Foreign direct investment in China's main mode of Sino-foreign equity joint venture, Sino-foreign cooperation and wholly foreign-owned, that is, "three-funded enterprises" form of organization. With the development of China's economy, foreign direct investment presents new characteristics and development trends. From the point of view of the transformation of the equity structure of foreign investment, there has been a significant change in the proportion of these three modes: from the 1980s to the first half of the 1990s, the establishment of joint ventures has been the main mode of foreign direct investment; however, from the mid-1990s onwards, there has been an obvious trend of "sole proprietorship" in the foreign direct investment in China. However, since the mid-1990s, there has been a clear trend of "sole proprietorshipization" of foreign direct investment in China, with wholly foreign-owned enterprises gradually replacing joint ventures and becoming the main way of utilizing foreign direct investment in China. This is mainly manifested in the following three aspects:
(1) increase in the number of newly established wholly-owned enterprises
The proportion of wholly-owned enterprises among the newly approved FDI enterprises has been significantly increased, and has become the main mode of utilizing FDI. since the 1990s, the number of newly established wholly-owned enterprises and the proportion of their investment in China's utilization of FDI have been on a rising trend. in 1997, the number of newly approved wholly-owned enterprises was 1.5 million, while the number of newly established wholly-owned enterprises was 1.2 million. In 1997, the number of sole proprietorships in China's newly approved foreign investment projects began to exceed the number of joint ventures; in 1998, for the first time, the proportion of contracted foreign investment accounted for by sole proprietorships (41.8 per cent) exceeded that of Chinese-foreign joint ventures (33.2 per cent), making them the main mode of utilizing foreign investment in China. Since then, the proportion of wholly foreign-owned enterprises has been growing sharply, from 41.8 per cent in 1998 to 76.4 per cent in 2004, greatly exceeding the share of Chinese-foreign joint ventures and Chinese-foreign cooperative ventures, and becoming China's main mode of utilizing foreign investment. in 2004, the number of new wholly foreign-owned enterprises was 2.7 times higher than the number of joint ventures, and the amount of contractual investment by foreigners was 4.2 times higher than that of joint ventures. The actual amount of utilization was even 2.5 times. Not only that, in 2005, the actual use of foreign capital amount of wholly foreign-owned enterprises accounted for 67.33%, greatly exceeding the proportion of Chinese-foreign joint ventures 22.90%.
(2) Expansion of Equity in the Original Joint Ventures
While the number of newly approved wholly-owned enterprises and the amount of foreign capital exceeded that of the joint ventures, the original joint ventures also accelerated the pace of reorganization, and gradually transformed into wholly-owned enterprises. Initially, multinational corporations became the major shareholders of joint ventures through capital increase and share expansion, and after 2001, with the liberalization of policy adjustment, many multinational corporations began to use the acquisition of shares of the Chinese side of the joint venture to turn the joint venture into a wholly-owned enterprise.
On October 23, 2001, Alcatel gained control of Shanghai Bell by acquiring the Chinese side's shares, which amounted to 50%+1. In August 2004, Beijing International Switching Systems Company Limited (BISC), which is famous in the telecommunication industry, announced that its name was changed to Beijing Siemens Networks Company Limited (SCNB), and the proportion of Siemens' shareholding increased from 40% to 67%, and the nature of the enterprise also changed from a joint venture to a sole proprietorship. 67%, and the nature of the enterprise was changed from a joint venture to a foreign-controlled enterprise.On January 12, 2005, Konica Minolta announced the establishment of a 100% wholly-owned investment management company in China and a wholly-owned manufacturing base in Wuxi.
(C) mergers and acquisitions of domestic enterprises
China's accession to the WTO after the emergence of a new trend, that is, multinational corporations to enter the Chinese market through acquisitions and mergers, such as the U.S. Emerson spent 750 million U.S. dollars to acquire Huawei's subordinate enterprises, Ansheng Electric; U.S. AB Brewing Company to buy the Green Brewery; the French company Danone Holdings Lobelia and Wahaha, which in the past and This was not common in the past. Entering the Chinese market through M&A and setting up a holding or wholly owned enterprise can shorten the investment cycle and reduce risks.
The above facts show that the development of foreign direct investment in China has shown a trend of "sole proprietorship", and sole proprietorship will become the main form of foreign direct investment in the next period of time. The aggressive development of foreign-funded enterprises should cause us enough vigilance and attention, we need to calmly think and analyze.
