Foreign Direct Investment Policies in China from 1990s to 2017: review and analysis

2.5 Regional Policies

Uneven FDI Distribution by Region

Since the beginning of the policy of reforms and opening (1978) the agenda was to develop advantageous regions first. In 1980s first four special economic zones (hereinafter: SEZ) were created in Shenzhen, Zhuhai, Shantou and Xiamen, and in 1988 the sixth one was established in Hainan. These zones were designed to serve a “sandbox” for market reforms. There are several reasons why these areas were selected and not others: their location near big ports of Hong Kong and Macau, Yuan Yiming: “The Dynamic Evolution of China's Special Economic Zones and their Practice”; Springer books: http://www.springer.com/gp/book/9789811037030, accessed 15.04.18 longer history of contacts with other countries and distance from Beijing. Bret Crane, Chad Albrecht, Kristopher McKay Duffin & Conan Albrecht : “China's special economic zones: an analysis of policy to reduce regional disparities”; Regional studies association website: https://rsa.tandfonline.com/doi/full/10.1080/21681376.2018.1430612#.WtNCidNuajg; accessed 15.04.18 According to the World Bank special economic zone is a generic term covering several types of commercial zones such as free trade zones, freeports and export processing zones. Main features are:

Geographically delimited area, usually physically secured;

Single management/administration;

Eligibility for benefits based upon physical location within the zone;

Several customs area (duty-free benefits) and streamlined procedures. “Special Economic Zones performance, lessons learned, and implications for zone development'; World Bank website: http://documents.worldbank.org/curated/en/343901468330977533/pdf/458690WP0Box331s0April200801PUBLIC1.pdf; accessed 15.04.18

SEZ of China are not like all the others. They have their own specific features which make them different from what is traditionally called a special economic zone. If traditional SEZ model is focused on manufacturing for export, China's SEZ are zones of big scale which combine residential, commercial and industrial activities. “Special Economic Zones Progress, Emerging Challenges, and Future Directions”, Edited by Thomas Farole, International Trade Department, World Bank; 2011 Library of Congress Cataloging-in-Publication; 346 pages; p.3 Other differences are the motivation for SEZ establishment and country's background. China's first special economic zones were created, in fact, within the frameworks of planning economy, and their aim was to explore a new way of development. They encompassed economy, administrative system, cultural reform and social construction. Yuan Yiming: “The Dynamic Evolution of China's Special Economic Zones and their Practice”; Springer books: http://www.springer.com/gp/book/9789811037030, accessed 15.04.18 Preferential regional policy resulted into uneven FDI distribution along the regions, and in the 1990s, as you can see on Graph 6 eastern (Shanghai, Jiangsu, Zhejiang, Anhui, Fujian, Jiangxi, Shandong) and southern (Guangdong, Guangxi, Hainan) provinces surpassed more than three times all the other regions in foreign direct investment and other foreign capital absorption.

Graph 6: FDI regional distribution in China, 1994 (%)

Source: China Statistical Yearbook 1996

At the same time, southwestern and western areas lagged behind most of all. And not only in FDI absorption: in 1994 Gross Domestic Product and payment for labor in western and southwestern areas was almost three times less than in eastern and southern provinces and business surplus was about four times lower.China Statistical Yearbook 1996, Structure of Gross Domestic Product by Region (1994), National Bureau of Statistics of China website: http://www.stats.gov.cn/english/statisticaldata/annualdata/; accessed 16.04.18 Although according to neoclassical growth models poorer areas tend to catch up with more developed onesBret Crane, Chad Albrecht, Kristopher McKay Duffin & Conan Albrecht: “China's special economic zones: an analysis of policy to reduce regional disparities”; Regional studies association website: https://rsa.tandfonline.com/doi/full/10.1080/21681376.2018.1430612#.WtNCidNuajg; accessed 15.04.18, that was not the case of China, and creation of SEZ only extended the inequality between regions. When creating special economic zones Chinese officials expected a “spillover effect”, but it did not happen due to several reasons including geographical location, high concentration of state owned enterprises in the hinterlands and fiscal decentralization. The latter was introduced in 1980s and separated central and local budgets. Fiscal decentralization allowed local governments to leave more of the revenue into the region, and that was beneficial for economically strong areas, as more money could be spent on infrastructural development and other issues. For the underdeveloped regions, however, it had no advantages. Bret Crane, Chad Albrecht, Kristopher McKay Duffin & Conan Albrecht: “China's special economic zones: an analysis of policy to reduce regional disparities”; Regional studies association website: https://rsa.tandfonline.com/doi/full/10.1080/21681376.2018.1430612#.WtNCidNuajg; accessed 15.04.18

