The Irish Asia Strategy and Its China Relations: Appendix II ~ “Ireland & China: Friendship And Cooperation”

IrishAsiaSpeech by An Taoiseach Mr Bertie Ahern TD at Tsinghua University,

Beijing Tuesday, 18 January 2005

President, distinguished guests,

I am pleased to be here today, at this centre of academic excellence which has educated so many of China ‘s leaders.

Tsinghua University reflects the energy of China in many ways:
· through its emphasis on change and development;
· through its openness and eagerness for international cooperation;
· through its commitment to high standards, exemplified by its motto of “self-discipline and social commitment”;
· and through its recognition of the challenge of balancing carefully the ancient and the modern, tradition and innovation, in a way which generates healthy and sustainable progress.

It is six years since my first visit to China. In that period, China has continued its remarkable economic and social transformation. China is playing an increasingly important role in international affairs. China is now very much a world power in every sense, with a solid and rapidly growing presence in the global economy.
Ireland is a strong supporter of Chinese engagement in the international community. We were at the forefront in welcoming China ‘s membership of the United Nations some three decades ago. And we recognise that China ‘s entry to the World Trade Organisation in 2001 was both a political and an economic landmark.

After my visit in 1998, I authorized the elaboration of an Asia Strategy, with a particular focus on China.
The aim of this Strategy is to ensure that the Irish Government and Irish enterprise work coherently to develop the important and many dimensional relationship between our two countries. As a result of that Strategy, we have strengthened our diplomatic and trade representation in China , both in Beijing and also through the opening of a Consulate General in Shanghai.
The adoption of the Asia Strategy by the Irish Government in 1999 has contributed in a significant way to the development of the relationship. Trade has increased very considerably.
Education links have also increased and Ireland is now attracting significant numbers of Chinese tourists. There is an active and popular Chinese community in Ireland – Chinese New Year is celebrated in Dublin as well as in Beijing. Cultural contacts have increased in both directions – I am always impressed by the impact that Riverdance has made here in China.

If Ireland ‘s interest in China has developed and expanded, so too has there been a growing interest in Ireland, here in China. This arises from a number of factors, for example:
· Ireland ‘s economic growth and record of economic achievement;
· our status as a knowledge-based high-tech economy with a strong track record of achievement in software, life sciences, and information technology in general;
· our regional development policies;
· and our active role and influence within the European Union. Read more

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The Irish Asia Strategy And Its China Relations: Appendix III ~ Chronology Of Sino-Irish Relations

IrishAsia1979
– Establishment of Diplomatic Relations between Ireland and the PRC 22nd June.

1980
– Exchange of Ambassadors between Ireland and China.

1982
– Minister for Foreign Affairs Gerald Collins to China in October.

1983
– Minister of Health Cui Yu to Ireland in May.
– Minister of Trade, Commerce & Tourism Frank Cluskey to China in May.
– Minister for Health & Social Welfare Barry Desmond to China in September.

1985
Agreement on Cultural Cooperation between the Government of the People’s Republic of China and the Government of Ireland signed by China’s Minister of Culture, Mr. Zhu Muzhi and Ireland’s Minister for Foreign Affairs, Mr. Peter Barry during Mr. Zhu’s visit to Ireland in May.
– Ministry for Agriculture He Kang to Ireland in July.

1986
Agreement between the Government of the People’s Republic of China and the Government of Ireland on Economic, Industrial, Scientific and Technological Cooperation officially signed by the two countries during the visit to Ireland by China’s Minister of Foreign Trade and Economic Cooperation, Mr. Zheng Tuobin in May.
– State Councilor & Minister for Foreign Affairs Wu Xueqian to Ireland in May.

1988
– President Patrick J. Hillary to China in April.

1993
– Minister for Tourism & Trade Charlie McCreevy to China in April.

