The Rise of China: Effect on Reshaping the Business Environment and Multinational Enterprises - Term Paper Example

?The Rise of China, its Effect on Reshaping the Business Environment and how this Affects Multinational Enterprises. The economic boom in China is resulting in dramatic and sustained growth of the Chinese economy. As a consequence, China is emerging as a global economic leader, with projections indicating it will overtake the United States economy by 2035. This dramatic shift in the business environment has strong implications for multinational enterprises. The change can result in benefits such as opportunities to import, especially raw materials and high quality goods, and advantages of using China as a headquarters or for outsourcing labour to. Disadvantages include increased competition in the export market and increased competition for raw materials. In addition, it is unknown what China will be like as a world economic leader and what effects this will have on the rest of the world. Introduction The economic boom in China has resulted in continued significant growth to the Chinese economy and the growth is predicted to continue. Already China has the second strongest economy worldwide and projections indicate that this growth is likely to continue. Calculations suggest that by 2035 the economy of China will have completely overtaken that of the United States, who is the current economic world leader. As the economy of China continues to grow, there is already evidence of the country reshaping many economic variables and the environment for businesses. There are a large number of implications for businesses as a consequence of this growth particularly those which span multiple countries. A multinational enterprise (MNE) is a corporation or enterprise that has its headquarters in one country, and operates in other countries also. This operation may be in terms of having distinct branches or stores in other countries, or it may mean outsourcing production or a portion of production to a different country. MNE’s vary significantly in size, with some being small, and others large, with budgets that are so large they exceed the gross domestic products of some countries. The countries in which MNE’s have their headquarters play an important role in the way in which they operate and their ability to generate revenue, however the international economic situation also plays a significant role. The rise of China has already significant affected economic relationships and trends internationally and there are strong indications that this trend will continue. As a consequence, the rise of China has many potential effects for MNEs including both positive and negative effects. The Economic Rise of China The financial crisis which has been affecting enterprises, governments and countries worldwide has provided significant opportunity for the economy of China to strengthen itself and emerge as one of the fastest developing economies worldwide. The economic boom that has caused this rise has been steady for four decades, and indications suggest that the rise is sustainable. Already it ranks as the second strongest worldwide economy, after that of the United States. It is the largest exporter of products worldwide, and the second largest importer of goods. It has been projected that the economy of China will be stronger than that of the US by 2035, and will be twice the size of the US economy by 2050 . The growth of China’s economy has always been independent of the US, having low growth when the US economy was soaring, and now growing rapidly as the US economy is having significant difficulties. As China is gaining economic strength and power internationally, the consequence is a shifting of economic power and the redistribution of economic linkages as well as the creation of new ones. The continued growth and development of China’s economy will eventually result in the displacement of the US as the predominant market economically, resulting reassessment and changes within all major economic markets worldwide. Before the financial crisis, China used an export model for its economy, exporting goods to developed countries, such as the United States and Europe. The exports from China continue to rise, currently at the level of 20% a year with imports also rising, although at a lower rate . China is now the largest worldwide exporter of information and communication technology. In 2010 it became evident that China was ready to move from being dependant on the export market towards developing their own internal market. This is a more reliable form of market and the change makes sustained economic growth of China even more likely. Changes as a Consequence of Leadership Changes Up to now, the US has always taken the lead in shaping patterns of trade and investment for other countries. With the emergence of China as an economic leader, coupled with the problems of the US economy, this position will instead be taken by china. One strong effect will be that the world turns to China for all market surveys, and the policies that it makes will drive the interest rates worldwide. One implication of the increased economic dominance of Chinese is the increased role that it would play on the world stage, in terms of current affairs, military status and business leadership. As the economic power of China grows, it is likely that they will use this as a means of pushing for change within the current markets and rules in order to better guarantee their own interests. There has been consideration of a ‘Group of Two’ (G2) agreement between the US and China, where the two nations would be at the head of international affairs. The nations have shared more than 30 years of ties diplomatically, and the move would make strong economic sense from the perspective of the US, who despite announcements that the economy is in recovery, is still struggling economically. However, China has disagreed with the idea, saying that as a country it is still developing and has a large population that it has to manage. In addition the Chinese Premier said that the country was one of peace and would not alight itself with any country or group of countries, choosing instead to remain independent. Finally he comment that it