*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
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"Sustainable FDI for Sustainable Development", "Towards an Investment
Facilitation Framework: Why? What? When?", "Beware of FDI Statistics!",
"Towards an Indicative List of FDI Sustainability Characteristics", “The
Importance of Negotiating Good Contracts", "A New Challenge for Emerging
Markets: the Need to Develop an Outward FDI Policy”, "China Moves the G20
toward an International Investment Framework and Investment Facilitation", "The
Next Step in Governance: The Need for Global Micro-regulatory Frameworks",
and "The Evolving International Investment Law and Policy Regime: Ways
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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 225  May 7, 2018
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Marion A. Creach ([log in to unmask])
*To succeed in China, focus on interests rather than rules*
* <#m_-6123932989743990034__edn1>
Michael J. Enright** <#m_-6123932989743990034__edn2>

FDI has been a major factor in China’s development. Its impact and ripple
effects through the economy in recent years have been estimated to reach
one-third of China’s GDP.[1] <#m_-6123932989743990034__edn3> In 2017, China
ranked third in inward FDI stock according to UNCTAD[2]
<#m_-6123932989743990034__edn4> and third in A.T. Kearney’s FDI Confidence
Index.[3] <#m_-6123932989743990034__edn5> China is increasingly important
to major MNEs. In some years, the China profits of companies like GM and
Volkswagen have exceeded those in all other countries combined.

However, China’s FDI regime remains highly restrictive. China ranked 59th
of 62 economies in the 2016 OECD FDI Restrictiveness Index, having the
lowest scores in transportation equipment, radio and TV broadcasting,
media, telecommunications, and fisheries; and it is in the bottom 10 scores
in 30 of the 42 sectors assessed.[4] <#m_-6123932989743990034__edn6> Given
this background, it is useful to ask how China will approach FDI, given
statements by President Xi Jinping (at the recent 19th Party Congress) that
China will encourage more inbound and outbound FDI.

While China’s policies toward FDI have evolved substantially since the
onset of the country’s economic opening, the underlying approach has
remained remarkably consistent. It is best described as opening to the
extent necessary to promote national development, including the development
of indigenous firms, while limiting the influence of foreign entities. It
is a targeted, “interests” approach that focuses on China’s immediate needs
and concerns, sector-by-sector and region-by-region. Trying to understand
China’s position using a rules-based[5] <#m_-6123932989743990034__edn7>
approach or asking whether China is “opening” or “closing” misses the
point. China can open some sectors more, while closing others, and while
making life more difficult for foreign affiliates in general.

This approach could be seen during President Xi Jinping’s first term.
Sectors related to finance, some services, advanced machinery, and the
environment were further opened. Special “Open Areas” were designated in
the belief that doing so would accelerate China’s development. China also
showed itself willing to trade access in sectors that it considered
non-strategic in order to obtain better access for its own companies in
investment negotiations.

On the other hand, China has pushed back against foreign affiliates in
other sectors, or when it perceived foreign influence as too strong. This
was done through a selective enforcement of antitrust rules,[6]
<#m_-6123932989743990034__edn8> limiting license payments, increasing
difficulties of repatriating earnings, and forcing technology transfer.
China continues to limit foreign internet firms; has called foreign
technology companies “guardian warriors infiltrating China;”[7]
<#m_-6123932989743990034__edn9> has tightened restrictions in the cultural,
media and education sectors; has adopted cybersecurity regulations that
limit the integration of China activities into global information systems;
and has increased the influence of Party cells in foreign affiliates.
Industrial policy initiatives, like Manufacturing 2025 and Internet Plus,
include specific plans to displace foreign companies. In addition, China
has increasingly sought to purchase foreign technology, expertise and
brands rather than obtaining them through FDI.

The implication for many foreign affiliates in China has been greater
uncertainty, an unlevel playing field as Chinese companies are favored at
home and supported internationally and, for some, a rethinking of China

President Xi’s consolidation of power at the 19th Party Congress likely
means a continuation of the trend observed during his first term. It likely
means China will continue to be suspicious of foreign interests, Chinese
companies will be more aggressively favored and supported in domestic and
international markets, Chinese firms will become more active acquirers
abroad in targeted industries, foreign affiliates will be subject to
increased scrutiny, and foreign hopes that the market will be decisive when
it comes to the overall direction of China’s economy will not be realized.

