The future of foreign investment Go back »

2012-12-01 | All chapters

The reason for this is because European industry is regarded as exactly that: as European; as foreign. European companies accepted investment constraints trusting that further opening up and reform would remove the initial barriers. But this now is overdue and it is time to address the structural inequalities that foreign investors face. In order to tap into the further potential that companies of EU origin could contribute, including to China’s economic rebalancing, our companies should be treated as Chinese companies as they are Chinese companies.

 

The European Union doesn’t have a term for categorising investment as foreign. If a Chinese or other non-EU company legally invests in Europe, the resultant legal entity is considered European. China has a fundamentally anachronistic view of foreign investment. Rather than commencing from the premise that foreign investment and healthy competition in an open marketplace brings positive impacts in and of itself, China places conditionality on the opening of markets to foreign investment. This is reflected in the piecemeal opening of markets and control of foreign investment in the ‘Foreign Investment Industrial Guidance Catalogue’. The Catalogue delineates a sharp distinction between domestically-invested and foreign-invested industry and prescribes conditions for the acceptance of foreign investment only where it is perceived to serve clear industrial policies.

 

The fundamental issue in China today is economic rebalancing. European business has long contended that increased competition in the marketplace is the elemental requirement for China to continue its impressive growth by moving up the value chain and more efficiently and productively utilising capital and resources. For a marketplace with the size and growth potential of China, competition should not be viewed with apprehension but as something to be actively encouraged. In recognising further reform and opening up as the driving force of the 12th Five-Year Plan, the Chinese government has seemingly recognised the need for economic reforms to substantively reduce state involvement in the business environment and to give much greater play to market principles. Amidst what is now widely recognised as both a cyclical and structural downturn, we see that the voices for speedy reform are being raised more loudly and more urgently.

 

While it is now widely accepted that there needs to be decreased state control of the business environment and greater play given to private industry, there still seems to be a remaining section of the government that aims to tie access to the Chinese marketplace with considerations of economic nationalism and protection for Chinese domestic industry. Continuing to restrict access for European and other foreign-invested firms would inhibit the full realisation of the various and sizeable contributions that increased European investment would give to China’s economy, business and society – not to mention the highly detrimental impact that continued inequity would cause in the form of increased trade frictions that are already starting to rear their ugly head.

 

Never has the idiom of when one sneezes everyone catches a cold been truer than it is in today’s globalised economy. No doubt the severe downturn in Europe has sharpened this perception of interdependency for China. It holds true for the trade relationship and increasingly so for the investment relationship and is reflected by China’s determination to speed up the negotiation of investment treaties with its major partners, including efforts now for a bilateral EU-China investment agreement. China’s process of rebalancing will bring the economies of the EU and China closer together. This will bring synergies, but will also put China and the EU into greater competition together on the global stage.

 

Amidst the downturn, Europe remains staunchly and resiliently open. But as a democratic society, European policy-making is basically forged by public opinion. With China increasingly being recognised as an economic competitor, asymmetries in the levels of market openness between the two partners become more apparent and perceptions of unfairness become more marked amongst Europe’s citizens. Europe absolutely believes in the benefits of an open investment environment and actively encourages Chinese investment, but remaining open will become an increasingly hard sell to European constituencies if asymmetries persist. This is why we see trade tensions rising and why it is imperative that all parties maintain an eye to the long term. Open markets must be viewed as two-way streets. It is no-one’s interest for this pressure to lead to a closing of markets.

 

China’s degree of openness to foreign business will therefore increasingly have implications for the interests of Chinese business on a global stage, especially as Chinese firms are stepping up their overseas investments. Chinese policy-makers are aware of this and will need to increasingly factor in the impact of trade frictions into their internal economic policy-making to ensure that Chinese firms can enjoy the benefits of access to large marketplaces around the world. But I would argue the major reason why China should further open its internal marketplace not only to private domestic firms, but also foreign-invested firms, is for the direct benefits that increased foreign investment in China will bring.

 

The European Chamber is encouraged by recent policies such as revisions to the ‘36 Clauses for the Non-State Owned Economy’ to allow private investment into sectors where little competition is allowed. Such moves would not amount to less government monitoring of the business environment, but a liberalisation of central government control. De-centralisation and increased competition would yield a greater flexibility in the business environment to respond to China’s growing consumer and industrial needs. This would not only assist economic rebalancing, it would also help to unleash the underexploited entrepreneurial potential of China’s private industry. However, we are concerned at indications we have received in discussion with relevant government authorities that such pronouncements to encourage private investment are unconnected with foreign investment. I would argue that such halfway measures would only produce halfway results. 

 

At the European Chamber we believe that corporate cooperation is best developed in a truly competitive environment. Cooperation at its heart lies in the organic functioning of a competitive marketplace and the interplay and benefits that come from allowing the best companies to compete on equal footings and to choose when and how to partner together. Policy should focus more on encouraging voluntary technology transactions instead of forced technology transfers. In Europe we see an increasing and organic tendency in many sectors towards the development of mature partnerships between competitors entered into in mutual trust and on the premise of the long-term benefits of specialisation. This leads to a natural flow of technology, both across national borders and industries and it leads to the formation of joint ventures where the respective strengths of the partners produce a whole that is more than the sum of its parts.

