Emerging Market-The Challenges And Opportunities Investing In China - Essay Example

? ‘Emerging market’-The challenges and opportunities investing in China ‘Emerging market’-The challenges and opportunities investing in China 1.0. Introduction The global market today has undergone a lot of changes. Amongst these changes are inclusive of the emerging markets in the globe, and their contribution towards foreign investment in the market. It is evident that the emerging markets have flexed their muscles in the global arena, and their effect is expected to increase the more. Companies that have invested in these markets have enjoyed and are continuing to enjoy revenues that emanate from these transactions. China is among the emerging markets that has contributed a great mile to the spending of a huge clientele-base, and that has also attracted numerous multi-national companies (MNCs). With the country expected to dominate the global market by the year 2030, challenges are also not devoid from these transactions. This essay shall attempt to discuss the concept of ‘emerging markets’ using the case study of China. Additionally the essay shall keenly analyze the opportunities and threats facing the investors that are likely to invest in this emerging market. 2.0. Body 2.1. Definition of ‘emerging market’ In the thought of Beridze (2008), emerging markets refer to the nations that have actively been involved in business activities that have seen their fast growth as well as a huge development in the industrialization process. Among these countries that are termed to be emerging range from Brazil to China. As seen in the research conducted by Palepu & Khanna (2010), China has retained her position as the third in the list of the emerging markets. China has also been termed as one of the growing economies with largest imports and exports in the globe. Agtmael (2007) indicates that the economy has had a growth rate of about 10% over the years. With the country being termed as the world’s second largest economy after the U.S., China’s economy is indeed one that is emerging. In the thought of Lorenzoni & Broner (2004), emerging economies have been integral in the world economy. This may arguably be because the supposed emerging economies have already emerged and are taking the centre stage of the global economy. A good example is China that is export-driven with strong capital inflows and investments from well-capitalized banking institutions. Jain (2006) indicates that the markets are expected to stabilize by the day. Additionally, the growth of the world’s economy is expected to emanate from the emerging markets, and 70% of the growth is anticipated according to the economists (Kvint, 2009). Despite the varying interpretations of the term, the fact about the entire aspect is that emerging markets have been instrumental in recording an increase in the capital share in the world economy, and that their GDP is on the increase. As seen in figure 1, China may be defined as an emerging market as emerging markets are ones that are undergoing transformations from third world countries to developed countries, whilst their markets are now reduced to free markets from the state dominated ones (Enderwick, 2012). On another viewpoint, Mody (2004) says that emerging markets are slowly freeing up both internally and externally, due to the processes of economic reforms, that need to incorporate the rapid economic growth. It is evident that the country has opted to increase their role in the market, and minimize the chances that the government will have avenues to control the planning of the market. Pragmatic ideologies have in this case taken the day in the case of China’s economy. Its emergence cannot be alienated from the fact that the country has shed more energy in perfecting its contribution in the manufacturing industry as opposed to other countries that have opted to focus on the service industry whilst others in the agricultural sector. Figure 1: Real GDP growth (%) in the BRIC and US economies Source: IMF, World Economic Outlook (International Monetary Fund Staff & International Monetary Fund. Research Dept., 2009). From the above stipulations, today’s emerging markets are ones that are playing a major role in the world’s economic growth engine. With the expectations of the emerging markets escalating by the day, it is important that the risks of investing in these markets be scrutinized. This is an interpretation that careful planning needs to take the centre stage of many of the countries that need to invest in such markets. Liu & Ciu (2000) indicate that China is an emerging market that needs a lot of assessment as a lot of misconceptions have been made on the country’s market. At times, China has been said to possess a homogenous market; thus, makes it difficult for other countries to make entry into business with the country (Liu & Ciu, 2000). Since consumers from various groups are diverse in terms of their purchasing power to consumption patterns, sustainable strategies are vital for the survival of these countries. Of essence, it is reasonable to conclude that China as an emerging market faces numerous challenges just like other emerging markets (EM). It is therefore crucial to assess the challenges and opportunities investing in China poses to a potential client. 2.2. Investing in China- Challenges and opportunities Liu & Ciu (2000) are of the opinion that China as one of the major emerging markets (EM) has attracted a great percentage of MNCs to its economy, specifically 200 out of the major global companies. These companies have been indicated to position themselves in this market in such a way that no from of conception would wipe them out of the current market. In the thought of McAllister, Maschek & Sauvant (2009), the concept of Foreign Direct Investment (FDI) have been of concern in the quest of China’s emerging market. At times the performance of the FDI projects has been sluggish, but at times the same has been instrumental in the success of the MNCs in the emerging market (Wang, 2009; Pradhan, 2000). It is however vital that both the challenges and opportunities be analyzed before making entry into the Chinese market. 