Foreign Investment in China and Its Effects on Economy and Chinese Workers - Assignment Example

FOREIGN INVESTMENT IN CHINA AND ITS EFFECTS ON ECONOMY AND CHINESE WORKERS By Insert Name Institution Instructor Date Executive Summary The foreign direct investment into China has risen to 6% from the last year’s growth. The major contribution of the rapid foreign investment into china is the rising economic growth. There is increased investor confidence because China is creates an enabling environment for investors. The ministry of commerce in China indicated recently that incoming direct investments into China reached $800 billion by the end of the year 2012. Foreign direct investments are expected in the coming years because of the investor confidence on the competitive of China’s economic growth. The majority of investments into China come from Asian countries but other countries that are showing great interest to invest in China include the United States of America, European countries and Australia. China’s economy has been ranked as the world’s second largest in the previous years and there are possibilities of much improvement. Due to the rapid foreign direct investment into china, there have been a labour laws control measure which affects the Chinese workers positively. The labor laws analysis is meant to regulate foreign investors on the issues of employment and protection of the Chinese workers in the industries. This has direct impact on both Chinese workers and the economy. The rate of unemployment is being reduced by foreign investment into China and this impacts to the economy positively. Workers are protected from any abuse of the foreign investment institutions by ensuring that there are proper rules and regulation governing employment. The Chinese government has also given a percentage of foreign workers and the percentage of local workers in foreign businesses in China that must be followed. All these labor measures are meant to protect workers and boost the entire economy of China as a country. Table of Contents Content Page Executive Summary----------------------------------------------------------------------------------- 2 Table of Contents-------------------------------------------------------------------------------------- 3 Introduction ------------------------------------------------------------------------------------------- 4 Effects of Foreign Investment on the Chinese Economy---------------------------------------- 4 Comparative Advantage------------------------------------------------------------------------------ 5 Effects of Foreign Investment on the Chinese Workers----------------------------------------- 6 Analysis of Labor laws and its effects on Chinese workers------------------------------------- 9 Effect of Labor laws on the Economy of China-------------------------------------------------- 10 Chinese Workers Advantage ------------------------------------------------------------------------ 11 The Chinese Development Advantage ------------------------------------------------------------- 12 Conclusion -------------------------------------------------------------------------------------------- 12 References ---------------------------------------------------------------------------------------------- 14 Foreign Investment in China and Its Effects on Economy and the Chinese Workers. Introduction China has become a home for investors from all spheres of the world and a good example is the introduction of “Iphone’ Nintendo 3DS Company. There are a number of factors that have contributed to this and among them include: economic stability and rapid growth, market expansion, sound labor laws, political stability and competitive business environment among others( Zhao & Chan 2012). The aim of this paper is to discuss the effects of foreign investment into China on the economy and the Chinese workers. Also it looks into the analysis of the labor laws and how they affect the economy of China and its workers. Of much importance as well are the benefits of the foreign investment on China and its workers. The paper concludes by summing up the benefits of foreign investment on the China Economy. Effects of Foreign Investment on the Economy of China For the last 10 years, the foreign direct investment (FDI) into China has been the success story of the rapid economic growth. 20 years before the investors began to venture into China, the economy was staggering and in fact China was ranked among the developing countries (Third World Countries). In the previous 10 years, massive foreign direct investments have been witnessed in China and now China is the second largest economic leader in the world. In the year 1990, the stock of Foreign Direct Investment (FDI) in China was less than $19 Billion. Due to increase in foreign direct investment that was witnessed between 1990 and 1999, the stock of the in word FDI rose to $300 Billion at the end of 1999 (Lipsey & Sjöholm, F2011). Recent Statistics indicate that at the end of the year 2012, the inward FDI stock of China has rose to $800 billion. Among the major contributors include the recent introduction of the “Iphone””Nintendo 3DS companies into China. This rapid increase of FDI into China has made it to be ranked as the second largest economic leader in the world and among the APEC nations. It has been indicated that only the United States of America holds the larger stock of inward FDI. The Foreign Direct Investment (FDI) into China mainly is made of Greenfield investment while in the United States of America the FDI inwards is majorly made of takeover of already existing enterprises or business. The greater percentage of FDI into China is from the Great economic pillars of Asia including Japan and Hong Kong. Hong Kong now is a self governing body in China. Most FDI into Hong Kong in fact are from western countries but they count to the FDI into China since Hong Kong a part of China Republic (Deng, Falvey & Blake 2012). Japan also is a powerful economic country and it has invested heavily in China leading to the increase stock of FDI into China. Other major FDI in China originates from countries like Taiwan that is placed into the republic of China through its intermediary; Hong Kong. Nations investing directly to Taiwan have a direct positive impact on the FDI into China. Comparative Advantage Official sources reveal that between the years 1992 and 1996, most the FDI into China came from developing Asian countries. As from the year 1999 onwards, other countries began to show interest to invest in China among them are United States of America, Europe and Australia. The later FDI into china has been greatly influenced by the concentration of Export Processing Activities (EPA) in China in which China has shown much comparative advantage in. The previous FDI into China from Asian countries was due to domestic market sectors in which China revealed no comparative