Self-Reliance and the Open Door: The Role of Foreign Investment and Technology in China’s Economic...

‘Self-Reliance and the Open Door’: The Role of Foreign Investment and Technology in China’s Economic Development.

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NATHAN

Department of International Business and Asia Studies

7010IBA: China Rise: Challenges and Opportunities

Course Convenor: Prof Ronald Keith

Submitted by: Adnan Hafeez

St Id # s2142424

Email: [email protected]

mailto:[email protected]


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.

Topic: “Self-Reliance and the Open Door”: The Role of Foreign Investment and Technology in China’s

Economic Development.


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By self-reliance we mean that a country should mainly rely on the strength and wisdom of its own people,

control its own economic lifelines, make full use of its own resources, strive hard to increase food

production and develop its national economy step by step and in a planned way’. (Deng Xiaoping, 1974,

Address to the United Nations).

Zi li geng sheng: “regeneration through one’s own efforts” (Self-reliance) is a connotation that China as a

nation derived from the hardships endured during a century of humiliation, followed by the first opium war

and treaty port experience in 1840s. The crucibles of this century served as driving force for Maoist

revolution completed in 1949, after which China ‘Stood up’ through the effort of its own people (Keith

2009; Luolin and Watson, 1986) . According to the Keith (2009) self-reliance was a profound moral lesson,

learned by the forefathers of modern China that resides at the heart of their revolutionary ideas. After

completing its transformation from an imperial kingdom to a nation state in 1949, CCP (Chinese Communist

Party) leadership engaged in dialectical debates to determine the role of their newly born state in the world

and its interaction with international community that would define the nature of foreign economic, social

and political influences on China in future. These debates revolved around the core value of self-reliance

and dialectical reasoning among CCP leadership was the principle to formulate policy framework. However,

overemphasis on self-sufficiency generated stagnant economic growth and the failure of Cultural Revolution

and Great leap forward, ultimately led China into the state of autarky and isolationism.

Keith (2009) suggests that after a dialectical synthesis of the notion of self-reliance, Deng Xiaoping

announced the newly developed ‘open door’ policy to the world while addressing the UN in 1974.

Consequently, massive reforms took place in the economic structure of China in 1978. Thereafter, China

embarked on a journey of economic development, which restored the shredded social fabric of China back

to its shimmering silk glory. In the last decade, China has emerged as the world second largest economy by

becoming one of the prime recipient of foreign direct investment (FDI) and embracing innovation and

technology. The objective of this paper is to critically assess the role of FDI and technology in the economic

development of China under the lens of the dialectical connotation of ‘open door and self-reliance’.

Feez

Cross-Out


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Imperial China, for most of its recorded history remained isolated from rest of the world, both

geographically and culturally. The sense of economic, social and cultural superiority ran through the tapestry

of Chinese society and deeply embedded in their philosophies and outlook of their status in the world.

Opium trade started to build external pressures on tightly regulated coasts of China and in 1840s British

Royal Navy blasted through its gates, thus destroying the pride and superiority of imperial China.

Consequently, foreign influence in terms of culture, technology and ideologies started to infiltrate the

Chinese society, penetrating deeper than the level of approval of customary Sino values. Bounded by

humiliating war treaties, China started to lose its sense of dignity and this propagated the crisis of national

identity and integrity. These predicaments swamped the country for a century until 1949, when under the

leadership of Mao Zedong the nation state of People’s Republic of China (PRC) was founded (Luolin and

Watson, 1986). According to Luolin and Watson (1986) national unity and liberation from foreign

oppression, humiliation and insult were the central themes of Mao Zedong celebratory speech and he

conveyed to the international community that Chinese people had ‘stood up’. The mammoth tasks of

rebuilding the nation, restoring the national integrity, restructuring of unplanned and scattered economy lied

ahead of CCP leadership.

Tisdell (2013) argues that during the period of 1949-60, China was not practicing self-reliance in

technicality, as it was heavily dependent on Soviet aid and assistance in restructuring its economy. However,

attempts to replicate the Soviet economic model met with failure because the strategy adopted by CCP to

plan centralised economy was not as comprehensive as Soviet Union. The nature of economic structures and

lower level of development were also not compatible with Soviet model. Furthermore, China found the

attitude of Soviet Union, dictatorial, interfering and coercive. Thus, CCP leadership started to resent this

dependence and forced political influence of Soviet Union. As a result, the association between the two

states started to deteriorate in late 1950s. Soviet Union withdrew its aid and assistance to China in 1960, thus

relationship between the two states turned hostile and sour (Tisdell, 2013, 2009).


