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Chinese manufacturers no longer need infant industry protection

Chinese manufacturers no longer need infant industry protection

By Daniel Gros, Director of the Centre for European Policy Studies.

BEIJING – Even as observers in developed countries criticize US President Donald Trump’s use of blunt tools such as tariffs against China, many believe that he is responding to a real problem. China, they argue, really is engaging in unfair trading practices. But is it?

One of the chief complaints against China is that it relies on what US authorities call “forced technology transfer”: foreign companies seeking access to the Chinese market are required to share their intellectual property with a domestic “partner.” But the word “forced” suggests a degree of coercion that does not make economic sense. American and European companies do not have to invest in China; if they choose to do so, knowing that it will require them to share their technology, it is because they still expect to earn a profit.

The technology-transfer requirement should help foreign companies secure better deals with Chinese firms, which will include the technology’s value in their overall appraisal of a foreign investor’s contribution to a joint venture. In exchange, the local partner and local government eager to foster growth would provide cheap land, infrastructure, tax exemptions, or loans on favorable terms.

In short, the transferred technology is priced into any foreign direct investment (FDI). This is reflected in the continued high profitability of companies with foreign investors.

It is only natural that American and European companies declare in surveys that they would be better off had they not been “forced” to transfer their technology. But these statements assume that the terms on which the initial investment was made would be the same without the technology transfer, and that is not the case.

Of course, if technology transfer were not a requirement, the most efficient investment deal in many cases would involve a licensing agreement or the payment of royalties. But that should be only a secondary consideration, because the present value of the foregone licensing fees or royalties would figure implicitly in any investment deal.

But while the costs to Western companies imposed by the technology-transfer requirement are probably being vastly overstated, so, too, are the benefits that the policy brings to China. So why do the Chinese authorities insist on linking market access to technology transfer?

China’s main official argument is that, as a developing country, domestic firms are at a disadvantage vis-à-vis foreign investors, which possess advanced technologies that the local companies do not understand. But while this argument may hold water in some of the less developed countries that use it to justify restrictive FDI regimes, China’s technological capabilities have exploded over the last couple of decades.

In fact, China’s expenditure on research and development is now higher both as a percentage of GDP and in absolute terms than the level in Europe and many other OECD countries. With the country’s capacity for indigenous R&D – not to mention technological absorption – having progressed substantially, there is little need to continue protecting Chinese “infant” industries.

It is this progress that has driven Western companies to become more vocal in their complaints about “forced” technology transfer. Previously, they were more willing to transfer their technology, based on the expectation that Chinese competitors would be unable to adapt and master it, anyway. With China now producing more graduates with bachelor’s degrees in science and engineering than the US and Europe combined, that expectation is no longer tenable.

Despite rising resistance to technology transfer, however, the Chinese authorities remain reluctant to abandon their policy, probably for much the same reason the US is angry: they overestimate its impact. They fail to recognize that Western companies might be offering worse terms to Chinese partners than they would if they could keep their technology and use licensing agreements instead.

Yet these other forms of technology transfer are already becoming increasingly prevalent: recorded royalties payments from China have skyrocketed, and now amount to close to $30 billion per year. With China now second only to the US in terms of paying for foreign technology, it is clear that a large and growing share of technology transfer is not “forced.”

For Trump, however, that may not be the point. What his administration is really worried about is that China is about to surpass the US and lock down technological leadership in a number of sectors considered critical for national security (on both sides of the Pacific). Yet forcing China to eliminate its technology-transfer requirements will not change this.

An end to that policy may actually be in China’s best interests. The US and China account for a large share of global trade, but they do not dominate the global economy. The bilateral trade war will be won by the side that can gain the support of the neutral powers (such as Europe and Japan) by appearing more reasonable. For China, this would mean abolishing all restrictions on foreign ownership, including the requirement that technology be shared, rather than licensed.

Such a move would underscore the strength of the Chinese economy, without costing China nearly as much as its leaders or US policymakers seem to think. Perhaps more important, it would force the US either to stop its China bashing or to admit that the underlying motivation is not economics, but geopolitical rivalry.

Copyright: Project Syndicate, 2018.


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Following reverse listing, public can now acquire shareholding in Paratus Namibia


20 February 2020, Windhoek, Namibia: Paratus Namibia Holdings (PNH) was founded as Nimbus Infrastructure Limited (“Nimbus”), Namibia’s first Capital Pool Company listed on the Namibian Stock Exchange (“NSX”).

Although targeting an initial capital raising of N$300 million, Nimbus nonetheless managed to secure funding to the value of N$98 million through its CPC listing. With a mandate to invest in ICT infrastructure in sub-Sahara Africa, it concluded management agreements with financial partner Cirrus and technology partner, Paratus Telecommunications (Pty) Ltd (“Paratus Namibia”).

Paratus Namibia Managing Director, Andrew Hall

Its first investment was placed in Paratus Namibia, a fully licensed communications operator in Namibia under regulation of the Communications Regulatory Authority of Namibia (CRAN). Nimbus has since been able to increase its capital asset base to close to N$500 million over the past two years.

In order to streamline further investment and to avoid duplicating potential ICT projects in the market between Nimbus and Paratus Namibia, it was decided to consolidate the operations.

Publishing various circulars to shareholders, Nimbus took up a 100% shareholding stake in Paratus Namibia in 2019 and proceeded to apply to have its name changed to Paratus Namibia Holdings with a consolidated board structure to ensure streamlined operations between the capital holdings and the operational arm of the business.

This transaction was approved by the Competitions Commission as well as CRAN, following all the relevant regulatory approvals as well as the necessary requirements in terms of corporate governance structures.

Paratus Namibia has evolved as a fully comprehensive communications operator in Namibia and operates as the head office of the Paratus Group in Africa. Paratus has established a pan-African footprint with operations in six African countries, being: Angola, Botswana, Mozambique, Namibia, South Africa and Zambia.

The group has achieved many successes over the years of which more recently includes the building of the Trans-Kalahari Fibre (TKF) project, which connects from the West Africa Cable System (WACS) eastward through Namibia to Botswana and onward to Johannesburg. The TKF also extends northward through Zambia to connect to Dar es Salaam in Tanzania, which made Paratus the first operator to connect the west and east coast of Africa under one Autonomous System Number (ASN).

This means that Paratus is now “exporting” internet capacity to landlocked countries such as Zambia, Botswana, the DRC with more countries to be targeted, and through its extensive African network, Paratus is well-positioned to expand the network even further into emerging ICT territories.

PNH as a fully-listed entity on the NSX, is therefore now the 100% shareholder of Paratus Namibia thereby becoming a public company. PNH is ready to invest in the future of the ICT environment in Namibia. The public is therefore invited and welcome to acquire shares in Paratus Namibia Holdings by speaking to a local stockbroker registered with the NSX. The future is bright, and the opportunities are endless.