Patterns of direct foreign investment in China

WDP- 130 World Bank Discussion Papers China and Mongolia Department Series Patterns of Direct Forelgn Investment in Ch'ina Zafar Shah Khan FILE COPY  Recent World Bank Discussion Papers No. 73 Information Systems and Basic Statistics in Sub-Saharan Africa: A Review and Strategyfor Improvement. Ramesh Chander No. 74 Costs and Benefits of Rent Control in Kumasi, Ghana. Stephen Malpezzi, A. Graham Tipple, and Kenneth G. Willis No. 75 Ecuador's Amazon Region: Development Issues and Options. James F. Hicks, Herman E. Daly, Shelton H. Davis, and Maria de Lourdes de Freitas [Also available in Spanish (75S)] No. 76 Debt Equity Conversion Analysis: A Case Study of the Philippine Program. John D. Shilling, Anthony Toft, and Woonki Sung No. 77 Higher Education in Latin America: Issues of Efficiency and Equity. Donald R. Winkler No. 78 The Greenhouse Effect: Implicationsfor Economic Development. Erik Arrhenius and Thomas W. 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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, and countries 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 from Publications, 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 0-8213-1911-6 1. Investments, Foreign-China. 2. Investments, Foreign- -Government policy-China. I. Title. II. Series. HG5782.K43 1991 332.6'73'0951-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 taken special measures to attract DFI. This paper reviews the growth of DFI in China and identifies various constraints which need to be removed to further improve China's attractiveness to foreign investors. The paper draws exten- sively on reports, papers and other material available on DFI in China as well as 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 in Chapter I, followed by a review of the experience in East Asian countries in Chapter II. Chapter III reviews the recent history and developments of DFI in China including data on its distribution by source, region, and sector. Chap- ter IV provides information on gains from DFI to China and an assessment of trends 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 Fen Y 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 Nations CV = Cooperative Ventures DFI = Direct Foreign Investment FIE = Foreign Invested Enterprise JV = Joint Venture LAMIC = Low.- and Middle-Income Countries MOF = Ministry of Finance MOFERT = Ministry of Foreign Economic Relations and Trade MNC = Mulitnational Company NIC = Newly Industrialized Country NIE = NewLy Industrialized Economies SEZ = Special Economic Zone SOE = State Owned Enterprise UNCTC = United Nations Center on Transnational Cooperations WOV W WhoLly Owned Ventures  - vii - Foreword The World Bank's economic and sector work program in China is a very active one ranging over a wide spectrum of topics from macroeconomics to health 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 them containing valuable analysis and information, have remained outside the public domain. Through the China Department Working Paper Series, we hope to make available to a broad readership among the China watchers and development communities a few of the papers which can contribute to a better understanding of China's modernization. Mr. Zafar Khan's paper on Direct Foreign Investment provides an auspicious launch to the series and will be followed in the coming months by papers on price reform, rural industry, Sino-Japanese relations and provincial development. We hope to publish six to eight papers each year drawn from the entire cross-section of fields in which the Bank is engaged. We wish our readers bon appetit, Shahid Javed Burki Director China and Mongolia Department Asia Region  I  - ix - Table of Contents Page No. Sunmnary .*.*.. . . . . . . . . . . . . . . . . . . . . . .*. xi I. GLOBAL OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . 1 A. General Trends . . . . . . . . . . . . . . . . . . . . . 1 B. Impact of DFI on Host Country Economy . . . . . . . . . . 2 II. EXPERIENCE IN THE EAST ASIA REGION . . . . . . . . . . . . . 3 A. Overall Pattern . . . . . . . . . . . . . . . . . . . . . 3 B. Policies, Regulations, and Inst.tutional Environment . . 5 C. Lessons Learned . . . . . . . . . . . . . . . . . . . . . 6 III. CURRENT STATUS OF DFI IN CHINA . . . . . . . . . . . . . . . 7 A. Background . . . . . . . . . . . . . . . . . . . . . . . 7 B. Performance Analysis . . . . . . . . . . . . . . . . . . 9 C. Post-Tiananmen Developments . . . . . . . . . . . . . . . 12 IV. IMPACT OF DFI ON CHINA . . . . . . . . . . . . . . . . . . . 13 A. Gains from DFI . . . . . . . . . . . . . . . . . . . . . 13 B. Assessment of Trends and Patterns from the Perspective of China's Development Goals . . . . . . . . . . . . . . 15 V. DFI ISSUES RELEVANT TO CHINA . . . . . . . . . . . . . . . . 21 A. Government Objectives . . . . . . . . . . . . . . . . . . 21 B. Key Issues in the Areas of Policies, Procedures and Infrastructure . . . . . . . . . . . . . . . . . . . . . 22 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ANNEXES 1. Flow of Direct Foreign Investment by Region . . . . . . . . . . 30-34 2. Investment Incentives on DFI in China and ASEAN Region . . . . 35 3. Types of DFI . .............. 36-38 4. Overview of Investment Incentives and Taxes . . . . . . . . . . 39-42 5. Total Contracted Direct Foreign Investment in China . . . . . . 43 6. Utilized DFI and Share by Source . . . . . . . . . . . . . . . 44 7. Direct Foreign Investment in Zones and Special Cities . . . . . 45 8. 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 . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Direct Foreign Investment in Selected East Asian Countries . 4 3.1 Contracted and Actual DFI in China: 1988, 1989 and 1990 . . 12  - xi - SUMMARY i. Global direct foreign investment (DFI) has had tremendous growth since the 1960s. During 1985-89 alone, the gross annual inflow of DFI increased from $47 billion to $185 billion and the stock increased from $713 billion to about $1,000 billion. Most foreign investment comes from the industrialized countries, and also more than three-fourths of such investment is channeled to the industrialized countries. According to an estimate, by 1995, the global annual inflow of DFI is expected to increase to $230 billion in 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 DFI has not only declined in the 1980s, their actual capital inflows have also decreased in real terms. A small number of LAMIC, mostly located in the East Asia region, have seen an upsurge in foreign investment. The annual inflow of DFI to China doubled (from $1.7 billion to $3.4 billion) in 1985-89 but Singapore, Malaysia, Thailand, Indonesia, the Philippines and Korea have done even better. iii. All Association of South East Asian Nations (ASEAN) countries offer generally similar incentive schemes. The relative attractiveness of indivi- dual countries is therefore influenced by the macroeconomic and political stability, physical infrastructure, labor skills and wages, local support industries, level of government controls, and availability of information on investment opportunities. Almost all ASEAN countries and NIEs in Asia have assigned a prominent role to the private sector; liberally opened fields of investments to foreign and domestic companies; lowered, simplified, and/or removed tariffs and surcharges; relaxed/deregulated the capacity-licensing system; relaxed foreign investment regulations; and introduced liberal foreign exchange policies. The above policies have proved to be a boon for foreign investment. iv. Due to historical and ideological reasons, DFI was very limited in China before the 1979 economic reforms. The Government's development program that 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 safeguarding investment--were introduced over time. In fact, China's present package of incentives is quite similar to that of ASEAN countries. China also estab- lished special economic zones (SEZs) and opened up many coastal cities with special 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 the abundant supply of cheap labor in China. Hong Kong and Taiwan (which account for 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 have invested mainly in simple labor-intensive assembly or packaging operations for export 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 under DFI. vi. Along with new technology, foreign-invested enterprises have adopted the management systems introduced by their foreign partners and most of them have reported major improvements in productivity and efficiency although bene- fits were slow to come in joint ventures formed with existing state-owned enterprises (SOEs). The lessons learned from foreign-invested enterprises with respect to ownership, management, organization, systems, policies and procedures can be very useful for China and are reflected to some extent in the enterprise reforms already under way. vii. Another major objective of DFI in China has been the promotion of exports. Up to the end of the 1980s, the impact of DFI on China's foreign trade remained relatively small, but it was growing rapidly; exports by for- eign-invested enterprises amounted to about 13 percent of total exports in 1989. 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 is a net earner of foreign exchange if, as it should be, the service industry is included. viii. While the preference of the Chinese government for export-oriented or 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 to foreign investors. Among the wide range of such incentives, only a few are related to high-technology industries and incentives for R&D in China are virtually absent. ix. China will continue to welcome DFI in the future but, as in the past, the emphasis will remain on technology transfer and exports. In addi- tion to labor-intensive technology, China will seek modern technology from developed countries to narrow the technology gap, to increase the value added in 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 is needed at least for the manufacture of certain important components. In many cases, 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, in order to attract multinational companies (MNCs) from developed countries to 1/ In this paper, "modern technology" refers to the latest state-of-the-art technology available in inclustrialized countries.  - xiii - invest in more technology-intensive heavy industries, China will have to respond to their special concerns and motivations. MNCs' investment deci- sions, particularly in industries with long gestation and payback periods, are influenced to a greater extent (compared to relatively smaller investors from Hong Kong and Taiwan) by the macroeconomic environment and political situa- tion, local and third-country markets, government controls and restrictions on DFI operations, foreign exchange constraints on imports and dividend remit- tances, supply and prices of local raw materials and other inputs, regulations governing intellectual property rights, availability of skilled workers, and the condition of infrastructure in host countries. They also minimize their financial risks by diversifying investments in different countries. The recent liberalization in East European economies has opened new investment opportunities for MNCs and, at the same time, developed countries (e.g., US, Germany, Britain) and the fast-growing East Asian countries continue to offer sound investment propositions. While China still remains attractive because of its large domestic market, provided foreign investors perceive that they will have access to it, it will need to make greater efforts in future to present itself as a comparatively safe and rewarding investment avenue from the perspective of MNCs and, thus, to obtain modern technology. x. The export objective of DFI is somewhat inconsistent with the advanced technology objective. Advanced technology is generally available from developed countries that would like to transfer it only if they can cater to 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 by giving greater attention and emphasis to the following four areas. First, foreign investment should also be encouraged in the service sector such as banking, insurance, shipping, aviation, and consultancy services. DFI is increasing very rapidly in these fields worldwide and can bring many direct and indirect benefits to China. The experience of developed countries shows that the existence of an efficient service sector is crucial to the overall economic development. Second, China should open up onshore exploration of oil and gas for DFI, notably in Tarim Basin, which, among others, needs modern technology. Third, the Chinese government should explicitly recognize the importance of backward and forward linkages that can be created by foreign investment in large industrial projects, and make them an integral part of its policy and strategy for DFI. Such linkages would not only promote the devel- opment of feeder and downstream industries, but would also help to improve the cost efficiency and quality of products of such industries and, thus, promote their exports. Fourth, China should shift its emphasis on DFI from SEZs to a nationwide basis. The focus on SEZs was perhaps justified in the early period of attracting DFI and the related experimentation. However, China has now gained significant experience in DFI and, considering the cost of developing and maintaining SEZs on the one hand, and the general confinement of benefits to a few locations on the other, it would be desirable that attention now shift to the broader economy.  - xiv - xii. Given more conducive policies, procedures and infrastructure, China will be able to attract larger amounts of DFI, particularly in high-technology industries. In this context, a major issue that needs to be addressed is substantial bureaucratic controls and involvement leading to difficulties in investment decisions and impairment of enterprise profits. An excessive num- ber of government agencies are involved in DFI; there is lack of readily available information on all rules, regulations, directives, etc. applicable to a particular DFI and many of these rules and regulations are vague and subject to different interpretations; municipal and provincial governments frequently issue new rules and permit new incentives which vary from place to place; ad hoc changes are made in government regulations which are often detrimental to the interest of foreign-invested enterprises; additional con- cessions, which are outside the agreements already reached, are asked for from foreign investors; compliance with central government guidelines and direc- tives at local levels is not properly monitored; and there is the absence of a genuine "one-stop" foreign investment promotion agency in China. xiii. Another major issue is the availability of foreign exchange to nonexporting enterprises. While the government has allowed, since 1986, foreign-invested "advanced-teclnology enterprises" to sell their products in the domestic market, they are still expected to balance their foreign exchange needs. 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 measures have helped to mitigate some oif the problems faced by foreign investors in meeting their foreign exchange needs, they do not completely offset the effects of nonconvertibility of the Yuan and continuing emphasis on the for- eign exchange balance requirement. As long as the foreign investors are not assured of a reliable and efficient system for acquiring foreign exchange to import raw materials and spare parts and to remit profits, they will continue to be reluctant to invest in projects that are not export-oriented (at least in the early years of operation) but could result in significant transfer of modern technology. The absence of such a system also prevents the development of effective backward and forward linkages. xiv. Other issues that need to be addressed are inadequate foreign investment 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 of managers to hire, fire and reward workers; inadequate legal framework; and weak transport and communicatioln links and shortages of water and energy in many locations. Of course, most of the above-mentioned issues are equally applicable to domestic investments in, China. xv. A proposed action program to address the above-mentioned issues is summarized in the following box. While a majority of these actions will be the 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.  -xv- Box: PROPOSED ACTION PROGRAM TO PROMOTE DIRECT FOREIGN INVESTMENT IN CHINA Timeframe [vea S 1-3 4-7 above Minimization and Simplification of Administrative Controls Introduce clear and transparent rules and regulations from the entry to the exit of foreign investments x x - The approval process (including the timeframe) and incentives across SEZs, 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 promotion agency. Chinese officials to visit such agencies in other countries to 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 FlEs and local enterprises can freely trade foreign exchange x - Until the above market starts functioning smoothly and taking care of the needs of FIEs, the government should allocate foreign exchange at a realistic exchange rate to FIEs that need it x Concerted Promotion of DFI Regularly 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 individual investment 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 FIEs Introduce a well-designed system of export financing, particularly to finance working capital needs and financing of accounts receivable on export sales x -Provide insurance for some of the risks of financing export sales x Recent 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 simple duty-drawback arrangement) necessary inputs if domestic producers cannot match the international quality and price x x x - Encourage local producers to improve quality and price through compe- tition x x x Labor Allow FIE managers full authority to exercise their powers to hire, fire and set wages and incentives x Irovement of Legal Framework Introduce 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 x Make all Taws and regulations to be clear and precise and thus easy to interpret x x x Do away with not-so-publicized winternal rules" imposed by regional and local authorities x Development of Infrastructure - D-velop efficient RAD organizations, training institutes, insurance companies and banks, consultancy services, etc. x x x - Develop transport and communications facilities and improve power and water supply x x x   - 1 - Direct Foreign Investment I. GLOBAL OVERVIEW A. General Trends 1.1 The volume of global direct foreign investment (DFI) has increased more than tenfold since 1960. During 1983-88 alone, DFI increased by 24 percent annually as shown in Table 1.1 (details in Annex 1). Table 1.1: GLOBAL DFI INFLOW ($ billion) 1983 1985 1987 1988 Value Z Value % Value Z Value % World Total 47.82 100.0 47.50 100.0 110.08 100.0 141.53 100.0 High-income economies 38.94 81.4 36.66 77.2 96.28 87.5 121.41 85.8 Europe 21.67 45.3 16.21 34.1 42.14 38.3 50.05 35.4 United States 11.96 25.0 19.03 40.1 46.89 42.6 58.45 41.3 Japan 0.41 0.9 0.64 1.3 1.17 1.1 -0.52 -0.4 Low- and middle-income economies 8.88 18.6 10.84 22.8 13.80 12.5 20.11 14.2 Latin America 3.58 7.5 4.28 9.0 5.64 5.1 7.92 5.6 Asia 2.96 6.2 3.34 7.0 4.74 4.3 7.79 5.5 Africa 1.18 2.5 0.74 1.6 1.34 1.3 0.84 0.6 Others 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 (the latest 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 the end of 1989. The scale of investments reflects the phenomenal growth of mul- tinational corporations which have been enhancing their competitiveness and seeking new markets by setting up subsidiaries to serve consumers in different locations. Most foreign investment has come from the industrialized coun- tries, and also more than three-fourths of such investment has gone to the industrialized countries--mainly to the US, Britain, Germany, and France. The low- and middle-income countries, as a group, have not only failed to share in the boom of the 1980s, but have actually experienced a drop in inflows of capital if measured in real terms. ASEAN countries, Hong Kong, Taiwan, and  -2- South Korea have by contrast, sieen sharp increases mainly due to Japanese investment in the area, but the rest of Asia has lagged behind. 1.3 Not only is foreign investment growing fast, its character is also changing. 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 than the United States. At the same time, services were accounting for a bigger share than manufacturing though the actual situation varied from country to country depending upon investment opportunities. For example, the share of service sector in Japanese DFI is increasing but the share of manufacturing in its US investments remains at around 40 percent. Another new development in the 1980s is the acceleration in foreign investment by the newly industrial- ized economies (NIEs). Total recorded direct foreign investment by NIEs in developing 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 Royal Institute of International Affairs in London, expects the above-mentioned trends in DFI to continue in the 1990s. The study indicates that the global stock of DFI will more than double in real terms between 1988 and 1995 and the annual 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. It involves a capital flow into the host country and thus supplements other forms of foreign transfer of savings. In the case of joint ventures, DFI also results in the mobilization of clomestic savings for productive purposes. It is normally expected that DFI would bring in production and process technology that are often new for the host country. In some cases, multinationals would not be prepared to transfer this technology unless it was for one of their own subsidiaries. Another benefit of DFI is that it helps to promote exports as the foreign investor would normally be more conversant with foreign markets and would have its own well-established market networks. Sometimes exports are 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 by exposing them to international practices and applying their well-established training methods. Multinationals also bring some management and organiza- tional know-how which includes organization, accounting, marketing, etc. In many countries, DFI may result in the promotion of subcontracting as the home country's manufacturers would like to supply various parts and components to the foreign-invested enterprise. In turn, this may also lead to better Rual- ity control in the local industry. Most of the above-mentioned benefits of DFI would have a demonstration efEfect as the new technology, production methods, and management techniqutes would be replicated in other industries in the host country. 