 

When China laid out the list of strategic emerging sectors to be promoted, European business in China initially viewed the plan with great enthusiasm. European business is traditionally strong and is the global leader in many of the technology driven sectors identified in the strategic emerging industries, such as energy-efficient and green technologies, new energy technologies, next generation IT and high-end equipment and transportation manufacturing. However, it has become increasingly apparent that the plan to promote these strategic emerging industries is part of China’s industrial policy strategy intended to develop national champions that can compete on the global stage with large multinational corporations through protected markets, subsidies, misguided indigenous innovation policies and other favourable treatment.

 

Access to the Chinese market for foreign-invested enterprises in these strategic emerging industry sectors and in other traditionally administrative monopoly sectors is massively curtailed. Much of the access exists in areas of the supply chain where China has not developed the technologies or expertise, or is only possible in the form of minority equity stake joint ventures with domestic Chinese firms that are often conditional on a transfer of technology by the European partner. In a recent publication the European Chamber produced on how patent-related policies and practices in China are hampering innovation, we referred to these examples of forced technology transfer requirements as raw deals. In the same study, we noted that evidence shows that European cutting-edge innovation-intensive operations do not generally agree to these raw deals and that these policies actually serve to deter enterprises from contributing valuable technological knowledge in Chinese operations. This unintended consequence is the opposite of what China wants as it aims to carry out industrial upgrading and stimulate innovation.

 

Those sectors in which we are least able to fully participate – the strategic emerging industries and the traditionally administrative monopoly sectors – are exactly those sectors where we would be able to most fully contribute. As China further develops and urbanises, it will be necessary to find ever more sophisticated, sustainable and efficient ways to meet its growing needs and consumption demands. Europe has already gone through much of the same industrialisation and urbanisation processes that China must go through today. We made mistakes, we learnt lessons and we have developed some tools. European industry is bringing this experience and many of these tools to China and we are working together with Chinese industry, academia and the government to develop new solutions to meet China’s needs.

 

European firms do bring real benefit for China’s economic and societal development. Our companies are competitive because they are innovative, efficient and produce high-quality products and services. In addition to the jobs creation and capital expenditure that our investments have brought, we have also passed on skills, training, management and technical know-how to Chinese workers. We have built a reputation for high-quality, advanced and environmentally sustainable solutions and we have made many important contributions to China’s development, including through enacting best practices in ecological protection and labour conditions. There are also many examples of long-term symbiotic partnerships between Chinese and European companies that are built on mutual trust and mutual interest that encourage voluntary technology transactions, joint research and development and where both partners contribute skills and expertise and both parties benefit. But there could be many more examples. As most Chinese policy-makers are acknowledging the need for increased participation and competition in the economy, we hope that the trepidations of some do not cause the government to stop short of comprehensively following through on reform by not including foreign industry.

 

Even when it doesn’t lead to corporate cooperation and partnerships, healthy competition should be recognised as a good in and of itself. Competition is the driving force for excellence and innovation. Competition on an equal footing forces all companies to develop the best and most needed products and services at the lowest price obtainable. Not only is this good for the consumer and for meeting societal needs, it compels excellence and induces innovation. Such competition has acted as the greatest spur for the development of China’s own domestic industry. As Chinese firms increasingly aim to compete in mature global marketplaces where Chinese firms will not benefit from favourable treatment, they will need to be ready. Only by having a truly competitive marketplace at home can enough Chinese companies develop the skills to compete with the best abroad. History has proven that it is ultimately only by competing with the best that you can become the best.

 

The stakes are high. This is not just about promoting foreign direct investment or reducing trade frictions. It is not just about stimulating innovation or ensuring that the best products and solutions are available in China. It is not even just about providing the tools to meet the myriad societal needs that China is facing. This is central to the key question of the time regarding economic rebalancing and the ability of China to overcome the middle income trap and spur a prolonged period of growth.

 

On the eve of a generational leadership transition, China holds a historic opportunity to raise its economy to a new level. China’s state-led investment development model has supported growth over the last 30 years, but it is by design unequal and no longer sustainable. The last decade of stalled and piecemeal reform during prevailing advantageous economic conditions maintained strong growth but failed to create the supporting institutional framework required to sustain China’s development. China possesses the necessary ingredients, including the technology and physical infrastructure bases, as well as the human capital to make this shift. However, reforms to substantively reduce state involvement in the business environment and to give full play to market principles are needed. The 12th Five-Year Plan recognised this need for change, but meaningful implementation has been lacking. With signs of over-investment and poor productivity returns already perceptible and with the demographic dividend coming to an end, these changes are now urgently required not only for China, but also for global economic growth.

 

At its core, China must create the conditions that ensure that the drivers of innovation, productivity and efficiency prevail. Rebalancing the economic growth model requires equal access for all companies, whether private or state-owned or whether Chinese or foreign-invested, not only to markets, but also to public procurement, technology innovation, treatment under the law and to finance and subsidies.

 

In order to stimulate healthy competition and to comprehensively realise the benefits that European and all foreign industry could bring, both singularly and in partnership with domestic industry, China must re-evaluate its mindset towards foreign investment. We as European industry want to be here and we want to contribute to bolster the marketplace and to meet China’s needs. In order to do so, China must allow European and all foreign companies the same access and the same operating conditions as Chinese firms, including in the strategic emerging industries and in all those industries that China plans to open to private investment. We want to achieve the same ends. We’d like to be regarded as Chinese.

By Davide Cucino, President of the European Union Chamber of Commerce in China

 

Source: Caijing