Zhao Jinping

After its WTO accession, China has been facing a dual strategic task of accelerating opening up and expediting structural adjustment in order to respond to the new changes in international division of labor and cooperation and to achieve a rapid and sustained economic growth. Attracting foreign investment is an important component of its opening to the outside world. Therefore, analyzing the basic features of foreign-invested industries and their impact on structural upgrading is of vital importance for studying and formulating industrial policies on foreign investment designed to promote structural adjustment.

I. The capital equipment and technical contents of foreign-invested industrial enterprises are clearly better than those of the non-foreign-invested industrial enterprises and have helped improve the technical competence and international competitiveness of China’s industry as a whole.

Capital equipment is the basis for manifesting industrial technical competence and structural upgrading. According to the 2000 statistics on industrial enterprises, the average rate of capital equipment of China’s foreign-invested industrial enterprises was 1.183 million yuan, which was 31 percent higher than that of non-foreign-invested industrial enterprises. The sales revenue/total assets, sales revenue-profit rate and per capita sales revenue were respectively 41 percent, 11 percent and 106 percent higher than their non-foreign-invested counterparts. In terms of industrial sectors, the electronic and communications equipment manufacturing industries are representative of the technology- and capital-intensive industries. However, the non-foreign-invested industrial enterprises in these two sectors accounted for only 1.5 percent of the balance of the fixed assets of all non-foreign-invested industrial enterprises, which was 8.8 percentage points lower than that of the foreign-invested industrial enterprises in the two sectors among all foreign-invested industrial enterprises. The disparity was about 3 percentage points in the electric and transportation equipment manufacturing industries. This is an indication that the overall capital equipment and economic efficiency of the foreign-invested industrial enterprises were much higher than their non-foreign-invested counterparts. The former had an obvious technical and capital superiority.

Analysis indicated that the average capital equipment of China’s industry as whole, including foreign-invested industrial enterprises, was 912,000 yuan, which was 6 percent higher than the average level of the non-foreign-invested industrial enterprises. The rate of sales revenue to total assets, sales revenue-profit rate and per capita sale revenue increased respectively by 8 percent, 3 percent and 16 percent. The proportion of the capital-intensive manufacturing industries of electronic and communications equipment, transportation equipment and electric equipment in all industries also rose by 0.5-1.7 percentage points. Even though the above results represented the level of the year 2000, they could be regarded as the annual average of the late 1990s because the proportion did not change visibly during that period. This is a clear indication that foreign-invested industrial enterprises have made tangible contributions to the improvement of the overall technical equipment and input-output efficiency of China’s industries.

The proportion of export in the sales revenue of industrial sectors reflects the dependency of domestic industrial production on foreign markets. At the same time, it is also a manifestation of the technology, quality and international competitiveness of products. Analysis of substantial evidence indicated that in the industrial sectors where the proportion of foreign-invested enterprises is higher, the export of these industries also accounts for a larger proportion of their sales revenue. And they maintained a higher trade surplus. Therefore, the industries that have more foreign investment have a stronger international competitiveness and export advantage and hence become an important factor for spurring the development of China’s export-oriented economy and increasing the international competitiveness of the industry as a whole.

II. The investment of foreign-invested industrial enterprises has a clear industrial preference for labor-intensive industries, and this structural feature offsets the effects of their higher capital equipment to a certain extent.

Industrial preference index refers to a ratio between the proportion of foreign-invested sector in all foreign-invested industries and the same indicator for all industrial sectors. The industries that enjoy higher preference by foreign investors are mostly the processing industries of finished products, especially the industries that produce consumer goods for daily use. The industries enjoying the least preference by foreign investors are (1) the monopoly industries in the state-owned economic sector; (2) the domestic industries that have solid bases and enjoy marked competitive advantages; and (3) the industries that entail longer time for investment returns and have stricter requirements for technical transfers.

A classification of 190 industries according to preference index revealed the following three features. One is the more labor-intensive (or the less capital-intensive) an industry, the higher the preference by foreign investors. Two is that the preference index is in inverse proportion to the capital-output scale. Three is that the preference index is in inverse proportion to the amount of tax burden for unit sales revenue. These features indicate that China’s labor-intensive industries or the labor-intensive processing links of the capital-intensive industries, which enjoy comparative advantages, are the areas preferred by foreign investors. On the other hand, the level of industrial tax burden is a negative factor for their industrial preference.

The effect of foreign investment on upgrading the technical equipment of the industries nationwide can be further divided into two factors: the average level of the technical equipment of all industries and the structural ratio. The latter indicates the impact of the structure of foreign-invested industries on the overall technical competence of the industries. According to factor analyses of the composite indexes, the average technical equipment level of all industrial enterprises rose by 12.1 percent merely due to the rise in the technical equipment level of all industries, fell by 5.9 percent merely due to the impact of the structural factor of foreign investment distribution, and drop by only 5.5 percent due to the combined effect of the two factors. Therefore, the role of foreign investment in promoting structural upgrading is mainly manifested in the technical equipment advantage of all industries. As far as the structural factor is concerned, the preference of foreign investment for labor-intensive industries offsets in a certain degree the upgrading effect of their capital advantage on the technical equipment level of all industries. The analysis of the composite indexes on output efficiency can also come to the same conclusion.

This structural problem can be attributed to the need of the investors’ home countries (or regions) for industrial transfer, the international market strategies of transnational corporations, and the abundant labor resources in China. In addition, industrial policies also play a role. One is that capital-intensive industries have a heavier tax burden; two is the market access restrictions on the industries of natural monopoly and the industries of specialized equipment in the state-owned economic sector; and three is the neglect of the technical transformation and upgrading of the traditional industries.

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