Investment environment could be seen as a marketable “commodity”, which concept generates from the theory of “marketing a country”. From the perspective of host country, the essence of attracting foreign investors is to introduce and marketing the investment environment to potential investors. Therefore, it is necessary to conduct the evaluation programme on China’s foreign investment environment in order to find out the achievements and prospective routes by the government, which is the main stakeholder in this field. To provide better facilitating services for foreign investors is a part of government’s function on stimulating foreign investments as well. It is undeniable that government plays irreplaceable role in improving foreign investment environment and realise the facilitation of foreign investment. It could be argued that for government, the key to realise investment facilitation is to liberalize commercial competition and avoid increase of unnecessary costs and risks in business.
In specific, improving the investment environment includes a variety of topics, if only concerning with providing an operable implementation guide, the most important goal of investment environment evaluation is encouraging investments flow to the most efficient and profitable fields by improving the factors that affect foreign investors’ decisions (namely the foreign investment environment). This evaluation research will focus on comparatively analysing the changes of China’s foreign investment environment (include investment facilitation appropriately) along the time series, so as to evaluate Chinese government’s endeavour as well as deficiencies in improving foreign investment environment, in order to successfully provide operational guide for Chinese government to further improve foreign investment environment and boost investment facilitation.
1. Microeconomic analysis on influencing factors of foreign investment environment
Profit maximisation is the economic principle that abided by foreign investors when they making decisions, it is also the driving force of their investments. The standard function of expected after-tax profit of foreign investment could be written as:
,where is the expected after-tax profit, is tax rate, is expected risk probability, is expected income and is expected cost.
Hence, to achieve profit maximisation, transnational enterprises incline to choose certain countries in order to meet the following requirements:
Ø Expected income increase
Ø Expected cost decrease
Ø Expected risk is manageable
Ø Tax level is reasonable
When a country or region could meet one or more above requirements, this country or region is likely to be preferable by decision makers of transnational enterprises, which means it has stronger attractiveness or relatively better environment for foreign investors. Taking present research findings and economic facts into account and concluding the above four factors we find that:
1. The main factors that affect expected income are: economic scale of the host country, total demand, urbanisation level, industrialisation level, etc.; the difficulty and scale for the connection between host country and international market.
2. The main factors that affect expected costs are: availability and price of production factors, the production factors include: labour force, capital, energy, technology, raw material, etc.; availability and price of infrastructure, which include: transportation, communication, etc.; efficiency and effectiveness of investment-related services provided by government.
3. The main factors that affect expected risks are: host country’s macro economy, society, environment, etc.; international macro-environment.
4. The main factors that affect tax level are: tax level (income tax level and tariff tax level).
Based on the four requirements, categorising the foreign investment environment affecting factors can clarify the variable choices of transnational firms from microeconomic perspective. However, concerning on the country’s level, more attention should be paid on how to provide operational guide to the government and relevant institutions.
2．Macroeconomic analysis on influencing factors of foreign investment environment
Briefly, the classification of four requirements is designed for transnational enterprises, but the investment environment evaluation indices system we need to formulate should aim at the government and relevant institutions. Therefore, the above factors that influence the four requirements (the components of foreign investment environment) are reclassified into five categories (table 1.1) to constitute the analytical framework of foreign investment environment evaluation, specific as follows:
Firstly, demand potential: the market potential of host country’s demand. It mainly includes: host country’s economic scale, population, total demand, urbanisation level, industrialisation level, etc.
Host country’s demand potential is the central enabler for transnational investors who want expand in the country’s market. With bigger scale of host country’s economy, higher level of industrialisation, the requirements for intermediate products and complete equipment of production unit are larger, which result in the intensive attractiveness for transnational companies that produce key parts, complete set of production equipment. Host country’s population, total demand and urbanisation level stand for its demand potential for end products, which helps to attract transnational companies that produce differentiated end products.
