Foreign Direct Investment in China by Opening a Second Filter Factory in China - Assignment Example

? Foreign Direct Investment (FDI) In China by Opening a Second Filter Factory in China Geographical Location of China China is located in Southeast Asia along the Pacific Ocean, remains the world’s largest nation after Russia and Canada with an area of 9.6 million square kilometres, and bordered by 14 nations Vietnam, Korea, India, Nepal, Pakistan, Burma, Afghanistan, Mongolia and Tajikistan among others. The country has vast expanses of land defined by rocky plateaus, and mountains that occupy most of the land. Even though physical features segregate china into several regions, while people tend to segregate the nation in four areas that include south, north, northwest and Qinghai-Tibetan areas and owing to the differences in geography, residents in the regions have different lifestyles and customs. Both north and south parts are within the eastern-monsoon area that is separated by Qin Mountains-Huai River with nearly 95% of people in the country living in the region. The country’s geographic location and its natural environment have significantly influenced and shaped civilization in the country (Travel China guide, 2013). Economic Situation in China China is a nation with huge attraction factor for companies from all over the world interested by either its cost efficient production environment or even the huge market potential of more than 1.3 billion citizens (Hecker, 2012). China’s economy rose spectacularly since the onset of its reform in 1978 growing at an average rate of 9.9% for more than three decades and was not affected by the 1997 Asian financial crisis and recently in the global crisis of 2008 the nations remained largely unaffected, even though the crisis left many nations grieving and many having negative growth. However, China’s economic growth of 2009 remained 9% and increased to 10% in 2010 after government injection of massive stimulus package; therefore, China economy quickly bounced back in high growth and was at the forefront in global economic recovery. Before, the global financial crisis, china had transformed itself into a leading contributor of world economic growth since the nation’s contribution to world GDP growth rose from 4.6% in2003 to 14.5% in 2009. In 2010, China replaced Japan to become the world’s second largest economy with a GDP of US$7.4trillion in 2011, which was about half of US’s level, US$15 trillion. China’s purchasing power parity has for a long time been the world’s number two after USA and in 2011 china’s PPP was 70% that of US. For many years, china remained and remains to be the world’s largest exporting country with 2011 exports amounting to US$1.9 trillion that took 11% of world market share. In post-crisis world, China has managed to distinguish herself by holding the world’s largest reserves worth US$3.1 trillion and remains to be the only large economy not burdened by domestic and external debts. To get the right sense of Chinese economic production scale and the fact that the nation remains to be the world’s manufacturing powerhouse, it is worth looking at the output levels of China’s core industrial products. For instance in 2011, China was number one in the world in production of coal, steel, cement, automobile, TV and refrigerators among others (Wong, 2013). China’s economy is expected to prolong its high growth in short-term while at the same time rebalancing and restructuring and since China’s economy has already developed a wide base, further growth will produce its dynamics of sped compounded by scale. Owing to its sheer size, Chinese level of domestic production and consumption as well as its imports and exports will continue to have significant regional as well as international ramifications. Based on the massive industrializations reflected in mega output volumes, china has become global top consumer of various natural resources and essential commodities from steel, aluminium, oil and gas. Rising demand of such products in China has driven the prices of those products up, hence china is responsible for the creation of recent commodity boom, and in addition, China’s large-scale fabrication of many products is responsible for lowering prices of products. Regionally, Chinese economy remains the most significant engine for growth to the neighbouring economies which utilise China’s huge domestic markets as the basis for their growth by exporting products both manufactured and primary commodities to China; the process has brought great regional economic integration. China exports over 50% of raw material that include parts and components, technology and equipment, and financial and economic services from various Asian economies thus converting ‘made-in-Asia’ into ‘made-in-China’ products for global market. Therefore, the economy of China operates not only as an engine for propelling economic growth in the region but also acts as a catalyst for regional economic integration (Yueh, 2010). In recent past, China reinforced integration trends by initiating regional economic and cooperation schemes like the Free Trade Agreement and economic partnership agreement with nations across the region. China’s economic rise produces greater and profound regional and global impact and promises to change the rise of EA (East Asia) further, although it is the second time after Japan’s