1.6 Direct foreign investmuent has also been criticized for several shortcomings. For example, in some cases, it results in the import of raw  - 3 - 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 does not result in significant exports to offset the import burden. In some cases, used machinery has been shipped from the headquarters plant, which does not result in any technological gain to the host country. It is also argued that often import protection, and export subsidies have to be provided to a foreign invested enterprise to keep it financially viable. This causes further dis- tortions, and often bias against domestic manufacturers. Also, political trouble has followed private investment where it has come predominantly from one home country and the host country has been merely the recipient of foreign investment 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 developing countries in global DFI has declined in the 1980s. However, a small number of developing countries, mostly located in the East Asia region, has seen an upsurge in foreign investment, as shown in Table 2.1. 2.2 Thailand and the Philippines had the most rapid increase in DFI though 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 has tripled mainly because of its growing importance as a financial center in Asia. The DFI in South Korea increased more than threefold during 1985-89 because of the greater opening of the economy for foreign investment in late 1980s. In China, the DFI doubled during the same period. During 1985-89, DFI has accounted for between 1.5 percent and 6.5 percent of gross domestic investment in Thailand, 1.2 percent and 3.5 percent in Indonesia, 5.7 percent and 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 about 35 percent of the total, followed by 21 percent by NIEs of Asia. The United States provided only 7 percent of the tot~al DPI in ASEAN countries. Japan's share in East Asian countries is increasing in absolute numbers. 2.4 Indonesia, the site of large-scale natural resource projects, has been the leading recipient of Japanese DFI in Asia. In the 19708, Indonesia captured 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's inflow 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 proportion of flows to the NIEs in Asia, particularly in the 19809. Japanese DFI flows to Hong Kong more than doubled from the 19708 to the 19808. In 1987, Hong Kong received over $1 billion in flows, or roughly 3 percent of the world  -4 - Table 2.1: DIRECT FOREIGN INVESTMENT IN SELECTED EAST ASIAN COUNTRIES ($ million) 1985 1986 1987 1988 1989/a ASEAN Countries Malaysia 694.7 488.9 422.7 719.4 1,845.8 Thailand 163.2 262.5 351.9 1,105.7 1,699.4 Indonesia 310.0 258.0 446.0 542.0 735.0 Philippines 12.0 127.0 307.0 936.0 482.0 Singapore 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 inflow in 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 two decades, attracted by a fast-growing economy and a rapidly diversifying indus- trial base. Malaysia had slow but positive growth between the 1970s and 1980s. Flows to the Philippines dropped by 31 percent, mainly due to politi- cal and economic instability. An important new recipient of Japanese DFI was China. Flows to China began in 1984; by 1987 China had 4 percent of the Japanese global DFI, about $1.2 billion out of $33.4 billion. 2.6 Application. The composition of DFI in key Asian countries has varied according to the economic strengths of the host country. In general, there is a shift from investments; in mining and oil and gas exploration towards manufacturing and service industries. Again, Japanese DFI in key Asian countries (for which more detailed data is available) is a good indica- tor of overall trends. About 90 percent of Japanese subsidiaries set up in Korea in the 1970s were in the manufacturing sector. The share dropped to about 80 percent in the 1980s, but manufacturing was still dominant. In Thailand, the manufacturing sector has absorbed about half of Japanese DFI in that country, and the combined share of commerce and trade sector has been  -5- 20 percent. Some 10 percent of investment has gone to mining, agriculture and construction. Malaysia showed a similar pattern to Thailand but is notable for the increasing share of DFI in its construction sector (from 3.9 percent in the 1970s to 15.1 percent in the 1980s) and for the decreasing share in its manufacturing sector. 2.7 Hong Kong has had dominance in the commerce, trade and financial sectors (about 60 percent) with a share of 16 percent to 22 percent of the Japanese DFI in the manufacturing sector. Singapore also has had dominance in commerce, trade and finance (about 30 percent to 50 percent). Compared with Hong Kong, Singapore has received a larger share of manufacturing (30 percent to 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 the 1970s 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 leading sector 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 for Japanese DFI have been manufacturing (51 percent) and construction (13 per- cent). 2.8 Leading manufacturing subsectors for Japanese DFI in most Asian countries in the 1970s were electrical machinery (including electronics), tex- tiles and chemicals. In Korea, Taiwan, Hong Kong and Malaysia these were the top three sectors, but Asian countries, in general, had comparative advantage in these sectors in the 1970s. The only exception is Singapore, whose negli- gible textile share indicated a lack of comparative advantage in textiles. In the 1980s, the textile industry dropped from among the top subsectors in almost every country except China. In Korea, Taiwan, Singapore and Thailand, more capital- and technology-intensive subsectors such as transport equipment and general machinery replaced textiles and chemicals. The direction of Japanese DFI toward electrical machinery could be observed in two broad groups: its share dropped in Korea, Taiwan and Singapore but increased in Thailand, Malaysia and Indonesia. Chemical products and other basic material industries, including metals, decreased in share in the 1980s but were still significant in many Asian countries.l/ B. Policies, Regulations, and Institutional Environment 2.9 A comparison of DFI incentives across ASEAN countries indicates that their incentive schemes are generally similar in important respects and offer roughly equal inducements (Annex 2). In addition to general incentives in terms of tax holiday, duty drawback in case of exports, etc., specific incen- tives and guarantees are provided to, foreign investors in such matters as repatriation of profits, dividends and capital expropriation, nationalization and so on. The relative attractiveness of individual countries is not affected by their incentive schemes because of similarity of such schemes; any change 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 Asia which have made them attractive to foreign investors by distinguishing them from 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 of foreign investment regulations; and liberal foreign exchange policies. In addition, 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 of debt-to-equity swap facilities whereby they could purchase Philippine external debt at a discount and use it to convert their peso investment needs. The government is also considering replacing the present negative list that con- tains the business areas from which the foreign investment is prohibited by a shorter and transparent negatives list. Also, consideration is being given to relaxing the upper limit of 40 percent which is presently applicable to for- eign investments in many areas. A similar relaxation which may allow majority ownership (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 MNCs which respond to two basic factors: (a) safety of investment, and (b) opportunity for profit. Macroeconomic and political stability is central to a country's attractiveness as a DFI location because it is considered cri- tically important by foreign investors for both the safety of the investment and the realization of opportunities for profits. Sound macroeconomic and sectoral policies and well-prepared sectoral development programs can provide an effective and efficient framework for DFI and help to avoid many of its negative aspects. Such policies and programs, together with a smoothly work- ing investment approval mechanism are often more important than financial incentives and regulatory policies. 2.12 There are five other main areas in which developing countries could improve 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 chances of attracting DFI. 2.13 A second area, closely related to infrastructure, is training and human resource development. Many foreign investors experience the scarcity of middle level technical workers, and generally low levels of productivity among unskilled or semiskilled workers. As production processes in many industries become more sophisticated, the ability to provide relatively low cost labor, with narrow or limited skills, will not necessarily ensure the future success of many developing countries as sites for assembly or manufacturing foreign investors. Countries should evaluate their educational and vocational train- ing policies, in collaboration with local and foreign firms, to make sure that adequate training programs are designed to meet industry's current and future labor requirements.  -7- 2.14 Third, developing countries should encourage the development of nec- essary support industries that provide basic machinery and parts, material inputs, components, and testing services to foreign investors. Most foreign firms would be willing to use more local inputs if these were available and competitive on a quality and cost basis. 2.15 Fourth, an area which could be improved in many developing countries is administration and overall bureaucracy. Bureaucratic red tape and import- export bottlenecks are considered by foreign investors as the chief problems in their DFI operations. 2.16 Fifth, most developing countries would greatly improve their chances of capturing DFI by providing better information on investment opportunities in their economies. A major reason for most riCs decision to invest in East Asia 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. During the 1950s, DFI was restricted to some technology transfer type of cooperation with 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 as of end-1978. 3.2 In order to achieve the objective of raising the living standard of its people through economic development, the Chinese realized that they had to have greater access to Western science and technology. China announced its ambitious program for economic cooperation in the Fifth Ten-Year Plan at the end of 1978. This program called for high investment in the economy and DFI was to be used to accelerate the process of technology transfer as well as to provide 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 understanding of 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. For details, see Annex 3.  -8- 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 to develop the institutional infrastructure and to adopt laws to regulate the legislative, administrative and judicial organs since 1978. For example, the Joint Venture Law was promulgated in mid-1979 and gave an unprecedented encouragement to DFI generally. The Joint Venture Income Tax Law, the Foreign Enterprise Income Tax Law offering tax incentives to encourage foreign trans- fer of advanced technology on preferential terms, and the Civil Procedure Law for resolving disputes involving foreigners were promulgated between 1980 and 1982. Additional incentives and safeguards were provided through "22 Arti- cles" of October 1986 (see para. 3.15). The Foreign Economic Contract Law of 1985 offered guidance for virtually all kinds of contracts between foreign companies and Chinese legal persons including foreign-invested ventures. Reg- ulations governing the licensing for importation into China of various types of technology were also promulgated. A comprehensive system regarding patent protection and trademarks was established and, more recently (October 1990), the copyrights law was adopted. Two sets of implementing rules regarding import substitution were established in 1987, and regulations on the contribu- tion of capital for JVs and CVs were drawn in 1988. Bilateral agreements on the avoidance of double taxation and bilateral agreements for the mutual pro- motion and protection of investments against political risks such as those relating to repatriation of funds and compensation for expropriation were signed with more than 18 countries by the end of 1987. An updated summary of investment incentives offered by various laws is given in Annex 4. It would be observed that while the preference for investment in export-oriented or foreign exchange earning ventures is fully supported by various tax holidays and import duty exemptions, the preference for technology-transfer ventures is not reflected in the package of investment incentives offered to foreign investors. Among the wide range of such incentives, only a few are related to high technology industries and incentives for R&D in China are virtually absent. 3.4 The "open-door policy' introduced in China in 1978 did create great enthusiasm among potential investors. However, the overall pattern of commit- ments of DFI has been irregular. There have been periods of rapid increases and slowdowns, reflecting adjustments in the government policy and changes in priorities from time to time. More recently, the events of June 4, 1989 affected the confidence of foreign investors, and caused a decline in foreign investments. B. Performance Analysis 3.5 From 1979 to June 1990, China has approved 24,565 contracts with total foreign investment commitments of $36.1 billion. The actual utilized amount as of June 1990 was only $16.7 billion, i.e., a 48 percent utilization rate. Total DFI in China grew at an average rate of 34 percent per annum from 1983 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. The austerity measures imposed by the central government in 1985 and 1988 had definite impact on DFI flow to China. For instance, the contracted DFI in 1986 was only half of the value in 1985 and reflected China's increasingly selective policy of screening out many nonproductive projects as well as the central authorities' tightening of credits and foreign exchange in mid-1980s. The austerity program introduced in late 1988 resulted in a significant decrease in the growth rate of DFI. In 1989, the growth rate of contracted DFI was only 5.7 percent, compared to 30.9 percent and 42.8 percent in the preceding years. 3.6 Despite a slowdown after the June 4, 1989 events, total approvals of DFI 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 was nearly $1.0 million. DFI in China is predominantly in equity joint ventures and 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 decreasing share in CVs was filled by the increasing investment in WOVs. This type of investment was not given much preferential treatment in early 1980s because it was considered to have limited ability to transfer technology or management skills. In 1986, as part of China's major effort to attract foreign invest- ment, the central authorities promulgated legislation offering tax incentives to attract this type of investment. The result was a surge of DFI in WOVs from $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 in 1985-89. While the specific destination and purpose of this investment is not available, it is believed that the bulk of Chinese DFI has gone to investment in properties and businesses in Hong Kong. Other investment has been in basic material and technological industries in developed countries such as forestry and 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 from all 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 ranks third (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 countries have an insignificant share in China's total DFI. However, the actual Western investment in China is probably much higher than the recorded statistics since a number of the Hong Kong investors represent a combination of Western compa- 5/ See Annex 3 for definition.  - 10 - nies and local investors. Also, a part of the total investment from Hong Kong might have been indirect investment from Taiwan. 3.9 During the 1980s, more than half of Hong Kong's overseas investment went to China. China's ability to attract investment from Hong Kong was mostly due to geographic and cultural proximity and not entirely because of the incentives offered by the Chinese authorities. In fact, the incentives offered 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 travel goods, handbags, toys, and footwear. It is estimated that over 80 percent of the output by the Hong Kong-invested enterprises was shipped back to Hong Kong as reexports. Most of the plants are located in SEZs in neighboring Guangdong and 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 lagged behind 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 total and 4 percent of Japanese total :DFI abroad) in 1988. 3.12 Mainland China is the second largest recipient of Taiwan's DFI flows to Asia. According to official statistics, by the end of 1989, there was $1 billion 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 plants from Taiwan to the mainland. The official figures are the low end estimate of Taiwanese investment. In the past 10 years, enterprises from Taiwan have been rerouting their investment to China via Hong Kong, Singapore, the United States, and the Philippines in order to protect themselves from the local ban on 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 has been greatly improved. In July 1988, the central government promulgated pref- erential treatment to Taiwan investors by passing the "National Regulations on Encouraging Taiwan Compatriots' Investment." This legislation allows Taiwanese 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 and Fuzhou all offer longer tax holidays (3-4 years instead of 2 years commonly offered to other investors) and lower land-use fees, etc. The Taiwanese involvement 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 the new wide range of incentives offered exclusively to Taiwanese investors by local governments.  - 11 - 3.14 Distribution by Region. The distribution of DFI in China is highly uneven among regions. China initially extended incentives to foreign inves- tors in the four coastal SEZs that were established in 1979 (Annex 7). It gradually 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 19 cities received 48 percent of total DFI in 1989. Guangdong province, contain- ing the coastal cities of Guangzhou, Zhangjiang, the Shenzhen, Zhuhai, Shantou SEZs 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 preference for 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 is believed that the service sector has received the largest portion of total DFI inflow. Unfortunately, official statistics by sector are not available. How- ever, it has been reported that between 1978 and 1988, over $4 billion in DFI funds were actually invested in luxury hotels, taxi services and other tourist facilities. Between 1979 and 1984, 69 percent of the investment by Hong Kong and Macao and 59 percent of those by Japanese were in service industry. The energy 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 of the State Council of the People's Republic of China for the Encouragement of Foreign Investment, (commonly known as the "22 Articles"), were enacted in 1986. These "22 Articles' basically recognized two basic categories of DFI, regardless of the types of ownership. The two categories are: the productive ventures entitled to maximum incentive if they qualify as either "export enterprises" or "technologically advanced enterprise" and other foreign- invested enterprise, which are allowed to enjoy only some of the benefits the new legislation makes available to enterprises in the first category. The nonproduction ventures, such as hotels and other services, do not receive all the benefits enjoyed by other enterprises in the second category. In 1986, induced by the new incentives offered by the 22 Articles, 76 percent of the total DFI was for productive projects in fields such as industry, transport and telecommunication. Moreover, with an increase in investment from Japan and Taiwan which tend to emphasize manufacturing industries over the service 'industries, the rate of growth of investment in the manufacturing sector was accelerating 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, Zhuhai and Shantou in Guangdong province, Xiamen in Fujian province and Hainan province.  - 12 - C. Post-Tiananmen Developments 3.17 New DFI flow to China began to slow in the third quarter of 1989 after 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 to 1988. As shown in Table 3.1, contracted DFI in the fourth quarter of 1989 decreased by 43 percent compared to the same quarter in 1988 and 22 percent compared to the third quarter of 1989. The contracted DFI fell another 23 percent in the first quarter of 1990 over the previous quarter, but it started picking up in the later part of the year and recorded an increase of 17.9 percent for the whole year. Actual DFI did not decrease as much as the contracted DFI in the last quarter of 1989 indicating that foreign investors continued to honor earlier commitments. Total utilized DFI was $3.34 billion in 1989, a 4.4 percent growth from 1988 following a 38 percent growth from 1987 to 1988. The utilization rate remains at around 60 percent since 1986. Table 3.1: CONTRACTED AND ACTUAL DFI IN CHINA: 1988, 1989, AND 1990 ($ billion) % Change % Change 1988 1989 1988/89 1990 1989/90 Contracted January-June 2.09 3.01 +44.02 2.35 -21.93 July-September 1.23 1.45 +17.89 4.25 1 +64.73 October-December 1.98 1.13 -42.93 Actual January-June 0.99 1.20 +21.21 1.23 +2.50 July-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 Taiwan investment, it was not as severe as the impact on Japan and the West. For instance, the growth rate of Taiwan's investment in the mainland slowed down from 40.9 percent in the first six months to 22.6 percent in August and 4.24 percent in September 1989; 'US investment levels, by contrast, were nega- tive for the same period. The Japanese DFI in China was accelerating in the first six months of 1989, but it dropped by 63 percent in the second half of the 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 of 1989. In fact, in July 1990, the Taiwanese government issued a preliminary list of 2,000 product categories for investment in the mainland. These are  - 13 - mainly labor-intensive products and low-technology electrical consumer goods in 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 of the Taiwanese government. 