Merger and Acquisition in China - Coursework Example

The open-door policy initiated by Deng Xiaoping in China in1992 with the intention to push forward China’s economic progress brought in considerable wealth in the form of Foreign Direct Investments (FDI) (Galbraith, 2000). This policy enabled institutional change (North 1990), which in turn created opportunities for investment into the Chinese economy. What was different about this policy was that it was a gradual change and not a sudden change as experienced in other developing countries, which led to bankruptcies and high costs (Campbell and Lindberg 1991). This policy also placed emphasis on foreign capital policy, the foreign exchange system, and it also offered promising conditions for foreign investors (Galbraith, 2000). This policy has since reaped dividends given that the main mode for FDI into the Chinese economy has been through foreign-funded and joint venture companies. This has also been reflected in figures which show that between 1990 and 1996, China managed to attract approximately $230 billion of foreign capital, with 20% of that amount coming from developing nations (Galbraith, 2000). However, the open-door policy did more than just attract FDI to China; it also introduced the market for corporate control, which is where firms are sold and bought or are taken over (Groenewegen 2004). This market for corporate control previously did not exist, due to the high number of enterprises owned by the state, which also meant that no FDI was coming into the economy. By opening up the economy, most of these government enterprises have now been left open for mergers and acquisitions, due to market forces operating in the economy. For instance, this open-door policy led to initiatives from the Chinese government to reduce non-profitable enterprises (Groenewegen 2004), and between 1995 and 2002 the number of state-owned enterprises decreased by 46%, and profit increased by 163.6% (SASAC 2004). First of all these figures demonstrate that during that time period there was a record number of mergers and acquisitions and that these were probably due to the need to establish profitable organizations for the Chinese government. These figures also show that mergers and acquisitions have the ability to generate revenue through profits, which demonstrates that the news organizations are more efficient than they were in their previous state. This clearly suggests that the Chinese government experienced a lot of the advantages of mergers and acquisitions from the introduction of the market for corporate control; however one also has to consider the effect of this open-door policy on small private companies.
The move from a centrally planned economy to a market economy has also encouraged FDI as the government has had to make changes to tax systems, in order to make them more favorable to investors. Foreign investors are considered to introduce new technology, new methods, structures, processes, and management styles to the economy which result in increased productivity and revenue (Lupton 1994). It would also seem that these introductions into the economy also trigger mergers and acquisitions, as other organizations find cost-effective ways of obtaining these new technologies and methods.