1994
– Attorney General Harry Whelan to China in May.
– Tánaiste & Minister for Foreign Affairs Dick Spring to China in September.
– Minister of Civil Affairs Doji Cering to Ireland in October. Read more

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Irish Investment In China. Setting New Patterns ~ Contents, List Of Abbreviations & Glossary Of Terms

IrishAsia2Now online:  Nicholas O’Brien – Irish Investment in China. Setting new patterns. 

Consideration of Irish investment in China will be located within the context of investment theory. Accordingly, chapter two examines the seminal literatureon foreign direct investment and sets out an appropriate model of investment theory within which this research shall be considered. The limited literature on Irish outward FDI is also considered, with specific emphasis on Barry et al’s model on Irish outward FDI.
Chapter three outlines the results of this research and emerging themes are identified. This allows conclusions to be drawn as to whether Barry et al’s model holds in the case of Irish FDI into China. It should be stressed that this is not in any manner a judgement on Barry et al’s model. Rather, it is a reflection on the nature of China as an emerging economy and the unique political economy which it enjoys.
Chapter four draws on the research to explore the opportunities and challenges which China represents. The principal locational advantages and disadvantages which China poses are set out. It is argued that the major potential which China represents for Irish investors lies in market opportunity rather than in low labour costs, an opinion which is supported by the relevant literature on FDI in China. The principal locational disadvantages are identified as existing in the regulatory, cultural and legal environments. This allows conclusions to be drawn on our sub-hypothesis, namely the challenges which China poses for investors.
Chapter five explores the nature of Irish FDI into China. The non-application of Barry et al’s model to China is discussed together with our prescriptive research question, namely the desirability of state involvement in outward FDI. This chapter also seeks to explain why Irish FDI into China is different from that in the traditional destinations for outward FDI.
The concluding chapter draws on previous chapters to identify conclusions which can be drawn. Key findings are highlighted and potential areas for further research suggested.

Abstract & Acknowledgements

Chapter 1 – The Giant Arises
Introduction
Research Methodology
Outline

Chapter 2 – The Nature of Outward FDI
Introduction
Investment Defined
Dunning’s Eclectic Paradigm
Investment Theory
The Role of the Multinational Enterprise in FDI
Why FDI Occurs
Irish Outward FDI
Barry’s Model on Irish Outward FDI
China and Inward FDI
Relationships and Contract Law
Conclusion

Chapter 3 – The Views of Investors
Introduction
Profile of the MNEs Included in This Research
Structure of the Chinese Subsidiaries
Rationale for Investing and Incentives
Incentives
Experience Since Investing
Disincentives and Barriers to Investing in China
Guanxi
Intellectual Property Rights
Contract Law
Role of the State
Investors in Eastern Europe
Conclusion

Chapter 4 – A land of Opportunity and Challenge
Introduction
Locational Advantages which China Offers
Locational Disadvantages which China Poses
The Regulatory Framework
China’s Culture
Contract Law
Intellectual Property Rights
Corruption and the Giving of Gifts
Regionalism – Advantages and Disadvantages for FDI
Conclusion

Chapter 5 – Irish FDI into China–Evidence, Potential and Policy
Introduction
Barry’s Model
Irish FDI into China and Barry’s Model
The Potential for Irish Investment
Home Country Effect
Irish Public Policy
Conclusion

Chapter 6 – Conclusions & Bibliography
Introduction
Main Findings
Conclusion

Bibliography Read more

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Irish Investment in China. Setting New Patterns ~ Abstract & Acknowledgements

IrishAsia2Abstract
According to the Industrial Development Path Hypothesis (Dunning, 1981, 1986, 2001), outward Foreign Direct Investment is symptomatic of successful advanced industrialised economies. After a decade of unprecedented growth and prosperity from the mid-1990s, the Irish economy had reached a sufficient level of maturity that Irish firms were beginning to seek new markets in which to invest.