economic rise three decades ago. The difference with the China-led East Asia is that the rise guarantees to be formidable in terms of geo-economic and geo-political terms dominated by China’s economic growth. China’s relentless growth proves to be more dynamic compared to Japan’s past growth because of China’s size and diversity, which in turn generate a lot of growth potential. Moreover, with great internal dynamics, China promises to sustain its development longer compared to Japan’s; thus, China’s role of being the engine for EA growth is powerful compared to Japan’s time. In addition, China plays a large role in integrating EA economies because of its many regional production networks; thus, it is unsurprising that China has eclipsed Japan’s economic leadership role in EA. China-led EA rise is quantitatively and qualitatively significantly different from Japan-led EA rise since the China-led EA rise accounted for 24.4% of the worldwide GDP similar to EU’s level but bigger than that of USA, while in 1985 Japan-led EA rise accounted for 15%, which was below half of USA level at the time. Moreover, China-led EA rise accounted for 29% of global market share, while Japan-led EA rise accounted for 24% of worldwide markets (Wong, 2013). Environmental Situation China’s sustained and rapid economic development in the past 30 years is an essential event in global economy and country has been opening up to the outside world; hence foreign trade and FDI continue to increase rapidly in the country and have made great achievements. The dependence on foreign trade increased; as well, FDI increased from US$1.956billion to US$74.8 billion and an annual increase of 18% making China top the list of attracting FDI in developing nations; thus, foreign investment plays a significant role in the country’s economic growth (Yang, Yang and Xu, 2008). Although, FDI and economic growth are on the rise, the country’s pollution is becoming worse day in day out thus deterioration of the environment is indisputable. China’s most processing trade enterprises engage in labour-intensive processing programs and the manufacturing industry has high carbon emission (YOU and SUN, 2012). The country emits large amounts of carbon for other nations since consumption of goods processed in China does not entirely happen in china but in different nations. With the advent of science and technology, humanity destroyed the survival environment at an unparalleled rate, which is still the case in China since the onset of its economic development. Enterprise production and operation activity is a significant reason for the environmental pollution in China, since enterprises use resources in production processes that belong to the society and the nation. Nevertheless, the nation has established test sites to check the effects of transforming the processing trade and in the year 2011the country’s ministry of commerce took measures to explore direction of reforming export processing trade (Day and ebrary, 2005). Political Stability Throughout the twentieth century, China suffered huge economic and human losses owing to the nation’s political instability; however, in recent decades, Chinese have lived with political stability and the corresponding economic benefits to the nation cannot be overstated. In the past, there were social rebellions, political divisions, civil wars as well as foreign invasions that kept the nation poor, weak and underdeveloped. Comparing China to advanced industrial democracies, the country would seem unstable and fragile; however, when comparing the nation to poor nation in developing world China appears stable and strong. Since China is a developing nation in many ways regardless of it being the second largest economy in the world, it is therefore meaningful to view the nation as such. Even though stability is a relative term and granted that some nations are more stable compared to others; however, few nations can claim absolute stability, in addition, there are no nations especially in emerging economies and rising powers are without concerns regarding threats both domestic and international. However, stable countries share something in common for instance stable nations have all or most of such characteristics like efficient state institutions; high degree of political legitimacy among the people, sound economic performance and policies among others and infrequent humanitarian emergencies as well as the capability to mitigate natural disasters: most of these are true to China (Zheng, 2012). Political dominance of (CPP) Chinese Communist Party is expected to continue unchallenged for the period 2013 to 2017, although factional struggles in the party were evident and intensified in the run-up to the CPP congress, which saw fresh generation of politicians promoted to party leadership (Country Report: China, 2012). The Manufacturing Industry in China Manufacturing industry is the country’s main body of industry and the foundation and driving force for the nation’s economy since the establishment of reforms on openness in 1978. China in the planned economy system carries out the general development strategy of agriculture, heavy industry, lighting industry and managed to establish a completely new and relatively independent industrial system. After implementation of the reforms on openness, China actively joined the global market economy system taking part