Global Enterprise and Innovation - Case Study Example

Global Enterprise and Innovation Introduction The Business Environment of the Republic of China is very exciting from the investor’s point of view. China acquired the appealing Business Environment owing to several factors like its world economic position, the country’s growth capacity, consumption and infrastructural patterns and so on. An estimate made in 2008 reflects that Chinese economy stands second in the world just below the economy of United States of America. It states that being measured on the Purchasing Power Parity basis the Gross Domestic Product (GDP) of China stands out to be at $7.8 trillion. The Gross Domestic Product of China on being measured in terms of Exchange Rate amounts to $4.3 trillion. This figure was stated to rate the third highest in the world after the economy of Japan and United States of America. Estimates made in regards to the growth capacity of China shows that the country grows at rate of 10 percent being measured in terms of average annual growth rate of Gross Domestic Product. In regards to the above fact, China is often regarded as the fastest growing nation in the world. Further, the growth of per capita income of China at the rate of 8 percent measured based on average annual growth rate helps the country to eliminate poverty. Owing to China’s stated economic position in the world it has become an attractive spot for several investors around the globe. Many companies producing consumer goods consider China to be a highly viable market owing its huge population of probable consumers. China offers to its investors a market of 1.3 billion consumers comprised of several minor ethnic groups. Moreover, the country has ventured into several production and service sectors to make the life of its people more sophisticated. The Chinese Government also looks forward to invite huge investment by bettering up of the infrastructural facilities. (Business Environment China, 2009; Kotttoli, n.d.; Ghimire, 2006). However, the Republic Of China lags behind in the promotion of carrying on innovative works. It is observed that the innovation parameters of China have not yet achieved the global mark. China is found to imitate the innovation made by countries like Taiwan and South Korea for its Research and Development infrastructure lags behind these countries. Lack of logistics and infrastructural facilities account for such low innovation growth. (Obstacles To Innovation In China And India, 2006) Main features of the Legal and Political Environment of China It is observed that the legal system of the Republic of China was seemingly unstable in comparison to the legal systems of global countries like Western Europe, North America and Japan before 1949. Moreover, the Cultural Revolution brought about in China in 1976 caused a cease on the teaching of Law in the Chinese Universities. However, the reform movement, which was initiated in 1978, changed the face of the Chinese legal system in an abrupt manner. The happening of the meeting of the fifteenth National Congress of the Communist Party of China in 1997 emphasized on the creation of a socialistic pattern of legal system based on China’s needs. In the meeting held by the Communist Party, changing the legal system was taken to be the “basic strategy”. Moreover, the Chinese constitution was made amended in 1999 to render protection to the rule of law. The seventeenth National Congress meets of the Communist Party of China in 2007 emphasized on the rapid implementation of the rule of law. To this end, the State Council of China in February 2008 reaffirmed the implementation of the rule of law. The State Council in the report on “China’s Efforts and Achievements in Promoting the Rule of Law” stated China’s commitment in implementing the rule of law as the “fundamental principle”. The history of the enactment of Chinese Law starts on May 15, 1996 when adoption of Chinese National Law was made. The Law came into effect from 1 January 1997. Subsequent amendments to the National Law were made during 29 December 2001 and on 28 October 2007. Finally it came into effect from the 1 June 2008. The level of reforms brought about in the legal system enabled China to join the World Trade Organization just within a matter of thirty years in 2001. Joining the World Trade Organization not only helped the country to promote the development of activities in trade and economic sphere but also strengthened its legal stand in the international arena. China in coming with terms to the regulatory policies of the world institutions like the World Trade Organization and International Monetary Fund has conducted widespread regulatory changes in its legal system. It is observed that China within a short span of time has made 3150 regulatory changes in its legal framework. (Lapres & Yuejiao, n.d.). Further in contemporary China protection of the legal interests of the Foreign Investors is rightly emphasized. The modern legal system of China is continually been made stronger through the passing of bilateral and multilateral agreements and other in-house legislations. The Government Departments of China are continually updating the rules and regulations in terms with the international standards. It is observed