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China International Business Analysis

by Dani

China Industrial Structure

The Chinese economy was initially under the control of the Chinese government until the year 1978 when capitalist market was introduced (World Economy team 2013, p. 1). The introduction of the capitalist market was the turning point of china’s economy as massive growth has been experienced since then to date. Management of corporations focused more on corporate governance and formulation of policies free of government interference. The focus on the traditional industry also changed. China’s economy was traditionally dependent on agriculture, but with the liberation of trade came industrialization. Manufacturing industry soon developed and would account for a huge percentage of china’s economy. However, this came with its own challenge. The major challenge that China is facing is the pollution of the environment.

China International Business Analysis

Air and water pollution in China has increased significantly so that most of the Chinese water bodies are polluted with waste even as the various firms release fumes of waste gases to the atmosphere. The state of pollution has prompted the government to direct the assessment of industrial projects for social risk before approval (Bradsher 2012, p. 1). This is aimed at reducing pollution in the environment. China has a large rural population that mainly engages in farming. The urban areas are the ones that have the major sources of income for the country due to the development of industries and service sector (Sakamoto 2011, p. 4). To improve on agriculture on the provinces, adoption of the use of machinery in farming is necessary. The majority of China’s labor force is in the agricultural sector that is more than 40% of the labor force, but the sector contributes very little; 10% in 2005 contribution to the economy in 2005 (Sasaki and Ueyama 2009, p. 4). The data reflects inefficiency in the agricultural sector through use of human labor thus the need for adoption of machines.

Macro-Economic Indicators for China

China’s GDP has been increasing over the past 10 years as evident in the chart below.

China International Business Analysis

Accessed from: http://www.tradingeconomics.com/china/gdp

The GDP is an indicator of the total amount of amount of output of a country as it measures the total expenditure on the total goods and services produced by a country. The growing GDP of china is an indicator of a growing economy through increased economic activities. This may be majorly attributed to the increasing exports by the Chinese in the recent years. China’s share of total world exports exceeds 9.6% making it one of the world’s major exporters (Enderwick 2012, p.35). The current account balance of china was growing from the year 2004 only for it to drop in 2008 following the world economic recession. Efforts to revive the BOP have borne little fruits as the BOP has continued to decrease further recently.  The outflow of capital has exceeded the inflow thus creating a deficit. This I an indication that china’s economy has been slowing down compared to the past where this economy was growing rapidly.

Accessed from: http://www.tradingeconomics.com/china/current-account-balance-bop-us-dollar-wb-data.html

Most of china’s wealth is concentrated on few wealthy individuals due to the capitalist nature of the country. These wealthy individuals in most cases have access to insider information on the economic conditions of the country thus a move by these investors to relocate their wealth to other nations is an indication of a looming danger in the economy (the economist 2012 p.1). A report by the China’s State administration of foreign affairs further indicates a falling BOP with the country recording a negative BOP for the first time since the year 1998. More money is leaving the country than that which is entering thus creating the deficit. This implies that the imports have exceeded the exports.

Despite the falling BOP, china has managed to control its rates of unemployment over the years. It is measured as a percentage of the work force in the country. Statistics show that the rate of unemployment in china stands at the rate of 4.1%. The highest figure recorded was in the year 2009 with a rate of 4.3 being recorded. Prediction of the future rate of unemployment still stands at 4.1 up to the year 2018. China is therefore maximizing on the available workforce. The upcoming industries are also playing a major role in ensuring that they provide more jobs for the active job seeking population thus maintaining the rate of unemployment constant. The high rate of population growth is a reason for the constant unemployment rate instead of a reducing rate. As more industries come up, there are more people seeking jobs. The country engages in both export and import trade. The increasing demand for containers for transport of exports has favored china’s economy since it is the world’s major exporter of containers. China is the main exporter in the world and the world’s second largest importer (EW World Economy Team 2013, p. 1). In the year 2011, china was the largest exporting partner for 32 countries, while it’s the largest importing partner for 34 countries. Thus, there is growing importance of China in the world trade. It also engages in intra-industry trade, for example through importing electronics from Japan while it is still an exporter of electronics.

