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					                        FDI in China and the Chances for Hungary
                                                         Central European University
                                                                         Xie Yichun

1. Introduction

      Since the start of Reform and Opening-up in 1978, foreign direct investments
(FDI) to China have had a dramatic increase. According to the 2007 World Investment
Report released by United Nations Conference on Trade and Development
(UNCTAD), China was the fourth largest FDI recipient in 2006 (second until 1998,
third until 2005), following the US, the UK and France.1 Together with the inflow of
FDI, China has been experiencing an “economic miracle” in the recent decades. Its
GDP has increased from 364.52 billion yuan in 1978 to 18308.48 in 2005, with an
average growth persisting at around 7-10% annually.2 There are reasons to believe
that FDI inflow plays a crucial role in China’s economic development, e.g. boosting
trade, employment and restructuring and upgrading industry. According to an official
report from Ministry of Commerce, FDI contributes to 40% of China’s GDP growth.3
On the other hand, because of the large number of cheap labor force, huge domestic
market and favorable state policies provided by China, FDI is also beneficial to the
transnational corporations (TNCs) and their home economies by generating lucrative
high returns.
      The EU is the fourth largest investor in China. In 2007 alone, the total number of
FDI from the EU amounted to 23.84 million US dollars, 6.3% of the whole amount of
FDI in China. However, regarding FDI from Hungary, despite the fact that Hungary is
one of China’s biggest trading partners in Central and East Europe, there are relatively
few Hungarian companies invest in China - the total number of Hungarian
investments amounts to 250 million US dollars by stock according to Chinese official
statistics.4 The beginning of the 21st Century has witnessed two historic events for
both countries: China’s accession to WTO in 2001 and Hungary’s accession to the EU
in 2004. The two accessions have opened up more chances for bilateral economic
cooperation. As a matter of fact, more and more Chinese firms are now investing in
Hungary, e.g. Hisense. There are also great opportunities for Hungarian companies to
invest in China.
      The aim of this paper is to provide adequate information on FDI in China and
give suggestions to Hungarian firms which are interested in investing in China. This
paper will be divided into four major sections. In the first section, I will give a general
introduction to FDI in China. In the second part, I will analyze the recent trends of
FDI in terms of geographic and sector distribution, governmental policies and
legislation relevant to FDI. In the third section, FDI from Central and East European
countries will be examined. And in the last section, I will give suggestions to

1
  UNCTAD (2007): World Investment Report 2007
2
  State Statistics Bureau of China (2006): China Statistical Year Book 2006
3
  Ministry of Commerce (2005): 2005 Kua Guo Gong Si Zai Zhong Guo Bao Gao
4
  Foreign Ministry of People’s Republic of China:
http://www.fmprc.gov.cn/chn/wjb/zzjg/xos/gjlb/1796/default.htm

                                                                                         1
Hungarian firms based on the above analysis. All statistics and related information in
this paper are from primary sources from China and UN, including official reports,
academic papers and UNCTAD reports (mainly World Investment Report series).

2. General Introduction to FDI in China

    During the early year of Reform and Opening-up, four coastal cities in
Guangdong Province and Xiamen Province (Shenzhen, Zhuhai, Shantou, Xiamen)
were first opened up to foreign capital. Since then, the line separating open and closed
areas moved gradually westward and finally disappeared. Investments from foreign
companies start from almost zero in the mid 1970s to 694.7 USD million in 2006 (See
Table 1), making China the largest FDI destination in the developing world for 17
years in a row.5

          Table 1 Actual Ultilitized FDI in China from 1979 to 2006 (Billion USD)

          80
          70
          60
          50
          40
          30
          20
          10
           0
                  84

