Discuss about the General Overview of China for Institutional Factors and FDI.
China has been ranked as the most populous nation in the world with a rich culture that dates back 4000 years (TCT, n.d.). Some products such as gunpowder, compass, and paper constitute that fragments that make up China. Under the communist regime that lasted for more than two decades led by Mao Zedong, the founder of the People’s Republic saw China stagnate for more two decades. However, China has been categorized as a nation with the fastest-growing economy and as per the reports it is stated that China might be undergoing what is referred as the second industrial revolution. China has also put in place space exploration program and entails plans of establishing a space station by 2020.
Currently, China has been identified as the global leading exporter and is attracting a lot of investments. Also, China is investing abroad in projects worth billions of dollars. Following the collapse of global export markets that was followed by financial crisis globally in 2009 saw China hit hard, though its economy rebounded first enough ensuring the country was back on its track. China overtook Japan in 2011 in becoming the second largest economy in the world despite the debt crisis that was evident in the eurozone in 2012 which played a critical role in dragging China’s growth as Eurozone was the largest market for products from China. China now benefits from a large access to international markets as it is a member of the World Trade Organization. However, China relations with trading members have been strained due to China’s piracy goods and the large trade surplus. This has led to increasing demands for Beijing to devalue its currency that will see currency value raised and this will make goods from China expensive for buyers and the overall effect will hold back exports. The economic differences that exist between urban China and the remote hinterlands are among the largest in the global arena. Over the past few decades, many rural dwellers that are impoverished have flocked to China’s eastern cities and this has led to China enjoying a construction boom.
At the onset of 2012 for the first time, it was reported that the number of city dwellers seemed to outnumber rural population. The manifestation of social discontent is evident as revealed by demonstrations by both the farmers and employees. Thousands of individuals travel to Beijing annually to launch legal petitions with the courts in the hope of seeking legal redress for alleged corruption and grabbing of land. Other crucial matters entail corruption which impacts negatively on the development of society and the alarming rate of HIV pandemic. Environmental degradation has been propelled by the downside of the economic boom. China has been reported as the hub to many most-polluted towns globally.
Campaigners from human rights continue criticizing China for the many executions that involve hundreds of individuals annually and for failing to eradicate torture as well as the continued censorship for artistic and political expression. China has been keen on stamping down on what it considers as dissent among ethnic minorities such as the Muslim Uighurs that occupy the North-west of China. The country’s rule over Tibet is considered controversial. The lobby groups from human rights blame the state of the destruction of Tibetan Buddhist tradition and the execution of monks that were loyal to the Dalai Lama, a spiritual figure that was exiled for campaigning for autonomy in China.
China continues to dominate and remains as the major recipient of the global hub of FDI over the past two decades. Reports indicate that FDI accounts for more than 25% of the value-added production,4% of China’s tax revenue and more than 50 % of foreign trade (Fogel, 2010). Over 190 nations across the globe invest in the country and this entails 450 out of the 500 enterprises listed in the Worlds Fortune. In one of the surveys that were conducted by Member Priorities Survey, it revealed that most of the companies from the United States of America invest in China purposely to enrich the domestic market and not for purposes of exporting back to the United States. As per the estimates by UBS AG, the approximated gross shares of US, European and Japanese MNCs in exports from China was approximately 11% in 2009 (Fogel, 2010).Most exports were said to originate from Hong Kong and Korean enterprises. It is approximated that approximately 75% of the MNCs from the European countries and Japan are stationed in China to trade to the local market. However, a drop in foreign direct investment in the previous decades indicates that enterprises are losing interest in the Chinese market. Priority Sources of FDI for China have remained fairly constant over the past few years. Hong Kong leads the list and is closely followed by other nations such as the Virgin Islands and Japan (Bailey, 2018). The survey by Member priorities reported that more than 80% of the firms that operate in China are profitable.
The National Development and Reform Commission set up a good plan of managing FDI investment in China’s economy in 2006.The plan focused on the nexus between investment in China’s security and foreign investment. The commission directed the country to impound restrictions on holding of foreign firms. Foreign financing should be channeled towards industries that are high-tech, service industries that are modern and high-end manufacturing. The NDRC is urging the MNCs to raise investment and establish production and assembly centers in China (Verbeke, 2018). The primary motive would be to boost the autonomy of creativity for Chinese firms.
Outward FDI has seen China’s economy expand and prosper and China’s outbound direct investment reached the target of about $73 billion by the close of 2016 financial year. Overseas acquisitions were the primary sources of Chinese outbound direct investment (Verbeke, 2018). Hong Kong, the Cayman Islands, and the Virgin Islands classified as tax havens received approximately 81% of the total foreign investment (Fogel, 2010). The primary sources of outward FDI from China are the states in the Coastal and border territories. Provinces such as Fujian, Jiangsu, and Shanghai accounted for more than 60% of China’s outbound FDI (Fogel, 2010).The service industry received approximately 50% of the Chinese FDI, more than 20% targeted manufacturing and 22% covered segments such as the wholesale and retail trade and more than 15% was invested in the manufacturing sector (Fogel, 2010).
