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THE POLITICS OF FOREIGN DIRECT INVESTMENT IN SHANGHAI

By

JIAO DING

A Thesis

Submitted to
Michigan State University
in partial fulﬁllment of the requirements
for the degree of

MASTER OF ARTS

Department of Sociology
and
Urban Affairs Program

1999

ABSTRACT

THE POLITICS OF FOREIGN DIRECT INVESTMENT IN SHANGHAI

By

Jiao Ding

Foreign direct investment (FDI) has inﬂuenced the Chinese economy
tremendously since economic reform was initiated in the late 19703. FDI,
however, has been embedded in national and local politics. This thesis, a case
study of the politics of FDI in Shanghai -- a provincial municipality in Eastern
China -- explores how public policy inﬂuenced inﬂows of FDI by changing the
local political environment in the 19803 and ‘903. Historical literature,
government documents and census data are used in this study. Central and
local government have led FDI inﬂow in Shanghai. National policies have offered
Shanghai developmental priorities with favorable treatments since late 19803.
Shanghai municipality took this political opportunity to reverse its previous
backward status and promote its economy in the nation by soliciting and guiding
FDI ﬂow. The development of FDI in Shanghai was hence initiated by the center

and reinforced by local polices.

To My Family

ACKNOWLEDGMENTS

This paper would not have been possible without the encouragement and
support from my wife, family, professors and colleagues. I would like to thank
Drs. Steve Gold and Rita Gallin for being on my thesis committee and for their
sharing of knowledge and enthusiasm for learning.

A special thank you and a deep expression of respect to Dr. Richard Hill,
my committee chair, for his guidance and expertise on this subject matter as well

as his mentoring through my graduate studies.

TABLE OF CONTENTS

LIST OF TABLES ............................................................................... vii

LIST OF FIGURES ............................................................................. viii

INTRODUCTION .................................................................................. 1

CHAPTER 1

INFLOW OF FDI IN CHINA: AN OVERVIEW ............................................. 3
China’s Economic Reform and the Open-door Policy ............................... 4
Inﬂow of FDI in China ........................................................................ 8

CHAPTER 2

FDI IN SHANGHAI: CENTER-LED GROWTH ........................................... 11

CHAPTER 3

FDI IN SHANGHAI AND THE EXPANDING LOCAL AUTONOMY ................. 16
Local Political Bargaining with the Central Government ........................... 16
Local Policy Initiatives ...................................................................... 17
Sectoral Distribution of FDI in Shanghai ............................................... 20

CHAPTER 4

POLITICALLY EMBEDDED FDI AND THE CHANGING RELATIONSHIP

BETWEEN THE CENTRAL AND LOCAL GOVERNMENTS ......................... 23

CHAPTER 5

IMPLICATIONS OF FDI FOR SHANGHAI’S POLITICAL ECONOMY ............ 28
TNC’s and Local Market Socialist Economy .......................................... 28
Organizaitonal Power of TNCs and Local Politics .................................. 31

CHAPTER 6

CONCLUSIONS ................................................................................. 32

LIST OF TABLES

TABLE 1
FLOW OF FDI INTO CHINA, 1979-1995 ................................................... 9
TABLE 2
FLOW OF FDI INTO SHANGHAI, 1979-1995 ........................................... 19

vi

LIST OF FIGURES

FIGURE 1

SHANGHAI OF ACTUALLY UTILIZED FDI IN TOTAL CAPITAL USED

BY CHINA, 1984-1995 ......................................................................... 10
FIGURE 2

ANNUAL GROWTH RATE OF FDI IN CHINA, 1984-1995 ........................... 12
FIGURE 3

ANNUAL GROWTH RATE OF FDI IN SHANGHAI, 1984-1995 ..................... 13
FIGURE 4

REALIZATION RATION OF FDI IN SHANGHAI, 1984-1995 ......................... 19
FIGURE 5

NUMBERS OF FOREIGN INVESTED ENTERPRISE WITH TOTAL
INVESTMENT OF US$10 MILLION OR MORE IN SHANGHAI ..................... 20
FIGURE 6

FOREIGN INVESTMENT IN INDUSTRIAL SECTORS IN
SHANGHAI (END OF 1995) .................................................................. 22

vii

LIST OF ABBREVIATIONS

ETDZ: ECONOMIC TECHNICAL DEVELOPMENT ZONE
FDI: FOREIGN DIRECT INVESTMENT

GDP: GROSS DOMESTIC PRODUCT

OCEA: OPEN COASTAL ECONOMIC AREA

OCC: OPEN COASTAL CITY

SEZ: SPECIAL ECONOMIC ZONE

SOE: STATE-OWNED ENTERPRISE

TNC: TRANSNATIONAL CORPORATION

viii

INTRODUCTION

Since economic reform was initiated in the late 19703, foreign direct
investment (F DI) has inﬂuenced the Chinese economy in ways that no one
anticipated. High economic growth rates are usually associated with vast amounts
of foreign direct investment in Chinese cities. And foreign investment is widely
considered a blessing to break with local economic stagnation and a miraculous
catalyst to speed up urban economic growth. Hence, FDI is overwhelmingly desired
in regional economic development strategies. Competing for the available yet
limited FDI has become a major concern in urban economic development. However,
on the supply side, FDI is limited, and foreign investors carefully weigh economic,
political and social factors at national and local levels. Obviously, a favorable
investment environment may induce a substantial inﬂow of FDI. This thesis, a case
study of the politics of FDI in Shanghai, a provincial municipality in Eastern China,
explores how public policy inﬂuenced inﬂows of FDI by changing the local political
environment in the 1980s and ’903. This study concurs with the assumptions of
urban political economy that urban development and municipal behavior are
outcomes of extra-local political, economic and social processes (Castells, 1977;
Hill, 1977). An urban economy cannot be isolated from the larger political and
economic systems of which it forms a part.