Barry et al’s (2003) authoritative work states that Irish outward FDI is disproportionately horizontal and oriented towards non-internationally traded sectors. This study was based exclusively on developed economies – Europe and North America, rather than developing economies or emerging markets. Such countries have not yet featured in the literature on outward Irish FDI. Given the importance of China as the largest global recipient of inward FDI, this book explores the nature of Irish FDI into China and specifically considers whether Barry et al’s model on Irish outward FDI holds for current Irish investment into China. This consideration will be conducted within the framework of Dunning’s Eclectic Paradigm, which contends that locational, ownership and internalisation advantages must exist for successful investment to occur.

While the level of Irish FDI into China is limited, research was conducted among all Irish firms which had invested in China (this research was conducted in 2006 and 2007). It was found that the nature and scope of Irish FDI into China differs from earlier patterns identified by Barry et al in the case of developed economies. Irish FDI into China is found to be predominately in the traded sector and can be described as only marginally horizontal.

In order to gain a deeper understanding of this development, the locational advantages and disadvantages which China poses are explored. The principal locational advantage is identified as market opportunity. Perhaps the most significant challenge facing investors is the risk to the protection of intellectual property rights (IPR). It is argued that this has the potential to affect the ownership advantage which Irish MNEs possess. Accordingly, there is a need to utilise internalisation advantage to protect IPR. Consideration is given to the role which the state can play in the provision of ‘soft supports’ for investors, primarily through the provision of market information.

Acknowledgements
The experience and insight offered by senior business executives offered a valuable and unique perspective on the world of private sector decision making. I am particularly grateful for the level of access and openness which I received. I would also like to thank senior staff in the Irish Government state agencies, Enterprise Ireland and the Industrial Development Agency for the valuable information and assistance provided. Without the openness and positive disposition of my interviewees, this research would not have been possible.

I wish to acknowledge the support and encouragement of my doctoral thesis supervisors Dr. Andrew Baker, Queen’s University Belfast and Dr. Michael Mulreany, Institute of Public Administration, Dublin. Their guidance and support were particularly important and insightful in helping me develop my line of argumentation. I should also like to acknowledge the support of the Department of Foreign Affairs for their positive attitude and support towards continuing professional education. A special word of thanks is due to the staff at the Department’s library, who aided my search for literature in a professional and helpful manner.

Finally, I should like to thank my wife Caroline who, on a snowy afternoon in Monscheau, Germany, suggested that I pursue a doctorate. Together with my daughters, Ciara and Niamh, she provided support, encouragement and especially the time to facilitate my studies.

Nicolas O’ Brien

For anybody with an interest in investing in or doing business in China, Nicholas O’Brien’s scholarly and informative book should be essential reading. Given the growing importance of China in global trade this is a very timely work which I highly commend.
Dick Spring, former Deputy Prime Minister and Foreign Minister of Ireland

This book identifies clear differences between Irish investment into China and that into traditional FDI locations such as the US and UK. It is an authoritative work, particularly in view of the author’s experience as a senior diplomat in China and offers clear conclusions as to the benefits and challenges of investing in China”.

Dr. Michael B. Murphy, President, UCC

This is a must read for Irish people considering investment in China. The author discusses why considerable challenges still remain. A very comprehensive insight into informed investment in China.
Donal O’Callaghan, former Chairperson, Ireland China Association

Dr Nicholas O’Brien worked at the coalface of the transformation of modern China during his four years as Irish Consul General in Shanghai. His work is a testament to intelligent observation and the insight that experienced observers can have. The sideline sometimes brings more perspective than those on the pitch have. His book greatly expands our store of knowledge on this subject in an accessible manner with lucid division of what he is discussing and crystal clear conclusions.
Richard Barrett, Treasury Holdings

This admirable book charts the experience of Irish investors in China and has valuable pointers and good advice for business investors planning to invest in the Middle Kingdom. Given the author’s wide international experience, in particular his unique insight as Irish Consul General in Shanghai, this book is an authoritative source on the challenges and opportunities which China offers.
Dr T P Hardiman, Asia Europe Business Forum

