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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 Regulatory Framework for FDI in China

A body of legislation relating to foreign direct investment (FDI) and foreign-invested enterprises (FIEs) has been passed since 1978. Separate laws govern FIEs of different forms. These laws specify the procedures for examining and approving FDI projects as well as some incentive measures. Major changes resulted from China’s accession to the World Trade Organisation (WTO) in 2001, including the opening up to foreign investment of several services sectors. FDI is guided into or away from specific sectors of the economy by four Catalogues for Guidance of Foreign Investment Industries: prohibited, restricted, permitted and encouraged. Incentives are provided to encourage investment in the Central and Western regions. One result of WTO entry was the removal of traderelated investment measures (TRIMs) such as local-content requirements and export performance requirements, and the requirement that FIEs balance their foreign exchange receipts and expenditures...

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