At the outset of urban reform, the central government adopted preferential
policies only for four Special Economic Zones (SEZs). In 1984, these preferential
treatments were expanded to Coastal Cities. Shanghai was one of them. Starting

from 1990, more favorable conditions have been granted to Shanghai to allow the

city to resume its pivotal and locomotive role in national economy. These changes
in national policies toward regions had tremendous consequences for Shanghai’s
economy. FDI in Shanghai is ﬁrst situated in this political context of China's
economic reform. In the 19903, local policy initiatives have become important in
soliciting and managing FDI. Beyond public policy, the politics of national and local
leadership has made FDI development in Shanghai differ from that in Southern
Chinese cities, especially Shenzhen. As one journalist points out, “Mr. Deng
[Xiaoping] often seemed most enthusiastic about southern Chinese cities like
Shenzhen, where the economy boomed because of private enterprises and joint
ventures with foreign companies, ....Mr. Jiang [Zemin], in contrast, has always
seemed most enchanted by the economic model of Shanghai, the city where he
served as mayor and Communist Party leader, where the Government plays a major
role in guiding the economy and large, modern companies build their glass-and-steel
ofﬁces.” (Kristof, 1997) Thus, from the very beginning, FDI has been embedded in
national and local politics.

This paper consists of ﬁve sections. Chapter 1 presents an overview of
Chinese economic reform and FDI. The open-door policy is discussed because
of its importance in facilitating FDl’s growth. Chapter 2 centers on the impact of
central government policies on trends in FDI. Chapter 3 surveys major local
initiatives adapted to central planning to solicit FDI into Shanghai. In Chapter 4,
the politics of FDI inﬂow in Shanghai during the reform are investigated. Chapter
5 discusses the implications of FDI for Shanghai’s local political economy.

Conclusions are drawn in Section VI.

Chapter 1

INFLOW OF FDI IN CHINA: AN OVERVIEW

FDI is one consequence of China’s economic reform and open-door policy.
Between 1949 and 1980, there had been little FDI in China for ideological reasons.
China had been satisﬁed with its closed self-reliance economy, termed a “socialist

command planned economy”. Before the reform, this economic system seemed to

be realizing ofﬁcially deﬁned advantages of socialisml, though it was wastefully
inefﬁcient in today’s perspective. The Chinese economic system was pushed to the
edge of debacle by the turbulence of the ten-year (1966-1976) Cultural Revolution.
At the passing of Mao Zedong in 1976, various political forces inside the Chinese
Communist Party had an opportunity to redistribute power and adjust national
policies. Deng Xiaoping became the leader of China and began to reformulate the
liberal vision of national development that he had in 19503 in order to avoid further
economic disaster and reinvigorate China’s economy. However, Deng’s
developmental strategies focused on rectifying mistakes in previous economic not
political systems. Hence, economic reform and the Iopen-door policy were
formulated in the late 19703. Without this national economic policy change, foreign

investors could not have entered China.

 

1Though the Chinese Communist Party tried to adopt the Stalinist economic system, some
disagreed. For instance, Liu Shaoqi, who was once President of the country, advocated leasing

arable land to peasants, but his ideas were opposed by hardliners, and he was soon forced out of

the Party.

China’s Economic Reform and the Open-door Policy

One major reform task was to tackle inefﬁciencies in Chinese agriculture
under the Commune system. Farm workers had little incentive to work hard under
the work-point system because they were not rewarded for their labors. To enhance
agricultural productivity and stabilize agricultural supply, the “household
responsibility system” was promoted by the Fourth Plenum of the Eleventh Central
Committee of the Communist Party in September 1979. In this system, each farm
household is leased a certain amount of land for a given number of years and is
granted control over the land. The household can choose what to grow and after
delivering a given quantity of its production to satisfy the procurement requirement of
the government how to allocate its remaining products for self consumption or sale.
This reform led to a rapid increase in agricultural output and incomes of the farmers.

The agricultural reform, as Gregory Chow (1994) points out, was the ﬁrst step
in the economic reform. The subsequent steps included (1) allowing private markets
and small private enterprises to ﬂourish, (2) state-owned enterprise reform; (3)
allowing price determination by market supply and demand, (4) the decontrol of the
supply of consumer goods, (5) expanding foreign trade and encouraging foreign
investment, and (6) banking reform. These steps were designed to help achieve the
modernization goals set in late 19703 and ’803. Since the open-door policy is
claimed to be one fundamental element of China’s economic reform, and reform and
opening up are always linked together in the Chinese mass media, a thorough
investigation of this policy is presented in this section; other reform policies will be

taken up in the discussion of speciﬁc political inﬂuences on FDI inﬂow in Shanghai.

The open-door policy was adopted in 1979. After the ten-year Cultural
Revolution was over and the focus of socialist construction was transformed from
class struggle to economic development, China found its economy far behind
neighboring countries. The rise of the so-called “four little dragons”, South Korean,
Singapore, Taiwan, and Hong Kong, along with Japan, which in the 19503 or ’603
were almost at the same economic level as China, posed a profound challenge to
socialist China. The gap in living standards, GDP per capita, and national income
per capita between China and these countries/regions had grown bigger and bigger.
China’s central government was determined to design new national economic
development strategies based upon its own past lessons from failure and, more
importantly, the successful economic experience of its neighbors. Government
ofﬁcials and scholars began to acknowledge that internationalized production and an
open-door policy had been the inexorable trend in social development since World
War II. (Gao, 1996)

The open-door policy intends to increase China’s participation in the world
economy and allow foreign economic entities to do business in China, and thus to
facilitate high and stable growth of the national economy. The policy contains
strategies such as,

