FDI, Globalisation, and Innovation in China - Essay Example

?FDI, Globalisation, and Innovation in China Introduction The world has experienced the globalisation process in the past twenty years, one that brings about growing political, economic, social, environmental, and cultural interdependence among countries. However, very few studies have been carried out to examine how globalisation really affects business activities. Scholars of international business emphasise the need to study more the impacts of globalisation on businesses. Hence, this essay will try to examine the influences of globalisation on business performance, specifically in China. In this essay, globalisation is defined as “the process of increasing social and cultural interconnectedness, political interdependence, and economic, financial and market integrations” (Geenhuizen, Nuttall, Gibson & Oftendal 2010, 288). The world has witnessed major changes in the global marketplace since the 1980s (Chai 1998). Liberalisation of capital markets and world trade encouraged by globalisation has produced a new competitive field for all businesses. With the development towards more interdependence among countries, a number of adjustments in the business setting have appeared. There has been an appearance of international markets for financial investment, labour, products, and services. The demands of consumers all over the world have met. Growing liberalisation of trade and investment promoted by developments in communication and transportation technologies has led to even more global business transactions. These developments have resulted in two major impacts of globalisation, namely, (1) global market opportunities, and (2) global market threats. It is clear that the process of globalisation not just provides more opportunities to business organisations, but greater degree of threats as well. Although opportunities can be created by globalisation, instability and competition are unavoidable. Even though largely cited in earlier literature, studies connecting these influences to business performance remain limited. This requires more research on the relationships between globalisation and firm performance. These two areas will be discussed in relation to international business activities in China. The Impact of Legal and Political Environment of China on Business Activities Because economic change started in 1978, the Chinese government has intentionally initiated commercial and legal reforms in order to exploit the economic interest of China, both locally and internationally (Guthrie 2008). Loosening of regulations on foreign direct investment (FDI), changing State ownership and economic liberalisation in general are just practical instruments. The government views the free market as a way to achieve its goals, not as an ideological tool (Wei & Xiaming 2001). The policies will transform whenever it is believed that it is important to do so. The Chinese government is acting in harmony with Confucianism; laissez-faire capitalism is applied to create wealth (Wei & Xiaming 2001), but it is the state’s duty to make sure that the produced wealth is spent for the most needed goals. New policies on FDI are proclaimed almost every year and smaller regulatory reforms more frequently than that. The 1990s also witnessed the start of a development towards power devolution to local and regional governments (Xiaojuan 2003). Hence, one of the most important rules of dealing with the Chinese government is to acknowledge that various departments at various levels could have the right to meddle with business activities. And, they could each be operating towards completely distinct objectives. The Chinese government has major powers. It can turn down future projects, and it can remove permits from current ones. In 1996, on a single day, the Tianjin government remove permits for numerous joint ventures, because of conflicts between partners and/or problem with productivity (Ambler & Witzel 2003). Government also has major influence. As different from power, this implies that the Chinese government normally succeeds in realising its objectives without having to wield its official privileges, by ‘proposing’ that individuals or firms should carry out a particular course of action (Ambler & Witzel 2003). This is greatly similar to the Chinese conflict prevention and inclination to reach jointly decided solutions. It means that if a company have a good and strong relationship with important government agencies, it is more likely to acquire what it needs, such as authorisation to sell goods, build a factory or whatever. Favourable ties with the government can speed up the bureaucratic process, even permitting a company to ‘skip the line’ and acquire permission more swiftly than it might expect (Blackman 2000). The absence of relationships or unfavourable rapport, in contrast, can put companies at risk. One of the most recognised examples is the case of McDonald’s in Beijing. Having been given authorisation to build a restaurant in a major site on Tiananmen Square, several months later McDonald’s found out that its authorisation had been withdrawn and the location had been granted to developers based in Hong Kong (Peerenboom 2007). McDonald’s recovered the location at last after three years of disputing (Peerenboom 2007). Governments, outside China, are also somewhat interfering. Democracies, such as Taiwan, have more limits on governmental powers and more cooperation between business and government (Guthrie 2008). On the other hand, in Indonesia and Thailand (Guthrie 2008), government is similarly dominant as in China. Multinationals in China The choice of location for companies has to be determined within the strategic aim. Yet, foreign investors do not put their money in the same location “because they appear to accord different weights to various locational characteristics” (Zhao & Zhu 2000, 60). Companies that want to generate large profit will examine the site-awarded resources from different locations. They consider location-specific resources as matches to their own central assets (Zhao & Zhu 2000), because location-bound variables reveal themselves with differing levels of appeal to foreign investors. Developing the work of Dunning, later studies definitely recognised the essential contributions of location variables in FDI. One scholar, Svcdberg (1981 as cited in Zhao & Zhu 2000), made a record of