China and the Global Economy in the 21st Century

John Saee

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136654916
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

As China continues to ride out the global economic crisis while still retaining year on year GDP growth it is increasingly important to understand how this 'new' economic giant, with its communist-capitalist model operates its economic and business environments. This book is designed to scientifically examine the contextual variables that foster sustainably dynamic economic growth in China. In particular, the contributors provide an incisive analysis of the contextual bases underlying such a dramatic rising economic power and the immense implications for enterprises and countries involved in dealing with China. Drawing on the latest studies and cutting edge research findings, this book analyses FDI, project management, internationalisation, the continued role of state-owned enterprises and doing business in China.

As such it will be essential reading for all students of Chinese business and economics, as well as businesses seeking to develop a critical understanding of the driving global economic force which is China.

1 International investment strategy
in China

Opportunities, prospects and challenges
confronting multinational corporations
and global entrepreneurs

John Saee

Napoleon Bonaparte once referred to China as a ‘sleeping giant’, but I maintain that ‘the sleeping giant’ is awakened and is now pushing forward with full rigour the growth-engine for the global economy in the 21st century (John Saee, 2011).

Introduction

Generally speaking, the main players contributing to such a spectacular foreign direct investment (FDI) globally have been the multinational corporations (MNCs).

With that in mind, the production of goods and services by an estimated 79,000 MNCs and their 790,000 foreign affiliates continues to expand, and their FDI stock exceeded US$15 trillion in 2007. The United Nations Conference on Trade and Development (UNCTAD) estimates that total sales of MNCs amounted to US$31 trillion – a 21 per cent increase over 2006. The value added (gross product) of foreign affiliates worldwide represented an estimated 11 per cent of global gross domestic product (GDP) in 2007, and the number of employees rose to some 82 million of the Chinese national economy. On the whole, FDI flows to South, East and Southeast Asia including China rose to a new record level in 2007, reaching US$249 billion (UNCTAD, 2008).

Key variables contributing to this exponential growth in FDI included a favourable business sentiment about the region’s economies, the significant rise in cross-border merger and acquisition (M&A) sales and progress towards further regional economic integration and country-specific attributes. While East Asia continued to represent the lion’s share of FDI to the region, flows to South and Southeast Asia also increased significantly. China including Hong Kong remained the largest FDI recipients in the region (as well as in developing economies as a group) (see Table 1.1 showing the top five recipients of FDI inflows).

China as a host destination country for FDI

For much of the twentieth century, China’s economy was closed to foreign competition. This changed in 1978 when the Chinese Government adopted its ‘open-door’ policy (kaifang zhence), a strategy aimed at internationalizing the country’s economy. This was followed quickly by the enactment of the Law of the People’s Republic of China on Joint Ventures using Chinese and Foreign Investment (1979), which granted FDI legal status in China. This law, and its subsequent amendments, provides the basic legal framework for MNCs to invest in China. Following these developments, FDI in China grew exponentially; particularly in the 1990s. China’s strategy for using FDI to promote economic development has three important dimensions. First, from the outset, Chinese authorities pursued the equity joint venture (EJV) as the primary mode for foreign investment, in order to accelerate the transfer of technology and both scientific and managerial know-how (Beamish, 1993). Second, the strategy of opening up the local economy to foreign investors proceeded in stages, targeting initially light manufacturing, followed by more technology-intensive industries and more gradually, the service sector. Third, foreign investors’ access to the local economy has also changed gradually, through the creation of specially designated areas for foreign multinational enterprises’ (MNEs’) operations (Chadee et al., 2003).

Table 1.1 South, East and Southeast Asia: top five recipients of FDI inflows, 2006–2007 (billions of dollars)

Country	FDI inflows (billions of dollars)
	2006	2007
China	72.7	83.5
Hong Kong	45.1	59.9
Singapore	24.7	24.1
India	19.7	23.0
Thailand	9.0	9.6

Source: adapted from UNCTAD (2008).