that 30 government departments in China have issued around 2,300 documents in regards to updating their rules and regulations. Thus, China’s legal framework is observed supporting the cause of the emergence of a market economy, which thereby encourages Foreign Investment. (Feng, 2003). Moreover, the framework of the Chinese legal system comprising of the Constitution, the Civil and Criminal Code, Corporation and Partnership Law and the Law passed for the development of small to medium enterprises all are found to contain clauses catering to the development of Private sector enterprises. Thus, it shows the country’s increased focus on granting legal protection of trade and investment activities both in the national and international scale. (China improves legal environment for private sector, 2004). In regards to the political environment of China, it is found that the transition of China in emerging as a market economy has been triggered by the state intervention. The government of China encourages the role of business activities as freed from state intervention. It desires the business activities to take place in an independent environment free from policy regulations. In addition to the above initiatives taken by the government of China the concept of Laissez Fare or Free Trade is being widely recognized and practiced. Moreover, the Government of China looks forward to decentralization of power. Through decentralization, the local authorities would be granted a greater role to perform. However, the entry of foreign investors in China is still observed to pass through administrative channels. The level of administrative intervention in regards to foreign investment entering China depends on the level of activity pursued and the sector for which it is taken. High amount of foreign investment to be made in a certain sector requires administrative scrutiny largely. Thus, the entry of Foreign Direct Investment in large sectors becomes a delayed act. However, certain business zones do exist in the Republic of China, which requires low government intervention. Thus, the foreign companies should assess the level of government intervention in the sectors before proceeding to make any investment. The China’s political system responsible for making the regulations is comprised of the President’s office, the State Council or the Chinese cabinet and the National People’s Congress or the Chinese Parliament. The eleven-member team of the Chinese Cabinet and the Chinese Parliament comprising of three thousand delegates respectively carry out the passing and enactment of the laws in China. (Political Environment - who are the decision makers?, n.d.; Background Note: China, 2010). Sectors and Industries in China attracting Foreign Direct Investment-An Analysis The secondary and tertiary industries of the Chinese economy are considered to have become the hub centers attracting huge amount of Foreign Direct Investment. In the near future China is looking forward to invite more amount of Foreign Direct Investment in sectors like finance, insurance, telecommunications, energy resources, water and other commercial and legal sectors. Big multinational companies are eyeing China as the center of their research and development activities. To this end, China by now has registered with a number of patents of innovations and technologies. It is observed that the number of patents being registered with China is increasing at an average annual rate of 30 percent from 1990. An estimate reveals that the number of Research and Development centers built in China has crossed the hundredth mark by the end of 2000. The Research and Development centers built by the multinational firms in China are mainly found centered in areas like Beijing, Shanghai and Guangzhou. In the light of increased market completion the multinational corporations think it quite feasible to open up localized Research and Development centers in the key areas. It is observed that the concentration of Foreign Direct Investment in China is mainly centered on the eastern and southern regions of the country. Further observation states that the provinces spread along the eastern coast and the metropolitan cites absorb 90 percent of the total Foreign Direct Investments made in China. The uneven distribution of Foreign Direct Investment in China with spatial concentrations occurs mainly due to three reasons. The first reason for such uneven Foreign Direct Investment distribution in China is due to the government’s role in restricting the entry of Foreign Direct Investment in only four zones. Later however the four zones were expanded to encompass fourteen cities spread the coastal regions. The second reason attributed to such uneven distribution of Foreign Direct Investment is the wide amount of Chinese diversity. Finally, the third reason attributed to the cause of such effect is the psychology of the multinational firms in setting up industrial centers around market areas. Thus, they mainly depend on the coastal and metropolitan cities for their investments. Again, it is observed that the new trend of Foreign Direct Investment is making headway to the Yangtze delta belt for availability of quality labor. (Ali & Guo, 2005: 23-24). An estimate made in 2003 reveals that the