3.20 With regard to sectoral preference, the central government has reas- serted authority since the Tiananmen incident and DFI proposals are expected to 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 this stage because it is of a relatively recent origin and many of its long-term effects have not yet materialized. Moreover, complete information needed for an 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 affected China's economy. These are: technological progress, enterprise management, foreign trade, capital contribution, government revenue, local employment, and income distribution. Although there were limits and costs, initial DFI per- formance has made a significant contribution to China's economic development as 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 worth particular attention. First, the transfers tended to be pragmatic and to emphasize the economic result. Compared to the state enterprises, the foreign invested enterprises (FIEs) were more conscious of cost-benefit calculations, and were therefore more careful in selecting the appropriate technology. Most FIEs actively adopted technology if it would improve the quality and variety of their products. On the other hand, if the technology developed abroad was more labor saving in nature, many FIEs chose not to use it. For instance, in Guangdong 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, the insistence of foreign partners on using the most pragmatic production means was 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 the firm should be adopted. Second, obtaining technology through DFI appeared to be more effective than other forms of technology transfer, such as machinery import or licensing arrangements. This seemed particularly true in those industries where high-tech transfer was involved and the technology involved was often of an exclusive nature. DFI in the form of Sino-foreign joint ven- 71 See Shen, 1990.  _ 14 - tures offered a common interest and an institutional framework that encouraged and facilitated normally difficult technology transfers. Third, the technol- ogy in these fields was more complicated and often required an intensive human interaction. 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 dynamic technology transfer, which was particularly useful in those industries where technological progress and replacement were rapid. Many Sino-foreign joint ventures concluded technology transfer agreements that enabled the recipients to follow closely technological developments abroad. 4.3 Enterprise Management. The success of technology transfer was often closely related to improvements in enterprise management. FIEs typically adopted either partially or entirely the management system introduced by their foreign partners. As a result, most of them reported major improvements in productivity and efficiency though they were slow to come in joint ventures formed 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) in China 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 steadily increased--from less than half a percent in 1984 to about 6 percent in 1988 and about 13 percent in 1989. The impact of DFI on exports was most prominent in Guangdong, the province known for using such investments primarily to develop its export industries. Guangdong doubled its total exports between 1984 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, or 5.3 percent of the province's total exports; in 1986, it was $750 million, or 17.9 percent of total exports. 4.5 Capital Contribution. One measure of what DFI has contributed to the Chinese economy is the absolute amount of capital attracted through this particular 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 the total 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 gross investment 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 the five 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 the capital 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-  - 15 - tries seeking to attract DFI, China granted special tax incentives and license privileges 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 country became profitable, and therefore taxable, government revenue increased signi- ficantly. According to one official source, the Chinese government received in 1986 a total revenue of Y 840 million from the 1,178 FIEs operating that year in China, Y 270 million in the form of corporate and income taxes and Y 570 million in customs duties. This was about half of the total profits generated 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's total 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 venture enterprises while created jobs in others. Overall, as the activities of FIEs, especially those in export-oriented manufacturing, expanded rapidly, they hired increasingly large numbers of local employees. According to one prelim- inary estimate, some 300,000-500,000 Chinese men and women were working for the 6,000 or so FIEs in operation in the country by early 1988. If one includes the offshore processing and assembling enterprises, the workers involved numbered between 1.5 million and 2.0 million. 4.9 Income Distribution. DFI activities unquestionably contributed to an overall increase in incomes, but the distribution of the benefit tended to be 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 ranked tenth 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 of DFI were quite significant. Especially in the areas of capital contribution, technological progress, balance of payment and enterprise management, DFI appeared to have contributed very positively to China's economy. B. Assessment of Trends and Patterns from the Perspective of China'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 during 1985-89. However, compared to many other East Asian countries, the growth was less spectacular, particularly considering that China being a newly opened country had a greater potential for DFI. Singapore, Malaysia, Thailand, Indonesia, the Philippines and Korea experienced much faster growth in DFI during the same period and the absolute amounts were also quite large consid- ering the relative size of their economies. In retrospect, China could have received 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.)  - 16 - 4.12 Development Impact. The two main development objectives of China for opening up to DFI are technology transfer and export earnings; other bene- fits of DFI, e.g., resource mobilization, employment, backward and forward linkages are not considered of prime importance in China. 4.13 A dominant reason for, and objective of, DFI has been the transfer of technology to China to modernize the economy and to make it more efficient. The above objective has been achieved with reasonable success, particularly with respect to labor-intensive technology needed for small and medium-sized industrial enterprises. Investors in SEZs and other coastal areas are largely from Hong Kong which is not an original innovator and its technology lags behind that of Western industrialized nations. Furthermore, most enterprises in Hong Kong are small in size and adaptable to market changes by employing labor-intensive techniques. A great majority of these enterprises depend mainly on cheap labor, with operations generally confined to technically sim- ple assembly or packaging work. The technology thus transferred from Hong Kong (and also from Taiwan) is not the most modern, but, generally, it is still new for China and appropriate considering the abundant supply of cheap labor. 4.14 The investment originating from the United States, Japan and other industrialized countries forms about 30 percent of the total DFI in China. A major 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 technology to 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 the extent 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 are guided by considerations of maximnizing benefits and minimizing costs and "the most advanced technology" is not necessarily the only solution in all cases. 4.15 Along with the transfer of technology, the Chinese managers and staff working for FIEs have learned modern management techniques and have also received 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 of this knowledge on Chinese enterprises would only be felt in the long term when the government's policies and procedures towards SOEs will change and they will start functioning in a more market-oriented environment. In fact, the lessons 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 hire and fire the labor, profit centers in factories, incentive systems for manag- ers and workers, etc.) which have amply demonstrated their benefits can be  - 17 - 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 and learning of proper marketing strategies, methods, procedures and channels of distribution by the Chinese counterparts and employees of FIEs. In 1989, the total exports of FIEs located in Guangdong, Hainan and Fujian and the SEZs were $6.3 billion and were about double that of 1988. If exports of FIEs in Jiangsu and other provinces are included, the total exports would be well above $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 difficult to estimate net foreign exchange earnings and thus to assess the real impact on the balance of payment. Also, an estimate of the net foreign exchange impact has to take into account direct and indirect costs of SEZs that have been 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 for exports by many projects are good as economic levels of operation are achieved (resulting in a decrease in the marginal cost of production), and overall improvements are brought in production methods, management skills, worker efficiency and product quality. 4.18 As regards the knowledge of foreign markets, experience through FIEs has been useful but of limited relevance. So far, FIE exports from China have comprised mainly textiles, garments, electronics, leather goods and other light industry products. In the future, China plans to diversify its exports by 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 to make significant exports of the above-mentioned products, and thus, to impart relevant experience to the Chinese side. 4.19 DFI's contribution to capital investment was particularly salient in certain sectors of the economy (Shen Xiaofang). The sector that absorbed the largest 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 funds were actually invested in luxury hotels and other tourist facilities in the metropolitan cities. The rapid growth of China's tourist industry contributed significantly to the national economy in the last decade, and that such growth would not have been possible without DFI. In 1988, for example, the country received a total of more than 31 million tourists from overseas, and thereby gained $2.22 billion gross income in hard currency. Moreover, the building of hotels might be a net gain to China as many of the tourist facilities actually cost 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 of related technology and management skills and the development of certain local support services.  - 18 - 4.20 Another major beneficiary of DFI was the energy sector, especially offshore oil development. In 1980-87, the country signed 33 joint exploration and exploitation contracts with 12 countries, attracting $2.17 billion of foreign capital, a substantial part of the total investment in the energy sector. By the end of 1987, 162 exploratory wells had been drilled along China's continental shelf. They helped China discover a few valuable fields of oil and natural gas, establish a primary offshore oil base, and, more important, compile valuable firsthand information in its offshore oil depos- its. DFI participation clearly relieved the Chinese government of a sizable financial burden in accomplishing these tasks. 