688 { China’s Quest
began to flood into China.^24 Between 1992 and 1996, some two hundred Fortune
500 MNCs began operations in China, setting up 45,000 factories, offices,
and branches. As this happened, SOEs that had traditionally dominated
China’s markets were put under intense competitive pressures, while foreign
MNCs increasingly dominated China’ domestic markets. High-quality for-
eign brand goods proved very attractive to Chinese consumers. Nationalists
and liberals had very different views of this process. Nationalists argued that
foreign ownership served foreign profit-seeking rather than China’s develop-
ment. Foreign MNCs would never transfer advanced technology to China,
nationalists said, but only second-class or even obsolete technology. Reliance
on foreign technology acquired via FDI would also stifle China’s domestic
technological innovation. Together, these factors would consign China to a
position of technological inferiority. Reliance on FDI also meant that trade-
marks would be foreign-owned, resulting in most of the value added going to
the foreign firm rather than remaining in China. Different locales also com-
peted with each other to shower favors on MNCs, while corrupt local officials
were too frequently willing to betray China’s developmental interests for per-
sonal gain, said the nationalists. The result was that the flood of FDI was lock-
ing China into a subordinate position in the emerging international division
of labor. A far better course, economic nationalists argued, would be to fol-
low the path of Japan and South Korea. Those countries had sharply limited
FDI during the early stages of industrialization, relying instead on borrowing
money from foreign lenders to purchase technology under state guidance,
with that advanced technology being integrated into domestic industrial sys-
tems. China’s SOE’s would be the leaders in that process, nationalists asserted.
China’s economic liberals argued that FDI was the quickest and most ef-
fective way to industrialize China. FDI was producing new factories, products
and processes, jobs, exports, technology transfer, foreign currency, and gov-
ernment revenue. It was doing this more rapidly and effectively than China’s
SOEs, which simply had to become competitive and stop being dependent
on government support. Allowing foreign MNCs to make a profit was the
only way to encourage them to undertake operations in China. Otherwise
they would go to some other country. The current domination of Chinese
markets by foreign MNCs, and China’s dependency on MNCs for technology
development, were temporary situations. They would disappear as Chinese
firms developed and became competitive. Moreover, much of the FDI com-
ing into China was actually Chinese—from Hong Kong, Taiwan, or Chinese
firms in Southeast Asia, or even PRC firms. An estimated 25 percent of invest-
ment from Hong Kong was actually from PRC entities routing capital on a
“round trip” via Hong Kong to secure advantageous treatment as “foreign
invest ment.”
The modest results of efforts in the mid-1990s to vitalize SOE operations via
reform of the banking system strengthened the linkage between WTO entry