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Chapter 1: The Giant Arises ~ Irish Investment in China. Setting New Patterns

IrishAsia2Introduction
The introduction of the ‘opening-up’ policy by the Chinese authorities in 1979 heralded an era of economic reform and ‘symbolised China’s sharp turn towards participation in the world market to speed to economic growth and technological modernisation’. (Riskin, 1987: 316) Since then, China’s economic story has been a remarkable success, growing on average over eight per cent per annum. Central to this economic success was the attraction of inward foreign direct investment. Such was the success of this policy that in 2003 China overtook the US as the largest global recipient of foreign direct investment (FDI), attracting $53 billion in that year (OECD, 2004).
On the other side of the globe, the Irish economy was also going through its own transformation. The 1970s and ‘80s were a period of high inflation, unemployment and the presence of large-scale emigration. In contrast, the 1990s was an era of unrivalled economic growth, with double digit GNP increases for most of this decade. Central to this transformation was the high level of inward FDI which Ireland attracted. Building on the strength of the economy, outward FDI continued to grow to such a degree that in 2004 Ireland became a net exporter of FDI for the first time.
Given the importance which both inward and outward FDI plays in economic development, the drivers and patterns of Irish FDI into the surging Chinese economy are worthy of examination. Barry et al’s (2003) seminal work on Irish outward FDI focuses on FDI into the US and UK, both of which are developed economies. Barry et al show that Irish outward FDI has been disproportionately horizontal (focused on replicating production facilities in third countries rather than moving an entire component of the production chain) and oriented towards non-internationally traded sectors.

Given the importance of China, as the largest recipient of inward FDI and the world’s second largest economy, it is opportune to explore the nature of Irish FDI into China and specifically whether or not the model identified for developed economies by Barry et al holds for Irish investment into China. ‘As Dunning (1997) has emphasised, full account must be taken of location factors, such as the structure of the host economy, the policies of the host government  and the nature of local business culture, in explaining the comparative success and failure of FDI’. (Buckley and Casson, 1998: 27) However, ‘China’s size makes it different from nearly all other developing and developed countries’. (Eckaus, 1987: 117) It is important therefore for investors, policy makers and commentators on FDI to be conscious of the challenges and opportunities which China holds. While China displays the hallmarks of a market economy, it is a unique political economy. The State is still heavily involved in virtually all facets of economic life. In addition, China has a strong cultural tradition which places an emphasis on relationship building.

The author conducted research into Irish investment during the period 2006-2007 among the relatively small number of Irish investments in China. In the intervening period, the pattern of investment has not appreciably changed and the findings are still valid. The author had the good fortune to witness at first hand the rapid advances which the Chinese economy is experiencing over a four-year period. The rationale motivating this research is the importance of China in the study of FDI and the potential modifications to theory which China may necessitate, because of its status as a developing economy and its non-adherence to the Weberian concept of contract law. Read more

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Chapter 2: Literature Review And Issues To Be Addressed ~ Irish Investment In China. Setting New Patterns

IrishAsia2Introduction
There is a considerable amount of material on FDI, the multinational enterprise (MNE) and the role of China in today’s globalised economy, and the literature considered in this chapter reflects the key issues under discussion. Initially, investment is defined and competing views on investment theory are considered, with the most suitable one for this study identified. Given the inter-twined linkage between FDI and multi-national enterprises (MNEs), the role of MNEs is explored, followed by an analysis of how FDI occurs at the level of the firm.
The limited literature on Irish outward FDI is also set out. Specifically, Barry et al’s model on Irish outward FDI is examined, so that the application of their hypothesis to the Chinese economy can be considered. This is followed by a consideration of the rise of FDI in China and the influence which China’s unique culture has on the FDI environment.