Foreign direct investment is also a macro economic indicator of international business that affects China as a developing economy. FDI can either be inward or outward in nature. Foreign direct investment in China is majorly Greenfield investment from firms wanting to be part of the economic revolution in China. Measured in hundred million dollars, in 2004 china’s FDI was slightly above 600. This figure has grown over time to the highest point being 1200 recorded in 2012 and January 2014 (trading economics 2014, p. 1). The figures indicate a growing economy that is receiving many foreign investors. Any growing economy attracts investors both local and global who hope to benefit from the growing trade in the country. China also engages in foreign direct investment. The surge for OFDI has been on in china since 2000. The most interesting part of it all is that it is not only the private investors carrying out OFDI but the Chinese government is also part of it. This government has invested in many foreign projects abroad (Ritchie 2013, p. 1). With the growth of the Chinese economy after the industrial revolution, a surplus was created thus the need to invest the surplus somewhere else. Thus china has become a participant in many economies through outward foreign direct investment.

Investing in Developing Economies by Developing Economies

Emerging markets carry out investment activities in each other’s country due to the mutual benefit that can be derived from these investments. There are two main reasons why countries trade with each other. Difference of the countries is one of the reasons. No country is exactly the same with another. There are different natural resources in every country that makes them unique. The geographical location can also be an added advantage to a country due to the different weather conditions in the various countries. Climatic conditions are in most cases a determinant of the agricultural activities that a country undertakes. Using artificial means to create the conditions for growth of crops is expensive compared to the use of the natural climate of a region.

The other reason for trade between countries is their comparative advantage that different countries have. By virtue of being endowed either with capital or labor force enables countries to undertake production efficiently using the resources at their disposal. Making use of the comparative advantage gives rise to specialization of countries in production. Specialization ensures that countries produce only what they are best at producing. This encourages international trade. For any meaningful development to occur in developing countries, trade must occur both locally and cross border. Specifically investing in other developing economies is a benefit to the country.

First of all, most developing nations are situated within the same geographical area. Therefore, investing in another emerging economy will enable regional development of the region where the country is situated; resulting in regional integration of the area. Through investing in Taiwan, china has been able to benefit from a reciprocal investment in china by Taiwan. China has been able to grow its economy through the use of the resources at its disposal locally and from Taiwan. The outcome of this integration is the establishment of manufacturing industries with credible suppliers from Taiwan and locally complementing each other. Regional integration of these two countries is evident in the more than 500,000 Taiwanese living in china, the control of about 70% of china’s IT sector by the Taiwan and China becoming Taiwan number one trade partner (Enderwick 2012, p. 35). China has had much impact on the Asian region due to its trade with other Asian countries.

Investing in developing economies is both extremely risky and stands high chances of a good income. The developing countries carry additional political, economic and currency risk with it. This leads to fluctuation of interest rates and return on investment. However, this should not scare away investors. With the growing nature of the economy, there is increasing cash flow in the country, thus reducing chances of default by the government on debts (Arouri, Boubaker, Nguyen 2013, p. 17). Assurance of payment of debts is a good reason for investing in other developing economies. A high return is assured resulting from little competition in the market and introduction of products that were not there initially (Lynn 2010, p. 18).with increased risk comes increased return on investment. Furthermore, governments of developing economies are welcoming to investments due to the economic benefit the country will gain from the investments. Therefore, the government may provide incentives to these firms willing to invest in various projects to encourage investment. The lower tax rate for development projects is one more reason that emerging economies should invest in other emerging economies. Lower taxes mean lower overhead cost resulting in higher profits.

