FDI incentives: it may be defined as any measurable advantages accorded to specific enterprises or categories of enterprises by (or at the direction of) a Government, in order to encourage them to behave in a certain manner. They include measures specifically designed either to increase the rate of return of a particular FDI undertaking, or to reduce (or redistribute) its costs or risks. Examples of such measures include liberalizing the laws and regulations for the admission and establishment of foreign investment projects; providing guarantees for repatriation of investment and profits; and establishing mechanisms for the settlement of investment disputes. Tax incentives are also part of these promotional efforts. (UNCTAD, 2000)
Export-Oriented FDI: it is one type of FDI that mainly looks for cost competitiveness in the host country (Tseng and Rodlauer, 2003: p73). These costs can include cost of labor, cost of raw materials, and other cost of operation. According to Easson (2004) “it is also frequently insulated from the rest of the host country, often being located in segregated export processing zones”.
Open economic zone: it is a strategy from the China’s Government to offer a more liberal investment and trade regime than other geographic areas, as well as special tax incentives. […] these zones have played an important role in attracting FDI (Tseng and Rodlauer, 2003)
2. Question
What is the role of FDI incentives in the Chinese economic development?
Source: Shangai Skyline (2005) [Online]Available at: http://www.gettyimages.com/detail/200277241-001/Stone
Currently, China is the country that receives more FDI and, According to the Wall Street Journal only in the first two months of 2010 China attracted US$14.09 billion in foreign direct investment (FDI) what represents an increase of 4.9% that is largely export-oriented FDI and the country is now the second largest economy in the world (The economist, 2010). For this reason, China is considered as an example of rapid economic growth and the role of government is very relevant to reach these levels of growth, exports and FDI, because it has made reforms that have become China in a perfect scenario for international business.
As the Organization for Economic Cooperation and Development (OECD) mentioned, these initiatives begin after the economic reforms in the 80’s when the government liberalized some sectors and decentralized state policies. These reforms and other factors has become China in a very attractive country to receive FDI. These factors can be classified into three groups: economic structure (Market size, abundant supply of cheap labor force, infrastructure, and scale effects), liberalization and preferential policies and cultural and legal environment (Tseng and Rodlauer, 2003).
Main policies are concentrated in two groups: the creation of special geographic zones for FDI and exports activities and the implementation of Tax incentives. Tzeng and Rodlauer describe the main types of Open economic zones in China and they are:
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- Special economic zones (SEZ’s): these are zones that have enjoyed considerable autonomy in their investment policies regarding both infrastructure projects and investments approvals and they can offer preferential income taxes treatment and exemptions for imports.
- Open coastal cities (OCC’s): these areas are less independent than SEZ’s but they have enjoyed greater flexibility in investment and tax polices than other regions in China. There are 14 OCCs.
- Economy and Technologic Development Zones: offering tax incentives similar to SEZs.
- High technology Development Zones: HTDZs have placed particular emphasis on attracting investment in High Technology industries by providing additional tax concessions.
- Free Trade Areas: exports and imports can be traded freely in FTAs, and enterprises are free to engage in export-oriented production.
On the other hand; the OECD (2005) explains the tax incentives as a complex system and a tool of the government to attract FDI in pursuit of national development priorities. Most of these incentives are not available to Chinese enterprises. Currently there are 14 taxes related to FDI, including corporate income taxes, personal income taxes value-added tax and business and consumption taxes. […]For example, the 33% corporate income tax rate may be reduced to 15% or 24%, depending on the geographic location and the type of foreign investment and generally 15% rates is applicable to enterprises located into the SEZs, high technology companies and companies engaging designated industries in western and central regions.
I think that definitively China is the best example of economic growth in recent years and it is a result of an excellent analysis of the internal capabilities and strengths to offer the lowest operational cost and to take advantages of current international conditions (globalization and internationalization of companies) in order to be one of the most exporter countries and the most important recipient country of FDI flows.
Besides, I think that China shows clearly the importance of governments in the economy as a policy maker who incentives or no some economic sector or activities which are a key factor in the economic and social development of people. I think that if a country wants to reach more competitiveness it must create enough infrastructure and incentives that support enterprise activities and China government has had an effective strategy, not only in implementation of political incentives but also in the urban development that ensures the access to facilities (for example ports).
However, I think that is important to take into account that development is mainly concentrated in the eastern region that obviously is the most developed zone and central and western regions, with a high proportion of rural lands, have less production and FDI and consequently have less economic development. For this reason, I think that China’s government should implement mechanism that improve the conditions of people in these zones and reduce the inequality between regions. For example, Chen and Ravallion from the World Bank (2004) analyze the inequality in China and suggest the strengthening of key sectors as agrarian sector and the creation of macroeconomic stability in the country in order to reduce poverty and inequality.
BIBLIOGRAPHY
Chen, S. and Ravallion, M. (2004). Learning from success: Understanding China’s progress against poverty. World Bank. [online]. Available at: http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:20634060~pagePK:64165401~piPK:64165026~theSitePK:469382,00.html
Easson, A. (2004) Tax incentives for Foreign Direct Investment. [Online]. Available at: http://books.google.com/books?id=pte5y2rXc64C&printsec=frontcover&dq=Easson+(2004)&hl=en&ei=4RiwTJvxFoSBlAfIid3kBQ&sa=X&oi=book_result&ct=result&resnum=1&ved=0CCYQ6AEwAA#v=onepage&q&f=false
OECD. (2005). Governance in China. [Online] available at: http://books.google.com/books?id=nErORPJ6v74C&pg=PA447&dq=FDI+incentives+in+China&hl=en&ei=ArSvTOTfJMSqlAefupznDw&sa=X&oi=book_result&ct=result&resnum=2&ved=0CDQQ6AEwAQ#v=onepage&q=FDI%20incentives%20in%20China&f=false
Tseng, W. and Rodlauer, M. (2003) China: competing in the global economy. Washington: International Monetary Fund. [Online] available at: http://books.google.com/books?id=H1JgRt5qDf8C&pg=PA84&dq=government+incentives+for+export+in+china&hl=en&ei=xqevTLe-MMOclgfL8rG9Ag&sa=X&oi=book_result&ct=result&resnum=9&ved=0CF0Q6AEwCA#v=onepage&q=government%20incentives%20for%20export%20in%20china&f=false
UNCTAD (2000). Tax incentives and Foreign Direct Investment. [online]. Available at: http://www.unctad.org/en/docs/iteipcmisc3_en.pdf
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