Download Optimize FDI Taxation and Improve Nation’s Innovation Capability

Optimize FDI Taxation and Improve Nation’s Innovation Capability
BAO Fang ZHANG Wei
School of Management, Jinan University, P.R.China, 250022
Abstract
FDI can not only make national economy increases fast, and can bring advanced
technology and advanced culture through overflow, strengthen overall ability of technical research and
development, improve technology level of R&D, strengthen the innovation ability of our country
eventually. Therefore, we should perfect the tax revenue policy of FDI, use foreign capital reasonably to
strengthen our innovation ability. The first of all is to unify the tax rates of domestic and foreign capital
enterprises step by step; Secondly is to lower the tax rates of high and new technique industries; Thirdly
is to diminish tax revenues of innovation talents; The last is to lower tax rates of venture capitals.
Key words Innovation, FDI, Tax policy
1 Introduction
Since our country opened door to carry out reforming and opening up to the world in 1978, the
scale that uses foreign capitals has enlarged continuously and maintained higher increasing speed all
along. The entry of foreign capitals not only can make huge contributions to economic growth,
structural upgrading and the promotion of competition abilities, but may also produce some problems.
For example it will cause state-owned assets running off, technology dependences of domestic capital
enterprises and so on. If these problems can’t be solved well, it will bring harms to national economy.
Under this new situation, how to adjust tax policies of foreign capital enterprises making them promote
technology spillovers better to strengthen innovation abilities of domestic capital enterprises is the
problem that we must solve right now.
About the research to technology spillover and transfer, international scholars have reached many
conclusions. Li Rui’s research shows that, spillover is an important channel that foreign capital R&D
affects the level of the technology of host country. According to the research of Archanun Kohpaiboon,
the higher the freedom degree of trading policy is, the bigger the technology spillover effect is. After
analyzing for the data of tertiary industry of our country in 1995, Yih-Chyi huang discovers that the
technology level discrepancy between domestic and foreign capital enterprises is the major factor that
decides the level of technology spillover; the less the discrepancy is, the higher the technology spillover
level is. At the same time, domestic scholar Gu bao-guo proves that human capital stock of host country
is the important factor that affects the technology transfer of Multinational Corporation. These are the
domestic and international scholars’ researches about the technology spillover that produced by
Multinational Corporation and the absorption ability of the host country enterprises, also is the analysis
about the state that technology spillover existed and all kinds of factors that influenced technology
spillover from the angle of enterprises. However, from the angle of government, the researches about the
host country policy’s influences to the technology spillover of Multinational Corporation and to the
innovation ability of domestic enterprises are little; however the researches that about tax policy are
fewer. So this paper will discuss how to strengthen the innovation abilities of our country through FDI
from the angle of tax policy.
2 Mechanisms and principles of strengthening the innovation ability of our
country through attracting FDI
No doubt, innovation needs a large amount of funds and we must have higher risk bearing capabilities,
this is a challenge to our national economy. If we do not innovate, we will be restricted by others and
our international competitiveness also will be weakened gradually, this will affect development and
even survival of our country in future. Face to this baffling problem, we need introduce foreign capitals.
On the one hand, it can promote national economy keeping a high increasing speed, so as to accumulate
793
capitals for innovation and strengthen risk bearing capabilities; On the other hand, it can promote the
level of technical R&D, adjust the direction of technical R&D, to make the technical R&D of our
country stand in the front row in the world.
2.1 Contributions of FDI to economic growth ——Positive Analysis
For investigating the influences to GDP by FDI, we choose the data of GDP and FDI between
1986to2004 as a time series to analyze, using FDI as an explanation variable, using GDP as a being
explanted variable. To be a base period in 1978, making scattered point diagram, we found that there is
exponent relation between them, then taking logarithm, to become a partly logarithm model. Using the
eviews5.0 software to analyze, get the estimated result of partly logarithm model, it shows that the join
degree is high between GDP and FDI.
Table 1
the regression result of FDI and GDP relation
Method: Least Squares
Sample: 1986 2004
Included observations: 19
Variable
Coefficient
Std. Error
t-Statistic
Prob.