Western Regions Promotion Policy

In the 1990s China's central government recognized the problem of growing regional inequality. During the 14th Party Congress of 1992 Jiang Zemin said, that western and central regions “should open faster to the other parts of the country and to the outside world” Full Text of Jiang Zemin's Report at 14th Party Congress, Beijingreview.com: www.bjreview.com.cn/document/txt/2011-03/29/content_363504_3.htm, accessed 16.04.18, and in 1999 Western Development Strategy was introduced. Western Development strategy aimed not only to attract foreign capital into the hinterlands, but to eliminate regional inequality completely Bret Crane, Chad Albrecht, Kristopher McKay Duffin & Conan Albrecht: “China's special economic zones: an analysis of policy to reduce regional disparities”; Regional studies association website: https://rsa.tandfonline.com/doi/full/10.1080/21681376.2018.1430612#.WtNCidNuajg; accessed 15.04.18, which was very ambitious. It included:

Measures to improve investment policy by giving priority to construction projects, increasing fiscal transfers and credit support;

Measures to improve investment environment including state owned enterprises reform, preferential tax policy, preferential land and mineral resource use policy, price reform deepening;

Measures to expand the opening policy including further expansion of fields open to foreign investment, further expansion of usage of foreign investment channels, active development of foreign trade and regional cooperation promotion;

Measures to attract talents and develop education in the fields of science and technology including talent attraction, scientific and tech project support, education investment increase and cultural industries development. №ъОсФє№ШУЪКµК©ОчІїґуїЄ·ўИфёЙХюІЯґлК©µДНЁЦЄ, MOFCOM website: http://www.mofcom.gov.cn/article/zt_swfg/subjectby/200612/20061204134776.shtml; accessed 16.04.18

Although all of these measures could play role in attracting FDI current paper will focus only on those which are directly related to the subject of research.

China's Western Development Strategy included several policies to expand opening. Further expansion of fields opened to foreign investment meant more “encouraged” industries to invest in. Notice of the State Council on Several Policies and Measures on the Implementation of the Western Development Strategy specifically mentions infrastructure construction, resource development, service trade, environmental protect, telecommunications, insurance and tourism as the most encouraged industries in the western region. What is more, foreign banks were allowed to make operations with RMB. №ъОсФє№ШУЪКµК©ОчІїґуїЄ·ўИфёЙХюІЯґлК©µДНЁЦЄ, MOFCOM website: http://www.mofcom.gov.cn/article/zt_swfg/subjectby/200612/20061204134776.shtml; accessed 16.04.18 Measures to expand the use of foreign investment channels intended to introduce Build-Operate-Transfer (BOT) pilot projects into the region, to allow foreign investment projects to carry out financing with RMB and to be listed on foreign and domestic stock markets and to relax the restrictions on proportion of foreign investment. Another important point was the intention to expand the autonomy of foreign trade enterprises in the western regions. №ъОсФє№ШУЪКµК©ОчІїґуїЄ·ўИфёЙХюІЯґлК©µДНЁЦЄ, MOFCOM website: http://www.mofcom.gov.cn/article/zt_swfg/subjectby/200612/20061204134776.shtml; accessed 16.04.18

Preferential tax policy included a list of incentives both for domestic and foreign invested enterprises. FIEs could enjoy:

Reduced corporate income tax of 15% (for FIEs investing into encouraged industries); ІЖХюІїЎў№ъјТЛ°ОсЧЬѕЦЎўєЈ№ШЧЬКр№ШУЪОчІїґуїЄ·ўЛ°КХУЕ»ЭХюІЯОКМвµДНЁЦЄ; Pkulaw.cn: http://www.pkulaw.cn/fulltext_form.aspx?Gid=39388; accessed 17.04.18

Two years tax exemption and three-year half deduction policy for transportation, water conservancy, postal service, radio and television enterprises (operating period of FIE should be no less than ten years); Zeng Lu and Xiang Deng: “China's Western Development Strategy: Policies, Effects and Prospects”; MPRA website: https://mpra.ub.uni-muenchen.de/35201/1/Chinas_Western_Development_Strategy_Policies_Effects_and_Prospects.pdf; accessed 17.04.18