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Narrating the account of termination of the Sino-Soviet alliance, Keith (2009) states that Mao abandoned the

‘slavish copying’ of Soviet Model after the closure of cooperation between the two states. Strongly rejecting

the dogmatic submission to other countries, Mao contended that aid was a helping gesture, however,

assistance that came at the cost of self-reliance, state autonomy and national independence was futile. In the

internal dialectical debates of CCP, Mao reasoned that domestic issues of development of China could not

be resolved by the assistance and aid of any foreign country, despite its ideological and political affiliation

with China. Therefore, China needed to rely exclusively on its own resources and learn from the experience

of other countries, extracting constructive lessons that were compatible with the revolutionary ideas of CCP.

However, countering this stance, Premier Zhou argued that those who assumed that China could achieve

development at its own were in denial of the prospects that could emerge by participating in the realms of

international community and applying superior foreign technology in domestic practice effectively (Keith,

2009).

The dialectical debates steered a shift in Mao’s approach. Hence, during the Great Leap Forward, Mao

introduced the new philosophy of ‘walking on two legs’. The new outlook Mao espoused towards the

connotation of self-reliance signalised the acceptance of the mixture of foreign and domestic technology.

Expressing his dissatisfaction with the First Year Plan, Mao identified that in the effort to replicate entirety

from Soviet Union, party had lost creativity and this undermined domestic abilities to innovate. Thus, Mao

declared self-reliance as the primary objective of the national policy and foreign aid as the secondary goal

(Keith, 2009).

Keith (2009) states, Zhou Enlai undertook thorough and rigorous analysis of the conditions attached to

various Chinese aid projects. After conducting a comparative study of aid programmes designed by other

countries, he concluded that the most of the aid projects were unreasonably conditional and exploitative.

Zhou strictly rejected the strings attached to aid, profit orientation and unbalanced privileges in the favour of

the donor. Therefore, based on lessons learned during the course of revolution, Zhou formulated a detailed


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framework of guidelines. He stressed ‘to respect strictly the sovereign right of the recipient country, to

attach no strings of any kind, to enable the recipient country to stand on its feet and develop without outside

interference, to require Chinese personnel working on aid projects to share weal and woe and to live and

work in the same conditions as the local personnel in similar position’ (Keith, 2009; p. 47). These guidelines

later synergised by Deng with the notion of ‘open door’. In the light of this dialectical approach, Deng

Xiaoping delivered his historic speech of the year 1974 in the UN, highlighting the Chinese approach

towards ‘self-reliance’ and opening up China’s gate to the outside world in terms of financial assistance and

collaboration. Furthermore, Deng stressed that ‘open door’ would not be wide open but this policy be

regulated on the merits of ‘mutual benefits and equality’, hence the process of opening up would be gradual.

Deng faced harsh criticism at home and termed as ‘Clever Bukharinist’ in denial of the importance of class

struggle. The ultra-left faction of CCP accused him of violating Mao’s fundamental principle of self-

reliance. Deng’s unorthodox ideology of ‘open door’ was compared with the humiliating port treaties that

would allegedly reverse the revolution and reduce China to a ‘raw material base, a repair and assembly shop

and an investment centre’ (Keith, 2009; p.51).

Deng was fully prepared to face this condemnation, in his rebuttal to the above criticism. Firstly, he engaged

the ultra-left faction to analyse Mao’s self-reliance philosophy in historic context. Secondly, with the help of

dialectical synthesis, Deng proved himself as a true subscriber of Mao’s legacy. According to Keith (2009)

Deng stated that Comrade Mao never prohibited the collaboration in technical and trade matters with foreign

countries, capitalists or socialist. He talked about ‘walking with two legs’ and extending China’s role in the

family of international community. However, in the absence of the favourable circumstances such as

embargos on China and the unnecessary opposition to foreign relations by the gang of four, China had been

sealed off for too long. Deng further stressed that locking doors and refusing to put intellectual abilities of

Chinese people in effective use would keep the country under developed. Condemning the closed-door

dogma, he argued that this was against the dialectical approach of Chairman Mao because he stressed on

learning from other countries experience and drawing useful lessons by applying superior foreign


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technology in domestic context. Thus in the light of these arguments and synergy of self-reliance and open

door formulated by Deng, China unlocked its door. Furthermore, the four points approach, 1yi yong, er

pai, san gai, si chuang constructed by Zhou Enlai served as a parameter for adopting foreign strategies.

