Effects of Foreign Direct Investments on China Economy - Essay Example

The Implication Of Foreign Direct Investments (Fdis) In China’s Economy Introduction Foreign direct investment refers to the direct investments made to a businesses or a production process in a given country by companies or individuals from other countries. This exercise is achieved by either buying the targeted business entity or by expanding corporates operations. Foreign Direct Investment (FDI) has gained an intense popularity in in most parts of the world in the past few decades. This has significantly been contributed by the overall change of many countries perception towards foreign investments in their countries. In the mid-20th century, most of the countries in the world used to view FDI as a major threat to the local industries, a factor that led to adoption of liberalized policies that strongly discouraged foreign inflows into their countries (Huang 31). On the other hand, some other countries like China adopted an open door policy that promoted foreign investments, a factor that can be attributed to the intense growth the country’s economy has been experiencing in the past few decades. Many studies have shown that China is currently the major destination of foreign direct investment from many parts of the world. However, Chinese have also been aggressive in making investments in other foreign countries with African region being their major target (Huang 25). This research paper is going to explore the impact of FDIs in Chinese Economy, point out the key determinants of FDIs as well as highlight the future expectation of FDIs in China. Effects of FDI on China Economy Effects of FDI on the recipient countries have been a touchy area of research in commerce, economics and politics (Organisation for Economic Co-operation and Development Staff 56). In this particular area, there are two approaches that are commonly applied namely the macro approach and the micro approach. Macro approach encompasses empirical scrutiny of effects of FDI on the general economic evolution in areas related to creation of employment, business and industry as well as international relationships. On the other hand, micro economic approach focuses on the impacts of FDI on the grass root economy in various sectors like skills development and employment generation specifically establishment of small businesses being highly emphasized on (Huang 40). FDI has helped China a lot in creating good and reliable networks with other major countries and corporates. It has played a major role in creation of employment and enablement of utilization of local resources (Chen 96). Relatively well paying jobs have been created in the country as business organizations start operating from the country whereby the manufacturing industry has created the highest number of jobs. It has also enabled easy transfer or acquisition of important skills and technology and most importantly the creation of an inflow of foreign funds and capital. Most recent studies on the effects of FDI on the local micro enterprises of the developing countries have shown that foreign investment tremendously increases local production (Karlsson and Lundin para3-11). FDI immensely contributes to the China total GDP with sources showing that Foreign Direct Investment contributes more than 20% in the county’s overall economy. According to UNCTAD, construction undertakings, services, telecommunication as well as computer wares are the major sectors that enticed the highest foreign inflows. The same reports showed that the main origins of FDI in China include UK and USA (Karlsson and Lundin para3-11). The continuous growth of FDI in China has continued to expand its economy, a factor that has made western countries re-evaluate their policies. Chinese government has fully allowed FDI in various sectors such as the manufacturing industry and service sector though there are some exemptions. Retail sector is another major area that has been impacted in a great way though FDI is permitted selectively in this industry. As a result, these sectors have continuously grown and are currently among the sectors that are contributing significantly to the country’s GDP. Manufacturing industry has been the main absorber of FDI in China cumulatively taking over 60% of total FDI in China by 2012 (Organisation for Economic Co-operation and Development Staff 50). This is primarily because China offers a conducive environment for manufacturing activities like ample supply of labor, which involve unskilled workforce and mid-level technicians or managers and a rapidly growing domestic market as well as good policies attract foreign manufacturing investment (Karlsson and Lundin para3-11). Within the manufacturing sector, investments in labor-intensive sectors such as footwear, toys, textile/clothing and electronic part/assembly, had been dominant until the mid- 1990s (Chen 39). More recently, however, larger-scale investment in capital-intensive sectors such as automobile, higher-end IT products like semiconductor, petrochemical, and steel projects have increased remarkably. Real estate sector is the second absorber of FDI with about 19% share of the cumulative total (Organisation for Economic Co-operation and Development Staff 53). Determinants of FDI in China Foreign direct investments are influenced by a number of factors such as economic factors, legal environment and political factors among other macro-economic factors (Organisation for Economic Co-operation and Development Staff 98). Most of these factors are covered in economies and are represented by an acronym ‘PESTEL’ (Political, Economic, Social, Technological, Legal, and Environmental). These factors play a major a role in determining how business organizations or even human capital is channeled. Legal, economic and political factors however seem to be like the key determinants of why multinational organizations are investing in China (Chen 69). Political Factors China has been enjoying a cool political climate for many years, an aspect that many people associate to her political system. Being a communist country makes the country enjoy peace and political stability all through unlike many democratic countries that create non-conducive business environment during the election period. Political instability is one of the factors that can instantly cripple economy of a country almost in an overnight. This has happened in various countries like in Africa and in the Arab countries during the political revolutions that were witnessed in Tunisia, Yemen, Iraq, Egypt and Libya just to mention a few. China has put into place systems that ensure that the future of businesses is not determined by the leader who will get into power, unlike other countries like USA whereby every time there is a change in regime investors hold their breath hoping that the new regime would not introduce unfriendly business policies (Chen 74). China has been focusing on building strong political and diplomatic ties with other countries and continents such as Africa, America and Europe. This has been achieved as a result of application of various strategies like the establishment of the Confucius Institute, which is funded by the Chinese government and is meant for teaching Africans Chinese culture, language, and traditions. This has played a key role in promoting foreign direct investments particularly in Africa by the Chinese firms. This has been a