4.21 The foreign investment in offshore oil and gas exploration would have been much higher if the foreign exchange balancing requirement for indi- vidual projects (see para. 5.5) had not precluded the entry of many potential investors. Even in those cases where foreign investment has resulted in gas discovery, the development of gas fields has not been possible because the gas can only be used for domestic purposes and its export is not feasible to earn foreign exchange needed for debt--serving and payments to foreign oil/gas com- panies. 4.22 The government's restrictive policy on foreign investment in onshore 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 up for DFI participation. The investment of foreign investors would provide an infusion of much needed investment: capital, share some of the risks of explo- ration with the host country, and most importantly, facilitate the transfer of modern technology needed for exploration in the prospective areas. 4.23 Although the contribution of DFI to the industrial manufacturing sector has been relatively small, it was accelerating toward the end of the decade. In 1988, for instance, over 80 percent of the DFI projects approved were reportedly related to manufacturing activities. Moreover, the benefit to China from use of DFI in this sector might be greater than it at first appears, considering the fact that many Chinese partners used existing plants and facilities as their major conitribution to the joint ventures formed in this field. The practice not only saved the Chinese cash inputs but also helped them renovate their old plants, which otherwise would have required a large amount of their own capital investment. 4.24 The Chinese government's objectives for DFI do not explicitly recognize the importance of backward and forward linkages that can be created as a result of foreign investment in large industrial projects. Such linkages not only promote the development of feeder and downstream industries but also help to improve the cost-efficiency and quality of products of such indus- tries, which in turn, could also enhance their potential for increasing exports. Other East Asian countries have placed high importance on the devel- opment of backward and forward linkages in relation to FIEs and China also needs to move in this direction by adopting appropriate policies and strate- gies.  - 19 - 4.25 As mentioned in para. 1.3, DFI in the service sector has grown worldwide 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 of the above services is crucial to the development of economy, particularly the industrial 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 reconsider this policy and open up the service sector for DFI. It would help to improve the quality and efficiency of various services to international standards. As a result, the development of the real sector will be accelerated and foreign investment therein from developed countries will also be facilitated. 4.26 Regional Impact. The geographical pattern of DFI in China is largely 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 were regarded as "experimental labs" as well as windows for obtaining capital and modern technology and promoting exports. SEZs offered a more developed infra- structure, minimal controls by the government and tax incentives which made a big difference, compared to the rest of the country. During 1983-85, 14 coastal cities and three deltas along the east coast were also opened up for DFI, and the government issued new regulations in 1986/87 to encourage DFI. This was followed by the "gold coast" development campaign of 1988. At the same time, the bulk of the investment that came from Hong Kong and Taiwan was directed mainly to Fujian and Guangdong provinces because of proximity and ethnic ties; although in later years other coastal cities were also signifi- cant beneficiaries of such investment. All the above factors led to DFI's concentration in the SEZs, and coastal cities. Such investment also had a spillover 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 impact on attracting DFI. For example, Fujian was granted similar status as Guangdong in 1979, but its extremely poor infrastructure failed to attract even the most enthusiastic overseas Chinese investors. Given the special eco- nomic zone status, and other preferential terms, only one wholly foreign-owned enterprise and a few joint ventures contracts were concluded in 1979-83. The improvement of infrastructure (such as air and sea transport linkages, water and electric supply), the expansion of SEZ to the whole Xiamen Island, and less 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 April 1984, had been designated open coastal cities. The investment was limited and confined mainly to small service businesses such as taxi companies, dry clean- ers and restaurants. Only a few manufacturing projects received DFI and these too were aimed at the domestic market. The provincial incentives announced in November 1986, which went beyond the national incentives introduced in October 1986 ("22 Articles for Foreign Investment"), together with, perhaps more importantly, simplified and decentralized approval process for DFI changed the investment environment significantly. Jiangsu already offered other advan- tages including a well-developed industrial base, the best internal transport  - 20 - network in China, major ports, proximity to Shanghai, lower wages than Guangdong, and a well trained labor force. As a result, approval of DFI in Jiangsu increased from $33 million (33 projects) in 1985 to $302 million (247 projects) in 1988. This growth rate was faster than even that of Guangdong province. Furthermore, more than 90 percent of investment went to cities other than the two open cities of' Jiangsu. The province has been able to attract some large industrial pricjects for domestic market, as well as a large number of smaller export-oriented projects. The growth trend in DFI in Jiangsu is expected to continue in the near future. 4.28 Inland provinces, on the whole, are less attractive for foreign investment mainly due to inadequate infrastructure, absence of direct trans- port to the outside world, underdeveloped industrial base, shortage of trained and skilled work force, and lack of social and ethnic ties with overseas Chinese investors. While the above-mentioned geographical pattern of DFI has not contributed to a balanced regional development of China, it has been con- sistent with the government's strategy of promoting the eastern region as an engine of growth and the inland provinces to develop and prosper through back- ward linkages. 4.29 SEZs or similar other facilities (often called export-processing zones) are typically established by less developed countries in the early years of their industrial development to attract foreign investment in export- oriented manufacturing activities, Foreign investors are expected to bring technical, marketing and managerial know-how; links to world markets; and capital goods--all lacking locally. The "zones" help to ensure free trade or free-trade status for export activities and provide sufficient institutional and physical infrastructure to support exports; two key factors required to induce foreign and domestic enterprises into export activities. The develop- ment of these zones entails signif'icant capital and operating costs as well as substantial administrative responsibilities for the government. The benefits accruing in the early years of industrial development can justify these expenses. However, as soon as the country has acquired adequate know-how and exposure to foreign markets and succeeded in attracting reasonable amounts of foreign investment, it should shiEt its focus of DFI and exports from special zones to the whole country. This shift should be supported by appropriate foreign trade policies and overall development of infrastructure. China has now reached the above stage of development where DFI and development of export-oriented industries should now be promoted throughout the country and the 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 to the 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 year its commitment to the "open-door" policy. This implies that DFI will continue  - 21 - to be welcomed, but, as in the past, the emphasis will remain on technology transfer and exports. In fact, there will be greater emphasis on the import of modern technology to supplement the flow of labor-intensive technology from neighboring economies including Hong Kong, Taiwan and Korea. The government will also continue its policy (introduced after 1986) of discouraging invest- ment in the tourism industry which in the past was the largest beneficiary of DFI. In the future, the manufacturing industry is expected to receive the major 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 oil prices may somewhat slow down the phenomenal growth rate of the past years, but still the increase would be significant; (b) DFI is generated mostly by multinationals which are looking for reasonable 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 from labor-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 in labor-intensive and low-technology industries in other countries for export purposes because their own comparative advantage in these 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 in foreign countries is one of the means to achieve these objectives. However, MNCs' strategy for foreign investment has been changing with new developments at home and abroad. Beginning in the late 1960s, several multinationals began rationalizing their global production. Whereas before most foreign subsidiar- ies had produced finished products, often with technological and intermediate inputs from the parent company, now all the subsidiaries were increasingly linked into a unified production process. Each performed only those aspects of the manufacturing process in which it had a comparative advantage. This system is not always confined to transactions among subsidiaries of the same MNC. Sometimes the arrangements are made between locally-owned companies and foreign-owned companies. Another major shift in the 1970s and 1980s was less emphasis on investment in primary natural resources (dictated earlier by importance attached to the safeguarding of supplies of raw materials) and greater emphasis on maintaining and/or enlarging foreign markets. Another area of increasing investments by MNCs is banking, insurance and other service activities because of their rapid growth and enhanced importance for economic development. MNCs have also shown a significant shift towards investing in developed countries; DFI in developing countries has decreased in real terms in the 1980s. MNCs continue to invest in countries with relatively low labor costs and other favorable conditions of production, mainly through export- oriented manufacturing and tourism, but NICs are becoming more active in this  - 22 - area. The main source of advancied technology is still MNCs from developed countries. 5.4 The expected rapid increase in global DFI provides possibilities for China to capture a greater share in the future. However, the other key features of global DFI pose two major conflicts with the Chinese objectives because of the policies and general environment for DFI in China. First, due to traditional misgivings about foreign businesses, prolonged history of the central planning system and the modus operandi of SOEs, the concept of profit as understood in market economies, is still not fully recognized or apprecia- ted in China. Consequently, while foreign investors are motivated by profit considerations, Chinese agencies and counterparts have other priorities and conditions which sometimes do not ensure profitable operations of FIEs. This problem would be much more serious for MNCs from developed countries compared to smaller investors from Hong Kong, Taiwan and Korea who seem to have an edge because of geographical closeness, ethnic and cultural ties and/or absence of language barriers. 