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The impact of ownership on the propensity to innovate in China's large- and medium-sized industrial enterprises.

This article uses the latest enterprise data by registration to study the impact of ownership on the innovation performance of China's large-and medium-sized industrial enterprises. Using a panel analysis from 2000 to 2004, it is found that there are sign cant differences in performance and innovation among SOEs, collectives, domestic private enterprises, Hong Kong, Macau and Taiwan-funded firms and foreign-invested firms. The presence of FDI does seem to be important in improving domestic enterprises' performance and innovation in terms of sales revenue per employee, share of new product value to gross output value and share of patent applications and invention patent applications.


International joint ventures (IJVs) are viewed as a viable means and vehicle for knowledge/technology transfer, from multinational enterprises (MNEs) to domestic firms, and such technology transfer can contribute to a higher propensity to innovate in domestic firms. In the context of development, MNEs often bring specific advantages such as sophisticated technology, financial resources, manufacturing skills, managerial talents and entrepreneurship when the level of competition in the host country is intense. Based on the transaction cost approach, IJVs reduce the transaction cost of investing in a country when the cultural and linguistic differences are wide. Indeed it is necessary to have a local partner who maintains a good relationship with local government officials and is familiar with the local environment to ensure provision of sufficient supporting resources (such as water and electricity) and the timely delivery of necessary intermediate goods. A higher foreign ownership level in IJVs allows MNEs to maximise the returns on ownership specific advantages, and to have full control and protection over business operations and proprietary assets. These factors make them more willing to transfer advanced technologies to the host country. The choice of entry mode for foreign direct investment (FDI) thus depends on the host country's government policy, the parent firms' international experience, familiarity with the host country, the size of the parent firm, the firm's specific assets and the perceived market potential of the host country.

Beginning in late 1978, China adopted an "open door" policy, not only to reduce its shortage of capital and promote its exports, but also to accelerate technological diffusion from the industrial world. A strategy of "market for technology" was adopted so as to overcome the technology gap by absorbing foreign advanced technology through FDI. After more than two decades, how successful has this "market for technology" strategy been? Studying the performance and innovation of different ownership types helps in understanding the impact of FDI on the Chinese economy. As few studies have looked into this subject empirically, this article tries to fill this gap. It can be regarded as an extension of Jefferson's work, whose data was drawn from a private survey, spanning 1994 to 1999. (1)

It is hypothesised here that foreign equity joint ventures have a positive spillover effect on domestic industries. This hypothesis is tested upon the basis of panel data for large- and medium-sized industrial enterprises (LMEs) in China from 2000 to 2004. The share of patent applications, share of invention patent applications and the ratio of new product sales to total output sales are used as a proxy to measure the innovation output and/or the spillover effect of FDI. The performance of the industry is measured both by the sales revenue per employee and the ratio of gross output share to its sector share. In addition, the real expenditure on importing technology and the ratio of real expenditure on new product and (science and technology) S&T activities are included as a measure of the "crowding-out effect" of FDI.

Using the share/number of patent applications and invention patent applications as a measure of innovation output, and indirectly as a measure of spillover effect on FDI, has its limitations. First, it is possible that some LMEs may have chosen to keep their innovations as "trade secrets" so as to prevent their competitors from utilising the information that would be disclosed from filing patent applications. Second, the number of patent applications does not reflect the quality of the inventions concerned. Therefore, new product sales are used here as an alternative measure of innovation output. However, the use of this alternative is not also without costs. There may be large potential distortions in the official statistics about new products in these LMEs. As stated in Cheung and Lin, enterprises in China tend to "cheat" about their new products in order to receive tax credits provided by the government on new product sales which are intended to serve as an incentive to stimulate R&D. (2)

The time period covered in this analysis is mainly a function of the availability of data. No data of this kind is available before 2000. Most of the research on the performance of firms with different ownership types is based purely on questionnaire surveys and interview data. Interviews or survey samples are not used when analysing technology transfer because it is well recognised that there are potential biases, potentially leading to flawed conclusions because, generally speaking, only high technology transferability firms respond.

Literature Review and Discussion of Data

Though there have been a large number of empirical studies focusing on the spillover effects of FDI on host country economies, there is no consensus. Caves, using cross-sectional Australian manufacturing data for 1966, finds that the presence of foreign firms has a positive impact on labour productivity in the corresponding industries. (3) Similar studies by Globerman on Canadian manufacturing, and Blomstrom and Persson and Blomstrom and Wolff on Mexican manufacturing industries, come up with similar results. (4) Three recent studies on Indonesia's manufacturing industry all find supporting evidence of spillover effects from FDI. (5)

However, Germidis examines a sample of 65 multinational subsidiaries in 12 developing countries and finds almost no evidence of technology transfer to local firms. (6) Blomstrom, using sectoral data, finds that an increase in foreign presence failed to increase the productivity growth of Mexican firms. (7) The study by Haddad and Harrison for Morocco concludes that foreign presence has no significant effect on local labour productivity. (8) In a study of Venezuelan firms, Aitken and Harrison also conclude that FDI negatively affects the productivity of local firms. (9)

Aside from the fact that different methods and levels of data (aggregate, industry or firm level) are used to conduct estimations, the large variation in empirical results suggests that significant spillover may be conditional upon other unspecified factors. One such important factor is the structure of ownership types in the host country's industrial sector.

