Chinese Legal Reform: The Case of Foreign Investment Law

By Yan Wang | Go to book overview
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Objectives and framework of foreign investment law

Objectives of foreign investment law

There are many different theories on foreign direct investment. The classical economic theory takes the position that foreign investment is wholly beneficial to the host country's economy. The dependency theory is opposed to the classical theory and takes the view that foreign investment will not bring about meaningful economic development. The theory in the studies undertaken by the United Nations strikes a middle course, which points out both the benefits and harmful effects of foreign investment. 1 The influence of the UN theory has been significant. Many developing countries have moved away from a position of hostility to foreign investment and adopted more flexible and pragmatic approaches intended to speed up foreign investment inflows, while maintaining certain controls. 2

As discussed in Chapter 2, China faces a dilemma with regard to foreign investment. As in most developing countries, in China there is a great need for capital and technology from developed countries. The goal of the economic reform started in the late 1970s is to realize the four modernizations. One of the strong motivating forces behind the adoption of the open policy and the introduction of foreign investment was the recognition of the deep economic problems and the potential benefits of foreign investment. Therefore, one aspect of China's foreign investment law is to encourage foreign investment. This is reflected both in the official statements and in the law. 3 However, China also has concerns about the potential harmful effects of foreign investment. Therefore, the other aspect of the law is to control foreign investment. Thus, the main objectives of regulations relating to foreign investment are to attract foreign investment that is beneficial to the host country and to limit its potential harmful influence.

Historically, the developed countries have generally maintained a favorable policy environment for foreign direct investment in both their national and international legal framework, without a special bias aimed at attracting foreign investment. For instance, the incentives system in most developed countries does not aim at foreign investment in particular. Instead, it aims at investment in the country in general. Therefore, regulations on foreign direct investment in developed countries are mainly to control the perceived harmful effects.


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