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Unit 8: World Trade Organization

5. Strategic positioning: Many companies see investment in China as a crucial part of notes
a global strategy, particularly given its status as the world’s final big growth market.
Explained one analyst, “If you want to survive, you have to be global, and China is a
part of the global economy.”
Over time, the Chinese government has encouraged foreign investment—albeit only in
certain sectors of the economy and only subject to evolving constraints. Early on, the Chinese
government believed that the superior competitiveness of foreign investors would crush
its fledgling domestic firms. Therefore, since the early 1980s, China has provided special
Economic Zones (SEZs) that offered foreign investors preferable tax, tariff, and investment
treatment as long as they exported all of their output. These incentives were necessary
because the uncertainty of China’s political environment made foreign companies wary
about investing there.
Foreign companies could also establish joint ventures with Chinese companies to sell to the
domestic market. However, the government approved these proposals only if they served
a national priority for which China had to seek outside help. Chinese market-serving
investments were made to improve an existing Chinese product or industry rather than to
launch production of a new product in China. For example, China approved of a number
of joint ventures in the petroleum industry because it considered future oil sales a high
priority for earning foreign exchange.
Getting permission to operate in China required companies to follow a long and winding
road that started with an expression of interest and ended with an extensive review by
MOFTEC or provincial authorities. A foreign firm began by finding a Chinese organization
to sponsor its application to establish a representative office. The foreign company
might then be assigned a Chinese company with which it negotiated. This same Chinese
company could negotiate with more than one foreign company to develop the best offer.
The same steps applied to a wholly-owned investment; however, the foreign company
could deal directly with all authori ties rather than have a proposed partner handle the
arrangements.
Determining the proper authority depended on the priority of the particular type of
investment. For example, provincial officials could approve those business operations
that planned to export all output. Further, MOFTEC prioritized industries—those that it
encouraged, restricted, or prohibited involvement by foreign companies. The higher the
priority, the more likely that approval would be granted at the provincial level. The list of
industries was quite detailed and specific. For example, the list applied in 1995 included
industries within 18 categories.
Until the mid-1990s, China required most foreign firms to agree to an equity joint venture
with a local partner as a precondition to market access. The Chinese government believed
that equity joint ventures versus other types of FDI transferred capital, technology and
management skills yet did not dilute its own control. Theoretically, a foreign firm could
estab lish a wholly foreign-owned venture in select industries. Such proposals, however,
received greater scrutiny from Chinese authorities.

China has steadily increased its dependence on international business. Its trade (imports
plus exports) as a percentage of GDP has risen, so too has the number of SEZs. It has grad-
ually permitted wholly foreign-owned ventures. In 1997, such ventures surpassed equity
joint ventures for the first time. By 1999, more than half of all foreign investments in China
were in the form of wholly foreign-owned ventures. Further, Chinese companies could
seek foreign joint venture partners on their own.
China joined the WTO in November 2001. Accession to the WTO required the Chinese
government to agree to trade and investment liberalization. China’s gradual integration
Contd...

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