The Hopes and Fears of Foreign Direct Investment: A Comparative Evaluation of FDI Regulation in the People's Republic of China and Taiwan


Notes

The Hopes and Fears of Foreign Direct
Investment: A Comparative Evaluation

of FDI Regulation in the People's
Republic of China and Taiwan

The announcement by the People's Republic of China (PRC) of
it's "Open Policy" toward foreign investment in 1978 raised great
hopes for economic growth and prosperity both within the PRC and
abroad. Rejecting past policies of autarky and strict "self-reliance,"
the PRC embarked on a new path, which sought to encourage the
transfer of advanced technology from abroad and the investment of
foreign capital in the PRC.1

In the years that have followed, reactions to the PRCs "Open
Policy" have been mixed. While elements of optimism remain, senti-
ments of ambivalence, and even frustration have surfaced, especially
among foreign writers.2 In such analyses of the foreign direct invest-
ment (FDI) regime of the PRC, one often finds two implicit assump-
tions: 1) that despite significant liberalization in recent years, the
PRC's legal regime for FDI remains significantly more closed than

1. S. Ho & R. HUENEMANN, CHINAS OPEN DOOR POLICY: THE QUEST FOR FOREION
TECHNOLOGY AND CAPITAL 20-27 (1984).

2. See, e.g., Cohen & Valentine, Foreign Direct Investment in the PRC Progress,
Problems and Proposals, 1 J. CHINESE L. 161 (1987); Hendryx, The China Trade." Making the
Deal Work, HARV. Bus. Rav., July-Aug. 1986, at 75; Pye, The China Trade" Making the
Deal, id at 74; Cohen, Equity Joint entures-20 Potential Pitfalls That Every Comp:any
Should Know About, CHINA Bus. REv., Nov.-Dec. 1982, at 276; Shellenbarger, Beatrice Foods
Finds the Pace Lags in China, Wall St. J., Nov. 22, 1982, at 33, col. 2. For a more optimistic
perspective, see Ruggles, The Environment for American Business Ventures in the People's
Republic of China, COLUM. J. WORLD Bus., Winter 1983, at 67. For a discussion of recent
negative experiences with FDI from the PRC's perspective, see Nournoff, Transnational Cor-
poration Investment in China.: A View from the Outside, in TRANSNATIONAL CORPORATIONS
AND CHINA'S OPEN DOOR POLICY 199, 209-18 (W. Teng & N.T. Wang eds. 1988).



JOURNAL OF CHINESE LAW

those of other countries;3 and 2) that obstacles to openness, such as
government regulation and "interference" with "market forces," are
detrimental not only to foreign investors in the PRC, but also to the
PRC's own interests in its drive towards economic modernization.

Using Taiwan as a comparative basis, this paper will examine the
validity of these two assumptions with respect to the government reg-
ulation of FDI in the PRC and Taiwan. After summarizing and com-
paring the basic legal structures of the FDI regimes in these two
economies, this paper will compare their relative openness with
regard to four apparent policy objectives: 1) the promotion of domes-
tic capital accumulation; 2) the regulation of foreign exchange; 3) the
promotion of advanced technology; and 4) the maintenance of domes-
tic control over FDI activities. In addition, this paper will analyze
the government regulation of FDI in the PRC and Taiwan in light of
economic arguments set forth by both FDI proponents and critics.
An attempt will be made to provide a theoretical background from
which one may assess the economic rationality of relevant FDI laws
and regulations.

From the perspectives of both PRC legal studies and develop-
ment economics, Taiwan provides an interesting comparative basis for
such analysis. As this paper will attempt to demonstrate, in addition
to cultural, historical, and even ideological' roots shared by the PRC
and Taiwan, the similarities between the legal regimes for FDI in the
PRC and Taiwan undermine the conventional communist-capitalist
dichotomy often associated with comparisons of the two economies.
Not only is foreign private ownership of industrial enterprises in the
PRC inconsistent with traditional notions of "communism;" the level
of government regulation over FDI enterprises in Taiwan is inconsis-
tent with traditional notions of "free market capitalism." Moreover,
Taiwan's widely acknowledged "success story" of economic develop-
ment challenges both conventional Marxist and conventional liberal
economic development theories. Contrary to the expectations of con-
ventional Marxist economic theories, Taiwan has achieved high levels
of economic growth through a capitalist economy, while at the same

3. In its March 28, 1988 issue, FORTUNE Magazine gave the PRC a grade of "C" for
"receptivity to foreign investment" while it gave Taiwan an "A." Kraar, The New Powers of
Asia, FORTUNE, Mar. 28, 1988, at 126, 129.

While a multitude of extra-legal factors may affect a host country's attractiveness for
FDI, e.g., costs of labor and raw materials, education levels, climate, political stability, geo-
graphic location, etc., the analysis in this paper will be limited to the legal aspects of the FDI
environments in the PRC and Taiwan.

4. Both the PRC and Taiwan share political and ideological roots in the 1911 Revolution
and the teachings of Dr. Sun Yat-sen. See, e.g., SUN YAT-SEN, SAN MIN CHU I (The Three
Principles of the People).

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FDI REGULATION IN THE PRC AND TAIWAN

time maintaining relatively equal levels of income distribution.5 Con-
trary to the expectations of conventional liberal economic theories,
however, Taiwan also has achieved its "economic miracle" in spite of,
if not because of, high levels of government regulation over FDI and
other aspects of its domestic economy.

The impact of FDI on the economic development of less devel-
oped countries (LDCs) has been one of the most controversial issues
in the study of economic development.6 Proponents of FDI, which
generally include business and government leaders of industrialized
countries, as well as liberal economists, generally share the conven-
tional view that FDI positively contributes to LDC economic devel-
opment by providing host countries with missing factors of
production such as capital, technology and management skills, as well
as access to international export markets. These proponents contend
that government "interference" with "market forces" should be mini-
mized.7 Critics, on the other hand, question the extent to which

5. See generally, GROvTH wITH EQuITY: THE TAi\vAN CASE (J. Fei, G. Ranis & S.
Kuo eds. 1979).

6. For a concise summary of both the conventional and critical perspectives on FDI, see
T. BIERSTEKER, DISTORTION OR DEVELOPMENT? 1-26 (1978). See also, _ HE.AwELL &
R. PUGH, TAXATION OF TRANSNATIONAL TRANSACTIONS 1987-1988 6-35 (1987).

In the words of international economics Professor Chen Yin-fang of the PRCs Nanai
University, "[O]pinions are widely divided on the role it [the multinational corporation] pla)s
in world economic development-so much so that scholars with diverse views have made com-
pletely contradictory evaluations based on the results of their research." Chen Yin-fang,
Transnational Corporations and World Development: An Evolutionary Vie, in TRANSNA-
TIONAL CORPORATIONS AND CHINA'S OPEN DOOR POLICY, supra note 2, at 33, 33.

7. T. BIERSTEKER, supra note 6, at 2. See also, I. FRANK, FOREIGN ENTERPRISE IN
DEVELOPING COUNTRIES 2 (1980); Drucker, Multinationals and Developing Countries Myths
and Realities, 53 FOREIGN AFF. 134 (1974).

This "free market" ideology with respect to international capital flows has been central to
United States policy. In the words of an official United States policy statement:

International direct investment plays a vital and expanding role in the world econ-
omy. To ensure its maximum contribution to both global and domestic economic
well-being, the United States believes that international direct investment flows
should be determined by private market forces and should receive non-discrimina-
tory treatment consistent with the national treatment principle.

U.S. DEPT. OF COMMERCE, INTERNATIONAL DIRECT INVESTiENT 85 (1984), quoted in
Robock, U.S. Policies Toward Transnationals, in TRANSNATIONAL CORPORATIONS AND
CHINA'S OPEN DOOR POLICY, supra note 2, at 109.

With regard to inward FDI into the United States, since the end of World War II, the
United States Government has maintained an essentially open policy, which was described by
one French investor as a "no-door policy." I at 111. FDI critics might have predicted that
such an open policy would have had a detrimental impact on the domestic United States econ-
omy. However, many of the potential problems associated with inward FDI may have been
alleviated in the early post-war period by the United States' status as the world's largest credi-
tor nation and the fact that inward FDI into the United States was only slightly more than
one-fifth of the amount of outward FDI from United States. Id However, in the 1980s, the
United States has become the world's largest debtor nation and has a rapidly growing ratio of

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JOURNAL OF CHINESE LAW

LDCs actually receive the alleged benefits of FDI and emphasize neg-
ative results of FDI which are detrimental to host country economic
development.8 A primary source of this critical perspective has been
the "dependency" school of theorists, whose work has been based pri-
marily on the historical experiences of Latin America. Other critics
of FDI have included both Marxist and non-Marxist scholars from
Africa, Europe, North America, and the United Nations. 9

Given this controversy over the impact of FDI on the economic
development of LDCs, an analysis of the extent to which legal
regimes regulating FDI address the concerns of both FDI proponents
and critics is worthy of attention. The purpose of this paper is to
elucidate the economic rationale underlying the legal regimes for FDI
in the PRC and Taiwan. Conclusively resolving the theoretical and
empirical economic debates over FDI, however, is beyond the scope
of this paper. Specifically with regard to the PRC and Taiwan, one
must consider not only the extent to which relevant laws and regula-
tions encourage and maximize the benefits associated with FDI, but
also the extent to which such laws and regulations minimize, for the
host country, the risks and costs associated with FDI.

inward to outward FDI. Whether this dramatic change in the international economic position
of the United States will cause U.S. policymakers to consider more seriously the host country
concerns emphasized by FDI critics remains to be seen.

8. See, e.g., R. BARNET & R. MOLLER, GLOBAL REACH: THE POWER OF THE MUL-
TINATIONAL CORPORATIONS (1974); Cardoso, Imperialism and Dependency in Latin America,
in STRUCTURES OF DEPENDENCY (F. Bonilla & R. Girling eds. 1973); Muiller, (More) on
Multinationals: Poverty is the Product, 13 FOREIGN POL'Y 71 (1973-74); Stallings, Economic
Dependency in Africa andLatin America, III, 01-031 COMP. POL. SERIES 5 (1972); Sunkel, Big
Business and "Dependencia," 50 FOREIGN APE. 517 (1972).

9. T. BIERSTEKER, supra note 6, at 1. Chinese leaders also have criticized FDI and the
international economic order for impeding the economic development of LDCs. In the words
of Premier Zhao Ziyang:

The developing countries, which may differ in their conditions, are in the same
plight. They were subjected to prolonged imperialist and colonialist domination and
plunder in the past, and now are still heavily fettered by the unjust and inequitable
international economic relationship .... The prosperity of the developed countries
was, in the past, built on the impoverishment of underdeveloped countries.

Zhao Ziyang, For a New International Economic Order, Statement Delivered at the Cancun
Meeting (Oct. 22, 1981).

For a discussion of multilateral efforts by the United Nations to curb abuses by multina-
tional corporations, see Ebenroth & Karl, Code of Conduct, International Investment Con-
tracts, the Debt Crisis, and the Development Process, 22 INT'L LAW. 179 (1988), reprinted in
TRANSNATIONAL CORPORATIONS AND CHINA'S OPEN DOOR POLICY, supra note 2, at 171.

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FDI REGULATION IN THE PRC AND TAIWAN

I. THE BASIc LEGAL STRUCTURE FoR FDI IN THE PRC AND
TAIWAN

A. The PRC

This paper will focus on three major forms of FDI in the PRO:
equity joint ventures (equity JVs), cooperative enterprises, and wholly
foreign owned enterprises (WFOEs).'0 All of these forms of FDI
require examination and approval by the PRC's Ministry of Foreign
Economic Relations and Trade (MOFERT) or its designates before
they can be established. The approval process is conducted on a case
by case basis.I The decision to grant approval is highly discretionary
and is based in large part upon the perceived impact that an enterprise
is expected to have on promoting the economic development goals of
the PRC.

The primary legal provisions governing equity JVs in the PRC
are contained in the Law of the People's Republic of China on Joint
Ventures Using Chinese and Foreign Investment (JV Law),12 promul-
gated in July 1979, and the Regulations for the Implementation of the
Law of the People's Republic of China on Joint Ventures Using Chi-
nese and Foreign Investment (JV Implementing Regulations),' 3

promulgated on September 20, 1983 and amended on January 15,
1986. The JV Law contains fifteen articles which set the basic legal
framework for equity JVs in very general terms. The JV Implement-
ing Regulations contain 118 articles, divided into sixteen chapters,
providing more detailed provisions governing equity JVs.14

The following are several key elements of the legal status of

10. Cooperative enterprises are sometimes referred to as "contractual joint ventures" or
"cooperative ventures," and wholly foreign owned enterprises are sometimes referred to as
"enterprises with sole foreign investment."

11. Zhonghua Renmin Gongheguo Zhongwai Hezi Jingying Qiye Fa (The Law of the
People's Republic of China on Joint Ventures Using Chinese and Foreign Investment) art. 3
(adopted July I, 1979, promulgated July 8, 1979) trans, in CHINA LAvS FOR FOREION BUSI-
NF.ss (CCI) (CHINA L. Fog. Bus.] 4 6-500 [hereinafter IV Law]; Zhonghua Renmin
Gongheguo Hezi Jingying Qiye Fa Shishi Tiaoli (Regulations for the Implementation of the
Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign Invest-
ment) arts. 3-5, 8 (promulgated Sept. 20, 1983, as amended Jan. 15, 1986) tran-. in CHINA L
FoR. Bus. 4 6-550 [hereinafter JV Implementing Regulations]; Zhonghua Renmin Gongheguo
Hezuo Jingying Qiye Fa (Law of the People's Republic of China on Sino-foreign Co-operative
Enterprises) art. 5 (adopted Apr. 13, 1988) tran& in CHINA L FoR. Bus. 4 6-100 [hereinafter
Cooperative Enterprise Law]; Zhonghua Reanin Gongheguo Waizi Qiye Fa (Law of the Peo-
ple's Republic of China Concerning Enterprises with Sole Foreign Investment) art. 6 (promul-
gated Apr. 12, 1986) trans, in CHINA L. FOR Bus. f 13-506 [hereinafter VIFOE Law].

