Chinese Economy - Case Study Example

Case Analysis Name Class Unit Executive summary The report analyses international business environment and critically evaluates the risks and opportunities. The report has chosen China as the preferred country for investing. Since the Chinese open door policy, the country has experienced a surge in FDI. China has a good infrastructure in transport and communication, large domestic market and a large workforce which makes it an attractive investment destination. The country political economy analysis makes it favorable to invest. The economy is stable with fast growth rate and well established infrastructure. China is a member of the WTO makes which have made the economy to grow at a very fast pace. The economy has availability of labor. The risks in Chinese economy lie on corruption, environmental pollution and currency devaluation. The political system is stable and has support for FDI with a strong infrastructure. The political system poses high chances of nationalization of companies with currency devaluation and inflation. The legal system has been able to support laws for trading partners’ countries, international trade laws and upholding justice for the business laws. The main legal problem lies in contradicting laws from central and local government. China has to ensure that they continue with the economic reforms for FDI. Investing in free economic zones poses a great advantage due to provision of infrastructure and government exemptions from tariffs. By balancing the benefits, costs, and risks associated with doing business in china, it proves to be worth investing in the country. Table of Contents Case Analysis 1 Executive summary 2 Table of Contents 3 Introduction: 3 Political Economy Analysis 4 China Political Economy analysis table 6 Comparison of three systems 7 Political and legal system 7 Benefits 7 Risks 7 Costs 8 Legal system 8 Benefits 8 Risks 8 Costs 8 Economic system 8 Benefits 9 Risks 9 Costs 9 Recommendation 9 Conclusion 10 References 11 Introduction: China success in the global economy has been based on an increase in their foreign direct investments (FDI). The country open door policy saw it increase their foreign direct investment by a large margin. In 1990, Chinese foreign direct investment was at $19 billion and rose to $300 by 1999. The country has also been able to increase their overseas investment during the same period. The country had engaged in market liberalization and encouraging investments during 1980s and 1990s. The years between 1991 and 2001 had seen the country experience unstable development. The last phase between 2002 and present have seen China having rapid and steady development. This is a period in which the government adopted the open door policy (Jun & Meijun, 2005). There are various reasons for investing in china. China has invested heavily in economic structure change presenting a good investment opportunity (Riedel, Jing & Jian, 2007). The country has Free Trade Zones which offer the investors exemption of tariff and ease of currency conversion. The country economic growth has the capability to top the world. The country also enjoys a good transport network, which enables ease of transport and can help the business in export and import logistics (Pike, 2009). The Chinese market is large which gives the investor a chance to explore new market there is also a large workforce in the country (Ding & John, 2008b). The report will critically discuss issues on decision making and international investment. This will be achieved through a case study analysis of the attractiveness of investing in china. The report will analyze Chinese political economy analysis through its political system, economic system, legal system and finally gives recommendation and conclusion. Political Economy Analysis Political economy analysis is a tool that looks at the way in which the power and resources in a country are distributed and utilized in various contexts and their impacts on the country development. The analysis gives an insight on the underlying interests, incentives and institutions that hinder or encourage change. Using political economy analysis, it will be possible to note the challenges in China and give a realistic overview of the expected achievements by investing in china. The analysis will enable the investor to view opportunities and barriers that exist in the Chinese economy. Through the analysis, an investor is able to view how the political and economic processes in China interact (Allen, Jun & Meijun, 2005). This will help in determining the feasibility of the investment in the country as it gives a realistic view of the opportunities and challenges that are involved (Wurgler, 2000). China Political Economy analysis table Political Economy Analysis Benefits Risks Costs Political system -Support for FDI by the government -Political stability which is good for investment. -Possibility of nationalization. -Currency devaluation. -Inflation. -Loss of business. -Loss of revenue. Economic system -A member of WTO. -Well developed infrastructure. -Fast growing economy. -Availability of labor. -High corruption. -Poor environmental concern. -Currency manipulation. -Loss of revenue. -Environmental pollution. Legal system -Adoption of laws from china trading partners. -Upholding of justice. -Confusing laws by central and local governments -Losing revenue due to confusion of laws. Comparison of three systems Political and legal system China political system is led under the Communist party of China (CPC) which rules under the set constitution. The government consists of multiparty cooperation but the system ensures that only CPC is under leadership (Li & Li-An, 2005). The country has made some progress from the authoritarian leadership and some form of democracy is experienced. The country has started changes which are believed will eventually lead the country to democratic leadership. At the moment, the country holds elections, which are free and fair in their villages in electing the government officials. The country leadership is thus collective with CPC in leadership where consultation has to be carried out with other political parties. The Chinese laws are made by the legislative arm of the government and local governments (Li & Li-An, 2005). Benefits Despite being not considered a full democracy, the government has made several reforms which have enabled good business and government relationships. The country has experienced political stability for a long time which is good for investment (Buckley et al. 2008). The government has also been supporting foreign direct investment in the country through establishment of Free Economic Zones. The current laws have been supportive for the investors. The investors in the FEZ have been excluded from tariffs and are provided with infrastructure according to the law. The investors are also legally granted the right