1. Reducing the trade controls that prevailed for three decades between
1949 and 1979 and gradually abolishing state monopolies on foreign trade
by permitting more active participation by the private sector in external
economic activities;

2. Active interaction in international ﬁnancial markets, utilizing foreign capital;

3. Encouraging foreign direct investment, primarily through equity joint

ventures;

4. Adopting other trade practices, such as leasing, compensation trade,
export processing, and assembling to rapidly expand external trade; and

5. Encouraging overseas equity investment by Chinese industrial companies
and ﬁnancial institutions in order to broaden the export base and
marketing network for Chinese products. (Grub and Lin, 1991 , p.18)

One short-term goal of the open-door policy is to enhance domestic production and
access to the international market by acquiring foreign capital, advanced technology,
and managerial skills. Establishing Special Economic Zones and designating Open
Coastal Cities to solicit F DI, rather than foreign loans, was considered to be the best
way to implement this goal.

In August 1980, the central government declared four cities, Shenzhen,
Zhuhai, Shantou, and Xiamen, “Special Economic Zones”. SEZ investment
decisions are made largely outside the state plan. Privileges such as special tax
concessions and less restrictive regulations on foreign exchange and land use were
granted to attract foreign investment. Foreign—owned/managed ﬁrms received a two-
year tax holiday, followed by another three years of low tax rate (7.5 percent). After
the initial ﬁve years, foreign ﬁrms paid a 15 percent tax rate. Outside the SEZs, the
tax rate was 33 percent for foreign ﬁrms and 55 percent for domestic, state-owned
ﬁrms.

Hainan Island was soon granted more decision-making power equivalent to
the SEZs. Moreover, foreign businesspersons and their resident dependents are
issued multi-entry visas. Natives of Hong Kong, Macao and Taiwan, along with
overseas Chinese, enjoy even simpler and more convenient entry and exit

procedures. In 1988, the Island was declared an independent province. By

elevating the status of Hainan Island, the central government wanted to create a
zone that would provide an even better investment environment than was available
in the SEZs.

In April 1984, fourteen more coastal cities, named Open Coastal Cities
(OCCs), on the western Paciﬁc rim were opened up by the central government.
From north to south, they are Dalian, Qinghuangdao, Tianjin, Yantai, Qingdao,
Lianyungang, Nantong, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang, and
Beihai. In comparison to the SEZs and Hainan Island (or Hainan Province), as
Shangquan Gao (1996) points out, 0003 are either the most economically
developed areas in the country or are regional political centers with rich experience
in developing overseas economic links and trade. The open-door policy thus began
to touch the core of the national economy, and entered an important transitional
stage from limited experiment to nationwide opening up. These OCCs were
explicitly designed to focus on technological innovations and export industries, a
more deﬁned target than simple foreign capital attraction, and were expected to lead
to a national economic boom. They also have greater decision-making power in
their dealings with foreign business. Many hi-tech parks and economic districts have
been set up in the OCCs to allow F DI to take full advantage of local resources.

In February 1985, Changjiang (Yangtze) Delta, Zhujiang Delta and the
triangle region of southern Fujian including Xianmen, Zhangzhou and Quanzhou
were designated as “Open Coastal Economic Areas" (OCEAs). These areas include
thirteen cities, forty-six counties and two district counties. In March 1988, the State

Council decided to further expand the scope of these coastal areas, and designated

several more territories to share this status. These include Liaodong Peninsula,
Shandong Peninsula, Circular Bohai Region, and the counties governed by the
OCCs. Hence the OCEAs include seven cities and sixteen counties in Liaoning
Province, two cities and twelve counties in Hebei Province, ﬁve counties in Tianjin,
three cities and twenty-seven counties in Shandong Province, seven cities and forty
counties in Jiangsu Province, ten counties in Shanghai, ﬁve cities and thirty counties
in Zhejiang Province, four cities and twenty-eight counties in Fujian Province,
thirteen cities and thirty-nine counties in Guangdong Province, one city and ﬁve

counties in Guangxi Autonomous Region (Gao, 1996, p.42).

Inﬂow of FDI in China

FDI ﬂows into China have grown steadily since the beginning of the economic
reform (Table 1), and China has become a major recipient of FDI. Between 1979
and 1983, China actually used an average of US$360 million FDI annually. The
annual amount of utilized FDI reached US$375 billion in 1995. The annual growth
rate of used FDI in China between 1979 and 1995 was 85 percent. In 1993 China
received more FDI than any other country (World Bank, 1994, p. 16), and in 1994
China was exceeded only by the United States in gross value of FDI (Lardy, 1996).

Compared with growth rates in contracted FDI, actually utilized FDI had
changed little except for sharp increases in 1992 and ’93. Actually utilized FDI has

recently become the predominant form of foreign capital in China, reaching a record

Table 1

Flow of FDI into China, 1979-1995

 

 

Year Number of Contracts Contracted Value Used Value
(US$1,000,000) (US$1.000,000)
1979-83 1,392 7,742 (8,916) 1,802 (2,683)
1984 1,856 2,651 (2,875) 1,258 (1,419)
1985 3,073 5,932 (6,333) 1,661 (1,959)
1986 1,498 2,834 (3,330) 1,874 (2,244)
1987 2,233 3,709 (4,319) 2,314 (2,467)
1988 5,945 5,297 (6,191) 3,194 (3,739)
1989 5,779 5,600 (6,294) 3,392 (3,773)
1990 7,273 6,596 (6,987) 3,487 (3,755)
1991 12,978 11,977 (12,422) 4,366 (4,666)
1992 48,764 58,124 (58,736) 11,007 (11,292)
1993 83,437 111,436 (110,850) 27,515(25,750)
1994 47,549 82,680 33,767
1995 37,011 91,282 37,521