12. JV Law, supra note 11.
13. 1V Implementing Regulations, supra note 11.
14. For a more detailed discussion of other laws and supporting regulations for FDI in

the PRC, see generally, Gelatt, Legal and Extra-legal Issues in Joint Venture Negotiations, 1 1.
CHiNESE L. 217 (1987).

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JOURNAL OF CHINESE LAW

equity JVs in the PRC. An equity JV in the PRC is a limited liability
company, with the liability of each party limited by the amount of
capital subscribed by it.15 The profits, risks, and losses of an equity
JV are "shared by the parties to the venture in proportion to their
contributions to the registered capital."' 6 The JV Implementing Reg-
ulations provide that equity JNs are Chinese legal persons, "subject to
the jurisdiction and protection of Chinese law," 17 with the right "to
do business independently," with relevant government departments
providing "support and assistance."18

The duration for ordinary equity JVs is between ten and thirty
years and is to be agreed upon by the parties. Terms of fifty years or
more may be available in special cases.19 Early dissolution of an
equity JV may occur, upon authorization by the proper governmental
authorities, for reasons such as the incurring of heavy losses, force
majeure, or failure by one of the parties to fulfill its obligations to the
venture.20 Disputes between parties to an equity JV which cannot be
settled through friendly consultations may be resolved by arbitration,
as agreed to by the parties, or suit may be filed with the Chinese Peo-
ple's Court.21

The Law of the People's Republic of China on Sino-foreign Co-
operative Enterprises (Cooperative Enterprise Law) 22 was adopted on
April 13, 1988. Prior to the recent adoption of this law, some provi-
sions of the JV Law and JV Implementing Regulations for equity JVs
were applied by analogy to cooperative enterprises. In addition, gov-
ernment officials often followed internal (neibu) guidelines, which
were generally unavailable to foreigners. In spite of a high degree of
legal uncertainty, however, even before the 1988 adoption of the
Cooperative Enterprise Law, cooperative enterprises had been a popu-
lar form of FDI in the PRC.23

15. JV Implementing Regulations, supra note 11, art. 19.
16. JV Law, supra note 11, art. 4.
17. JV Implementing Regulations, supra note 11, art. 2.
18. Id. arts. 6, 7.
19. JV Law, supra note 11, art. 12; JV Implementing Regulations, supra note 11, arts.

100, 101. Such special cases include "projects in which the amount of investment is large, or
the construction period long and the return on investment low, projects producing sophisti-
cated products using advanced or key technology provided by the foreign partner, or for
projects producing internationally competitive products." Id. art. 100.

20. JV Law, supra note 11, art. 13; JV Implementing Regulations, supra note 11, art.
102.

21. JV Law, supra note 11, art. 14; JV Implementing Regulations, supra note 11, arts.
109-112.

22. Cooperative Enterprise Law, supra note 11.
23. Moser, Foreign Investment in China: The Legal Framework, in FOREIGN TRADE,

INVESTMENT AND THE LAW IN THE PEOPLE'S REPUBLIC OF CHINA 106, 111 (M. Moser ed.

1984).

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FDI REGULATION IN THE PRC AND TAIWAN

There are two basic forms of cooperative enterprises. The first,
sometimes referred to as the "true" cooperative enterprise, does not
result in the creation of a new legal entity. These enterprises are gov-
erned by a joint management body consisting of members appointed
by both partners. Rights, obligations, and liabilities remain clearly
separated between the partners to the venture, the terms of which are
specified in the underlying contract. The benefits of limited liability
enjoyed by equity JVs therefore are not available to true cooperative
enterprises.24 The second form of cooperative enterprise, sometimes
referred to as the "hybrid" cooperative enterprise, has certain charac-
teristics of both true cooperative enterprises and equity JVs. The
establishment of a hybrid cooperative enterprise creates a new legal
entity with legal person status, governed by a board of directors con-
sisting of both Chinese and foreign members. The partners to a
hybrid cooperative enterprise remain liable for debts in accordance
with a ratio specified in the venture's underlying contract.25 Whether
hybrid cooperative enterprises may enjoy limited liability remains
somewhat ambiguous. While the Cooperative Enterprise Law does
not expressly provide for limited liability, the legal person status of
hybrid cooperative enterprises might entitle them to limited liability
under the General Principles of the Civil Law of the People's Repub-
lic of China (Civil Law).26 The duration of a cooperative enterprise
must be stipulated by its partners in the cooperative enterprise con-
tract and must be approved by the government's examining authori-
ties in the initial approval process. This term may be extended upon
application to and approval by government authorities."7

WFOEs are enterprises established within the PRC, in accord-
ance with PRC laws, with capital entirely owned by foreign inves-
tors.28 The legal status of WFOEs is outlined in The Law of the
People's Republic of China Concerning Enterprises with Sole Foreign
Investment (WFOE Law), 29 promulgated on April 12, 1986. More
detailed regulations on WFOEs are to be issued in the future by the
PRC's State Council.3" The WFOE Law guarantees that the PRC

24. I,; Cooperative Enterprise Law, supra note 11, arts. 12, 22. See also, Cohen, The
Long-Awaited Cooperative Venture Law, CHINA Bus. REV., Jul.-Aug. 1988, at 14, 16.

25. Moser, supra note 23, at 112; Cooperative Enterprise Law, supra note 11, arts. 12,22.
26. Cohen, supra note 24, at 15-16. See also, Zhonghua Renmin Gongheguo Minfa

Tongze (General Principles of the Civil Law of the People's Republic of China) art. 37
(adopted Apr. 12, 1986) trans in CHINA L FOR. Bus., supra note 11, 19-150 [hereinafter
Civil Law].

27. Cooperative Enterprise Law, supra note 11, art. 25.
28. WFOE Law, supra note 11, art. 2.
29. Id.
30. Id art. 23.

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JOURNAL OF CHINESE LAW

and its laws will protect "the lawful rights and interests" of WFOEs
and their investors.3a WFOEs are protected against nationalization
and expropriation by the state, except under special circumstances, in
which commensurate compensation will be paid. 2 Duly established
and registered WFOEs, which conform with the definition of legal
persons in the Civil Law, are recognized as having legal person sta-
tus. 33 Unlike the JV Law, which explicitly states that equity JVs are
limited liability companies,34 the WFOE law has no such explicit
statement, leaving some ambiguity as to whether the liability of a for-
eign investor in a WFOE can extend beyond his/her capital contribu-
tion to the venture. 35 The term of operation of a WFOE must be
approved by government authorities as part of the venture's initial
approval process. As with cooperative enterprises, this term may be
extended upon application to and approval by government
authorities.36

B. Taiwan

Unlike the FDI regime of the PRC, in which the major opportu-
nities for FDI are limited to corporate forms specifically designed for
foreigners and created under laws separate from those applicable to
domestic entities,37 Taiwan's Company Law applies to both foreign
and domestic investors.38 Under the Company Law, both foreign and
domestic investors in Taiwan may choose from the following corpo-
rate forms: unlimited company, unlimited company with limited lia-
bility shareholders, limited company, or company limited by shares.3 9

In addition, Taiwan's Company Law allows foreign investors to opt
for establishing a foreign company branch.'

An unlimited company is a separate juristic entity which must

31. Id. arts. 1, 4.
32. Id. art. 5.
33. Id. art. 8. These criteria require that the entity 1) be established in accordance with

the law; 2) possess necessary property or funds; 3) have its own name, organizational structure,
and premises; and 4) be capable of independently bearing civil responsibility. Civil Law supra
note 26, art. 37. See also, Torbert, Wholly Foreign-Owned Enterprises Come of Age, CHINA
Bus. REV., July-Aug. 1986, at 50.

34. JV Law, supra note 11, art. 4.
35. Torbert, supra note 33, at 51.
36. WFOE Law, supra note 11, art. 20.
37. At the time of this writing, the PRC has not adopted a general company law applica-

ble to foreign investors.
38. See generally, Gongci Fa (Company Law) (as amended May 9, 1980) trans. in

INVESTMENT LAWS OF THE WORLD--TAIWAN [INV. L. WORLD TAIWAN] 39 [hereinafter

Company Law].
39. Id. art. 2.
40. Id. arts. 4, 370-386.

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FDI REGULATION IN THE PRC AND TAIWAN

have two or more shareholders. The shareholders of an unlimited
company have unlimited joint liability.4' The provisions of chapter II
of Taiwan's Company Law, which govern unlimited companies, apply
mutatis mutandis to unlimited companies with limited liability share-
holders unless otherwise provided by the statute. The primary differ-
ence between an unlimited company and an unlimited company with
limited liability shareholders is that, in addition to unlimited liability
shareholders, the latter also has shareholders whose liability is limited
by the amount of their contributed capital.42 Limited liability share-
holders in this context cannot transfer their capital contribution with-
out the majority consent of the company's unlimited liability
shareholders.

A limited company must have at least five but no more than
twenty-one shareholders.43 The liability of shareholders of limited
companies is limited to the amount of their contributed capital." The
articles of incorporation of a limited company must state the terms of
profit and loss distribution and may prescribe that votes be allocated
to shareholders in proportion to their respective capital contributions.
If no such prescription is made, however, each shareholder shall have
one vote irrespective of the amount of his/her contributed capital.45

The minimum total capital required for a limited company is decided
by a government authority "according to the nature of the [com-
pany's] operations ...and in consideration of the existing situa-
tion."'  A limited company is prohibited from reducing its
authorized capital.47 Majority shareholder approval is required for
shareholders to transfer all or part of their contributed capital. In
addition, dissenting shareholders have a preemptive right to purchase
such shares.48

The longest and most complex chapter of Taiwan's Company
Law governs companies limited by shares. This corporate form is
most similar to that of a United States corporation and tends to be
most attractive to foreign investors.4 9 In addition to the rights and
opportunities provided by the Company Law and the Statute for
Investment by Foreign Nationals (SIFN), companies limited by

41. Id. arts. 2, 40.
42. Id arts. 114-115.
43. Id art. 98.
44. Id art. 99.
45. Id arts. 101-102.
46. Id art. 100.
47. Id. art. 106.
48. Id. art. 111.
49. Wang, Chinese Corporation Law, in TRADE AND INVESTMENT IN TAIWAN 479, 486

(Cosway, Ma & Shattuck eds. 1973).

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JOURNAL OF CHINESE LAW

shares which obtain foreign investment approval (FIA) may be eligi-
ble for additional investment incentives provided for by the Statute
for Encouragement of Investment (SEI). 0 A company limited by
shares is initially formed by at least seven promoters,5 and capital
may be raised by soliciting shares to the public. The liability of share-
holders is limited by the amount of their contributed capital.52 A
minimum requirement of invested capital may be fixed for a company
limited by shares by a government authority in consideration of "the
nature of the company's business and the circumstances thereof. 53

Subject to a few exceptions, shares of a company limited by shares are
freely transferable.54

A foreign company branch in Taiwan, if it receives a certificate of
recognition from government authorities,55 with a few exceptions,56 is
entitled to the same rights and subject to the same obligations as a
company formed domestically within Taiwan.5 7 Government author-
ities may specify a minimum requirement of capital invested by a
company branch in Taiwan.58

From a technical legal standpoint, both foreign and domestic
investors in Taiwan are governed by the same Company Law, which
gives foreign investors access to the same corporate forms that are
available to domestic investors. From a practical standpoint, how-
ever, foreign and domestic investors are treated quite differently by
the laws of Taiwan. In contrast to the PRC, where many of the basic
rights and interests of the foreign investor are closely linked to the
form of FDI that is chosen, analogous rights and interests in Taiwan
seem to be less closely linked to corporate form. More important is
whether a foreign investor receives FIA under Taiwan's SIFN. 9

50. Waiguoren Touzi Tiaoli (Statute for Investment by Foreign Nationals) (as amended
May 14, 1986) [hereinafter SIFNI; Jiangli Touzi Tiaoli (Statute for Encouragement of Invest-
ment) art. 3 (as amended Jan. 26, 1987) [hereinafter SEI].

51. Company Law, supra note 38, arts. 2, 128.
52. Id. arts. 2, 154.
53. Id. art. 156.
54. Id. art. 163; Wang, supra note 49, at 495.
55. Without recognition, a foreign company in Taiwan may still engage in business, but

with very limited capacity. To do so, the foreign company must file with government authori-
ties a report which includes information required by article 386 of the Company Law. How-
ever, if a foreign company branch has applied for and/or been denied recognition, it may not
conduct business as a foreign company branch without recognition. See Company Law, supra
note 38, arts. 371, 386.

56. A foreign company branch with recognition may not own land, solicit shares or issue
bonds in Taiwan if its home country does not extend the same privileges to companies from
Taiwan. Id. arts. 376, 383.

57. Id. art. 375.
58. Id. art. 372.
59. SIFN, supra note 50, art. 8.

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FDI REGULATION IN THE PRC AND TAIWN

Although foreigners may invest in Taiwan without FIA, FIA allows
foreign investors to have many important "privileges," the possession
of which many would consider to be prerequisites to their investing in
Taiwan. Among these privileges are: protection against government
expropriation, 60 the right to outward remittance of profits and
invested capital, foreign exchange settlement,6" full foreign ownership
of capital and control of management, 62 and various tax incentives.63

With these privileges, however, come a variety of restrictions and
requirements (discussed in greater detail below) that foreign investors
must adhere to in order to qualify for FIA. In short, it is through the
granting of FIA privileges, rather than the controlling of FDI entry
per se, that the government seeks to shape the nature of FDI activities
in Taiwan.

