Chinese Legal Reform: The Case of Foreign Investment Law

By Yan Wang | Go to book overview

5

Legal controls on foreign direct investment

Introduction

As previously discussed, China needs foreign capital and technology, but at the same time is concerned about the potential negative effects of foreign investment. One result of the debate over how to use foreign investment is that foreign investment could be beneficial to China, if such investment were properly harnessed to China's economic development. Therefore, for China there is a dilemma of regulating conduct against the national interest yet not discouraging foreign investment. Thus, the aim of legal control is not to discourage foreign investment, but to supervise and ensure that the investment is geared to the economic goals of the state and that potential harmful effects to such goals are eliminated.

Legislative measures aiming at control may cover a wide range and extend from direct controls over new investments and expansions of foreign investors to various policies and measures that may have an indirect effect on their activities. Legislative and regulatory measures not only deal with foreign investment in different economic sectors, but also relate to such aspects as the extent of foreign holdings and their reduction over a period of time, the supply of technology and services, foreign exchange implications and the like. They enable host countries to compare the merits of all foreign investment when making a choice between them.

It is not intended to provide a comprehensive description of all the relevant instruments and measures. Rather, some examples are given to illustrate the main approaches which have been adopted and their underlying reasons. The analysis will be done in a changing context illustrating China's changing perception of foreign investment. After a comparison with some Western countries, the effectiveness of the law in regulating foreign investment will be analyzed to identify different problems and their underlying reasons.


Control measures

Entry screening

The most effective and systematic form of national regulation seems to be control over initial capital investment. That is, the government screens the

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