 

Sources: China Statistical Yearbook 1996, State Statistical Bureau, p. 597; ﬁgures in
parentheses are used by Lardy (1994), p.63 (since Lardy uses the World Bank’s
data rather the ﬁgures from China Statistical Yearbook, there are discrepancies

between the two.).

high of 78 percent of total used foreign capital in 1995 (Figure 1). This suggests that
the motives underlying China’s open-door policy, which are to take advantage of
western advanced technology and scientiﬁc managerial expertise to modernize
Chinese industry, as well as to employ foreign investors’ established access to
global market to expand China’s export capacity, have been effectively guiding
foreign capital inﬂow. Other factors also contribute to this. Foreign investors ﬁnd

China has comparative advantages in certain kinds of production, and thus their

locally produced products can be very competitive in the international market. They
also are allured by China’s vast market potential, and ﬁnd it much more proﬁtable to
sell products made in their China’s plants in Chinese market. This feature in China’s

foreign capital will carry on into the next century.

 

Percentage (%)

 

 

 

0 . r T r r . r
V <0 5 ’\ e: 9 o x (t '5 l» e
9: <8 ‘5 <2: Q: 9: 9 9 9 9 9 9
q ,9 ,9 ,9 ,9 ,9 ,9 .9 ,9 ,9 ,9 ,9

 

Figure 1
Share of Actually Utilized FDI in Total Foreign Capital Used by China, 1984-1995

Source: China Statistical Yearbook 1996, State Statistical Bureau, p. 597.

10

Chapter 2

FDI IN SHANGHAI: CENTER-LED GROWTH

As a result of national economic considerations, Shanghai was designated
one of fourteen OCCs by the central government in 1984, and a variety of
investment policies and incentives, targeted on restructuring industry and expanding
production capacity, were offered to the city. Investments from wholly foreign-owned
ﬁrms are allowed, and no limits on the duration of FDI projects, choices of
investment locations/sectors, or hiring practices are imposed. Joint ventures are
managed by their own boards of directors, and wholly foreign-owned ventures have
complete autonomy over their internal operations. Shanghai also has the authority
to approve FDI projects up to US$30 million, and this simpliﬁes investment
application and approval for foreign investors.

The investment incentives awarded to Shanghai by the central government in
1984 mainly involved tax incentives and preferential land use. Lower tax rates are
given to technology, capital intensive, and other desired FDI projects. For example,
income tax rate is 15 percent for technology projects with foreign capital of US$30
million or more and a long period of investment recovery, or for energy, transport
and port construction projects for means of transport. Equipment and raw materials
are tax-exempted (Grub and Lin, p. 48-9). Shanghai is also allowed to offer
exemptions from the land-use fee during construction and start-up periods, and may

extend reductions for FDI projects.

11

Hence, it is no wonder that Shanghai’s FDI had increased in 1984 and ’85,
and this growth accorded with the FDI situation at the national level during the period
(Figures 2 and 3). When the national growth rate of FDI experienced ﬂuctuations,
FDI in Shanghai also wavered. For nationally contracted FDI from 1984 through
1995, the lowest years of growth were 1986, 1989, and 1994. FDI in Shanghai

correspondingly dropped in those years.

600 l + ContracTedl

 

500 _

400 -

300 -

200 .

Annual Growth Rate (%)

100

 

 

 

0 f I 1 ‘ i i r F t 1*
198419851986198719881989 19901991 1992 199319941995

 

Figure 2
Annual Growth Rate of FDI in China, 1984-1995

Source: China Statistical Yearbook 1985, 1996, State Statistical Bureau.

Some scholars point out (Lardy, 1994, 1996) that these drops in the FDI
growth rate were directly linked to China’s internal political disturbances. At the end
of 1986, students at the Chinese University of Science and Technology in Hefei,

capital of Anhui Province began demonstrations. And this evolved into the Beijing

12

I; mmwFDTl
700 I... Used FDI l

 

 

 

  
 
  

Annual Growth Rate (%)
J}
o
o

 

    

* “v

1989 1991 1993

 

 

 

Figure 3
Annual Growth Rate of FDI in Shanghai, 1984-1995

Source: Tian (1996) p.169

students’ demonstrations for greater democratization in Tiananmen Square in
January 1987 (Dreyer, 1993, p. 161-2). After the demonstrations were put down, Hu
Yaobang, was removed from the position of General Secretary of the Party, as a
result of compromises between reformers and hardliners. He was succeeded by

Zhao Ziyang, then Premier of the State Council. Then a campaign opposing

bourgeoisie liberalization and upholding the Four Basic Principles2 was launched.

 

2 The Four Basic Principles are (1) acceptance of the leadership of the communist party, (2)
adherence to Marxism-Leninism-Mao Zedong thought, (3) the practice of democratic centralism,
and (4) following the socialist road. They have become the central tasks of Chinese socialist

construction.

13

But soon the policies were back on the liberal track, and reform was stressed
by the Thirteenth Party Congress in April 1988. Later in the same year, Zhao
Ziyang, backed by Deng Xiaoping, launched an ambitious retail-price reform with
intent to move to a free market. This reform induced the worst inﬂation since 1949.
In June 1989 the central government, using military forces, cracked down on the
nationwide, pro-democracy anti-corruption student movement, which had been
ignited by the death of Hu Yaobang. Zhao Ziyang was deprived of political power,
and his position was taken over Jiang Zemin, a former Shanghai party chief. Since
Hu Yaobang and Zhao Ziyang were the most important leaders supporting Deng
Xiaoping’s reform strategies, their ousting from China’s political stage made the
1989 political disturbance seem more severe than the 1986 one. “In general, the
policies China has pursued since the Tiananmen incident of 1989 have been in line
with the composition of the standing committee: somewhat more conservative, but
not without important countertrends.” (Dreyer, 1993, p. 169) However, when
comparing the percentages of FDI increase over the previous year, the ﬁgure of
1986 (47.8%) was far smaller than that of 1989 (105.7%).