soft policy that China has been using in luring African countries and it has proven to be effective (Chen 76). Social Factors Social and demographic factors are also major determinants of FDI in China since China has the highest population on the earth. This large population not only provides cheap labor, but also creates huge market for the manufactured products. Sources have indicated that China and India are the leading countries in terms of providing cheap labor, which significantly reduces the overall production cost. In other countries like USA, production cost is usually very high because of high costs of labor even though the quality of products produced in the US are incomparable to those produced in China. Low production cost enables business organizations to sell their products at a relatively lower price in the international market thus giving them a competitive advantage (Karlsson para1-9). Western countries like USA can only compete on basis of producing quality products and not price. The large population also creates a huge domestic market for the products produced thus encouraging investors to relocate their operations to China. Legal Factors Legal factors can also be termed as a major determinant of FDI in China. Initially, China used to follow conservative policies with the main motive being to protect the local industries and investors. This move of liberalizing its policies hindered economic growth of the country in a very significant way. However, the country’s top leadership and legislatures later came to understand the positive impacts that the country could experience by simply having favorable policies that would welcome foreign investors. About four decades ago, the country started establishing open door policies that were promoting FDI rather than scaring away investors. The change in China’s policies led to a dramatic growth of the country’s economy as leading business organizations started basing their production activities in the country thus creating job opportunities to the locals (Karlsson para1-9). Since then, the country’s economy has been growing at an extremely high rate to a point that it overtook Canada economy in just one year with sources showing that China’s economy might overtake that of USA in about 20 years’ time. Up to date, China is the leading destination of FDI and many investors are eying the country very much. However, the country has poor policies that control issues such as infringement, piracy or in general counterfeit. Some sources refer to China as the main hub for counterfeits. Economic and Technological Factors Economic factors such as cheap labor and availability of huge domestic market is also another main factor that promotes FDI in China as explained earlier. Technological factors like having good transport networks be it land transport network, sea or air transport have also played a key role in attracting investors in the country. China has some of the most effective road network (Ramamurti and Niron 63). The country also has an irregular coastline that enables her to have some of the most efficient ship harbor (ports) on earth. China also has numerous top-class airports throughout the country thus facilitating trade. Availability of reliable sources of power, ample security and internet connectivity as well as having a population whereby a significant percent of it has up to date skills and knowledge are also key factors that have significantly promoted FDI in China and that cannot be overlooked. A combination of all these factors has made many organizations start outsourcing their operations to China particularly business in the technological industry. Availability of abundant and cheap raw materials as well as investors’ ability to penetrate easily into the Chinese market are also termed as other major determinants of FDI in China (Ramamurti and Niron 52). Future expectation of FDIs in China FDI in China has a very bright future as economic experts predict that the current trend of major conglomerates relocating their operations into China will continue. Currently, the country is the leading destination of FDI in the whole world followed by India, and the trend is expected to continue growing even further. According to the report that was released by the Ministry of Commerce of China, Chinas volume of FDI was $8.4 billion in April 2012, which was a relative drop of about 0.7 percent year-on-year. According to the American Chamber of Commerce, China has remained and will remain to be the favorite destination for foreign investors (UN Conference on Trade and Development para2-7). The annual “Business Climate Survey” circulated by the American Chamber of Commerce (ACC) based in China indicates that about 78 percent of US companies still regard China as one of the three major investment regions. The most recent “Capital Confidence Barometer” published by Ernst and Yong, which is a world’s well-known accounting firm, Chinese Mainland is still the most attractive investment region in the world, followed by India, the United States, Brazil and Indonesia (UN Conference on Trade and Development para 2-7). The World Investment Report 2014 that was released by the Geneva-based UN Conference on Trade and Development (UNCTAD) RANKED China as the leading destination of FDI globally whereby China and other Asian countries attracted more than $420 billion in foreign investment last year (UN Conference on Trade and Development para 2-7). Conclusion FDI has been growing at a rampant rate in China in the past few decades making the country experience one of the most astonishing economic growth ever witnessed in history. The key determinants of this tremendous expansion of FDI in the country include political stability, implementation of effective open door legal policies that attract investors, large population that provides both cheap labor and large domestic market as well as having an ample economic environment. China also adopted modern technology with regard to human resource as well as necessary infrastructures and facilities that business organizations require. The future of FDI in the country continues to become more promising as leading business organizations relocate their operations to the country with others outsourcing part of their production to China. Works Cited Top of Form Bottom of Form Top of Form Bottom of Form Top of Form Chen, Chunlai. “Foreign Direct Investment in China: Location Determinants, Investor Differences and Economic Impacts.” Cheltenham: Edward Elgar Pub, 2011. Internet resource. Huang, Yasheng. “Fdi in China: An Asian Perspective.” Hong Kong: Chinese University Press, 2011. Print. Karlsson Shan and Lundin Sjöholm. "FDI and job creation in China - Eldis." Welcome to Eldis - Eldis. N.p., 2008. Web. 10 July 2014. . Karlsson Sune. "EconPapers: FDI and Job Creation in China." EconPapers. N.p., 2009. Web. 10 July 2014. . Organisation for Economic Co-operation and Development. “OECD Investment Policy Reviews, China 2013.” Paris: Organisation for Economic Co-operation and Development, 2008. Print. Ramamurti, Ravi, and Niron Hashai. “The Future of Foreign Direct Investment and the Multinational Enterprise.” Bingley: Emerald, 2011. Print. UN Conference on Trade and Development. "United Nations News Centre - UN reports foreign direct investment hit $1.4 trillion in 2013, upward trend to continue." UN News Service Section. N.p., June 2014. Web. 10 July 2014. . Bottom of Form Read More