                         86

                                88

                                       90

                                              92

                                                     94

                                                            96

                                                                   98

                                                                          00

                                                                                 02

                                                                                        04

                                                                                                  06
            2
          98

                19

                       19

                              19

                                     19

                                            19

                                                   19

                                                          19

                                                                 19

                                                                        20

                                                                               20

                                                                                      20

                                                                                                20
        -1
      79
    19




Source: Investment Promotion Agency of Ministry of Commerce, P.R.C., Invest in China Serials


    By the end of 2006, 590,000 foreign companies from nearly 200 countries have
invested in China, with an actual ultilitized foreign capital exceeding USD 700 billion.
Among them, ten Asian countries and regions (Hong Kong, Macau, Taiwan,
Singapore, South Korea, Japan, Indonesia, the Philippines, Malaysia and Thailand)
cover almost 54.74% of the total FDI inflow in 2006. Overseas Chinese are the major
investors. FDI from some free ports e.g. Cayman Islands, British Virgin Islands and
Mauritius amounts to 25.25%. The EU is the third largest FDI source, with a total
amount of USD 5.3 billion, 8.45% of the total number, followed by North America’s
5.33%.6 Germany, Netherland and the UK are the three biggest EU investors.
    FDI is absorbed by China in various forms, including setting up joint ventures,
China-foreign cooperative enterprises, wholly foreign-owned enterprises, corporations,
and joint-development companies. In recent years, more and more wholly foreign

5
    Investment Promotion Agency of Ministry of Commerce (2007): Invest in China Serials, P:77
6
    Ibid., P:375

                                                                                                       2
owned enterprises have emerged and occupied the dominant position (See Table 3).
     In terms of industry, the majority goes to manufacturing sectors, e.g. textile,
clothing and so on. In 2006, 400.8 out of the total 694.7 USD million FDI were
invested in these sectors. Real estate, ranking the second, attracted only 82.3 USD
million. In the 1970s and 1980s, after the four Asian Tigers (South Korea, Singapore,
Hong Kong and Taiwan) achieved economic success and stepped into the developed
world, the subsequent rising labor costs and the opening-up of China mainland pushed
and pulled TNCs to relocate their labor-intensive sectors. Till now, cheap labor is still
the comparative advantage of China in attracting FDI. However, FDI is not limited to
the manufacturing sector. As we can see in Table 4, FDI also covers a wide range of
other sectors including real estate, information industry, financial and service sectors.
Actually, in recent years, FDI in manufacturing sectors are declining, moving upward
in the value chain. Even within the manufacturing industry itself, FDI are moving
from sectors such as textile and clothing to more capital and technology intensive
sectors such as semi-conductors and automobile.

 Table 2 Actual Ultilitized FDI in China in 2006 Based on Source Countries (Billion
                                        USD)

           Others
                         4




                                       15.91




        Freeports
                        3.29




  North America
                           5.32




          The EU
                                                             34.5




   Ten Asian C/R

                    0             5            10      15             20      25       30       35       40

                               Ten Asian C/R        The EU          North America   Freeports   Others

Source: Investment Promotion Agency of Ministry of Commerce, P.R.C., Invest in China Serials


             Table 3 Foreign Capital Utilization Approach Analysis in 2006

                                                 Foreign Capital Approved in 2006
                                       Number of Projects           Actually Utilized Foreign Capital
                                                                             (Billion USD)
                                 Volume Volume in Year on           Volume Volume in Year on
    Utilization                  of This  the Same        Year       of This    the Same      Year
    Approach                     Year on  Period of Comparis        Year on     Period of Comparis
                               Accumula      the          on %    Accumula         the        on %
                               tive Basis Previous                 tive Basis Previous
                                             Year                                  Year
Total                            41485      44019         -5.76      73.523      75.886       -3.11

                                                                                                          3
ⅠFDI                          41485           44019            -5.76          69.448           72.406         -4.06
  Joint Ventures              10223           10480            -2.45          14.378           14.614         -1.62
  China-Foreign                1036            1166           -11.15           0.94             1.831         5.92
  Cooperative
  Enterprises
  Wholly Foreign-             30164           32308              -6.64        46.281           42.961         7.73
  owned
  Enterprises
  Corporations                  50              47               6.38         0.422             0.918          -54
Ⅱ            Other               0               0                 0          4.055              3.48         16.52
Investment
Source: Investment Promotion Agency of Ministry of Commerce, P.R.C., Invest in China Serials




