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The WTO and China's ban on foreign investment in telecommunication services: a game-theoretic analysis

By Milton Mueller and Peter Lovelock

Abstract

China's telecommunication services sector was closed to foreign direct investment (FDI) during the 1990s. The official ban on FDI persisted despite China's enormous demand for capital to build out its telecommunication infrastructure. It remained in place despite statements from Western analysts that it was not sustainable and repeated predictions that it was about to be relaxed. What created the ban, why did it stay in place so long, and why did China suddenly offer, in its World Trade Organization accession agreement with the United States, to change it significantly? This paper identifies the domestic policy bargains that supported the FDI restriction. A simple game theory model is used to analyze the way four players -- (1) the Chinese state, (2) the Ministry of Information Industry/China Telecom, (3) Telecom's domestic rivals, and (4) foreign strategic investors -- interacted over access to foreign capital and technology. We contend that this analytical framework provides a much more solid understanding of the forces shaping Chinese telecommunications policy than simplistic extrapolations of Western notions of liberalization and privatization. The model is then used to assess whether China's willingness to open up to foreign strategic investment in the sector was driven primarily by its own domestic reform process, or by the external pressures generated by its desire to join the WTO. Our model predicts that China would not have opened up to foreign investment in telecommunication services without the need to bargain for WTO accession. It is our conclusion that the state's desire for WTO accession tipped the game's equilibrium sufficiently to alter the FDI ban.China WTO Foreign direct investment (FDI) Game theory

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