In this manner both of these reports reveal that the macro-environment is perhaps the most crucial consideration which influences decisions regarding the choice of foreign investment method in China. Although slightly differing terminology is used it is easy to recognise that the stated factors belong to one of the following aspects of the macro environment – political, economic and legal. Thus, having identified them as key influencers, this report will now proceed to examining how the changes in these factors is expected to impact on the market entry strategies chosen by foreign investors in the future.
Political factors It is an undisputable fact that during the last 25 years China has made important steps to liberalise its economy. The changes that occurred since 1979 (see Historical section above) have been gradual and as such reflect the perceptions evolution that has taken place at central government as well as local authorities’ level regarding attitudes towards foreign capital. In fact, today the Chinese’s government’s main aim is to actively encourage the participation of FDI into the national economy by providing it with equal opportunities to local companies.
In spite of this, however, China remains a Marxist-style party-state with a history of ideological intolerance and some political unrest in the 1990s. And while in the last decade or so the country has managed to strongly reassure potential investors of the stability of its political regime and the latter’s commitment to economic reforms, some aspects of this factor condition remain unchanged. Probably the most important of those is the fact that favourable relations with the local government remain a major challenge for most foreign businesses54.
Managers that have some experience in operating in China state55 that “Guanxi” (connections in Chinese) remain an important key to doing business in the country. Despite the recent unification of the rules that apply to domestic and foreign companies, the nature of the relationship with the local and/or central government can make or break the business venture. For companies that decide to set up a wholly owned subsidiary (i. e. without the participation of a local partner) this might be particularly challenging.
At times even the joint venture method does not guarantee success due to the fact that correctly determining the political connections of the prospective partner and the influences of its senior management with the local and national governments are difficult and often impossible56. As a direct consequence of this many foreign companies still can fall pray to false “guanxi”. In the 2001 Corruption Perception Index published by Transparency International, a global corruption monitoring group, China was ranked 57th out of 91 countries.
The problem is substantial and is seriously hindering the growth of foreign direct investment into the country. An indication for this is a recent speech by the President Jiang Zemin in which he called for the need to stop corrupt practices and urged government officials to firmly establish a correct concept of power. Major policy moves to counter corruption so far have included separating the military and the police from business57. Nonetheless corruption continues to be a significant issue on the Chinese business scene which would continue to restrain all forms of market entry, including the ones involving direct investment.
Hence, due to their nature, the above two factors are likely to have a negative long-term impact on prospective investors in the future. At the same time the author of this report believes that their influence on strategic choice will be moderate rather than strongly pronounced. The reason for this is that the political constraints discussed above have been in existence for a number of years during which foreign direct investment has continued to rise58.
Therefore, political factors are viewed here as important considerations but not hindrances to FDI methods of market entry to China. The Regulatory Environment The Chinese political, social and economic systems have been and continue to be unique in a variety of ways. Therefore, it is not surprising that in the PWC59 report quoted above many companies expressed their concerns about the complexity of the Chinese local and national legislative structure as well as its relatively frequent changes.
Similarly, the research performed by DTT60 , also identified the country’s regulatory setting as a major concern in the Chinese investment environment (see Fig 7 below). In it, 76% of the respondents already in China interviewed ranked it as a major obstacle. Of the respondents not already in China 88% stated that it was their most dominant concern. By industry, this feeling was particularly strong in sensitive industries such as banking and finance (86%) and telecommunications (82%).
In the past, the Chinese regulatory system has been known for its complexity and ambiguity. Its key priorities were to attract investment and expertise only in certain areas of the Chinese economy while protecting national industries and enterprises from foreign competition. Since the Civil law system became effective in 1987, however, continuous efforts have been made to improve various types of legislation. The latter process was spurred by China’s accession to the WTO, which forced the national government to revise a substantial part of its laws.
Realising that foreign investors prefer to locate their long-term high-value projects in countries that have predictable policy regimes62, China embarked on a significant regulatory system change that aimed to open and restructure its economy. One of the vital steps that the Chinese government took recently is expected to have a very pronounced impact on the process of liberalising the investment environment in the country. In 2004 China changed its foreign investment laws to remove most constraints to FDI and enable foreign investors to operate in the domestic market in the same manner as their domestic counterparts63.
In the next two years, until 2007, following its commitments to the WTO, the Chinese government is expected to free foreign investors from operational constraints such as local content requirements, foreign exchange balancing requirements and export performance obligations. Another reflection of the extensive effort put in attracting foreign investment is the recent change in the process of approving FDI projects established by the Chinese government. In the past, all foreign enterprises needed to provide detailed project proposals with feasibility studies and operation reports, before being able to receive permission to proceed.
By reducing the administrative requirements and delays for approving purely foreign investment projects the central government has made it much easier and more convenient for multinational enterprises to establish local representation. The new policy will eliminate the need for the elaborate proposals and protracted approval procedures for all ventures that do not include state funds. Thus in the future companies would only need to submit a simplified application to the government before the project commences.
Furthermore, provincial governments will also be given further autonomy over approving foreign invested projects that include state funds. Prior to the reforms, local governments were able to approve projects that included state funds at a maximum of USD 30 million. From 2004 provincial governments instead of the central government will be able to give approval to all projects up to USD 100 million. In spite of these positive changes it is clear that with the Chinese market opening to foreign companies, numerous other laws and regulations would have to be issued to ensure a stable environment for foreign investment.
Hence, a number of foreign investors today, both prospective and current, questions whether the laws will be comprehensive and clear enough to enhance predictability, and most of all whether they will be enforceable64. In the same manner there is concern over whether the extent and pace of the implementation of commitments to the WTO will be sufficient. Between 82 – 94% of the respondents in the Deloitte Touche Tohmatsu survey quoted above stated that non-implementation will be a major concern for them (see Fig. 8).