Table 4 Ultilitized FDI Distribution in Different Sectors (more than 1 Billion USD) in
                                  2006 (Billion USD)

                        Commercial service
                                   Real Estate
                                         Finance
                                      Retailing
                                   Information
                  Transportation and Post
     Production and supply of energy
                                Manufacturing
                                   Agriculture

                                                      0      5     10    15    20     25       30   35   40    45

Source: Investment Promotion Agency of Ministry of Commerce, P.R.C., Invest in China Serials


     The geographical distribution of FDI is also worthy of notice as well (See Table
5). The majority goes to eastern part of China where there is a relatively longer
history of opening-up, better infrastructure and industrial basis, and higher skilled
labor force. In 2006, the eastern region attracted 90.3% of total utilitized FDI7,
leaving central and western regions far behind. The three deltas in the east, the
Yangtze River Delta (Shanghai, Jiangsu and Zhejiang Province), the Pearl River Delta
(Guangdong Province) and Circum-Bohai-Sea Delta have the densest FDI inflow and
industries, and are considered as engines promoting China’s industrialization.
However, Beijing’s current policies are more in favor of the central and western in
order to fill the gap between developed east and undeveloped central and west caused
to some extent by early policies.
7
    Ibid., P:81

                                                                                                          4
Table 5 FDI Attracted by Eastern, Central and Western Regions in 2006 (Billion USD)




                                Western 2.994
                      Central 6.022




                                                                 Eastern
                                                                  59.529



Source: Investment Promotion Agency of Ministry of Commerce, P.R.C., Invest in China Serials
Notes: East includes Beijing, Tianjin, Hebei, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong,
Guangdong, Hainan; Central includes Shanxi, Jilin, Heilongjiang, Anhui, Jiangxi, Henan, Hubei and
Hunan; West includes Inner Mongolia, Guangxi, Sichuan, Chongqing, Guizhou, Yunnan, Shaanxi,
Gansu, Qinghai, Ningxia, Xinjiang and Tibet


3. Analysis of Recent Trend

    After 30 years of opening-up, FDI has been undergoing some important changes,
both in terms of FDI decisions by TNCs and policy preferences of the Chinese
government. Hence, in this part, I will examine the FDI from a dynamic perspective,
analyzing the recent trends: change of geographical distribution, sector concentration,
governmental policies and legislation.

3.1 Geographical distribution

      As mentioned above, the geographic imbalance of FDI distribution is evident in
China, with the eastern coastal provinces and cities attracting more than 90% of the
whole FDI in 2006. Till recent years, the regional concentration has been increasing.
But there is the trend that labor-intensive and low value-added sectors are moving
westward in central and west regions.
      The regional FDI concentration can be explained by various reasons. On the one
hand, the eastern part of China is more densely populated with better climate,
infrastructure, industrial legacy and more convenient transportation. On the other
hand, the early policies of Chinese government were more favorable to the east. Deng
Xiaoping, the designer of China’s Reform and Opening-up made the decision to open
the eastern part first, guided by the mindset of making a few people and regions rich
first and later spill over to the rest part of China. However, serious regional inequality