Tax exemptions on imported equipment. Zeng Lu and Xiang Deng: “China's Western Development Strategy: Policies, Effects and Prospects”; MPRA website: https://mpra.ub.uni-muenchen.de/35201/1/Chinas_Western_Development_Strategy_Policies_Effects_and_Prospects.pdf; accessed 17.04.18

Initially Western Development Strategy was set from 1999 until 2010, but in 2010 Party Central Committee and the State council announced the opening of the new round of western development until the year 2020. №ъОсФє№ШУЪЙоИлКµК©ОчІїґуїЄ·ўХЅВФЗйїцµД±Ёёж; National People's Congress of the PRC website: http://www.npc.gov.cn/npc/xinwen/2013-10/22/content_1810645.htm; accessed 17.04.18 Report of the State Council on Development on deepening of the Western Development Strategy clarified that corporate income tax will remain reduced (15%) and introduced further steps in strategy development, including making large-scale development of the western region number one priority for all the departments, planning a number of major infrastructure projects, strengthening the construction of “ecological civilization”, supporting the development of advantageous industries, raising the level of basic public services and increasing the level of opening up to the outside world. Within the frameworks of opening up policy it was decided to create inland open economic highlands such as Chongqing, Chengdu and Xi'an, and speed up the construction of Ningxia inland open economic pilot zone. №ъОсФє№ШУЪЙоИлКµК©ОчІїґуїЄ·ўХЅВФЗйїцµД±Ёёж; National People's Congress of the PRC website: http://www.npc.gov.cn/npc/xinwen/2013-10/22/content_1810645.htm; accessed 17.04.18 In 2017 another document (notice of the State Council on Several Measures for Promoting the Growth of Foreign Investment) mentioned one more time that foreign investors should be encouraged to invest into western and old industrial. №ъОсФє№ШУЪґЩЅшНвЧКФці¤ИфёЙґлК©µДНЁЦЄ; The State Council website: http://www.gov.cn/zhengce/content/2017-08/16/content_5218057.htm; accessed 17.04.18

To sum up, 1990s was the starting point for China to formulate FDI policies within the frameworks of socialist market economy. This chapter reviews construction of FDI regulatory system, guiding policy and regional policies. Establishment of FDI regulatory system based on commercial law was a big step in creating a more attracting legal environment for foreign direct investments. However, initially commercial legal system was ambiguous with one laws regulating domestic companies and other laws regulating FIEs. Recently the approach of China's officials have changed towards more equal treatment for domestic and foreign invested enterprises by introducing record-filing approval system and negative list. Guidance policy intended to make foreign investment compatible with country's needs. For that reason, MOFCOM issued catalogues with encouraged, restricted and prohibited industries. Whereas the number of encouraged industries is increasing with the time the number of restricted ones, on contrary, is reducing, and prohibited industries remain at about the same level with minor fluctuations. The most encouraged industry is manufacturing and since 2007 there is an increase in the share of innovative and green industries. The number of additional requirements is, in contrary, reduced with the time and now they can only be found in the negative list. Besides, if initially export orientation was actively encouraged, the situation changed after the world financial crisis of 2007 and the corresponding articles were removed from the guidance. Regional FDI promotion policies since 1990s were implemented within the frameworks of coordinated development paradigm which intended to eliminate the developmental gap between different parts of China. The most remarkable policy is Western Development Strategy set up from 1999 to 2010 and then extended until 2020. The aim of the strategy is to eliminate the regional inequality, and one of the measures is the further opening of hinterlands to foreign capital by providing special incentives for foreign-invested enterprises in the region. 

Chapter 3. China FDI Incentive Policies Effectiveness Analysis

As mentioned before, FDI policy is one of location advantage's determinants. China's incentives for foreign investors can be generally divided into sectoral and regional. Sectoral policy aims to influence the distribution of FDI inflow between different industries and the aim of regional policy is to attract FDI to a particular region. This chapter is about to determine whether these policies are effective or not. The degree of effectiveness is measured as ability to reach the desired result. English Oxford living dictionaries website: https://en.oxforddictionaries.com/definition/effectiveness; accessed 18.04.18

3.1 FDI Guidance Policy Effectiveness

In this paper sectoral incentives' policy is presented by FDI guidance policy. FDI guidance policy's target is to increase foreign capital inflow in some industries and prevent foreign investors from investing in another industries. To determine whether there is a relation between China FDI guidance policy and FDI inflow I will determine the relations between a selection of top five China's industries by FDI inflow (by number of projects and by value) and the share of these industries in the “encouraged” section. These industries are: manufacturing, wholesale and retail, real estate, business and leasing services and financial intermediation.