to operate in the country with all the documents being provided (Allen, Jun & Meijun, 2005). Risks The main risk lies on the possibility of nationalization. This had occurred earlier in 1945. There are also risks of currency devaluation, expropriation and inflation. Business operating in China is supposed to be well versed with the country laws to avoid conflict with authority. There are issues where conflict arises between the central government and local governments over applicable laws. This may lead to investors being confused to know the exact law to follow (Buckley et al. 2008). Costs The costs may be extreme in case of nationalization of investment. Business may also lose revenue due to non compliance with laws penalties or due to currency devaluation. Legal system The legal system in china is based on influences from Confucianism, Daoism and legalism. The legal system is also influenced by several political philosophies such as Marxism. In commerce and foreign investment, Chinese government has adopted laws from international sources. The country has been fast to adopt the legal system of their trading partners to enable trade. Benefits The government support for the development and ensuring law is upheld has made it possible to create a good investment environment. (Allen, Jun & Meijun, 2005). China has been fast to adopt of trade laws from trading partners and international bodies. Risks There exists confusing laws by central and local governments. Costs Business may lose due to fines on breaking laws which may be caused by confusion of central and local government. Economic system China has been the main destination of the world FDI over the recent years. The country has a large population which enables the investors to have a direct market. The country has been working on economic reforms aimed at enabling a good investment environment. The country has also been embarking on measures that will enable innovation in the Chinese enterprises. As China joined WTO in 2001, the country has experienced rapid economic growth (Wurgler, 2000). Chinese economy is market based with the technology manufacturing sector being able to dominate the market. The country’s large population which is educated provides source of labor for the investors. There is an extensive infrastructure which enables transportation and communication to be carried out with ease especially in the economic zones set by the government. The Chinese economic structure helps it to become one of the favored investment destinations globally (Cull & Lixin, 2005). Benefits China accession to WTO has enabled the country to enter into the global market. The country extensive infrastructure poses an advantage to the investors due to ease of export and imports logistics. The country has the fastest growing economy at the moment which makes it an attractive investing destination. There is availability of labor in the country (Jun & Meijun, 2005). Risks Chinese government has been criticized for high rate of corruption. This may affect the economy of the country in the long run. The Chinese economy has been slow in responding to environment deterioration which poses a problem to foreign investors. There have been claims that Chinese government has been manipulating the currency holdings though at low levels. The country fast economic growth has been slowing down (Jun & Meijun, 2005). Costs The rise in corruption and poor concern for the environment may affect the investment future. The business may also lose revenue due to corruption. Recommendation The Chinese government must work to ensure that they maintain and enhance an attractive environment for the investors (Redding & Michael, 2007). The country has to ensure that they enhance their national saving. Lack of appropriate national saving which matches the investment rate can lead to the investment boom collapsing (Bosshart, Thomas & Emma, 2010). The collapse can be brought about by the macroeconomic imbalances. China should be prepared for the potential threats to the economy such as labor scarcity. The country also faces threats from negative shocks which occur due to financial imbalances. The government should come up with saving policies to enable the progress of a healthy economy (Buckley et al. 2008). There is also need for further financial liberalization which can help in equalizing the cost of capital. The central government should increase their transparency towards FDI policies (Bosshart, Thomas & Emma, 2010). The Chinese government can also work in enabling takeover for the state owned enterprises at reasonable terms. This would allow the enterprises to participate in the market driven economy where competition is allowed. China being among the leading countries with FDI, it has to work hard to ensure that its policies are favorable towards foreign investors. Conclusion Chinese FDI policies present a good platform for the manufacturing and service sectors. The government has set Free Economic Zones where FDI can be set. The zones have the required infrastructure which enhances FDI operations. The laws have set exemption for the investors in these zones from tariffs. The country has been having a rapid growing economy. Understanding the existing political, economic and legal structures in China is the key to conducting a business successfully in the country. By balancing the benefits, costs, and risks associated with doing business in china, it proves to be worth investing. References Allen, F., Jun, Q. & Meijun, Q. (2005). Law, finance and economic growth in China, Journal of Financial Economics, 77: 57-116. Bosshart. S, Thomas, L. & Emma, W. (2010). Past Lessons for China’s newjoint ventures, McKinsey Quarterly, December. Buckley, P., Adam, R. C., Hui, T. Liu, X. & Hinrich, V. (2008). Historic and Emergent Trends in Chinese Outward Direct Investment, Management International Review, 48(6), pp. 715- 748. Cull, R. & Lixin C. X. (2005). Institutions, ownership, and finance: the determinants of profit reinvestment among Chinese firms, Journal of Financial Economics , 77:117-46. Ding, S. & John, K. (2008b). Why has China grown so fast? The role of structural change, University of Oxford, Department of Economics, Discussion Paper No. 415. Li, H. & Li-An, Z. (2005). Political turnover and economic performance: the incentive role of personnel control in China, Journal of Public Economics, 89(10): 1743-62. Pike, J. (2009). People’s Republic of China Infrastructure. Retrieved August 29, 2014, From http://www.globalsecurity.org/military/world/china/infras.htm Redding, G. & Michael A. W. (2007). The Future of Chinese Capitalism, Oxford University Press, Oxford. Riedel, J., Jing J. & Jian G. (2007). How China Grows. Investment, Financeand Reform, Princeton, New Jersey: Princeton University Press. Wurgler, J. (2000). Financial markets and the allocation of capital, Journal of Financial Economics, 58(1), 187-214. Read More