                                                                                                    5
occurred as a result. The gap between rich east and relatively poorer central and west
is enlarging, causing serious social problems, e.g. instability of minority regions in the
west, environmental degradation. The GDP per capital of the east part of China is 2.75
times and 2.43 times that of the west and central regions respectively in 2006.8
Consequently in order to fill the enlarging gap, in 1999, Chinese government decided
to carry out the “West Development Strategy”, promoting the modernization of the
west region. In 2005, “Central Rise Strategy” was listed at Beijing’s agenda. These
two regions cover 89.5% of China’s territory and 59% of the whole population.9
     As a matter of fact, the traditional predominant FDI destination in the east is
experiencing an industrial upgrading. Both land and labor is in shortage and
manufacturing cost is rising. For example, from 2006 till now, the Pearl River Delta
region is suffering serious labor shortage, and the Yangtze River Delta region is
suffering land and energy shortage. Many TNCs have no choice but move their
labor-intensive sectors to the hinterland to reduce cost. Investments in these more
industrialized regions have been shifting from textile to relatively high value-added
units such as computer peripherals, telecom equipment, and semiconductors10.
     The industrial relocation and state policy preferences go hand in hand. At both
national and local level, government in the west and central region carries out
favorable policies attracting FDI. Currently, major policies encouraging investment in
central and east regions include: for those industries and projects which central and
east regions have comparative advantages, the percentage of FDI share can be higher
than in the east; after the execution of current tax preference for 3 years, FDI in
central and east part can enjoy 15% deduction of the enterprise income tax; the
government are also accelerating the infrastructure construction, e.g. transportation,
energy, raw material, agriculture, in the two regions.

             Table 6 FDI Attracted by the East, Central and West (Billion USD)




8
   Xinhua net (2007): Zhong Guo Jing Ji Cun Liu Shi Heng,
http://news.xinhuanet.com/fortune/2008-01/21/content_7463462.htm
9
   State Bureau of Statistics of China (2006): China Statistical Year Book 2006
10
    UNCTAD, P:42

                                                                                        6
     60
     50
     40
     30
     20
     10
      0
                 2002              2003               2004              2005               2006
                                    East             West              Central
Source: Investment Promotion Agency of Ministry of Commerce, P.R.C., Invest in China Serials


3.2 Changes of Sector Concentration

      According to UNCTAD, FDI inflow to China suffers a slight decline for the first
time in the past seven years 11 . According to the prediction from Ministry of
Commerce, during the eleventh “Five Year Plan”, the growth rate of FDI will remain
at 1%, much lower than during the previous one. This is not a sign of the saturation of
Chinese manufacturing capacity and market, but a result of FDI selection in coastal
area, meaning China is emphasizing the quality of FDI rather than its quantity.
      For a long period of time, Chinese export is labeled as large quantity and poor
quality, concentrating on low value-added products like textile. There have always
been motivations within the government and society to change the situation. In almost
every Communist Party Congress and government reports, the need to “promote
industrial upgrading and optimize industrial structure” has repeatedly been
highlighted. According to the eleventh “Five Year Plan”, industrial restructuring
contains two parts: first, upgrading from low tech to high tech industries; second,
shifting from first and second industry to the third industry.12
      Within the manufacturing sector, Yangtze River Delta and Pearl River Delta
regions are moving from low value-added textile or clothing sectors to more capital-
and technology-intensive sectors such as semi-conductors, LCD, television, and other
machinery products. Moreover, when examining the current distribution of FDI in
different sectors, it is not difficult to find out that FDI in manufacturing sector these
years are stabilizing and even suffering slight decline. To the contrary, FDI in
information industry or service sectors are increasing (See Table 7). Take Shanghai
for example, early in 2005, the proportion FDI in manufacturing sectors declined to
1/3 from 1/2 in the previous year with a sharp increase in sectors such as retailing and
11
   Ibid
12
   Central Committee of the Communist Party of China (2006): Zhong Hua Ren Min Gong He Guo Guo Min Jing
Ji He She Hui Fa Zhan Di Shi Wu Ge Wu Nian Gui Hua Gang Yao

                                                                                                      7
commercial services.13

                   Table 7 FDI in Manufacturing and Information Industry

          50

          40

          30                                                                     Manufacturing
                                                                                 (Billion USD)
          20                                                                     Information (100
                                                                                 Million USD)
          10

           0
               2000    2001    2002     2003   2004    2005    2006


Source: China Statistical Year Book from 2001 to 2006; Investment Promotion Agency of Ministry of
Commerce, P.R.C., Invest in China Serials


3.3 Shifts in Governmental Policies

     A favorable domestic environment has been crucial in attracting FDI in China. In
recent years, there have been evident policy shifts in respect to FDI. At the national
level, these shifts include: encouraging FDI in high-tech and service sectors,
preferential policies for investing in central, west and northeast China, broadening
encouraged industries, and focusing more on environment and labor protection.

