Foreign Direct Investment in China

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Considering all the statistics given in the introduction, let us first examine how China has become such an attractive target for FDI. The path to economic liberalization has been a difficult but fruitful one for China. It has triumphed due to its determination and commitment to open up its markets to foreign investors. A Business Week article in 2001 stated that after two decades of steady but halting reforms, Beijing is now racing to dismantle the last vestiges of a command economy. Let us trace the FDI history in China. Since late 1978, China has carried out massive economic reforms in an effort to restructure its economy to be more market-oriented. FDI was one of the primary goals of its reforms. The government has over the years slowly liberalized the restrictions on FDI to gain technology transfer, modern management skills, and foreign exchange. The government’s first move to entice FDI was taken in 1979 with the Equity Joint Venture Law. This law allowed the legal entry of FDI and provided a statutory basis for the establishment of joint ventures in China. But Investment was allowed in only designated Special Economic Zones (SEZs) and was encouraged via tax incentives. As investments grew, additional laws were required. In 1983 another law was issued which provided greater details on all joint ventures in FDI. The government also expanded the SEZs in 1984. Then it passed Foreign Exchange Balance Provisions and Encouragement provisions in 1986 which facilitated FDI and allowed firms to solve foreign exchange problems. (Jun Fu, November 2000). In 1994, China conducted a new round of FDI reforms. It abolished the official exchange rate and adopted a market rate. It also abolished the exchange quota retention system. In 1996, the government adopted IMF article A that removed all restrictions on foreign exchange transactions.