This allowed the systematic importation of foreign technology and merit based foreign investment,

compatible with the requirements of domestic economic development, to enter in China.

In the winter of 1978, Eleventh Central Committee held its third plenum, which completely transformed

Chinese leadership policies for economic development. The new policy framework was based on the pillars

of readjustment, restructuring, consolidation and improvement (Luolin and Watson, 1986). Initially, the

government of China adopted pragmatic and controlled approach towards FDI in China. The primary reason

behind this approach was to address the concerns of high party officials who might see this as an invasion of

negative Western values and influences (Davies, 2012; Tisdell, 2009). Therefore, it was decided to keep the

FDI restricted to the four specially developed economic zone in the coastal regions.

According to Davies (2012) the preliminary policy framework allowed two kinds of joint ventures schemes

for foreign investors because 100% foreign ownership was in clash with the ideology of self-reliance. In

order to attract foreign investment to improve state owned enterprises, government offered 5 years tax

holiday and reduced the business income tax by 50%. These tax reductions were also adopted to compensate

the lack of institutional framework for FDI such as inadequate infrastructure, mobile workforce, standard

accounting practices and general security concerns. However, in 1992, the importance of FDI for economic

development grew and under the instructions of Deng, more areas were opened to the foreign investors and

new reforms were introduced. Thus, new reforms combined with improvement in institutional framework

for FDI, the inflows started to rise in multiple folds. According to the reforms introduced in 1992, foreign

investors were allowed to have 100% ownership of their businesses; export restrictions were relaxed and ban

on the domestic consumption of commodities, produced by foreign businesses was also lifted. These reforms

1 first use, second criticise, third improve and fourth make it your own


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attracted world renowned Multinational Corporations to set up their facilities in China because the world

largest consumer market opened up to the world (Tisdell, 2009).

In the light of the connotation of open door and Zi li geng sheng: FDI in China is catalogued in four

categories prohibited, restricted, permitted and encouraged. The list of prohibited sectors includes the areas

of national security and defence related matters. The restricted catalogue deals with the area of sensitive

nature where security clearance, close examination is required, the approval criteria is strict and time

consuming. Priority and favourable treatment is provided to the encouraged category because of their

compliance with domestic development needs. The encouraged catalogues includes sectors such as hi-tech

industry, green energy, recycling, environment protection and development projects in Western and Central

regions (Davies, 2012).

Table no: 1

Source: UNCTAD’s FDI/TNC database at < http://unctadstat.unctad.org/EN/>

The data projected in table no: 1 shows the total accumulation of FDI inflows stood at US$ 473 billion by

2009. The cross-country comparison shows that China is the leading recipient of the FDI among the

developing world and transition economies such as Brazil (US$ 401bn), India (US$ 164bn), Russia (US$

253bn) and Singapore (US$ 167bn). It is important to analyse the FDI inflow trends for 2009 – the year

followed Global Financial Crisis. China received highest FDI inflows with a minor reduction in the year

2009 compared to 2008. This consolidates China’s international reputation as safe haven for investors.


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Evaluating the current trends of FDI inflows in China, under the light of current development in the global

economy, Davies (2012) argues that concerns have been raised about the future role of FDI in Chinese

economic development. These concerns originate from the following issues.

(i) The main driver of growth in China is the fixed FDI, which is increasing at the rate that could take

the economy beyond its capacity and potential level. Thus exhausting the available resources and

overheating the economy, which could lead to hyper-inflationary trends.

(ii) Various industrial sectors have matured to the stage where intercompany rivalries are getting

aggressive. This could lead to unhealthy competition, especially when the implementation of

corporate laws are not as strict as the developed world, bigger enterprises can curb the smaller

companies by using unethical tactics.