Graph 7: FDI inflow in manufacturing, wholesale and retail, leasing and business services, real estate and financial intermediation by number of projects, 1995-2016 (unit)

Source: China Statistical Yearbook, various editions

Graph 8: FDI inflow in manufacturing, wholesale and retail, leasing and business services, real estate and financial intermediation by value, 1995-2016 (USD 10 000)

Source: China Statistical Yearbook, various editions

Manufacturing

Manufacturing has been the most encouraged industry from the very beginning and until nowadays. In terms of FDI inflow manufacturing is the industry absorbing the largest amount of FDI by value and until 2011 it was also leading by number projects (see graphs 7 and 8). China Statistical Yearbook, various editions; National Bureau of Statictics website: http://www.stats.gov.cn/english/statisticaldata/annualdata/; accessed 18.04.18 However, in general, FDI inflow in manufacturing is decreasing both by number of projects and by investment value. China Statistical Yearbook, various editions; National Bureau of Statictics website: http://www.stats.gov.cn/english/statisticaldata/annualdata/; accessed 18.04.18 This decrease is happening against the background of growing share of manufacturing in the encouraged industries list: in 2017 manufacturing accounted for 77,5% of all the encouraged industries. ЃsЉOЏ¤“ЉЧКІъТµЦёµјДїВјЈЁ2017”NЏC¶©Ј©Ў·, National Development and Reform Commission Website:http://www.ndrc.gov.cn/zcfb/zcfbl/201706/t20170628_852857.html,accessed 18.04.18 Statistical analysis of FDI inflow in manufacturing by number of projects, number of encouraged project types in manufacturing and FDI inflow by value revealed a strong negative correlation between FDI inflow in manufacturing by number of projects and number of encouraged project types in manufacturing (-0,86). However, the correlation between number of encouraged project types and FDI inflow by value showed up to be very weak (0,01).

Using regression, I will try to evaluate how the depending variable - FDI inflow in manufacturing (Y) - will change if the independent one - number of encouraged project types (X) - changes.

Table 3 - Regression results

	Coefficients	Standard error	t-statistics
Y-intersection	64961,40	8711,25	7,46
Number of encouraged project types in manufacturing	-199,20	33,89	-5,88

Source: Author's own summary

To find out if these coefficients are significant Student's t-test is used. Knowing that the level of reliability for regression was set at 95% and the overall number of observations is 14, t = 2,17881283. It is less by module than t-statistics, coefficients are considered significant. As the number of observation and level of reliability is the same for all the selected industries, t value will be the same as well. Therefore, we got the following equation:

y=64962,4-199,2x

where X is the number of encouraged project types and Y is FDI inflow in manufacturing by number of projects. It means, that number of encouraged project types in manufacturing influences FDI inflow by number of projects with negative weight of -199,2. Growth of number of encouraged project types in manufacturing results into decrease of FDI inflow into this industry. Obviously, this indicates the inefficiency of guiding policy in case of manufacturing.

Wholesale and retail

Wholesale and retail is number one industry by FDI inflow in number of projects and number four by FDI value (see graphs 7 and 8). In the year 2011 it surpassed manufacturing in FDI by number of projects and there is an upward trend in the FDI inflow into it. China Statistical Yearbook, various editions; National Bureau of Statistics website: http://www.stats.gov.cn/english/statisticaldata/annualdata/; accessed 18.04.18 Initially MOFCOM did not encouraged foreign investors to invest into wholesale and retail. Even without this by 2002 wholesale and retail was already number three industry by number of FDI projects. China Statistical Yearbook 2003; National Bureau of Statistics Website: http://www.stats.gov.cn/english/statisticaldata/yearlydata/yarbook2003_e.pdf; 19.04.18 However, statistical analysis of FDI inflow in wholesale and retail by number of projects, number of encouraged project types in wholesale and retail and FDI inflow by value revealed a positive correlation both between FDI inflow by number of projects and number of encouraged project types (0,57) and between FDI inflow by value and number of encouraged project types (0,66).