in industrial division of labour as well as trade activities worldwide and attracting large number of foreign direct investment. Moreover, through the open policy, introduction of international advanced science and manufacturing technology was possible that transformed an agricultural nation into an industrial power. Therefore, in china manufacturing plays an essential part in the process of industrialization and the expansion of the nation’s economy that make China an industrial power in manufacturing. However, comparing china to US and Japan and other developed nations, there is a huge gap of the manufacturing industry especially in the twenty first century when the world economic pattern shifted (Jinhua, 2013). Since many multinational companies are the main carriers of FDI, they are continuously altering the production layout in the world and transfer large number of labour-intensive industries as well as labour-intensive production process of capital technology-intensive industries to the developing nation. Following the economic meltdown of 2008, which hit economy of many nations, many industries including manufacturing were faced with historical choices of upgrading, adjusting and transformation. Faced with the challenge of economic background in the world and the reality of China’s economic development, china determined to speed up transformation of economic development in an attempt to upgrade industrial structure, alleviate restrictions of bottlenecks of environment resources and enhance international competitive advantage. Therefore, China issued policies and technical regulations regarding upgrade and adjustment of industries, while focus on the energy conservation and environmental protection. Since its reform, China FDI increased drastically from US$1.23 billion in 1986 to US$92.40 billion in 2008, which made China the main purpose of FDI invasion among evolving nations since 1992 and the second largest in the world after US in latest years. China has become a major exporter of manufactured goods across the world, which has been a result of china effort of introducing preferential policies that attracted foreign investors to china bringing advanced technology and management skills. The expertise brought to China increased total share of manufactured exports in China from 74.4% in 1996 to 94.6% in 2008 and of all the exports, low technology goods like light and textile industrial products, rubber products increased from US $12.57 billion in 1990 to US$262.39 billion in 2008 (Kelly and Kevin, 2011). China’s manufacturing industry enjoys fast development, is ranked among the top in the world with obvious advantages internationally, and remains the pillar of china’s economy since it is the dominant sector for economic growth as well as economic transformation. Therefore, manufacturing industry remains China’s main symbol of development and national power in the last 20 years since comprehensive development and optimized upgrading of the manufacturing industry enabled China establish herself as a powerhouse in manufacturing and put in place foundation for China to transform into a strong economy. Concerning the utilization of foreign capital, manufacturing industry in China remains dominant for instance in 2008, there were 11568 foreign capital projects in manufacturing industry, which accounted for 42.04% of all foreign capital projects. Because of low labour cost, products manufactured in China have great prices advantages in the global market; thus, china’s manufacturing industry attracts great deal of foreign capital from all over the world. moreover, global market share of Chinese manufacturing industry increases year by year and more people around the world beginning to familiarise themselves with brand made in china. Therefore, China has come to be known as “world factory” because of its large scale manufacturing industry although the structure of manufacturing industry in the country remains largely unbalanced at the moment. For-instance, labour-intensive industry is large compared to technology-intensive industry and the capital-intensive industry; thus, many companies in manufacturing industry are engaged in production of low-end consumer goods with low-valued and high pollution although few of them concentrate on equipment manufacturing (Li, Liu and Yu, 2011). The Automobile Industry In less than two decades, China auto industry has experienced revolutionary transformation from a collection of state-owned enterprise groups operating in a centralised socialist economy to a group of joint project assemblers generating diversity of traveller cars in large sale volumes to households in a liberalised market condition. By 2002, virtually all main global assemblers and first class auto suppliers established main operations in china with VW and GM leading the way and three of Japan’s leading manufacturers Honda, Nissan and Toyota (Doner, Noble and Ravenhill, 2006). The development of Auto part manufacturing in china is driven by the rapidly growing automobile manufacturing industry as well as the strong growth in the number of automobiles used across the nation. In the year 2009, the Chinese government initiated a series of measures aimed at boosting automobile sector growth with measures such as reduced automobile sales tax, subsidies for rural households keen on purchasing automobiles as well as the indirect effects