5.5 The second major conflict arises from the inconsistency in high- technology and export objectives. Advanced technology is generally available from developed countries who would like to transfer it only if they can cater to domestic market needs; exports would follow after several years of opera- tions when international levels of efficiency and economy have been achieved and in many cases exports may not be possible at all. For a project to be export-oriented from the beginning, its overall production cost would have to be comparable to that in neighboring Asian countries. China's present compar- ative advantage is likely to be in simple, labor-intensive technologies. Even the low wages do not often offset relatively low production efficiency, poor product quality, inefficient infrastructure and other unexpected operational problems 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 is the excessive involvement of various government agencies on one hand and the lack of readily available information on all rules, regulations, directives, etc. applicable to a particular DFI, on the other. As mentioned in para. 2.10 above, the East Asian economies that have been most successful in attracting large amounts of DFI have simplified and made transparent all procedures--from entry to exit--of DFI with minimal government interference. In addition, they have provided comprehensive and up-to-date information that may be useful to DFI enterprises in their investment decisions. A reasonable progress has also been made in this regard in China, but still much more needs to be done in the area of screening and approval of investments and supervision of operations of DFI enterprises. 5.7 One pervasive characteristic of the environment for setting up a joint venture is the complexity and the many changes over time of the rules, procedures, incentive structure, etc. (and large number of institutions that are involved in screening and approval). Ventures of different sizes are sub-  - 23 - ject to approval by municipal, provincial, or central authority. Different ministries (or their municipal or provincial equivalents) enter the picture, depending on the sector of the proposed venture. Each special economic zone has its own set of procedures and incentives. Municipal and provincial gov- ernments frequently issue new rules and permit new incentives, which of course differ from place to place. Moreover, these are often not collected in any one 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 fundamental change of the domestic system and yielded only limited results. For instance, the attempt to maintain "one window to the outside," i.e., to authorize MOFERT as the sole government agency granting approval to DFI projects, simply shifted the burden of obtaining individual approvals from the foreign inves- tors to MOFERT. 5.9 As to the screening and approval process, considerable progress has been made in delegating authority to approve DFI ventures below certain size limits to provincial and municipal authorities--although these lower level authorities may also require difficult and lengthy negotiations. Sometimes, they are much more rigorous in their negotiations than the central government would desire. 5.10 During operation of DFI enterprises, Chinese partners often demand additional concessions from their foreign partner. These demands are outside the agreements already reached. Government officials use occasions when enterprises need help because of unforeseen problems (sometimes caused by government policy) to extract additional concessions from the joint venture or from the foreign partner. Also, ad hoc changes are made in government regula- tions which are often detrimental to the interest of DFI enterprises. For example, in February 1990, the government decided to allow enterprises in SEZs to retain 80 percent of foreign exchange earned through export; this limit used to be 100 percent before the austerity program in 1988. In addition, the exchange rate at foreign exchange swap centers was deflated because of the government controls on imports. These two developments reduced Yuan earnings of 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, has been a matter of more frequent and severe frictions and troubles in China, particularly compared to its East Asian neighbors. Consequently, more efforts are needed in China to eliminate unproductive delays, unjustified demands, and the proliferation of different agencies that must be dealt with. While the decentralization of approval powers to provincial and municipal governments is justified, and probably unavoidable in so vast a country, more stability over time and more assurance that local authorities practice the general principles and laws adopted by the central government would also be useful. 5.12 Specific actions needed to minimize and simplify the administrative controls would include the following: (a) the government involvement in the approval/screening of DFI proposals and subsequent affairs of FIEs should be  - 24 - significantly reduced through the introduction of clear and transparent rules and regulations from the entry to the exit of foreign investment; (b) the approval 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 in policies and procedures should be avoided; (e) contracts between foreign investors and local authorities/partners should not be renegotiated unless absolutely necessary and unavoidable; and (f) the positive list system of industries open to foreign investment should be replaced by a negative list system to specify only those industries in which foreign investment is pro- hibited or restricted and immediate approval should be granted to projects satisfying 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 be given to the establishment of a separate and independent "one-stop" foreign investment promotion agency in China. Certain countries (e.g., Malaysia and Singapore in East Asia) had particular success in attracting foreign invest- ment through such agencies. They are responsible for policy formulation and regulation and aggressively seek out new foreign investment. They centralize all relations with potential project investors, "fathering" each proposal, coordinating bureaucratic action, and ensuring speedy processing. Their staff follows a project through from its initial promotion to final implementation and also provides post-investment consultancy services. Of course, such indi- vidual relationship depends on the! nature and size of an investment. It would be desirable that the Chinese officials should visit some investment promotion agencies 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 also assist, subsequently, in the formulation of its structure, responsibilities, staffing plan, etc. The above agency should also monitor the decisions taken at the regional level to ensure that laws, regulations and general guidelines are being followed invariably. 5.14 Foreign Exchange Availability. Chinese planners recognized in the mid-1980s that unless they were willing to allow FIEs some access to domestic markets, it would be impossible tc' attract substantial amounts of foreign capital 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 their products in the domestic market. Hiowever, due to nonconvertibility of the Yuan, the enterprises are still expected to balance their foreign exchange needs. 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 foreign currency; FIES may reinvest their Yuan profits in Chinese foreign-exchange generating enterprises open to foreigners; FIEs may export products made by other Chinese enterprises; and foresign exchange may be purchased in newly established "foreign currency adjustment centers". Also, in exceptional cases and subject to certain conditions, the government may provide the necessary foreign exchange to some technolog:Lcally advanced enterprises that are having temporary difficulties balancing foreign exchange in the early years of pro-  - 25 - duction. While all the above measures help to mitigate the problems faced by foreign investors in meeting their foreign exchange needs, they do not com- pletely offset the effects of nonconvertibility of the Yuan and continuing emphasis on the foreign exchange balance requirement. There are only a few countries (Egypt, Mexico and Yugoslavia) that allowed DFI but imposed a bal- ancing requirement for foreign exchange. The requirement has worked very badly 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 best approach is to have an efficient nationwide market in foreign exchange. FDI ventures (and local enterprises as well) should be permitted to freely trade foreign exchange among themselves and also with other local enterprises with foreign exchange retention rights. As the development of above-mentioned mar- ket would take time until it can adequately meet the requirements of all enterprises, the government should also consider developing a more regular, and longer-term system of allocating foreign exchange to FIEs that need and deserve it so that potential new investors in China, particularly those trans- ferring modern technology mainly for import substitution, are not driven away because of foreign exchange balancing problems. The allocation system can be phased 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 attracting foreign investment, it has not sought such investment aggressively. Its over- all approach has been somewhat passive, basically waiting for investors to come up with their proposals for approval. The experience of countries such as Brazil, Korea, Malaysia, Singapore and Spain and also that of Taiwan show that 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 make corresponding adjustments in its own policies. It should then formulate an industrial development strategy including targeting of priority industries for investment and identification of key individual investment opportunities. The strategy should also focus on backward and forward linkages that should be developed in conjunction with foreign invested projects. The "one-stop" investment promotion agency should make an active search for prospective investors to finance priority industries and key identified projects. This search should include efforts to publicize conditions that are favorable to investment in China and to identify and seek out foreign investors. The above approach is more important in the competitive market for outward-oriented foreign investments. In order to facilitate the promotional work, China (through its "one-stop" agency) should establish investment offices in key source countries. All European Economic Community countries and many develop- ing countries have offices in major capital exporting countries to identify prospective investors and to provide information about their countries. 5.17 Financing of DFI Enterprises. Overall, good progress has been made in providing local and foreign currency loans to FIEs in China. Nevertheless, improvements are still needed in certain areas. The main issue is the absence  - 26 - 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 present export finance arrangements in China are inadequate and vary from place to place. In order to compete with other industrialized countries with large and growing exports, China will need to adopt appropriate policies and to develop institutions that would ensure the availability of efficient export financing facilities to FIEs (as well as toD local enterprises). 