Global Enterprise and Innovation in China - Essay Example

?Global Enterprise and Innovation (in China) Table of Contents Table of Contents 2 Introduction 3 The Legal Environment Affecting Business of China 4The Political Environment Affecting Business of China 5 Motivation for Investing In China 6 Industry Likely To Attract FDI 6 Risk and Obstacle 10 Measures To Reduce the Risks 11 National Innovation System of China 12 Question 1 15 Question 2 16 Conclusion 18 References 19 Bibliography 22 Introduction China has developed to become one of the most preferred foreign investment destinations. Many foreign investors are interested for investing and performing business in China. The major reason to attract foreign investors is that the country has competitive production cost, good economic policy for investor, sturdy economic growth and favourable business environment. The legal condition of the country is extremely crucial factor which decides the foreign investment. For making a good investment situation there must be a reliable and efficient legal system and the system must be transparent. This will help the investors to perform their business activity without any concern. Despite the above factor several legal problems have been encountered in China which affects the foreign investment and business enterprises (Bulcke & Beule, 2010). The Legal Environment Affecting Business of China China has a good and established legal condition that encourages the foreign investment of different companies and protects their interest to invest in their country. By various rules, regulation, legislation and joint agreement the country has strengthened their legal systems. In order to spread their business in the whole world China is taking part in many global trade activities. For maintaining a good legal environment condition for business, China has repeatedly modified the existing law and conducted new laws. Moreover, 30 government departments have changed their regulation towards law in approximately 2300 files. By these changes in law and policies on foreign investment activities China has steadily developed a legal environment which is convenient for foreign business interests. For implementing the law there has been a series of actions and procedures regarding the management, establishment, purchase, investment, reinvestment, liquidation, reform and termination of foreign company. By the help of those policies and guidelines, China seeks to attempt the foreign capital entry. In the year 2002 China established ‘Directory of Guidelines for Foreign – Capital Investment’ for motivating foreign company to invest in their construction industry, agriculture industry and technology industry and resource development sector. China also provided permit to the telecommunication industry, insurance industry, financial industry, service industry and foreign trade sectors. ‘The General Agreement of Science and Trade’ showed 142 services and business enterprises which are grouped under 11 activities. Foreign investors always want a sound legal condition because it allows high return on investment and they want a system which allows them to withdraw their investment capital according to their strategic plan. There are various methods by which the investor can withdraw their capital investment which are: initial public offer, equity transfer, management takeover, liquidation and purchase share back (Feng, 2010). The Political Environment Affecting Business of China Any country’s political condition has a significant impact on business. There are several factors which a country must consider if it wants to expand the business and investment of foreign companies because a political environment of a country is unstable and can change rapidly. The power of political party and government represent the opinion of the country’s citizen. The rules and regulations created by politician have great impact on business. Political condition creates advantages and also disadvantages for certain companies. For example, the policies of Chinese government drove out few U.S. technology companies from making a growth in their business in the technology market of China. Because of China’s huge and growing economy, the U.S. Companies wanted to do business in China. The officials of China wanted to encourage fair trade but in the mean time they acted as protective despotism and favoured the Chinese companies over foreign companies by creating new law which hampered the trade of the U.S. technology companies (Kessler, 2004). Motivation for Investing In China The foreign direct investment in China is quite large. After the U.S., China is the second largest FDI receiver in the whole world. China’s position in foreign investment has gone too far than any other developed country. The total foreign investment in China was 306 billion USD in the year 1979 – 1999. It was approximately 30% of worldwide foreign investment (OECD, 2007). Between 1979 and 1983, the government of China developed 4 SEZs (Special Economic Zones) which offered special incentive for foreign investors. Within these five years their foreign investment was 1.8 billion USD. The foreign investment in China was approximately 2.1 billion USD between 1984 and 1988. This was resulted because of opening of ten new regions for investment. In the year 1992, China brought new policies and laws for motivating the foreign investors. In the year 1998 the newly issued laws fuelled the investment in China and reached 45.463 million USD. In the year 1999 the