111.7748
0.0000
12.9301
0.0000
C
7.9302
0.0709
X
0.0011
8.52E-05
R-squared
0.9077
Mean dependent var
8.6836
A S.E. of regression
0.9022
S.D. dependent var
0.5643
Adjusted R-squared
0.1764
Akaike info criterion
-0.5324
Sum squared resid
0.5291
Schwarz criterion
-0.4330
Log likelihood
7.0581
F-statistic
167.1884
Durbin-Watson stat
0.5936
Prob(F-statistic)
0.0000
According to table 1, got this equation:
Ln (Y) = 7.9302 + 0.0011X
It indicates when increase 100 million Yuan FDI, GDP will increase 0.11% on last annual
foundation. That is say, the promotion effect that FDI to GDP is obvious.
2.2 Discussions about technology spillovers of FDI
Judging from macroscopic view, if a country wants her economic growth to stand on her own feet
and become powerful, it must own independent R&D system right away; this system is the most
important prerequisite and basic guarantee. But establishing independent R&D system does not remove
cooperation with Multinational Corporations; contrarily we must reinforce this cooperation to benefit
each other and develop together. These days, Multinational Corporation are controlling over 80% patent
rights of new technology and new handicraft, or so 80% sophisticated technologies and 30% trades of
international technology allover the world. They are main innovators and monopolists in the world. As
one of the countries that attract FDI most at the present stage in the world, we need grasp the good
chance that Multinational Corporations invest to china plentifully improving the innovation ability of
our country.
2.2.1 FDI can bring advanced cultures to domestic enterprises
As a kind of informal system, culture influences technology development enormously. Advanced
culture can promote technology development; inversely, conservative culture can obstruct technology
development. We not only lack advanced technology, but also need advanced culture. With the plenty
establishments of foreign capital enterprises, a lot of areas and investors that do not get the baptism of
industrial civilization established new domestic capital enterprises successfully relying on the studies
and imitations to foreign capital enterprises. At the same time, the domestic capital enterprises can also
introduce new property relations and market operation mechanism, form society mentality and behavior
way of advanced technology and so on, to create conditions for breeding advanced technology.
2.2.2 FDI can strengthen overall technical R&D abilities of our country
The R&D centers of FDI are the forceful complements to the R&D constructions of our country.
794
Because of the restriction of financial resources and manpower, our country is limited on the inputs of
R&D. In the interest of the overall maximization of benefits or gaining more benefits in the market of
host country, foreign capital enterprises throw into a certain amount of funds and human resources on
researching and developing new technology in the host country; as a result, the ratios of R&D inputs of
the host country to the GDP of the whole country and the ratios of people who are engaged in R&D to
the population of the whole country are increasing. So the R&D activates of FDI improves the whole
R&D abilities of the host country. The entry of R&D centers of FDI makes competition aggravates and
the quantity of the R&D centers of the host country increases, and because of competitive effects, it can
also promote the development of the R&D centers of the host country.
For this, Xian guo-ming makes use of the related data of provincial-level that between 1998 and
2003 to analyze the spillover effects that FDI to the innovation ability of China. The result indicates the
spillover effects that FDI to the patent application quantities of our country is obvious.
