Ties That Bind - Bay Area Council Economic Institute

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Investment: Building Global Businesses
in a New China
China’s technological capacity is growing, and while it is not currently a source of innovation
comparable to the United States, this may change with time. Taiwan has established itself as a
major center for semiconductor manufacturing and, like the PRC, for applied research. While
Taiwan’s ability to innovate has been hampered by its lack of a large domestic market, the size of
the mainland market suggests that by mobilizing its base of entrepreneurs, and by either importing
or leapfrogging foreign technology, it will eventually develop a capacity for advanced innovation
and a more sophisticated production capacity. Many examples of China’s incremental approach
to accessing global technology, business processes and management practices through
foreign investment are documented throughout this report.
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China’s market opening began in earnest in the 1990s, with sector-specific easing of rules to allow
foreign representative offices, then minority joint ventures, next followed by increases in
permitted equity stakes to majority or controlling interest, and finally full foreign ownership of
licensed businesses.
At the same time, the central government has sought to wean thousands of non-strategic stateowned
enterprises (SOEs)—which still account for some 30% of China’s manufacturing output—from
state control and support. Since 2003, it has fully or partially restructured more than
85% of SOEs listed on the Shenzhen and Shanghai stock exchanges; opened state-owned and
domestically-traded “A” shares in those companies to “qualified foreign investment institutions”
(QFIIs) meeting a minimum asset threshold; encouraged “qualified domestic investment institutions”
(QDIIs) to invest overseas; allowed a broader range of “foreign invested enterprises”
(FIEs) beyond traditional minority joint ventures; and eased mergers and acquisitions (M&A)
rules to encourage foreign acquisition of, and participation in, Chinese companies.
Chinese government estimates of foreign direct investment (FDI) in 2005 were revised upward
in June 2006 to $72.4 billion, to include government approvals of 18 foreign-invested banks, insurance
and securities firms, and fund management operations. This followed FDI growth of
$60.6 billion in 2004 and $53.5 billion in 2003.
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