Procedurally, obtaining FIA requires the approval of Taiwan's
Investment Commission, an investment screening committee estab-
lished by the Ministry of Economic Affairs (MOEA).64 A high level
of discretion in granting FIA is implied by the very general language
of the SIFN. The decision of the Investment Commission depends
largely upon its appraisal of the potential impact that a particular
FDI project will have on the social and economic development of Tai-
wan. Such discretion may be limited to some extent, however, by
administrative guidelines established by the Executive Yuan.65

For enterprises which obtain FIA, Taiwan's SIFN provides pro-
tection against government expropriation. The SIFN guarantees that
foreign investors with FIA who contribute and continue to hold more
than forty-five percent of an enterprise's total capital, "shall not be
subject to requisition or expropriation for a period of twenty years
after the commencement of business." 66 Foreign investors holding less
than forty-five percent of an enterprise's total capital are guaranteed
that they shall be "reasonably compensated if the government requisi-
tions or expropriates the enterprise because of national defense
needs."'67

60. Id. arts. 15-16.
61. Id arts. 12-13, 15.
62. Id art. 18.
63. See, eg., SEI, supra note 50, arts. 3, 6-65.
64. SIFN, supra note 50, art. 7.
65. Liu, Encouragement of Foreign Investment in the Republic of China in TRADE AND

INVESMENT IN TAivAN, supra note 49, at 252.
66. SIFN, supra note 50, art. 16.
67. Id art. 15.

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C. Comparisons

The FDI regimes of both the PRC and Taiwan grant foreign
investors legal capacity, rights, and protection in accordance with
their respective laws. However, neither regime treats these elements
of legal status as entitlements to which foreign investors have an
inherent right. Rather, the underlying bases for legal status of FDI
enterprises in both the PRC and Taiwan appear to be more in the
nature of contractual rights, granted to FDI enterprises by adminis-
trative authorities with very high levels of discretion, in exchange for
positive contributions to economic development. Nor is it assumed by
either regime that all FDI enterprises are necessarily beneficial to host
country economic development. As will be discussed in greater detail
below, the qualitative requirements for FDI imposed by the PRC and
Taiwan appear to serve the dual purpose of encouraging and facilitat-
ing FDI by beneficial enterprises, while at the same time screening out
enterprises which are potentially detrimental to the pursuit of long
run economic goals.

In the PRC, the discretionary approval process regulates the ini-
tial entry of virtually all FDI projects. In Taiwan, on the other hand,
such discretionary approval does not regulate FDI entry per se, but
rather the granting of FIA and its related privileges. Arguably, Tai-
wan's FDI regime appears to be more liberal than the PRC's in this
regard since a foreign investor could invest in Taiwan without
obtaining FIA and thus avoid the government's discretionary
approval process. Prior to 1987, however, the practical effect of this
difference was minimal, as invested capital and profits could not be
repatriated by foreign investors without FIA due to strict foreign
exchange controls. Taiwan's foreign exchange liberalization of 1987,
however, makes it now possible for foreign companies without FIA to
outwardly remit up to US$5 million per year. 68 Nevertheless, despite
this foreign exchange liberalization, other legal rights important to
foreign investors in Taiwan still are conditioned upon obtaining FIA,
thus continuing in large part the subjection of potential foreign inves-
tors to the discretionary approval process of Taiwan's administrative
authorities.

With regard to limited liability status, both the PRC and Taiwan
allow both limited and unlimited liability FDI enterprises. In the

68. Liu, supra note 65, at 259; Minjian Huichu Kuanxiang Jiehui Banfa (Regulations for
Non-Governmental Outward Remittances) art. 4 (amended and promulgated by the Central
Bank of China July 13, 1987) trans. in INDUSTRIAL DEVELOPMENT AND INVESTMENT
CENTER, REVISED OPERATIONAL GUIDELINES FOR FOREIGN EXCHANGE BUSINESS 23
(1987); Liu, Taiwan's Deregulation of Foreign Exchange, E. ASIAN EXECUTIVE REP., July
1987, at 7, 21-22.

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FDI REGULATION IN THE PRC AND TAIWAN

PRC, equity JVs have limited liability while cooperative enterprises
generally do not.69 The WFOE law is silent regarding limited liabil-
ity, leaving some ambiguity as to the status of WFOEs7 In Taiwan,
limited companies and companies limited by shares have limited lia-
bility, while unlimited companies do not. Unlimited companies with
limited liability shareholders have both shareholders with limited and
unlimited liability.71 In both the PRC and Taiwan, where limited lia-
bility status is allowed, such enterprises are not allowed to reduce
their invested capital below prescribed levels.

The FDI regimes of both the PRC and Taiwan provide FDI
enterprises with protection against government expropriation. How-
ever, in neither case is this protection absolute. In Taiwan, a foreign
investor must obtain FIA in order to receive the protection against
government expropriation provided by Taiwan's SIFN. Even with
FIA, however, a foreign investor owning less than forty-five per cent
of the total capital of an enterprise is only guaranteed to be "reason-
ably compensated if the government requisitions or expropriates the
enterprise because of national defense needs." 72 A foreign investor
with FIA owning forty-five per cent or more of an enterprise's total
capital "shall not be subject to requisition or expropriation," but only
"for a period of twenty years after commencement of business," and
only "as long as the investor continues to hold forty-five per cent or
more of the total capital. '73 In the PRC, the WFOE law provides
that the "State will not nationalise or expropriate" WFOEs except
under special circumstances "where it is necessary to the public inter-
est." Expropriation is to be conducted "in accordance with legal pro-
cedures," and "appropriate compensation" is to be paid to the
foreign investor.74 With regard to equity JNs, the JV Law is less
explicit, stating only that the PRC Government protects "the
resources invested by a foreign participant... as well as his other
lawful rights and interests. 75 The Cooperative Enterprise Law con-
tains similar language, providing that "[t]he State shall protect the
legal rights and interests of cooperative enterprises and Chinese and
foreign partners in accordance with the law."'76

69. JV Law, supra note 11, art. 4; -T Implementing Regulations, supra note 11, art. 19;
Moser, supra note 23, at 112; Cooperative Enterprise Law, supra note 11, art. 22. See also,
supra note 26 and accompanying text.

70. Torbert, supra note 33, at 51.
71. Company Law, supra note 38, arts. 2, 4.
72. SIFN, supra note 50, art. 15.
73. Ia art. 16.
74. WFOE Law, supra note 11, art. 5.
75. JV Law, supra note 11, art. 2.
76. Cooperative Enterprise Law, supra note 11, art. 3.

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In summary, the basic legal structures for FDI in both the PRC
and Taiwan grant FDI entry and other legal rights, but only on a
discretionary basis of administrative approval, based upon the positive
contributions that an FDI project is expected to make to host country
economic development. The opportunity for both limited and unlim-
ited liability enterprises are available in both the PRC and Taiwan.
Guarantees against government expropriation also are provided,
although such guarantees are not absolute.

II. PROMOTION OF DOMESTIC CAPITAL ACCUMULATION

A. Comparisons Between the PRC and Taiwan

The FDI regimes of both the PRC and Taiwan appear to pro-
mote domestic host country capital accumulation by imposing
requirements with regard to: 1) the ratio and amount of foreign capi-
tal investment; 2) the nature of in kind capital contributions; 3) the
distribution of profits and losses; 4) domestic linkages; and 5) qualita-
tive requirements for FDI activities.

1. Ratio and Amount of Foreign Capital Investment

The FDI regimes of both the PRC and Taiwan strongly
encourage domestic participation in the ownership of FDI enterprises.
Although both regimes allow for full foreign ownership (in the form
of WFOEs in the PRC, and limited companies with FIA and compa-
nies limited by shares with FIA in Taiwan), stricter requirements and
restrictions apply to such enterprises. In the PRC, for example, the
WFOE Law places a greater emphasis on high technology and
exports than do the JV Implementing Regulations by explicitly
requiring that WFOEs "adopt advanced technology and equipment or
export all or most of their products."77 In Taiwan, as a general rule,
at least one half of the shareholders (or promoters in the case of com-
panies limited by shares) of all companies formed in Taiwan must be
"domiciled within the territory of the Republic of China"78 This
requirement can be waived, allowing for greater foreign ownership,
for limited companies and companies limited by shares, but only after
such companies qualify for and receive FIA. Such exceptions are not
available for other corporate forms.

7 9

The FDI regimes of the PRC and Taiwan also seek to ensure
that FDI enterprises actually introduce foreign capital to their respec-

77. WFOE Law, supra note 11, art. 3; JV Implementing Regulations, supra note 11, arts.
3-5.

78. Company Law, supra note 38, arts. 40, 98, 115, 128.
79. SIFN, supra note 50, art. 18; Company Law, supra note 38, arts. 98, 128.

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FDI REGULATION IN THE PRC AND TAIWAN

tive economies. When an equity JV is formally established in the
PRC, both the Chinese and foreign parties must register the capital
that they initially contribute to the venture with the government's
registration authorities. This "registered capital," which is essentially
the parties' equity investment in the venture, cannot be reduced dur-
ing the entire term of the venture. In general, the foreign party must
contribute at least twenty-five percent of an equity V's registered
capital.80 Debt financing from domestic sources is available to equity
JVs in the form of loans from the government-owned Bank of China.
Loans may be obtained for working capital, for the settlement of
accounts, or for the purchase of fixed assets. Such loans are not avail-
able, however, until after the venture is approved and registered. Col-
lateral or a guarantee, often from the parent company of a party to an
equity JV, must be pledged in order to obtain loan approval from the
Bank of China.8' The Cooperative Enterprise Law does not prescribe
a specific minimum percentage for foreign equity contributions.
However, article 9 of the Cooperative Enterprise Law requires both
Chinese and foreign partners to a cooperative enterprise to "discharge
their obligations both to subscribe their investment in full and to pro-
vide conditions for cooperation on schedule" in accordance with rele-
vant laws, regulations, and contractual terms. Failure to do so may
result in deadlines being set by administrative authorities, who may
"handle the matter in accordance with relevant regulations."'8 2 With
regard to WFOEs, the enterprise's total capital investment must be
made within the approved time period and under the supervision and
examination of administrative authorities.8

Taiwan is somewhat more liberal than the PRC with regard to
minimum requirements for foreign capital contributions. Unlike the
PRC's JV Law, Taiwan's SIFN does not explicitly set a required min-
imnum percentage, although presumably government authorities have
the discretion to deny FIA to ventures in which they think the capital
contribution of the foreign party is too low.84 In addition, as dis-

80. JV Law, supra note 11, art. 4; JV Implementing Regulations, supra note 11, arts. 20-
22; Moser, supra note 23, at 121.

81. Moser, supra note 23, at 122; See also Zhongguo Yinhang Banli Zhongnai Hezi
Jingying Qiye Daikuan Zanxing Banfa (Provisional Regulations for Providing Loans to Joint
Ventures Using Chinese and Foreign Investment by the Bank of China) (promulgated March
13, 1981) tran in CHINA L. FOR. Bus., supra note 11, f 6-530; Zhongguo Yinhang Dui
Waishang Touzi Qiye Daikuan Banfa (Measures of the Bank of China on Loans for Foreign
Investment Enterprises) art. 7 (promulgated Apr. 24, 1987) trans. in CHINA L FOR. Bus. f 8-
702.

82. Cohen, supra note 24, at 14; Cooperative Enterprise Law, supra note 11, art. 9.
83. WFOE Law, supra, note 11, art. 9.
84. SIFN, supra note 50, arts. 8-9.

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cussed above, Taiwan's Company Law gives government authorities
the power to prescribe minimum requirements of capitalization for
companies with limited liability (i.e., limited companies and compa-
nies limited by shares) as well as for foreign company branches.8 5

2. Nature of In Kind Capital Contributions

In both the PRC and Taiwan, capital invested by a foreign party
to a venture may take the form of in kind contributions, 86 subject to
certain restrictions. For equity JVs in the PRC, in kind capital contri-
butions must be indispensable to the venture, unavailable on substan-
tially the same terms from domestic PRC sources, and priced at or
below current international market prices.87 Valuation of in kind cap-
ital contributions to equity JVs is to be made through consultation by
the parties to the venture "on the basis of fairness and reasonable-
ness" or by a third party agreed to by the parties.88 The Cooperative
Enterprise Law is less specific with regard to restrictions on in kind
capital contributions and merely provides that "[i]nvestment or terms
for co-operation by Chinese and foreign partners may be in the form
of cash, [in] kind, land-use rights, industrial property rights, non-pat-
ented technology and other property rights."8 9 While this lack of
specificity in the Cooperative Enterprise Law might be interpreted to
suggest that fewer restrictions apply to in kind contributions made to
cooperative enterprises, it is possible that, as was the case for equity
JVs, more specific restrictions will appear in the implementing regula-
tions for cooperative enterprises, which are to be promulgated in the
future.90

Taiwan's FDI regime also prescribes requirements for foreign
capital investments made in the form of in kind contributions such as
machinery, equipment, raw materials, technical know-how, or patent
rights. According to the SIFN, in kind foreign capital contributions
must be "domestically needed." In addition, according to regulations
promulgated by Taiwan's MOEA, patent rights and technical know-
how capitalized as equity investments must enable the production of
new products not currently available in Taiwan, improve the quality
of existing products, or reduce costs. The amount of capitalized pat-
ent rights cannot exceed twenty percent of an enterprise's total capital

85. Company Law, supra note 38, arts. 100, 156, 372.
86. For a discussion of in kind capital contributions of advanced technology, see infra

notes 150-59 and accompanying text.
87. JV Implementing Regulations, supra note 11, art. 27.
88. Id. art. 25.
8'). Cooperative Enterprise Law, supra note 11, art. 8.
90. Id. art. 27.