of government’ $500 billion stimulus package. Toward the end of the year 2012, the number of automobiles in China reached close to 121 million and this is expected to continue in the future. The industry’s operations are mainly located in economically well developed East china and Middle South China regions because of the regions’ high per capita incomes, significantly high populations and high usage of automobile, which makes industries in the sector focus in the area because of the great demand for automobiles as well as automobile parts and accessories. The industry tends to concentrate highly on the eastern coastal areas since large firms in the area are able to gain from economies of scale and proximity to imported raw materials and downstream industries. In China, businesses in auto part manufacturing industry produce parts, accessories and components for motor vehicles that include motor vehicle bodies, mechanical and electronic components, parts for electric motors and filters among others. The manufacturers supply vehicle assembly and replacement part companies; hence, some of the companies in automobile industry in china engage in aftermarket service (Auto parts manufacturing market research Report, 2013). Developing nations often nurture automotive industry as a way for technological and economic development since the industry is capital intensive and has significant effects on related industries. Because of its capability to create numerous employment opportunities and increasing per capita GDP, the automobile industry has been referred to as industrial engine. Chinese government the transition from “self-development, self-reliance” during the planned economy to the introduction of foreign capital, co-operative development in marked-based economy gave priority to development of automobile industry as core industry. Announcement of the automobile industry policy in 1994 effectively categorised automotive industry as core in development of the nation moreover, the policy regulated foreign investment (Anderson, 2012). Despite recent deceleration owing to the tight credit, policies in 2010 and 2011 auto sales are expected to pick up in the coming years since there are signs that sales are beginning to rise after supportive policies. Moreover, the short-term the current urbanization process and the increasing purchasing power of Chinese people contribute to additional rise in the nations market growth. China domestic growth of automobile market increased rapidly after the country became a member of the WTO in 2001 and by 2009, the country’s market became the world is largest exceeding USA in both domestic trade and production. However, automobile ownership in China remains low by global standards even though there have been increased ownership rates by more than five times since 2003 and remains in line with countries having same GDO per capita levels. Nevertheless, the on-going urbanization combined with increased purchasing power and policy initiatives to aid private consumption auger well with sustained growth of China’s automobile market in future. The government policy plays a significant role in driving production as well as determining the market trends in china, since the government approach favours joint ventures with international producers (Doner, Noble and Ravenhill, 2006). While car ownership rate in China is in line with other nations having the same GDP per capita levels, the rate remains below those of advanced economies since passenger car ownership per 1000 people in China was around 56 units in 2011 and increase of 10 from 2003. However, it remained below global average of 125 and far from averages of OECD economies, which were 456 in 2009. Nevertheless, the low ownership rates signify huge potential for further development of the market given the huge population base, prevailing urbanization process and increasing purchasing power. Chinese automobile market is likely to sustain rapid growth in the future and growth is set to benefit from policy efforts that boost consumption as part of the economy’s rebalancing and support for Chinese made automobile parts and accessories. China’s automobile production has increased rapidly in the past decade resulting in the nation being a significant contributor to international output, expanding supply and low production costs and increasing share of low-end automobiles in sales have decreased average retail prices by more than 35% (Economic Analysis, 2012). Foreign Direct investment has contributed significantly to Chinese economic development although geographic development of FDI has been quite uneven since compared to eastern and mid regions of China that have attracted a lot of FDI, the western parts attract les FDI. Most of FDI in china is concentrated in developed coastal provinces like Guangdong and the residual mainstream immediately next to the coast is slightly touched. FDI in china fuels much of the rapid economic development in the nation’s regions, which drives the significant inequality in the regions although various factors influence FDI inflow (Economic Analysis, 2012; Chen, 2011). China’s FDI story is remarkable since the accumulated inflow today is around $1 trillion considering FDI was once banned in China; besides the annual growth is over 30% since 1979. As a result, china has become the largest FDI recipient in developing world over the past