Preferential policies toward high-tech and service investments
      China continues to carry out preferential policies attracting high-tech FDI.
According to official resource, favorable policies will be given at appropriate time in
terms of percentage of requirement in corporate registration capital and industrial
property contributions. For TNCs which are based on advanced technology and export,
tariff and import VAT are exempted for importing equipments, tax rebate is applied, if
the companies are engaging R&D activities, the equipment they purchase can offset
corporate income tax, etc.
      At the local level, especially in more industrialized east coastal areas, due to
labor and land constraints, local government is actually selecting capital and
technology intensive industries. Favorable policies are given in a more specific basis.
For example, government in Shanghai established four provisions concerning
high-tech FDI: Provision on Enhancing the Quality of Foreign Capital, Index System
on Enhancing the Quality of Foreign Capital, Catalogue of Foreign Invested
Industries and Plan for Attracting Multinational Headquarters. Under the guidance of
these provisions, high-tech industries are given priority in land and related resources.

Favorable policies to the central, west and northeast region

13
   Mei Ri Jing Ji Xin Wen (2005): Shanghai Wai Shang Tou Zi Zhi Zao Ye Bi Zhong Xia Jiang,
http://biz.163.com/05/0720/02/1P2PTFI600020QGP.html

                                                                                                    8
      FDI in China are mainly divided into four types: encouraged, permitted,
restricted and prohibited. In order to promote the industrialization of less developed
central and west regions, this restriction is loosened for FDI investing in these regions.
Projects listed in the permitted and restricted catalogue, if they can make full use of
the advantages in central and west regions, can enjoy the preferential policies of the
projects in the encouraged catalogue. 14 The encouraged catalogue has also been
broadened. Projects which are restricted or prohibited or limited in share of equity
ration can be approved.

Environmental protection
      As the environmental degradation and pollution are becoming more serious with
the development of Chinese economy, the environmental protection has been at the
state’s top agenda. Chinese government is aware of the fact that many TNCs have
relocated their activities which may cause serious pollution; environmental factor is
now an important standard in selecting FDI. Some of the heavily polluting industries,
such as galvanizing, chemical, are restricted. On the other hand, FDI which helps
improving environmental problems are encouraged.

Labor protection
      Social inequality, abuse of peasant workers, illegal land occupation for factories
and such social problems are side effect of the development of China. Many scholars
argue that the attractiveness of China to FDI is based on the “sacrifice” of Chinese
labor force. Since the social problems have become so serious and even threat the
social stability, a term most emphasized by Chinese government, there has been a
shift from favoring capital to labor protection for the sake of social stability. In 2006,
the first trade union is set up in Wal-mart, the world’s largest retailer with a strong
anti-union stance. Later, the setting up of trade unions spilled over to other foreign
enterprises such as McDonald, Pizzahut, and foxcnn. From the legal perspective, the
adoption of Labor Contract Law passed in 2007 also marks a cornerstone in labor
protection. Although improving quite slowly and far from enough, labor protection,
possibly result in the increasing labor cost is the long-term trend.


3.4 Legislation aspect

     As China is still in the process of economic transition from planned economy to
market economy, until recently, the difference of management and legal systems in
respect of domestic and foreign capital still exists.15 However, as FDI is playing such
a great role in Chinese economic development, foreign capital is more and more
involved in the legislating process. A series of new laws have been passed or under
discussion which matter a lot to the interest of foreign enterprises. Thus, it is
important to analyze the recent trend of Chinese legislation relevant to FDI.