In this study, it is first hypothesised that the presence of FDI improves domestic enterprises' performance and innovation. In addition, as discussed earlier, FDI from industrial countries may have larger potential spillover effects on China than FDI from Hong Kong, Macau and Taiwan (HKMT) because foreign-funded enterprises in general carry more advanced technology than HKMT enterprises. However, it is also possible that HKMT generate higher spillover effects on domestic enterprises because their technology is more applicable to the domestic industries. Thus, it is assumed here that the spillover effects of FDI are different for different ownership types.

The dataset is from the China Statistical Yearbook on Science and Technology and the China Statistical Yearbook. It covers the 23 ownership types as categorised by China's registration system (see Appendix A). Thus altogether, the total sample size is 4 x 23 = 92 observations. Due to data limitations, econometric methods are not used here to examine specific issues, though each of the above areas warrants a separate in-depth analysis. The purpose here is to investigate associations among ownership patterns, enterprise performance and innovation in industrial LMEs.

FDI Entry Mode and Type of Foreign-Invested Enterprise Ownership in China

In those sectors where foreign investment has been allowed, foreign-invested enterprises (FIEs) have entered as equity joint ventures (EJVs), cooperative (or contractual) joint ventures (CJVs), wholly foreign-owned enterprises (WFOEs) or foreign-invested companies limited by shares (FICLS). To be considered as FIEs, foreigners must own at least 25 per cent of a firm for purposes of investment incentives and other measures. (10) In late 2002 and in 2003, this regulation was amended, allowing enterprises with foreign ownership of between 10 and 20 per cent to be included. These enterprises, however, do not qualify for incentives aimed at FIEs.

From 1979 to 1997, equity joint ventures were the main mode of inward direct investment. After 2000, investment in wholly foreign-owned enterprises became the most popular FDI ownership type in China (see Table 1), outpacing equity joint ventures as the main entry mode of foreign investment enterprises for the first time. (11) In the early 1980s, China restricted foreign investments to export-oriented operations and required foreign investors to form joint venture partnerships with Chinese firms in order to capture benefits from expanding exports and avoid the shrinkage of domestic enterprises from intense foreign competition. Not until early 1990 did China allow foreign investors to manufacture and sell a wide variety of goods on the domestic market. In the mid-1990s, China authorised the establishment of wholly foreign-owned enterprises as part of its WTO commitments. Contractual joint ventures were the third most important mode for the whole period. As mergers and acquisitions have become the trend for global FDI, this entry mode presents great potential for the future expansion of FDI in China.

Major Sources of FDI

The major sources of FDI in China are from Hong Kong, Macau and Taiwan, accounting for 58 per cent of the total FDI in China. For individual entity, the foremost source, however, is from Hong Kong which contributed about half of China's total inward FDI. The US and Japan, the major players in global FDI, accounted for only 8.34 per cent and 8.09 per cent respectively, ranking second and third. Taiwan ranked fourth, contributing about 7.76 per cent in realised value. The primary driving forces for HKMT investment in China are: (a) the fact that rising production costs in Hong Kong-Taiwan in the late 1970s forced the HKMT firms to seek more economic bases in China, together with the structural transformation from labour- to capital-intensive industries; (b) China's export promotion FDI strategy; and (c) HKMT's ethnic links to China. (12)

The motives for a firm to set up a subsidiary overseas and to undertake international production rather than exporting and licensing are greatly influenced by its specific advantages. Apart from the traditional reason of circumventing tariff barriers, other important location factors for market-oriented FDI are the market size, prospect for market growth and the degree of development of the host country. Large multinational corporations from the US, Japan and EU are usually associated with such intangible assets as leading edge technology, brand names and efficient international market networks. China's huge market size (with 1.3 billion people, a vast potential for consumption) and continuous rapid economic growth (averaging 11 per cent over the last decade) provide better opportunities to exploit their ownership advantages and therefore, attract more FDI in chemicals, household electrical appliances, automobiles, electronics and pharmaceutical industries. The investments from Hong Kong and Taiwan are relatively small in size and do not possess these frontiers of technology and organisational sophistication. Their advantages are derived more from either their marketing skills or their adaptation of mature technologies to a more labour intensive context and use of local raw materials. With relatively small-scale facilities, these labour-intensive manufacturing skills are easily transferred. Therefore, HKMT investments are generally export-oriented. Another unique and critical advantage is the ethnic links to China. Most people in Hong Kong, Taiwan and Macau still have friends and relatives in the Mainland. Thus garments, footwear, light electronics and similar consumer goods are their prime candidates.

Entry Mode from Different FDI Sources

The entry mode of HKMT investments obviously differs from those of the US, Japan and the European Union. Three FDI entry modes in China are equity joint ventures (EJV), contractual joint ventures (CJV) and wholly foreign-owned enterprises (WFOE). More of the FDI from the US, Japan and the EU is in the form of EJVs than CJVs when compared with HKMT investment. This is largely due to the strong interest of the US, Japan and EU investors in developing a long-term economic commitment in the Chinese market. The HKMT investments tend to be relatively small in size and short in duration, focusing on export-processing manufacturing and products. Thus the CJV are particularly appealing. The EJV generally requires a relatively long time horizon and an integral operation under the central control of a single joint venture management. It can be concluded that the type of FDI --market-oriented FDI versus export-oriented FDI--determines the pattern of FDI entry mode and thus the type of FIE ownership in China.

