OECD Investment Policy Reviews China Progress and Reform Challenges: The evolving competitive environment for FDI

State‐owned enterprises (SOEs) are playing an increasingly smaller role in the Chinese economy. They no longer employ most of the workforce; their share of output has fallen to less than half the total; they appear on average to be less profitable than all other enterprises. The reform of SOEs has been slow to start but is now accelerating. Domestically‐owned private enterprises, once banned, are now being encouraged. SOE reform offers opportunities to foreign investors, including the possibility of acquiring SOEs or their assets, improved corporate governance and accounting in domestic partners of FIEs, a reduction of unfair competition, stronger competition and a growing market for consultancy and other business services. Although cross‐border mergers and acquisitions (M&A) have become the main form of FDI flow between developed countries, crossborder M&A still plays a negligible role in China's FDI inflows, largely because the legal status of M&A there remains uncertain and several regulatory obstacles continue to impede M&A involving FIEs. Recent measures to improve corporate governance are welcome, but problems such as high state ownership of shares, related party transactions and inadequate transparency and disclosure have yet to be fully addressed...