14
     Investment Promotion Agency of Ministry of Commerce, p: 178
15
     ibid

                                                                                         9
     Basically, there are mainly three types of law and their implementing rules on
FDI: those specially deal with FDI, general law deal with both domestic and foreign
capital, and bilateral or multilateral treaties on investment, trade, taxation and so on.

Laws specifically deal with FDI include:
Law of People’s Republic of China on Sino-Foreign Equity Joint Ventures
Law of People’s Republic of China on Sino-Foreign Contractual Joint Ventures
Law of People’s Republic of China on Wholly Foreign-Owned Enterprises,
Income Tax Law of People’s Republic of China for Foreign Invested Enterprises and
Foreign Companies and its Implementing Rules
Provisions on Guiding the Orientation of Foreign Investment, Catalogue for the
Guidance of Foreign Invested Industries, Catalogue of Advantageous Industries in
Middle West Region for Foreign Investment
Law of People’s Republic of China on the protection of Taiwan Compatriots and its
Implementing Rules
Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors
Provisions on the Establishment of Investment Companies by Foreign Investors
Interim Rules on the Foreign Invested Joint-Stock Corporations

General laws relevant to FDI include:
Corporate Law of People’s Republic of China
Labor Contract Law of People’s Republic of China
Insurance Law of People’s Republic of China
Arbitration Law of People’s Republic of China
Labor Law of People’s Republic of China
Enterprise Income Law of People’s Republic of China
Interim Regulations of People’s Republic of China on Value-added Taxes
Interim Regulations of People’s Republic of China on Consumption Taxes
Interim Regulations of People’s Republic of China on Business Taxes
     Till now, China has signed more than 100 bilateral and multilateral treaties with
other countries. WTO rules and regulations are especially important for the economic
legislation and regulation in China.
     In recent years, especially after China’s accession to WTO, a growing number of
business laws relevant to FDI have been passed or on the way, e.g. Labor Contract
Law, Bankruptcy Law, Property Law, etc. Endeavors are made to improve the legal
environment for foreign investors, and protect their rights within the framework of
rule of law. A most historical legal achievement is the inclusion of the protection of
private property into the Constitution in 2004. As the legislation process is becoming
more transparent, during the legislation process, foreign capital actively participates.
Foreign enterprises form lobbying groups, sometimes with Chinese domestic capital,
to persuade legislature adopting items favorable to them. There is no doubt that
legislation is catching up with the development of Chinese economy, and
liberalization process is accelerating after China joined WTO. The protection of
foreign capital will be based on rule of law.

                                                                                       10
      But on the other hand, serious social problems have occurred during the
economic development. There are scholars arguing the development of China is in
fact built on the exploitation of labor and land. Social inequality, peasant workers and
other related problems have affected the social stability which is a major concern for
the government. It can be predicted that in the foreseeable future, protecting the
interests of labor will dominate the government agenda for the sake of social stability.
Sometimes, this may be in conflict with FDI. A most attention-getting case is the
adoption of certain items in the Labor Contract Law passed last year. This law
enhanced the standard of labor protection which may result in the increasing of labor
cost, thus caused unsatisfactory from foreign capital. According to China Newsweek,
some representatives of TNCs even threat to withdraw investment during the
legislation process.16 At the end, this law is promoted without withdrawing of foreign
capital.
      Another most recent development is the merger of Interim Regulations of
People’s Republic of China on Enterprise Income Taxes and Law on Enterprise
Income taxes of Foreign Investment Enterprises and Foreign Enterprises in 2007.
Because of the separate legal system in treating foreign and domestic capital, there
had been a long period of time when FDI enjoyed “nondiscriminatory” tax
preferences. For example, the tax rate for foreign enterprises was 14%-15% while for
domestic counterparts, the rate was up to 33%.17 After the merger of the two laws on
tax, foreign FDI should compete with domestic capital on equal basis, meaning 25%
tax rate. However, this does not mean that tax preference toward foreign capital has
been totally abolished, but rather based on a “selective” basis. Enterprises investing in
central and west part of China, in high value-added and high-tech sectors can still
enjoy tax preference policies.
      In conclusion, Chinese government is making an effort to consummate the legal
system and protect the rights and interests of foreign investors according to the rule of
law. However, in the foreseeable future, it can be predicted that the separate legal
system dealing with foreign and domestic capital will disappear, and they will have to
compete on a more equal basis. Moreover, the relationship between capital and labor
will also be more balanced.