Ownership and Sector Performance

Two indicators are used to measure the overall performance of the LMEs according to the ownership types: the sales revenue per employee and the ratio of the share of gross output value to the share of firms. The sales revenue is used here because no data on value added by ownership was available. According to the Chinese National Bureau of Statistics, there is no uniform set of size classifications for LMEs. However, there are certain criteria or requirements for enterprises belonging to this select group, either in terms of annual production capacity or in terms of fixed production assets. (13)

From Tables 2a and 2b, it can be seen that on average the sales revenue per employee of the domestic firms increased 80 per cent, while that of the foreign-funded enterprises increased only marginally, and there was a drop in that of the HKMT enterprises. Among the domestic enterprises, the SOEs have the greatest increase, followed by the limited liability corporations, joint ownership enterprises and finally the private enterprises. The firm size in terms of the number of employees per firm in the three major ownerships, on average, is quite close: around 1,267 of the national average (see Table 2b). There has been no change in the domestic enterprises over the study period. The ratio of the share of gross value output to the share of firms among LMEs can be used as another indicator for the performance of different ownership types.

Over the study period, the share of gross value output to the share of firms for foreign-funded enterprises, on average, was about 1.45 (see Table 3), indicating that the foreign-funded enterprises produced at 145 per cent of their share in terms of enterprises over the study period. This was the highest among the three major sources of ownership. It is interesting to observe that the ratio of domestic-funded enterprises outpaced that of the HKMT funded enterprises from 2002 onwards. Against the fact that they are approximately of the same size, it can be inferred that the presence of foreign firms has a positive spillover effect on the productivity of domestic enterprises, particularly on SOEs and joint ownership enterprises. The performance of the SOEs increased 0.73 in 2002 to 1.17 in 2004. This may also be attributed to the structural reform of the state-owned enterprises since 1990, i.e., corporatising of some of the large SOEs and privatising some of the loss-making and inefficient ones, and the stronger industrial competition based on the improvement of the market mechanism under the WTO agreements. (14)

Among all the different ownership types, the domestic private enterprises were found to have the lowest value, an average of 0.46. The main reason might be their relatively small size. Other reasons for this can be many, including preferential policies towards certain kinds of ownership types, difficulties in getting financial resources and important raw materials and entrance barriers into certain industries for different ownership types due to technology, security, etc.

Ownership and Innovation among LMEs

The following variables are used: the ratio of the new product value to gross output value, the share of patent applications and the share of invention patent applications among LMEs as a proxy to measure the innovation of different ownership types.

The Proportion of New Product Value to Gross Output Value

From Table 4, it can be seen that the foreign-funded enterprises had the highest proportion of new products (in value) among all the different ownership types. Over the study period, the foreign-funded enterprises produced an average of 24 per cent of their output in terms of value in new products. This may be an indication of the ability to produce new industrial products as a result of R&D and specific knowledge/technology in the industry. This proportion plays an important role in determining the market share among firms of different ownership types, especially when competition is intense. In addition, we find that the JVE performs better than the WFOE in both the foreign-funded and HKMT enterprises. This reflects the fact that the JVEs are more willing to take risks, face uncertainty and explore market opportunities due to the advantages from a local partner who is familiar with the local environment and market conditions. The SOEs, however, have the lowest proportion of new products among all the different ownership types. There are many reasons, including the internal inefficiencies arising from poorly defined property rights in SOEs and the soft budgets they face, product design, marketing strategies, technology and management differences between SOEs and foreign-funded enterprises.

When looking closely at the three major fund sectors, there is an obvious difference between the proportions of domestic- and foreign-funded enterprises, though the margin began to narrow from 2001. This may be the result of domestic enterprises devoting more resources to innovation activities and imitating imported goods. In the short-run, domestic firms could enjoy substantial profits from their product with minor modifications on an imported product. With the stronger industrial competition and improvement of the market mechanism in China today, profits will diminish/ disappear in a short period once a new product appears in the market. (15) Thus, the domestic-funded enterprises may be reluctant to conduct long-term R&D projects and consequently concentrate relatively more on minor innovations. This is evident from the fact that a high proportion of the patent applications from the domestic enterprises are for external design patents. (16)

A closer look at Table 4 reveals that the share of new products for foreign-funded enterprises peaked at 2002, and decreased steadily to 20.4 per cent in 2004. The HKMT enterprises show a similar pattern. They both peaked in 2001, decreased to 14.1 in 2003 and then rebounded to 15.5 in 2004. Though, the lowest among the three ownership types, the share of new products for domestic-funded enterprises improved after 2001. It can be inferred that inward FDI does have a positive spillover effect on innovation, particularly with respect to minor innovation types.

Patent Applications by Ownership

Over the period in question, the majority of patent applications were from domestic-funded enterprises, followed by the foreign-funded enterprises and the HKMT funded enterprises (see Table 5). In 2001, more than 80 per cent of the patent applications were from domestic-funded enterprises. Thereafter, they decreased steadily to 67 per cent in 2004. However, the foreign-funded enterprises increased steadily from 19 per cent in 2001 to 33 per cent in 2004. The HKMT enterprises held roughly at 12 per cent for the whole period. Of the 42,318 patent applications in 2004, 58.3 per cent came from the three sectors--the limited liability corporations, shareholding corporations and private enterprises--of domestic enterprises. The JVE and WFOE of the foreign-funded enterprises contributed another 13 per cent and 5.6 per cent, respectively, in that year. The SOEs' share of patent applications decreased continuously from 14.4 per cent in 2001 to 5.3 per cent in 2004. This is consistent with what was discovered earlier, i.e., that the SOEs have a relatively low new product ratio during the period.