The Chinese history of foreign exchange reserves indicates that in 1978 the reserves were minimal though substantial to support the import sector. The exports as per 1980 were critical in contributing to the rise in reserve to approximately, $17 billion (McCaffrey, 2016). The economic depression that was witnessed in 1980 led to a sharp decline in the imports as exports continue to rise. This had the effect of creating a surplus in the merchandise trade reaching close to $9.1 billion (Bailey, 2018). However, the surplus was soon eroded by the sharp increase in the imports, as the imports rose rapidly as compared to the exports. The trade and the current accounts were responsible for creating deficits, but due to acceleration in inward FDI, the foreign exchange reserves kept growing.
The joining of China to the World Trade Organization(WTO) in 2001 has contributed to a rapid increase in the value of imports and facilitated the growth of exports as evidenced in 2006 when FDI inflows surpassed the $60 billion target that was established on an annual basis. In October 2006, it was reported that foreign exchange reserves surpassed the $1 trillion in the history of China’s economy (Dlabay & Scott, 2011). In September 2008, the reserved amounted to $1.9 trillion and remained constant till the end of 2008 when the growth of trade slowed and the levels of FDI inflows declined (Fogel, 2010).
China has been associated with manipulation of the holdings of its currency at a low level artificially. In mid-2008, the currency appreciated more than 20% against the dollar and then stagnated as the authorities in China were careful about slipping exports (Fogel, 2010). The continued manipulation of currency by China has been linked to hurting China’s economy. The reports by the Treasury revealed that appreciating the Yuan could end up being a win-win scenario for the global economy. The administration of Obama once wanted to empower the IMF with the aim of improving practices in the currency sector.
The Chinese textile industry has been a backbone of the economy for many decades and this has been attributed to factor endowment and the existence of the market scale. The level of trade of the textile industry has been reported to increase more than 7 times in the past two decades. It is estimated that in 2005 exports from the textile industry accounted for 15.4 % of total exports in China and more than 20% of the global gross exports in textiles (Fogel, 2010). The production and exportation of products from Chinese textiles are the largest across the globe. However, the textile industry in China is not without challenges and difficulties, for instance, excessive reliance on resources, a technology that is ranked as low and a trade structure that is indisposed. The imposition of trade sanctions against textile products from China is healthy as it casts tight restrictions on the competitive advantage of the textile industry from China bringing on board suggestions.
In light of the connection of factor and global absolute advantage, the progress of the textile industry relies upon and is facilitated by costs of labor and technology. In comparison, it is crucial to state that the garment industry is labor oriented whereas the textile industry specifically the chemical fiber segment is sort of capital and technology intensive (Fu & Tao, 2012). The textile industry in China displays economies of scale and cost impacts in the distribution of materials, costs associated with labor, compatibility of up and downstream and this translates to a stiff export competitive edge. However, it has been noted that developed economies are investing and adopting modern technologies into their textile industries and the benefits associated with cheap labor in third world nations gets crippled by constant improvements in productivity in developed economies. As such the textile industry in developed nations continues to reap great profits while at the same time production gets reduced. In this context, the comparative advantage of the textile industry in China will be evaluated.
The competitive advantage that is exhibited by China in the present day in textile market relies to a large extent on the firm industrial ground and cheap costs. Compared to the overseas competitors, the textile industry in China displays a competitive edge in the following sectors that are projected to exist in future.
The substantial supply of key inputs such as labor and associated materials is vital for the textile industry in China. Among the factors, the most crucial advantage is labor. There are two primary characteristics of the labor force in China, one is its low wage and the superior quality. The median education of employees in China is one decade which is the average of developing nations and around four years gap in comparison to the developed nations through the wage rate in China falls below that of other nations (Fu & Tao, 2012). As witnessed in 2005 the wages in textile market in China accounted for about 1/18 as compared to England and 1/21 of that paid in the United States. China has received many economic bonuses from the textile market without losing its comparative advantage in labor supply and such an advantage is a propelling force for the textile market’s further progress. The other trait is China’s sustainability. The growth of urbanization and improvements in higher education in China will create room for more robust but low-priced labor force for the textile market. Thus, the increase in the human stock will ensure supply of employees and technological support needed for the future progress of China’s textile sector.
