12 - Shifts of Chinese government policies on inbound foreign direct investment  pp. 291-314


By Yadong Luo

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Introduction

Multinational corporations (MNCs) have been increasingly active in investing and operating in emerging foreign markets such as China, Brazil, India, Russia, Mexico, and Eastern Europe. In these countries, regulatory policies concerning foreign direct investment (FDI) play an even greater role on MNCs' market expansion and financial returns than do those in more developed countries. Moreover, the regulations and policies governing MNC activities in these countries differ greatly from those governing domestic business activities. These factors are important, because the regulatory environment in which MNCs operate determines operational conditions under which they maximize risk-adjusted net returns. Specifically, regulatory policies could affect an MNC's (1) outsourcing strategies (e.g., import materials vs. local procurement), (2) production processes (e.g., requirement for local inputs and for technological commitment), (3) marketing effectiveness (e.g., restrictions on marketing approaches, channels, and destinations), (4) financial conditions (e.g., foreign exchange balance, foreign currency cash flow, local financing costs, taxation rates, and security investment), and (5) management efficiency (e.g., local employment and dismissal, union power, and costs of human resources).

Our accumulated knowledge about developing country or emerging economy FDI policies, however, has changed little from what we learned in the 1980s and early 1990s. Major previous studies include Lecraw (1984), Poynter (1985), Behrman and Grosse (1990), Brewer (1993), and Stopford (1994), among others. These studies provided enormous insights into the characteristics and contents of FDI regulations and rules established by developing country governments before the mid-1990s, when MNC–government relations were largely adversarial and were built on the basis of bargaining power (Fagre and Wells, 1982).