Invention Patent Applications by Ownership

Of the three kinds of patent applications--invention, utility model and design --filed in China, the majority are for utility models. (17) Over the study period, the share of invention patent applications increased from 30.3 per cent in 2000 to 36.8 per cent in 2004, of which about 50.6 per cent were from domestic firms in 2004. The share of utility model patent applications for all the LMEs, however, decreased from 40.3 per cent in 2000 to 31.8 per cent in 2004, of which about 99 per cent of utility model applications were from domestic firms. A similar pattern was observed for the design patent applications. The share of design patents was around 30 per cent, of which 93 per cent were from domestic firms; the share from the foreign-funded enterprises, however, increased from 7.2 per cent in 2000 to 8.4 per cent in 2004.

Table 6 shows the ratio of invention patent applications to patent applications by different ownership. Since China joined the WTO in 2001, there has been a drastic change in this ratio for the domestic firm: the ratio of invention patent applications increased from 23.6 per cent in 2002 to 29.4 per cent in 2004. For the foreign-funded enterprises, around 50 per cent of the patent applications were invention patents. For the JVEs in particular, the proportion maintained steady at around 60 per cent. For the WFOEs in both of the foreign-funded enterprises and HKMT enterprises, the proportion of invention patent applications was also as high as 30.8 per cent and 31.9 per cent, respectively. Domestic private enterprises had the lowest proportion of invention patent applications, with an average of 15 per cent, much lower than 26 per cent, which was the average for the domestic-funded enterprises as a whole.

The share of invention patent applications by ownership types had a comparable pattern to that of patent applications (see Table 6). Domestic-funded enterprises dominated the share of invention patent applications, but this dominance was reduced after China's entry into the WTO in 2001. The share of patent applications by the domestic-funded firms decreased from 83.2 per cent in 2001 to 57.8 per cent in 2004. The same pattern was true for the HKMT enterprises, decreasing from 10.1 per cent in 2001 to 8.3 per cent in 2004. The foreign-funded enterprises, however, increased continuously from 6.7 per cent in 2001 to 31.9 per cent in 2004. This was due mainly to a drastic increase in the share of JVEs, in particular since 2002. The share of invention patent applications for the JVEs increased from 3.3 per cent in 2001 to 20.7 per cent in 2002 and held at around 24 per cent. The increase in the share from all sectors in foreign-funded enterprises is evidence of the more modern and updated techniques/R&D transferred and registered in China instead of at home as before. This is due to the fact that China authorised the establishment of wholly foreign-owned enterprises and promised higher property rights protection on ownership-specific advantages as part of its WTO commitments, allowing MNEs to maximise their returns on these specific advantages and have full control over the business operations, and thus being willing to transfer more advanced technology to China.

Expenditures on Import of Technology and the "Crowding-out" Effect

In this section, we relate the analysis on innovation of the LMEs to the so-called "crowding-out effect" of FDI mentioned in the literature. According to the "crowding-out" hypothesis, inward FDI may have a negative effect on domestic R&D activities because purchasing technologies from abroad is a substitute for innovating on one's own. This substitute is attractive especially when the technology is of high standard and high uncertainty.

From Tables 7 and 8, it can be seen that domestic-funded enterprises are the dominant demanders of foreign technology over the study period. This dominance has decreased recently: the share of expenditure on imports of technology by domestic-funded enterprises has decreased from 71 per cent in 2001 to 54 per cent in 2004. The HKMT enterprises maintained about a 6 per cent share for the whole period. The share of foreign-funded enterprises as a whole, however, increased from around 23 per cent in 2001 to 41 per cent in 2004, reflecting the fact that MNCs are more willing to supply the specific technology to their affiliates instead of establishing their own R&D facilities in China. (18) This confirms that IJVs became more willing to transfer more advanced technology after China joined the WTO in 2001.

When examining whether inward FDI had a negative effect on domestic R&D activities, it is apparent that the real expenditure on S&T activities (in constant 1978 yuan) in all sectors increased over the study period. When looking at the ratios of expenditure on new products, however, we see there is a decrease in all the sectors in domestic-funded enterprises except the SOEs and share-holding enterprises. The same is also true of the HKMT. This implies that they would rather spend more on compensation for labour and/or purchase of fixed assets and instruments. The decrease in the ratio of expenditure on new products and expenditure on S&T, together with an increase in real expenditure on imports of technology in these sectors lead one to infer that the "crowding out effect" does exist in some of China's LMEs. This can also be part of the reason why the share of patent applications dropped over the study period.


How successful has the "market for technology" strategy been? Has FDI increased Chinese productivity? The latest panel data is used here to study the performance and innovation of different ownership types in China's LMEs from 2001 to 2004.

With the presence of foreign-funded enterprises, it is found that domestic enterprises' performance/productivity, in terms of sales revenue per employee and ratio of gross output value to sector share, improved. This can be largely attributed to the role of FDI. As is well discussed in the literature, inward FDI can raise innovation activity by domestic firms in the host country through the products and technologies brought in by foreign investors (through reverse engineering), frequent contact and turnover among labour and from the demonstration effect of inward FDI that inspires and stimulates local R&D activities and innovations.

