What is the role of foreign direct investment (FDI) on China’s path to capitalism?
Until 1979, foreign investment in Chinese enterprises was simply forbidden. Given the country’s political instability, it is doubtful whether there would have been many volunteers even without the ban.
FDI was very slow to take off to begin with. Until 1984, only 250 state owned enterprises were allowed to take in foreign partners as “joint ventures”. Between 1979 and 1984 only US$1.8bn was actually invested, although the state borrowed some US$11bn as well.
Although the figures did increase for the rest of the decade, before falling back sharply in the aftermath of the Tienanmen massacre, it was not until the fundamental change of policy in 1992 that the floodgates opened. By 1994 China was second only to the USA in terms of FDI – attracting US$33bn that year.
Enterprises were dropped and all provinces were allowed to invite in foreign investment. By 1995, according to the official industrial census, there were 59,000 firms in China with foreign investment. They employed nearly nine million people, 13.6 per cent of the industrial workforce and produced 13.1 per cent of total industrial output.
Investment on this scale clearly has implications for the character of the economy. While loans to the government are guaranteed a return, investment into joint ventures on a shareholding basis, or into wholly owned companies, is obviously investment in production and foreign capitalists will want to ensure their profits by influencing, if not controlling, production.
Consequently, the availability of huge volumes of foreign capital acted as a solvent of the production and distribution linkages established under the planned economy and accelerated the creation of new ones determined by the pursuit of profit.
This is particularly important with regard to the scrapping of controls on foreign investment into the large scale industry of the state sector after 1992.