In addition to the political disturbances hindering the F DI growth rate, the
national ﬁscal austerity policy worsened the environment for foreign investors. It
was introduced to curb the “overheated” economy after the second half of 1985. As
a result, the authorities began screening new investments more tightly. The foreign
exchange requirement turned out to be too restrictive for both investors and China.

The tight ﬁscal control was relaxed later in the 19803.

14

The slight decrease of F DI in 1989 also suggests that foreign investors were
less upset about their business prospects in China than in1986. Though the
crackdown on the student movement was annoying, China was still an attractive
place for foreign investors , especially when the tradeoff for the crackdown was
political stability and policy continuity. The conﬁdence of foreign investors in China
soon recovered and was further dramatized by the following political events. In the
closing days of 1990 the open-door policy was reafﬁrmed in a party plenum. In early
1992, Deng Xiaoping made a heavily publicized visit to Wuhan, Shanghai,
Shenzhen, and Zhuhai, praising achievements of the reform and open-door policy
while harshly criticizing conservatives who opposed the peaceful transformation
instigated by western capitalist countries instead of insisting on economic reform and
opening up. His speeches had a tremendous political inﬂuence and symbolized a
new reform era. The contracted value of F DI surged in 1992 overall.

Chinese legislation since 1990 has also enhanced the national investment
environment, including Shanghai. Changes included promulgating an amended law
on Sino-foreign joint ventures in and legalizing the transfer and retransfer of usage
rights for state-owned land in Chinese cities and large-scale land development
schemes by foreign investors. More importantly, a comprehensive legal system

protecting intellectual property rights was established.

15

Chapter 3

FDI IN SHANGHAI AND THE EXPANDING LOCAL AUTONOMY

It is oversimpliﬁed to assume that FDI growth in Shanghai has solely been led
by national policy. Various factors in Shanghai itself also contributed to the increase
of FDI, especially in the 19903. The establishment of industry including human
capital stock and local policy initiatives are most important. The following discussion
will focus on local policy initiatives.

Shanghai ﬁrst requested privileges granted by the central government, then
prepared a favorable local social, economic and political environment for FDI inﬂow
to upgrade for technology, expand exports, and reestablish itself as the nation's
industrial and ﬁnancial center. Not until the city was designated one of the fourteen

OCCs in 1984 could local initiatives be effective, however.

Local Political Bargaining with the Central Government

In 1983, Shanghai submitted “A Report on Shanghai’s Economic Strategy” to
the central government. The city promised to revitalize its role as the nation’s center
for international trade, ﬁnance, and commerce by opening up more widely and
upgrading its industries, concentrating on hi-tech sectors, and asked the center to
give the city more control over its own resources. This report was approved by the
State Council in 1984. This deal allowed Shanghai municipality to retain more of its
revenue. The new money enabled the city to start a series of local economic

projects.

16

In 1986 the State Council approved Shanghai’s request to expand foreign
capital (SJN, 1987). Shanghai was able to solicit capital in international ﬁnancial
market for urban infrastructure construction, technology upgrading and innovation,
increased exports, and developing tertiary industries like tourism. At the time, it was
difﬁcult to solve Shanghai’s urban infrastructure problems by state ﬁscal allocation
and/or FDI since the central government didn’t have enough available funds, and
infrastructure construction was not proﬁtable for foreign investors. With foreign
capital, the city gained time to restructure its low-efﬁciency high-waste economy, and
lay down a foundation for revitalization. Moreover, the local government
accumulated valuable experience in managing foreign capital since it had to assume

all risks of international borrowing.

Local Policy Initiatives

The municipality then offered additional incentives to foreign investors. Its
local Sixteen article provisions supplemented the national legislation and promised
another set of preferential treatments for enterprises operating in Shanghai’s three
Economic Technical Development Zones (ETDZs): Minhang, Hongqiao, and
Caohejing. These changes in the national FDI policy and local regulations removed
most bureaucratic obstacles to small, export-oriented investments (Tian, 1996).

In 1989 Shanghai increased the number of wholly foreign-owned enterprises
from 3 to 12, with gross investment value from $4.06 to $152 million (SJN, 1990, p.
99). Five were from Hong Kong, 4 from Japan, 2 from the United States, and 1 from

Taiwan. Most were export-oriented or import substituted for local. In setting up

17

these enterprises, foreign investors were preparing for larger-scale investments in
the future.

As with the SEZs and other OCCs, Shanghai saw a dramatic increase of FDI
in the 19903. The central government’s decision to develop the Pudong New Area
and improvement in China’s legislative environment markedly improved the
investment environment in Shanghai.

Shanghai’s efforts to expand its local authority were reinforced by the central
govemment’s decision to develop the Pudong District. This project brought
Shanghai an additional 6.5 billion Chinese Yuan from the center to help build
infrastructure in the eastern part of the city. It had also brought Shanghai the
authority to implement several special policies it had long hoped for, such as the
authority to issue stocks to overseas investors and to open tertiary sectors, including
banking, retail-wholesale and service, to foreign investors.

FDI jumped more than ﬁfteen times between 1991 and 1993, that is, from
US$450 million to US$7,016 million (Table 2). In 1994, FDI in Shanghai grew by 43
percent in comparison to an overall decline of FDI in the country as a whole. FDI in
Shanghai grew by ﬁve percent in 1995, which made the city China’s second largest
region for attracting FDI following Guandong.