Foreign presence is important for overall improvement in domestic enterprises' innovation as well, in terms of the share of new product value to gross output value, the share of patent applications and share of invention patent applications, though the increase was marginal. In addition, we can infer that the "crowding-out effect" does exist in some of China's LMEs, especially in the joint ownership sectors.

This study reveals a rapidly diversifying ownership structure in which the role of the SOEs has been steadily diminishing and been replaced by limited liability corporations, private enterprises and foreign and overseas ownerships. Foreign ownership in JVs continues to contribute to higher productivity and innovation because higher ownership allows MNEs to protect their proprietary assets and encourages them to transfer more advanced knowledge despite the spillover risk.
Appendix A. LMEs (Industrial) by Type of Registration


 State-owned Enterprises
 Collective-owned Enterprises
 Cooperative Enterprises
 Joint Ownership Enterprises
 State Joint Ownership Enterprises
 Collective Joint Ownership Enterprises
 Joint State-collective Enterprises
 Other Joint Ownership Enterprises
 Limited Liability Corporations
 State Sole Funded Corporations
 Other Limited Liability Corporations
 Share-holding Corporations Ltd.
 Private Enterprises
 Private-funded Enterprises
 Private partnership Enterprises
 Private Limited Liability Corporations
 Private Share-holding Corporations Ltd.
 Other Enterprises

Enterprises with Funds from Hong Kong, Macau and Taiwan

 Joint-venture Enterprises (with Funds from Hong Kong, Macau and
 Cooperative Enterprises (with Funds from Hong Kong, Macau and
 Enterprises with Sole Funds from Hong Kong, Macau and Taiwan
 Share-holding Corporations Ltd. with Funds from Hong Kong, Macau
 and Taiwan

Foreign-funded Enterprises

 Joint-venture Enterprises
 Cooperative Enterprises
 Enterprises with Sole Foreign Funds
 Share-holding Corporations Ltd. with Foreign Funds

(1) Gary Jefferson, Albert Hu, Xiaojing Guan and Xiaoyun Yu, "Ownership, Performance, and Innovation in China's Large- and Medium-size Industrial Enterprise Sector", China Economic Review 14 (2003): 89-113.

(2) Kui Yin Cheung and Ping Lin, "Spillover Effects of FDI on Innovation in China: Evidence from the Provincial Data", China Economic Review, 2004.

(3) Richard E. Caves, "Multinational Firms, Competition and Productivity in Host-country Markets", Economica 41 (May 1974): 176-93.

(4) Steven Globerman, "Foreign Direct Investment and 'Spillover' Efficiency Benefits in Canadian Manufacturing Industries", Canadian Journal of Economics 12 (1979): 42-74; Magnus Blomstrom and Hakan Persson, "Foreign Direct Investment and Spillover Efficiency in an Underdeveloped Economy: Evidence from the Mexican Manufacturing Industry", World Development 11, no. 6 (1983): 493-501; and Magnus Blomstrom and Edward Wolff, "Multinational Corporations and Productivity Convergence in Mexico", in Convergence of Productivity: Cross-national Studies and Historical Evidence, ed. William Baumol, Richard Nelson and Edward Wolff (Oxford: Oxford University Press, 1994).

(5) Magnus Blomstrom and F. Sjoholm, "Technology Transfer and Spillovers: Does Local Participation with Mutinationals Matter?", European Economic Review 43 (1999): 915-23; Fredrik Sjoholm, "Technology Gap, Competition and Spillovers from Direct Foreign Investment: Evidence from Established Data", The Journal of Development Studies 36 (1999): 53-73; and Sadayuki Takii, "Productivity Spillovers and Characteristics of Foreign Multinational Plants in Indonesian Manufacturing 1990-1995", Journal of Development Economics 76 (2005): 521-42.

(6) Dimitrios Germidis, Transfer of Technology by Multinational Corporations (Paris: Development Centre of the OECD, 1977).

(7) Magnus Blomstrom, "Foreign Investment and Productive Efficiency: the Case of Mexico", Journal of Industrial Economics 35, 1 (1986): 97-110.

(8) Mona Haddad and Ann Harrison, "Are there Positive Spillovers from Direct Foreign Investment? Evidence from Panel Data for Morocco", Journal of Development Economics 42 (1993): 51-74.

(9) Brian J. Aitken and Ann Harrison, "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela", American Economic Review 89 (1999): 605-18.

(10) The incentives available include significant reductions in national and local income taxes, land use fees, import and export duties and priority treatment in obtaining basic infrastructure services.

(11) EJVs fell because of dissatisfaction with respect to choice of local partners, board decisions, capital formation, dividend distributions and other matters. It declined further as restrictions on WFOEs loosened in October 2000 and April 2001 as China implemented its WTO commitments. The revisions eliminated requirements for foreign exchange balancing, struck requirements for domestic sales ratios, removed or adjusted technology transfer and export performance requirements, and modified provisions on domestic procurement of raw materials.

(12) This is called the "Chinese connection", since Hong Kong, Taiwan and Mainland China all share the same language and culture, making it much easier to do business in China (negotiations as well as operations).

(13) See "Criteria for Defining Large- and Medium-sized Enterprises" (Beijing: National Bureau of Statistics (NBS): 2000).

(14) The SOE reforms began in the early 1990s by giving workers and managers a share of the enterprise profits. It was hoped that they would have more incentive to work and also care more about the SOEs in the long term. The government policy was to corporatise large SOEs and privatise some loss-making ones. The number of SOEs fell by 40 per cent from 1996 to 2001. The government still controls the large SOEs because of their vital position (mainly heavy industries) in the economy and because they employ large numbers of workers.