So what are the reasons for the change in the mode of foreign investment, especially the wholly-owned capitalization? All along, about the foreign investment in China, the reasons for the wholly-owned, there are many different opinions, but the author believes that this can be summarized in economics in the category of transaction costs, the reduction of transaction costs is the main reason for the tendency of foreign investment in China, wholly-owned.
Transaction cost theory overview
Transaction cost, also known as transaction costs, is the core of property rights economics, "a transaction as the basic unit of analysis, the study of economic organization of the comparative institutional theory".1 In 1937, the United States, the University of Chicago School of Law Professor Coase (COASE) in his "The Nature of the Enterprise" article, "the nature of the enterprise", "the nature of the enterprise", "the nature of the enterprise", "the nature of the enterprise", "the nature of the enterprise". The Nature of the Enterprise", pointed out that "the main reason why it is profitable to establish an enterprise seems to be that it is costly to utilize the price mechanism. The most obvious cost incurred by 'organizing' through the price mechanism is all the work of discovering the relevant price With the emergence of specialists who sell this type of information, it is possible that this cost will be reduced, but not eliminated. The cost of negotiating and contracting a transaction that takes place in the market must also be taken into account." Coase only introduced the idea of "transaction costs", but did not refer to the concept directly.
Since Coase, Williamson (Williamson) made a more systematic refinement of the transaction cost theory. According to Williamson, transaction cost is "the price or cost of operating an economic system" (②). And the transaction costs are divided into pre-contract costs and post-contract costs: pre-contract transaction costs refer to "the cost of drafting the contract, negotiating the content of the contract, as well as ensuring that the contract can be fulfilled"; after the contract is signed, there are several types of transaction costs: (1) the cost of non-adaptation; (2) bargaining costs; (3) establishment and running costs; and (4) warranty costs. Williamson believes that business behavior should be studied in terms of contractual relationships. He states that "any problem can be viewed, directly or indirectly, as a contractual problem, which is useful in understanding whether transaction costs can be saved." Williamson explains vertical integration in terms of transaction cost savings, and there are two important assumptions and three transaction dimensions in his analytical framework. The two key assumptions are "limited rationality" and "opportunism", and the three transaction dimensions are asset specialization, uncertainty, and transaction rates. The three transaction dimensions determine the magnitude of transaction costs and thus whether a firm chooses to vertically integrate.
Three reasons for wholly foreign-owned enterprises based on the theory of transaction costs
(I) Technology or asset specialization
For the explanation of wholly foreign-owned enterprises, transaction cost economics puts forward the concept of asset specialization. According to Williamson's definition, the so-called asset specialization is the ease of reallocating an asset that has already been put into the production process, and asset specialization is actually a measure of the degree of dependence of a particular asset on the market. The greater the asset specialization, the more expensive it is to conduct market transactions, i.e., transaction costs are a curve that rises more rapidly as asset specialization increases. On the one hand, one party to a collaboration may take advantage of the trust of the other party and there may be evasion, free-riding or misuse of technology. On the other hand, there are technologies that are core technologies, exclusive technologies or sales know-how of foreign firms, etc. These technologies are the core competencies for firms to gain long-term competitiveness, and the foreign party does not want others to share their know-how or technologies together. In order to protect the exclusivity of assets, enterprises tend to choose a highly controlled governance structure, and sole proprietorship is the best choice. This not only reduces the transaction costs of trying to protect their proprietary technology, but also reduces the risk of misappropriation or abuse. Therefore, when the benefits obtained through joint ventures are not sufficient to cover the cost of monitoring and controlling the risk of misuse of their patents, firms prefer the form with a higher degree of control (3).
(II) Cultural Differences between China and the West
The Sino-foreign joint venture is a contractual arrangement for the purpose of cooperation on the basis of reciprocity and mutual trust between the two parties, and the contract reached by the two parties is often uncertain due to limited rationality and uncertainty on both sides of the transaction. In the case of a two-party exclusive asset investment relationship, there exists the possibility for one party to the contract to take advantage of the loopholes or imperfections in the contract to seek the quasi-rents that the other party is entitled to occupy through the adverse selection of withholding information ex ante and the moral hazard of hiding actions ex post. Adverse selection beforehand and opportunistic behavior after the fact often become important factors of conflict in the relationship between the two parties and instability within the joint venture.