Foreign investors will find their best opportunities in industries that
China’s leaders do not view as strategic (like consumer-packaged goods,
personal care products, luxury goods, mid-tech manufacturing), and in those
that contribute to such initiatives as One Belt-One-Road, Go Global,
Manufacturing 2025, and Internet Plus. Industries with foreign affiliates
with capabilities beyond Chinese firms (like environmental technologies,
some service sectors, advanced machinery) will also be favored. Firms are
also trading support for China’s initiatives outside of China (like One
Belt-One Road) for better treatment inside of China.

Crucial for how most foreign companies will be treated in China will be for
them to demonstrate the clear economic value they bring to China and how
specifically they will support China’s major initiatives in ways domestic
companies cannot—as opposed to appeals to rules or investment agreements.

* <#m_-6123932989743990034__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_-6123932989743990034__ednref2> Michael J. Enright (
[log in to unmask]) is Professor at the School of Business of
the University of Hong Kong and Director of Enright, Scott & Associates.
This *Perspective* draws on the author’s *Developing China: The Remarkable
Impact of Foreign Investment* (London: Routledge, 2017). The author is
grateful to Sophie Meunier, Huaichuan Rui and an anonymous reviewer for
their helpful peer reviews.
[1] <#m_-6123932989743990034__ednref3> Enright, op cit.
[2] <#m_-6123932989743990034__ednref4>
[3] <#m_-6123932989743990034__ednref5>
[4] <#m_-6123932989743990034__ednref6>
In comparison, the US ranked 38th as most open overall, and was in the
bottom 10 in 5 of 42 sectors.
[5] <#m_-6123932989743990034__ednref7> A senior EU negotiator recently told
the author: “We don’t negotiate from interests, we negotiate from rules.”
Of course, all governments negotiate based on their interests, but the
difference is still significant.
[6] <#m_-6123932989743990034__ednref8> Samson Yuen, “Taming the ‘Foreign
Tigers’: China’s anti-trust crusade against multinational companies, *China
Perspectives*, 4/2014, pp. 53-59.
[7] <#m_-6123932989743990034__ednref9> “Investigation into America’s eight
guardian warriors infiltrating China,” *China Economic Weekly*, vol. 24
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “**Michael J. Enright, ‘To succeed in China,
focus on interests rather than rules,**’ Columbia FDI Perspectives, No.
225, May 7, 2018. Reprinted with permission from the Columbia Center on
Sustainable Investment (***
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*. *

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Marion A. Creach, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 224, Axel Berger, ‘What’s next for the investment facilitation
   agenda?’ Columbia FDI Perspectives, No. 224, April 23, 2018.
   - No. 223, David Chriki, “Investment arbitration liability insurance: a
   possible solution for concerns of a regulatory chill?” April 9, 2018.
   - No. 222, Makane Moïse Mbengue, “Facilitating investment for
   sustainable development: it matters for Africa,” March 26, 2018.

*All previous FDI Perspectives are available at *
*. *

*Other relevant CCSI news and announcements*

   - *Save the Date: September 27-28, 2018:* This year, CCSI’s Annual
   Columbia International Investment Conference (CIIC) is on “Multinationals
   in the Age of Sustainable Development: New Thinking on the Role of
   International Investment Agreements.” The Conference, taking place
   alongside the 73rd Session of the UN General Assembly in New York, will
   build on a multi-year effort to identify guiding principles and practical
   approaches for aligning international investment treaties with the
   Sustainable Development Goals (SDGs). Additional information will be posted
   shortly on our website here
   - CCSI has released its 2016-2017 Annual Report. *The full report is
   available here
   - In January 2018, The *Yearbook on International Investment Law and
   released*.* The *Yearbook* monitors current developments in
   international investment law and policy, focusing (in Part One) on trends
   in foreign direct investment (FDI), international investment agreements,
   and investment disputes. Part Two, then, looks at central issues in the
   contemporary discussions on international investment law and policy. This
   volume includes a chapter by CCSI's Lisa Sachs, Lise Johnson and Jesse
   Coleman, with CCSI Fellow Kanika Gupta. *For more information, please
   see our website here

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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rights reserved.*
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