Using regression to find out how the depending variable - FDI inflow in wholesale and retail by number of projects (Y) - will change if the independent one - number of encouraged project types (X) changes I got the following result.

Table 4 - Regression results

	Coefficients	Standard error	t-statistics
Y-intersection	3408,125	1200,02	2,84
Number of encouraged project types in wholesale and retail	1956,46	819,77	2,39

Source: Author's own summary

As Student's t (2,18) it is less by module than t-statistics, coefficients are considered significant. Therefore, we got the following equation:

y= 3408,13+1956,46x

where X is the number of encouraged project types in wholesale and retail and Y is FDI inflow in wholesale and retail by number of projects. Number of encouraged project types in wholesale influences FDI inflow by number of projects with positive weight of 1956,46, and that means that FDI inflow by number of projects grows with the increase of number of encouraged project types in wholesale and retail. Therefore, guiding policy in case of wholesale and retail is considered effective.

Real Estate

Real estate is the forth industry by number of projects and the second by value. According to statistical analysis, there is a strong positive correlation between FDI inflow by number of projects into real estate and number of encouraged project types (0,87), and strong negative correlation between number of encouraged project types and FDI inflow value (-0,74). There is a simple explanation of this difference: the share of real estate in encouraged industries is reducing with the time, and so does the FDI inflow by number of projects. However, FDI inflow by value has been growing steadily (see graph 8). It means, recently there are fewer FDI projects in real estate, but they are more expensive.

To evaluate how number of encouraged project types influences FDI inflow I used regression with number of encouraged project types in real estate as independent variable (X) and FDI inflow in real estate by number of projects as dependent variable (Y); and then changed dependent variable to FDI inflow by value.

Table 5 - Regression results

	Coefficients	Standard error	t-statistics
Y-intersection	583,3	113,76	5,13
Number of encouraged project types in real estate	1316,95	212,83	6,19

Source: Author's own summary

Student's t (2,18) is less that t-statistics by module, so coefficients are considered significant. The equation is:

y = 583,3 + 1316,95x

where X is the number of encouraged project types in real estate and Y is FDI inflow in real estate by number of projects. Number of encouraged project types in wholesale influences FDI inflow by number of projects with positive weight of 1316,95. It means, that FDI inflow by number of projects grows with the increase of number of encouraged project types in real estate and goes down with the decrease of encouraged project types.

Taking FDI value as Y we got the opposite result.

Table 6 - Regression results

	Coefficients	Standard error	t-statistics
Y-intersection	2155664,9	207989,90	10,36
Number of encouraged project types in real estate	-1485293,65	389113,48	-3,81

Source: Author's own summary

As Student's t (2,18) is less that t-statistics by module coefficients are considered significant. The equation is:

y=2155664,9-1485293,65x

where X is the number of encouraged project types in real estate and Y is FDI inflow in real estate by value. Number of encouraged project types in real estate influences FDI inflow by value with negative weight of 1316,95.

Overall, although the decrease of encouraged project types in real estate is followed by decrease of FDI inflow in this industry by number of projects, the situation with FDI by value is the opposite. Therefore, in case of real estate guidance policy is considered ineffective.

Business and Leasing services

Leasing and Business Services is the second industry by number of projects and the third by value. It was distinguished as a separate industry only in 2007, and before it was a part of “domestic and foreign trade, real estate and service industries in 1995”, which were all restricted, and in 2002 and 2004 - a part of “social services”. As statistical analysis reveals, there is a strong positive correlation both between FDI inflow by number of projects and number of encouraged project types (0,72) and between FDI inflow by value and number of encouraged project types (0,71).

Now let's find out how the depending variable - FDI inflow in business and leasing services by number of projects (Y) - will change if the independent one - number of encouraged project types (X) changes, and then change the variable Y to FDI inflow by value. The result is the following.

