On Mar. 31, 2001, China's National People's Congress ratified amendments to the law on foreign capital enterprises and the law on Sino-foreign contractual joint ventures. The amendments demand that following entry into the WTO, China must formulate its foreign investment policies in accordance with the Agreement on Trade-Related Investment Measures. Taiwan businesses which already have investments or are planning to invest in China, must re-evaluate China's investment environment and make the necessary strategic adjustments.
Foreign-invested enterprises will no longer be required to export all or the majority of their products. They will no longer be required to report their business or production plans to the government and will be able to source raw materials either in China or elsewhere. Also, the provisions requiring that foreign companies achieve a "foreign exchange balance" have been removed.
These newly-amended laws have significant implications for Taiwanese companies. In particular, the lifting of restrictions on the domestic sales of the products will open up the China market further to foreign enterprises.
Taiwan has always been the third largest foreign investor in China. According to China's Taiwan Affairs Office, by the end of 2000 there were more than 49,000 Taiwan investment projects, with promised investment of US$49 billion and US$27 billion in actual investment thus far. About 90 percent of these investment projects are in the manufacturing sector.
In the past, Taiwanese companies mainly used China as an export-processing base, with products destined for overseas markets. As China has gradually opened up its market in recent years, and as its domestic consumer demand increased, many Taiwanese companies have been drawn to the enormous potential of this huge market. Now that the newly-revised laws do not require the export of all or a majority of products, Taiwan-ese companies have a much greater opportunity to expand their markets there.
While Taiwanese companies can benefit from the revised laws, however, they will also be exposed to intensified competition. As the China market becomes more attractive, multinational corporations which have already established a presence in the country are bound to increase their investments or accelerate the pace of their expansion. However, with the gradual adoption of the policy of national treatment, some investors entitled to supra-national treatment may eventually lose their privileges and have to face competition from domestic enter-prises. In order to stay ahead of the competition, Taiwanese companies must be fully aware of the competitive pressure from both multinationals and indigenous Chinese enterprises and grasp any emerging opportunities ahead of their rivals.
As far as foreign investment policy is concerned, China established many special zones in the past to lure investors and foreign firms were offered various preferential treatments. Following WTO entry, China must adopt unified investment policies for the whole nation and must not favor one region over another, or it will be accused of violating the principle of national treatment. China will therefore gradually shift to a policy of giving preferential treatment to selected industries rather than selected regions.
By April 2001, China already had approved the establishment of more than 370,000 foreign-invested enterprises, with total investment approaching US$700 billion. In the future, it will no longer say "yes" to every proposed investment, but will move in the direction of joint ventures between state enterprises and multinational corporations with the aim of involving foreign capital in the reform and restructuring state-owned enterprises.
China will also aim to steer foreign multinationals in the direction of establishing high-tech industry and research and development facilities, investing in technology-intensive projects and initiating more technology-intensive projects of its own. It wants foreign investment in infrastructure in the inland and western parts of the country -- in mining, tourism, environmental protection, processing of agricultural and dairy products, restructuring of existing production capacity and new electronic products and other technology-based projects.
The government has announced, for example, a series of new tax policies to encourage foreign investors to take part in the software and integrated circuit sectors. From now until the end of 2010, foreign investors who sell self-developed software products will get a rebate after paying the 17 percent value-added tax. Newly-established software firms will enjoy the "two-year exemption, three-year reduction" preferential tax policy from the first profit-making year. Companies recognized as new and high-tech enterprises will enjoy the same treatment.
The production facilities of integrated-chip manufacturers can be imported tax-free within a period of not less than three years of approval by the tax authorities. These policies will turn China into a market even more suited to multinational corporations, high-tech industry and research and development facilities.
For Taiwanese firms interested in getting into the fields of finance, insurance, telecommunications, trade, wholesaling, or retailing, the only opportunity to get the upper hand in the market will be to cooperate with European and US multinationals. This is because after China joins the WTO, liberal-ization in those areas will still be selective. Until the transitional period of market opening is completed, there will be only gradual liberalization under fixed controls and, in the early period of liberalization, European and US multinational corporations will be at an advantage.
The trends just described will create a special situation in the early days of the liberalization of China's sales and service industries. This situation will favor multinational corporations, who have international reputations, strong capabilities, and advanced management experience. Taiwanese firms will be at a disadvantage.
If they want to succeed, therefore, Taiwanese companies must utilize the assets and contacts they have there, and their deep understanding of Chinese trading and operating habits, to convince European and US multinationals to enter into cooperative relations. From the point of view of market competition, joint investments in China with foreign capital will help Taiwanese firms to cope with the tremendous pressure of market competition.
Tsai Horng-ming is vice secretary-general of the Chinese National Federation of Industries.
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