Secondly, production factors: the necessary production factors for transnational companies’ operation offered by the host country. It mainly comprise availability and price of production factors like labour force, capital, energy, technology, land, raw material, etc.
One of the main driving forces for transnational companies’ global production is cost minimisation. Company’s costs are fundamentally manifested as availability and price of production factors, which mainly include: labour force, capital, energy, technology, land, etc. Easily accessible and cheap production factors can help foreign enterprises to gain absolute cost advantage, or improve productivity to reduce relative costs under the average level so as to produce or provide low value-added products or services and consequently get economic benefit.
Thirdly, infrastructure: the infrastructure essential to realise smooth circulation of production factors, products and information. It is mainly concerned with: availability and price of transportation, communication, etc.
The quality of infrastructure like transportation, communication systems is reflected in their quantity, quality and using price. High density, wide coverage, complete quality and service, low cost infrastructures can reduce transaction costs between companies to generate the multiplier effect, and therefore enhance the attractiveness to foreign investors.
Fourthly, government services: availability and effectiveness of public services in host country. It mainly include: transparency and effectiveness of public policies, efficiency and quality of investment-related government services and tax rate imposed on companies.
Appropriate public policies and implementation mechanism can effectively reduce transaction cost, improve transaction efficiency between firms and benefit companies to form precise investment expectation. Government’s efficiency and effectiveness in capital investment process directly determine efficiency of foreign investors in their process of implementing investments. Company’s tax level determines the weight of after-tax profit investors can get. Therefore, favourable policy, efficient investment-related services and relatively low tax rate show improvement of investment environment. Nonetheless, it should be explained particularly that government service is an important component but not the whole of foreign investment environment. The investment facilitating project concerns more with every aspect of government services in foreign investment environment, which is significantly policy-oriented.
Fifthly, the macro-environment: macro-environmental factors of host country and international factors beyond boundary of the host country. It mainly includes: host country’s macro economy, society, environmental background, international macro-environment and the difficulty and scale of connection between host country and global market.
Host country’s macro economy, society and environmental background constitute the panoramic background faced by investors; and they are the background variables for transnational investors when they are deciding investment areas. Generally, for stable economic and social conditions, favourable environmental resources have positive influence on transnational investors. While international connections go beyond national boundaries and redirect the investment environment views between different countries. International macro-environment factors contribute to the most macroscopic background for transnational investment. Deterioration of international macro-environment caused by significant shock always leads to shrink of transnational investment, for instance, the financial crisis in 2008 significantly decreased the amount of transnational investment. The difficulty and scale of connection between host country and global market is measure of the ability of host country or foreign investment companies connect to international market. The easier connection to global market and larger scale could bring greater market space for foreign companies, which will generate huge attraction to export-oriented foreign investments.
Table 1.1 Foreign Investment Environment Analysis Framework
|From Macro Perspectives for Action Guide|
|Demand potential||Production factors||Infrastructure||Government services||Macro-environment and external links|
|From Micro perspective from companies||income||economic scale of the host country, market capacity, urbanisation level, industrialisation level, etc.||——||——||——||Difficulty and scale for the host country to connect to global market
|cost||——||availability and price of production factors, include: labour force, capital, energy, technology, raw material, etc.||availability and price of transportation, communication, etc.||availability and effectiveness of public services in host country, include: trans- parency and effectiveness of public policies||——|
|risk||——||——||——||——||host country’s macro economy, society, environmental background, international macro-environment|
|tax||——||——||——||income tax level and tariff tax level||——|
The subsequent design on indices system for foreign investment environment evaluation will depend on the above analysis framework. From the previous analytical framework, the general suggestions for the host country to improve foreign investment environment are: enhance market demand potential; provide more sufficient and high-quality production factors; construct wider coverage and more efficient infrastructure to ensure economy functioning; provide more transparent and efficient government services; sustain stability of macroeconomic environment, enhance facilitation for international connections.