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China-Japan-Korea investment opportunities studied

China Daily, 2005-02-25

Investment opportunities studied

Editor’s note

The joint study group, consisting of members from China, Japan and South Korea, issued a report recently on possible trilateral investment arrangements between the three countries, which recommended that a legal framework concerning investment among the three countries should be explored in the near future. Yi Xiaozhun, China’s assistant minister of commerce, told the media last month that China and the other countries involved would soon begin a feasibility study on the establishment of an East Asia Free Trade Area (FTA) covering China, Japan, South Korea and the 10 members of the Association of Southeast Asian Nations.

Such an investment arrangement, if well operated, would not only help integrate the economies of the three countries, but also give a fresh boost to the start of FTA negotiations.

Following are extracts from the report.

Findings and links to policy issues

In October 2003 in Bali, Indonesia, the leaders of China, Japan, and South Korea agreed to launch an informal joint study on the possibility of trilateral investment arrangements involving representatives from government, business, and academia.

The joint study group discussed a wide range of issues on the economic impact of the enhancement of investment, the improvement of the business environment, and the implementation of possible trilateral investment rules, with a view to taking further steps to promote inward foreign direct investment to develop each economy.

The group noted the conclusion of the economic analysis concerning FDI between the three countries and confirmed that it is worthwhile to explore ways and means to further encourage investment in this region as a joint undertaking of these countries.

In addition to the role of market-led growth in attracting FDI, a well-established environment, which includes the greater transparency of rules, a prudent approach to deregulation, greater protection of investors’ rights and intellectual property rights, and an effective dispute settlement mechanism, is also important in promoting FDI, so that business risks of large-scale and complicated FDI can be reduced.

It is inevitable that China, Japan and South Korea make efforts to improve their own investment environment in order to further enhance the economic benefits of FDI. An important starting point will be for the three countries to share the common experiences among China, Japan, and South Korea. By properly developing the huge potential of the three countries, further institutional reform at home and trilateral co-operation based on the common experiences would not only benefit the three countries, but also the entire East Asian region.

The group recommended that the three countries implement the measures as soon as possible.

The group agreed on the need to establish a mechanism among the governments of the three countries to follow up on the implementation of the suggestions and to produce additional measures for the improvement of the business environment with input from the business community.

Transparent laws and regulations

The recent moves to make laws in the three countries more transparent were discussed. In order to improve transparency, Japan has introduced a no action letter system, a public comment system and the Administrative Procedure Law of 1993. These measures have substantially improved transparency. South Korea’s Administrative Procedures Act of 1996 and the Act on Disclosure of Information by Public Agencies of 1996, which mandated inviting public comment and providing details of regulation and criteria for authorization upon request, have also contributed to enhancing overall transparency in its government regulations. China introduced the Administrative Licensing Law in 2003 to limit the scope of investment activities requiring licenses. Ministries in China have requested comments from foreign companies before finalizing the rules and established focal points to respond to questions relating to its WTO accession.

While welcoming such improvements by the three countries, the group believes that further steps should be taken to enhance transparency.

In particular, Japan and South Korea stressed the importance of the enforcement of laws, regulations, and taxation. In this regard, the group agreed on the need to establish an information exchange system among the three countries with a view to providing prompt investment-related information including the details of regulations, criteria, and procedures.

Measures to respond to specific questions concerning rules and regulations are also recommended. The investment-related websites of the three countries could be linked. It is also recommended that the following measures be introduced among China, Japan and South Korea, if not yet taken:

 Introduction of a public comment system in the area related to investment activities.

 Making an unequivocal commitment that those laws and regulations pertaining to or affecting investment are published or made available to other members. Also, making an unequivocal commitment that people or companies shall not be disadvantaged for not following administrative guidance which is not specifically based on laws or regulations or for raising legitimate concerns including IPR infringements.

 Adoption of a system which responds to questions concerning the status of applications to the governments after the period of time stipulated in the relevant laws and regulations has passed.

 Provision of a clear explanation, preferably in written form, when declining requests for licenses or authorization.

To enhance transparency, Japan proposed the introduction of a no action letter system and South Korea proposed the introduction of an authorized responding system, by the ministries responsible for areas that affect the activities of foreign companies, and by local governments in regions with a significant foreign business presence. China stated that it would study a system under which it would endeavour to respond to written requests in a written form regarding the clarification of the legality of business activities.

Protection of intellectual property rights

With regard to IPR, the importance of protecting IPR in promoting investment was discussed and reaffirmed.

While the group welcomed the significant improvement in the protection of IPR in China, Japan and South Korea in recent years, it believes that further action is required.

Japan suggested that a review mechanism should be established to address and provide recommendations to resolve specific issues concerning IPR protection raised by foreign companies. It was also suggested that the IPR authorities of the three countries should pay special attention to and strengthen co-operation on issues related to IPR protection. The importance of establishing divisions specializing in IPR issues within courts was also noted.

Dispute settlement mechanism

In the context of dispute consultation, the group welcomed the establishment of claim centres by each country. Also, some examples of consultation among local governments and the foreign business communities were quoted.

The group believes that such a mechanism will help prevent disputes and promote investment.

Promotion of investment and relevant services

The group noted the success of "one-stop service centres" such as those in South Korea and in Suzhou, China, where the central government and local offices of the government ministries co-operate in coping with substantive matters with a view to promoting investment in the region.

In this regard, the group suggested that other central or local governments of each country follow and build upon the effective model of "one-stop service centres" demonstrated in South Korea and in Suzhou, China.

