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FDI and Privatization

the defining theme of the CCP’s economic policy in the post-Mao era is “reform and opening” (gaige kaifang). Under this policy foreign direct investment (FDI)—the inflow of foreign investment that involves varying degrees of both direct ownership and direct management by foreign investors—has become an increasingly important force in the remaking of the Chinese economy. A major consequence of the inflow of foreign capital is the deepening of privatization, which has taken place both because of the quantitative growth of foreign (private) investment and as a result of the changing organizational forms of foreign capital. As highlighted in chapter 1, since 1979 foreign investment has significantly increased in volume and expanded to more and more geographic areas and economic sectors. The landscape of the foreign-invested sector has also experienced a transformation from being dominated by joint ventures with public enterprises to being dominated by organizations involving greater degrees of private ownership, that is, wholly foreign-owned companies, joint ventures with declining state-owned shares, and companies with various mixes of foreign and domestic private owners.

Understanding these developments entails an examination of the behavior of local officials, who are the primary gatekeepers and regulators of foreign investment. Under the postreform system the inflow of foreign capital may help improve the local economy, thereby contributing to the careers of local officials and increasing the resources under their control. Yet the efforts to attract foreign capital are not without constraints. While promoting foreign investment has been politically more legitimate than facilitating domestic private business, there have been centrally imposed rules on the entry and boundary of foreign capital and on the organizational forms of foreign- invested companies. In particular, there have been formal and informal restrictions on the geographic locations and economic sectors that foreign investors have sought to enter. There has also been a long-standing policy bias toward joint ventures with public enterprises, whereas joint ventures with domestic private enterprises faced severe restrictions before the mid-1990s. In reality, however, these rules have been relaxed by many local authorities, resulting in expanded institutional space for foreign capital and greater intensity of private ownership. Bending the rules nevertheless involves a risk, as such an act contradicts the ideological, political, and economic considerations behind central policies. The abilities of local officials to contain the risk vary under different conditions and at different times; so do the benefits of rule bending. The interplay of different cost-benefit calculations by local officials has led to variations in the gatekeeping and regulatory strategies of local governments toward FDI, adding further twists to the uneven process of privatization before and beyond the tipping point in 1997.[1]

  • [1] My analysis in this chapter focuses on the two decades before China’s accession to the World TradeOrganization in 2001. Although the findings are also relevant for understanding the ramifications ofthe trade liberalization thereafter, a full investigation of that issue is beyond the scope of this book.
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