GISPRI No. 16, 1998

Is China Suigeneris ?

On 27 February the Conference on Foreign Investment in China got an end from a very broad view which included those of Japan, Germany and United States. Main areas of discussion were treated in the previous day on the strategies regarding the flows of capitals and technology to the most potential inward country in East-Asia region. Foreign Direct Investment locates in China taking into consideration specific trends of her nature to clear up the way as a potential membership at WTO level. The Panel discussion was mainly a number of conclusions and questions on the case of China as a "sui generis" entry-mode-country of FDI in East-Asia. A number of questions were taken to find proper answers. Following that the number of interventions of the distinguished Panelists were intensive indeed in settling up a diverse number of preliminary features with clear connections of each others, it should be important to avoid a named list of the Panelist interventions but focusing on the main content of their interventions as a clear overview. By that means, as follows: The answer was YES, as a whole conclusion from the diverse Panelist perspectives, but their reasons were at some extent different on the question above-mentioned. China is a huge country not only as a territory but as a historical and cultural entity. It should be fundamental when an answer is given to conclude that Chinese know what they want. Far different from the learning and innovation experiences of Japan during the 50s-70s and Thailand during the 80s, and respectively differentiated because the import of technology via licensing in the case of Japan through a low process of adaptation and assimilation of new technologies, or capitals in the case of Thailand that represented low value-added kind of foreign investors, i.e. low-tech manufacturing, as a entry- mode of FDI. China had passed very much quickly through a short period of time, mainly beginning of 90s, from low-value-added type of FDI to high-value-added ones. They know on their enormous market potential to take whatever possibility to negotiate patiently what their market capability and essence means. Taking the example in the high-tech field of telecommunications, China market potentiality of growth is much superior than the European Union and United States market together, and for China it just represents that the classical view of FDI, when manufacturer firms used to shrunk the lag between the moment a product is state-of-the-art and when it is a low-tech commodity as an assembly production base, is over. China is currently eager to attract only technologically capable investors, particularly technology-based firms or multi-technology corporations in which technology and management are implicit in the Chinese concept of FDI. The consequence for foreign investors looking for an opportunity to entry in that huge market is a global battle for competitiveness, and in being success on that purpose, from the Chinese perspective as an inward country, multinational enterprises must apply into the China production sites their last and best management and technological factors, i.e. diverse kind of transfer of technology through ties-up; intensive learning and training of local suppliers in China; continued movement of Chinese technicians abroad to be trained through accelerated programmes at the country investor head-quarter, etc,. From a general observation the competition to gain the Chinese market in terms of FDI has a picture different from each of the investor positions. In the case of United States, it started in mid-80s through financial instruments, e.g. equities, in the last half-decade US firms have opted to involve significant amount of high-tech and infrastructures investment projects and their entry-mode through institutional instruments have attracted large private funds . The experience of European investors, mainly EU countries, started considerable much more delayed, and at a very broad base, but an unusual movement of investments have took place lately gaining the time-lost and at a large portfolio level, specially on heavy industrial projects. The experience of Japan was considerable characterized by her trading companies, which have play a key role to differentiate Japanese FDI from other investors. Japanese companies had on an average the most developed managerial capability for concerted technology, product and market diversification but Japan initially was much more reluctant than her counterparts in Europe and United States to transfer high-tech know-how following her investments into China, however, the current global competition, at some extent derived from the great extension of the emerging market of China, had made to Japan to reconsider a deeper exchange of technology entry-mode of outward direct investments from Japan. There is also a notorious differentiation, when Western companies hired mostly local people for their investment projects but Japanese firms used their own style of expatriates. It gives a total different meaning to the concept of FDI in China, for Western enterprises China is a territory to colonize. On the territorial extension of the emerging market of China a discussion has taken a definitive importance. To define the exact location of FDI in China as a special economic zone for foreign investors, and future trends on her territorial administration. A hypothesis is to be examined if the location of inward investments were to be a Chinese coastal exclusive zone, and differently from investments in the inner-mainland of China. It is proved that there is a clear East-Asia map of FDI dominated and along the Chinese coastal territory characterized by no government intervention to rule business and commercial activities, integrated in the global market activities with high-technological infrastructures and named East-Asia coastal zone or Mediterranean “corridor”, which should include all the countries and their respective commercial ports, manufacturing and business coastal sites. It should extent from Vladivostok in Russia to Hanan in China, with emphasis in Hong Kong, Macao, and Taiwan . From this hypothesis it seemed that an imbalance were took place in the Chinese entry-mode of FDI and consequently a hypothetical non-equilibrated economic development between the coastal inward zones and the inner-mainland territory of China. The theoretical analysis and discussion took then a complete approach between principal arguments on the question that coastal region must be paralleled to an economic development in the interior regions of China once that the stage of market investment type is being followed by a more exclusive capital intensive investment one. In fact, a most convenience Chinese public policy to take further steps to develop new inner economic zones through public investment in infrastructures, particularly transportation to gain direct access to inner China, together with updated regulatory measures to avoid the current situation of overlapped rules and norms, and to accomplish a much centralized administration programme, and by the way of taking from municipalities and provinces legal capacity and competencies to act with transparency under a regulatory regime. Nevertheless there are a couple of observations, firstly, that while clearly a labor market is located in the coastal zones, people used to move capitals from that area to inner China with the result of increasing the economic development of those interior regions of China. And, secondly, due to her weak regulatory regime, a feeling that the Chinese current policy on inward FDI were to be just a short-term economic experiment. Here appears the dilemma on the rule of law instead of rule of man and the necessary changes in the legal institutions of China because the tendency of evasion of policy and law. And hereby a question on the floor: Is the central government of China able to enforce the law in a future membership participation at WTO level ?.Observation.- China regulations on FDI, including market access norms and trade policy at an ideological or political level, are in accordance with WTO principles of free trade. WTO as a non-governmental international organization tries since its creation to regulate free markets under a non-protectionism legal base. But it is happening that those actors that initially were negotiating trade and market, named "States", are loosing the floor. In other words, I referred to "uncertainty" because MNEs -multinational enterprises- are running the real economic development of markets and a highest level to influence politics, and as a result also policies. 2.- NEWER REALITIES: When MNEs enter in a new market, the case of China, it might result into a dispute of interests, particularly because a complete cultural differentiation between those MNEs and the host country. Clearly that the inward country should deal properly on it through new national regulations if it wants to attract foreign investors, but at the same time the classic idea of "to shrink the lag between the moment a product is state-of-the-art and when it is a low-tech commodity" is already over in the very near future. And this is a NEW REALITY, as a long-term economic development perspective through FDI from the inward country's point of view. and 3.- At the Panel Discussion a North-American lawyer, with experience in China on US infrastructures projects, explained us how the lack of transparency of Chinese regulations is currently a severe problem for foreign investors. It was really obvious that as a US lawyer assisting to US corporations under the legal base of the "Common Law" he had tried to apply his own legal model and business know-how into something totally different, so the Chinese legal base and market. Which is the traditional way of understanding business law for "Common Law" lawyers needs to be up-dated to understand legal models and business networks far diverse. 

The End.