economic crisis of Asian region had affected the investor and total foreign investment declined to 40.398 million USD (OECD, 2007). Industry Likely To Attract FDI The major part of FDI is attracted towards the manufacturing sector. Almost 60% of total investment was put in this sector in the year 2001. The real estate industry was the second attractive segment for an investor. It had occupied around 15.44% of total investment. The logistic and communication sector covered almost 4.22% of investment; the electricity, water and gas sector occupied about 3.23% of foreign investment and finally the construction industry covered 2.15% of total investment but agriculture sector was only 1.32% (Long, 2011). Figure 1: Percentage of Foreign Direct Invest in various sectors of China in the end of 2001. Sector Percentage Share Agriculture 1.32 Mining 0.41 Manufacturing 59.76 Electricity, Gas, and Water 3.23 Construction 2.15 Geology Investigation 0.39 Logistic and Communication 4.22 Distribution 3.14 Finance and insurance 0.39 Real Estate 15.44 Social services 6.45 Health and sports 0.31 Education, Culture and films 0.19 Research & Development and technology services 0.6 Others 2 Total 100 Source: (Long, 2011). Later the finance industry, telecommunication industry and resale business industry also invested in China. The investment in agricultural sector in China depends on expansion of agricultural products market and ‘industrialized process of production’ functions. Figure 2: Chart showing percentage figure of Foreign Direct Invest in various sectors of China in the end of 2001 Source: (Long, 2011). Almost half of manufacturing industries investment was towards the labour industry. The investment of capital sector of manufacturing industry was 22.7% and technology investment was 26.9% (Long, 2011). Figure 3: Percentage of various manufacturing sectors FDI of China (As per figures of end of 1995). Manufacturing Industry Percentage Share Labour Sector 50.4 Capital Sector 22.7 Technology 26.9 Total 100 Source: (OECD, 2007). From these figures it is clear that foreign investors were much interested to invest in labour sector. The foreign company wanted to take advantage of low labour cost in China. Figure 4: Chart showing Percentage of FDIs in various manufacturing sectors of China (As per figures of end of 1995). Source: (OECD, 2007). Risk and Obstacle Though China has maintained a good legal environment for foreign investors there are several obstacles that block the investing in that country. ‘The foreign investment merger and acquisition’ laws and regulations are not ideal. The laws relating to the procedure of foreign investment which are inventory alteration, acquisition/ divide, rights of investment, reinvestment procedure are not ideal. For regulating the business condition, the legal provisions are not adequate. There is no ‘Anti – Trust Law’. The law of ‘Unfair Competition’ is only meant for the retailers not for the producers. Several government departments are engaged in the laws relating to merger and acquisition, which makes it complicated for many foreign companies to invest. There are a string of regulations and laws of different departments which affect the government policies. Thus, this provides rise to conflicts and confusion among different departmental levels. Another deficiency of foreign investor is that the taxation system is immature in China. Sales tax, income tax and consumption tax in foreign companies are treated as separate units (Feng, 2010). There are many ‘Hidden rules’ in China which provides a negative impact on foreign investors because these rules are meant to be violation of laws and can be applied without any rhyme or reason (Feng, 2010). There are innumerable fraud activities which harm the trust and reliability of sound business environment. Often various attractive incentives are offered to the foreign companies for investment, but later it is found that those incentives are not applicable. An analysis in the year 2003 revealed that approximately one third of investors are badly affected by fraudulent dealing such as failure of loans, breach of contract and production and sales of false products (Feng, 2010). Measures To Reduce the Risks The Chinese government should put much emphasis for improving a good business environment for the benefit of FDI. The government should develop fair legal system for sound business environment. The basic features of good legal environment are appropriate disclosure of information on time and better transparency. For improving the transparency openness can be promoted. In any business, trust is a significant factor. The government and individuals have to act with openness and honesty to regain the trust of people. A strong legal system always has a good effect on business and all investors should abide by the laws and regulations in order to avoid uncertainties (Feng, 2010). National Innovation System of China China has maintained a good financial growth and it is developing at a rapid pace. It has been able to sustain economic, political, environmental and social growth. Economic growth leads to rise in per capita income, provides job opportunity and reduces poverty. China has promoted a good innovation system for expanding their business further. The economy of China is one of the major powers in the whole world. Several foreign investors prefer to invest in China’s market. China’s investment has been largely driven by capital growth. The total productivity growth is extremely high in