was not the role of one or two countries to decide on global issues, but rather these decisions should be made by all nations . This gives a strong indication that as an economic world leader, China is not likely to play the same role that the United States has in the past. Opportunities and Benefits for Multinational Enterprises One of the opportunities that are provided from the economic rise of China for MNEs comes from their increasing levels of both exports and imports. In particular, the import of raw materials has become increasingly important as the country has now developed its own ability to manufacture. The growth of the country has resulted in increased importation of scientific equipment, metals and petroleum. In general, domestically made products within China are of lower quality than is usually anticipated in industry. As a consequence there is the potential for MNEs to take advantage of this by creating high quality products for importation into China. The same is also true of services. Demand for these types of goods and services are increasing in China as a result of the increased economic growth. Thus, MNEs can take advantage of this demand. There are substantial advantages for MNEs to have branches or even headquarters in China. One advantage is the substantially lower cost of labour in China compared to the Western world. This trend has been present for many decades, and has resulted in many Western businesses outsourcing much of their work to China because of the savings in cost that this provides. Establishing a physical presence in the country allows for the creation of networks and connections, such as with other businesses and with the government. This is important as there is a high likelihood that China will become the dominant economy in the future. The economic rise of China has resulted in the opening up of the Chinese economy to overseas interests and influence. As a consequence there is now a large potential for gain through buying shares in Chinese businesses that are rapidly expanding. Threats and Problems for Multinational Enterprises Multinational enterprises operating within China still face a significant number of challenges. China is ranked as the 83rd easiest place to do business in the world. The ranking provides a strong indication of the problems that bureaucracy and corruption still play in the operation of a business in China. The consequence of this is significant increase in the time and money that is required to start up a business in China compared to Western locations. In addition, the country is still developing and there are problems of a lack of infrastructure which limits how well businesses can succeed. The ability of businesses to get access to finance in China is very low, and many businesses are unable to access finance . However, having physical business headquarters or branches in China is only one aspect of the way in which the economic rise of China affects MNEs. There is substantial concern that as an economic power China may be detrimental to other countries and economies. China is intensely focusing on raw materials for use in their development and industry. One way in which they are achieving this is by pursuing contracts with African nations in order to obtain their resources. They are able to offer the African nations large incentives for the resources, which other nations are unable to match. There are long term concerns about this strategy and how it affects the rest of the world, as raw materials are non-renewable, and as a consequence they are limited . The push by China to acquire these resources represents a decrease in the ability of other countries to obtain resources. This may result in an increase in the price of raw materials in Western countries, which would have significant impacts for enterprises that have any production based outside of China, such as many multinational corporations. The large number of exports that China makes each year has a significant impact on enterprises who export products, decreasing their potential market. China has a cheap labour market, in part due to a large portion of their goods and services being of low quality. As a consequence they are able to export goods and services at a much lower price than enterprises that do not have access to this type of labour can. This competition can be detrimental to MNEs as many will have no way of completing with the low cost of goods and services that China exports. Conclusion The economic rise of China has significant implications for multinational enterprises at its present state, and even more so if the nation continues along the same path. There are many advantages for MNEs as China continues to rise as an economic entity. Firstly, they have a high demand for specific imports, in particular petroleum, metals and scientific equipment. MNEs that are able to work at providing these resources, especially through trade agreements stand to gain significant profit and stability. Second, as products produced in China are often of low quality, there is potential for companies to produce high quality imports. The increase in desire for high standards of living and luxury items has led to an increase in desire internally for high quality items, as well as demand from industry for high quality items. It can be advantageous for MNEs to use China as a base for their operation, or to outsource work there. The cost of labour in China is much lower than in Western countries, and this can result in lower costs. In addition, being centred in the nation that is likely to become the next economic world power gives important advantages. However, there are difficulties in setting up a business within China due to poor infrastructure and government regulations. Exports from China can make it difficult for MNEs as they must compete with these exports when selling their own products and services. In addition there is concern as to what China will do as a world power, whether it will be fair, and how its acquisition of raw materials will affect businesses in other countries. The effects of the economic growth of China on MNEs are already widespread and it is likely that they will continue as the nation continues to grow economically. Bibliography Read More