advantage. This is a clear indication that the rising percentage of FDI into China from Japan, Europe, USA and Australia is due to Export Processing Activities (EPA) in which China has shown much interest in. The econometric test shows that those provinces of China that have been heavily dominated by the inward FDI have increased the total factors of productivity growth. The Foreign Direct Investment into China has greatly contributed to the rapid economic growth making it the second economic leader in the world (Jeon, Park & Ghauri 2013). Effects of Foreign Investment into China to the Chinese Workers China has the largest population of people in the world. This brings a big challenge to the Government of the Republic of China in ensuring that people live above the poverty line. Creation of job opportunities is essential to curb this challenge. But the increase rate of the Chinese population is alarming and this calls for maximum attention. Statistics show that over 65% of the internal migrants to China constituting 85.2 Million people who have no household registration to access formal employment. This increasing number is bringing job creation to a halt in China. Sources indicate that employment rate decreased from 73% to 62 % between the years 1995-2000. China’s major local employments sectors include manufacturing and agriculture. The local manufacturing industry in China employs about 98 million people and the agriculture sector employs about 20 million people. These two sectors alone can not maintain employment needs because it leaves over 100 million without employment and that is alarming (Deng, Falvey & Blake 2012). However, in the last 10 years, Foreign Direct Investments into China is trying to solve the unemployment problem through the creation of job opportunities. Introduction of the investing companies like “Iphone Nintendo 3DS”, 3Ds and other foreign manufacturing and service industries are trying to curb this problem of unemployment. The inflow of FDI has led to the expansion of the Chinese market and improved technology that has enabled people to access employment opportunities. The introduction of new industries and establishment of foreign firms in China has increased employment through partnering with the local firms through the buying of the locally produced products and services. The local firms are adapting the new ways of doing things from the investing foreign industries like the use of technology, management and employee training. This has previous had a positive impact on the local firms because they are expanding and hence increasing the job opportunities. The adaption of technology has recently seen local firms penetrate both in the internal and the external market. That has been made even possible because the foreign firms have taken the initiative to train and educate the local industries to produce high quality inputs to be used by both upstream local and foreign firms. This initiative has an impact of expanding local firms to create more employment opportunities. However, another significant effect of the inflow of the FDI in future might be the decrease of employment in the local firms. This may happen if the foreign markets exert much competition on the local firms to push them out of the market or force them to reduce their workforce. However, the downsized employees by the local industries may end up being absorbed in the competitive foreign firms but the labor replacement costs will have adverse effect on the economy of China. The replacement costs will be incurred because downsizing of employment of the local industries will stagnate economic activities for a short duration. There are two factors that will make foreign industries to force local firms to downsize their employment. One factor is that the foreign firms advanced technologic wise and may have greater competitive advantage compared to local firms thus winning over the local firms. This will force local firms to downsize their employment in order to reduce expenses to enable the continue existing in the market. Another factor that will force local firms reduce employment is the fact that the foreign firms may offer attractive wages to attract experienced and resourceful employees. Local firms due to economical instability they may not counter this trick by increasing wages too. Instead, they will be forced to lose employees since they will move to greener pastures in the foreign firms that have invested in the company. A good example is the case of Pricewater House Coopers, an international Audit firm that has invested in China’s Capital cities. It offers attractive wages to competitive remunerations to qualified Chartered Certified Accountants. The company has managed to scoop the top most brains in accountancy field leaving the local accounting and audit firms struggling to exist in the market. These replacement costs from domestic firms with foreign firms have had a negative employment effects because the foreign firms are capital intensive and the local firms are labor intensive. Regardless of the replacement costs, the foreign firms are important employers. However it can not just be concluded that they are potential job creators if they continue shifting employees from local firms just by offering attractive wages and having the competitive advantage. Recent statistics are showing that the local firms have started showing negative employment growth due to employee replacement. However the foreign firms are showing a positive improvement in the employment sector. However, the foreign firms are advised to create more employment opportunities by expanding their operations to increase the number of opportunities to employees rather than offering attractive salaries to win employees. Local firms are also encouraged to update themselves with technology to compete favorably in the market for them to increase employment opportunities. FDI Effects on the Chinas Market Structure It is evident from the discussion above that most industries in China are from foreigners. The foreign industries accounts for a substantial share of the China’s economy. These firms have a large impact on the structure of the Chinese Industry. This has led to the imposition of strict start up measures of foreign industries into China to regulate the foreign industry. Foreign industry has promoted competition between both local and foreign industries hence promoting quality production. The negative impact due to competition is that some of the local industries are pushed out of the markets by the well established foreign firms and the replacement costs on employment. Analysis of Labor laws and its Impacts on Chinese workers In the year 2008, China enacted a new Labor Contract Law aimed at protecting employees. Since the enactment of this new law, there has been a great impact on the treatment of employees in China and now the Chinese employees