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FDI REGULATION IN THE PRC AND TAIWAN

stock. Capitalized technical know-how may not exceed fifteen per-
cent of an enterprise's total capital stock. In addition, an investor
contributing capitalized technical know-how must, at the same time,
make an additional capital contribution, of at least an equal amount,
in cash or in kind. Both technical and economic specifications for
capitalized patent rights and technical know-how must be examinied
and approved by authorities designated by the MOEA. 91 Taiwan's
SIFN further requires that the contributed capital of foreign investors
be remitted in full within a prescribed time limit. Failure to meet this
requirement can result in revocation of FIA.'2

3. Distribution of Profits and Losses

The PRC's JV Law requires that after income taxes are paid and
reserve, expansion, and workers' welfare and bonus funds are set
aside, net profits of an equity JV be divided between the Chinese and
foreign parties in proportion to their respective shares of registered
capital. 93 Profits cannot be distributed, however, until the losses from
previous years have been made up.94 More flexibility is allowed with
regard to the profit distribution schemes of cooperative enterprises,
although government approval still is required. Unlike in equity JVs,
the profits of cooperative enterprises do not have to be divided
between the parties in proportion to their respective capital contribu-
tions.95 Some differences with regard to expense allocation and profit
distribution exist between hybrid and true cooperative enterprises. In
hybrid cooperative enterprises, before profits are distributed to any of
the partners, joint operating expenses of the venture are paid from
gross income, and taxes are levied on net income. Deductions also are
put aside for the venture's reserve, workers', and expansion funds. In
a true cooperative enterprise, a fixed amount of total revenues is con-
tributed to a common fund to cover joint operating expenses. Taxes
and other expenses are paid by the individual partners themselves
from the income they receive from the venture.96 WFOEs in the PRC
are free to remit their lawful profits and other lawful income abroad,
subject to foreign exchange controls (discussed below).' 7

91. SIFN, supra note 50, art. 3; Zhuanli Quan i Zhuanmen Jishu Zuowei Guben Touzi
Banfa (Regulations Governing the Use of Patent Rights and Technical Know-How as Equity
Investment) arts. 4-6 (approved May 9, 1968, promulgated June 3, 1968) [hereinafter Capital-
ized Technology Regulations].

92. Id. art. 9.
93. JV Law, supra note 11, arts. 4, 7.
94. JV Law, supra note 11, art. 7; JV Implementing Regulations, supra note 11, art. 88.
95. Moser, supra note 23, at 112-13; Cooperative Enterprise Law, supra note 11, art. 22.
96. Moser, supra note 23, at 113.
97. WFOE Law, supra note 11, arts. 18, 19.

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Taiwan's SIFN does not prescribe a specific profit distribution
scheme for FDI enterprises in Taiwan. However, whatever scheme is
devised can be monitored by government authorities through the
application process for FIA.98 In addition, companies with FIA seek-
ing foreign exchange settlement to repatriate profits under the SIFN
must submit a profit distribution list, balance sheet, profit and loss
statement, and other relevant documents to Taiwan's foreign
exchange authorities for review.99

4. Promotion of Domestic Linkages

The FDI regimes of both the PRC and Taiwan seek to promote
linkages between FDI enterprises and their domestic economies. In
the PRC, equity JVs and WFOEs are allowed to import inputs needed
for production. However, where conditions are the same, the JV Law
and JV Implementing Regulations, as well as the WFOE Law, state
that such enterprises should give priority to domestic Chinese
sources. 1°° Interestingly, the new Cooperative Enterprise Law does
not require that such preferences be given to Chinese sources, possibly
suggesting greater flexibility in this regard.1"' Taiwan's SIFN does
not include explicit provisions requiring preferences to domestic input
sources. However, similar objectives have been pursued in Taiwan
through administrative guidelines for implementing the SIFN, which
have included domestic content requirements ranging from 40 to 70
percent for products produced by companies seeking FIA. 0 2

5. Qualitative Requirements

The qualitative requirements applied to FDI enterprises by the
FDI regimes of the PRC and Taiwan are strikingly similar in several
respects. First, at a very general level, both regimes contain explicit
language requiring FDI enterprises to have a beneficial impact on eco-
nomic development.10 3 The PRC's JV Implementing Regulations
provide that "[j]oint ventures established within China's territory
should be able to promote the development of China's economy."
Moreover, they prohibit the approval of projects which are antitheti-
cal to China's sovereignty, laws, national economic development,

98. SIFN, supra note 50, art. 8.
99. Id. art. 14.
100. JV Law, supra note 11, art. 9; JV Implementing Regulations, supra note 1I, art. 57;

WFOE Law, supra note 11, art. 15.
101. Cooperative Enterprise Law, supra note 11, art. 19.
102. Liu, supra note 65, at 252.
103. JV Implementing Regulations, supra note 11, arts. 3-5; Cooperative Enterprise

Law, supra note 11, arts. 1, 3; WFOE Law, supra note 11, art. 3; SIFN, supra note 50, art. 5.

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FDI REGULATION IN THE PRC AND TAIWAN

environmental interests, or which contain an "obvious inequity."'"
The Cooperative Enterprise Law prescribes that cooperative enter-
prises are established "in accordance with the principles of equality
and mutual benefit," and that they "shall not harm the public inter-
ests of Chinese society."' 05 The WFOE Law requires that WFOEs
"benefit the development of the Chinese national economy," and that
such enterprises "shall not harm the social order or public interest of
China." 106 In Taiwan, the SIFN provides that FIA may be granted to
investments which are conducive to the "economic and social devel-
opment in the Republic of China."' 10 7

In both the PRC and Taiwan, where advanced technology (dis-
cussed below) is not involved, FDI enterprises generally are restricted
with regard to competing with existing domestic producers. Most
outputs must be exported or serve as import substitutes if sold to the
domestic market. °10 In addition, Taiwan has allowed companies with
FIA to sell to the domestic market goods for which there is a domes-
tic shortage despite domestic production, goods for which domestic
quality is below international or nationally prescribed standards, and
goods for which domestic prices exceed import prices by ten percent
or more.10 9

Finally, the FDI regimes of both the PRC and Taiwan give pref-
erences to FDI enterprises producing for sectors of their respective
economies targeted by the government for development. °10 In the
PRC, these targeted sectors include: "(1) [e]nergy [d]evelopment[,]
the building material, chemical and metallurgical industries;
(2) [m]achine manufacturing, instrument and meter industries and
offshore oil exploitation equipment manufacturing; (3) [e]lectronics
and computer industries, and communication equipment manufactur-
ing; (4) [l]ight, textile, foodstuffs, medicine, medical apparatus and
packaging industries; (5) [a]griculture, animal husbandry and fish
breeding; (6) [tlourism and service industries."'11 In Taiwan, similar
preferences have been given to "important industrial, mining or com-
munication enterprises," and "service enterprises which are needed

104. JV Implementing Regulations, supra note 11, arts. 3, 5.
105. Cooperative Enterprise Law, supra note 11, arts. 1, 3.
106. WFOE Law, supra note 11, arts. 3, 4.
107. SIFN, supra note 50, art. 5. See also, Liu, supra note 65, at 255.
108. JV Implementing Regulations, supra note 11, art. 4; Cooperative Enterprise Law,

supra note 11, art. 4; WFOE Law, supra note 11, art. 3; SIFN, supra note 50, art. 5; Chiu, The
General Economic and Business Climate for Trade and Inestment Between the United States
and Republic of China, in TRADF AND INVESThMENT IN TA1iVAN, supra note 49, at 63.

109. Liu, supra note 65, at 252.
110. JV Implementing Regulations, supra note 11, art. 3; SIFN, supra note 50, art. 5.
111. JY Implementing Regulations, supra note 11, art. 3.

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domestically."'1 12

B. Economic Rationality

Perhaps the most common theoretical justification for FDI is
that it promotes economic development by introducing foreign capital
to a host country economy, thus supplementing host country savings
and investment. This can be especially important at early stages of
economic development, when the need for investment in infrastruc-
ture and long term productive capacity is great, but the availability of
domestic capital is scarce. Proponents of FDI also contend that FDI
by multinational corporations (MNCs) may further help to promote
host country capital accumulation by providing host LDCs with
greater access to international export markets and distribution chan-
nels.' 13 Such export opportunities can be especially beneficial to an
LDC's capital accumulation efforts since they not only increase
demand for the country's productive outputs but also do so without
raising the country's domestic consumption level with regard to the
exported goods."I4

Critics question, however, the extent to which LDCs actually
receive these alleged benefits of FDI. They contend that as an empiri-
cal matter, FDI often does not promote host country capital accumu-
lation due to disproportionately large outward repatriations of profits,
which make such funds unavailable for domestic reinvestment or even
consumption. According to a 1983 United Nations study, between
1970 and 1980, the annual capital outflows from LDCs associated
with FDI were approximately twice the amount of capital inflows.",
Critics thus charge FDI with promoting the "decapitalization" of
LDCs." 6 Critics further charge that FDI often fails to provide host
countries with access to international export markets due to the com-
mon MNC practice of limiting sales to domestic host country markets
in order to protect the markets of other subsidiaries operating in
neighboring countries." 7

112. SIFN, supra note 50, art. 5.
113. T. BIERSTEKER, supra note 6, at 2.
114. This contrasts with domestically produced consumer goods sold to the domestic

market, which do increase a country's GNP, but raise domestic consumption at the same time,
thus lowering the country's domestic savings/consumption ratio.

115. Cunningham, Multinationals and Restructuring in Latin America, in MULTINA-
TIONAL CORPORATIONS AND THE THIRD WORLD 42 (C. Dixon, D. Drakakis-Smith & H.
Watts eds. 1986).

116. T. BIERSTEKER, supra note 6, at 3.
117. Id. at 4; See also Sunkel, National Development Policy and External Dependence in

Latin America in CONTEMPORARY INTER-AMERICAN RELATIONS 484 (H. Ferguson ed.
1972).

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FDI REGULATION IN THE PRC AND TAIWAN

Several common practices may serve to inflate the profits repatri-
ated by FDI enterprises. One such practice is the financing of FDI
enterprises not through predominantly foreign capital, but rather
through loans obtained from host country sources. By obtaining
loans from host country sources as a form of leveraging, foreign inves-
tors can introduce relatively small amounts of capital to a host coun-
try in the form of initial investment, while in the long run repatriating
a disproportionately large share of profits.11 8 Such leveraging may
further decrease host country ownership and profit reinvestment by
displacing host country investors from obtaining the use of already
limited domestic capital. According to one study, while United
States-based MNCs in Latin America financed 83 percent of their
operations from host country sources between 1957 and 1965,
between 1960 and 1968, such United States-based MNCs repatriated,
on average, 79 percent of their net profits to United States stockhold-
ers. 9 In its examination of specific sectors of Latin America's econ-
omy, one study concluded:

Between 1965 and 1968, 52 percent of all profits of U.S. sub-
sidiaries operating in Latin America in manufacturing-the
most dynamic sector of the hemisphere's economy-were
repatriated to the United States. This means that for every
dollar of net profit earned by a global-corporation subsidi-
ary, 52 cents left the country, even though 78 percent of the
investment funds used to generate the dollar of profit came
from local sources. If we look at the mining, petroleum, and
smelting industries, the capital outflow resulting from the
operations of global corporations is even worse. Each dollar
of net profit is based on an investment that was 83 percent
financed from local savings; yet only 21 percent of the profit
remains in the local economy.1 20

Repatriated profits also may be inflated by monopoly profits,
which may be available to foreign investors for several reasons related

118. A. AKINSANYA, MULTINATIONALS IN A CHANGING ENVIRONMENT 92 (1984).
Furthermore, in very highly leveraged capital structures, host country creditors are not only
denied the opportunity to share profits; they also incur levels of risk which may be as high as
those incurred by the foreign owners of equity. In short, host country creditors to highly
leveraged FDI enterprises can be stuck with the "worst of both worlds." For a discussion of
the relationship between an enterprise's leverage and its creditors' levels of risk, see generally,
CORPORATE FINANCE CASES AND MATERIALS 372, 430 (V. Brundey & M. Chirelstein eds.
1987).

119. R. BARNET & R. MOLLER, supra note 8, at 152-54. See also, R. HELLAWELL & R.
PUGH, supra note 6, at 30-31; A. AKINSANYA, supra note 118, at 98.

120. P; BARNET & R. MULLER, supra note 8, at 153-54, reprinted in f. HE.AVELL &
R. PUGH, supra note 6, at 30.

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to the underdeveloped nature of LDC economies. If the host country
has a real shortage of the goods produced by an FDI enterprise
(assuming a market economy), monopoly profits can be expected, at
least in the short run. If an FDI enterprise selling to the domestic
market lacks competition from both foreign and host country compet-
itors, due to a significant competitive advantage derived from
advanced technology, the enterprise could earn monopoly profits by
reducing output and raising prices. FDI enterprises which sell to the
domestic market also could earn monopoly profits in LDCs which
pursue import substitution strategies' 2

1 for economic development (as
Taiwan did in the 1950s).22

Other common practices of foreign investors can exacerbate the
problems of LDC "decapitalization" associated with FDI. The ten-
dency of FDI enterprises to obtain raw materials and other inputs to
production from foreign sources rather than form greater linkages
with the domestic economy reduces potential earnings for domestic
producers of intermediate products and reduces the positive "multi-
plier effect" that increased investment and consumption have on
domestic GNP. 123  Tie-in clauses which require FDI enterprises to
purchase raw materials, intermediate products, and/or capital goods
from foreign sources (often the parent company of a foreign party to a
joint venture) can not only deny host country producers potential
earnings; they also can allow foreign suppliers to charge higher than
competitive market prices. 124

121. Governments pursuing such strategies impose tariffs and/or quotas on imports. One
purpose of such a policy, often referred to as "infant industry protection," is to raise domestic
prices of imported goods to enable domestic producers which are uncompetitive (i.e., have
average costs exceeding import prices) in the short-run to stay in business and hopefully
become competitive in the long run. A second purpose can be to enable domestic producers of
import substitutes to earn economic rents in the short run, thus encouraging other domestic
producers to enter the market in order to reduce the country's dependence on imports.