share of People’s Republic of China in regards to Foreign Direct Investment has increased from 21 percent in 1999 to 39 percent in 2003. This estimate is however made in regards to developing economies share of Foreign Direct Investment. In regards to the share of developed economies in the Foreign Direct Investment China accounts to 30 percent. (Palmade & Anayiotas, 2004:1-2). A survey conducted on the distribution of Foreign Direct Investment in Chinese industries reveal that the manufacturing sector in China occupies the highest portion contributing about 60 percent of Foreign Direct Investment absorption. It is followed by the real estate sector, which absorbs about 24 percent of the Foreign Direct Investment. Finally, the wholesale, retail and logistics sector absorb only 6 percent of the Foreign Direct Investment. It is further observed that the labor-intensive industries like textiles, furniture and food-processing industries in China contribute to about 30 percent to the total 60 percent absorption of Foreign Direct Investment by the manufacturing sector. On the contrary, technology and capital intensive industries like engineering and pharmacological companies absorb the remaining 30 percent of the Foreign Direct Investment. The above fact thus reflects on the Foreign multinationals to gain the advantage of cheap labor economies in China for readily investing in labor-intensive sectors. (Tseng & Zebregs, 2002: 4-5). Motivations and Obstacles for Multinational Firms investing in China The main motivations behind the multinational firms in investing huge amounts money in China rests mainly on three factors. Firstly, the economic factors like size of the market, abundance of labor at low cost and infrastructural facilities all contribute to the flow of Foreign Direct Investment in China. The increasing size of the market understood by the growth of Gross Domestic Product in the Chinese economy is considered to be a triggering factor for increased Foreign Direct Investment. Similarly, the prevalence of cheap labor in the Chinese economies also motivates the foreign nationals to invest more in China. It is because the multinational companies earn the benefit of low labor cost for low wage structures. It helps them to generate more revenue. Moreover the infrastructural facilities obtained by the multinational firms while investing in coastal areas also acts as a motivational factor in rendering huge investments. The multinational corporations feel that they can get easy access to markets by investing in metropolitan cities and coastal areas. Secondly, the role of policy guidelines framed by the Chinese government in reducing the barriers to the entry of Foreign Direct Investment in China is also considered to be one of the motivational factors behind the heavy flow of Foreign Direct Investment in China. The government of China observes that increased flow of Foreign Direct Investment to the country would also bring in technological and process innovations and expertise. The export sector would be further strengthened due to the above effects. Moreover, the government also reduced the levy of taxes on foreign funded enterprises and also created an Open Economic Zone to that effect. The Open Economic Zones created by the government of China have the autonomy to import and export goods without paying any duty and also can commute goods freely amongst each other. Thirdly, the easy flow of Foreign Direct Investment in China is also based on the huge amount of culture and ethnic diversity in the country. The Chinese population of 1.3 billion people comprises of several minor ethnic groups residing in Taiwan, Hong Kong and Singapore. This accounts for inviting huge amount of Foreign Direct Investment. (Tseng & Zebregs, 2002: 8-18). Looking at the obstacles framed by China in deterring the flow of Foreign Direct Investment it is observed that some sectors have been made immune by the government in regards to receiving Foreign Direct Investments. Industries where the Chinese nationals have a larger share or play a principal role it is made immune to such foreign investments. Key strategic industries like nuclear power sectors, key infrastructural projects like construction of airports, railways, water and gas resources are also made immune to foreign investments. Similarly, technological and medical advancements are kept apart from being entered into by foreign nationals. On the legal standpoint the use of arbitrative measures to settle the disputes rather than taking court help has also deterred the foreign multinationals to make investments. (Tseng & Zebregs, 2002: 13,18). Moreover, other factors like high amount of employee turnover in the Chinese industries have also led to the foreign multinationals in being deterred in making investments. The Chinese nationals are also found to have low innovative mindset and also lack the initiative to participate voluntarily in research activities. Bureaucratic interventions and Language barriers also are found to deter the flow of Foreign Direct Investments in China. (Gassmann & Han, 2004: 431-434). Risks for Foreign Companies in entering China In the previous days, the element of widespread nationalization in China was considered as one of the risk factors for foreign