are aware of their rights. The law has ensured increased employees’ wages and work conditions. Due to the effect of the New Labor Law, some foreign companies to quit China because of the increased employers’ cost in ensuring employees’ comfortability in terms of working conditions and attractive wage payments. These are some of those manipulative companies that never to took into consideration the welfare of employees and never provided a conducive working environment. The new Labor Law ensures that every company has a conducive working environment, insurance of employees, attractive wages and takes regard of the general welfare of the employees. This law has increased the cost of running a foreign investment in China and as a result some foreign companies have opted to quit China and move to countries where there are no strict labor contract laws. Most of the quitting companies are not profitable enough to withstand the increased cost of running a foreign investment in China. Initially before the new Labor Law was enacted, there was massive abuse of employees all over China especially by the foreign companies. There were rampant labor disputes especially between 1995 to 2006 and this caught the attention of the public and led to public demonstrations. Majority of the labor experts in China during that time argued that labor laws that were in place were not adequate enough to protect Chinese Employees and could not solve the employee disputes that were being witnessed. Because of these concerns, the labor law to address the employee disputes. This law managed to enable accesses their rights way of them for maximum employee satisfaction to create harmony in the greater society. Currently in China, with the ne Labor Contract law in place, the Chinese workers can not hesitate to move to courts to demand for their rights in case of any violation. Currently the Chinese employees know their rights and they have an opportunity to seek justice from the courts of law within China. Companies in China are also embracing the new law by ensuring implementing it. The Effects of the New labor law on the economic development The china Economy has been slightly affected by the introduction of the labor laws between 2008 to 2013. It can be argued that the new law has imposed increased costs of starting and a running a foreign company in China. Meeting employees’ needs may be said to be an expensive affair for companies. This law in return might be said that it has discouraged some new inward FDI into China. However other foreign companies especially those in the manufacturing have moved out of China to seek pastures in other countries where Labor Contract Laws are not strict. This has slightly affected the economy of China between the years 2009-2010 (Arnold & Quelch 2012). Interestingly, since most developed countries embrace labor laws, still more FDI are recorded to continue flowing to China. A research carried out by the Ernst & Young shows that since the enactment of the new Labor Law since the year 2008, China has been able to attract more investors and a total of $42.7 billion in FDI has been achieved. This is so because more foreign investors are embracing the new law and that the law creates a friendly environment between employers and the employees’ hence promoting productivity. The new can be said that it has contributed to economic development of China. The Chinese Workers Advantage; Income Law and help employment The most important contribution foreign investment in China is the creation of employment to Chinese workers. Also the enactment of the Labor Contact Law has ensured that the income of the Chinese workers is sufficient to meet their needs. Zhao & Chan 2012). The la ensures that all employees are favorably paid according to the work they do. The FDI into China has helped a lot to curb the unemployment issue. Chinese employees are now more informed than ever regarding their rights. They get income based on their experience, expertise and education background. Contrary to the begging when employers abused them regardless of their experience and expertise. Chinese workers now are able to earn an income that can sustain them. Incidences of unemployment have also declined to a greater deal. The Chinese Development Advantage; Increased in Revenue and reduction in Crime The FDI into China has greatly played a very important role on the economic development of China. The FDI has enabled China to be ranked as the second largest economic leader before the United states of America. Experts are saying that there are indicators that few years to come, China might emerge to be the largest economic leader in the world. The foreign investments into China have greatly increased revenue collection in. Now, China can record great revenue which is as four times as big as it was 10 years ago (Seth & Yaprak 2012). The incidents of crime have also reduced. This shows that the large number of those people who engaged in crime activities were among the unemployed. Since there are more employment opportunities generated by foreign investors in China, the majority are employed. There is no more room for idlers to engage in crime. In few years to come, china is going to be ranked as the highest revenue generation earner in the world. This is because of the large inflow of foreign investors flocking into China. Also the local industries have come up to appreciate technology and they are penetrating both internal and external markets (Resmini and Iulia 2012) Local industries also contribute much revenue to China. Conclusion Foreign direct investments into China have proved to be one of the most important pillars of its economic growth. The new Labor Contract Law has also encouraged more investments into China than those leaving. Most importantly, the Chinese workers are well protected from any form of manipulation by the foreign firms. They know their rights and incase of any violation they are able to seek justice from the courts (Ramasam & Matthew 2012). Generally, China as a nation has made great strides to economic development and in few years to come, USA might follow from behind. It has proved to the developing countries that economic development is possible if they set standards that will favour foreign investments in their respective countries. Foreign investments into a country can as well solve greatly the unemployment problem and help people to upgrade their standards of life. China has proved the above statement by recording a wonderful record of economic development and the reduction of unemployment rates as a result of encouraging foreign investments. Reference List Arnold, D. J., & Quelch, J. A. 2012. New strategies in emerging markets. Sloan management. New York; International University Press. Deng, Z., Falvey,R. 2012. Market Access to China. Foreign Direct Investment to China. 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