Foreign Direct Investment in China

I read in a press statement recently attributed to an NGO spokesperson that Malawi is poor because a few people get big salaries while the majority get low salaries. Low salaries are blamed for low morale and corruption in the civil service.

Blaming low salaries for the poverty and corruption in Malawi is like putting a cart before the horse. This makes forward movement impossible. To describe an elephant as an animal with four legs hardly gives the complete picture.

Low wages is not the cause but the result of our country’s poverty. University lecturers, court officials, civil servants will get higher remuneration when the economy has experienced higher levels of growth.

One of the things we must do in order to enhance economic development in Malawi is to know how other countries have attracted and handled Foreign Direct Investment (FDI). In this article we shall look at FDI in the recent history of China.

When the emperor of China learned of how India was colonized by western nations he and his people became wary of contacts with foreigners. When Mao Zedong formed the Peoples Republic of China in 1949 he retained the traditional suspicion of China against foreign contact. Between 1949 and 1979 there was hardly any FDI in China and its foreign trade was minimal.

With its huge population of more than a billion people, China was able to practice a good deal of autarky, but at a price. Surrounding countries Japan first then Taiwan, South Korea, Singapore and Malaysia were undergoing industrial revolution and becoming prosperous. Reasons they had established firm contacts with foreign markets and sources of capital as well as technology.

The leadership of China after chairperson Mao began to espouse what they called ‘socialist market economy’ in place of the strict command economy. President Deng uttered a memorable slogan; it does not matter if the cat is white or black so long as it catches the mice. In other words, the end justifies the means. Any system that modernised the Chinese economy would be acceptable.

From 1979 China began to welcome FDI but cautiously. Each proposed investment was separately scrutinised to determine to what extent it would benefit China. Preferred investments were joined ventures in which the foreign investor contributed 49 percent of the capital while 51 percent was contributed by the Chinese partner.

The multinational enterprises were keen to go and do business in China because of its enormous market but the Chinese government through a variety of methods discouraged imports. Hence the multinationals found that the surest way to access the Chinese market was to transfer their production facilities to China. In other words to engage in direct investment.

Each investment proposal was subject to the approval of the Chinese Ministry of Foreign Trade and Economic Cooperation (MoFTEC). The authorities of the ministry rejected a proposal investment that introduced nothing of extra benefit such as technology not available in China. An investment which would merely replicate what was already being done in China had no chance of approval unless it involved improving the products currently being made by the Chinese company.

Where a joint venture was proposed the following were the steps to be undertaken.

1. Potential partners sign a letter of consent. This was not a binding contract , the letter just gave the broad outline of the future contract.
2. The Chinese partner submits a proposal including a preliminary feasibility study to the immediate administrative supervisor.
3. Once the authorities have approved the proposed joint venture the investors must complete a feasibility study that includes sales prospects, equipment to be used, labour content and infrastructure requirement.
4. The partners draft and sign a contract while keeping the authorities appraised of the agreements contents.
5. The agreement is sent either to the local authority or to MoFTEC for final approval.
6. The approving authority gives a deadline when the actual investment must be made. Delays attract penalties.
7. The joint venture must obtain a business licence.

For a long time Malawi has been described as a country where bureaucracy hampers investment. The current DPP government has reportedly simplified dealings with potential investors. This is welcome but there should be no give way.

In China, Japan and the four Tigers of the Pacific rim governments have made sure there is optimum indigenous participation in the economy. Most businesses belong to the nationals of the country; they are either State owned or privately owned, South Korea and Japan were particularly insistent on this.

Our politicians must pursue the policy of pragmatism subject to an overarching economic philosophy. To what extent is the State to divest itself of participation in the economy? Which parts of the economy should be reserved for the citizen of the land and which is open to foreign participation.

This must be said in view of the recent move by government to privatise the Malawi Savings Bank (MSB). There must be clear thinking about flagship entities.