However, the realization ratio (actual value/approval value) (Tian, 1996) of
FDI in Shanghai has also declined since 1988 (Figure 4). Along with the negative
impact of the political disturbance in 1989, the local government was forced to
revoke the business licenses of 140 foreign enterprises since late 1994 as their

capital funds failed to arrive long after registration (CBJ, 27 April 1995). After that

18

Table 2

Flow of FDI into Shanghai, 1980-1995

 

 

 

Year Number of Contracts Contracted Value Used Value
(US$1 ,000,000) (US$1 ,000,000)
1980-83 17 113.7 17
1984 41 389.1 28
1985 94 710.8 62
1986 62 297.4 98
1987 76 246.6 212 ..
1988 219 333.3 364 F
1989 199 360.0 422
1990 201 375.0 177
1991 365 450.0 175
1992 2014 3357.0 1259
1993 3650 7016.0 2318
1994 3803 10025.8 3137
1995 2845 10540.0 3250 E
By 1995 13586 34271.1 11519 "

 

Source: Tian (1996) p.169.

140.0

 

120.0 a
100.0 a
80.0 a
60.0 it
40.0 -

Realization Ratio (%)

20.0 A

 

 

 

0 0 i l J i i ; I i L J
' T l T l I I I T

 

u 9 9 ’\ 9 9 9 x '1, 9 is 9
9 9 9 9 9 9 9 9 9 9 9 9
,9 ,9 ,9 ,9 ,9 ,9 ,9 ,9 ,9 ,9 ,9 ,9

Figure 4
Realization Ratio of FDI in Shanghai, 1984-1995

source: Tian (1996) p.169.

19

the Municipal Foreign Investment Management Committee and the Municipal
Industrial and Commercial Administration intensiﬁed their supervision over the arrival
of foreign capital for enterprise business operations (Tian, 1996). FDI has

increasingly been concentrated in large projects in recent years (Figure 5).

 

 

 

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 I

E____._ _____ . .—

Figure 5
Numbers of Foreign Invested Enterprises with Total Investment of US$ 10 Million or
More in Shanghai

Source: Shanghai Internet Trading & Consultancy Ltd., 1997.

Sectoral Distribution of FDI in Shanghai

On October 11, 1986, the State Council promulgated The Regulations of the
State Council on Encouraging Foreign Investment, or The Twenty-Two Articles in
short, to develop selected manufacturing, like electronics and the chemical industry

and expand technology transfer and exports. In addition, Shanghai also established

20

“Two Kinds Enterprise” honors for foreign enterprises: one is “Technology-Advanced
Firm” (TAF) and the other is “Export Firm”. Thus Chinese governments have
changed policy from providing incentives for foreign investment in general to
selecting industries for large investments, such as high-tech energy-related
industries. FDI in priority industrial sectors has been particularly supported since
19903 when Shanghai selected six pillar industries of the Eighth Five-Year Plan
(FYP) (1991-96). To promote these industries, the local government has chosen
several large and medium-sized SOEs for cooperation with transnational
enterprises.

In 1992 Shanghai, together with Beijing, Tianjin, Guanzhou, Dalian, Qingdao,
and the SEZs, was granted rights to open more tertiary industries to foreign
investors. These industries include ﬁnance, insurance, land rent, retail, wholesale,
and telecommunications. These industries were initially monopolized by the SOEs
because they were regarded as the arterial industries for whole economy of China,
especially wholesale and retail, which are highly proﬁtable. FDI had increased
strikingly in the tertiary industry by the end of 1995 (Figure 6). This change in
sectoral distribution indicates a dramatic FDI policy shift from a focus just on
industrial production during 1986-91 to a focus on both industrial production and a

more open service sector.

21

Secondary Industry
69.94%

    

ll
Terti lndust
Primary Industry 354% ry
0.52%

i) Sectoral Distribution of Projects Number

Secondary Industry
43.89%

Tertiary Industry
55.97%

 

Primary Industry
0.14%

ii) Sectoral Distribution of Pledged Foreign Capital

Figure 6

Foreign Investment in Industrial Sectors in Shanghai (end of 1995)

Source: Shanghai Internet Trading & Consultancy Ltd., 1997.

22

Chapter 4

POLITICALLY EMBEDDED FDI AND THE CHANGING RELATIONSHIP
BETWEEN THE CENTRAL AND LOCAL GOVERNMENTS

It is evident that FDI has never been independent of national policies in
China. As we discussed above, changes of FDI inﬂow into Shanghai has been
consistent with changes of FDI inﬂow into China as a whole. When national policies
retrench, FDI value, contracts and actually utilized, tends to decline signiﬁcantly.
Conversely, when national policies are relaxed, it goes up dramatically. Shanghai,
despite its extraordinary importance in national economy and politics, has never
been able to override these political restraints on FDI. Thus, the ﬂuctuations of FDI
over time are embedded in China’s political regime. In other words, whether
localities are effective in economic development or not, they alone do not produce
regional F DI inﬂows, which are actually a function of preferential treatments by the
central government. However, regional differences in FDI inﬂows are beyond the
scope of this investigation because consistent time-series data on F DI inﬂows at city
levels are not available. In order to understand the dominant role of China’s central
government in FDI inﬂows, the following discussion centers on theories of state and
civil society in China.

Civil society is not a new concept; it was extensively discussed in works of
nineteenth-century philosophers such as Hobbes, Paine, Locke and Hegel. What is
new is applying the concept “civil society" to social nonconformity and opposition in
Communist regimes. Civil society theory was initially applied to East Europe and the

former Soviet Union, and its importance lies in pinpointing small civil societies as

23

potential carriers of the transition from a totalitarian dictatorship to an authoritarian
and further to a pluralist order (Brzezinski, 1990; Frentzel-Zagorska, 1990; Keane,
1988; Miller 1992; Tismaneanu, 1990). The development of civil societies in state
socialist systems has fundamentally changed their political process.