Table 7 - Regression results

	Coefficients	Standard error	t-statistics
Y-intersection	2947,83	173,28	17,01
Number of encouraged project types in leasing and business	212,29	58,22	3,65

Source: Author's own summary

As Student's t (2,18) it is less by module than t-statistics, coefficients are considered significant. Equation is the following:

y= 2947,83+212,29x

where X is the number of encouraged project types in business and leasing services and Y is FDI business and leasing services and retail by number of projects. Number of encouraged project types in business and leasing influences FDI inflow by number of projects with positive weight of 212,29, and that means that FDI inflow by number of projects grows with the increase of number of encouraged project types business and leasing. Now let's find out whether it is also true for FDI inflow by value.

Table 8 - Regression results

	Coefficients	Standard error	t-statistics
Y-intersection	426159,70	115678,13	3,68
Number of encouraged project types in leasing and business	137580,79	38869,1	3,54

Source: Author's own summary

As Student's t (2,18) it is less by module than t-statistics, coefficients are considered significant. Equation is the following:

y= 426159,70+137580,79x

where X is the number of encouraged project types in business and leasing services and Y is FDI business and leasing services and retail by value. Number of encouraged project types in business and leasing influences FDI inflow by value with positive weight of 137580,79. Therefore, in case of business and leasing services guidance policy is considered effective.

Financial intermediation

Foreign direct investment in finance, banking and insurance was never encouraged, and, in contrary, they always figured out into the restricted industries list. However, since 2015 there is a significant growth of FDI inflow into this industry, so it is now number five by FDI inflow by value (see graph 8). As it was never in the list of encouraged projects, I decided to find out whether there is a correlation between number of restricted and prohibited project types in financial intermediation and FDI inflow by number of projects and value. Statistical analysis shows that there is a weak negative correlation in both cases. It is -0,367 and -0,37 respectively. Negative correlation means that the bigger is the share of restricted and prohibited project types in financial intermediation the lower is the inflow into these industries. Although this correlation is weak, in fact it reflects the situation: with the time this industry is becoming slightly less restrictive. However, taking into consideration the fact that traditionally restricted industry which was never encouraged became number five by FDI inflow value, the guidance policy in case of financial intermediation is considered generally ineffective.

To sum up, the result of analysis of five selected industries is the following:

Table 9 - Overall result

Manufacturing	ineffective
Wholesale and retail	effective
Real estate	ineffective
Leasing and business services	effective
Financial intermediation	ineffective

Source: Author's own summary

Ultimately, analysis of five industries which absorb most of FDI inflow has shown the general inefficiency of China's guidance policy. Among the selected industries only one - manufacturing - was always encouraged since the beginning of the policy. However, in fact, growth of encouraged project types in manufacturing is followed by decrease of FDI inflow into this industry. Real estate and financial intermediation reveal guidance policy inefficiency in another way: although they are not encouraged, FDI inflow into them is growing. At the same time, analysis revealed positive correlation between number of encouraged project types in another two industries (leasing and business, wholesale and retail) and FDI inflow into these industries. Therefore, guidance policy cannot be considered as completely ineffective.

3.2 Regional Policy Effectiveness Analysis on Yunnan Province Example

The aim of regional FDI policy is to attract foreign investment to a particular region. As mentioned in Chapter 2, currently Chinese government is focused on attracting more foreign investment to foreign provinces to eliminate the regional development gap. Western development strategy introduced in 1999 includes several measures to improve western areas investment environment and promote foreign investment.

Although there is a significant growth in FDI inflow into Western and Southwestern regions, the goal of eliminating the gap between the industries was not fulfilled. Graph 9 shows regional distribution of foreign investment in 2016, and the proportion does not differ greatly for western and southwestern provinces: they are still lagging. However, this paper is mostly interested in another issue - whether western development strategy succeed in attracting FDI to the region.



Graph 9: China Inward Foreign Investment regional distribution, 2016 (%)

Source: China Statistical Yearbook 2017

Two main tools used by Chinese officials tools to implement western development strategy are national investment and different kinds of incentives for FIEs described before. However, incentive policy for FIEs in Western regions only covers the priority industries. They are different for every province, and in 2000 Ministry of Commerce and State Development and Reform Commission issued a “Catalogue of Priority Industries for Foreign Investment in the Central-Western Region” “ЦРОчІїµШЗшНвЙМН¶ЧКУЕКЖІъТµДїВј”

; MOFCOM website: http://www.mofcom.gov.cn/article/b/f/200207/20020700031080.shtml; accessed 02.05.18, which was later amended in 2004, 2009, 2013 and 2017. Taking Yunnan province as example I will try to evaluate whether number of priority industries and government expenditures in this province have influenced FDI inflow.

