If we are looking at the FDI Confidence Index, with inflows reaching USD 133 billions in 2016, China is ranked as the third country where FDIs tend to be the most attracted. China has known significant changes since the beginning of its open door policy. As this country is mainly known for its low production cost, an important amount of foreign firms are investing in this country. According to these figures, we could state that investing in China would be beneficial for your company. This report aims to highlight the positive and negative aspects of this statement, analysing the Chinese environment key points for FDIs.
The People Republic of China has always been established through a communism party. This party is mainly known for interferences with the Chinese economy framework. Even though China knew a massive transformation in late 1978 when Deng Xiaoping started a market-orientated system, this vision has still to be considered in context: the Chinese economy is still China’s communism party domination.
Foreign Direct Investment
This graph is underlying the FDI inflows growth in China since its open door policy started in the 80s.
Since China’s “open door” policy, FDI reached a high level. For example, it has reached a growth rate of 54% from 1984 to 1985. Nowadays, China is one of the leading countries in the world for the receipt of FDI inflows.Due to the liberalisation of the regime, FDI inflows are mainly dominated by industrialised and developing economies. The leading kind FDI in China is Greenfield investment, representing 90% of the total FDIs. Those are often foreign join venture that are doing a partnership with Chinesecompanies.The Chinese Government is encouraging investments in some specific sectors; such as high technology and new materials. On other hand, the government is trying to protect specific sectors in the domestic market.
China is an open door to the Asian market with important raw materials already existing in the host country. This makes to the country a location specific advantage. In that way, according to this theory, and combining technological and managerial capabilities of your company with location specific resource of China, this would be a great opportunity to boost your goods or services production.
You will also benefice from China comparative advantage for domestic sales and exports. China produces and exports a large amount of labour-intensive goods at a lower price (textiles and clothing mainly) that would generate an economy of scale for your company. Also, with a population of 1.3 billion people, China is the world’s largest market. It is also experimenting a consumer revolution, increasing living standards in its core economy and by the way consumer purchasing power. In that way, we can say that your company would obtain a good branch of customers if investing in China. However, a good part of the population is also relatively poor with a lack of purchasing power, making it difficult to buy western products that are much expensive than the local one. An other comparative advantage to underline for China is the large domestic market the country has, giving more supplies for the company (such as transportations, agricultural goods) that would reduce the search costs.
Regulatory environment is high in China. Although this country has a flourishing market with a population that is getting higher wages, China is still dominated by a communist party : exports and imports are controlled under a system of trading rights, through laws and regulations such as the Law of Republic Of China upon Foreign Wholly Owned Enterprise. In a first view we can think that investing in China would be difficult do to the large influence of the state. However, since China’s commitment to the WTO in 2001, a huge amount of restrictions has been removed or reduced such as export taxation in order to encourage FDI. In that way, the Chinese government now mainly encourages solely foreign-owned enterprises: if your company is willing to implement FDIs, it would be easier than the last decades.Plus, investing in China won’t be such risky compared to others countries because the Chinese economy is enjoying a stable currency through its new macro economic policy.
– Local business climate
The local business climate in China is favourable for FDI. When Deng Xiao Ping’s reform allows farmers to sell their crops on the free market, people where encouraged to set up enterprises. Thus, local firms emerged in the Chinese territory, that are often dealing with multinational companies in order to give them knowledge and know-how on the Chinese market. The development of an export-driven orientation in the Chinese’s east coast (Shanghai, Shenzhen) with Special Economic Zones has been created on the with very good preferential tax rates, which would be a good place to implement FDIs if your company will. China has moreover a good country infrastructure, with cheap transportations and reliable public services. The domestic market is fast growing and large, with well educated human resources. In that way, your company could easily cooperate with local join venture partners in a good business climate. However, you have to be careful on the local companies behaviour: they tend to be inexperienced and sometimes opportunistic.
Openness to Regional and International Trade
Regarding to international trade, we would tend to think that China has always been retreat on itself. This statement is making sense, as China has always been a self-sufficient and protectionist economy. However, a significant improvement has been made for the last 20 years. The most important agreement was in 2001, when China entered in the World Trade Organization, stating deep changes for the FDI policies and the increase of marketization of China. Plus, China was one of the twenty-two countries to get part of the General Agreements on Tariffs and Trade (GATT) in 1947. It is signatory to the OECD and has signed 14 Free Trade Agreements, with 9 FTAs under negotiation.