However, when the theory of “civil society” constructed upon the collapse of
Communism in East Europe is used to analyze China’s case, it seems limited and
superﬁcial. First of all, it is controversial whether China has a “civil society",
comparable with the one conceptualized in East Europe. One inﬂuential theory
claiming an emerging civil society in China is the drama vision. This vision contends
that the 1989 student demonstration showed the potential of civil society in China as
nationwide massive autonomous groups organized for a civic politics. It concludes
civil society is the product of a “revolutionary moment,” when disparate social
elements forge a solid front against an intransigent regime (Sullivan, 1990; Unger,
1991). A weakness of this theory is that it fails to distinguish mass social
movements from the political expression of civil society. We have to acknowledge
the fact that the 1989 student movement was originally initiated by students’
intellectual consciousness, which is embedded in the core of Chinese traditional
Confucianism, and in socialist patriotism, though it later mobilized diverse social
forces and evolved into actual political dissatisfaction and protest. The movement
had complex dynamics; without a more comprehensive analysis, it can’t be treated
as the beginning of a civil society era in China. Another theory is the intellectual’s
vision of civil society: urban-based intellectuals have protested against the state

since the early 19803 (Bonnin and Chevrier, 1991; Goldman, 1991; McCormick, Su

24

 

and Xiao, 1992; Nathan, 1990). The eruption of the 1989 student movement was an
expression of this ﬂourishing civil consciousness. The signiﬁcance of this theory is
to shed light on the institutional process of civil consciousness formation. But it
leaves out social and economic factors in its theoretical framework.

The second problem in applying the “civil society” theory to China is the
dichotomy between “the state versus civil society”. This is well pointed out by X.L.
Ding (1994). He argues that it is oversimpliﬁed to adopt this dichotomy in analyzing
the developmental process of Chinese civil society. Instead, he employs “institutional

amphibiousness” as an analytical tool. Dissenting and protesting organizations are

 

seen to be in a parasitic relationship with party-structures, and the civil society
emerges and grows through institutional manipulation and conversion within the
political regime. For example, opposition-minded intellectuals were well-educated
specialists working in education, research, publishing, consulting, legal service, and
mass media institutions. They were situated inside the political system, acted as
institution heads and researchers, and voiced their dissent through meetings,
magazines, newspapers, books and television programs. They gradually formed a
nonconforming and opposition stratum through ofﬁcial and semi-ofﬁcial institutions,
as a part of the party-state machinery, as well as through non-ofﬁcial institutions.
That China’s civil society is contextualized in the party-state regime is also
recognized by other studies (Chamberlain, 1993; Tong, 1994). Prior to the reform
the party-state monopolized institutional resources. Local government became an
extended instrument of the center rather than a local political actor. In the late

19703 the center began to balance society and state as well as economy and state

25

to maintain its political legitimacy. However, under China’s socialist system the
balance between society and state is much harder to achieve than the balance
between economy and state, since the former requires fundamental political reform
which would shake long accepted socialist ideology. Therefore, since 1979 national
policies have primarily been designed to facilitate economic growth and to improve
domestic living standards. r:-
The weak civil society, strong party-state leadership, and a different relation
between state and civil society have made China’s political transition gradual instead

of the Big Bang experienced by the former Soviet Union, Poland, and other East

 

European Communist countries. The most recent development in Chinese politics is *'
the empowerment of local government.

During the economic reform and decentralization, challenges to the party-
state regime by intellectuals and students have been suppressed. Desires of the
nascent civil society are not limited to only wanting back political freedom and
democracy from the party-state. Non-state business bodies have emerged at local
level, gradually forming voluntary associations, and have become a basis of local
empowerment. Local government has started to bargain and negotiate with the
center to promote local interests nationally. After 1990, local states became an
interface between the structure of the regime and the structure of civil society. The
active role of the local state was conceptualized as local state corporatism by Oi
(1992, 1996), local market socialism by Lin (1995), or industrial ﬁrms by Walder
(1995). In order to compete more efﬁciently in external markets. Local political

institutions must use their administrative power to mobilize local, and sometime

26

national, resources to coordinate local economic entities, and thus to realize state-
Ied growth strategies.

Therefore, central and local governments, as well as the changing
relationship between them during the reform era, constitute the political framework of
FDI inﬂows in China, including in Shanghai. Without recourse to the center, foreign
investors initially had no guarantee for their business operation at the local level;
local government in general had not the power or capability to handle complex
international deals. With continuously growing civil society and the penetration of
market mechanism in Chinese society, local states will be more and more important
in the politics of FDI inﬂows. Voluntary, nongovernmental organizations such as
trade unions, religious and cultural groups have little inﬂuence the economy in
today’s China through their strategic interactions with local government make it
somehow represent their respective interests. Local developmental strategies will
shift focus from direct involvement and intervention to creating a favorable
environment for business. However, this by no means implies that the center will
lose its inﬂuence on the local economy. The central government might change from
commanding and controlling to guiding, coordinating and negotiating, but localities

will still depend upon the center’s support.

27

Chapter 5

IMPLICATIONS OF FDI FOR SHANGHAI’S POLITICAL ECONOMY

The contributions of FDI to economic development in Shanghai are obvious.
The increasing inﬂow of F DI has promoted continuous export growth. The annual
growth rate of foreign invested ﬁrms’ exports grew from 60 percent in 1990 to 67
percent in 1991, to 109 percent in 1992, and dropped back to 55 percent in 1993;
however, the absolute volume of exports in 1993, US$ 1,61 billion, was still
remarkable, and constituted 21.8 percent of Shanghai’s total exports (Tian, 1996, p.
98). Though it was difﬁcult to get accurate imports ﬁgure for foreign invested ﬁrms
for these years, rough estimates show foreign invested ﬁrms almost balanced their
foreign exchange accounts. As the local government becomes more interested in
hi-tech, capital intensive, large-scale, and/or export-oriented foreign funded projects,
FDI will continuously enhance Shanghai’s export capacity and facilitate technology
transfer, and sustain fast economic growth.

