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Posted on October 7th, 2012, by

In 1980s foreign direct investment became significant for the economic development of China. The Chinese government acknowledged the necessity for the transfer of more advanced technologies to China together with the FDI. Innovations are the objectives of China’s foreign investment and trade policies, which aim at modernization and self-sufficiency of industrial and military branches of the PRC. To do that, Chinese companies need to work out know-how and reach new high value markets. The transfer of Western technology plays a leading role in these attempts.

Many global companies long to enter the Chinese market and establish long-term partnerships in China; however technology transfer process still collides with difficulties.

Comparative analysis of China’s norms in relation to domestic and foreign investment policy shows discriminatory provisions concerning rights and obligations of foreign partners. To enter the Chinese market in some sectors (car manufacturing, manufacture of railway locomotives and rolling stock), foreign companies must create joint ventures with Chinese companies. Sometimes, a partner is not permitted be freely chosen and may appear a competitor to his partner.

In order to participate in public tenders, foreign companies should ensure that part of their production is local (in some cases up to 80%).

Manufacturing by foreign affiliates is often not considered as local. Instead, foreign companies have to work with a general Chinese contractor and wholly transfer their technology.

The drawings and know-how invented at foreign companies in China may later be used by other Chinese projects which duplicate and use the design for their benefit. Such situation threatens the competitiveness of foreign companies which rival advantage lies in innovations, creativeness, and brands. This risk is exaggerated through ineffective legal protection of intellectual property rights in China.

In efforts to stimulate national technological innovation and to spread applied technologies, numerous National Engineering Research Centers (NERCs) were founded in China fulfilling the Research & Development function and aiming at reforming scientific and technological research system, which is at the same time the way to stop technology “leakage”¯.

China’s policy is very strict in questions of foreign investments that should be prohibited. Nevertheless, privileges are given to foreign investors in high-tech, for instance, they are motivated to transfer technology through tax reductions or lower tariff rates, but simultaneously they are subjected to regulations not assigned for national competitors. The PRC obtains more FDI than any other developing country; so it’s currently outrun only by the USA. Chinese industry is better succeeding in using and absorbing foreign capital together with technology.

Chinese government implemented a number of strict measures concerning the foreign trade policy, which is directed on national producer maintenance. Thus, export indexes outreach import indexes in China’s main trading coastal zones. According to Chinese statistic data, the share of Chinese exports produced in foreign-invested plants has grown significantly over the last 10 years comparing to nearly half of all exports in 1996.

Foreign import and investment policy of China has become increasingly selective and restrictive in questions of imports and investments which are allowed or officially encouraged. In particular, an increased emphasis on industry-specific investment and high-technology imports has been done.

The Chinese government has identified several industrial branches as “pillar”¯ industries, mainly machinery, petrochemicals, construction materials, car manufacturing and electronics. These pillar industries are planned to be developed with preferential governmental support as the principal engines of unstoppable economic growth of the PRC.


China’s and India’s approaches to economic development

The economic growth of the world’s two most populated countries can enrich the whole world. But China and India have gained economic success by means of totally different methods and followed radically different approaches to their economic development, each having their positive and negative sides. And it is far from clear which of them will provide more sustainable growth.

The effectiveness of China’s approach is based on capitalism implemented by leaders and lifting millions out of poverty, but lacking clear property rights and democratic freedoms that could hinder further economic progress. The India’s economic model is more disordered.

The government’s task is to let the private sector conduct growth and create jobs. These main principles form the 3 structural differences of China’s and India’s economic approaches.

1. The Chinese economic activity is more controlled by the government than the Indian one. The state infrastructure is governmentally invested and, it is government which makes decisions concerning governmental resources division among companies. On the contrary, the Indian government is systematically becoming less interfering into the market and stock activity. Private business is restrained in China, while India is empowering it.

2. Chine embraces foreign direct investments, while India remains cautious. However, India started its economic reforms about 10 years later than the PRC did and it’s only opening to FDI now.

3. The abovementioned features impact the types of companies and entrepreneurialism. China’s approach is focused on manufacturing and “hard”¯ infrastructure projects (roads, ports, power), India is specialized on “soft”¯ infrastructure business (software, biotechnology, advertising and cinema).

Negative consequences of China’s approach to economic development are easily found: cyclical overcapacity, state-influenced resource allocation, and growing social inequalities. However, the Government’s intervention into the Chinese economy has brought a significant improvement in the living standard that India hasn’t enjoyed. Besides, China has effectively built industries large enough to raise its economy; and cyclicality makes survive only the most competitive enterprises, which no longer depend on local-government funding and start to compete for the long term, both domestically and internationally.

Moreover, foreign investments are in some way not connected with the development of Chinese markets or banking system reforming. China is also relying on its own resources to finance the economic growth. So the stock markets of the PRC continue to develop.

The government of China controls most of the financial resources but has been reasonably successful in allocating them, so the economy has grown that fast. Comparing with the private sector of an efficient market, the government is surely worse at allocating funds. But the PRC isn’t an efficient market, and the Indian model with relatively little investment could not have reached the growth through such approach. At the same time, the Indian development approach might not be adequate for India’s economy too: the private investors can be good at deciding what is profitable for them, but they don’t make big investments into the whole economy process, as it’s done in China.

Both China and India own some inefficient industries that are strictly regulated and lack competitive dynamism. But both countries also own successful industries thriving free and private. It’s far from clear which country’s economy will emerge as the stronger one. The basics of sustainable economic growth should be built at the industry level, at high productivity achieved when governments ensure a playing field level through proper regulation and remove the barriers limiting competition. Both China and India have endless opportunities to contribute to their industries and economies. It can also appear that both countries have chosen the most appropriate ways to develop that correspond to their own historical circumstances.

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