2.2.3 FDI can improve industrial technical levels of our country, offering higher starting point for the
innovations of our country
At the beginning of reforming and opening up, the overall technical level of FDI is not high, but
along with the entry of large scale Multinational Corporations and the expansion of investment scale, the
technical level of the foreign capital enterprises has raised obviously. According to the industry
technical standards that the trade development committee of the United Nations divides, until the end of
2003, during the 1204 enterprises that Multinational Corporations invested in China, 303 ones belonged
to high-tech industries, 684 ones belonged to medium technical industry, 217 ones belonged to low
technical industry, the medium and high-tech industries have occupied 83% of the entire industries. At
the same time along with the continual high speed growth of our economy, the economic foundation
from weak changed to strong, the market competitions became aggravated Multinational Corporation
increased the R&D inputs to our country. The statistical data showed that, the proportion of R&D
enterprises that Multinational Corporations invested in China goes up continuously; it is from 30.33% in
1999 to 33.77% in 2000 and to 38.71% in 2001. Looking from the angle of development tendency,
Multinational Corporations will have furthered expanding the R&D investments to our country. At the
same time, the proportion that Multinational Corporations used the most advanced technologies of
mother land in our country was also enlarging; the proportion was 26.3% in 2000, it’s up to 42% in 2001,
and it’s over 80% in the former 3 seasons of 2002. In the export products of foreign capital enterprises,
the most of them were electromechanical and high-new technical products. The exports of high-new
technical products of foreign capital enterprises occupied 57% of the total export volume of our country,
the introduced technologies by foreign capital enterprises occupied 50% of the total introduce amounts
of our country in 2004.
According to this, we found that in the investments of Multinational Corporations technical
investment has occupied more and more important position and the grade of technical investment is also
higher; the most of technologies they used were not only in the lead ship of China, but also in the lead
ship of the world; for example, the mobile phone manufacture of Motorola in China is using the most
advanced technologies in the world. In the contacts with Multinational Corporations, through forward
connections, backward connections, employee flows, market competitions, every industry of our
country absorbed advanced technologies, exchanged technologies with the possessors of advanced
technologies; these have improved the technical level of our industries and made the innovation of our
country stood at higher starting point. Multinational investments have played the most important role of
helping our industries realized technical striding and chasing the most advanced technologies in the
world.
3 Suggestions of perfecting tax policies of FDI improving the innovation abilities
of our country
3.1 Unifying tax rates of domestic and foreign capital enterprises step by step
Abiding the impartial criterion of market economy, unifying the tax rates of domestic and foreign
capital enterprises is a general tendency. Now what we should do is cutting down the tax rates of
795
domestic capital enterprises, but not raising the tax rates of foreign capital enterprises. According to the
report of <Forbes>, the painful index of tax burden of Chinese mainland was the second during 56
countries in 2005. So, it indicates that the tax burden in Chinese mainland was already very heavy.
Reducing tax rates of domestic capital enterprises is not only helpful for it’s growing up and along with
it becomes stronger and stronger, the competitions with foreign capital enterprises will be more intense,
this can promote the technology transfers of foreign capital enterprises to our country.
3.2Guiding foreign capital enterprises to high-tech industries through tax preferential policies
Tax preferential policies should have definite purposes and outstanding priorities; we should
guide foreign capital enterprises to high-tech industries through the tax preferential policies. We should
establish more definite and unified standards to define high-tech enterprises, divide high-tech industries
more meticulously to avoid deviations when local governments classify high-tech enterprises. At the
same time we should establish tax preferential policies for R&D processes and projects. Now our tax
preferential policies are mostly taking enterprises as a beneficiary, the defects of doing this is that we
can not certain the incomes that innovation activities brings in total incomes, on the condition of
diversified managements of enterprises, the encouragement role of tax preferential policies can’t be
played. Therefore according to the characteristics of R&D activities, the tax preferential policies of
foreign capital enterprises should strengthen preferences to R&D projects and processes encouraging the
genuine innovation behaviors of science and technology; Besides, this is helpful for reducing the costs
of technique innovation of foreign capital enterprises in our country, encouraging foreign capitals
transferring to R&D links, diffusing links; so this will be also benefit for producing technology
spillovers.
