Long Guoqiang

The share of the electromechanical products of foreign-invested firms in the national export has exceeded 60 percent, yet problems persist, such as ignorance of the true picture of the exports of the electromechanical products of the foreign-funded enterprises, each department acting on its own and lack of policy coordination. For a healthy progress in this regard, a research group was set up by the Development Research Center of the State Council to hold enterprise forums or conduct questionnaire inquiries on an extensive scale in Beijing, Shanghai, Guangdong Province and other places in the hope of widening our acquaintance with the relevant situation. On the basis of investigations, a report for the reference of decision making is hereby submitted for enhancing the macro-economic benefits from the exports of electromechanical products of foreign-funded enterprises.

I. Evident macro-economic benefits from the exports of electromechanical products by foreign investors

1. Offering a big contribution to the national total export of electromechanical products.

From 1993 to 1999, exports of foreign-funded enterprises increased by 33.6% annually on average, by far outstripping the corresponding average annual growth rate of similar exports by the domestic enterprises, 12.5%. In other words, the contribution rate of foreign-funded enterprises reached 70% of the national export in seven years.

Indeed equally remarkable was their contribution when measured against the increase in the export of the nation as a whole. Since 1990s, such contribution rate averaged 36.6% annually. Especially noteworthy is the fact that when the export situation of China in 1998 was extremely severe under the shock waves of the Asian financial crisis, this export earned USD 5.79 billion, not only offsetting negative growth of USD 4.68 billion made by other sectors, but also realizing a net growth of USD 1.1 billion for the national export. This means a 521.6% high contribution rate to national exports, thus making important contribution toward assuring the success of the RMB non-devaluation policy.

2. Benefiting the realization of the international balance of payments for China.

The exports of electromechanical products of foreign-funded enterprises have positive effects on the international balance of payment of China, which can be seen in two respects. In terms of current account, in 1999, the imports of electromechanical products by foreign-invested enterprises was USD 46.39 billion, of which, USD 11.08 billion worth of equipment imported by the foreign investors were paid by direct investment of that year; whereas the exports of their electromechanical products amounted to USD 46.42 billion, thus leaving a surplus of some USD 11 billion. After the estimated profit remittances were deducted, the surplus under the current account for export-oriented foreign-funded enterprises engaged in electromechanical products still came to USD 9 to 10 billion.

As for the capital account, income was mainly composed of direct investments and loan capital while expenditure was made up of investment withdrawal and repayments of the principal of the loan. In 1999, there was an estimated surplus of USD 4-4.5 billion for such foreign-funded enterprises. Under the circulating funds, they constituted the number one main body of foreign loan borrowers with foreign borrowings rising annually. Since their borrowings were clearly more than repayments of the principal and payment of interests, a surplus of foreign exchange also existed.

In sum, with a surplus of international balance of payment over USD 15 billion in 1999, these foreign-funded enterprises played a positive role in ensuring our international balance of payments.

3. Promoting technological progress in China.

Firstly, these enterprises have brought new technologies and new products. The introduction of many projects has upgraded our technology by 15 to 30 years. Secondly, such enterprises possess capacity for technological development. Of the enterprises under surveyed, 33.9% are capable of providing most of the skills by their own technological development institutions and almost one third (29.9%) of the enterprises have their own R&D institutions. Obviously, these enterprises focus on technological development, with the proportion of R&D institutions not only much higher than the corresponding average of other large and medium-sized foreign-funded enterprises, but also higher than that of the domestic counterparts, public and non-public. In investigation, we found that some enterprises had shifted from the original equipment manufacturer (OEM) and upgraded to the original design manufacturer (ODM). Finally, the evident technological spill-over effect comes through three channels. The first channel is the spread and competition of their products. They have brought many new products, stimulated China's domestic market demand and set examples for domestic enterprises to develop similar products. The Chinese enterprises are being forced to value product competitiveness under competition pressures. The second channel is the demand for orders from upstream enterprises. To reduce cost, many enterprises have adopted a variety of measure to raise the quality of Chinese-made parts and components, and some have even demanded Chinese upstream enterprises to operate in compliance with their technical standards by providing designs or sending technical personnel for on-the-spot-guidance. With their expanding purchasing on domestic market, these foreign-funded enterprises have not only enlarged production and marketing of the domestic enterprises, but more importantly elevated their technological levels by a big margin, raised the overall quality of domestic enterprises by strengthening their market-oriented concepts, such as stable product quality, timely delivery and so on. The third channel is concerned with their personnel training and flows. Our survey shows that 97.3% of the export-oriented foreign-funded enterprises related with electromechanical products have offered training to their Chinese employee. In addition experience gained from practice has also brought these employees new knowledge and ideas in technology and management. Many of them have flowed to domestic enterprises with other forms of ownership as China’s labor markets make incessant improvements, thus helping transfer technologies and management skills.

4. Contributing to creation of job opportunities.

Employment is one of the major contradictions in China’s economic and social life today. Processing trade has provided over 30 million job opportunities, thereby alleviating to a considerable extent employment pressure. The overwhelming majority of foreign-funded enterprises under review involve labor-intensive processing and are in need of massive employees. As the comprehensive statistics are not available at present, estimates based on incomplete statistics put the figure at several millions.

II. Existing problems

Our survey reveals a huge potential for enhancing the macro economic benefits in this respect. Yet for further prompting the export of electromechanical products of the foreign-funded enterprises to make bigger contribution to national economy, we must focus our attention on tackling the following major issues.

1. Enhancing procurement ratio of domestic materials, components and spare parts.

Although China has had a considerable manufacturing capacity, weak international competitiveness due to a variety of factors makes it difficult for the products of many domestic enterprises to penetrate the global markets on their own. A shortcut, however, exists for them to go abroad through supplementing the exports of foreign-invested enterprises so as to "go overseas by borrowing their ships". Such foreign-funded enterprises mostly adopt processing trade. But our survey reveals a low domestic procurement ratio, more than half of these enterprises with a procurement ratio below 25 percent. Major factors responsible for this are as follows. Firstly, domestic products present unstable quality, unpunctual delivery and clogged transportation. Secondly, the procurement right usually rests with the parent company of the foreign-invested enterprises. Our survey shows that 42% of the joint ventures with foreign investors holding the majority shares procure their raw material, components and spare parts from their parent company. Finally, long time and complicated procedures plague tax rebate. Settling and transferring accounts at different customs involve too much trouble. The domestic procurement for processing trade with supplied materials doesn’t enjoy tax rebate. All these policy factors hamper raising the ratio of domestic procurement.

A rise in such ratio would bring about enormous macro-economic benefits. A rise of ten percentage points would possibly help domestic industrial products worthy of RMB 50 billion enter international markets.

2. Elevating technical level and development capacity.

Insufficient R&D capacity prevails in technological development institutions set up by the foreign-funded enterprises engaged in the export of electromechanical products, their technological upgrading still depend on parent company or overseas purchases. This shows they failed to transfer their technological development activities to China together with their production. This has something to do with their strict control over key technologies and their reluctance to foster potential rivals as well as our policy factors. Our survey finds many policy obstacles to R&D activities and new and high-tech production in China. Weak protection of intellectual property rights discourages many foreign-funded enterprises from making R&D efforts in China or transferring advanced technologies. Complicated procedures for customs clearance and commodities examination hinder production of high-tech products. Restrictions over imports of samples hamper development activities. To raise development capacity of these foreign-funded enterprises, we must give priority to removing the adverse factors in our existing policies which have hindered technological advance.

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