Yunnan

Yunnan is a province in the South-west of China with population of 47 710 000 Population, China statistical yearbook 2017; National Bureau of Statistics' website: http://www.stats.gov.cn/tjsj/ndsj/2017/indexeh.htm; accessed 02.05.18 and Per Capita Gross Regional Product of 31093 RMB. China statistical yearbook 2017; National Bureau of Statistics' website: http://www.stats.gov.cn/tjsj/ndsj/2017/indexeh.htm; accessed 02.05.18 This is more than two times lower than the average Per Capita Gross Regional Product in Eastern provinces. China statistical yearbook 2017; National Bureau of Statistics' website: http://www.stats.gov.cn/tjsj/ndsj/2017/indexeh.htm; accessed 02.05.18 Biggest industries include tobacco manufacturing, production of electricity power, smelting and pressing of non-ferrous metal, raw chemical materials and chemical products, processing of food from agricultural products, manufacturing of non-metallic minerals products and coal mining. Yunnan: Market profile, HKTDC research website: http://china-trade-research.hktdc.com/business-news/article/Facts-and-Figures/Yunnan-Market-Profile/ff/en/1/1X000000/1X06BVWJ.htm; accessed 02.05.18

Graph 10: Number of Priority industries in Yunnan province, 2000-2017 (unit)

Source: Author's own summary

Priority industries are mainly connected to agriculture and ecology, but also include machinery (automobile and semi-trailers manufacturing), broadband and telecommunication (within the framework of China's WTO commitments), and culture and tourism. ’†ђј•”’n‹жЉOЏ¤“ЉЧКУЕКЖІъТµДїВј Ѓi2017 ”NЏC¶©Ѓj; NDRC website: http://www.ndrc.gov.cn/zcfb/zcfbl/201702/W020170217583526540136.pdf; accessed 02.05.18 Overall number of priority industries in Yunnan has been growing with some fluctuations (see Graph 10).

To evaluate the effectiveness of regional FDI policy four kinds of dataset were used: government expenditure in Yunnan (RMB 100 Million), number of priority industries for foreign investment in Yunnan (unit), FDI inflow by number of FIEs (unit) and total foreign investment (USD 100 Million).

Table 10 - Correlations between government expenditure, number of priority industries for foreign investment (unit), FDI inflow by number of FIEs (unit) and total foreign investment (USD 100 million) in Yunnan province

	Government expenditure	Number of priority industries for foreign investment	FDI inflow by number of FIEs	Total foreign investment
Government expenditure	1
Number of priority industries for foreign investment	0,70	1
FDI inflow by number of FIE	0,84	0,94	1
Total foreign investment	0,98	0,70	0,85	1

Source: Author's own summary

Table 10 shows that there is a strong correlation between government expenditure and FDI inflow both by FIEs units (0,84) and by total investment (0,98). There is also a strong correlation between number of priority industries for foreign investment in Yunnan and FDI inflow by number of FIEs (0,94) and total foreign investment (0,70).

Let's find out how the independent variables - number of priority industries for foreign investment in Yunnan (X) and government expenditure (X1) - influence the dependent one FDI inflow by number of FIEs. The result is presented in Table 11.



Table 11 - Regression results

	Coefficients	Standard error	t-statistics
Y-intersection	-3258,46	619,66	-5,26
Government expenditure	0,24	0,058	3,64
Number of priority industries for foreign investment in Yunnan	365,24	44,36	8,23

Source: Author's own summary

Knowing that the number of observations is 16 and the level of reliability for regression was set at 95% we got Student's t criteria of 2,12. I t is less by module than t-statistics, so coefficients are considered significant. Equation is the following:

y= 0,24x1+365,24x-3258,46

where X1 is government expenditure in Yunnan, X is number of priority industries for foreign investment in Yunnan and Y is FDI inflow in Yunnan by number of FIEs. Government expenditure and number of priority industries influence FDI in Yunnan (by number of FIEs) with positive weight of 0,24 and 365,24 respectively. As growth of independent variables result into growth of dependent one, regional FDI promotion policy is considered effective.