(iii) There is a risk of monopoly creation in some of the strategically sensitive sectors; that could be

concerns of national security, stability and possible exploitative tactics adopted by monopoly

powers.

(iv) Over dependence on FDI will concentrate the economy and might lead to the economic crisis similar

to the Latin American countries suffered in 1990s.

However, Chinese government is rejecting proposals to take strict measures in tapping the inflow of FDI. On

the contrary, applying the strategy of dialectical approach, under the principle of self-reliance and open door

and extracting truth from fiction government is gradually adopting a change in policy framework. As of

2008, government has abolished the tax holiday schemes for future FDI with grandfathering and phasing

clauses to ensure the stability of existing ventures. Most importantly, after a detailed and in-depth review for

the future domestic needs and long-term sustainability of economic growth, Chinese government is inviting

firms to bridge the technological gaps in the economy. The new policy framework provides exclusive

incentives for research and development, hi-tech, and environment industry in order to promote green

practices, innovation and technology oriented development in the economy.


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Wirz (2008) argues that micro level analysis of Chinese economy reveals that the growth is attributed to

increase in productivity. Inventing new technology is not only expensive but also a time-consuming course

of action. Therefore, Chinese economic policy relied on foreign technology but moulded it, according to the

domestic needs of its industrial and manufacturing sector. The increased in productivity can also be credited

to the four point principle of yi yong, er pai, san gai, si chuang, formulated by Zhou Enlai. Hence, first

use the technology, then evaluate it critically in the context of domestic needs, third improvise it for

domestic use and fourth adopt it as your own. The reforms of 1978 promoted the capital-intensive

investment in China that resulted in importation of new plants and machinery for upgrading the existing

manufacturing units and installing new ones. The data reveals that capital-output ratio and the real return to

capital have been constant since the reforms of 1978. This indicates that productivity gains have played a

vital role in China catch-up with the leading economies such as the United States, Japan, German, and the

UK (Wirz, 2008).

Figure no: 1/ Growth rates: GDP per worker and TFP

Source: Total Economy Database

The economic output trajectory as illustrated in fig no: 1(a) shows that since 1978, GDP per worker has

multiplied by five folds. This remarkable growth is the result of adopting foreign technology and using it

effectively in the context of domestic needs. The microeconomic theoretical framework suggests that

economic output can be increased by expanding the human (labour force) and physical capital (plants,

machinery, and infrastructure). However, after a certain point this expansion starts to generate negative


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returns because of the laws of 2economies of scale. Chinese economic planners crossed this barrier by

adopting the approach of efficient allocation of resources and established an organised managerial hierarchy,

which ultimately led to the increase in total factor productivity (TFP) (Morrison, 2011). Figure no: 2(b)

illustrates that Chinese TFP rate increased by 3.9% from 1978 to 2005. The comparative analysis shows that

the world TFP increased by 0.9%, TFP for industrial country and East Asian states grew by 1% and for India

1.6%. This comparative analysis shows that China leads the world in TFP growth by a vast margin.

According to Wirz (2008) the explosive economic growth of China is a result of technology adaptation

combined with efficient resource allocation techniques. The analysis of the data shows that this combination

accounts for striking 80% of the productivity gains during 1978-2005.

Figure no: 2: GDP Growth of China: 1990-till date

Figure no: 2 illustrates the GDP growth trend of China since 1990. It can be observed that there has been a

slowdown in the growth rate since 2008. Initially the downturn was the result of GFC in 2008; however, it is

also being attributed to the limitations of Chinese economy that arise by solely relying on the importation of

technology. China hi-tech sector has gained vital industrial importance in the last two decades. However,

2 In microeconomics, economies of scale are the cost advantages that enterprises obtain due to size, output, or scale of

operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units

of output (refer to http://www.investopedia.com/terms/e/economiesofscale.asp for further details.)

http://www.investopedia.com/terms/e/economiesofscale.asp


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most of the development generated in Chinese industrial sector was the result of massive foreign capital

infusion and technology embodied in FDI. Therefore, the government is adopting new policies to encourage

indigenous research and development of new technology. The practice of holding National Conference on

Technology was started in 1997 to address the indigenous generation of technology. These conferences have

promoted the role of enterprises to contribute towards the Research and Development needs of the national

economy. As of 1999, the government has demanded the large business enterprises to spend 5% of their

annual sale on research and development. The most recent policy measures allow this expenditure to be

counted as cost. One of the most important policy measure adopted by the government is the ‘technology

standard’ strategy. According to this strategy, China wants to compete in the international market place by

adopting and setting its own benchmark in technological standardization (Cao, 2004).