direct investments. The element of nationalization clubbed with the absence of a legal framework resulted in political chaos. However, in the later stage with the drafting of the constitution the element of risk minimized for granting legal protection to the foreign multinationals. However, China reserves the right to nationalize the foreign funded enterprises for strategic reasons. The Chinese government compensates for the same. However, in regards to an American company it is found that compensation paid for the assets acquired amounted to only 41 percent. The Chinese constitution also grants the right in taking over an enterprise deemed to fit public interest. This also accounts for a threat to foreign multinationals in making investments. The change of economic policies of China in regards to industries and enterprises having sought foreign collaborations can seriously affect the position of the multinational firms. (Shoushuang, 2007: 109-116). Thus, the foreign multinationals must safeguard themselves from investing into sectors concerning public interests to minimize the risks of making investments. National Innovation System of China The national innovation system of China entails the following features. Firstly, the innovation capacity of China flows from the East to the West part of the country. Secondly, there is a noticeable imbalance in the innovation capacities of the different regions. Thirdly, it is found that the coastal provinces of China reflect strong innovation expertise. Finally, there reflects a huge difference in the innovation capacities of the different regions in China ranging from the east to the west. (Hui, n.d.: 16). The effect of Foreign Direct Investment in regards to promoting innovation in China is found to be positive. It is seen that the rate of innovation in regards to the firms having access to foreign direct investment surpasses that of other firms not having access to proper finance. The foreign direct investment made in China is carried out to foster better Research and Development initiatives. (Girma, Gong & Gorg, 2008: 18). China has developed special Science and Technology programs to develop the province of West China, Xinjiang Province and the industrial area of North-East China. Moreover, China also developed the torch program to help cater the high, medium and small sized technological concerns. China also developed the Spark program to cater to the Science and Technology needs of the rural areas. (Hui, n.d.: 25-26). Conclusion The People’s Republic of China is found to be a large absorber of Foreign Direct Investment funds. This owes to the opening up of China in transforming itself as a market economy. China brought about necessary regulatory changes in its legal framework keeping in tune to the policies of World Trade Organization. This helped the foreign multinational companies foster their research and development activities in China. The research and development units mainly were established in the eastern coastal and metropolitan areas. This happened for the foreign multinationals got the advantage of cheap Chinese labor and access to wider markets. However, the foreign multinationals suffered some drawbacks owing to language, bureaucracy, cultural and legal problems. Bureaucratic control though leveraged in regards to foreign funded enterprises changed often mostly in regards to sectors of national interests. The sudden nationalization and taking over the enterprises made the foreign nationals suffer heavy losses. Moreover the legal system being traditional rested on arbitrage agreements and avoided the courts. This practice also deterred the foreign multinationals in making investments. However, still most of the research and development units of key foreign multinationals do foster in the Chinese environment. References 1. “Business Environment China”, (2009), jyschinabusiness.com. Available at: http://www.jyschinabusiness.com/news/business-environment-china.html (accessed on November 11, 2010) 2. Kottoli, A. (n.d.). Business Environment in China. Available at: http://www.slideshare.net/kvarun/business-environment-in-china (accessed on November 11, 2010) 3. Ghimire, B. (2006). Business in China. Available at: http://www.google.co.in/search?sourceid=chrome&ie=UTF-8&q=china+%2B+business+environment (accessed on November 11, 2010) 4. “Obstacles To Innovation In China And India”, (2006). Bloomberg Business Week. 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Hui, L. (n.d.). Sub-national Innovation System Practices in China. Available at: http://www.unescap.org/tid/projects/sisindo_s2_hui.pdf (accessed on November 11, 2010) 16. Girma, S., Gong, Y. & H. Gorg. (2008). Foreign Direct Investment, access to finance, and innovation activity in Chinese enterprises. Kiel Institute for the World Economy. Available at: http://docs.google.com/viewer?a=v&q=cache:uEH9aDeMlMoJ:citeseerx.ist.psu.edu/viewdoc/download%3Fdoi%3D10.1.1.163.7143%26rep%3Drep1%26type%3Dpdf+foreign+direct+investment+in+china+%2B+help+in+innovation&hl=en&gl=in&pid=bl&srcid=ADGEEShuGpnrzGssRWtca-F74ZXXmf_0V_D-5iH1gdlN10bH-ZoQ3MxEyZXbPOkSwtoCNqcLfVwUfqPUuX9BVhvetSasqmoyUaoSX0_kdhd4lH55ZbdtsHw42cotfpUbFsBYRL1zforp&sig=AHIEtbQd4ySwXXzaqQKf2Yn6FMhD7ATlRQ (accessed on November 11, 2010) Read More