The second superiority stems from the availability of materials. China is ranked as the laeding producer of cotton, yarn and natural fiber in the world due to the unique nature of her agriculture and superiority in its inputs. Though abundance in natural fiber and the growing chemical fiber sector makes China’s textile industry enjoy advantaged superiority that has been manifested in more than 10 million tons of fiber output (Fu & Tao, 2012). China is also ranked as the number one global producer of cotton and consumer and China’s cotton accounts for more than 25% of the global gross production (Fu & Tao, 2012). With regards to the production of cloth, China has been dominating the market as the leader since 1985 and the production of other products is well above the average compared to other nations.
The government of China directly advocates stringent enterprise opposition to trade and investment protectionism (OECD Observer, 2012). As displayed ten years ago during the Asian crisis, the state established a strong position towards outward retrenchment during the period of economic depression. A transparent and sustainable investment system is one of the comparative advantages exercised by China. Such a crisis is an avenue to upgrade the trade system. As enterprises exhibit on how to adopt investment decisions to the global depressions, states seize the opportunity of revising their investment policies to take into account a pile of achievements while at the same time identifying pending hurdles and obstacles.
The government of China has made massive strides over the past few decades in establishing laws and regulations that promote the responsible conduct of business operations. As such that was behind the remarkable expansion of FDI inflows in the past few decades. Some of the steps entailed the laws that China adopted in 2006 that entailed the acquisition of local firms by foreign investors, the enterprise tax law that targeted income which saw abolishment of fiscal incentives for FDI in 2008 (OECD Observer, 2012).Also, it is in the same year that saw the establishment of China’s first intellectual rights law, the anti-monopoly law and the latest version of the catalog which guides investment by foreign firms.
The policies and regulations on protecting the environment are other perfect illustrations of improvements. In preparing their review, the OECD team made visits to four textile industries that were located in South China. The four textile industries are excellent illustrations of what gets done by firms in understanding the necessity of responsible business operation. Significant development has also been established in the conservation of energy and in constructing a sustainable economy. Laws regarding labor have also progressed and are more open. A perfect illustration is the current Labor Contract Law.
These are all fundamental fulfilments, however, there is no room for complacency. There is some task that is still vital to be done. The review has gone a notch higher by adding recommendations that will help China make better utilization of foreign investment. However, government security screening frameworks with regards to foreign investment projects are still not open and clear (OECD Observer, 2012). It is important for investors in the manufacturing sector to gain more clarity on how the new property law will be implemented.
Close collaborations and working with the OECD and other relevant stakeholders will help in keeping the global investment regime transparent and this will help China’s FDI to assist in global recovery and in development of China. China’s participation in the liberty investment process that was hosted by the OECD was crucial and marked China’s effort in establishing liberalization of China’s markets (OECD Observer, 2012). The multilateral process helps states in monitoring changes in policy formulation that are proposed or initiated by other nations and also establishes discipline for measures that are restrictive.
The rate of unemployment in China has decreased to 3.89% in the initial quarter of 2018 from 3.9 as witnessed in 2017. However, in years such as 2002, the rate of unemployment reached an all high of 4.3%. High unemployment rates are as a result of huge population and also due to lack of formal jobs that can accommodate all the willing and able persons. In China, the rate of unemployment evaluates the number of individuals that are actively seeking for a job as a proportion of the workforce. The rate of unemployment is still high as China faces hurdles as the economy moves on with structural reforms as per the ministry of labor. The ministry of social security in an announcement revealed that it needed to create more than 10 million jobs. However, the need to create more jobs still faces a lot of pressure.
The government of China is encouraging people to establish self-employment by starting their enterprises. This can be achieved by reducing taxes and loan availability for some people based on certain terms and conditions. Encouraging an entrepreneurial culture has the benefit of improving the standards of living of particular individuals.
Encouraging business enterprises to absorb laborers, more so the small enterprises in the service industry and labor-intensive enterprises and this can help ease the pressure on job markets. Insurance subsidies for certain levels more so when they recruit people from urban centers that are vulnerable.
In accordance with the Constitution of China, China is a socialist government that is under the democratic dictatorship that is dominated and run by the working class and grounded on cooperation by employees and peasants (PESTLE Analysis, 2015). The state is a composition congresses by people and a system of a political party that enhances a multi-party cooperation and political consultation ruled by the leadership of Communist Party of China. The kernel and primary framework of the political system is composed of the systems of people’s congress, the autonomy of regional ethnicity and governance at the grass root.
The government of China is made up of a multi-party system that cooperates with the consultation of political systems under the leadership of CPC. The system is tasked with the responsibility of ensuring that CPC is the sole political party in power. With the acceptance of leadership by CPC, the other political parties also engage in participation entailing discussions and management of affairs of the state in conjunction with CPC. Political consultation in this context means that under CPC’s leadership, all partners and representatives from all areas in the country can partake in negotiations of the nation’s primary policies and critical matters in politics, economic and social affairs before a decision is reached. Political consultation assumes the form of conferences by Chinese People Political Consultative forum. Political negotiation is the most fundamental political and organization form of multi-party consultation system.