Investment Defined
The International Monetary Fund (IMF) offers a definition of foreign direct investment.
Direct investment is the category of international investment that reflects the objective of a resident entity in one economy obtaining a lasting interest in an enterprise resident in another economy. (The resident entity is the direct investor and the enterprise is the direct investment enterprise.) The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the investor on the management of the enterprise. (IMF, 1993: 86)
The IMF goes on to define a direct investment enterprise ‘as an incorporated or unincorporated enterprise in which a direct investor, who is resident in another economy, owns 10% or more of the ordinary shares or voting power’. (IMF, 1993:86) This definition is aimed at providing a standard by which balance-of-payments data is compiled. However, it does not adequately address the issue of control.
The OECD (2006: 2) defines direct investment as a category of international investment made by a resident entity in one economy (direct investor) with the objective of establishing a lasting interest in an enterprise resident in an economy other than that of the investor (direct investment enterprise). ‘Lasting interest’ implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the direct investor on the management of the direct investment enterprise.

Again, this definition is not precise enough for use in this research, as the issue of control is couched in terms of a ‘significant degree of influence’. Moosa (2002: 1) comes close to a workable definition when he defines FDI as ‘the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country)’.
Lipsey (2001) contends that the United Nations System of National Accounts, which governs the compilation of national income data, appropriately addresses the concept of control. The UN System of National Accounts defines foreign controlled enterprises as subsidiaries of which more than 50% are owned by a foreign parent. (United Nations, 1993) This definition focuses on control and is the one which shall be used as our reference point. Investments below 50 per cent of a firm’s stock are either of a portfolio nature or offer the investor a minority shareholding. In seeking to explore potential Irish investment into China and gain a fuller appreciation of the complexities and challenges of FDI, the scope of this research includes only those firms which have a controlling interest. MNEs holding 50% of stock or less are, by their nature, restricted in the scope of their decision-making and influence. ‘The distinguishing feature of FDI, in comparison with other forms of international investment, is the element of control over management policy and decision’. (Moosa, 2002: 2)
For the purposes of this research, therefore, control is a central concept. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a multinational enterprise (MNE). Given the importance of MNEs and the central role which they play in FDI decisions, their role and structure is explored later in this chapter.
Having set out our working definition of FDI, it is important to distinguish between the two principal forms in which FDI takes place. Firstly firms can invest abroad to supply a market directly through a subsidiary, whereby production processes from the home economy are replicated in the host economy, and this is described as horizontal FDI. This form of FDI is often undertaken to exploit more fully certain monopolistic or oligopolistic advantages, such as patents or differentiated products. (Moosa, 2002) The second form, vertical FDI, is undertaken to locate low-cost locations for components of the production process, whereby certain elements are moved in their totality from the home to the host economy. Horizontal and vertical FDI should not be seen as competing theories. Rather, they seek to explain different rationale underlying
investment decisions.
All investments necessarily entail trade-offs and compromises. Horizontal FDI avoids trade costs but foregoes economies of scale, as production is diversified. Vertical FDI incurs the costs of splitting production over various geographic locations. ‘Theory suggests factors that are important in these tradeoffs; some of these factors are firm or industry specific (e.g. the importance of economies of scale), some are country characteristics (e.g. the market size or factory prices)’. (Navaretti and Venables, 2004: 127) It would appear that horizontal FDI is by far the major component of outward FDI. Moosa (2002) argues that horizontal FDI may be in the region of 70% of the total. Jim Markusen, one of the leading FDI scholars, states that horizontal exceeds vertical, but acknowledges the difficulty in quantifying this. Reliable data on the breakdown between horizontal and vertical FDI is difficult to obtain. While it can be assumed that horizontal FDI still dominates, the extent of such pre-eminence is unquantifiable.
Having defined FDI for the purposes of this research, it is appropriate to move to a consideration of the body of literature which exists on FDI theory. This literature provides an appropriate investment theory within which to locate our consideration of Barry et al’s model and the potential challenges and opportunities facing Irish investors into China. Read more

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