Why did China Benefit from a Joint Venture Policy? A Case Study of Shanghai

Abstract

AbstractMandatory joint venture requirements have played an important role in many developing countries’ foreign investment policies. However, such policies have been criticized in some of the economic literatures on the grounds that they deter investment and lead to the development of inefficient industries. A significant amount of foreign direct investment in Shanghai has been in the form of joint ventures. Yet, by many measures, Shanghai has benefited enormously. This article argues that there are three reasons to explain Shanghai's successful use of the joint venture for its industrial development. First, local firms and industries have had the capability and willingness to learn from joint ventures and other foreign invested firms. Second, the joint venture policy has been more likely than not to have “crowded in” local investment rather than crowd it out. Third, investment authorities in Shanghai have had sufficient bureaucratic capacity and political insulation to prevent the joint venture policy from being manipulated by rent seekers.