When only domestic producers are involved, import substitution strategies might create
problems of income inequality by transferring wealth from consumers to producers. However,
capital accumulation should not be adversely affected in aggregate terms since surplus profits
earned by protected producers can be reinvested into the domestic economy (assuming, of
course, that such funds are not allowed to be sent abroad or consumed).

Import substitution strategies also are often criticized because of the "loss of consumer
surplus" caused by higher prices. However, in an LDC, this could be a beneficial form of
"forced savings" if the corresponding producer surplus is reinvested in new productive enter-
prises.

Import substitution strategies are much less defensible, however, if foreign producers with
technological advantages prevent the entry of new domestic firms, and the economic rents
earned by such producers are not reinvested in the host country economy but are instead
repatriated abroad as profits. See I. FRANK, supra note 7, at 48.

122. C. LIN, INDUSTRIALIZATION IN TAIWAN, 1946-72 64 (1973).
123. T. BIERSTEKER, supra note 6, at 5.
124. Id. United States antitrust law has recognized the detrimental economic effects of

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FDI REGULATION IN THE PRC AND TAIWAN

The use of transfer pricing is another practice contrary to the
goals of host country capital accumulation. Foreign investors can use
this mechanism to avoid host country taxes as well as to disguise prof-
its earned by FDI enterprises. Transfer pricing may operate by a sub-
sidiary in an LDC importing inputs and equipment from its parent
company at inflated prices. The subsidiary also exports finished prod-
ucts to the parent company at highly discounted prices. The result is
high profits on such transactions for the parent company12 and sig-
nificant losses on the books of the subsidiary, enabling it to avoid
income taxes otherwise payable to the host country government. 126

Finally, FDI enterprises which mass market luxury consumer
products within a host country can increase the host country's con-
sumption levels and thus adversely affect capital accumulation. To
use a simplified example, if in one year, each person in the PRC
purchased and consumed one bottle of Coca-Cola for one Renminbi
(RMB) instead of putting that RMIB in the bank, at the end of the
year, the PRC economy would have one billion less RMB to invest in
its long-run productive capacity.

While the FDI financing schemes and practices discussed above
can be very profitable for foreign investors, 127 one must not forget that
such benefits are at the expense of host country capital accumulation
and economic development. Moreover, it is important to note that
even if foreign profits are not "artificially" inflated for the reasons
discussed above, one would still expect that, over the long run, repa-
triated profits flowing out from a host country would exceed a foreign
investor's initial capital investment, since an economically "rational"
investor only would invest in an FDI project for which the discounted
present value of expected profits exceeds the value of initial invest-
ment. Nevertheless, it would be a mistake to characterize all FDI as

tie-in arrangements. See generally TRADE REGULATION CASES AND NIATERIALs 672 (N.
Handler, H. Blake, 1 Pitofsky & H. Goldschmid eds. 1983).

125. Of course, increased profits from transfer pricing could raise the tax liability of the
parent company. However, if, for example, the parent company is subject to a lower tax rate,
does not receive the benefits of a foreign tax credit, and/or is entitled to deductions such as
accelerated depreciation, transfer pricing could reduce the total amount of taxes actually paid
by the parent company and subsidiary.

126. T. BIERSTEKER, supra note 6, at 4. See also, Nishikawa, The World Crisis and
Transnational Corporations, in TRANSNATIONAL CORPORATIONS AND CHINA'S OPEN DOOR
POLICY, supra note 2, at 93, 93-100. For a discussion of efforts by the United States Internal
Revenue Service to address problems of transfer pricing, see L HELLAWVELL AND R. PUGH,
supra note 6, at 163-84.

127. For example, one study found that between 1908 and 1928, a mining company in
Mexico paid annual average dividends of 124.5 percent. Another company paid an annual
average dividend of 945.8 percent between 1903 and 1927. A. AKINSANYA, supra note 118, at
99.

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JOURNAL OF CHINESE LAW

having a negative effect on host country capital accumulation for this
reason. FDI may positively contribute to LDC capital accumulation
where alternative domestic capital or debt financing is unavailable. 28

Profit repatriation and other negative aspects of FDI make it, as a
form of financing per se, a second-best alternative to domestic owner-
ship, '29 but it still may be better than no investment.

One possibly could resolve the conventional-critical FDI debate
over host country capital accumulation in the financing of new enter-
prises by analogizing FDI to the role of equity capital in the financing
of corporations. Three sources of financing are generally available to
such companies: retained earnings, debt, and equity. Which of these
three sources of funds is used to finance a given investment project
generally has no bearing on the gross earnings that are created by that
project. However, the form of financing used does greatly impact how
such earnings are to be distributed. If a project is financed solely
through retained earnings, all new profits can be retained by existing
shareholders. If debt financing is used, interest charges must be paid
before profits are distributed. If the project is financed through the
issuance of new shares of stock, new (and future) profits must be
shared with new shareholders. Thus, the "cost of capital" is generally
lowest for existing shareholders if an investment project is financed
through retained earnings. If sufficient retained earnings are unavail-

128. Historically, however, this has not always been the case. A study commissioned by
the United Nations, for example, found that during the late 1950s and early 1960s, an esti-
mated 46 percent of United States-based multinational corporation investment funds in Latin
America went into the acquisition of existing local firms. Id. at 98.

129. Conventional liberal economists might argue that notwithstanding repatriated prof-
its, FDI, in whatever amount, always will have a positive effect on host country capital
accumulation since it "frees up" domestic capital to be reinvested elsewhere in the domestic
economy. However, several factors could undermine the logic of this argument. 1) Without
host country government regulation of FDI, domestic producers might be forced to sell
existing enterprises to foreign investors at discounted prices under the threat of competition
from FDI enterprises with immediate technological advantages. 2) While capital is, at least in
theory, fungible and interchangeable, investment opportunities are not. Alternative invest-
ments opportunities with at least equal rates of return might be unavailable to domestic inves-
tors, especially in an LDC. Uncontrolled FDI together with inefficient capital markets could
enable foreign investors to dominate and exclude domestic investors from equity ownership in
the most profitable sectors of the host country's economy. 3) High transaction costs in financ-
ing alternative investments, due to inefficient capital markets and other factors, could exceed
the net benefits of capital contributed by FDI.

The foreign acquisition of existing domestically owned productive enterprises has an effect
on host country capital accumulation which is analogous to that of a corporation which sells
off its assets. While such foreign acquisitions might provide a host country economy with
large amounts of cash and foreign exchange in the short run, over the long run, such acquisi-
tions deny the host country economy the future (repatriated) earnings of foreign acquired
enterprises. Thus, such transactions only will promote host country capital accumulation if
their proceeds are used to reinvest in more productive enterprises within the host country and
are not consumed or reinvested in less productive enterprises.

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FDI REGULATION IN THE PRC AND TAIWAN

able, debt financing is generally a second-best alternative unless high
interest rates, a company's existing high level of debt, and/or high
risks of an investment project make debt financing undesirable.
Equity financing is generally used as a last resort since it generally
requires a higher "cost of capital" to existing shareholders than would
be required by financing through retained earnings or debt.

In the context of LDCs, domestic savings are analogous to
retained earnings. If an economic enterprise is financed solely by
domestic savings, all of the subsequent profits of the enterprise may be
retained in the domestic economy. If foreign debt financing is used,
interest must first be paid to foreign lenders. If FDI is used, repatri-
ated profits, which generally impose a higher "cost of capital" on host
countries, must be shared with foreign economies. Thus, with all else
being equal, it is in the interest of host countries to forbid FDI in
enterprises for which sufficient domestic capital is available.130 It also
can be advantageous for host countries to reserve the most profitable
sectors of their economies for domestic investors. However, if domes-
tic funds are unavailable, and increasing the nation's foreign debt is
not a viable alternative, FDI can benefit a host country economy just
as the ability to raise equity capital can benefit a private corporation,
notwithstanding the fact that the "rate of return" to domestic capital
would be much lower. As liberal economists are quick to point out,
FDI under such circumstances can enable a host country to invest in
capital goods and add even more productive capacity to its domestic
economy than it has to "pay back" to the home country in the form of
repatriated profits. 131 One should not ignore the possibility, however,
that if sufficient domestic funds are available for such capital invest-
ment, it might be possible to "add" that same productive capacity to
the host economy without having to "pay back" any interest or repa-
triated profits to a home country's economy.

Thus, from a theoretical standpoint, the role of host country
administrative authorities in selectively accepting or rejecting FDI as
a form of financing in light of existing circumstances appears to be
analogous to, and just as legitimate as, corporate managers exercising
discretion in selecting optimal forms of financing to maximize their
existing shareholders' returns. With regard to inward FDI, this criti-
cal choice should be made by a governmental body and not left up to

130. Conventional liberal economists might argue that there is no valid distinction
between domestic enterprises for which domestic capital is available and those for which
domestic capital is not available since in theory, all domestic investors have access to the same
domestic capital pool. However, such an argument assumes the existence of efficient capital
markets, which are unlikely to exist in an LDC or in a socialist economy such as the PRC's.

131. P. SAMUELSON & W. NORDHAUS, ECONOMICS 884 (12th ed. 1985).

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JOURNAL OF CHINESE LAW

"market forces," as the benefits of domestic over foreign financing
discussed above are primarily of a public rather than private nature.
Individual enterprises in a host country seeking financing generally
will be indifferent as to whether the source of such funds or the recipi-
ent of future interest and/or dividend payments is foreign or
domestic.

In summary, increasing FDI per se does not necessarily promote
host country capital accumulation. The value of outwardly repatri-
ated profits must generally exceed the amount of foreign capital ini-
tially invested in a host country in order for an FDI project to be
"profitable" for a foreign investor. Moreover, common practices and
circumstances surrounding FDI often artificially inflate the size of
repatriated profits. Thus, from the perspective of host country capital
accumulation, FDI is only a second-best form of financing, and unless
an FDI project offers special benefits (e.g., advanced technology and/
or management skills), it is in the interest of host countries to allow
FDI only where alternative domestic ownership and financing are not
available. In addition, it is in the interest of host countries to prevent
the practices and circumstances which allow for the artificial inflation
of repatriated profits.

Given the potentially dual impact of FDI on host country capital
accumulation, the various requirements imposed on FDI by the PRC
and Taiwan appear to be justified from an economic standpoint. Both
regimes seek to attract FDI, as FDI proponents would encourage, but
both regimes do so only on a selective basis, thus addressing many of
the concerns of FDI critics. Administrative screening enables FDI
entry to be at the discretion of the host country. Moreover, it allows
FDI entry to be conditioned, at least in part, upon the financial and
technological needs of the host country, rather than solely upon the
potential for foreign investors to earn profits. Where FDI is allowed,
various requirements seek to ensure that the benefits of host country
capital accumulation derived from FDI are actual rather than just
theoretical. Prescribed conditions for foreign equity contributions
and profit distributions help to prevent foreign investors from using
loans from host country sources as a means for excessive leveraging
and help to ensure that repatriated profits are not excessive. The
emphasis on exports at the initial approval stage helps to ensure that
the international export markets and distribution channels of foreign
investors are actually utilized to benefit the host country. Prohibi-
tions against tie-in clauses together with domestic content and other
requirements for utilizing domestic suppliers of raw materials and
intermediate products promote linkages with the host country econ-
omy. Consequently, the positive "multiplier" effect from FDI on

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FDI REGULATION IN THE .PRC AND TAIWAN

GNP may be increased, and the integration of FDI benefits with a
broader segment of the host country economy may be promoted.
Requirements that in kind capital contributions are domestically
needed prevent foreign investors from artificially inflating their equity
share in an enterprise. Such requirements also close a potential "loop-
hole" with regard to domestic linkages by preventing foreign investors
from disguising imported productive inputs, otherwise available in the
host country, as "in kind capital contributions." Restrictions on sales
to the* domestic market help to prevent not only the displacement of
domestic producers, but also the unnecessary lowering of domestic
savings through the increased consumption of mass-marketed luxury
consumer goods. Finally, preferences given for FDI enterprises with
shared domestic ownership help to ensure that FDI profits, which
may be unusually large due to a lack of competition in less developed
economies, are at least shared with domestic investors rather than
being totally repatriated abroad. Such shared equity structures
appear to be mutually beneficial to the extent that they reduce the
aggregate amount of profits repatriated out from a host country, while
at the same time enabling foreign investors to maintain a relatively
high rate of return.

III. REGULATION OF FOREIGN EXCHANGE

A. Comparisons Between the PRC and Tafiwan

Foreign exchange control has been a central feature of the FDI
regimes of both the PRC and Taiwan. Foreign exchange is regulated
on two levels by the PRC's FDI regime. First, the foreign exchange
impact of an FDI enterprise is given serious consideration in the ini-
tial approval process, with strong preferences given to enterprises that
are expected to earn large amounts of foreign exchange (e.g., through
exports). Article 9 of the JV Law states that a "joint venture is
encouraged to market its products outside China."'132 Article 4 of the
JV Implementing Regulations gives preference to joint ventures that
"shall enable the expanded production of products for export and
result in increasing income in foreign currency."' 33 Article 4 of the
Cooperative Enterprise Law provides that "[t]he State shall
encourage the establishment of export-oriented or technologically
advanced production-type co-operative enterprises."''1 According to
the WFOE Law, in order to gain approval, WFOEs which do not
adopt advanced technology and equipment must "export all, or the

132. JV Law, supra note 11, art. 9.
133. TV Implementing Regulations, supra note 11, art. 4.
134. Cooperative Enterprise Law, supra note 11, art 4.