Conclusion

In a nutshell, China has emerged as a resilient economic dragon over the last four decades. The Chinese

society has undergone profound evolutionary process in terms of culture, economy and policymaking. The

isolated society of imperial China went through a century of humiliation after 1839 and its bitter experience

with foreign occupation and invasion left dreadful memories in the minds of CCP leadership. Thus, the

ultra-left faction of CCP was skeptical to open China’s gate for foreign culture, investment and technology.

However, the dialectical approach of policymaking adopted by PRC forefathers has nourished fruitful results

for future Chinese generations. The connotation of zi li geng sheng catches the essence of modern China’s

economic evolution.

It can be concluded without a doubt that Deng Xiaoping dialectical synthesis and vision about zi li geng

sheng played a decisive role in achieving this remarkable miracle of economic growth. The ultra-left

faction of CCP aggressively resisted Deng vision and his approach towards Mao’s philosophy of self-


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reliance. Despite severe criticism, harsh allegations and acquisitions of insulting nature, Deng remained

steadfast and committed to transform China’s fortune through regeneration and efforts of Chinese people

and systematic integration of Chinese society with international community. The agenda of massive

economic reforms introduced in 1978, restored the shredded social fabric of China back to its shimmering

silk glory.

FDI and adoption of foreign technology under the philosophy of separating truth from fiction proved highly

beneficial for GDP growth of China. Today China is the leading manufacture and exporter of finished goods

and major recipient of FDI in the world. This remarkable journey of economic development has produced

profound impressions on the vision of CCP leadership; clearly, a paradigm shift is visible in the trends of

policymaking. It can be argued that China might have abandoned the principle of self-reliance in strict literal

terms, both in the realms of economy and international relations. Today, Chinese economy is highly

integrated with world economy, the industrial sector of China depends upon the demand of its finished

goods around the globe and the growing energy needs of China make it dependent on mineral rich countries.

Therefore, the suitability of economic growth and future prosperity is highly reliant upon the accessibility of

minerals resources and global demand for its export. On the other hand, emergence of China as the second

largest economy in the world has enabled its leadership to influence the decision making of countries;

therefore, it is a dominant force in international relations.

The CCP leadership has not abandoned the philosophy of ‘being your own master’. Thus, China is in control

of its capacity in policymaking and goal setting. Nonetheless, despite its departure from the autarky of self-

reliance, China still subscribes to the core values of zi li geng sheng, which is to generate through one’s

own efforts, be the master of one’s own fate and take the charge of decision-making and goal setting. This

philosophical connotation will remain a vital lesson for nations as well as academics, not only in the

discipline of economics but also for political scholars, historians, and scientists.


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Reference List

1. Cao, C. (2004). Challenges for Technological Development in China’s Industry: China Perspectives

[Online].

2. Davies, K. (2012). Inward Foreign Direct Investment in China and Its Policy Context. China: An

International Journal, 10(1), 62-74.

3. Keith, R. (2009). Plumbing the Relevance of 'Independence and Self-Reliance' in Chinese Foreign

Policy. In L.-H. Chan, G. Chan & F. Kwan (Eds.), China at 60: Global-Local Interactions (pp. 37-

60). Singapore: World Scientific Publishing Company.

4. Morrison, W. M. (2011). China’s Economic Conditions. United States Congressional Research

Service. Washington.

5. Tisdell, C. (2009). Economic Reform and Openness in China: China’s Development Policies in the

Last 30 Years. Economic Analysis and Policy, 39(2), 271-294.

6. Tisdell, C. (2013). Economic self-reliance and China's development: changing perspectives.

International Journal of Development Issues,, 12(3), 239-252.

7. Watson, A., & Luolin, X. (1986). China's open‐door policy in historical perspective. Australian

Outlook, 40(2), 91-99.

8. Wirz, N. (2008). Assessing the Role of Technology Adoption in China's Growth Performance. EPRU

Working Paper Series. Economic Policy Research Unit, Department of Economics, University of

Copenhagen. Copenhagen.

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