China. China has developed ‘open door’ policy for every foreign industry (OECD, 2007). The people of China are much educated which in turn create experienced labour and thus increase the development. The development in agricultural industry also have much affect on the financial condition of China. Unlike other countries, China has strengthened their manufacturing industry. The reason is that various foreign investors prefer to invest in this sector. The opening of international business in China has significant role in increasing the market forces and major inflows of FDI. FDI has made China highly competitive and a large export platform for multinational organisations. The welcoming behaviour of China leads to greater competition for other international companies. It helps to decrease the product price and increase the product quality and raise the product variety. It, therefore, tends to strengthen innovation in Chinese business (OECD, 2007). FDI in China has provided opportunity to use new technology. The projects of FDI and their business operation helped to improve the knowledge about advance technology. China had stimulated their advanced technology export. In the year 1990 their exports was 5% and in 2005 this figure had raised to 30%. China exports various technological products such as machineries of office, TV, communication tools and pharmaceutical products. These exports are mainly initiated by foreign–owned companies. The ICT (Information & Communication Technology) industries which operate in Chinese market are mainly possessed by foreign companies and China was the world’s major exporter of these ICT products in the year 2004 (OECD, 2007). Human capital creation and encouragement of using the technology and innovation have important role in future growth. China depends on the supply of foreign technology. China has now increased investment in science and technological industry for making an effective innovation system. Government of China has developed and implemented policies for encouraging science, technology and innovation such as provision of financial support for research and development. In the year 2006 China has developed “The S & T Strategic Plan” for making China an innovative society and one of the world’s greatest innovative economies by the year 2020. It also emphasised the need of ‘home – grown innovation’ (OECD, 2007). Chinese government has spotted certain weaknesses towards innovation: Education in China: The education structure of China is developed towards learning and exam based performance. The education structure should provide much concentration to innovative thinking, creativity and entrepreneurship (OECD, 2007). Competition: The competition is an important motivation for innovation. If a company makes innovation of a new product then it can achieve competitive advantage. In China, the imperfection market often harms the smooth functioning of business. Many illegal conducts or protectionism attitudes of local authorities hamper the proper competition environment. As a result the innovation activity is in a weak position (OECD, 2007). Corporate Governance: The Chinese business organisations were not familiar with innovation activity. Corporate governance motivated the business executives by offering good incentives and consequently developed the decision making procedure in the organisation. This has important effect on innovation of Chinese business industries. Government must offer additional incentive and investment in R&D sector because R&D department can address any failure in business before they occur (OECD, 2007). Financial Support for Innovation: The financial system of China is controlled by the State Banks. Their main function is to provide loan to the big SOEs (State Owned Enterprises). Many SOEs are running business at loss. The banks provide large amount of loan to these SOEs. These loans are considered to be ‘bad loan’. The financial system of China does not fulfil the financial needs of SMEs (Small and Medium Enterprise). It is difficult to secure loan to SMEs because the State Banks support mainly the SOEs. China’s financial authority should decrease the loan supply to those SOEs or it will cause a bad debt in near future (OECD, 2007). Question 1 Do You Think Investing In The Country Is Likely To Promote Innovation? Why? According to Justin Yifu Lin, the director of “China Center for Economic Research”, innovation is three types. First is original innovation, second is integrated innovation, and the third is initiating and absorbing advance technology. China has upgraded its industrial structure for making China an innovative economy (Chinadaily, 2006). There are various reasons for promoting innovation in China: China has surpassed in mobilising resources for technology on an extraordinary level and with exceptional speed and has become one of the key R&D competitors in the world The FDI in China is remarkable which contribute to the rapid economic progress in China Foreign investment in R&D department has increased rapidly. It motivates the other investors to promote innovation. The Chinese firms has innovated and made themselves a successful global brand. They expanded their business in abroad China is major S & T (Science and Technology) competitor in terms of input to innovation. Its expenditure to input had increased from 2001 to 2004 and calculated to be 133.536 billion Yuan (Hui, 2005) China’s innovation was seen to be quite less when judged from output side, but the relevant indicators are growing