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JOURNAL OF CHINESE LAW

majority of, their products."' 135

The PRC also requires that FDI enterprises, with few exceptions,
are required to earn sufficient foreign exchange on their own to cover
repatriated profits and expenditures which must be paid for in foreign
exchange. If special approval granted to an FDI enterprise to sell to
the domestic market creates a foreign exchange deficit, the govern-
ment authorities which grant such approval are responsible for resolv-
ing the imbalance.136

Unlike the PRC, Taiwan does not specifically require individual
FDI enterprises to maintain their own foreign exchange balance.
However, like the PRC, in its screening process for FIA, Taiwan
encourages "investments which have an export market" and/or a
potential to increase Taiwan's foreign exchange earnings.137 Prior to
1987, an FDI enterprise could not legally remit profits or invested
capital from Taiwan in the form of foreign exchange without FIA. 38

This made obtaining FIA approval virtually essential for most foreign
investors. Taiwan's liberalization of its foreign exchange controls in
June 1987, however, has reduced the importance of FIA for the out-
ward remittance of funds. Under the 1987 regulations promulgated
by the Central Bank of China, pursuant to a June 1987 amendment to
the Statute Governing Foreign Exchange, any properly established
enterprise (with or without FIA) is allowed to outwardly remit up to
the equivalent of US$5 million per year, subject to a ten day waiting
period for amounts over US$1 million. 139 Thus, foreign investors who
intend to repatriate less than US$5 million per year in profits and
invested capital no longer need FIA to do so. FIA still can be of great
importance, however, to foreign investors who want to repatriate
more than the annual US$5 million limit and/or wish to enjoy the
other privileges that FIA confers.

135. WFOE Law, supra note 11, art. 3.

136. JV Implementing Regulations, supra note 11, arts. 74-75; Cooperative Enterprise
Law, supra note 11, art. 20; WFOE Law, supra note 11, arts. 18-19.

Efforts are being made, however, further to facilitate obtaining foreign exchange in the
PRC through foreign exchange adjustment centers and other measures. See, e.g., Yowell,
Swap Center System to Expand, CHINA Bus. REV., Sept.-Oct. 1988, at 10-12.

137. SIFN, supra note 50, art. 5; See also, Liu, supra note 65, at 252.

138. SIFN, supra note 50, arts. 12, 13; Liu, supra note 65, at 259. Moreover, under
earlier versions of the SIFN, even with FIA, outward repatriations of profits and invested
capital from Taiwan were limited to fifteen percent of total capital investment. U.S. DEPT. OF
COMMERCE, INVESTMENT IN TAIWAN (FORMOSA)-BASIC INFORMATION FOR THE UNITED

STATES BUSINESSMAN 109-13, 128 (1959).

139. Regulation for Non-Governmental Outward Remittances, supra note 68, art. 4; Liu,
supra note 68, at 21.

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FDI REGULATION IN THE PRC AND TAIWAN

B. Economic Rationality

While problems of domestic capital accumulation relate to the
long-run productive capacity of an LDC, foreign exchange and bal-
ance of payments relate to the short run. LDCs have a tendency to
suffer from annual foreign exchange and balance of payments deficits
for several reasons. 140 The general export capacity of an LDC is often
limited due to the country's general low level of productivity, as well
as a heavy reliance on export commodities such as agricultural prod-
ucts, which are highly vulnerable to weather conditions on the supply
side, and/or price devaluation due to global overcapacity on the
demand side. LDCs also often have a great need to import due to an
inability to domestically produce necessities for domestic consump-
tion and production. Finally, most forms of advanced technology,
which most LDCs now realize are essential to increasing productivity
and sustaining long term economic development, must be imported
from abroad and paid for in foreign exchange.

Increasing foreign exchange deficits can be detrimental to an
LDC's economy in several respects. In order to settle a current
accounts deficit in one year, a country must borrow foreign exchange
from foreign or international sources (e.g., the International Mone-
tary Fund). This foreign debt implies that the country's consumption
and/or investment must be constrained in future years in order to
repay the principal on the debt, as well as interest charges. As a coun-
try's foreign debt increases, its risk of default generally increases,
which in turn generally increases the interest rates charged to it (i.e.,
its cost of capital). In extreme cases, a very large foreign debt could
have geopolitical consequences for an LDC, by forcing the LDC to
accept otherwise undesirable terms as conditions for future loans and
possibly giving creditor countries a justification for interfering with
the LDC's internal affairs in the name of "protecting" their
"investments."

Proponents of FDI contend that by introducing foreign exchange
to a host country through their initial investments, FDI enterprises
can help to alleviate the foreign exchange deficits of LDCs. However,
while this may be true for the year of initial investment, critics
emphasize that for subsequent years, FDI enterprises increase rather
than decrease their host country's foreign exchange deficit through
the repatriation of profits. In 1974, for example, MNCs on a global
basis repatriated profits of more than $16 billion from LDCs while

140. See, eg., C. FULDA & W. SCHWARTZ, CASES & MATERIALS ON THE REGULATION
OF INTERNATIONAL TRADE AND INVESTMENT 595 (1970).

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JOURNAL OF CHINESE LAW

they provided only $7 billion in the form of new investment. 41 Thus,
it seems possible that an LDC that seeks to solve its foreign exchange
deficits through FDI alone could soon find itself in a rapidly increas-
ing spiral of foreign exchange deficits. It would need to attract more
new FDI every year to compensate for the foreign exchange deficits
created by the repatriated profits and/or capital of FDI enterprises
established in previous years. However, new FDI in a current year
would imply a greater foreign exchange burden from repatriated prof-
its in future years, as well as greater foreign control over the domestic
economy. Moreover, over the long run, the foreign exchange outflows
of a single FDI enterprise will likely exceed foreign exchange inflows
to its host country since, as already discussed, economically
"rational" foreign investors will only invest in enterprises in which
the discounted present value of expected future earnings (i.e., future
capital outflows from the host country) exceeds the value of their ini-
tial capital investment (i.e., capital inflows to the host country). 142 In
addition, unlike interest payments on foreign debt, which end when
the principal is repaid, the foreign exchange burden of repatriated
profits continues for an LDC as long as the enterprise is owned by
foreigners. Finally, many of the practices discussed above which
inhibit host country capital accumulation also exacerbate the foreign
exchange deficits of host countries.

The exceptions to the foreign exchange/balance of payments def-
icits created by FDI are FDI enterprises which earn foreign exchange
themselves or reduce their host country's foreign exchange expendi-
tures in amounts which are at least equal to the amounts of foreign
exchange that they repatriate. Thus, FDI enterprises in service indus-
tries such as tourism, and productive industries which export their
products and/or produce import substitutes for the domestic market,
can improve a host country's balance of payments and increase its
foreign exchange reserves. However, FDI enterprises which neither
earn foreign exchange nor reduce host country foreign exchange
expenditures (e.g., those which sell non-import substitute products
exclusively to the domestic market), but repatriate their profits in the
form of foreign exchange, will likely exacerbate rather than alleviate
the foreign exchange and balance of payments deficits of their host
country.

The FDI regimes of the PRC and Taiwan appear to recognize
the potential foreign exchange burdens of FDI. Both regimes give

141. I. FRANK, supra note 7, at 30.
142. F. VON KIRCHBACH, ECONOMIC POLICIES TOWARDS TRANSNATIONAL CORPORA-

TIONS C569-70 (1983).

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FDI REGULATION IN THE PRC AND TAIAN

strong preference to FDI enterprises which export, and both restrict
FDI access to their domestic markets, especially with respect to goods
already available domestically (i.e., non-import substitutes). The
PRC's requirement that FDI enterprises maintain their own foreign
exchange balance not only protects against foreign exchange deficits
created by FDI profit repatriation; it also provides a strong incentive
for FDI enterprises to maximize their foreign exchange earnings (e.g.,
through exporting finished products), while minimizing foreign
exchange expenditures (e.g., through avoiding unnecessary and/or
overpriced imports of equipment, technology, raw materials, or inter-
mediate products). 143 In short, the PRC's foreign exchange balance
requirements for FDI enterprises at the microlevel force a conver-
gence of interests between the PRC's need to maintain its national
foreign exchange balance and the need of FDI enterprises to repatri-
ate profits.

Although Taiwan's foreign exchange controls have been signifi-
cantly liberalized as of June 1987, such liberalization should not be
viewed as a repudiation of past policies. Indeed, one could argue that
the recent foreign exchange liberalization in Taiwan results from the
success of past controls, which enabled Taiwan to accumulate foreign
exchange reserves of more than US$62 billion. 14 The legislation
authorizing Taiwan's Executive Yuan to liberalize foreign exchange
controls is expressly conditioned upon "the occurrence of (i) long
term trade surplus, (ii) excess foreign exchange reserves, (iii) material
changes in the global economy." The legislation also authorizes the
Executive Yuan to reinstate stricter foreign exchange controls upon
review and approval of the Legislative Yuan. 145

IV. PROMOTION OF ADVANCED TECHNOLOGY

A. Comparisons Between the PRC and Taiwan

Both the PRC and Taiwan encourage FDI enterprises that are
expected to transfer advanced technology, know-how, or training.
The PRC's JV Implementing Regulations, for example, give prefer-
ence to enterprises which "adopt advanced technical equipment and
scientific management," which "provide benefits in terms of technical
renovation of enterprises," and which "enable the training of techni-

143. Such foreign exchange regulation also encourages FDI enterprises to form greater
linkages with the domestic economy in obtaining inputs of raw materials, equipment, and
intermediate products, thus promoting host country capital accumulation.

144. Liu, supra note 68, at 7.
145. Liu, supra note 68, at 7. See also Guanli Waihui Tiaoli (Statute Governing Foreign

Exchange) art. 26-1 (as amended June 16, 1987).

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JOURNAL OF CHINESE LAW

cal and managerial personnel." '146 The Cooperative Enterprise Law
provides that the "State shall encourage the establishment of... tech-
nologically advanced production-type co-operative enterprises." 147

The WFOE Law expressly requires that WFOEs in the PRC "utilize
advanced technology and equipment or export all, or a majority of,
their products."' 148 In Taiwan, the SIFN allows FIA to be granted for
"[i]nvestments in enterprises which are engaged in scientific and tech-
nical research and development."' 14 9 In addition, as already dis-
cussed, both the PRC and Taiwan allow advanced technology to take
the form of in kind capital contributions to FDI enterprises and make
it possible to waive requirements such as those for domestic owner-
ship and management, where the transfer of advanced technology is
involved.

However, although they encourage advanced technology, the
FDI regimes of the PRC and Taiwan also regulate technology trans-
fer with regard to the types of technologies which are approved as
well as the terms of transfer and valuation. The PRC's JV Imple-
menting Regulations require that the "technology acquired by the
joint venture shall be appropriate and advanced and enable the ven-
ture's products to display conspicuous social and economic results
domestically or to be competitive on the international market." 150

Where industrial property or know-how is contributed as foreign cap-
ital, it must be capable of manufacturing new products urgently
needed in the PRC or suitable for export, markedly improving quality
and productivity, or allow significant savings in raw materials, fuel or
power.15'

Taiwan's Statute for Technical Cooperation, which applies to
technology transferred in forms other than capital stock, requires that
transferred technology promotes the production or manufacturing of
new products, increases the volume of production, improves product
quality or reduces production costs, or improves administration, man-
agement, design, operations, or other areas.152 As discussed above,

146. JV Implementing Regulations, supra note 11, art. 4.
147. Cooperative Enterprise Law, supra note 11, art. 4.
148. WFOE Law, supra note 11, art. 3.
149. SIFN, supra note 50, art. 5.
150. JV Implementing Regulations, supra note 11, arts. 44, 46; See also Zhonghua

Rennin Gongheguo Jishu Yinjin Hetong Guanli Tiaoli (Regulations on Administration of
Technology Import Contracts of the People's Republic of China) art. 9 (promulgated May 24,
1985) trans. in CHINA L. FOR. Bus., supra note 11, 5-570 [hereinafter Technology Import
Regulations].

151. JV Implementing Regulations, supra note 11, art. 28.
152. Jishu Hezuo Tiaoli (Statute for Technical Cooperation) art. 4 (as amended May 29,

1964) trans. in INV. L. WORLD TAIWAN, supra note 38, at 247.

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FDI REGULATION IN THE PRC AND TAIWAN

Taiwan's SIFN requires that machinery and technology contributed
as capital be needed domestically. 5 3 In addition, Taiwan's Regula-
tions Governing the Use of Patent Rights and Technical Know-How
as Equity Investment require that capitalized patent rights and tech-
nical know-how make possible the production of new products not
currently available in Taiwan, improve existing product quality, or
reduce costs.' 54

With regard to the terms of technology transfer and valuation,
the PRC requires that charges for the use of technology be "fair and
reasonable" and generally must not exceed international rates.
Restrictive clauses such as those limiting the export of goods pro-
duced by the transferred technology, the improvement of the technol-
ogy, and the purchase of related equipment, parts, and raw materials,
generally are prohibited. 5 ' The JV Implementing Regulations, for
example, prohibit tie-in clauses relating to technology transfer, stating
that the "technology importing party shall have the right to buy the
equipment, parts and raw materials needed from sources they deem
suitable," and that "[n]o irrational or restrictive clauses prohibited by
Chinese law and regulations shall be included."' 56 Valuation of in
kind capital contributions in the PRC is to be made through consulta-
tion by the parties to the venture "on the basis of fairness and reason-
ableness," or by a third party agreed to by the parties.15 7 The
language of Taiwan's SIFN appears to be stricter with regard to tech-
nology valuation. It prescribes that such valuation "shall be deter-
mined by the Investment Commission at the time of application for
investment."' 15 In both the PRC and Taiwan, the terms of technol-
ogy transfer agreements must be reviewed and approved by govern-
ment authorities.15 9

B. Economic Rationality

Low levels of technological development are a primary con-

153. See supra note 91 and accompanying text; SIFN, supra note 50, arts. 3, 5.
154. Capitalized Technology Regulations, supra note 91, art. 4.
155. JV Implementing Regulations, supra note 11, arts. 44, 46; See also Technology

Import Regulations, supra note 150, art. 9.
156. JV Implementing Regulations, supra note 11, art. 46; Article 9 of the Technology

Import Regulations also prohibits contract provisions (except those with specific administra-
tive approval) which restrict "the freedom of choice of the recipient to obtain raw materials,
parts and components or equipment from other sources." Technology Import Regulations,
supra note 150, art. 9.

