Opportunities and risks of FDI in China
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Published: Mon, 5 Dec 2016
China, the world’s biggest and most populated country, which has fourth largest area in world. There is not a single aspect in which china is running behind. All the sectors for China are really working fast with fastest growing rate of economy of any major nation. The country’s GDP ratio is so high, economic structure is working good, social and cultural aspects for business and country is bilateral. But when it is not always true, that all the country’s can enjoy success rate much than failure. There are some sections where China needs to look after like, education, health and safety and environmental crisis.
As it is a developing country, there are chances of increasing their business prospective in very huge sense with our developed or developing country. According to the news, China and the rest of the world have become closely interconnected with its large territory and population which guarantees the environmental impacts on all over the world. From the point of view of world, they try to increase these impacts by means of the trade and investment which fuels China’s rapid economic growth. From the business sector aspect, the trade was negligible before 1980’s and even FDI in China was nevertheless negligible till 1991. But the way they are accelerating their fast moving economy which is almost exponential. In economic terms there was 40-fold increase in international trade between 1978 and 2003. Therefore, there are several aspects we need to look at in order to find out the success ratio for Chinese Economy. In following article, we have tried to cover the main aspects of the Chinese strengths and weaknesses, as well as other factors such as political, legal and investments and so on.
According to the analysis and research we did, the important aspect for Chinese government are legal, political, motivation and obstacles for multinational firms to invest in the country, sectors or industries likely to attract FDI and what are the reasons, there can be possibility of bigger risk for foreign companies which would like to enter in this country and how can these risks be reduced and so on.
The political/legal environment:
A very good aspect of global marketing is legal/political features. A binding of rules and regulations with their own principles of state and nations is known as “International Law”. There are two different characteristics, the first is a “law” which belongs to an individual in a country and that particular law only exists to certain amount of degree that an individual nations are willing to relinquish their rights. The second law is, lack of truly comprehensive international legal system, which has an adequate international judicial and administrative framework for the countries legal system.
If we talk about international business, than it will also relate political decrees which are made by government for different home and host countries. There can be different measures which government would like to consider maintaining enough funding and operating smoothly in host country. Host governments take measures like taxations, ownership controls, operating restrictions or expropriation. Whereas for home country government, they take measure like make deal with eligible and approved parties, in order to avoid frauds and to grant an export licence, or withdrawal of export guarantee cover.
Availability of the legal or political system as if like, ideology, nationalism, stability and international relations out of which the main features are best described to know legal and political implications:
This can be the main possibilities of investor which may try to reduce their risk of doing business in the country. There are certain points which need to be considered while doing business in China.
The country should try to make the business transactions so easy, as in case of local supply infrastructure which will help the people to believe in new entrants of the company with similar tastes, whereas it will reduce any adverse action/damages for the host country. In a way, this can be benefitted to both home and host country.
Host country should try to make rapid depreciation of assets and repatriation of funds, if in case, there are uncertainties occurring in China, due to which the company has to wind up, it will also helpful for the company to stand with the loss if they are occurring. For the assets and funds they can be transferred at manipulated prices.
For Chinese market, whenever any new company or MNE’s wants to enter, they should try to invest as much as they can in order to maintain the stability of the market status, as well as they know the tastes of Chinese people which might be helpful for the host countries company’s.
To maintain the local stock market rates at the same levels, the company has to retain the control of critical inputs. That means, whenever they share any market share with higher price, needs to maintain the prices of those markets shares within the country. Even to make it low prices in order to earn profit, the company needs to maintain their cost of products to certain limit.
There are different aspects of providing incentives to motivate their workers, employees, public and for their own benefits. There are many countries which try to reduce their own potential risk of promoting their products, brands or advertising its products in different markets. Therefore, many countries try to reduce perceived risk of advertising or promoting inward investment as they are not tied with sharing, during the condition of tax breaks, free posts, free trade zones etc. this type of barriers affects the countries economy, as for example government tries to attract mobile investor, or considering the scheme for poor local skills which might be withdrawn once capital has been accumulated. It is same in the case of incentives which depend on feasibility of incentives compared to real return on investment?
Assessing political vulnerability
There are political aspects of economy, which create helplessness for the host and home countries business and its growth. Following are some the crucial aspects which we found out are the main features to make the company’s profit or loss in host country. Even Chinese economy could not deny to these aspects:
For a new MNE’s entering in to any new market, needs to create good relations with its legal, political, CSR and environmental aspects, as in case of its own home country.
The products should be good in quality, sensible to consumers, and trustworthy relationship with customers & industry.
Company needs to keep in mind the area and location of it growth. In order to reduce miscommunication, code of conduct, health and safety and good operating services.
