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Special> Boao Forum for Asia 2015> Exclusive
UPDATED: March 23, 2015 NO. 13 MARCH 26, 2015
Silver Lining, Open Door
Foreign companies' departure is no reason to panic
By Mei Xinyu

After China joined the Information Technology Agreement in 2003, it reduced the import tariff on mobile phones to zero. In such a market for open competition, the Chinese mobile phone industry has realized high growth in both output and exports.

Citizen's Chinese counterparts such as Fiyta and Seagull have also kept growing and more than half of the watch movements for Swiss brands are made by Chinese factories. Under these circumstances, reactions to individual cases seem overblown.

Some foreign companies shut down their old factories in China, but unless they declared bankruptcy, most of them are trying to transform their businesses so as to remain competitive in the Chinese market.

After all, China is very likely to replace the United States and become the largest economy in the world in the next decade. It has already been the world's largest consumer of various kinds of raw materials, consumer goods and equipment, and it is also maintaining one of the highest economic growth rates in the world. Leaving such a market will mean suicide to any multinational who aims at being a global leader in its industry.

The closing of Nokia's factory was an inevitable outcome after Microsoft acquired Nokia's device and service business in 2014, because according to their mutual agreement, Nokia sold all its device and service business to Microsoft and will no longer manufacture products. However, it will retain its patent portfolio related to telecommunications and smartphones with the aim of establishing a model focusing on technology development and patent operations.

Japanese home appliance giants have reduced their traditional business, but have in turn developed some new businesses. In Panasonic, car and housing businesses have contributed 50 percent to the company's total profits.

Business environment matters

A reasonable view on multinational companies' shutdown of factories in China certainly does not mean we will not improve the investment environment. As China has already been a net capital exporter and its capital exports will continue its trend of quick growth, we must pay special attention to this.

Rapid growth of China's outbound investment is a result of the country's fast-growing economy and national strength, and the improvement of its position among world economies will be more conducive to elevate the efficiency of China's trade and investment.

Just as every coin has two sides, outbound direct investment can weaken the strength of domestic industries and impede China's sustainable economic growth. Since the late 1800s, the United Kingdom invested heavily in overseas countries, but its domestic investment remained stagnant. In other words, the origin of modern industrial revolution missed the opportunity of the second and third industrial revolutions. Such risks should not be neglected. In China, private capital from Wenzhou, east China's Zhejiang Province, was formerly invested throughout the country, but the local economy later hit a bottleneck. This has also warned us to proceed with caution.

Moreover, sustained high growth of outbound direct investment is also likely to dampen the efforts China has made to balance regional development. China's overall economic development falls behind those of developed countries, and the development is unbalanced among different regions.

When China's developed coastal areas are transferring out labor-intensive industries because they have lost cost advantages, the central and western regions have to compete with developing countries such as Viet Nam, the Philippines and Indonesia for these investments. If surplus capital in the developed coastal areas is transferred to foreign countries merely for profits, the less developed central and western regions, which are still in want of capital, will be deprived of opportunities for development.

For these risks, it is not advisable for China to restrict outflow of capital. Instead, it must keep the domestic business environment attractive for investors in order to ensure the country's long-term competitiveness.

Copyedited by Kylee McIntyre 

Comments to yushujun@bjreview.com

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