location variables that affect the decision about FDI: price of resources, adequacy of infrastructure, investment privileges, government policy of the host country, and psychic proximity. Casson and Associates (1986 as cited in Zhao & Zhu 2000) proposed that the choice of a company to locate various production levels in various countries, also referred to as ‘vertical integration’, rests on motivations to internalise, barriers to trade, and comparative advantage between host and home country. In contrast, the horizontal integration of FDI was affected by barriers to trade in the shape of transport expenses and tariffs. Robock and Simmonds’s (1983 as cited in Cheung & Lin 2003) rational global planning approach tried to connect internalisation to site preference that stands for rational behaviours for providing a specific market rooted in location economics and market purposes. The variables involved in the approach are availability of research and marketing facilities, capital, management, and supply of labour (Cheung & Lin 2003). The size of the market is a major concern in making decisions about FDI. As the size of the demand in the host country increases that allows domestic production to be more lucrative or advantageous, foreign companies favour to work in the market through FDI to exports (Yao & Chen 2006). Furthermore, the large size of a market gives a greater chance for foreign investors to cut down trade barriers and to achieve economies of scale that encourages sales not just in the local market (Lin & Lin 2008), but also for trading with other markets. FDI also functions as an export proposal to trade with neighbouring markets. Lucas (1992 as cited in Zhao & Zhu 2000) supported such pattern in his investigation of FDI determinants in seven Southeast and East Asian countries. He discovered that FDI is less responsive to domestic demand in export markets than aggregate demand. One potential explanation for such a trend is the strategic action of foreign companies that aim to sustain their secured market position (Zhao & Zhu 2000). Thus, by relocating a production base to sites with lesser expenses, they can work in the third market more competitively and productively. There are actually several explanations why various foreign investors from various home countries vary in their preferences and interests for making decisions about location in different regions and cities in China. Primarily, foreign investors from various countries-of-origin vary in their cultural context, business values, and style of management (Wu 2006). Also, investors from various home countries have distinct competitive advantages and could look for particular features in the host location to match or enhance their business performance (Wu 2006). Hence they could be specifically concerned with the situations particular to that host region or city. These different preferences and interests could also be linked to the character of business operations where in these investors prefer to take part. They are at times greatly affected by product-specific and industry-specific variables. Lastly, social relationships, ethnic affinities, language, tradition, and culture fulfil an especially major function in distinct preferences and interests (Wu 2006) in a location preference. Risk and Obstacles in Doing Business in China I would tell anyone coming in now that you have to have a strong stomach for investment in China. --- Johnny Chen (1996 as cited in Dixon & Newman 1998, 121) Going to China for business purposes is definitely burdened with actual risks and possible rewards. The commercial prospects are great. Obviously, we should, and do, recognise the good feature of China, the creation of a vast market prospect, the outcome of the remarkable progress of China that has followed reforms in the economic sector. Investing in China gives the assurance of large rewards, yet these rewards should be reduced by the risks. Foreigners should constantly be responsive to the fact that they could, at any time, be placed at an unfavourable and intimidating conditions since China does not have any institutionalised law and an objective system of law enforcement. The rules of the game in China for doing business are widely perplexing and constantly changing. Foreigners should understand that the Chinese exercise foreign business rules as a process of domestic and global politics (Blackman 2000). They should understand that corruption is widespread. They should understand that their business ethics will be repeatedly questioned and dismantled by Chinese expectations and traditions (Blackman 2000). Foreigners have to be aware of major concerns of the strategic actors in China’s commercial transactions with foreigners, specifically the ever-present princelings and PLA, who wield their influence and authority to exploit foreign business ties (Cunningham, Cunningham, & Park 2008). It is important for foreigners to always remember that ‘a foreigner’s win is a Chinese loss, and a foreigner’s loss is a Chinese win’ (Dixon & Newman 1998, 123). ‘Rule of man’ and ‘rule by law’ implies that foreigners should not and cannot expect to be treated justly in China (ibid, p. 123). They do not have enforceable political and legitimate rights. Officers do not control themselves so as to maintain the legal rights of foreigners (Dixon & Newman 1998). China is not a safe location for foreigners anymore; hence it is now a must to take safety measures. Murder, sexual violence, kidnapping, and robbery are some of the risks that should be confronted in China (Jones 2005). The recent history of terrorism and violence against foreigners in China is troubling because it is normally committed, or at least allowed, by the officials of China (Guthrie 2008). Commonly, they are employed as a way of resolving business conflicts. In these conditions, as victims, foreigners have very little implementable legal privileges (Guthrie 2008). China is no doubt facing a period of anarchy that the Chinese officials appear hesitant or incapable of dealing with, or regulate. National Innovation System of China In just a matter of thirty years, China has developed from being a marginalised actor to become the greatest machine in the international market (Geenhuizen et al. 2010). Alongside its remarkable economic growth and the numerous progresses in the standard of living for the vast majority of the Chinese population, different