2.2.1. Challenges As seen in the work of Guarino (2010), the potential created by the Chinese market aroused interest on various entrepreneurs. Guarino (2010) continues to argue that open markets have been created, as well as new group of consumers who have high purchasing power for the exporting companies. In this case, China does not apply winning strategies to handle the existent situation in their country as China possesses numerous resources. However, the market is in no way one that bears resemblance to that of a developed market. Baer & Rangel (2001) indicate that the population of the country is very high as compared to US, yet its per capital income is less than a sixth of the average US wage earner. The situation worsens as this emerging market has a huge disparity in terms of wealth in both the city and rural areas. Ceglowski & Golub (2007) say that the country has uneven growth due to its poor domestic infrastructure, a factor that has led to redirection to investment in other mega cities. The same case applies to the BRIC (Brazil, Russia, China, and India) emerging economies that simply face similar issues (Darrat, Elkhal & McCallum, 2006). Guarino (2010) is wary about the existence of weak institutions that jeopardize on the personal safety of an individual as well as the investors who are completely dissuaded into making investments in the country. With the case of China involving an international context, the transparency and legal protection of the functionality of the China’s market is in question. This is because the potential investors are usually expected to handle the cases of each of the international players, and thus are wary of investing in China (Guarino, 2010). On the other hand, McFarlan (2008) indicates that China has had its share of lack of proper infrastructure to facilitate development and growth in the international market. As compared to the US, China’s infrastructure has been one of the factors that have hindered growth of the same in the market. Chung & Bruton (2008) indicate that an investment in roads, airports, telecom, and ports amongst others would be instrumental in the growth of China. China has also not lacked its share of problems of a lack of raw materials. As seen in the argument of Guarino (2010), China has continuously had the need for raw materials and energy resources, but the same has not been possible as the country has continually relied on Africa and other countries fro their raw materials. McFarlan (2008) gives an example of Australia that has been China’s quarry. Africa has also aided China in producing its raw materials that have continually been used by the country to sustain its economy. The problem of a lack of raw materials has also been backed up by environmental issues of pollution all rounded ranging from air to water pollution. Though these problems are not unique to China and have been the characteristic of numerous countries, McFarlan (2008) emphasizes the same has been a big challenge to the investors who opt to enter into this market. In the argument of Jain (2006), China has had its share of success in the global market but the country is no longer feasible to support a sustained period of sustained growth. The factors that boost the functioning of the China model are slowly wearing out, and the planning model of China is on the verge of complete destruction. In the case of supply of cheap labor, China is losing its demographic dividends and is campaigning for a better distribution of its produce of the 30 years, in an attempt to increase the wages of its citizens. In this case, a huge number of investors are wary of the fact that they would not be safe investing in China with a lot of uncertainties expected. This is clear indication of a decreasing external demand of China’s market and its produce. Chung & Bruton (2008) continue to say that the global economic crisis has led to a decline in the FDI (Foreign Direct Investment) as caution has been put on assessing the returns on the investments in China. The present economic growth, as Liaw (2007) indicates, has clearly begun showing its deficiencies, and its inequalities; thus, low productivity, and lack of innovation in this emerging market. It is at this juncture that a lot of investors have opted to pull out of the market with China. Lin &Lin (2008) argue that China has become over-reliant on the contributions made by various state controlled investments to the GDP of the country. In the long run, China has found herself not in a position to utilize her capital efficiently; thus, a huge debt on the country. Sectors that enjoy monopoly in the country, have had a smooth way in getting through the market, whilst on the other hand, both the manufacturing and industrial sectors are diminishing bay the day. The increase in the state owned enterprises has rendered China not able to deal with inflation levels in the country that cannot sustain the high debt. In the long run, a lot of investors end up pulling out of China as a possible market and investment of their capital (n.d., 2013). The state owned enterprises have also slowed the growth and development of the country’s market status. 