Insufficient or total lack of natural resources in emerging economies have triggered the move by emerging economy to invest in other emerging economies. Countries undertaking such investments benefit from the natural resources of other countries of their similar economic status. Such investments increase the supply of the much needed resources for the developing economies to grow (Marinov, & Marinova 2011, p. 374). This informs china’s move to invest in various African countries and Latin America. The internationalization of firms from emerging economies to other resource endowed emerging economies is aimed at accessing the much needed economic resources in the growing economy.

The low cost of labor is another factor for investing in emerging economies (Sauvant, Maschek, & McAllister 2010, p. 451). The cost of labor in most emerging countries is considerably low due to the high level of illiteracy thus a high demand for jobs for the laborers. The demand for jobs causes inflation in the country, thus reducing the cost of labor in these developing nations. Therefore, for firms intending to maximize on labor intensive investments, other developing nations is the sure destination for them.

However, such investments are not always assured of success. The risk involved is too much and the turn of economic activities in these economies can lead to major losses. Developing countries investing in risky environment I even worse since they have limited capital to invest thus loosing it will be a big blow to their economy. Moreover, the frequency of change in developing economy, markets is high so that if information is not well analyzed, firms can have a problem in the market preventing their conquest into the new market. The unpredictable political environment is also a factor against foreign direct investment in developing nations. With the political upheavals experienced in these countries, the trading environment is frequently disrupted by unexpected civil war. Wars lead to the loss of value of investments so that investors are not only unable to gain from their investment but also the assets are not disposable. The demand for assets falls significantly almost paralyzing the trade on assets during the war thus the assets are devalued.

Difference Between Investing in A Developed and A Developing Economy

The difference between investing in a developed country and underdeveloped country is the regulations governing the countries and the nature of the two markets. With investment in emerging economies, firms will opt for collaborative investments instead of taking up the investment alone (Freeman, Rammal, &Cavusgil 2011, p. 457). The preference for collaborative investment is aimed at spreading the risk of investment in developing nations. Due to the risk involved in investing in developing economies, firms merge with other firms before entering the developing nation. For the developed nations, there is little collaboration for the purpose of entering the market. The markets are well developed and stable thus little risk is involved in the investment. Furthermore, information asymmetry in the developed nations is a factor for investors to consider before entering into these markets.

Lack of perfect information present a looming danger in these economies, thus the need for extensive research. In developed countries, there is perfect information for investors to refer to thus investment decisions are arrived at quickly. Government regulation on trade is another factor for the developing economies. Most developing nations are opposed to free trade (Chang 2003, p. 1). The resistance to free trade is aimed at protecting local industry from being overtaken by the foreign firms. However, the developed countries argue that the way to development is through free trade thus developing nations should adopt free trade. This creates a difference in the entry into the markets. For the developing economies, firms have to comply with the numerous government regulations before accessing the market; for the developed countries, few administrative processes take place for the purpose of identification and registration of the firms. Thus, it is easier to enter a developed market than to enter a developing market when there is government regulation.

In most cases, investing in developing nations is in the form of greenfield investment. This is because of the absence of well established infrastructure for firms to have been set up in the region thus acquisitions is not possible. Developing nation requires plenty of investment in the economy to boost growth. As a result, governments of these nations are taking steps to ensure they attract as many investors as possible. Protection of local industry is limited to allow them develop and be able to compete thus allowing foreign investments (Globalisation 101 2014, p. 1). This limits government protection of local industries for a given period. Development of infrastructure is also another move to attract investors as well as stabilizing the economy.

Further, firms from developing economies prefer changing their brand name when entering the market in developed countries to avoid stigmatization (Cuervo-Cazurra & Ramamurti 2014, p.290). This is caused by the negative publicity developing countries receive in developed countries. Changing the brand name and relocating a firm’s headquarters to another developed country will see the firm’s products accepted in the developed nation. For other developing economies, products from fellow developing economies are accepted with little (if any) resistance.     

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