3.3Strengthening tax preferences to high-tech talents
Science and technology are based on talents; talents are the sources of technique innovation. If we
want to encourage the R&D activities of foreign capital enterprises and R&D organizations, we need
pay attention to the tax preference polices for talents, increasing their enthusiasms and creativities to
technique innovation. Now our tax preferences for the high-tech talents in foreign capital enterprises
only confine to sale tax and nearly have not other kinds of tax preference policies. It is well known that
our country adopts income tax and increment tax as the main parts of taxation, being different from
enterprises, income tax often is the main part that individual pays. If we can not strengthen the income
tax preferences to talents, we will not make the tax preference policies become more efficient. In this
aspect South Korea has been in the lead, for example she stipulates the foreigners who engages in R&D
actives at domestic enterprises or specific research organizations (contain government) will be mitigated
income tax for 5 years. We can imitate the practices of South Korea adopting following measures for
high-tech talents that worked in foreign capital enterprises: the first is reducing the levy scope to
individual incomes, increasing the tax-free amounts in individual incomes; the second is reducing 30%
income taxes that in the aspects of technical accomplishment incomes and technical service incomes; the
third is exempting from income taxes to all kinds of rewards and subsidies that got in R&D actives; the
fourth is exempting from income taxes to equity profits that brings by technology appraised as capital
stock.
3. 4Attracting foreign venture capitals to support high-tech enterprises
Venture investment is the behavior that professional or unprofessional investors offering
time-limited funds and giving tutorials to new and achievable enterprises through offering management
services. Possessing high-new technologies is not equal to economy increases; we need combine
technologies with capitals to realize the industrialization of technologies. Venture investments are the”
engines” that promote the developments of high-tech industries and realize the prosperities of economy.
According to the researches of Kortum and Lerner, in a certain industry, the increases of venture capitals
will bring the increases of patents; when the proportion of venture capitals that throw to technical R&D
actives is below3%, it will bring about 15% contributions to industry innovations. Comparing with
science and technology developed countries, we are in the elementary stages of developing technique
innovations and promoting the growing up of high-tech enterprises; this decided we have more strong
demands in venture capitals relative to other countries. Up to 2004, our country had one hundred and
forty thousands private science and technology enterprises; it was two-hundreds thousands in 2005. For
796
so many private science and technology enterprises, financing links are their general weak links, lacking
fund supports has become the bottlenecks of their innovation actives; at the same time, adopting
advanced management methods is also an important link that promotes technique innovations According
to this, we deduce that attracting foreign venture investments is a good way to solve these problems.
Now, the development of foreign venture investments in our country still has many restrictions, the
industrial space that it can be developed is narrow. So our government needs change ideas, giving a new
location to the foreign venture investments and making corresponding encouragement policies.
According to this, we could refer to the practices of Taiwanese area and other foreign countries to
establish reasonable and efficient tax preferential policies. Specifically, the first is reducing profit taxes
on venture investments to enlarge venture capital scales, at the same time increasing income tax credits;
the second is adopting investment rebates system, returning 20%-30% taxes to the foreign venture
investors of high-new technique industries and through deferred paying taxes to reduce enterprise risks,
raising industrial attraction powers; the third is giving more tax preferential treatments to the foreign
venture investors that invested in the newly build high-new technique enterprises.
4 Conclusion
Since 1980s our country has began reforming and opening up to the world, the accomplishments
of attracting FDI are great, an important reason is the tax preferential policies for foreign capital
enterprises have played role. Though, people have disputes for tax preferential policies now, thinking
that the tax preferential policy is not major consideration factors for position option of foreign
investments, domestic capital and foreign capital enterprises have great disparities on tax burden and so
on. But we should see, the tax preferential policy has made up the deficiencies of our investment
environments and has perfected market economy systems, these measures has played a positive role of
encouraging foreign investments and promoting the fast developments of national economy. In future,
we need perfect the tax preferential policies of foreign investments further making it plays role in
improving innovation abilities of our country continuously.
References
[1] Li Rui. R&D investment of Multinational Corporation in China and Great-leap-forward development of Chinese
technology. Beijing: Economy Science Press, 2002, p120
[2] Kohpaiboon, Archanun. Foreign direct investment and technology spillover: A cross-industry analysis of Thai
manufacturing. World Development, 3(2006), p541 556
[3] Applied, Yih-Chyihuan. FDI, trade, and spillover efficiency: evidence from China's manufacturing sector.
Economics, 10(2004), p1103 1115
[4] Gu Baoguo. Regional discrepancy analysis to technology spillover effects of Multinational Corporation. China
Soft Science, 10(2005), p100 105
～
～
～
The author can be contacted from e-mail : [email protected]
797