157. JV Implementing Regulations, supra note 11, art. 25.
158. SIFN, supra note 50, art. 9.
159. Technology Import Regulations, supra note 150, art. 4; JV Implementing Regula-

tions, supra note 11, arts. 10, 11; SIFN, supra note 50, art. 7; Capitalized Technology Regula-
tions, supra note 91, art. 5.

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straint to economic development in LDCs. The level of technology
that a country possesses in large part determines its potential levels of
productivity and output (i.e., potential GNP). For LDCs, acquiring
technology from abroad offers them the opportunity not only to raise
levels of productivity, but also to do so within a time frame that can
be as much as decades shorter than what would be necessary if they
were to use solely their own research efforts to "reinvent the wheel."

Proponents contend that FDI provides LDCs with a complete
package of technology, know-how, and management skills that can
significantly increase their levels of productivity, improve the quality
of goods produced, or introduce new products into the LDC econ-
omy. Other benefits, such as the training of local personnel to oper-
ate, maintain, and even develop advanced technologies also may
result from FDI.

However, critics charge that these potential benefits of technol-
ogy transfer often are not realized by host LDCs. In their view, FDI
often introduces technologies to LDCs which are designed for
advanced countries and are inappropriate for the conditions in LDCs.
Capital intensive production processes appropriate -for labor-scarce/
capital-abundant advanced countries, for example, might be inappro-
priate for the factor endowments of labor-abundant/capital-scarce
LDCs. Critics also allege that the contractual terms by which tech-
nology is transferred to LDCs are often unfair and preclude LDCs
from actually receiving the alleged benefits of technology transfer.' 6

Extensive disclaimers, indemnification provisions, strict controls on
technology use,161 restrictions on exporting goods produced by trans-
ferred technologies, tie-in clauses for productive inputs, prohibitions
against improving transferred technologies, and other standard provi-
sions often are imposed on the LDC technology recipient. In a recent
study of technology transfer in Bolivia, Colombia, Ecuador, and Peru,
approximately eighty-one percent of the contracts surveyed prohib-
ited exports totally, and eighty-six percent had some restrictive
clauses on exports. Among technology transfer contracts in Bolivia,
Ecuador, and Peru, sixty-seven percent contained tie-in clauses. 162

Finally, critics allege that excessively high prices are charged for tech-
nologies transferred to LDCs. 163 In the words of one PRC commen-
tator, "As is proved by a great deal of experience, when they transfer

160. See, e.g., T. BIERSTEKER, supra note 6, at 9.
161. Cohen & Valentine, supra note 2, at 235.
162. Prasartset, Technological Domination by the Transnational Corporation in Thailand,

in TRANSNATIONAL CORPORATIONS AND CHINA'S OPEN DOOR POLICY, supra note 2, at 145,
148.

163. See, e.g., T. BIERSTEKER, supra note 6, at 9.

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FDI REGULATION IN THE PRC AND TAIWAN

their technology, transnational corporations impose a large number of
restrictive conditions as well as demand colossal prices."'"

Without government regulation, an individual enterprise in an
LDC often can be at a disadvantage when buying technology from an
MNC. In this context, the LDC buyer may have less international
access to information and technical expertise than does the MNC
seller. From the perspectives of individuals interviewed in the PRC in
1981, this problem has been especially critical in the PRC, where "the
inexperience of... Chinese negotiators, whose skills were more in the
area of foreign language than in economics, was fully exploited by the
multinational-capital side."1 65 Where proprietary information is
involved, the seller may have a kind of "monopoly" bargaining power
since such technology is not available from other sources. Finally,
valuation of technology can be a very difficult task since the unique-
ness of a technology often precludes the existence of a "market value"
on which the parties can base their negotiations. Even where market
prices are available, however, inexperience can lead to very costly
consequences for host country enterprises. The PRC's Qing Hal
County granite quarry on Hainan Island, for example, accepted its
foreign partner's valuation of equipment contribution as being
US$1.42 million, only to find out within a year that the open interna-
tional market value was no higher than US$700,000. On the market-
ing side, the same enterprise agreed to a unit price of US$19 per
square foot of finished granite while the international market price
was US$50 per square foot.166

Both the PRC and Taiwan recognize the importance of advanced
technology for economic development. Both strongly encourage tech-
nology transfer in their FDI regimes, and both allow for the waiver of
other requirements, such as those for domestic ownership and con-
trol, where advanced technology is involved. However, both regimes
appear to recognize the potential problems associated with technology
transfer, and both require government monitoring of technology
transfer agreements through their respective discretionary approval
processes. The FDI regimes of both the PRC and Taiwan prescribe
that transferred technology is appropriate and actually needed, and
both provide for governmental review of the appropriateness of the
contractual terms of transfer and valuation.

164. Chen, supra note 6, at 43.
165. Nournoff, supra note 2, at 209.
166. Id. at 214.

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V. MAINTENANCE OF DOMESTIC CONTROL OVER FDI
ACTIVITIES

A. Comparisons Between the PRC and Taiwan

The FDI regimes of both the PRC and Taiwan seek to maintain
a relatively high degree of domestic control over FDI enterprises.
Such control is achieved through: 1) requiring domestic representa-
tion in the internal management structures of FDI enterprises; and
2) monitoring by government administrative authorities.

1. Domestic Representation in Management

In the PRC, both the foreign and Chinese parties to an equity JV
appoint their own directors "with reference to the proportion of
investment contributed."' 67 Since an equity JV, by definition, must
have some of its registered capital contributed by a Chinese party,
Chinese representation on the board of directors of an equity JV is
assured. In addition, the JV Implementing Regulations require that
the chairman of the board of an equity JV be appointed by the Chi-
nese party. 168 This seems to ensure a significant degree of Chinese
control even in cases in which the Chinese party appoints less than a
majority of the board. In addition to being able to influence the major
corporate decisions of an equity JV, 16 9 the Chinese party, through its
directors, can help to ensure Chinese representation among managers
and other high office holders. Finally, the status of legal representa-
tive given to the chairman of the board of an equity JV'7 ° seems to
give the Chinese party at least a de facto veto power over unfavorable
corporate actions. The Cooperative Enterprise Law requires that
either the chairman or deputy chairman of a board of directors, or
either the head or deputy head of a joint management body of a coop-
erative enterprise, be appointed by the Chinese partner.'71 Although
cooperative enterprises may enjoy more flexibility than equity JVs
with regard to management structure, if a true cooperative enterprise
and its foreign partner lack legal person status and must rely on its
Chinese partner to execute contracts with other Chinese parties, this

167. JV Implementing Regulations, supra note 11, art. 34.
168. Id.
169. With regard to 1) amendments to an equity JV's articles of association, 2) termina-

tion and dissolution of the venture, 3) increase or assignment of the venture's registered capi-
tal, and 4) merger of the venture with other economic organizations, articles 35 and 36 of the
JY Implementing Regulations require unanimous agreement by all directors present at a board
meeting with a quorum of at least two-thirds of the entire board. JV Implementing Regula-
tions, supra note 11, arts. 35, 36.

170. JV Implementing Regulations, supra note 11, art. 37.
171. Cooperative Enterprise Law, supra note 11, art. 12.

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FDI REGULATION IN THE PC AND TAIMAN

could give the Chinese partner to the cooperative enterprise an even
higher degree of management control than is available to its counter-
parts in equity JVs. 17 2

Taiwan's Company Law also contains requirements of domestic
representation in the corporate structures of companies formed in
Taiwan. In unlimited companies and unlimited companies with lim-
ited liability shareholders, more than half of the shareholders must be
domiciled in the Republic of China (ROC). In addition, more than
half of the shareholders with capacity to conduct business for such
companies must be domiciled in the ROC.17 3 In a limited company
without FIA, more than one half of the shareholders, who must con-
tribute at least one half of the company's total capital, must be of
Chinese nationality and domiciled within the ROC 17 4 Voting rights
may be allocated equally among all shareholders irrespective of capi-
tal contributions, or they may be allocated in proportion to each
shareholder's contributed capital.17 5 In either case, however, a Chi-
nese majority is guaranteed. Such shareholders have the power to
elect directors and managerial officers. The chairman of the board of
directors (or sole director if only one is elected) is vested with the
power to represent the company externally and must be of Chinese
nationality and domiciled within the ROC.17 6 In a company limited
by shares without FIA, more than half of the promoters, 1 77 more than
half of the managing directors, s1 7 and at least one supervisor 1 9 must
be domiciled in the ROC. In addition, the chairman and vice-chair-
man of the board of directors must be of Chinese nationality and
domiciled within the ROC. 8

Despite these general requirements for domestic representation
in the management structures of FDI enterprises, the FDI regimes of
both the PRC and Taiwan do provide opportunities for greater for-
eign control, in the forms of WFOEs in the PRC and limited compa-
nies with FIA and companies limited by shares with FIA in Taiwan.

172. Moser, supra note 23, at 113.
173. Company Law, supra note 38, arts. 40, 45, 115.
174. Id art. 98.
175. Id art- 102.
176. Id arts. 29, 108.
177. Id art. 128.
178. Id art. 208.
179. Id. art. 216. The role of a supervisor has no counterpart in an American corpora-

tion. A supervisor, elected by the shareholders from among themselves, is responsible for
monitoring the financial condition and business operations of a company. He/she may require
reports, records, and documents to be submitted to him/her by the board of directors. A
supervisor has the power to call a shareholders' meeting and must report to the shareholders
his/her findings. Id. arts. 216-227.

180. Id art. 208.

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WFOEs in the PRC, being wholly owned by foreigners, are not
required to have Chinese representation in management. However,
this greater degree of foreign autonomy is coupled with the stricter
qualitative requirements and restrictions which are imposed on
WFOEs. Most important is the explicit requirement that WFOEs
introduce advanced technology to China or export all or most of their
products. In addition, WFOEs are excluded from certain indus-
tries. "'81 Thus, it seems that the PRC government is willing to accept
a greater degree of foreign internal control of WFOEs in exchange for
greater potential contributions to the PRC's economic development in
the form of advanced technology and exports.

Taiwan seems to take a similar approach with regard to foreign
control. Limited companies and companies limited by shares182

which obtain FIA are allowed a greater degree of foreign control.
Nationality and domicile requirements are waived with regard to
shareholders and directors of limited companies, and promoters, man-
aging directors, chairmen and vice chairmen of the board, and super-
visors of companies limited by shares, if such companies receive
FIA.8 3 However, as discussed above, in order to qualify for FIA, a
company must fulfill certain qualitative requirements relating to its
positive contribution to Taiwan's economic development, as well as
pass the discretionary screening of the Investment Commission.' 4

In this regard, Taiwan's regime might be more liberal than that
of the PRC to the extent that the SIFN contains broader statutory
language, merely encouraging that enterprises receiving FIA are con-
ducive "to the economic and social development in the Republic of
China". 8 ' This compares with the more specific requirement in the
PRC that WFOEs "utilize advanced technology and equipment or
export all, or a majority of, their products. 18 6 In both contexts, how-
ever, the highly discretionary nature of the approval processes seems
to enable government authorities to liberalize or constrict require-
ments for domestic corporate control in accordance with their
appraisal of the potential risks and benefits that an enterprise will
bring to the economic development of their country.

181. WFOE Law, supra note 11, art. 3; Torbert, supra note 33, at 50.

182. Similar exemptions are not available for unlimited companies and unlimited compa-
nies with limited liability shareholders that receive FIA. SIFN, supra note 50, art. 18.

183. SIFN, supra note 50, art. 18; Company Law, supra note 38, arts. 98, 108, 128, 208,
216.

184. SIFN, supra note 50, arts. 5, 7.

185. Id. art. 5.

186. WFOE Law, supra note 11, art. 3.

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FDI REGULATION IN THE PRC AND TAIWAN

2. Government Monitoring

Monitoring of FDI enterprises by the PRC government can take
place in three contexts: '87 1) through the initial approval process; 188

2) through the registration process after approval, by which the ven-
ture obtains a business license;18 9 and 3) on a continuing basis
throughout the life of the enterprise. 19 With regard to continued
monitoring, officially, production and operating plans of equity JVs
and WFOEs are to be submitted "for the record," and governmental
authorities are to refrain from excessive interference with manage-
ment. It is reported that in practice, however, government officials
play a more interactive role in helping to shape production and oper-
ating plans, and that their actions are sometimes more than mere
"guidance". 9 ' Like the JV Law and the WFOE Law, the Coopera-
tive Enterprise Law provides that a cooperative enterprise's "right of
autonomy in the area of business management shall not be interfered
with."'19 However, the Cooperative Enterprise Law does not pre-
scribe that production and operating plans be submitted to govern-
ment authorities, possibly suggesting that regulation of cooperative
enterprises is meant to be more liberal in this regard than that of
equity JVs and WFOEs. Nevertheless, cooperative enterprises still
are required to obtain government approval for major actions such as
the assignment of rights and liabilities and the appointment of a third
party as general manager. In addition, cooperative enterprises, like
equity JVs and WFOEs, are required to report to government author-
ities for accounting and tax purposes.19 3

Taiwan's Investment Commission screens companies seeking
FIA through an approval process similar to that used in the PRC for
the initial approval of equity JVs, cooperative enterprises, and
WFOEs. 94 In addition to the initial screening process for FDI enter-
prises seeking FIA, all companies formed in Taiwan must go through

187. Torbert, supra note 33, at 51.
188. V Law, supra note 11, art. 3; IV Implementing Regulations, supra note 11, art. 8;

Cooperative Enterprise Law, supra note 11, art. 5; WFOE Law, supra note 11, art. 6.
189. V Law, supra note 11, art. 3; Cooperative Enterprise Law, supra note 11, art. 6;

WFOE Law, supra note 11, art. 7.
190. V Law, supra note 11, art. 9; IV Implementing Regulations, supra note 11, art. 56;

Cooperative Enterprise Law, supra note 11, arts. 7, 10, 12, 15; WFOE Law, supra note 11, art.
11.