One of the most prominent problems in the management of many multinational joint ventures is the conflict between the two parties to the joint venture in terms of corporate management and culture4. The essence of management is a kind of culture, due to the difference of cultural background determines the completely different view of management between the East and the West. Enterprise managers from different countries have great differences in their work style, culture and way of thinking. Western culture pursues excellence, the pursuit of self-worth, the formation of a contract between people on the basis of equality, in the management style of normative management, system management and regulation management, strictly according to the rules, the pursuit of system efficiency, so as to achieve the orderly and effective management. Oriental culture is concerned about "love and reason", the formation of patriarchal ethics between people, hierarchical relationships. In the management mode, the business philosophy is suddenly fused together, making it difficult for Chinese and foreign investors to reach a unanimous agreement in the transaction process, or even conflict, this increasing cultural conflict will be manifested in the company's internal management and external operations. In internal management, people's different values, different life goals and behavioral norms will inevitably lead to an increase in management costs, increase the difficulty of organizational coordination, and even cause organizational inefficiency. In external management, due to the existence of cultural conflict, the joint venture cannot meet the market competition with positive and efficient organizational image, often in a passive position in the competition, and even lose many good market opportunities. This invariably increases the transaction costs of foreign investors. Therefore, when the cost of external coordination of enterprises is less than the cost of internal management of enterprises, enterprises tend to choose sole proprietorship.
(3) Host country system
Foreign investors choose to enter the international market strategy to be compatible with the host country system. Institutions can be divided into formal institutions, such as laws, regulations, government control, management of the economy and social behavior, the protection of intellectual property rights, etc.; there are also informal institutions, such as social customs, culture, standards of behavior, attitudes toward the operation of the formal system. Institutions regulate the "rules of the game" and can reduce transaction costs, the impact of the system will make the investment has a high degree of uncertainty and increase transaction costs.
In the early stage of foreign investment, due to the low degree of openness, many domestic industries do not allow foreign wholly-owned, joint venture is the best choice for foreign investors to enter. Because, the joint venture can use the local people or local enterprises in China have "relations", "policy" and other advantages, greatly reducing the external risk of business operations, to obtain higher external returns. However, with the continuous improvement of the investment environment, more transparent policies, the continuous improvement of laws and regulations, and the market rules of the game are increasingly in line with international standards, the external advantages of joint ventures gradually weakened. Since 1992, China has introduced a series of laws and regulations to reduce the restrictions on foreign investment, on the one hand, regulating the behavior of foreign investors, so that their legitimate rights and interests are protected, and at the same time, relaxing some of the regulations on foreign investment equity. 2002, China promulgated a new "Catalogue of Industrial Guidance for Foreign Investment", which further relaxed the restriction on the proportion of equity of foreign-invested enterprises, and canceled the restrictions on the proportion of equity between wholly-owned enterprises and joint ventures. differential policies between wholly-owned enterprises and joint ventures in terms of taxation and exchange rate, and further relaxed the restrictions on the areas of operation of wholly-owned enterprises. The loosening of policies on the management of foreign direct investment caters to the requirements of multinational corporations to invest in China as sole proprietorships. When China's external formal institutional environment tends to be perfected, and foreigners' familiarity with China's informal institutional environment is strengthened, which means that the external risks of running a sole proprietorship tend to be the same as those of a joint venture, foreigners will inevitably choose a sole proprietorship in order to strengthen the control over the enterprise and to facilitate the implementation of their global strategies flexibly, taking into account various interests.
Four.
Fourth, conclusion
The new entry point of transaction cost theory opens a new perspective for analyzing the tendency of wholly-owned investment in China. No matter which form of wholly-owned capitalization, its purpose is to save transaction costs, improve the economic efficiency of enterprises, and obtain greater profits. It can be said that transaction costs are an important reason to explain the trend of wholly-owned investment by multinational corporations in China. However, the impact of wholly-owned foreign investment on domestic enterprises is also obvious. This not only weakens the competitiveness of local enterprises, but also gradually formed a monopoly of the industry, crowding out the market share of domestic enterprises, especially the national brand has been greatly impacted, which is a greater threat to China's comprehensive national strength and international competitiveness. Therefore, our government should formulate corresponding countermeasures as soon as possible to further improve the quality level of the use of foreign capital, and strive to avoid the use of wholly-owned foreign opportunities to realize the monopoly of China's market and the manipulation of the economic system. At the same time, China's enterprises to enhance the ability of independent innovation, relying on technological innovation to strengthen the construction of core competitiveness of enterprises, strengthen the protection of brands, as far as possible to weaken the monopoly brought about by the "wholly-owned".