three decades FDI has become part of the Chinese economy and initiatives of multinational ventures. Therefore, China has come to be associated with increased capital formation, labour training, international trade, technology transfer and the transition from planned economy to market economy; hence, FDI increasingly integrated Chinese economy into the world economy. Due to China’s fast growth and huge inflow of FDI funds, the country has received increased attention in its FDI both within and outside the country’s borders owing to FDI initiative. China is the world’s biggest developing nation and one of the fastest growing economies with annual growth rate of GDP averaging 10% in the last three decades. Undoubtedly, FDI in the country’s economy plays an essential role in the processing of China’s integration to the world economy since the country is increasingly influencing not only the flow of FDI but also labour division and specialization in global production (Chen, 2011). Legal Issues of Investing In China by a Joint Venture There are various essential issues and factors to take into account before forming joint ventures in China like critical legal issues, operational issues and the reasons for forming a joint venture in China. There several platform s investors can operate a business in China one of them being a joint venture, which arises when Chinese investors and foreign investors have interest in the same Chinese liability company. Various legal and working issues in a joint venture in China are distinct from fully owned overseas enterprise. The issues when not properly addressed before and during the formation of the venture can leave foreign investors open to unnecessary risks and even loss of investment power. There are four steps in establishing a joint venture in China and they include obtaining assistance from China international Trust and Investment Corporation; negotiating the legal framework of the joint venture; obtaining authorization from Foreign Investment Commission of China and registering with the country’s general administration for commerce and Industry. Joint venture laws in china offer considerable flexibility in establishing composition of venture’s board and in defining its authority over operations of the business joint venture. Legal issues of a joint venture in china include equity transfer, unanimous approval, pledge of equity interest, profit sharing and board appointment (Salem, 2013). The Distribution Channels Recent studies show that selection and management of distribution channels have not entirely been a management function of daily operation but also an important part in ensuring that a company remains competitive and retains its completive advantage. Since the reform that opened up China many multination companies have ventured into Chinese market in various forms and their success in China cannot be separated from established distribution system. Distribution channels in china are grouped in various categories depending on market functions thus distributor systems are based on division of market (Dong, Tse and Hung, 2010). As well, distributions channels in different regions are legal units independent from each other and distributors maintain inventory quantity of products and parts authorised by parent company. In the competitive Chinese market, differences in products and services between competitors increasingly becoming small and homogenous marketing, having firm control of distribution channels is core to obtaining adequate profits. The main challenge firms’ face in trying to capitalise on market potential in China involves effective management of their distributors, which necessitates design of effective governance strategies that motivate and control various distributors (Sufang and Chenwei, 2010). In conclusion, China offers a great opportunity for companies interested in investing in the manufacturing industry in China since china is a large market for any product from vehicles to vehicle accessories. China’s support for FDI offers investors in the manufacturing industry the opportunity to invest in the world’s largest automobile market that has a robust market for automobile products and continuously growing. Increasing purchasing power of people in China and improved policies by the government make investing in the filter industry in the country an opportunity worth considering since China offers cheap labour force, which translates into cheaper products in the global market. Owing to the low labour costs and conducive government policies in China has have made the country the world’s factory for all products including automobiles and automobile parts and accessories. The rapid growth in domestic market and sharp increase in local capacities give China the upper hand in making sure the venture of setting up a filter industry succeeds. References Anderson, G. E. (2012). Designated drivers: How China plans to dominate the global auto industry. New Jersey: John Wiley & Sons. Auto parts manufacturing market research Report. (2013). Auto parts manufacturing in china: Market Research Report. Retrieved from http://www.ibisworld.com/industry/china/auto-parts-manufacturing.html Chen, C. (2011). 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China's Political Stability: Global Comparisons. Journal Of Chinese Political Science, 17(1), 1-13. doi:10.1007/s11366-011-9175-x Read More