International Investment Report - Research Paper Example

?Introduction: China is the largest country among the four emerging economies of the world and other three countries include Brazil, Russia, and India. It is the fastest growing economy among all these four countries. Data for 2011shows growth rate of China has outpaced peers with sharp contrast in GDP, merchandise export and GDP average growth rate as shown in the image below: (Global Sherpa, 2011) China is expected to maintain the growth momentum and outpacing its peers even G7 countries over years in future for many reasons with increase in middle class being among the leading ones. Rising middle class refers to increase in income bracket of large number of people. This trend has a constant positive growth projection to year 2050 as shown in the image below (Coface, 2010; (Global Sherpa, 2011); hence, it can be predicted that there would be increasing opportunities of investment in China. To mention, the world’s largest coffee shop Starbuck has also planned to expand in the more 70 smaller cities of the country (Bloomberg, 2012). This report analyzes China as an investment opportunity for a coffee house and for this purpose; the report will analyze the macroeconomic factors that could influence the business in the country. The report discusses about the economic, financial, political factors along with historical events that could impact the business and its geographic location that could influence the business in the country. At the end, the report analyzes the overall risks that businesses could face while starting a business in China. (Global Sherpa, 2011) (Global Sherpa, 2011) ECONOMIC STRUCTURE, INDICATORS AND RISK The economic factors show growth trend of the Chinese economy and these factors have been presented in image below. Given indictors highlights important factors that are having a positive trend for the last few years along with next year’s forecast. (OECD, 2012) Image below provides some synopsis that constitutes the strength and weakness of the financial structure of the economy. (Coface, 2010) The economy of China has been observing an accelerated growth rate with constantly growing exports to European countries (constituting almost 15% of total exports), however it has now shown a reduction in the growth rate due to European crises. This slowdown has been controlled by the targeted stimulus. For instance, construction of 36 million social housing units, support for SMEs in Wenzhou, bonuses cut down in the automotive sector, and subsidies on purchase of household electrical appliances etc. All these factors have supported the economic situation despite having troubles with export (Coface, 2010). FINANCIAL STRUCTURE, INDICATORS AND RISK Financial factors other important influence the businesses. Risk rating for the country is as follows: (Coface, 2010) However, access to finance for SME is difficult as banks are reluctant due to string of defaults as the main risk. Also overall strict policies have been imposed on banks for credit giving to avoid misallocation of resources etc (Coface, 2010). The overall financial figures are positive as investment in the country has increased, poverty level has decreased etc. The coffee shop market is expected to grow by 55 percent and it would reach to 4.5 billion Yuan ($714 million) in 2015 from 2.9 billion Yuan last year in 2011. To share this benefit, global coffee competitors such as Starbucks of US and Luigi Lavazza Spa, an Italian coffee company have entered and planned expansion in major and minor cities of China (Bloomberg, 2012). POLITICAL STRUCTURE AND RISK China has been mainly a socialist country. However, the country has accepted the capitalism mode of economy but socialism is still what it breathes. The political risk refers to intervention of country’s government in the business affairs of the foreign person or a company that is doing business in the country. China is usually accounted for this political risk and its government has already once considered the nationalization of industries in 1949 (China Risk Management, n.d.). Political risk with respect to these factors is less likely to affect the business these days as the country is constantly growing in all sectors Even though other countries are still recovering from recessionary impacts. Risk that is more likely to affect the business is the constant battle between the country’s central government and the provincial and local governments over applicable law (China Risk Management, n.d.). This creates a problem for business to work in such an environment. The problem mounts when such a situation exists is in multiple cities. Confusion exists regarding the law application when different outlets are required to work under different laws (China Risk Management, n.d.). Other major political concerns from the country are raising parity among population, social movement against the dislocation of agricultural people