Promotions of the products, brands and services are much more important for success. Therefore, visibility of the firm is must, in a way advertising the products in host country gives huge public entrance with competitors.
As we have discussed different political and legal aspect of host country’s in order to work out strategy accordingly.
Contribution to the host country, that means, giving charity, investing in shares or stocks, merging, partnerships, joint ventures, providing employment, good salaries to employees, motivation, incentives, and pensions to the current workers and so on, it is important to bring up a good goodwill in host country.
Localization of operations, in order to reduce import-export duties, getting cheaper rates of raw materials, cheap labor, etc.
After discussing the internal implications, we can also describe briefly the main external implication which might be the reason for failure in host country. International law on marketing operations is multitude or crowded.
Price controls/decisions- taxation, value added systems, resale price value/maintenance, price freezes after certain level in inflation.
Distribution- channel of retail or wholesale agents or distributors, physical distribution or manufacturing the products on your own, insurance policies for products, brands or patents.
Product decisions- includes designs of products, healthy and safety measure for using that product, overall performance measurement, packaging, labeling and warranty of the products.
Promotion- advertising for the products and its services is must, product restriction includes within which age group the product can be used to reduce dangers with people’s life, and sales promotion for products gives better results.
The most important market research- collection of details which are required by local public, tastes of particular brand, stock valuation, storage capacity for delivering goods to different areas and transmission of data to its local branches.
Reasons for sectors and industries which are more likely to attract FDI in China:
What is FDI? FDI means a multinational or transnational firm which engages in Foreign Direct Investment and owes its controls with value-added activities in more than one host country. The most used and widely accepted by data collecting agencies such as organization for Economics Co-operation and Development (OECD), UNCTAD’s Division on Investment, Technology and Enterprise Development (DITE) adjoined with national governments and supranational entities.
There are main points for the development of Chinese economy which are mentioned below:
1. There has been a positive development trend for Chinese economy, as the economy provides a huge entrance for FDI. In this situation and circumstances, the growth of global economy will rise slowly but the highly developed countries like US and Japan will grow slowly as Chinese government guide lines describes expansion of internal demand, implement of positive financial policy and steady monetary policy which will try to accelerates the adjustment of economic structure in Chinese economy. From this aspect further expansion is possible which will open outside world and will run actively and steadily to promote the reforms which will be in favor of China’s situation as well as its legislation of market economy, it will boost the overall quality and benefit of economy to run smoothly, which will maintain a strong bond with home and host country with its individual growth.
2. With stable political situation, Chinese economy has encouraged FDI as a part of its main entry policy. For certain period of time, the government itself was taking part to consider foreign direct investment in China which resulting made continuous efforts in improving or growing FDI investment. It was also protecting legal rights and interest of foreign investors.
3. After having FDI in China, foreign firms were attracted to start its business in order to earn like the foreign investors. Even some of the firms who invested experienced success in China. Since last 20 years of China’s restructuring and strengthens of foreign investors in investing in Chinese Economy increase confidence of every individual to make first choice for every firms, MNE’s or joint ventures to work in China or start Business in China.
4. Broad Market Potential: As now we all have an idea that China has got highest population with highest growth rate like developed country. The economy is fast growing, and domestic market of its services and products are massive. This is all because of China’s consistent political environment; low labor cost with high quality of work, whole range of industries, and return on investment is good and so on. In a way China exhibits strengthen and charismatic attraction to an number of foreign firms and enterprises or MNE’s.
Motivation and obstacles for MNE’s to invest in the China:
Market size and growth
MNE’s need more space to wide-spread their rapid growth and they have comfortable market environment in China. E.g. Tesco
Cheap labor cost
As China is highly populated country and in this country people are ready to work at any cost, the concerned to earn money for their normal standard of living.
The huge difference is currency rate. For example, if US wants to start a business than it will double profitable from the budgeted cost for starting a new business, as they can export- or can get each and every raw materials from China at cheaper rates.
High investment return
As we have studied, FDI has improved the economical level of China; therefore we can say every country is dreaming to start its ventures in China due to this reason, as before we earn profit we can earn money from the investment itself. E.g. shares, funds and charities
Local government system is quite compatible to motivate and encourage business to do in China, though is not in case of internal motivation but when it comes to business, the different policies are benefitted for outsiders. E.g. free trade zones, loans, etc.
Rules and regulations are not frequently changing with government; therefore it will be benefitted for new MNE’s to enter as they don’t have to think about any new shortcuts to enter or any other changes with its business working structure and strategies.