Concerning the openness to regional trade, since the Chinese’s “open door” policy has been applied, China made further Free Trade Agreement with the countries of the Association of Southeast Asian Nations (ASEAN), adding New Zealand, Singapore, Korea and Australia, including zero tariffs trades applied, a symbolic improvement since we know that the income taxes of China used to be very high for importing from outside countries.
This change has been made since China became aware that it plays a significant role in the regional production network. This network is involving Korea, Japan, HK, TW, and six ASEAN countries, added with trading relationships with North American and Europe.
Environmental issues/Ethics and Sustainability
China is well known for facing environmental issues, such as pollution, soil erosion, and water scarcity. This issue is mainly due to China economic boom that not only weaken its resources but also affect China economic growth, costing to the country 3 to 10% of its gross national income. in 2014 China has been announced the world larger emitter of greenhouse gases.
Corruption, lack of transparency, and party interferences are the main ethics issues affecting the Chinese economic system.
Today, according to the corruption perception index 2016,China is ranked as 79th out of 145.However, this result is strongly linked with the regional corruption environment in Asia Pacific, in that way it has to be put into context. It is relevant to underline this point because, according to the theory, corruption affects FDI by increasing the costs of doing business, creating uncertainty to the corporation and involving legal implication. Plus it would deter talented people to come working in the host country, and mostly altering the brand image through unethical statement.Also, your company needs to know the code of business ethics that deals with Chinese culture. Doing business in China is widely different from the western approach. Concepts such as “guanxi” (networks relationships) and “mianzi” are fundamentals to succeed negotiations with Chinese’s companies. In that way, not knowing properly the Chinese customs and traditions may be a disadvantage if your company want to cooperate with an existing Chinese firm.
Gathering all of these information, we could think that multinationals are reluctant to invest in China, firstly because of the environmental costs it would generate, and secondly by the negative image the company could obtain for its corporate social responsibility
China is trying to gain more in sustainability in order to attract inwards FDI. First, the entrance on the World Trade Organization has been a strong change for increasing FDIs. This statement shows the willing of the Chinese government to implement its economy policy into the international scale.
Secondly, corruption in China, lack of transparency, party interference that tend to disappear. This is due to the desire of the Chinese government to take part of the international business environment and attracting FDI in order to benefit from the resource transfer advantage: employment, resource transfer benefits and balance of payment.Also, even though corruption is still an issue in China, it won’t affect that much investments as this problem is regulated and mainly not arbitrariness (compared to India wher arbitrariness is very high).The company could work in a regulated environment who is controlling the corruption level in doing business with its anti-corruption campaign (with increase pressure and vigilance concerning business practices)Third, global warming. As this environmental issue is linked with the sustainability of Chinese economic growth, significant improvements on laws and regulations have been made by the Chinese government in order to fix this environmental issue and attract foreign firms.
Plus, the Chinese government is doing its best to get used to the western approach of doing business, by implementing the Corporate Social Responsibilities in its companies. As it appeared two decades ago, CSR is new in China. While opening its market to the world, China is willing to meet international standards in order to adapt to the western companies and in that way compete in the global world. China’s 12th Five Year Plan (2011) puts forward sustainable development as a top priority for the Chinese government. This plan, more than focus on water scarcity, pollution, labour conditions, has new priorities that tends to join to the western one, such as promoting new industries (such as clean energy, biotechnology, and high-end manufacturing)
It is clear that investing in China would represent an important benefice to your company, both given by the host country comparative advantage and the business environment that is playing in favour of inwards FDI. However, it will also generate costs that have been taken into considerations. Although further negative elements has to be considered such as a high corruption level, environmental issues and lack of transparency, the Chinese government is working on improvements to attract inwards FDI. On the 5th of December 2017, the United Nations have even awarded three environmental honours to Chinese companies leaders. In order to give recommendations to the company, I would advice to strongly prepare and getting informed about the legal framework of China. Although China opened its door to the international business world, there is still a strong government influence, through plenty of regulations and norms your business would need to apply.A second recommendation that could be applied is that your company should cooperate with other local firms. Those would give the know-how and infrastructures in order to settle your investment to the host country in the best way.