5.18 In the recent past, NIEs, like all other enterprises in China, have suffered from the credit squeeze policy of the government. The relaxation of credit 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 in the heavy industry sector. This reflects the broader financial sector issue of credit allocations principally by administrative decisions based on govern- ment priorities. A sound financial system should allow the banks and other financial institutions to operate in a competitive environment and to take investment decisions based on their own analysis of credit and project risks. 5.19 Product Supply and Pricing. In order to have an efficient cost structure that enables a FIE to compete effectively in foreign markets, it is necessary that (a) inputs are available to the enterprise at world market prices, and (b) price and quality of domestic inputs are comparable to inter- national levels. In China, at present, the ability to import is limited and some imports are prohibited. As regards the local inputs, costs are often much higher and quality is below standard. More recently, many FIEs have faced serious shortages of domestic raw materials. The best solution to this problem is a free trade policy. However, until this is achieved, all export- oriented FIEs should be allowed to import the necessary inputs without duties and taxes but at a more realistic exchange rate. At the same time, local enterprises should be encouraged to keep the costs of domestic inputs as low as possible by promoting competition through increased domestic production and/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 to reward them for good performance, and to fire them, if necessary, remains restricted. Overstaffing is common even in FIEs. More recently, in some areas, the FIEs are facing the shortage of trained and skilled workers. The root cause of these problems is the lack of labor mobility and the absence of a national social security system., This issue, which affects Chinese enter- prises more seriously, would have to be resolved in the context of overall labor and wage reforms in China. Meantime, FIE managers should be given full authority to exercise powers bestowed upon them by the government regulations. 5.21 Another issue is the shortage of skilled workers in certain parts of China which have been the recipients of significant DFI, e.g., Guangdong province. Vocational training schools and other technical institutes should be strengthened to improve the supply of skilled workers.  - 27 - 5.22 Legal Framework. Many national and local laws and regulations have been promulgation in order to provide a more stable and predictable business environment in China for both domestic and foreign investors. However, many of the laws and regulations are couched in broad, ambiguous and sometimes con- flicting terms, leaving local or central implementing agencies a wide scope for interpretation and leading to inconsistent treatment. Reliable English language translations of many implementing rules, and sometimes even of laws themselves, 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 of collateral 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 the entire economic reform now in process in China. They are necessary for the greater and more efficient functioning of DFI as well. 5.23 Infrastructure. A developed infrastructure--both institutional and physical--is essential for attracting DFI. The institutional infrastructure will 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 offered similar incentives from the beginning, investment in Fujian picked up several years later because, among other reasons, it did not have an adequate infra- structure in the early period of the open door policy. Similarly, Jiangsu has been able to attract rapidly increasing DFI because it offers, besides other incentives, relatively more developed infrastructure. A developed physical infrastructure is a high priority, particularly for inland provinces, if they have to attract large amounts of DFI.  - 28 - References Cohen, Jerome A. and Stuart Valentine, (1987). "Foreign Direct Investment in the PRC: Progress, Problems and Proposals," Journal of Chinese Law, Vol. 1, No. 2 Hallberg, Kristin, (1986). 'Foreign Investment Incentives and Restrictions in Developing Countries: An Analysis of the World Bank Policy Recommendations, 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 Series Paper No. 1, Industry and Energy Department, The World Bank, 1989 Kwon, Yul 0., (1979). "An Analysis of China's Taxation of Foreign Direct Investment,' The Developing Economies, September 1990 Ng, Yen-Tak, Kwan-Yiu Wong, David K.Y. Chu and Yee Leung. "Foreign Direct Investment in China--With Special Reference to Guangdong Province," The Chinese University of Hong Kong Pomfret, Richard, (1989). "Jiangsu's New Wave in Foreign Investment,' The China Business Review, November-December Shah, Anwar and Joel Shemrod, (1990). "The Sensitivity of Foreign Direct Investment--An Empirical Assessment,' Working Paper, Country Economics 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 from the 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 Coastal Cities and Special Economic Zones, April China Trade Report, (1990). April Case Studies. 'The Role of the United States in Technology Transfer to China,' 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 Developing Countries," Staff Working Paper No. 348, The World Bank The World Bank, (1987). "China's External Trade and Capital Reform," The World Bank The World Bank, (1987). "World Development Report 1987. Barriers to Adjust- ment and Growth in the World Economy--Industrialization and Foreign Trade," The World Bank. The World Bank, (1988). 'Foreign Direct Investment in China: Foreign Exchange Balance and Joint Venture Finance," FIAS, The World Bank The 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 Financing Developing 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 Improved Income 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," The World Bank  CHINA: DIRECT FOREIGN INVESTMENT Flow of Direct Foreign Investment by Region (USS million) 1983 1984 1985 1986 1987 1988 1989 Abroad 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 185118.3 High 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 72229.9 Japan -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 21203.6 Africa -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 2582.2 Asia -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 9340.6 China -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 3393.0 India 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 0.0 735.0 Korea -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 1845.8 Phi 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 0.0 482.0 Thailand -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 3116.5 Niddle 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 1613.5 Western 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 4550.8 Brazil -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 88.5 H 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 */ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Africa 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 12.2 Asia 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 16.0 India 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 Indonesia 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 3.5 Korea 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 3.6 Nalaysia 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 8.7 Philippines 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 2.3 Thailan 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 14.7 Middle 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 7.6 Western 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 21.5 Brazil 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 0.0 Mexico 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 1989 Abroad 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 72229.9 anada -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 2848.2 Australia -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 7543.4 Japan -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 -464.5 231.3 Austria -183.1 287.3 -93.6 185.7 -45.9 241.2 -323.0 284.2 -341.7 486.3 -320.3 510.7 -954.8 879.5 Belgium -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 7057.4 Denmark -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 0.0 Finland -265.0 16.2 -422.7 52.3 -345.7 65.8 -759.1 328.9 -902.8 95.9 -1978.8 279.2 -2915.0 317.4 France -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 10287.9 Germany -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 6561.9 Iceland 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 -27.4 Ireland 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 85.1 Israel -120.0 89.0 -34.0 53.0 -50.0 98.0 -119.0 167.0 -77.0 242.0 -77.0 241.0 -72.0 174.0 Itlax -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 2538.0 Kuwait -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 0.0 Netherlands -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 6162.1 Norway -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 1372.1 Saudi 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 4041.5 Spain -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 8428.4 Sweden -1052.7 55.6 -1038.8 156.3 -1292.7 264.6 -3077.1 828.3 -3165.7 332.4 -5298.5 899.6 -7210.0 999.2 Switzerland -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 1989 Abroad 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 06 Cameroon -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.o Congo, 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 25.4 Gabon -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 14.8 Ghana 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 15.0 Kenya -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 70.2 Lesotho 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 6.4 Malawi 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.i Mauritania 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 26.2 Morocco 0.0 46.1 0.0 47.0 0.0 20.0 0.0 0.5 0.0 59.6 0.0 84.5 0.0 167.1 Niger 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 2082.0 Rwanda 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 t Senegal 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 21.8 Sierra 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 8.4 Sudan 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 3.5 Swaziland 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 35.8 Tanzania 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 Togo 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 0.0 Tunisia 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 78.0 Uganda 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 0.0 Zambia 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 1989 Abroad 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 1.1 China -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 3393.0 Fiji -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 4.3 India 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 0.0 735.0 Korea -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 Malaysia 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 1845.8 Maldives 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 -- --