Foreign Direct Investment in China

By Phillip Donald Grub; Jian Hai Lin | Go to book overview
communications facilities at local rates. All incentives are aimed at further reducing the cost of joint ventures and, therefore, encourage more export- oriented and technologically advanced projects to be established in China.
Import-Substitution Projects
Import-substitution projects are those ventures that produce products that China needs to import. The products produced by these joint ventures, therefore, can serve as import substitutes. In this manner, China actually saves the foreign exchange that would otherwise be spent on these imports. The regulations for this type of joint venture stipulate that if needed the Chinese government will be responsible for providing foreign exchange assistance in balancing a project's foreign exchange receipts and expenditures. Certain conditions, however, must be met if the joint venture wants to qualify for such benefits:
1. The joint venture's need for foreign exchange must be temporary in nature, occurring in the initial period of operations;
2. The joint venture's products must be made with most materials obtained inside China, that is, with Chinese inputs;
3. The joint venture's products must be regarded as products that would otherwise have to be imported;
4. The product specifications, performance, delivery time, technical service, and training must meet the requirements of the Chinese inspectors. A quality inspection and testing center in China must certify that the venture's product meets the same quality standards as the import product;
5. The price for these products cannot be higher than the prevailing price in international markets; and
6. Approval for such a venture may be required from the central government.

The regulations on import-substitution projects have paved the way for many foreign investors to form joint ventures in China and have been a major step in resolving the foreign exchange problems of foreign investors. Before making a firm investment commitment, however, foreign investors should first determine whether or not the potential project will receive import-substitution project status.


NOTES
1.
Part of this discussion is based on International Monetary Fund [IMF], Foreign Private Investment in Developing Countries, Washington, D.C., 1985.
2.
IMF, Foreign Private Investment in Developing Countries, occasional paper no. 33, Washington, D.C., January 1985.

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