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FDI Quality Under the Microscope
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You Nuo


Very soon all companies, based on foreign direct investment (FDI), will most likely to go through a crisis a public relations crisis.


The Chinese-language press is asking whether China, having been the world champion in attracting FDI, has, in fact, attracted too much? Is FDI affecting the nation's "economic security" by attempting to take over some largest State-owned enterprises? Is FDI dominating too many industries and forming new monopolies?


Because of a rising sense of insecurity, people have also questioned the favorable tax policies that FDI companies have enjoyed since China's beginning of economic reform. Does it makes sense, they ask, to continue to levy lower taxes to FDI when it may be a potential threat to the economy?


Two weeks ago, the Ministry of Commerce, the government agency that oversees FDI in China, issued a report saying the FDI has not built a monopoly in any of the industries in China. The official paper has not made a strong enough defence.


Opinion makers have not been so lenient. An article in an influential news magazine (Nan Feng Chuang) over the weekend, signed by an independent researcher, insisted that FDI now controls the majority interest in 21 out of the 28 major industries in China. This allows FDI-operations in these industries the legitimate right to veto the interests of other stakeholders. This is a serious allegation.


Later this week new regulations will begin to take effect on FDI mergers and acquisitions in China, and it will include investigations on anti-monopoly grounds.


Having some rules is good but the challenge of the FDI role in China is not likely to weaken once these new rules are in place. FDI operators have to learn their lessons from the recent criticisms.


No businessman is operating in an environment of pure competitive business. For many years during the Chinese reform, including some most difficult times for the State-owned enterprises, people continued to welcome FDI. Only recently is their potential harm being questioned.


It is because FDI was then almost welcomed by everybody. It was seen by urban, "middle-class" groups as a useful, if not a magical substitute for low efficiency and poor service in the old State-owned industries.


For the self-made entrepreneurs, FDI was almost synonymous with examples of advanced technologies and management. FDI operators were also credible business partners because they had money and paid in time.


For the young migrant workers from the countryside and their families, FDI not only provided them jobs and opportunities to learn industrial skills, but also offered better pay than the State-sector and domestic private employers.


Even for the intellectuals those printing newspapers and conducting their ivory-tower research projects FDI was good because it helped China generate higher GDP (gross domestic product) records and earn more export money.


That was also why for so long, the dual tax system, in which FDI companies had more favor than their State-sector counterparts, could be tolerated.


The change of mood has come after FDI operators, mainly those merger-and-acquisition (M&A) funds, ventured out to seek high-profile deals in allegedly secretive ways.


At the same time, some other FDI companies have reportedly wiped out their domestic competitors and their brands, thus hurting the consumer interests, through their M&A deals.


There are also FDI companies, which have reportedly been exploitative to their workers especially when their products enjoy world-wide success.


These happenings are forcing the Chinese to adopt more differentiating policies.


(China Daily September 4, 2006)


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