4. Existing FDI from Hungary

     After 1989, the relationship between China and Central and Hungary countries
had been cooled off for a short time. But Since early 1990s, bilateral relations have
been normalized and trade has been increasing, especially trade between China and
Hungary. In terms of direct investment, although Hungary is not major FDI source for
China, after joined the EU, there are large room left for cooperation.
     FDI from Hungary or other CEE countries are relatively small than other EU
Member States. But the annual number has been increasing since 2000(See Table
8).The total number of investment from Hungary amounts to 250 million USD by

16
     Yang Zhongxu (2006): Ji Lie Bo Yi Xia De Lao Dong He Tong Fa, China Newsweek, Vol.21
17
     Liu Yunhe (2005): Wai Zi Shui Shou You Hui Zan Bu Qu Xiao, Global Times

                                                                                            11
stock. However beside these, there is little detailed information on FDI in China from
Hungary. One reason is given by Mr. Geiger, the Head of the Economic Section,
Commercial Counsellor in Hungarian Embassy, Beijing: Some Chinese people living
in Hungary reinvest in China through Hungarian firms. By origin, these investments
are Chinese instead of Hungarian.
     One big Hungarian firm investing in China is EGI Zrt, wholly owned by the
Energy Technology Division of the German based GEA Group. EGI Zrt is in the
energy sector, providing business line of power and process cooling systems and
technologies. The sum investment in China was 20 million USD up to 2007.

      Table 8 FDI from Hungary from 2000 to 2005 (Million USD)

   60
   50
   40
   30
   20
   10
     0
             2000          2001          2002            2003   2004   2005

Source: China Statistical Year Book, from 2002 to 2006


5. Suggestions for Hungarian government and companies

Investing in second line cities
     Hungary is rather a late comer in investment in China. For large companies with
great strengths in capital, technology or possess other comparative advantages, they
can invest in advanced coastal areas to take advantages of the huge market and skilled
labor force. However, it is possible that investment opportunities in first-tier cities
along the coast such as Beijing, Shanghai, Guangzhou have been occupied by early
comers. For relatively small and medium size companies in Hungary, the
opportunities lie in the second-tier cities, such as capital cities in central and west part
of China. On the one hand, these cities are expanding quite quickly in recent years.
The market is enlarging, population is growing, and the infrastructure is improving.
But competition is not so intense, and the capital, scale economy requirements are not
so demanding. On the other hand, in order to attract FDI and accelerate the economic
development in these regions, policies and laws both at the state level and local level
are quite favorable to foreign investors.

Investing in high tech and service sectors

                                                                                         12
    Two of China’s most important elements of attractiveness are abundant labor force
and huge domestic market. For Hungary firms, cheap labor may be a less pulling
factor, what is important is China’s huge market. Manufacturing sectors may not be a
good choice, reasons are: first, the manufacturing capacity of China is approaching
saturation; second, governmental policies are shifting from manufacturing sectors to
service sectors; third, a large percent of the manufacturing products are export
oriented. The EU is a major destination. In a sense, China is strong competitor with
Hungary.
      Service industry is different from manufacturing industry in the way that it
serves the domestic Chinese market. Investments in this sector can be attractive to
both China and Hungary. From a document released by the Shanghai Government, it
is thinking about introducing rubbish disposal and recycling technology from
company Organica and the water supply service from Fovarosi Vizmuvek Zrt. The
advanced biotech technology in Hungary is also quite attractive to China, especially
in field of Biopharmaceutical, e.g. Semmelweis and Biotecont.