etc. The most dominant concern remains government access to corporate balance sheets and tightened rule pertaining to the same which can have detrimental effects over credit sales and overall conduct of the business with freedom (Coface, 2010). All these pose serious threats to operational efficiency as well freedom to conduct business, hence, these political situations need consideration from the government to further promote businesses. Coffee shops need to understand these political situations and then operate accordingly. RECENT HISTORY WHICH IMPACTS CURRENT CONDITIONS AND RISKS Several things are happening on a daily basis that effect economy and hence influence the conditions of doing business in the country. For instance, European crises have affected the constant growth momentum of its exports which constituted almost 15% percent of its exports (Coface, 2010). However, country has gained the lost support from its local strength with growing investment in infrastructure etc. Bilateral relations between China and US is also strengthening which is aimed to get China totally aligned according to international trade rules and opening greater access for US investors to Chinese market (U.S. Department of State, 2012). China’s growth is also more dominantly supported by its low cost provision of labor that is constantly drying up and hence, increasing the chance for labor being expensive or any collapse of these companies can lead to joblessness in China etc. However, these risks are minimal but cannot be over ridden. So, these risks are to be considered for every company planning to invest in China including a coffee shop. GEOGRAPHY, NATURAL RESOURCES AND EXISTING INDUSTRIES China is located in Eastern Asia. Its borders are along several countries and the East China Sea, Korea Bay, the Yellow Sea, and the South China Sea. Its natural resources include coal, iron ore, petroleum, natural gas, mercury, tin, tungsten, antimony, manganese, molybdenum, vanadium, magnetite, aluminum, lead, zinc, rare earth elements, uranium, hydropower potential (world's largest) (CIA, 2012). However, there has been a growingly concern c for China and the country is expected to have water crises in future if it is not managed properly. This could hamper the entire industrial development as given in image below (China Water Risk, n.d). Industries in China have constantly been growing and time has reached when agricultural land is being confiscated for such development. Most of the industries are growing in China such as IT, LED lightings, Education, automotive, electrical appliances, mobile and many others. It is for reason of industrial growth that has made China the world leader of low cost and dumping strategy. (China Water Risk, n.d). So, with such an important geographic location and more investors planning to invest in China, coffee shop can take advantage of its important geographic location. OVERALL RISK INDICATORS The country is constantly on growth where the growth momentum do receives jerk from the world because of different factors including recession. Overall China is characterized with growth and as the country grows, more risks would emerge such as drying up cheap labor pool is expected to increase labor price over time. Other risk that is associated with China is the socialist government riding the capitalist mechanism. Nevertheless, the risk that is being associated is still in broader domain and the growth in coffee shop market is positive and the overall risks are not posing high impact on it; hence, starting a coffee shop seems to be a viable investment. References Bloomberg. (2012). Starbucks Heads for Smaller China Cities as Coffee Shops Triple. Retrieved October 11, 2012 from http://www.bloomberg.com/news/2012-04-01/starbucks-heads-for-smaller-china-cities-as-coffee-shops-triple.html China Risk Management. (n.d.) Political Risk. Retrieved October 11, 2012 from http://www.chinariskmanagement.com/Political.html China Water Risk. China Water Crisis. Retrieved October 11, 2012 from http://chinawaterrisk.org/big-picture/china-water-crisis/ CIA. (2012). ‘Field Listing: Natural Resources’. The World Fact Book, Retrieved October 11, 2012 from https://www.cia.gov/library/publications/the-world-factbook/fields/2111.html Coface. (2010). China. Retrieved October 13, 2012 from http://www.coface.com/CofacePortal/COM_en_EN/pages/home/risks_home/country_risks/country_file/China?extraUid=572105 Global Sherpa. (2011). BRIC Countries – Background, Latest News, Statistics and Original Articles. Retrieved October 12, 2012 from http://www.globalsherpa.org/bric-countries-brics OECD. (2012). China - Economic forecast summary (May 2012). Retrieved October 12, 2012 from http://www.oecd.org/china/china-economicforecastsummarymay2012.htm U.S. Department of State. (2012). ‘U.S. Relations With China’. Bureau Of East Asian And Pacific Affairs, Retrieved October 12, 2012 from http://www.state.gov/r/pa/ei/bgn/18902.htm Read More