso -- 0.00 -- 0.00 -- 0.00 114.21 4.36 -- -- 11 21 2.125h-do.g 35.53 2.70 65.66 3.77 23.81 1.64 43.09 1.65 -- -- 102,53 1.60

30.73 2.33 *6 24 2.83 37.74 2.60 20 65 0.76 -- -- 89 12 1.653h.jion* 26.63 2.02 24.77 1.42 73.37 1.61 26 57 1.13 -- -- 71.57 1.48M4*^., 8.27 0 63 10.69 0.6l 4 s0 0 31 64.18 2.4* -- -- 76 IS L 43Si ziws. 26.72 2.16 31.61 1.63 21.23 1.46 23.61 0.90 -7 _ _ 73.56 1.37H.; e>gi.g 3.6S 0.30 24.30 1.4t 11.32 0.76 40,09 1.63 -- -- 55.36 1.03

Hubei 6.00 0.61 12.41 0.7t LI.O 0.2 22.3L 0.65 -- -- '2.21 0.76H4..., 27.29 2.07 9.71 0.56 2.36 0.16 7.71 0.29 -- - 37.34 0,66Xi.j;sv6 10.61 0.63 14.00 0.60 17.31 1.2L 5.04 0.16 -- -- 33 46 0 62Hebei 6.24 0.63 11.27 0.65 7.44 '0.51 1.73 0.64 -- -- 32.4t 0 60j.n-.i 10.46 0.80 6.06 0.52 3.63 0.27 5.18 0.20 -- -- 19.60 0.36

A.lhui 3.03 0.23 35.15 2.02 1.36 0.10 11.51 0.44 __ __ 15 63 0.30C;Q i thO6 9.78 0.74 12.16 0.70 0.00 0.00 4.40 0.17 -- -- 14.16 0 26Jilin. 4.7 0.37 2S 21 1.36 0.18 0.01 6 20 0.24 It -- 11 25 0 21Yunn&n 1.63 0.12 3.76 Cl .22 4.80 0.33 3.10 0.12 -- -- 9 53 0.18Shan-i 0.52 0.04 0.15 0.01 2.27 0.16 6.52 0.25 -- -- 9.31 0.17

Inn'. 14r.gol; 2.62 0.20 7.45 0.43 1.06 0.06 3.37 0.13 -- -- 7 08 0 13Q;nghai 0.15 0.01 -- 0.00 0.00 0.00 2.70 0.10 -- -- 2.65 0 35C.O.. 0.57 0.04 1.27 0.07 0.21 0.01 2.00 0.06 . -- -- 2 79 0 05

0.28 0.02 0.05 0.00 0.03 0.00 0.30 0.01 -- -- 0 61 0.01T;b.t -- 0.00 -- 0.00 -- 0.00 0.03 0.00 0 03 0 00

So-dceal Chi's 56ta;stical Yonrbook .ro-Jr

Distributors of World Bank PublicationsA102CINTINAOoiUA,SRL U FINIAND MEXco SOU[IHAFRPICA,CTSWANA

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Recent World Bank Discussion Papers (continued)

No. 102 International Migration and Development in Sub-Saharan Africa. Volume II: Country Analyses. Sharon Stanton Russell,Karen Jacobsen, and William Deane Stanley

No. 103 Agricultural Extensionfor Women Farmers in Africa. Katrine Saito and C. Jean Weidemann

No. 104 Enterprise Reform and Privitization in Socialist Economies. Barbara Lee and John Nellis

No. 105 Redefining the Role of Government in Agriculturefor the 1990s. Odin Knudsen, John Nash, and others

No. 106 Social Spending in Latin America: The Story of the 1980s. Margaret E. Grosh

No. 107 Kenya at the Demographic Turning Point? Hypotheses and a Proposed Research Agenda. Allen C. Kelleyand Charles E. Nobbe

No. 108 Debt Management Systems. Debt and Intemational Finance Division

No. 109 Indian Women: Their Health and Economic Producivity. Meera Chatterjee

No. 110 Social Security in Latin America: Issues and Optionsfor the World Bank. William McGreevey

No. 111 Household Consequences of High Fertility in Pakistan. Susan Cochrane, Valerie Kozel, and Harold Alderman

No. 112 Strengthening Protection of Intellectual Property in Developing Countries: A Survey of the Literature. Wolfkang Siebeck,editor, with Robert E. Evenson, William Lesser, and Carlos A Primo Braga

No. 113 World Bank Lendingfor Small and Medium Enterprises. Leila Webster

No. 114 Using Knowledgefrom Social Science in Development Projects. Michael M. Cemea

No. 115 Designing Major Policy Reform: Lessonsfrom the Transport Sector. Ian G. Heggie

No. 116 Women's Work, Education, and Family We!fare in Peru. Barbara K. Herz and Shahidur R. Khandker, editors

No. 117 Developing Financial Institutionsfor the Poor and Reducing Barriers to Accessfor Women. Sharon L. Holtand Helena Ribe

No. 118 Improving the Performance of Soviet Enterprises. John Nellis

No. 119 Public Enterprise Reform: Lessonsfrom the Past and Issuesfor the Future. Ahmed Galal

No. 120 The Information Technology Revolution and Economic Development. Nagy K. Hanna

No. 121 Promoting Rural Cooperatives in Developing Countries: The Case of Sub-Saharan Africa. Avishay Braverman,J. LuisGuasch, Monika Huppi, and Lorenz Pohlneier

No. 122 Performance Evaluationfor Public Enterprises. Leroy P. Jones

No. 123 Urban Housing Reform in China: An Economic Analysis. George S. Tolley

No. 124 The New Fiscal Federalism in Brazil. Anwar Shah

No. 125 Housing Reform in Socialist Economies. Bertrand Renaud

No. 126 Agricultural Technology in Sub-Saharan Africa: A Workshop on Research Issues. Suzanne Gnaegy andJock R.Anderson, editors

No. 127 Using Indigenous Knowledge in Agricultural Development. D. Michael Warren

No. 128 Research on Irrigation and Drainage Technologies: Fifteen Years of World Bank Experience. Raed Safadi andHerve Plusquellec

No. 129 Rent Control in Developing Countries. Stephen Malpezzi and Gwendolyn Ball

The World Bank

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