factors show that the science and technology capacities of China also are on a rapidly developing stage. Imported technology and FDI continue to flow into China, establishing it as one of the biggest receivers of technology and capital across the globe (Yoshida 2007). And a large number of the most technologically innovative firms all over the world have preferred to advance beyond building production facilities in China to forming sophisticated research and development (R&D) headquarters to create new products and services for the Chinese local market as well as for global markets (Yoshida 2007). In sum, previously regarded as one of the more undeveloped nations, China nowadays is regarded as one of the most dynamic and wealthy technology and economic forces all over the world. These patterns have encouraged numerous scholars to inquire whether China is equipped to become a leader of innovation all over the world. FDI is a major source of power to speed up economic progress in China. The effect of FDI has broken through numerous components of the national economy with the boost of overall amount (Cheung & Lin 2003). The unfavourable effect emerged slowly such as the uniform development of Chinese production and the global trade conflict due to the over dependence of FDI (Yoshida 2007). Several concerns still have to be dealt with, for instance, the strategic impact of the policy of ‘market for technology’, the effect of FDI on the development of technology in local companies (Cheung & Lin 2003). Whether FDI can cause favourable spillover effects and enhance development of technology in China is debatable. FDIs are brought over by multinational companies mainly. MNCs have clear advantages in comparison to local companies, and have the strongest components in the global economy (Larson 2000). FDI’s contribution to the transfer of technology is clear theoretically. Less developed countries (LDCs) draw FDI, and afterwards create technology spillover impacts by means of sharing management abilities, personal network, reverse engineering, replication, and demonstration (Larson 2000). This is helpful to reduce the disparity in high-technology with industrialised societies and enhance the technological innovation skills. Yet, the spillover effects would not occur involuntarily; furthermore, FDI could also create unfavourable spillover effects (Cheung & Lin 2003). Due to the exposure of information, majority of knowledge and technology are tacit knowledge. It is by means of practice they will be learnt (Jones 2005). The level and method to which spillovers take place were decided by the owner of sophisticated innovations and the recipients. The arrival of more state-of-the art technology and the demand of absorptive capacity in the host nation (Larson 2000) were dual forces of spillovers. Yet, findings from current studies give few information/data on whether FDI has encouraged local innovation capacity of developing nations (Research Technology Management 2009). As stated in a recent account by Zhou (2006), majority of the foreign research and development agencies in China are self-governing entirely foreign held for improved safeguard of intellectual property rights. Most of the labs of multinational enterprises do not demand patents to prevent exposure of the technology expertise. A large number of foreign companies do not have any preparation for collaboration with local universities, companies, or labs. Findings from other studies also show that the absence of effective safeguard of intellectual property rights has been a major obstacle stopping multinational enterprises from bringing in more state-of-the art technology into China and spending more on steps toward innovation (Jones 2005). Furthermore, these foreign held research and development labs are unequally scattered geographically in China (Cunningham, Cunningham & Park 2008). Fu and colleagues’ (2006) research derived from 12 British businesses located in China shows that companies plan to employ technology greater than the local level instead of first rate technology in their joint ventures in China. One of the primary explanations is their consideration of the low protection of intellectual property rights in China. These developments raised thoughts that these R&D innovative multinationals may stay as secluded innovation entities in the Chinese economy (Fu et al. 2006). Although they have enhanced the general innovation contributions and productions in the Chinese economy, their gains to the technological capacity development of the local sector continues to be negligible (Cheung & Lin 2003). This could also create another kind of brain drain, according to Guthrie (2008), which bright research personnel has been depleted from the local segment to the foreign segment even though actually they remain in the country. Conclusions Generating profit by doing business in this developing market is the aspiration of many American firms. Numerous companies are taking into account or already have branched into China. It is essential for companies to understand, though, that even though the direction towards globalisation in China is loaded with prospects, it is also burdened with risk. Possessing an adequate awareness of these risks and prospects is important for any company that thinks of doing business in China. A small SWOT analysis is carried out to determine the future prospects and risks of conducting business in China. Nevertheless, before this form of knowledge can be applied it is important for American entrepreneurs to have strong knowledge of China’s history of modernisation and the globalisation processes that the Chinese are aiming for themselves. To contribute to the knowledge of the risks and prospects in China, foreign investors should also have cultural knowledge and a firm idea of the differences between the business practices of Britain and China in order to attain success in business performance. The differences in the culture of Britain and China are many. Nevertheless, they are very crucial, which, if used appropriately can result in business productivity in China. The lack of knowledge of these and other differences in culture may result in conflicts and hence, failure of a British company in China. Hence, it is vital for British companies to educate their workers about the culture of China before assigning them to China. 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