I Different Types o f Enterprise

First, we will consider the changing balance among different kinds of firms in China. In China, there are four different categories of firms: state-owned enterprises (SOEs), collective-owned enterprises (COEs), foreign firms, and other types of ownership (individually owned enterprises; private enterprises). SOEs are enterprises owned by the state, and these are distinguished according to levels of jurisdiction: the nation, the province, the city, the prefecture. As a consequence of economic reform and the development of marketisation, the share of SOEs in industrial output has steadily decreased. In 1999, the industrial output of the SOEs, including enterprises with a controlling share held by the state, accounted for only 28.1% of China’s total industrial o u t p u t C O E s are collectively owned firms and include public firms owned by local

TVEs). Many TVEs were originally based on the people’s commune (renmm gongs he).

COEs now employ nearly 70% of China’s industrial workers.11 Foreign firms are enterprises owned by foreigners.12 The other firms, according to Chinese categorisation, are enterprises owned by individuals. These firms can be called ‘private firms’, but according to Chinese socialist ideology, they were once illegal. In 1999, these ‘private firms’ contributed to 20.7% of China’s total industrial output.13 In the same year, the private firm’ was constitutionally adopted as an important part of the socialist market economy. It can be seen, then, that non state-owned firms have significantly increased their presence in the Chinese economy.

3.3.2 China's Inward FDI

China’s impressive economic performance, especially in the coastal provinces, is coincident with the growth of inward FDI. China has been the largest recipient of FDI among all developing countries. The UNCTAD (2000) estimates that at $US 40.4 billion in 1999, inward FDI to China accounted for 19.4% of total inward FDI to the developing countries ($US 207.6 billion). Between 1979 and the end of 1999, China absorbed a total of SUS 307.77 billion of inward FDI (actual use). Between 1985 and 1995, China’s annual average inward FDI accounted for 23.4% o f total inward FDI to the developing countries and 6.4% of total global FDI (UNCTAD, 2000). By 1999, there were 235,681 foreign affiliates in China, which accounted for 34% o f the total number of foreign affiliates of MNCs (UNCTAD, 2000).14

Hitherto, the primary motivations for FDI in China have been: the location advantage o f low-cost-labour and land, preferential government policies, and access to the rapidly growing internal market (Zhang, 2000). In addition, for Hong Kong and Taiwanese firms, there are also advantages arising from geographical, cultural and linguistic proximity, which help to reduce transaction costs. From a Chinese viewpoint, there are five advantageous factors for foreign investors: (1) political and social stability; (2) continuous economic growth; (3) the maintenance of a stable exchange rate; (4) a high level of foreign exchange reserves and a favourable balance o f payments; (5) further deepening economic reform and improvement of the legal system (Hu, 1999: 38). However, of equal importance is the role of inter-organisational linkages in exploiting the scale of advantages and

flexibility. For offshore manufacturing activities based on an export-oriented strategy, low-cost factors o f production are especially important. Foreign investors have been attracted by China’s official adoption of an export-oriented strategy based on the principle of comparative advantage in production through the international division of labour. The proliferation of coastal special economic zones (SEZs), open cities and open areas, all of which are allowed to give preferential treatment to foreign firms, has acted as a magnet to attract FD1. Inter-organisational linkages (i.e. sub-contracting, outsourcing and production networks) are not confined to regional clusters or to the nation state but cut across national boundaries.

3.3.3 China's Regional Differentiation

In the 1990s, inward FDI in China was concentrated mainly in the coastal areas (see Table 3.1). These areas are very attractive to investors because they have better infrastructure (e.g. ports) and a better quality o f labour. Among China’s coastal provinces, Guangdong’s dominant position is clear, but with the spread of a new open area towards the north, the gap with other coastal provinces is decreasing. For example, Jiangsu province has a steadily increasing share of inward FDI. By the end of 1998, Guangdong had the largest number of registered foreign firms (57,665) followed by Jiangsu (21,403), Fujian ( 18,071) and Shanghai (17,622) (Mitsubishi Sogo Kenkyusho: hereafter Mitsubishi, 2000: 506). But the growth of inward FDI does not tell the whole story o f the process of the reintegration of China with the world economy. Equally important are the growth and pattern of development o f contacts with foreign economies, especially through foreign trade. According to the rate of foreign trade, foreign loans, and rate of foreign investment, there is a huge inter-provincial differentiation, and the economies of the coastal provinces have

become more open, with Guangdong now being ranked as the most open economy (.Jing/i

