Fdi’s Efforts on China’s Trade Structure Optimization and Corresponding Suggestions

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3. Corresponding suggestions

Without a doubt, FDI has proved to be the driving force for economic growth of China. Foreign capital has two positive effects; it has improved the liquidity of the Chinese economy, and thus facilitated other investments (e.g. more business opportunities for local entrepreneurs as well as support businesses such as legal work, accountancy, construction, transportation, hospitality etc.). Secondly, it has created employment, earnings and thus taxation revenue for the central and regional governments. Such revenues have been fed back into the economy to boost the living standards of all Chinese people, further boosting the economy, facilitating a virtuous-cycle of prosperity for over two decades.

3.1 Properly guide the orientation of FDI and optimize the investment structure

In terms of the current situation due to the high utilization in manufacturing industry, China should take out policies as gradually deleting the preferential treatment of labor-intensive foreign owned enterprises, increasing their business cost and transaction costs, improving the thresholds of enterprise approval. Therefore, weakening the attractiveness of labor-intensive sectors to FDI. On the other hand, in view of the shortage of Foreign Direct Investment in China’s less advanced high technology industries and the first and the third industries, the government needs to do more efforts in capital inflows appropriately and offers some favorable polices which is based on the protection of domestic firms. These favorable polices combine implicating subsidiary regulations on core technology investment, providing tax reduction on accelerating depreciation and providing essential technology, etc. At the same time, improve the intellectual property protection laws and regulations and strengthen implication in order to create a better environment for foreign enterprises’ trade activities.

Besides, China should reform of investment laws. For example, under current Chinese laws, foreign investors are prohibited from owning more than 25 percent of a commercial bank, and no single foreign investor can own more than 20 percent. Such limits on foreign ownership of its banks need to be removed or optimized. Also, foreign financial institutions that want to buy Chinese securities need to be freed from having to have at least $10 billion in assets and to have been in business at least 5 years. Foreign-affiliated banks, brokerage firms and insurers need to be freed from restrictions on setting up multiple branches at one time.

3.2 Promote the effects of on FDI on technology spillover

China should promote FDI’s technology spillover effects from two aspects, improving the absorptive capacity and promoting technology diffusion. On one hand, in terms of improving the absorptive capacity, the government should take some actions to encourage domestic enterprises and foreign owned enterprises to cooperate and establish multinational technology alliance, encourage personnel exchange programs among domestic enterprises and multinational companies to promote information communication and also to promote research and development cooperation which finally promotes the absorbing advanced technology of domestic enterprises and in that way make use of the imports high technology. With a free market, free low of international trade and capital, deregulation of businesses, the country will become the preeminent economic powers it aspires to be. On the other hand, in terms of technology diffusion, except for putting forward some favorable polices to promote foreign investors to invest in advanced technology, under the competition of market, limiting the profit of technology monopoly. For those industries with technology monopolies, the government should reduce the import tariff of similar products, to make the market more comparative for domestic companies on the similar products. In this case, the technology diffusion would be accelerated.

Undoubtedly, China will push forward its reform on economy. As a sustained healthy economic growth is the biggest attraction for foreign capital. However, any political reforms need to ensure that instability does not ensure. Market access barriers should be removed and it should encourage market-oriented FDI as this is preferable to export-orientated FDI since it leads to technology transfer and spillover effects. Such a path will help Chinese firms to climb up the technology ladder. Furthermore,

China should speed up the privatization of state-owned companies, including banks, to develop a futures market for currency trading and to establish an independent credit-rating agency. Finally, some specific location advantages in Western areas of China such as skilled employees and improving the infrastructure should be created which is in order to attract more foreign capital to the region. This would help reduce the huge gap of development between the Eastern, Southern areas and the Western region.

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