Chinese province Fujian's ties to foreign investment

Chinese province Fujian's ties to foreign investment

Liao Shaolian looks at one Chinese province's experience with foreign capital inflows

Fujian, located in southeast China, was a relatively backward Chinese province before the 1970s. This was because limited investment was made in the province, and this was for largely political reasons, that is its proximity to Taiwan. At the end of the 1970s, however, Fujian (together with Guangdong) was selected by the Chinese central government as a province where "special policies and flexible measures" were to be implemented and preferential treatment was to be extended to foreign investors.

By June 1994, some 14,424 foreign-funded enterprises had been approved in Fujian. Of total approved foreign investments of US$26.3 billion, $7.6 billion has already been put to use. Among the 6,600 foreign-funded operating enterprises, 80 percent have achieved satisfactory results. Since the beginning of the 1980s, Fujian has been ranked second in China (after Guangdong) both in terms of the number of foreign-funded enterprises and in aggregate investment commitments.

The inflow of foreign capital has played an important role in the economic development of Fujian.

Firstly, it has greatly increased the economic output of the province. In 1993, foreign capital actually invested reached $2.9 billion, representing about three-quarters of the total planned investments in fixed assets that year. The total industrial output value of foreign-funded enterprises amounted to 32.6 billion yuan, or 38 percent of Fujian's total industrial output by value.

Secondly, foreign direct investment (FDI) has helped to increase government revenues. Foreign-funded enterprises paid tax of 1.63 billion yuan in 1993, which was about one-sixth of total tax collections that year.

Thirdly, FDI has improved the industrial structure of the province's economy. Because of the successful introduction of foreign capital, many key industries have been established, such as electronics, chemical products, food processing, textiles, metallurgy, machinery and so on. A large number of new products, such as household electrical appliances, garments, footwear, toys, jewelry and plastic products, have become competitive goods on the world market. The export value of the foreign-funded enterprises occupies about half of the province's total exports.

Fourthly, FDI has created more job opportunities. In 1993, foreign-funded enterprises provided jobs for about 1.5 million people.

After three successive years of rapid increase, 1994 saw a slow-down in foreign capital inflows. In the first half of 1994, both the number of newly approved investment projects and the amount of investment commitments by agreements dropped by more than 36 percent compared with the corresponding 1993 period.

Taiwan has been an important source of capital inflows into Fujian. By the end of 1993, 3,215 enterprises tied to Taiwanese capital had been approved, with a total of $2 billion actually invested. In the first half of 1994, however, the number of newly-approved enterprises decreased to 350, involving a total investment of $0.5 billion, representing a decline of 36 percent and 38 percent respectively compared with 1993.

Although a decline in FDI is not surprising after a long period of rapid growth, it should be noted that some factors are actually restricting the further introduction of foreign capital and hence putting a brake on economic development in Fujian as a whole.

Since the central government decided to open up other areas, including the interior, Fujian is no longer one of the few Chinese provinces being courted by the international investment community. Today, the interior provinces of China have been given more autonomy in approving foreign-funded enterprises and in offering preferential treatment to foreign investors. With the further opening-up of China, foreign investors now have more places to choose in locating their investments. Hence, Fujian has lost its previous special advantage over other regions.

After three years of high growth, Fujian's economy is now facing bottlenecks due to inadequate infrastructure. Poor supply of energy and transport facilities have become key factors impeding the absorption of foreign capital.

Apart from the slowdown in international capital inflows, the rate of actual utilization of foreign capital is also relatively low. Between 1992 and mid-1994, foreign capital actually invested was only 28.5 percent of investment commitments. The rate of actual utilization of foreign capital for big investment projects is even lower.

The structure of investments is still not satisfactory because the introduction of international capital has not been well planned and the local government has not been selective in introducing foreign investment. For example, as many as 14 golf courses have been approved and too many paper-mills and small power plants are under construction. Also, in the industrial sector, far too much investment has been made in assembly lines for household electrical appliances while investment in upstream and technology-intensive industries only occupies a small place in overall investment commitments.

In the future, more emphasis should be placed on encouraging international investment in key industries and in directing the flow of foreign capital to conform to industrial policies and the needs of long-term economic development. As Fujian has failed to make a breakthrough in introducing foreign investment in the production of energy, steel, precision machinery and communications, which are badly needed for the province's economic development, efforts should be made to readjust further the structure of its foreign-derived investments.

Professor Liao Shaolin is with Nanyang Research Institute, Xiamen University, Xiamen, China.

Window: After three years of high growth, Fujian's economy is now facing bottlenecks due to inadequate infrastructure. Poor supply of energy and transport facilities have become key factors impeding the absorption of foreign capital.