much faster. These represent increasing efficiency of business firms and focusing on new and advanced innovation such as nanotechnology (OECD, 2007). Question 2 Which Strategies Should Firms Put In Place To Leverage The Peculiarities Of The National Innovation System? Various measures should be taken to improve the innovative performance of China’s business firms. For successful innovation every firm should strengthen their ability towards science and technology otherwise firm’s innovation will face the risk and become marginalised. China has already faced major problems regarding huge population increase, limited energy supply and weakening business environment. By improving the innovation in S & T, China might solve these problems (Boeing, 2010). For improving innovation China can do the following things: Put much emphasis on original innovation and acquire more scientific discovery and technological inventions Provide importance to innovation integration to combine related technologies and form competitive product and industries Utilise the global S & T innovation resources which are existing in an open environment. Chinese firm should promote the interest and adapt advance technology Deploy pioneer technologies, create new market, foster rising industries and arrange basic research to develop the economic condition and business condition in future The firms should form scientific base and technology mechanism and develop ability in conducting reliable innovation to cope with the challenges of the future (Francisco, 2007) Policies regarding Tax, procurement laws, strengthening of IPR and progress of technology can promote further innovation development. China should take economic policy measure for stimulating the progress of labour intensive industry. China should improve the productivity of production capacity to attract high–return on investments. Conclusion China’s strategy for promoting FDI has achieved remarkable success. It built international manufacturing sector which are highly competitive in international market. FDI firms have made China strong in international business by increasing its specialisation in labour intensive products and technology intensive products. FDI allowed new entrants into China’s market and developed the diversification of ownership pattern. Their production has become important part and a determinant factor in opening up China’s business globally. China has implemented many compulsory and voluntary FDI policies. These policies plays important role in improving the export. China’s major emphasis on FDI policy was to introduce new and advance technology. Today China exports large amount of commodity in the international market and is the world’s fastest growing big economy. China attracts billions of Dollars in FDI which help to stimulate the countries economic growth (Guo & Ali, 2005). References Bulcke, F. D. & Beule, D. V. D., 2010. The Global Crisis, Foreign Direct Investment and China. Brussels Institute of Contemporary China Studies. [Online] Available at: http://www.vub.ac.be/biccs/site/assets/files/apapers/Asia%20papers/20100919%20-%20Van%20Den%20Bulcke%20&%20De%20Beule.pdf [Accessed March 08, 2011]. Boeing, P., 2010. China's National Innovation System: An Analysis of Innovative Performance, Key Actors, and Policies. Frankfurt School of Finance & Management. [Online] Available at: http://www.frankfurtschool.de/content/en/ecbc/ecbc_portal/content_files/file35/CBR2010_008_Boeing_Innovation.pdf [Accessed March 08, 2011]. Chinadaily, 2006. China's Innovation Campaign: Dos and Don'ts. News Center. [Online] Available at: http://www.Chinadaily.com.cn/english/doc/2006-03/19/content_545827.htm [Accessed March 08, 2011]. Francisco, S., 2007. National Innovation Strategies in the East Asian Region. National Institute of Science and Technology Policy. [Online] Available at: http://www.nistep.go.jp/achiev/ftx/eng/mat138e/pdf/mat138e1.pdf [Accessed March 08, 2011]. Feng, W., 2010. Legal Environment of Foreign-Capital Investment in China: Current Situation, Problems and Suggestions. Articles Reports. [Online] Available at: http://www.malaysian-chinese.net/publication/articlesreports/articles/1007.html [Accessed March 08, 2011]. Guo, W. & Ali, S., 2005. Determinants of FDI in China. Journal of Global Business and Technology. [Online] Available at: http://www.gbata.com/docs/jgbat/v1n2/v1n2p3.pdf [Accessed March 8, 2011]. Hui, L., 2005. Sub-national Innovation System Practices in China. Ministry of Science and Technology. [Online] Available at: http://www.unescap.org/tid/projects/sisindo_s2_hui.pdf [Accessed March 08, 2011]. Kessler, M., 2004. Chinese Policies Push Some U.S. Tech Companies Out. USA Today. [Online] Available at: http://www.usatoday.com/money/industries/technology/2004-03-28-Chinatech_x.htm [Accessed March 08, 2011]. Long, G., 2011. China’s Policy on FDI: Review and Evaluation. Peterson Institute for International Economics. [Online] Available at: http://www.piie.com/publications/chapters_preview/3810/12iie3810.pdf [Accessed March 08, 2011]. OECD, 2007. OECD Reviews of Innovation Policy. Organisation For Economic Co-Operation And Development. [Online] Available at: http://www.oecd.org/dataoecd/54/20/39177453.pdf [Accessed March 08, 2011]. Bibliography Corne, P. H., 1997. Foreign Investment in China: The Administrative Legal System. Hong Kong University Press. Graham, E. M., 1996. Global Corporations and National Governments. Peterson Institute. Huang, Y., 1998. 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