The purpose of this paper is twofold. It first of all seeks to determine the degree of influence that the level of industrialization or economic development of the investing country has on the foreign company investing in Mainland China, and, secondly, to ascertain the kind of influence that Mainland China’s investment climate and government policies have on the foreign investing company. The main findings are as follows:
(1) The greater the degree of industrialization or the higher the level of economic development of the investing country, the more technologically-intensive, capital-intensive or knowledge-intensive in nature is the investment made by that country. As the level of economic development of the investing country increases, so does the volume of investment by that country in the host country, up to a certain point. Beyond that point, the volume of investment starts to decline.
(2) In view of the different motivations which exist between the foreign investors and the Mainland Chinese authorities, the Chinese have been seeking to encourage various industries. However, apart from the electronics and tourism industries which more or less conform to the objectives on both sides, the investments carried out in most other industries do not achieve the intended objectives. Therefore, the Mainland Chinese authorities are seeking to exert more control over the direction of investment, the industries to be invested in, and the investment location.
(3) Owing to the problems brought about by the low-level of economic development in Mainland China, such as those associated with the lack of basic infrastructure, the deficiencies inherent in the legal system and other factors, foreign investors consider that the investment environment in Mainland China is worsening. Furthermore, the poor quality of bureaucrats in China, the high costs, managerial inefficiency, the inability of enterprises to make effective decisions, and other factors have resulted in a loss of confidence and interest on the part of foreign companies, and have even caused some to withdraw their investments. Therefore, in order to restore the confidence of the foreign investor, the Mainland Chinese authorities are seeking to improve the investment environment and reform the economic/legal system. However, since failure to observe the law is still very common in Mainland China, unless they can eliminate this phenomenon of non-compliance, attempts to improve the investment environment will prove ineffective.