Part of company’s
As we know that china is booming with all the aspect all over the world, that means if the country’s economy is booming, there are chances of new entrants to hit the set targets and run business successfully rather than home country. E.g. Wal-Mart
Serving as an export
Being a mediator China serves all the main countries its varieties of goods, technologies and cheap labor. E.g. watches made in China and sold in USA/India with a brand name, as well as toys.
This point is not much used by any MNE’s as we all have idea about Chinese technological power, what sort of machinery they use for manufacturing and production. Therefore, for MNE’s they don’t have to worry about its production of goods, as it can be made with cheap labor, materials but with consistent quality.
China’s weak Indus.
Infrastructure doesn’t really matter as the people in China want to adopt western trend, but they are facing constraints while adopting it. The reason might by cultural.
Obstacles for MNE’s firms to invest in Chinese environment:
This factor can be weakness, as there is no improvement in political aspect of country so there are no chances of MNE’s to innovate something new, or nothing such which is beneficial to MNE’s
Unsatisfactory foreign trade policy
Trade, tariffs, subsidies- aid and loans, custom valuation. Whereas regarding the quotas, MNE’s needs to consider- “Buy Local Legislation”, standards and labels, specific permission required, administrative delays, reciprocal requirements, restrictions on services. These factors are not up to certain limit to satisfy the Foreign firm.
Regulations not strictly implemented
Legal and illegal actions can take place while doing new business or continuing business. The laws which a business man is bound to follow, which are not being followed properly to maintain sustainability of economy.
Unsatisfactory banking system
The rates for interest, return on investment and etc., are not too enough for MNE’s to get its return with double profit. Even the facility of banking is not sufficient for the new company to enter in China and provide every information/database. This can be the important aspect to be a huge obstacles as employees of the company’s who has got bank account will not get up to the mark information, resulting failure.
The development of business related industry
China is huge in area, so in order to increase GDP, China is out sourcing too much to get the companies in to China for employment, high standard of living, good infrastructure etc.
Because of cheap labor and materials there are chances of doing fraud with public by providing them duplicate products and earn profit.
Risks for entering in to market and how to reduce the risks in host country:
Risk is such a big factor, which will consider by every firm, organization or enterprise as hindrance towards success. Even in here, there are different aspects of risks, which includes social, economical, political, legal, environmental and technological. But there are certain features which are the main to consider while you enter in host country. Some of them have been discussed below:
Build strategies to recruit and train capable managers:
In this case, there are many graduates from Chinese business schools, but they are lacking necessary skills like team leading, managing targets and so on. Chinese universities have formed partnerships in order to get successful and efficient employees to work within the company’s environment and its management curriculum. They are providing trading promises for future employment by doing partnership with MNE’s. firms are being trained properly, capable and intelligent Chinese student to get jobs in host country’s company.
Safeguard intellectual property rights:
Confidentiality is much more important while starting a new business in host country. Therefore foreign companies need to be cautious while transferring any important or proprietary information regarding its business growth or its development in china. There are chances of information being stolen and privacy for business strategy, budgets, and employee’s details can be hacked. Firms can pursue legal action for its patent but they are finding difficulties to maintain within Chinese border. With the help of technological development firms are being operated with creative solutions like existing computer code, alliances with Chinese partners, and joint ventures for production and patents for local public use. Some of the firms have found the solution for their problem, an opportunity of greater chance of influencing Chinese policy and enforcement strategies, which will help a lobby to speak for many parties or it can be a representative for one.
Understand the competition.
To bit the cut throat competition, Chinese are not competing home countries companies but they are also challenging host country’s company. They work on strategy which emphasis on production of high value added products, which resulting in to increase in amount of production or benefitted for foreign firms over Chinese companies. From the Chinese company’s opinion, they are not aware about particular design, marketing strategy or any new distribution channel system. Therefore they are required to have experience for the same.
Corporate governance and strategy in China is very crucial as the elements of R&D, production and supply chains are not present or not concentrated in any one Chinese province or region or overall Chinese border.
Develop strategies to maintain CSR:
After being followed first step, employees and local workers are being trained by foreign firm, as well as they invest for their education and in philanthropy/return firms will support host country’s charities which might be helpful for them to construct strong political relations locally. More or less Chinese communities are sensitive, therefore to perceive anything as corporate efforts to change the infrastructure and development of its country, according to western prescriptions.
Have an exit strategy:
All over the world, everyone is aware that China is emerging economy and everybody praises that. It will be the most attractive market with new development and emerging strategies within next few years. After all this compliments and comments, the long term perception is more likely uncertain. The reason is they don’t have political institutions like India, to minimize/reduce long-term risks of sweeping political change. So it is worth to be secure for long-term profits, as if it prematurely cashes in its chips and moves out. So it’s better to have an exit strategy as plan ‘B’, if plan ‘A’ doesn’t work.
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