Changes May Influence Future

Investments in China

Munkhzaya Ochirsukh MA2N0245Financial ManagementCase 8

Foreign Direct Investment in China soared in 2006. Not including banks, insurance, and securities, FDI amounted to $63.02 billion. China’s economy has surged more than tenfold since 1980, the first year it allowed foreign investments and money began pouring into factories on China’s east coast.

Foreign Direct Investment

Foreign Direct Investment in China increased to 958.80 USD Hundred Million in October of 2014 from 873.60 USD Hundred Million in September of 2014. Foreign Direct Investment in China averaged 385.52 USD Hundred Million from 1997 until 2014, reaching an all time high of 1175.86 USD Hundred Million in December of 2013 and a record low of 18.32 USD Hundred Million in January of 2000.

Foreign Direct Investment

Prime Minister Wen Jiabao wants to steer investments toward the manufacturing of higher-value products and toward less-developed regions. Wen is giving tax breaks and promising speedy approvals for investments away from areas in the east, such as Shanghai and the Pearl River Delta.

Foreign Direct Investment

China allows three types of Foreign Investments:

- WFOE (wholly foreign-owned enterprise)

in which the firm is entirely funded with foreign capital

- Joint venture in which the foreign partner must provide at least 25 percent of initial capital

- RO the most common and easily established entity, which cannot perform business activities that directly result in profits.

Foreign Direct Investment

Like any Foreign Investment, investing in China is not without risk. One potential risk facing foreign investors in China is the likelihood of a future tax increase. Currently, domestic (Chinese) enterprises have heavy tax burdens, while foreign investment enterprises enjoy a lower tax rate. The difference is about 13 percent and it is one reason why foreign investors favor China.

Foreign Direct Investment

The Chinese Government has encouraged foreign investments through favorable tax treatment.

Can you think of similar situations in your own country?

Foreign Direct Investment

Tax Policy

China implements a low-lax policy for foreign investment enterprises and implements preferential tax policies in the industries and regions where investment is encouraged by the state. At present, taxes for foreign investment enterprises and foreign individuals ( including compatriots in Hong Kong, Macao and Taiwan): business income tax, Personal income tax, turnover tax (value-added tax, Consumption tax and business tax included) ,tariff, land increment tax, resource tax, urban real estate tax. etc.

FDI in Mongolia In the last few years the interest of foreign

investors in capital investment in Mongolia has been rising, especially among investors from Northeast Asia and North America, and the volume of capital investment has increased in the all fields of trade, most of all in the mining industry.

The government of Mongolia is, of course, very concerned with the question of foreign investment and has directed the creation of both foreign and domestic policy which supports and stimulates the increase of foreign investment within Mongolia.

The Foreign Investment Law of Mongolia was adopted in 1993.  Further amendments were made in 1998 and 2002.  The objective of these changes was to create good conditions for foreign investment such as reducing the value-added tax on imported goods, improving services for registration and operation of companies with foreign investment, introducing provisions for cooperation between Mongolian and foreign investors, and establishing preferential tax treatment and stable investment guarantees.

Between1990 and 2006, 6,165 foreign companies from 96 countries were registered in Mongolia.

FDI in Mongolia

After amending the Foreign Investment Law of Mongolia investment in Mongolia has grown by between five and six percent, compared to the averages between 1996 and 2000, and investment for the exploration and mining industries rises every year. In 2006 foreign entities invested 366$US billion dollars in Mongolia, and total foreign investment reached 1.8$ US billion dollars since 1990.  Today in Mongolia 73 percent of all foreign investment companies consist of companies which have paid-in capital between US$10,000 and US$50,000.  9 percent of foreign investment companies have a paid-in capital of between US$50,000 and US$100,000 and the remaining 18 percent have paid-in capital of more than US$100,000.

FDI in Mongolia

The Government of Mongolia (GOM) has consistently said that it supports foreign direct investment (FDI) in all sectors. Throughout 2013 and well into 2014, the President of Mongolia, Ts. Elbegdorj, and other senior officials have publicly stated in a variety of international and domestic venues that the GOM will keep key foreign investment commitments and pass investor-friendly legislation, because they recognize the value of FDI for Mongolia. On May 8, Parliament passed a resolution on “measures to spur economic activities” identifying steps to improve foreign currency flows, lower risk, and improve the business and investment environment; and on July 1, passed long-awaited amendments to the Minerals and Petroleum Law respectively.

FDI in Mongolia

Domestic vs. Foreign: It’s Where You Are, Not Who You Are