Establishing R&D units
      Technology development is crucial for the prospect of companies. In order to
enhance their competitiveness, Hungarian firms are encouraged to take advantage of
China’s rich human resources. Traditionally, Chinese comparative advantage of
attracting FDI relies on its abundant cheap un-skilled labor force. However, it is also
true that China is abundant in cheap and skilled labor force. Most of the world’s major
TNCs have set up their R&D centers in China, e.g. Microsoft Asian Research Institute
in Beijing, GE and Google R&D Center in Shanghai, etc. For small and medium sized
firms, the cheap high-tech labor in China can also be an advantage evaluated by
cost-benefit effect.
      In order to attract high-tech inflow, the Chinese government has set up more than
one hundred high-tech parks across the whole territory, covering almost all industrial
sectors. In these parks, policy preferences are provided and scale effect has formed,
e.g. more flexible flow of capital and labor, frequent change of technology, etc.

Based on China, serving East and Southeast Asia
     China is a large country that shares land borders with 12 countries and sea
borders with four countries. These countries cover almost the whole Asian-Pacific
Region, one of the most promising regions in the world. Investment in China, to the
east can serve Japan, South Korea markets; to the south, it can serve the ASEAN
countries with which China has set up a free trade zone; to the west, it is the Central
Asia, an unexplored market. Actually, many big TNCs have set up their regional
headquarters in China. For Hungarian firms, establishing their headquarters in China
to serve the whole Asian-Pacific Region can be less costly than doing so in South
Korea or Japan; the investment environment can be more favorable than in Southeast
Asian countries.

Making full use of Chinese in Hungary

                                                                                     13
     As mentioned above, a large percentage of FDI in China comes from diaspora
Chinese overseas. The large Chinese population in Hungary can be an important asset
in bilateral economic cooperation. Many Chinese in Hungary have already get out of
the market business and set up their own trade companies. They can be sources of FDI
in China. On the other hand, because of their language skills, familiarity with the
environment in China and various guanxi (relationships) with people there, the
diaspora Chinese provide sufficient human resources for Hungarian firms’ business in
China.


Bibliography

Central Committee of the Communist Party of China (2006): Zhong Hua Ren Min
     Gong He Guo Guo Min Jing Ji He She Hui Fa Zhan Di Shi Wu Ge Wu Nian Gui
     Hua Gang Yao
Foreign Ministry of People’s Republic of China:
     http://www.fmprc.gov.cn/chn/wjb/zzjg/xos/gjlb/1796/default.htm
Investment Promotion Agency of Ministry of Commerce (2007): Invest in China
     Serials, pp: 1-487
Liu Yunhe (2005): Wai Zi Shui Shou You Hui Zan Bu Qu Xiao, Global Times
Mei Ri Jing Ji Xin Wen (2005): Shanghai Wai Shang Tou Zi Zhi Zao Ye Bi Zhong Xia
     Jiang, http://biz.163.com/05/0720/02/1P2PTFI600020QGP.html
Ministry of Commerce (2005): 2005 Kua Guo Gong Si Zai Zhong Guo Bao Gao
State Statistics Bureau of China: China Statistical Year Book, from 2001 to 2006
UNCTAD (2007): World Investment Report 2007
Xinhua net (2007): Zhong Guo Jing Ji Cun Liu Shi Heng,
     http://news.xinhuanet.com/fortune/2008-01/21/content_7463462.htm
Yang Zhongxu (2006): Ji Lie Bo Yi Xia De Lao Dong He Tong Fa, China Newsweek,
     Vol.21




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