Foreign Direct Investment and Government Action — An Overview of China Telecom Sector

Posted by Social Science Research Network

Foreign Direct Investment and Government Action — An Overview of China Telecom Sector – Jing Grace Guan (China Digest)

ABSTRACT: Capital, both human and physical, is a major element in facilitating China telecommunication industry’s growth. Because foreign investment is a scare resource, it is important to probe into the nature of foreign investment decision-making. This paper examines the relationship of Foreign Direct Investment (FDI) and host government actions using China’s telecommunication sector as a case study. Three cases (AT&T, BT, and Vodafone) depict how the Chinese government responded to sophisticated foreign investors, and how they interact with each other strategically. Some literature on foreign investment decision-making tend to look on foreign investors as simple, opportunistic maximizers (Wells and Wint, 1991; Cornell, 1993). However, governments can be opportunistic as well, but foreign investors, once detect they were cheated in one round, would “punish” the host government by reducing foreign investment far below its optimal point. Thus, the interaction between government and investment is complex and sophisticated with the role of regulation in the telecommunication market as well as in the area of antitrust and competition.

In this paper, I shall demonstrate the relationship of foreign direct investment (FDI) and host government regulations. With my research in China telecommunication sector, I will describe how government formulates its foreign policy to maximize FDI. This paper pays attention only to intentional government moves and tries to reveal their influences to foreign investment, although the conclusion may be applicable to government actions in a whole.

Restrictions on foreign stake are a great barrier for overseas telecommunication investors. The government was cautious in the first few months after WTO membership out of safety and stability concerns. Since China has joined the WTO, the telecommunication industry is developing faster than expected, the government might consider speeding up the process to open up more the market, including opening more regions, raising percentage of foreign shares and simplifying approval procedures to set agenda to maximize the FDI.

Despite China’s rapid economic ascension over the past 10 years, it has generally been difficult for foreign investors to break-even on their investments at net present value basis. Reasons include the lack of transparency in laws, regulations on repatriation of funds, and an insiders’ network built upon local business norms and values which often result in a disadvantage to foreign investors.

The performance of Chinese stocks has also been mixed as the government has used the public markets as a convenient tool to bail out floundering state enterprises. This is gradually changing as a growing number of Chinese companies, including telecommunication entities, have started trading on the Hong Kong, Singapore and NASDAQ stock markets. In this paper, I provide some evidence for non-linearity relation between Foreign Direct Investment (FDI) and Government action. Given the telecommunication liberalization across the region, I expect to explore further the correlation between FDI and government policy as long-term benefits of foreign involvement in domestic telecommunication markets begin to take shape. At this juncture in time, young generation of Chinese reformists appear to be in a good position to develop a regulatory framework that brings in the foreign capital required to gain a foothold in the newly competitive regime.