Political and economic incentives

If any developing country would seem to have bargaining power relative to MNCs, it would be the PRC. China's 1. 3 billion consumers provide an enormous lure for companies wanting to get a foothold in the Chinese market. And the PRC’s almost limitless supply of cheap labor makes it an enormously attractive location for labor-intensive, export-oriented production. Moreover, the Chinese government has a strong regulatory apparatus in place to manage and control MNCs.

Under these circumstances, one would expect that MNCs would be willing to make significant concessions to Chinese communities, workers and governments. One possible measure of the PRC's bargaining strength is the oft lamented “fact” that many foreign companies fail to make profits in China, nonetheless remaining there in order to be well positioned in the long-run to sell to the Chinese consumer.

An important question is whether the PRC government has been able to exploit its presumptive bargaining power to capture a greater share of the benefits from FDI than have countries with less bargaining power. If so, this would strengthen the argument that the free movement of FDI is in the interest of Chinese workers, even if it might not be in the interest of some workers in the U. S. However, if China has not been able to use its potential bargaining power to benefit substantially from FDI, that would call into question the desirability of making significant concessions to attract FDI in China. And this caution would apply even more strongly to other countries with much less bargaining power than China, which is to say, virtually every other country in the developing world. There are many important issues associated with this question.

Has the Chinese government tried to capture a significant share of the benefits and, if so, how has it tried to do so? For example, has the Chinese government attempted to achieve a high degree of technology transfer from MNCs? A substantial focus on export markets? High tax revenue? An improvement in wages and working conditions for workers? If so, has it been successful in this regard? Has it been more successful than other developing countries? A number of factors have potentially undermined the Chinese government's ability to exploit its presumptive bargaining power relative to MNCs.

Among the most important of these has been the extraordinary de-centralization of China's investment management institutions. As part of the reforms begun in 1979, China's central government ceded significant powers to provincial and local governments to attract and manage foreign investment. At the same time, the central government created significant political and economic incentives for provincial and local officials to try to attract investment, including signaling government officials that if they attracted more investment they would have better career prospects.

Other potential factors reducing the benefits of FDI to the PRC's general population include corruption, which allegedly pervades government-business relations, and the relative absence of independent labor organizations. Taken together, these three factors imply that benefits which could have accrued to the Chinese populace might have been siphoned off by government officials and shared with the MNCs themselves. However much the PRC has been able to exploit its bargaining power in the recent past, its entry into the WTO could dramatically reduce its bargaining power and the distribution of benefits from FDI.

Among other effects, WTO regulations may limit China's ability to engage in industrial policy, potentially compromising the PRC’s capacity to manage FDI in the interests of its economy. In this paper we will elaborate on these points by investigating issues of the race to the bottom versus neo-liberal convergence in the case of FDI and China. In particular, we will consider the nature of China's bargaining power in relation to MNCs and FDI, how it has tried to manifest and exploit that power, what leakages have occurred as the government has tried to exploit that bargaining power, and with what impacts on the Chinese population.

We will also study how China's likely entry into the WTO will alter China's bargaining power with MNCs. Finally, we will discuss the policy implications of our findings. In particular, we will ask whether there is an inevitable conflict of interest between workers in China on the one hand and those in the developed world on the other; or whether, as the race to the bottom approach implies, workers in both the PRC and the North have a common interest in regulating MNCs and FDI. The paper will proceed as follows.

The next section will review the recent history of Chinese policy towards FDI. We emphasize that the central government closely managed the process of foreign investment so that it would focus on exports rather than the domestic Chinese market. At the same time, the decentralized nature of some aspects of the policy made it difficult to manage all components of the FDI process. In this section, we also present some stylized facts about the size and distribution of FDI in China in recent years. In section III we present new empirical results assessing the impact of FDI on employment growth and wage growth.

We show that its impact has been positive but rather limited in size. We then consider whether FDI has crowded in or crowded out investment, and we find that, in fact, it has crowded it out. In section IV we consider the decentralized nature of FDI bidding and consider the impact of FDI on local tax revenue. We find that it is negative, suggesting that, at least at the provincial level, the social benefits of FDI have been dissipated. In the penultimate section we look at the impact of China’s entry into the WTO on China’s ability to manage and benefit from FDI. In the final section we consider some larger implications of our findings.