(15) To survive and/or maintain their market share, domestic firms must adapt modern technologies/techniques to their production systems.

(16) The three types of patents are invention, utility model and external design. External design involves a new design of shape, pattern or combination, or colour/ aesthetic properties. Applications for external design patents need only an "initial examination" with the patent office to make sure the same product has not been patented before. The processing time for this type of patent is least (three months).

(17) Kui Yin Cheung and Ping Lin, "Spillover Effects of FDI on Innovation in China: Evidence from the Provincial Data", China Economic Review 15 (2004): 25-44.

(18) Magnus Blomstrom and Ari Kokko, "Multinational Corporations and Spillovers", Journal of Economic Surveys 12, no. 3 (1998): 247-78.

Kui-yin Cheung ( is Associate Professor in the Economics Department at Lingnan University. He obtained his PhD from the University of Washington, Seattle in economics. His main research interests include the Hong Kong and Chinese economies, applied econometrics and applied microeconomics.
Table 1. Distribution of Utilised FDI among Different
Ownership Types, 1991-2004 (%)

 Equity Contractual
Year Joint Venture Joint Venture

1991 53.10 21.12
1992 50.11 22.81
1993 49.51 22.88
1994 48.61 24.56
1995 43.54 19.53
1996 43.50 19.51
1997 43.08 19.73
1998 40.36 21.38
1999 39.26 20.42
2000 35.23 16.20
2001 33.57 13.25
2002 28.46 9.59
2003 28.77 7.17
2004 27.03 5.13

 Wholly Foreign-
 Owned Others
Year Enterprises

1991 23.78 0.00
1992 27.00 0.07
1993 27.33 0.23
1994 26.55 0.29
1995 36.87 0.06
1996 36.59 0.40
1997 35.77 1.33
1998 36.23 2.03
1999 38.55 1.76
2000 47.31 1.26
2001 50.93 2.45
2002 60.15 1.84
2003 62.39 1.66
2004 66.34 1.40

Source: China Statistical Yearbook (Beijing: China
Statistics Press), various years.

Table 2a. Performance of LMEs by Ownership, 2001

 No. of of
 LMEs Gross
 and Output
Ownership (% share) Value

Domestic-funded Enterprises 18,019 72.9
 SOEs 7,995 26.2
 Joint Ownership Enterprises 231 0.62
 Limited Liability corporations 3,377 18.70
 Share-holding Corporations 2,129 18.90
 Private Enterprises 936 1.91
 Others 1,330 5.1

Enterprises with Funds from HK, 2,220 9.60
Macau and Taiwan (9.70)
 Joint Venture Enterprises 1,322 5.0
 Wholly Foreign-owned Enterprises 659 2.89
 Others 311 1.69

Foreign-funded Enterprises 2,665 17.5
 Joint Venture Enterprises 1,658 11.35
 Wholly Foreign-owned Enterprises 814 5.01
 Others 355 1.11

Total/Average 22,904 100.0

 Share of
 Employees Sales
 and Revenue per
 (Employees/ Employee
Ownership Firm) (1,000 yuan)

Domestic-funded Enterprises 88.7 182.4
 SOEs 40.8 156.4
 Joint Ownership Enterprises 0.5 266.5
 Limited Liability corporations 27.0 145.0
 Share-holding Corporations 12.0 346.4
 Private Enterprises 1.9 191.6
 Others 6.5 244.6

Enterprises with Funds from HK, 5.5 358.2
Macau and Taiwan (689)
 Joint Venture Enterprises 2.8 396.5
 Wholly Foreign-owned Enterprises 1.9 300.8
 Others 0.8 440.0

Foreign-funded Enterprises 5.9 617.1
 Joint Venture Enterprises 3.3 706.3
 Wholly Foreign-owned Enterprises 2.1 529.7
 Others 0.5 400

Total/Average 100.0 217.6

Source: China Statistical Yearbook on Science and Technology (Beijing:
China Statistics Press), various years and calculated by the author.

Table 2b. Performance of LMEs by Ownership, 2004

 No. of of
 LMEs Gross
 and Output
Ownership (% share) Value

Domestic-funded enterprises 18,791 65.7
 SOEs 3,681 15.5
 Joint Ownership Enterprises 116 0.41
 Limited Liability Corporations 6,683 23.8
 Share-holding Corporations 2,456 15.8
 Private Enterprises 4,525 7.14
 Others 1330 2.40

Enterprises with Funds from HK, 4,201 11.1
Macau and Taiwan (15.2)
 Joint Venture Enterprises 1,617 4.34
 Wholly Foreign-owned Enterprises 2,273 5.24
 Others 311 1.49

Foreign-funded Enterprises 4,700 23.3
 Joint Venture Enterprises 2,044 10.8
 Wholly Foreign-owned Enterprises 2,301 10.5
 Others 355 1.91

Total/Average 27,692 100.0

 Share of Sales
 Employees Revenue
 and per
 (Employees Employee
Ownership /Firm) (1,000 yuan)

Domestic-funded enterprises 72.9 345.5
 SOEs 18.5 336.6
 Joint Ownership Enterprises 0.3 500.0
 Limited Liability Corporations 29.6 309.5
 Share-holding Corporations 11.4 323.0
 Private Enterprises 9.4 276.5
 Others 3.7 254.1

Enterprises with Funds from HK, 12.9 320.7
Macau and Taiwan (1,074)
 Joint Venture Enterprises 4.1 387.2
 Wholly Foreign-owned Enterprises 7.7 256.0
 Others 1.1 517.1

Foreign-funded Enterprises 14.2 623.2
 Joint Venture Enterprises 5.4 744.5
 Wholly Foreign-owned Enterprises 7.6 545.7
 Others 1.3 567.2

Total/Average 100.0 381.8

Source: China Statistical Yearbook on Science and Technology
(Beijing: China Statistics Press), various
years and calculated by the author.

