Can US firms blame China for low investment return?

By Huo Jianguo Source:Global Times Published: 2018/7/17 22:43:40

Illustration: Luo Xuan/GT


Sino-US trade friction, to some extent, arises from unbalanced trade as well as disputes over technology investment and transfer. Below the surface are cognitive and logical discrepancies between the two countries, which go beyond conflicts regarding fair trade and competition.

China understands the discrepancies are complicated. But paranoid and absurd theories to lay false blame, or even bullying, will not be tolerated.

One accusation the US has been throwing at China is the unfair treatment to US companies and forced technology transfers. Returns on foreign investment have been declining since 2009, which has become evidence for the US side to fault China's investment environment. Therefore, an objective analysis of the investment environment in China is imperative.

First, successful investors find ways to make profits either by converting local comparative advantages into a company's competitive advantages, or by combining local advantageous production factors with a company's internal strengths to achieve a new edge.

Looking at China's economic development path since foreign investment was brought in, the investment return rate has always been set by the sunrise industries.

In the 1980s, the major investment field was textiles and clothing. Cheap land and labor costs at that time brought down the overall cost of setting up factories in China. Foreign investors made high profits by importing raw materials into China and exporting the finished products.

China further opened the consumer products sector to foreign businesses in the 1990s. The manufacturing of products such as TVs, refrigerators and washing machines grew rapidly through joint ventures, into which domestic and foreign companies poured capital. Foreign businesses at this stage also greatly benefited from the economies of scale generated by the fast-expanding consumer market in China.

After China's WTO entry in 2001, the opening sectors included the vehicle and electronics industries. Economies of scale and high productivity, driven by technology advancement, supported investment returns.

The financial crisis marked the downturn of investment returns in China. China's exports and imports suffered a severe impact due to the shrinking global economy and market demand.

The Chinese economy also began a structural adjustment. Models based on economies of scale and comparative advantages came to an end, and China faced the need to switch gears to an innovation-driven economy. High-technology industries and advanced manufacturing have become the nation's new economic engines. Investment returns are still stable in sunrise industries despite the decline in traditional industries.

The real problem is that some foreign companies have been complaining about low returns while being reluctant to invest further in the sunrise industries. This clearly goes against the nature of economic development.

Additionally, it needs to be pointed out that China hasn't adopted any discriminatory policies toward foreign investment, but has instead made sustained efforts to improve its business climate. China is clearly aware of the changes over the past four decades since reform and opening-up began. These changes can be partly attributed to foreign investors' contributions and efforts. Therefore, the country has long placed an emphasis on the business environment for foreign investment. An array of pro-foreign investment measures have been launched. These include moves to simplify investment, ease market access and comprehensively implement a negative list for foreign investment, allowing for a fairer and more transparent investment environment for foreign businesses making inroads into the country.

China is also making vigorous efforts to ensure the legitimate interests of foreign businesses operating in the country. The country also resolutely adheres to the national treatment principle, giving foreign businesses a level playing field in China. A raft of high-level opening-up measures that were recently announced are typical of the nation's push to appeal to foreign investors.

A look at long-term trends in economic and investment development reveals that the key to sustainable economic development and high returns on corporate investment is an improvement in labor resources and companies' innovative abilities.

The size of China's market and the move to consumption upgrading will still provide advantages to businesses that operate in the Chinese market at large. But it will be increasingly the case that a company's competitive advantages and profit margins depend on its ability to develop new products and sell them in innovative ways.

While US businesses are complaining about relatively low returns on their investments in China, US automaker Tesla Inc is going big in the Chinese market with its announcement of plans to build a new plant in Shanghai. Various high-technology companies are raising their presence in China, and that's also making headlines. This situation suggests that companies with competitive viability don't rely on changing market environments to make fat profits. Instead, they try to improve operations on their own, and they rarely attribute low investment returns to inappropriate government policies.

The fluctuating returns on foreign businesses' investment in China since 2009 don't result from the Chinese government's discriminatory policies. Rather, they are an outcome of supply-side structural changes happening concurrently with the shifting market competition environment. In this regard, complaints against the Chinese government don't reflect reality, and it would be ridiculous if bilateral trade friction had something to do with such complaints.

The author is vice chairman of the China Society for WTO studies.


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