Consequently, China has been able to attract enormous FDI. For instance, annual utilized FDI in China (excluding the financial sector) grew from US$636 million in 1983 to US$75 billion in 2007. The cumulative level of FDI in China at the end of 2007 stood at nearly US$760 billion, making China one of the world’s largest destinations of FDI.

Manufacturing was the largest sector for FDI flows to China in 2007, accounting for about 55 per cent of the total. The Chinese Government estimates that through June 2007, it had approved over 610,000 foreign funded companies and that 28 million people were employed by such firms, which is almost 10 per cent of all people employed in urban areas (Morrison, 2008).

Trade and foreign investment continues to play a major role in China’s booming economy. From 2004 to 2007, the value of total Chinese merchandise trade nearly doubled. In 2007, China’s exports (at US$1,218 billion) exceeded US exports (US$1,162 billion) for the first time. China’s imports were US$956 billion and its trade surplus was US$262 billion (a historic high). Well over half of China’s trade is conducted by foreign firms operating in China. The combination of large trade surpluses, FDI flows, and large-scale purchases of foreign currency have helped make China the world’s largest holder of foreign exchange reserves at US$1.5 trillion at the end of 2007 (Morrison, 2008).

Foreign enterprises represent 28 per cent of China’s industrial added value and one-fifth of taxation. They export about 57 per cent of the country’s total goods and services account for 11 per cent of local employment. China’s preferential foreign investment policies, inexpensive labour, increasing purchasing power and improving investment environment, especially after entry into the World Trade Organization (WTO) in 2001, have rendered the country a favourite destination for global investment (Yunshi and Jing, 2005).

The most prominent contribution of FDI has been expanding China’s manufacturing exports (Zhang and Song, 2000). Increases in foreign-invested enterprises (FIEs) not only added to China’s export volumes, but also enhanced its export structure. While China’s exports were ranked 26 in the world in 1980, with a volume of US$18 billion and 47 per cent of its exports as manufactured goods, the corresponding numbers in 2003 were the fifth ranking, US$438 billion, and 92 per cent (National Bureau of Statistics, 1996). The value of exports by FIEs in 2003 (over 90 per cent of them as manufactured goods) was US$240 billion, comprising 55 per cent of China’s total exports in that year. FDI has also enhanced China’s economic growth through raising capital formation, increasing industrial output, generating employment, and adding tax revenue (Zhang, 2001). The share of FDI flows in China’s gross fixed capital formation emerged from a negligible level in the 1980s to 7 per cent in 1992, and then to 12 per cent in 2003. The share of industrial output by FIEs in total industrial output grew from 6 per cent in 1992 to 33.4 per cent in 2002. FDI has also reduced China’s unemployment pressure and contributed to government tax revenues. By the end of 2003, the contribution of FIEs is prominent in terms of employment of 23 million Chinese, comprising 11 per cent of the total non-agricultural labour force. Tax contributions from FIEs increased as a result of FDI flows, and their share in China’s total tax revenues grew from 4 per cent in 1992 to 21 per cent in 2003 (Zhang, 2006).

Strategic modes of entry by MNCs

Multinational corporations (MNCs) penetrated the Chinese market in a variety of ways including as equity joint ventures (EJVs), contractual joint ventures (CJVs) and the establishment of wholly foreign owned enterprises (WFOEs). From the late 1970s, CJVs were the most important type. Since the late 1980s, EJVs and WFOEs became predominant and recent years have seen a proliferation of WFOEs. EJVs have been a popular entry mode for two reasons. First, the Chinese Government believes that EJVs best serve the Chinese objective of foreign capital, technology, and management experiences. Second, foreign investors hope that by engaging in joint ventures, they secure local partner’s assistance within the domestic markets (Zhang, 2002). Deng (2001) observes that many foreign investors have chosen WFOEs as the preferred entry mode in recent years so as to avoid problems associated with EJVs. Multinationals have built more R&D centres in China.

According to UNCTAD (2001), by the end of 2000, MNCs had established more than 100 such centres in China. Most of them are located in Beijing, Shanghai and Guangzhou. Intensifying market competition has driven the localization of the R&D capacities of MNCs. It can speed up the launch of new products on the domestic market, which is crucial for capturing market share. It can also help improve relations between MNCs and the host country, which often hopes MNCs can transfer more state-of-the-art technologies (Ali and Guo, 2005; Yunshi and Jing, 2005).