191. IV Implementing Regulations, supra note 11, art. 56; WFOE Law, supra note 11,
art. 11; Fang & Tang, The Wholly Foreign-Owned Enterprise Law: Defining the Legislative
History and Interpreting the Statute, 2 J. CHINEsE LAW 153, 174-76 (1988).

192. Cooperative Enterprise Law, supra note 11, art. 11.
193. Id arts. 10, 12, 15; IV Implementing Regulations, supra note 11, art. 89; V/FOE

Law, supra note 11, art. 14.
194. SIFN, supra note 50, arts. 7-8.

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JOURNAL OF CHINESE LAW

a registration process through which they obtain a certificate which
entitles them to transact business. 195 Companies in Taiwan also must
file with government authorities, on an annual basis, "a report of the
year's business, a balance sheet, an inventory, a statement of profit
and loss and a list showing distribution of surplus profits or their
appropriation."' 96 If an examining authority "entertains any doubts"
about these items, "it may order the company to produce certificates,
vouchers, receipts, documents and books, provided that they be kept
confidential and returned after examination within thirty days from
the time of receiving them." 197 In addition, government authorities
"may, at any time, dispatch officers to examine the business and finan-
cial condition of a company, and, upon finding that the company is
not properly managed, may order rectification."' 98

Thus, in both the PRC and Taiwan, opportunities are.available
for government authorities to monitor FDI enterprises prior to initial
approval and registration, as well as on a continuing basis. Arguably,
the degree of such monitoring in Taiwan may be less than in the PRC
for several reasons. First, the nature of the PRC's planned economy
necessitates greater coordination between individual enterprises and
the government's overall economic plans. Second, annual reporting
in Taiwan is retrospective and primarily of a financial nature. 199 By
contrast in the PRC, at least for equity JVs and WFOEs, production
and operating plans are filed prospectively, and governmental officials
have statutory authority to "examine and supervise" and to "provide
support and assistance."' Finally, the needs of the PRC's less devel-
oped stage of economic development, together with its limited prior
experience with FDI, possibly could induce PRC authorities to exer-
cise their discretionary powers more aggressively than their counter-
parts in Taiwan. One should not underestimate, however, the level of
discretionary power that Taiwan officials are statutorily authorized to
exercise, should they perceive a greater need to monitor the activities
of an FDI enterprise in their economy.201

B. Economic Rationality

The degree of domestic control which should be maintained over

195. Company Law, supra note 38, arts. 387-389.
196. Id art. 20.
197. Id art. 22.
198. Id. art. 21.
199. Id. art. 20.
200. JV Implementing Regulations, supra note 11, arts. 7, 56; WFOE Law, supra note

11, art. 9, 11.
201. Cf Company Law, supra note 38, arts. 21-22.

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FDI REGULATION IN THE PRC AND TAIWAN

FDI enterprises poses a dilemma for host LDCs. On one hand, one of
the expected benefits of FDI is its ability to bring to the host country
technology, management skills, and more efficient production
processes. Such benefits cannot be realized, however, if excessive
interference from the host country prevents foreign investors and
managers from acting as they see fit. Moreover, a foreign perception
of excessive interference by a host country might discourage foreign
investors from investing there in the first place.

On the other hand, the history of FDI in other LDCs, as well as
in China near the turn of the century, suggests that even if their tech-
nology, management skills, and expertise provide foreign investors
with the capacity to promote the economic development of a host
country, such foreign investors may lack the will to do so. While
foreign investors may be willing to promote host country economic
development when such efforts and the goals of profit maximization
converge, it is less clear how they All act when these interests
diverge. Indeed, in their fiduciary duty to maximize shareholders'
returns, foreign investors may have a legal obligation to choose profit
maximization over host country economic development if the promo-
tion of these two goals should conflict. For example, given a choice
between exporting its finished consumer products and selling them to
a host country's domestic market, a foreign investor would likely
choose to sell to the domestic market if it wanted to protect neighbor-
ing markets where it had other subsidiaries selling similar products.
This would be in spite of the fact that, for reasons discussed above,
exports are much more beneficial to a host country in terms of earn-
ing foreign exchange and promoting host country capital
accumulation.

Thus, given foreign expertise on the one hand, but potentially
divergent interests on the other, the line between excessive host coun-
try interference and domestic control needed to protect legitimate
national economic interests can be a very fine one. The FDI regimes
of the PRC and Taiwan attempt to address this dilemma by imposing
various requirements to preserve domestic control over FDI gener-
ally, but allowing greater independence for FDI enterprises which are
expected to transfer advanced technology.

In addition to historical experience, government monitoring of
FDI activities might be justified on other grounds. Where externali-
ties are involved (e.g., pollution), "market forces" alone cannot be
expected to protect a host country's national interest.202 Policies,
such as those imposing qualitative requirements on FDI activities,

202. Article 5 of the "V Implementing Regulations, for example, prohibits granting

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JOURNAL OF CHINESE LAW

would be difficult to enforce without some form of government moni-
toring. In the case of the PRC, given its relatively undeveloped stage
of economic and legal development, no practical alternative for regu-
lating FDI may be available to it other than broadly worded statutes
and regulations, implemented with high levels of discretion. However,
this does not necessarily suggest that such a system is antithetical to
the objectives of economic development. Given the highly qualitative
nature of FDI regulation in the PRC and Taiwan, the multiplicity of
often countervailing factors, and the many "loopholes" potentially
open to innovative foreign lawyers, a system of highly discretionary
administrative screening may be the only means by which the PRC
and Taiwan can ensure that FDI enterprises conform to their eco-
nomic policy objectives. Of course, high levels of discretion increase
the risks of administrative abuse, thereby increasing the need to pre-
vent corruption and to develop technical competence among govern-
ment officials. However, the historical successes of Taiwan, as well as
those of Japan and other countries where "administrative guidance"
and discretion have been central to economic policy,20 3 suggest that it
is at least possible for such legal regimes to be very effective in pro-
moting economic development. The successes of other countries,
however, do not necessarily imply success for the PRC. While the
economic rationale and legal framework for FDI regulation in the
PRC appear to be sound, the ultimate success or failure of the PRC's
FDI regime will depend in large part upon the degrees of rationality
and fairness with which PRC officials exercise their administrative
discretion.

Requirements of domestic representation at the enterprise level
also appear to have economic justification. Domestic investors and
managers, who are likely to have greater economic, social, and cul-
tural ties to the host country, may possibly have a greater willingness
to form greater linkages with suppliers and other sectors of the host
country economy. In addition, there may be a greater likelihood of
the personal interests of domestic investors and managers converging
with host country economic development goals than might be the case
with foreigners. After all, unlike foreigners, domestic investors and
managers must personally live with the level of economic develop-
ment that their host country achieves. Finally, domestic representa-
tion in the internal structures of FDI enterprises may facilitate policy

approval to projects involving "[e]nvironmental pollution." JV Implementing Regulations,
supra note 11, art. 5.

203. See e.g., Endoh, Direct Investment in Japan, in DYNAMICS OF JAPANESE- UNITED
STATES RELATIONS 139 (T. Schoenbaum, M. Matsushita & D. Dallmeyer eds. 1986).

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FDI REGULATION IN THE PRC AND TAIWAN

enforcement for the government, thus reducing the need for more reg-
ulation at the macro-level.

VI. CONCLUSIONS

While the PRC's planned socialist economy might differ in many
respects from the capitalist market mechanisms operating in Taiwan,
to characterize the two systems as being diametrically opposed would
be to ignore their significant similarities. At least with regard to FDI,
both the PRC and Taiwan appear to have legal regimes which pro-
mote similar policy objectives through similar policy instruments,
which include a significant level of government intervention. In their
regulation of FDI, both the PRC and Taiwan seek to promote domes-
tic capital accumulation, regulate foreign exchange, promote the
transfer of advanced technology, and maintain a significant degree of
domestic control over FDI enterprises. While both the PRC and Tai-
wan seek to encourage FDI, selectivity through administrative discre-
tion appears to be a central component of both regimes.

On a theoretical level, the economic rationale underlying the reg-
ulation of FDI in the PRC and Taiwan appear to be sound. In addi-
tion, the economic success of Taiwan, together with the economic
failures of other LDCs (e.g., in Latin America) which have exercised
less government control over FDI, suggest that government regula-
tion over FDI is not only needed in LDCs, but also that such regula-
tion can be effectively implemented. Moreover, the level of
government regulation in the PRC's legal regime for FDI does not
appear to be excessive in comparison not only to Taiwan, but to other
Asian countries as well. Commenting on a recent United States
Department of Commerce study, one Commerce Department official
wrote, "China's investment legislation now compares favorably with
that of the other countries surveyed. Its restrictions on foreign equity
holdings are less stringent than those of South Korea, the Philippines,
or Thailand." 2"

Despite their similarities, however, the apparent success of Tai-
wan's FDI regime does not guarantee success for the PRC. Extra-
legal factors, such as difficulties associated with the large size of the
PRC economy, its socialist economic planning mechanisms, political
instability, and the general level of underdevelopment that remains in
the PRC economy, may impede the successful implementation of the
PRC's legal regime for FDI. In addition, the future success of FDI in
the PRC will in large part depend upon the levels of rationality and

204. Dean, How Does China Stack Up? Investment Incentives Throughout Asia, CHINA
Bus. REv., Mar.-Apr. 1988, at 49-51.

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JOURNAL OF CHINESE LAW

fairness with which government authorities exercise the high levels of
discretion which the PRC's FDI regime reserves for them. While
PRC authorities should fully enforce the safeguards and protections
of national interest provided by law, they must guard against exercises
of authority which are arbitrary or overly aggressive, which could
deter potentially beneficial FDI enterprises.

For the foreign investor, the legal regimes for FDI in the PRC
and Taiwan provide useful guidelines of where the economic interests
of private foreign investors and less developed host countries both
converge and diverge. Both the PRC and Taiwan realize that FDI
can raise the technological levels and export capacities of their respec-
tive economies. However, as a form of financing per se, for purposes
of host country capital accumulation and foreign exchange balance,
FDI is only a second best alternative to domestic ownership, due in
large part to the need of FDI enterprises to repatriate profits and the
costs associated with displacing domestic producers. Both the PRC
and Taiwan appear to realize, and history seems to confirm, that
uncontrolled FDI can exacerbate rather than alleviate the capital
accumulation problems of LDCs. If FDI enterprises sell non-import
substitutes primarily to the domestic markets of host countries, for-
eign exchange deficits will likely ensue. Given these criteria for evalu-
ating FDI, the success of the legal regimes for regulating inward FDI
in the PRC and Taiwan must be measured not only in quantitative
terms, but in qualitative terms as well.

The economic interests focused on by the PRC's FDI regime
suggest that "equality and mutual benefit" is more than just empty
rhetoric; it appears to be a serious policy priority. Thus, at least for
the immediate future, both the economic interests and policies of the
PRC suggest that foreign investors who intend to enhance their
wealth by "cornering" the PRC's domestic market should lower their
expectations---especially if they neither produce import substitutes
nor offer advanced technology. Such FDI activity is unlikely to be
"mutually beneficial," at least from the PRC perspective, at least until
the PRC economy further matures. Even if one ignores the negative
effect domestically oriented FDI has on foreign exchange balance,
growth in discretionary income for consumers and growth by domes-
tic producers to reasonable levels of competitiveness appear to be pre-
requisites for such domestic market oriented FDI activity truly to
benefit host country economic development. This does not necessarily
imply, however, that there currently is no money to be made from
FDI in the PRC. Cost savings (e.g., from labor) still can give FDI
enterprises in the PRC a competitive advantage in international
export markets. In short, at least for the immediate future, the pri-

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FDI REGULATION IN THE PRC AND TAIWAN

mary benefits that the PRC potentially has to offer to foreign inves-
tors are cost savings on the supply side. Expectations to benefit
primarily from the PRC as a source of increased demand, however,
are less realistic and less consistent with the PRC's economic interests
and apparent policy objectives.

A greater understanding of the economic rationale underlying
the legal regimes for FDI will be mutually beneficial for both foreign
investors and host countries. Especially where government authori-
ties act with high levels of discretion, as in the PRC and Taiwan, such
understanding will enable foreign investors better to distinguish legiti-
mate policy promotion from arbitrary or bad faith bargaining. Tai-
wan's increased liberalization of its FDI regime in response to
successful economic development suggests that even if foreign inves-
tors, as economically "rational" businessmen, choose to ignore the
moral imperatives of alleviating the poverty and human suffering of
LDCs, achieving a greater understanding and concern for the eco-
nomic needs of their host countries will be, over the long run, in their
own self interests.

In short, foreign investors, like their host countries, must seek a
greater understanding of the legitimate hopes, as well as the legitimate
fears, of foreign direct investment.

Jeffrey K D. Au*

* A.B. 1985, Political Science, A.M. 1986, International Policy Studies, Stanford Uni-
versity; J.D. 1989, Columbia Unversity.

1988]