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Local regulatory flexibility has been a major factor for the deepening of privatization through FDI in post-Mao China. The mechanisms at work include the entry of foreign investment in areas and sectors restricted or banned by the central government and/or populated by public enterprises owned by higher-level authorities, the growth of wholly foreign-owned enterprises (versus joint ventures), the growth of foreign shares in joint ventures with public enterprises, and the growth of joint ventures with domestic private enterprises. These developments reflect, among other things, the impact of the decisions and interactions of gatekeepers and regulators at multiple levels of the government. With more encompassing and ideologically bound agendas, the central government has imposed gatekeeping policies restricting foreign access to certain economic sectors and regions and favoring joint ventures with public enterprises. With narrower interest calculus and in the face of spatial mobility of foreign capital and interjurisdiction competition, local governments tended to deviate from the centrally defined rules and policy bias to address their parochial interests. The degree of local deviation was nevertheless uneven and conditioned by local officials’ varying calculations of not only the benefit but the political cost of rule bending under different structural conditions before the late 1990s. Central to such calculations were local governments’ fiscal resource positions relative to higher- level authorities’. Understanding intragovernmental fiscal relations and the (largely unintended) consequences of the responses of local officials to the changing incentives and constraints after reform, therefore, yields useful clues to explaining the geographic and sectoral distribution of FDI as well as the evolving organizational forms it has taken.

In contrast with previous research on the privatization function of FDI (e.g., Huang 2002), the foregoing analysis broadens the scope of investigation from regions to organizations cross-embedded in regions and economic sectors, and from joint ventures to the full spectrum of organizational forms in the foreign-invested sector. More importantly, it shifts the focus of analysis from the dependence of local governments on foreign capital to the interdependence within the government system, and it examines the perceived benefits of foreign capital for local governments in relation to the varying costs of different gatekeeping and regulatory strategies in face of centrally imposed entry rules and policy bias. This allows for a clearer separation of the roles played by central and local governments in the process of internationalization, thereby helping identify the causal channels through which political actors’ self-interest calculus influenced and contextualized the scope and depth of foreign capital’s penetration into China’s new economy. It was the convergence of the ramifications from such penetration with those from the forces discussed in the preceding chapters that contributed to the generation of the momentum for the massive privatization in the late 1990s and beyond.

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