Key drivers behind exponential growth of FDI into China

China as a nation offers several specific advantages that are equally considered to be the main drivers underlying FDI. Swain and Wang (1995), Liu et al. (1997), Zhang (2000), Wei and Liu (2001), Zhang (2002) and others have argued the key variables of FDI inflows into China identified by FDI theories can be categorized into three classifications: micro, macro, and strategic determinants. Micro-factors concern firm-ownership-specific advantages such as product differentiation and the size of the firm. Macro-determinants of FDI emphasize the market size and the growth of the host country, which is measured by the GDP, GDP per capita, gross national product (GNP), or GNP per capita, as rapid economic development may bring about large domestic markets and businesses. Other macro-factors entail taxes, political risk, exchange rates, and so on. Strategic determinants represent those long-term factors such as to defend existing foreign markets, to diversify firms’ activities, to gain or maintain a foothold in the host country, and to complement another kind of investment (Ali and Guo, 2005).

Costs factors are one of the determinants of FDI, among which labour costs have been extensively investigated in studies within this field. China has rich resources of labour and China has paid great attention to the education of its people; therefore, Chinese labourers are of relatively high quality and there are comparatively numerous technical personnel with average salaries at a low level (Andreosso-O’Callaghan and Wei, 2003). Swain and Wang (1995) discovered that there was a positive relationship between the relatively cheap labour in China and inward FDI.

Research showed that FDI in China has been motivated by several factors, including China’s potential market size and growth. Another related motivation for FDI is to seek new markets. The larger the market size of a particular province, the more FDI the province should attract. Host countries with larger market size, faster economic growth and higher degree of economic development will attract more market-oriented FDI, as is the case with China (Ali and Guo, 2005).

Other trade costs are also seen to be the catalysts for attracting FDI. For instance, the availability of infrastructure, such as rail lines, is positively correlated with foreign entry, whereas high tariffs on imported inputs hamper entry. Provinces, which are more open to foreign trade, attract more foreign firms. In brief, barriers to trade whether in the form of tariffs on imported inputs, informal barriers to inter-provincial trade or underdeveloped infrastructure can hamper new foreign investors contemplating entry into China. Decreasing internal trade costs increases the extent of supplier and market access, and thus attracts the entry of new foreign firms (Amiti and Smarzynska Javorcik, 2008).

Challenges facing MNCs in China

There are some major challenges confronting MNCs in China. For instance, there is a cultural gap between the East and West, which was caused by societal differences in work attitudes, motivational structures, interpersonal norms, and negotiation patterns that cannot be eliminated in a short time (Luo and O’Connor, 1998; Yi, et al., 2004).

While, China remains the top destination for FDI in the developing world, there are still a number of crucial impediments for foreigners wishing to do business within the country.

These shortcomings are underscored by our business environment ratings. A study by Business Monitor International (2010), as tabulated with a selected number of countries with respect to the...

Table of contents

• Front Cover
• China and the Global Economy in the 21st Century
• Routledge Studies in the Growth Economies of Asia
• Title Page
• Copyright
• Dedication
• Contents
• List of illustrations
• List of contributors
• Preface
• Acknowledgements
• 1 International investment strategy in China: opportunities, prospects and challenges confronting multinational corporations and global entrepreneurs
• 2 An empirical study strategically assessing the role of the state government in corporate governance, ownership and performance of SOEs
• 3 Strategies for best practice in international project management with some reference to China
• 4 China’s automotive companies shift gears: manifestations and implications of global ambitions
• 5 FDI location choice of Chinese firms: traditional economic factors and institutional perspective
• 6 The rising world status of China within the global economy in the 21st century: a cultural knowledge-based strategy for conducting successful businesses in China
• 7 The effects of a free trade agreement between Australia and China with special reference to the Australian textiles and service industries
• 8 Potential determinants of China’s research and development
• 9 Concluding remarks and final reflections
• Bibliography
• Index