According to reports by the department of state on the human rights practices and global religious freedoms, it has been noted that the well archived and continuing abuses of the violation of fundamental human rights of internationally identified culture that stems from both the intolerance dissents of the authorities and inadequacy of legal frameworks that safeguard fundamental freedoms and rights (Fogel, 2010). Some of the reported abuses entail arbitrary and bureaucratic incommunicado detention and mistreatment of prisoners. Also, there are strict restrictions on freedom of press, speech, association and even religion among other things.
China is catastrophic with regards to nature of risks that are political. The likelihood of having nationalization policy by firms needs to be taken into consideration as this was once experienced in the country in 1949.Similarly, other threats such as confiscation, inconvertibility of currency, and repudiation of contracts are eminent and real in the Chinese economy (Czinkota, et al., 2011). The devaluation of currency and hyperinflation are all possible in many nations, wreaking havoc on the substantial insurance limits that are within the acceptable range. Company risks also arise in the form of company employees being kidnapped or personal harm occurring and extortion attempts ascribe to risks posed by the firm. However, a special kind of political risk that is evident in China and it is a constant problem is the battle that prevails between China’s national government and the provincial and local authorities over the application of the law. This makes it hard for enterprises that operate in the country to understand what the various regulations entail.
The level of investment of businesses in China has fallen dramatically following the Tiananmen Square massacre in many sectors such as tourism and investment by foreigners. Whereas firms not already engaged in China are conscious of investing in China, nations that are already integrated into investing in China are looking for a moment of tranquility where economic prosperity will revive and have confidence that China will not play a part in expelling foreign investors.
As per the census was taken in 1990 China was one of the countries that had the largest population of 1.1 billion people. This population has grown rapidly in the current times and grows rapidly by 15 million annually an increase that is equated to the gross population in Australia. Such an increase has been due to death rate declining sharply. One of the primary concerns for the Republic of China has been the challenge of providing the quality life for such a large society. Since 1978, the government of China has encouraged the concept of one child among the Han and families are to raise one child only.
The Chinese ideology is not grounded on ethnicity and is merely a cultural concept. Talking and behaving in Chinese means acceptance of the Chinese framework of traditional values and is to be Chinese. The Chinese identify themselves as sons of Han. The small ethnic groups that associated with the Han ended up adopting the Chinese culture and were later absorbed.
Establishing and conducting businesses in a country like China may be hard as there are many potential risks and variations in the, political, social and economic frameworks. The people from China prefer conducting business deals with the enterprises they are familiar with, thus working as an intermediary is vital in China. Relationships with regards to business deals are established formally. Some of the social norms that regulate operation of enterprises relate to establishing appointments two months prior and preferably in paper. The concept of punctuality is considered a positive trait by the Chinese. Arriving late is considered an insult and could negatively strain the relationship. The growing market exhibited in China coupled with rapid industrial revolution has been the primary driver for economic growth. China has continued to serve as an important investment partner of the U.S. It is crucial that foreign firms and countries wishing to conduct business with China understand the variations in a political, economic, social and cultural environment of China. Thus, it is critical to learning the cultural and political variations and their effect on business conduct and operations.
References
Bailey, N., 2018. Exploring the relationship between institutional factors and FDI. International Business Review, 27(1), pp. 139-148.
Czinkota, M., Ronkainen, I. & Moffet, M., 2011. International business. Hobonken(N.J): Wiley.
Dlabay, L. & Scott, J., 2011. International business. Mason,OH: South-Western Cengage.
Fogel, G. K., 2010. Business Environment in China: Economic, Political, and Cultural Factors. [Online]
Available at: https://www.usi.edu/media/3654697/Business-Environment-China.pdf
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Fu, X. & Tao, Y., 2012. China’s Textile Industry International Competitive Advantage and Policy Suggestion. [Online]
Available at: https://www.bpastudies.org/bpastudies/article/view/24/53
[Accessed 4 May 2018].
McCaffrey, R., 2016. How Chinese FDI Will Transform the Global Economy. [Online]
Available at: https://thediplomat.com/2017/12/how-chinese-fdi-will-transform-the-global-economy/
OECD Observer, 2012. China’s investment Policy. [Online]
Available at: https://oecdobserver.org/news/archivestory.php/aid/2881/China_92s_investment_policy.html
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PESTLE Analysis, 2015. PEST Analysis of China. [Online]
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Verbeke, A., 2018. The JIBS 2017 Decade Award: The determinants of Chinese outward foreign direct investment. Journal of International Business Studies, 49(1), pp. 1-3.
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