2.2.1.2. The present China’s economic situation In the argument by Morrison (2013), China is an economic success story. By the year 2012, China’s GDP has risen to an annual rate of 10%, and that 500 million citizens of US are out of poverty levels. The present economic reforms in China are a result of the government initiatives, like ownership and price for farmers; thus, farmers are4 able to sell their products in a free market. This explains the continuous growth of China’s economy to 9.2 % in 2011. However, Morrison (2013) is wary that China’s economy is likely to drop by the year 2013 as seen in the table 1. This shows that China is likely to pose a threat to potential investors. Table 1: China’s Annual Real GDP Growth: 1979-2012 YEAR REAL GROWTH RATE (%) 1979 7.6 1980 7.9 1981 5.3 1982 9.0 1983 10.9 1984 15.2 1985 13.5 1986 8.9 1987 11.6 1988 11.3 1989 4.1 1990 3.8 1991 9.2 1992 14.2 1993 13.9 1994 13.1 1995 10.9 1996 10.0 1997 9.3 1998 7.8 1999 7.6 2000 8.4 2001 8.3 2002 9.1 2003 10.0 2004 10.1 2005 11.3 2006 12.7 2007 14.2 2008 9.6 2009 9.2 2010 10.4 2011 9.2 2012 7.8 Source: Economist Intelligence Unit and IMF (Morrison, 2013) 2.2.2.2. Poverty in china- fastest growing but has extremely high gini coefficient In the thought of Tobin (2011) China’s rapid growth has numerous unquestioned assumptions. China has a lot of wealth contradictions, under the auspices of the Communist party. A lot of state enterprises have been privatized, that have created a lot of possibilities for personal wealth in China. In the long run, there have been inequalities between urban and rural wealth acquisition. By 2010, Tobin (2011) indicates that the Gini co-efficient stood at 0.4, a value that indicates that there is a lot of wealth inequalities in terms of wealth distribution. In fact, Tobin (2011) says that this data is a warning of international inequality of wealth distribution. Figure 2: Ravallion & Chen (2004) Available at: http://www.imf.org/external/pubs/ft/fandd/2004/12/pdf/ravallio.pdf. It is evident that with this gap widening, it is a bit uncertain for entrepreneurs to shift a lot of funds to conducting business in the country. 2.2.2. Opportunities However, China has the best resources to sustain growth in the economy. This is one of the major factors that facilitated an investment by many investors and entrepreneurs in the country. In the thought of Lin (2000), China is the hub of development, and growth that emanates from industrial gain and consumption from the China’s market. It is evident as seen in the argument of McFarlan (2008) that China has a positive business environment. Despite the many gaps, the same have been filled with opportunities such as the distribution chain in the market. Since the late 1970s, China has had sustained economic expansion that has been consistent and powerful to incorporate a huge percentage of investors (n.d., 2013). Ever since the 1970s, the economy has consistently been growing and by the year 2030, the country is expected to be on the top in the economic scales. China’s economy is one that is suctioned domestically, and was not affected by the financial country that once faced the west (McFarlan, 2008). The country’s economic growth came from the exports, with the domestic exports being the major drivers of this economy. With the country being a low-cost processing country, she has managed to sustain her economy with its service industry of service and IT businesses (Scott, 2002). The country also enjoys support from her large and capable labor force that emanates from the large population. As seen in the argument of McFarlan (2008), China comprises of 20% of the world’s largest population, and the same population is a literate one. It is of essence to note the university system of China that has been instrumental in producing excellent graduates that have seen China’s economy to achieving success in business. In the case, a lot of investors feel safe investing in the country, as the populace is not only hardworking, but seemingly own up to the country’s produce, and business world. China is also the home of entrepreneurial culture as depicted in the country’s business world and why the country has slowly become an emerging market (McFarlan, 2008). In as much the analysts and researchers indicate that the country is slowly being dominated by state owned operations, the country has not been shot of an entrepreneurial culture that has seen the development of the country to the upcoming powerful state in terms of economic prowess (Scott, 2002). In this case, a lot of investors are pulling towards the country due to her economic prowess. The role of the state in the China has created a sense of security in the country in terms of investments. McFarlan (2008) indicates that China has had a strong government with a strong military power; thus, bureaucracy in the country (Enderwick, 2012). China has risen to the position of a global power with the help of the government, and it is this superiority feeling that is attracting investors in the country (McFarlan, 2008). The country is confident of its success, and the West is slowly adjusting to being inferior to China.With the country also able to build lasting relationships, the government in acceptance to the same, China is the new place to watch for investors and prospective business persons. 3.0. Conclusion Conclusively, it is important to note that emerging economies have played a huge role in the world economy. Though economies have offered a huge playing ground for potential investors, the same have not faced numerous challenges. The emergence of these economies has not been a smooth ride, and the once strong economy powers have been forced to deal with the current situation. It is almost obvious that China’s economy will be the largest by 2030, through its large labor force and the entrepreneurial culture that has been inculcated in the same. Maintaining the stability of the economy has also not been easy and China has consistently been questioned on its viability in the global market. Investors are advised to understand China’s history, and culture prior to making any investments in the same. References Agtmael, A., 2007. The Emerging Markets Century: How a New Breed of World-Class Companies Is Overtaking the World. New York, NY: Simon and Schuster. Baer, W. and Rangel, G.B., 2001. 'Foreign Investment in the Age of Globalization: The Case of Brazil', Latin American Business Review, Vol. 2, No. 1/2, pp. 83-99. Beridze, L., 2008.Economics of Emerging Markets. Hauppauge, New York: Nova Publishers. 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