However, when the inﬂow of FDI in cities involves foreign transnational
corporations (TNCs), it usually brings about complex consequences for the urban
economy and politics, especially in a city like Shanghai. What are the potential

effects of TNCs on the city’s political economy?

TNCs and Local Market Socialist Economy

China’s economic growth is led by the state. The role of the local

government, mainly city government, during the economic reform has also been

28

L.

noticed by academia (Parris, 1993; Solinger, 1996; Wong, 1987). The emerging
local market socialist economy in Shanghai, sometimes termed local state
corporatism or local market socialism, has a fundamental characteristic: local
competition is minimized under the corporate-style political administration.

The emergence and bloom of TNCs in Shanghai has mixed effects on the
local market socialist economy. According to John Dunning’s OLI (organization,
location, internalization) paradigm (1979; 1981; 1983), FDI adds the comparative
advantage of internationalization by TNCs. Associated with this are the competitive
advantages of ownership and location. He points out that the mushrooming in all
types of transactions, notably of intermediate products, are best undertaken by
hierarchies rather than markets since TNCs are much better-equipped to supply
goods, services and distribution channels than their competitors. Thus, along with
TNCs, growth of exports will continue in Shanghai.

Nonetheless, TNCs also have negative impacts on urban economies in host
countries. Usually the urban economy in Third World countries is worsened by rapid
urbanization, and such rapid urbanization is brought about by TNCs' economic
stimuli. Empirical studies suggest that economic dependency of host countries
brought by TNCs penetration is one primary cause of urban economic stagnation
and poverty in developing countries (Chase-Dunn, 1984; London and Smith, 1988;
Timberlake, 1985, 1987). However, sufﬁcient data are not available to replicate
these analyses for Shanghai. But it is clear that inequality, as Stephen Hymer
(Hymer, 1979) argues, is built into the growth mechanism of the contemporary world

capitalist system and the pyramid hierarchies of TNC structures. These inﬂuences

29

will attempt to undermine local coordination over Shanghai’s market socialist
economy once internal and external markets are no longer differentiated.
Implications of TNCs for Shanghai’s economy can be seen in Singapore's
experience. The ongoing economic development strategies of Shanghai are very
similar to those of Singapore: “its requirements for technology, capital, management
skills and access to export markets have impelled Singapore towards high levels
of trade and inward investment by MNEs [TNCs]” (Lecraw, 1985). TNCs and
international trade have played crucial roles in the growth and structural change of
Singapore’s economy. To attract FDI, the government severely limited the rights of
workers to strike and bargain for wage increases and the rights of its citizens to
engage in political dissent. Local businessmen complained they were discriminated
against by those government incentive programs. In addition, local formerly state-
owned enterprises in Shanghai have lost their identities after joint venture with
TNCs. TNCs are usually reluctant to use the trademarks and brand names owned
by these enterprises even though they had been very famous in the country.
Furthermore, R&D personnel are dismissed. Foreign trademarks and brand names
are then substituted on products made by these joint ventures in China’s domestic
market. With these issues in mind, it is difﬁcult to predict how the local market
socialist economy in Shanghai will accommodate increasing inﬂow of FDI in the

future.

30

Organizational Power of TNCs and Local Politics

When tension between TNCs and local market socialist economy is
generated in economic sphere, it inevitably evolves into tension between the
organizational power of TNCs and the political power of the municipality. Hymer
(1979) claims modern TNCs are more powerful and sophisticated business
organizations than domestic economic enterprises, and they not only destroy the
possibility of national independence but also weaken local political control and inhibit
economic development in the hinterland regions through international labor division
and by manipulating government’s tax capacity. No evidence has suggested this is
the case for Shanghai by far. However, the growing organizational power of TNCs
in local politics cannot be ignored or underestimated.

TNCs also have an indirect yet important impact on the local government of
Shanghai. As stated above, growing civil society may internally weaken the local
government power. TNCs play a facilitator role in this process. The boom of TNCs
has helped economic prosperity in Shanghai, and in turn bolstered growth of the
nascent civil society. As a result, the local government of Shanghai current strong

control over its economy will become even more problematic in the future.

31

Chapter 6

CONCLUSIONS

Central and local governments have led FDI inﬂow in Shanghai. The center
designated the city to be another model for utilizing FDI in the early 19903, to serve
socialist consthction with Chinese characteristics after Shenzhen. National policies
offered Shanghai developmental priorities with favorable treatment. Shanghai
municipality took this political opportunity to reverse its backward status and promote
its economy in the nation by soliciting and guiding FDI inﬂow. The development of
FDI in Shanghai was hence initiated by the center and coordinated by local policies.

With preferential treatment from the central government, Shanghai will regain
its primary status in China’s economy. With continuous growth of FDI and TNCs in
the city, Shanghai's GDP growth rate jumped from 7.1 percent in 1991 to 14.8
percent in 1992, and has been above 14 percent since then. Such urban growth led
by the state is not a new invention in world urban development. The rise of Tokyo to
national prominence in Japan was propelled by the developmental state (Hill and
Fujita, 1995). Since theories based on observations of the collapse of East
European Communism have proved not applicable for China, the comparative study
of developmental strategies and political dynamics between China and other East
Asian countries such as Japan and South Korea will be important and necessary
despite of different political, social and economic systems. The theory of the
developmental state, in addition to civil society theory, will likely further light on the

politics of FDI in China.

32

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33

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I'.

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