Table 3. Ratio of the Share of Gross Output Value
to the Share of LMEs, 2001-4

Ownership 2001 2002 2003 2004

Domestic-funded Enterprises 0.926 0.938 0.938 0.968
 SOEs 0.751 0.739 0.875 1.165
 Joint Ownership 0.620 0.686 0.757 0.976
 Limited Liability Corporations 1.005 1.049 1.009 0.988
 Share-holding Corporations 2.032 1.958 1.769 1.781
 Private Enterprises 0.466 0.457 0.475 0.438
 Others 0.659 0.660 0.718 0.710

Enterprises with Funds from HK, 0.990 0.930 0.841 0.730
Macau and Taiwan
 Joint Venture Enterprises 0.867 0.788 0.792 0.743
 Wholly Foreign-owned Enterprises 1.003 0.960 0.807 0.638
 Others 1.610 1.521 1.230 1.330

Foreign-funded Enterprises 1.509 1.420 1.507 1.371
 Joint Venture Enterprises 1.569 1.453 1.627 1.463
 Wholly Foreign-owned Enterprises 1.411 1.403 1.380 1.264
 Others 1.321 1.350 1.362 1.492

Source: Calculated by the author.

Table 4. Share of New Product Value to Gross Output
Value by Ownership, 2001-4 (%)

Ownership 2001 2002 2003 2004

Domestic-funded Enterprises 13.4 14.9 14.1 13.7
 SOEs 10.0 10.3 10.2 7.8
 Joint Ownership Enterprises 10.1 13.0 9.4 15.8
 Limited Liability Corporations 15.6 18.7 18.0 15.8
 Share-holding Corporations 14.7 16.2 15.1 17.1
 Private Enterprises 12.9 11.0 7.7 9.5
 Collective-owned enterprises 20.0 19.7 15.5 21.4

HKMT Investment 16.7 15.6 14.1 15.5
 Joint Venture Enterprises 17.6 15.4 16.2 17.6
 Collective Enterprises 5.6 6.7 6.7 5.8
 Sole 16.6 15.5 12.3 14.9
 Share Limited Companies 20.4 24.4 18.6 16.6

Foreign-Funded Investment 26.0 26.9 22.8 20.4
 Joint Venture Enterprises 29.9 32.7 32.7 28.3
 Collective Enterprises 13.6 4.9 6.0 3.7
 Sole 20.1 18.7 10.0 12.1
 Share Limited Companies 13.8 30.6 34.0 32.4

Source: Calculated by the author.

Table 5. Share of Patent Application by
Ownership, 2001-4 (%)

Ownership 2001 2002 2003 2004

Domestic-funded Enterprises 81.11 74.32 70.86 66.87
 SOEs 14.35 12.59 10.54 5.34
 Joint Ownership Enterprises 0.33 1.15 0.30 0.21
 Limited Liability Corporations 22.65 26.18 24.74 24.99
 Share-holding Corporations 26.79 18.96 16.87 18.55
 Private Enterprises 4.84 6.45 11.80 14.80
 Others 12.15 8.99 6.61 2.57

Enterprises with Funds from HK, 11.44 12.88 12.15 11.65
Macau and Taiwan
 Joint Venture Enterprises 5.25 3.78 4.78 6.62
 Wholly Foreign-owned Enterprises 3.63 6.79 5.56 3.58
 Others 2.56 2.31 1.81 1.45

Foreign-funded Enterprises 7.45 12.81 16.99 21.48
 Joint Venture Enterprises 4.01 8.94 12.15 13.12
 Wholly Foreign-owned Enterprises 1.98 2.58 3.29 5.58
 Others 1.46 1.29 1.55 2.78

Total Foreign-funded Enterprises 18.99 25.69 29.04 33.13

Source: Calculated by the author.

Table 6. Share of Invention Patent Applications by Ownership, and
Share of Invention Patent Applications to Patent Applications
2001-4 (%)

Ownership 2001 2002 2003 2004

Domestic-funded Enterprises 83.17 64.80 60.79 59.76
 (24.2) (23.6) (25.7) (29.4)
 SOEs 14.54 11.46 7.77 4.91
 (23.9) (24.7) (22.1) (30.2)
 Joint Ownership Enterprises 0.33 0.23 0.23 0.11
 (0.24) (5.28) (22.6) (18.4)
 Limited Liability Corporations 30.57 31.49 30.98 30.07
 (32.2) (32.6) (37.5) (39.5)
 Share-holding Corporations 24.44 13.64 13.96 14.96
 (21.6) (19.5) (24.8) (26.5)
 Private Enterprises 4.38 2.80 4.37 7.60
 (21.4) (11.8) (11.1) (16.9)
 Others 8.91 5.18 9.52 2.10
 (24.6) (17.6) (27.1) (20.8)