Various investment promotion activities conducted by China, Japan and South Korea such as investment fairs and marts were discussed by the group.

The group recommended that the three countries co-operate further in such activities.

Coherence of national and local administration

The group agreed that the promotion of the coherence of national and local administration, including consistency in the implementation of rules and regulations at both national and local level, is vital to enhance investment.

In this regard, training officials at local level, as well as the prompt provision of details of regulations, criteria, and procedures to the public are recommended as effective measures to promote coherent national and local administration.

Other issues

In addition to the five areas described above, the availability of credit information was raised as an important factor for companies to provide finance and other credit. The group noted the system for sharing credit information operating in Shanghai, and encouraged the introduction of similar measures in other regions of the three countries, if not yet introduced.

The group noted that co-operative measures should be taken by the three countries to simplify the issuing of business visas in order to facilitate business travel among the three countries.

The group also noted that relatively high costs, incurred from the distribution and logistics systems that are different from or discriminate against each other, was one of the obstacles to promoting intra-regional investment and expressed its hope that co-operative efforts be made in this area.

The group emphasized the immediate need to put into action as many suggestions as possible. The group proposed the three countries to continue exploring the implementation of the aforesaid suggestions. Japan and South Korea expressed their hope to incorporate some of those suggestions into possible investment rules.

The group also stressed the necessity of regular follow-ups on the implementation of the suggestions in this report. The group expressed its strong desire that the suggestions be implemented in a timely manner. In this regard, the group agreed on the need to establish a mechanism among the governments of the three countries to follow up on the implementation of those suggestions on which consensus was reached, and to take additional measures for the improvement of the business environment with inputs from the business sector.

Recent trends in FDI among China, Japan, and South Korea

Since the 1990s, there has been a rapid and intensive increase of FDI flows among China, Japan, and South Korea, dominantly led by inflows to China. According to the Ministry of Commerce of China, FDI from Japan and South Korea to China peaked once in the mid-1990s, in terms of both numbers and value, and has been swiftly rising again since 2000. In 2003, FDI to China recorded the highest level both from Japan and South Korea, and especially South Korea’s FDI has overtaken Japan, not only in terms of numbers but also in terms of value.

FDI between China and Japan
According to Chinese figures, by the end of 2003, there were 28,401 Japanese-invested enterprises in China, accounting for 6.1 per cent of the total foreign companies in China. Japan has a cumulative contractual investment value of US$57.5 billion and actual investment of US$41.4 billion, representing 6.1 per cent and 8.25 per cent of China’s total respectively. Japan has already become the second-largest investor in China, but in terms of the value of investment, there still remains much potential.

Compared with Japan and South Korea, China remains a minor capital exporter, but the number of cases including M&As in Japan has increased to acquire modern production capacities, technology, brands, and marketing knowledge. According to Chinese figures, by the end of 2003, China had approved 250 non-financial enterprises in Japan with a total investment value of US$90 million.

FDI between China and South Korea
According to Chinese figures, by the end of 2003, 27,128 South Korean-invested enterprises had been established in China, with a cumulative contractual investment value of US$36.7 billion and actual investment of US$19.7 billion, accounting for 5.83 per cent of the total number of foreign-invested enterprises in China and 3.88 per cent and 3.93 per cent of the total amount of contractual and actual FDI in China respectively. Based on South Korean figures, by the end of 2003, 10,923 cases of South Korean investments had been made in China, with a cumulative actual base investment value of US$14 billion. South Korea ranks as the fifth largest FDI source of China. Although South Korea’s FDI to China started at a later stage, following the establishment of diplomatic relations in 1992, the number of cases as well as the proportion of FDI to China in South Korea’s total FDI has far exceeded that of Japan, reaching even 60 per cent in some instances, and nearly 40 per cent in value in 2003.

Chinese investment in South Korea is also relatively minor. According to Chinese figures, the number of approved Chinese-invested enterprises in South Korea reached 72 by the end of 2003, with a total investment value of approximately US$300 million. In contrast, according to South Korean figures, the number of Chinese-invested enterprises in South Korea reached 3,624 by the end of 2003, with a total investment value of approximately US$522 million. In South Korea, there have already been takeovers by Chinese firms in major manufacturing businesses, such as semiconductors and automobiles.

FDI between Japan and South Korea
Japan’s FDI to South Korea has increased in recent years, but the contribution has been modest, compared with the European Union or the United States, as South Korea has successfully diversified its FDI sources. Based on South Korean figures, Japan remains the third-largest investor with accumulated US$13.3 billion by the end of 2003. As South Korea is a relatively mature economy with an industrial structure closer to Japan, FDI from Japan to South Korea has become highly segmented, strategic, and R&D-intensive.

On the other hand, South Korea’s FDI to Japan has remained at a negligible level, as its FDI has traditionally headed for the United States and China. According to Japanese figures, Japan has received 554 cases and US$621 million of investment from South Korea between 1989-2003, the third-largest investor in the East Asian economies. Based on South Korean figures, 736 cases of South Korean investment have been made in Japan, with a cumulative actual investment value of US$989 million.

However, several cases of R&D activities by large firms as well as venture firms have begun to make a new trend of South Korea’s FDI to Japan in recent years. The new South Korea-Japan Bilateral Investment Treaty (BIT) is expected to promote this trend and make more dynamic industrial adjustments, as well as pave the way for an Economic Partnership Agreement (EPA) or a Free Trade Agreement (FTA) between the two countries.

 source: China Daily