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OECD Investment Policy Reviews: China 2003

Progress and Reform Challenges

image of OECD Investment Policy Reviews: China 2003

China has become one of the world's leading destinations for foreign direct investment (FDI) since the Chinese government opted to reform the economy and open it to foreign trade and investment. Inflows of FDI, which accelerated at the time of China's accession to the WTO in 2001, have been an important factor in promoting rapid economic growth and technological progress. However, there remains substantial potential for a greater inflow of long-term, high-technology, high-value-added FDI from OECD countries.

This study records and evaluates the development so far of an enabling environment for FDI and suggests policy options designed to improve it further. Foreign investors were initially attracted to China by cheap land and labour, the promise of a large market and, to some extent, by fiscal incentives. To sustain and increase large-scale FDI inflows, it is now necessary to move towards a more strongly rules-based attraction strategy, based on structural elements which will include a sound legal system, transparent laws and regulations, streamlined investment approval procedures, good corporate governance, effective competition policy and a sound financial system.

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The Evolving Competitive Environment for FDI

State-owned enterprises (SOEs) are playing an increasingly smaller role in the Chinese economy. They no longer employ most of the workforce; their share of output has fallen to less than half the total; they appear on average to be less profitable than all other enterprises. The reform of SOEs has been slow to start but is now accelerating. Domestically-owned private enterprises, once banned, are now being encouraged. SOE reform offers opportunities to foreign investors, including the possibility of acquiring SOEs or their assets, improved corporate governance and accounting in domestic partners of FIEs, a reduction of unfair competition, stronger competition and a growing market for consultancy and other business services. Although cross-border mergers and acquisitions (M&A) have become the main form of FDI flow between developed countries, crossborder M&A still plays a negligible role in China’s FDI inflows, largely because the legal status of M&A there remains uncertain and several regulatory obstacles continue to impede M&A involving FIEs. Recent measures to improve corporate governance are welcome, but problems such as high state ownership of shares, related party transactions and inadequate transparency and disclosure have yet to be fully addressed...

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