Rihao, 17 May 2001). Manufacturing exports through inward FDI are one of the key factors. Foreign firms now play a very important role in the Chinese economy, accounting for 16% of China’s industrial output and nearly half of China’s foreign trade.IS They employ more than 17.5 million people, equivalent to about 10% o f the country’s non-rural labour force (Li, 2000: 112).

Table 3.1 The Geographical Distribution of FDI in China in the National Total, 1987-2000 (Actual Use, SUS billion) (%)

\Year and \otal Rcgion\ 1987 2.314 1991 4.366 1993 27.515 1995 37.521 1997 45.26 1999 40.32 2000 40.71 Beijing 4.1 5.61 2.42 2.88 3.52 4.90 4 1 Tianjin 5.49 3.02 1.97 4.05 5.55 4.38 29 Shanghai 9.25 3.32 11.48 7.71 9.34 7.03 78 Guangdong 26.06 41.75 27.62 27.13 25.88 28.91 27.7 Fujian 2.20 10.67 1042 1076 9.27 9.98 8.4 Jiangsu 2.03 486 10.34 13.83 12.01 15.07 15.8 Coastal Provinces (Total) 55.92 89.75 86.10 86.53 85.29 85.35 86.98 Central and Western Province 6.74 5.4 12.34 11.91 14.01 13.70 12.09 Central Department 37.38 5 51 1.56 1.57 0.7 0.95 0.93

Note: There are no clear definitions o f the geographical divisions Here the coastal provinces are Beijing, Tianjin, Hebei, Liaoning, Shanghai, Zhejiang, Fujian, Guangxi, Jiangsu, Guangdong, Hainan and Shandong Figures are based on the rsearcher's calculations

Sources: Zhongguo Tongji Nianjian (ZTN) 1999 and 2000 editions, Zhongguo Duiwai Jingji Maoyi Nianjian

2001, Mitsubishi (1996 and 2001 editions) Chugoku Joho Handobukku (Information on China), Tokyo

Sososha; and Kaku, Shishi (1999) Nihon no lai Chugoku( ’hokuxetsu Toshi (Japanese FDI in China), Tokyo

Meitoku Shuppansha

3.3.4 China’s Processing Trade

It is important to note that nearly half o f China’s total trade is carried out in the form of processing trade arrangements (PTAs): the Chinese government or partner provides plant, labour, water, electricity and other basic facilities, and foreign investors supply the machinery, equipment, materials and design of products and take responsibility for marketing. They also pay the processing fee for the Chinese side (Sit, 1998: 896). In terms of transactions, foreign investors bring parts into China as imports and take the processed products back as Chinese exports.16 The key for PTAs is China’s abundant supply of low- cost labour. Table 3.2 confirms that processing trade has increased its proportion in China’s foreign trade. In exports, the processing trade accounted for 55.2% of total exports and 41.1% of total imports in 2000.17 In terms of division by industrial sectors, in 1999 machinery and electrical equipment exports accounted for about 40% o f China's total

exports. Foreign firms contributed 67% of total processing-trade arrangements exports

(Kokusai Boeki, 8 February 2000). In terms o f bilateral trade relations, China has trade surpluses with the US ($US 22.5 billion in 1999) and the EU ($US 4.7 billion 1999), and a trade deficit with Taiwan ($US 15.5 billion in 1999).'* This trend relates directly to the structure of China's PTAs. For example, in 2000, the trade surplus by the processing trade was $US 45.1 billion but in total trade the surplus was only SUS 24.1 billion Thus, the processing trade contributes greatly to China's trade surplus and without it China is likely to fall into a huge trade deficit.

fable 3.2 The Share of Processing Trade in China's Foreign Trade, 1986-2000 (SUS