Conclusion

Currently China is number two country by FDI absorption after the US. When introducing policy of reforms and opening in the 1970s Deng Xiaoping recognized the advantages of foreign investment, and since then foreign investors got an opportunity to enter China's market. However, until 1990s FDI inflow stayed limited, because of uncertainties of investment environment. Investing in China before 1990s meant facing risks of planned economy, public ownership and ambiguous status of private sector as a whole. In 1990s fundamental changes occurred both in the ideological rhetoric of CPC and in country's regulatory system. Throughout last two decades China's ideological discourse has changed from “planned economy on the basis of socialist public ownership” " Amendment to the Constitution of the People's Republic of China, National People's Congress of the People's Republic of China website: http://www.npc.gov.cn/englishnpc/Constitution/node_2828.htm; accessed 03.05.18 to “ruling the country by law”. Jiang Zemin's report at the 15th National Congress of the Communist Party of China; Wellesley College website: http://academics.wellesley.edu/Polisci/wj/308S/Readings/jzm15CCP.htm; accessed 03.05.18 When the debates on what is socialist and what is capitalist were over the time has come to reform the regulatory system. Indeed, modern commercial law in China originated in 1990s. At the beginning foreign and domestic enterprises operated within different legal frameworks. This was both good and bad for foreign investors: on the one hand, they all enjoyed lower enterprise tax rates Enterprise Income Tax Law of the People's Republic of China, FDI.gov.cn: http://www.fdi.gov.cn/1800000121_39_3339_0_7.html; accessed 03.05.18, on the other hand, they were subjected to much stricter supervision to enter the market. But already since 2008 a new tendency towards standardization and unification started. First, China established one corporate income tax for all. Then came the changes in market entry regulations. These changes were not adopted immediately, however, passing a whole way from party-level discussions, testing within the frameworks of Shanghai Pilot Free Trade Zone and, finally, nationwide introduction. A new system of market entry implied negative list approach, providing a simplified approval procedure for investment into industries which are not restricted or prohibited.

Despite the overall tendency towards equal treatment of foreign and domestic enterprises, foreign investors still can enjoy incentive policies under some circumstances. China's FDI incentive policies can be generally divided into sectoral and regional. This paper evaluated both types to determine whether they play a significant role in attraction and distribution of foreign direct investments. Aim of sectoral incentives policy is to encourage foreign investment in some industries and limit foreign capital access into others. As statistical analysis revealed, effectiveness of this policy is rather limited. Among the five selected industries which absorb the most of FDI only two (leasing and business services, wholesale and retail) showed a positive correlation between number of encouraged project types and FDI inflow. In case of another three - manufacturing, real estate and financial intermediation - policy was considered ineffective. In manufacturing, which is the most encouraged industry of all, growth of encouraged project types in manufacturing is followed by decrease of FDI inflow. Real estate and financial intermediation show negative or no correlation between number of encouraged project types.

As for regional incentives, currently they are given to those who want to invest into the western regions. Since the beginning of the policy of reforms and opening China had implemented preferential regional policy, which resulted into uneven FDI distribution along the regions, and in the 1990s East and South surpassed more than three times all the other regions in foreign direct investment and other foreign capital absorption. Therefore, in 1990s it was decided to open and promote western regions to eliminate the gap into regional development. In 1999 “Western Development Strategy” was introduced, and later promulgated until the year 2020. Along with other measures to improve economic performance of western regions it had a number measures to improve investment environment and ensure further opening. These measures can be generally divided into national investment (in infrastructure, capital construction, education, innovations, etc.) and incentives for foreign investors. The incentives such as reduced corporate income tax of 15% and tax exemptions on imported equipment can be enjoyed by foreigners investing into priority industries. Priority industries are different for each province of the region, and they are listed in the Catalogue MOFCOM and State Development and Reform Commission issue each few years since 2000. Taking Yunnan province as an example, this paper revealed the connection between national investment (government expenditure), number of priority industries and FDI inflow in Yunnan (by number of FIEs and total investment). Analysis revealed a strong correlation both between national investment and number FIEs units and total investment. There is also a strong correlation between number of priority industries for foreign investment in Yunnan and FDI inflow by number of FIEs and total foreign investment. Further regression analysis revealed that growth of independent variables (number of priority industries, national investment) result into growth of dependent one (FDI inflow by number of FIEs). Therefore, regional FDI policy in Yunnan to be considered effective. However, in general there is still a big difference between provinces, and the goal of eliminating the gap was never reached.



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