Enterprises with funds from HK, 10.12 9.58 9.85 8.32
Macau and Taiwan (20.9) (20.2) (24.3) (23.5)
 Joint Venture Enterprises 3.45 1.85 3.21 3.71
 (15.5) (13.3) (20.1) (18.4)
 Wholly Foreign-owned Enterprises 3.56 6.19 5.52 3.47
 (23.2) (24.7) (29.7) (31.9)
 Others 3.12 1.54 1.12 1.14
 (23.3) (17.1) (19.4) (28.5)

Foreign-funded Enterprises 6.70 25.62 29.37 31.92
 (21.3) (54.2) (51.7) (48.8)
 Joint Venture Enterprises 3.28 20.66 23.64 24.79
 (22.0) (62.6) (58.3) (62.1)
 Wholly Foreign-owned Enterprises 2.43 3.19 4.15 5.23
 (29.0) (33.5) (37.8) (30.8)
 Others 0.99 1.76 1.58 1.89
 (13.9) (37.1) (42.5) (25.9)

Total Foreign-funded Enterprises 16.82 35.20 39.22 40.24
 (23.6) (27.1) (29.9) (32.9)

Source: Calculated by the author.

Table 7. Expenditure on Imports of Technology (EIT million 1978
yuan), Share of Expenditures on Imports of Technology (SEIT, %),
Expenditures on Science and Technology Activities (ES&T, million
1978 Yuan) and Ratio of Expenditure on New Product (RNP, %) by
Ownership, 2001-4



Domestic-funded enterprises 4,660.0 18,180.7
 (71.24) (40.3)
 SOEs 1,361.4 5,496.3
 (20.81) (33.4)
 Joint Ownership Enterprises 47.4 168.0
 (0.72) (28.3)
 Limited Liability Corporations 1,283.5 5,684.2
 (19.62) (44.3)
 Share-holding Corporations 1,274.5 4,820.0
 (19.48) (39.0)
 Private Enterprises 76.2 296.1
 (1.17) (52.6)
 Others 4.4 8.3
 (0.07) (5.3)

Enterprises with funds from 367.8 1,463.1
HK, Macau and Taiwan (5.62) (56.8)
 Joint Venture Enterprises 205.3 772.6
 (3.14) (59.6)
 Wholly Foreign-owned 67.9 334.5
 Enterprises (1.04) (61.1)

Foreign-funded Enterprises 1,513.8 2,734.9
 (23.14) (54.7)
 Joint Venture Enterprises 1,177.4 2,005.3
 (18.0) (61.8)
 Wholly Foreign-owned 305.6 527.0
 Enterprises (4.67) (28.0)

Total Foreign-funded Enterprises 6,541.6 22,378.6
 (100.0) (43.2)



Domestic-funded enterprises 4,359.6 32,885.8
 (54.0) (38.8)
 SOEs 1,036.9 6,364.1
 (12.84) (35.1)
 Joint Ownership Enterprises 126.9 267.9
 (1.57) (18.3)
 Limited Liability Corporations 1,591.2 13,517.1
 (19.91) (38.1)
 Share-holding Corporations 1,466.3 9,132.8
 (18.16) (41.4)
 Private Enterprises 73.4 2,199.1
 (0.91) (43.3)
 Others 3.4 7.0
 (0.07) (3.3)

Enterprises with funds from 405.3 3,523.2
HK, Macau and Taiwan (5.07) (45.3)
 Joint Venture Enterprises 233.7 1,705.9
 (2.90) (45.9)
 Wholly Foreign-owned 100.3 1,227.6
 Enterprises (1.24) (46.1)

Foreign-funded Enterprises 3,303.8 7,514.8
 (41.42) (48.6)
 Joint Venture Enterprises 2,670.5 3,969.8
 (33.08) (47.5)
 Wholly Foreign-owned 420.0 2,691.5
 Enterprises (5.20) (47.7)

Total Foreign-funded Enterprises 8,072.6 43,923.8
 (100.0) (41.0)

Source: China Statistical Yearbook of Science and Technology
(Beijing: China Statistics Press), various years and calculated
by the author.

Table 8. Share of Expenditures on Import Technology by Ownership
2001-4 (%)

 2001 2002 2003 2004

Domestic-funded Enterprises 71.24 71.94 72.14 54.0
 SOEs 20.81 16.92 13.97 12.84
 Joint Ownership Enterprises 0.72 0.43 0.65 1.57
 Limited Liability Corporations 19.62 20.40 25.87 19.91
 Share-holding Corporations 19.48 25.80 25.46 18.16
 Private Enterprises 1.17 1.37 2.92 0.91
 Others 9.44 7.02 3.27 0.71

Enterprises with Funds from HK, 5.62 6.24 7.26 5.07
Macau and Taiwan
 Joint Venture Enterprises 3.14 5.41 6.07 2.90
 Wholly Foreign-owned Enterprises 1.04 0.31 0.98 1.24
 Others 1.45 0.52 0.22 0.94

Foreign-funded Enterprises 23.14 21.82 20.60 41.42
 Joint Venture Enterprises 18.0 5.36 15.80 33.08
 Wholly Foreign-owned Enterprises 4.67 5.20 4.33 5.20
 Others 0.47 1.26 0.46 2.64

Total Foreign-funded Enterprises 28.76 28.06 27.86 46.97

Source: Calculated by the author.
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Article Details
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Author:Cheung, Kui-Yin
Publication:China: An International Journal
Article Type:Report
Geographic Code:9CHIN
Date:Sep 1, 2007
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