From 1979-2000, China pursued a policy this promoted FDI related to export promotion, which contributed to Taiwan and Hong Kong investment, because it helped it helped protect China’s local businesses. Market driven FDI, which is primarily what the US, EU and Japan are interested in investing, was limited in China because it would potentially hurt Chinese firms due to intense competition from western firms (Naughton, 403). The “western” firms were less interested in investing in China for export purposes, but rather wanted to take advantage of the massive market for consumer products present in China (Zhang, 294). Because of this, Taiwan and Hong Kong investment contributed a larger amount to FDI in China than compared with the US, EU and Japan.
Understandably, the geographic proximity of Taiwan and Hong Kong to China also contributed to the large amount of FDI. Still, there are barriers to trade that could inhibit the desirability of investing in China, such as tariffs and transportation costs. But, the tariffs are usually offset for Taiwan and Hong Kong firms because of China’s policy of tariff-credit for export oriented FDI, of which most Taiwan and Hong Kong FDI is (Zhang, 305). Additionally, the low shipping costs, due to Hong Kong and Taiwan’s proximity to Mainland China and various Special Economic Zones, make any of these added costs relatively negligible.
Taiwan and Hong Kong pursued massive amount of investment in China because of policies that encouraged FDI for exports, the massive supply in labor and geographic proximity but China sought after investment from Taiwan and Hong Kong for different reasons. Though China was interested in promotion of exports like Taiwan and Hong Kong, it was also interested in pursuing political unification with Taiwan through economic engagement, and becoming more economically and technologically developed. The importance of exports was a factor that was beneficial to China, Taiwan, and Hong Kong, but naturally China also pursued engagement and sought investment to promote its own interests in Asia and the larger economic world.
China was interested in engaging economically with Hong Kong and Taiwan because it would lead to a transfer of technology, which would ultimately help China’s economy advance. Interestingly, the transfer of technology did not come from joint ventures or from the Taiwanese utilizing Chinese supply chains (Chien and Zhao, 250). Taiwanese firms in China are usually wholly foreign owned enterprises and Taiwanese firms maintained their existing production network, mainly other Taiwanese firms in China. “Taiwan firms only chose limited numbers of China’s local subcontractors because they could not rely on the local logistic support and production system, whose core technical skills and competencies were not available to fulfill the new IT global production requirements” (Chien and Zhao, 251).
Despite some lack of interaction between Taiwanese firms and the local Chinese...