Chinas Economic Growth, Its Entry to the World Market - Case Study Example

liсiеs Аnd Strаtеgiеs Оf Grоwth Name Institution Date Thе Соntехt and Сirсumstаnсеs Рrеvаlеnt In Аny Nаtiоn Thаt Shоuld Dеtеrminе Its Роliсiеs Аnd Strаtеgiеs Оf Grоwth Introduction The essay will discuss and explore the statement from the book India, China and Globalization written by Piya Mahtaney which was published in 2010. The statement was extracted from page 159 of the book and it states that … “it is the context and circumstances prevalent in any nation that should determine its policies and strategies of growth” . This statement tries to relete the context and circumstances of a country to the general economic growth of the country including its policies and strategies for growth. It establishes and tries to determine if the context and circumstances in a nation can directly affect its growth. This essay tries to establish the truth that the context and circumstances of a nation determines its policies and strategies of growth, where policies and strategies of growth are plans, rules or reforms put forward to determine the outcome or future of a country’s economic growth. Although both India and China have embraced globalization and have managed to improve their economies over a short period of time, this essay illustrates and discusses China’s economic growth. It discuss in details how the prevailing circumstances and context in China have determined its policies and strategies. The essay will also discuss China’s economic growth, its entry to the world market, export trade, policies and reforms in china and foreign investment in China-how China attracts foreign investors and how it keeps them there. The essay will also discuss some of the lessons that other countries can learn from China. China has been the world’s fastest growing country with regard to its economy. It has been the fastest growing country over the last quarter of a century reaching the double digit growth rate. Its economical growth is directly affected by the policies and strategies that have been put forward by various stake holders which affect and safe guard the economy growth. China is currently on the rise to a super power competing with the U.S economically. The fast economic growth which is largely supported by the policies and strategies put in place has led to a large percentage of poverty reduction and great improvements in the human development indicators (UNDP, 2005). Poverty reduction has been supported by the increase in employment opportunities which has happened because of the fast rate increase in industrialization and industrial revolution. Many investors from different countries headed to China to invest in different industries and this led to China entering the world market. When China first entered the world market, mixed reactions were expressed by different countries especially the first world countries like the U.S and U.K. When selling to the U.S, China’s status of the most favored nation was threatened. The country potentially faces substantially high duties and this diminishes shares in its important markets. Environmental policies such as antidumping suits by the U.S and European producers stipulated that Chinese exports are of poor quality and are subsidized. Such allegations have led to poor business and political relations between China and Hong Kong. Commerce with Taiwan has also been put at risk although it has significantly been growing over the years but the rules still remain unclear. The countries’ own reform process leaves much to be desired. Although China faces all these challenges especially with international policies and strategies, it still managed to enter the world market and has survived for a long time. China’s market share especially in the fashion world which includes garments, shoes and even toys has greatly increased. The fashion industry has been able to maintain lower prices with labor intensive strategies which have helped it become the world’s most dominant exporter and rapidly value added and higher quality products. Both country’s government and private stakeholders have worked together in building resources that will boost the economy. They have invested in roads, railways, airports, ports, energy and telecommunication and this has led to easy transportation of products. This also reduces dependency on foreign infrastructure. Educational standards and attainments have been improved and internal training in factories and companies has helped in laying down foundation for long term basis for continued and sustainable growth. China’s positive drive is the citizens’ strong belief in the country’s systems. Although, the policies, strategies and regulations are not perfect, the people of China still believe in their systems. Reform agendas have been put forward over the years and most of them were implemented and brought forward great results. The China government and other stake holders decontrolled prices from obligatory targets to greater price signals in determining firm and lucrative output and investment decisions. Decision making process was made easy and faster through giving the local government authority in decision making. This in return gave firms, factories and companies full autonomy and authority. Rules and regulations on taxation hinder the full growth of the country’s economy. Lack of transparency in rules and procedures and corruption are also a challenge. (Cappiello and Ferrucci, 2008) The country’s economy is suffering because of rigidity and complexities in its labor force and markets-both input and capital markets. There is also a major challenge in the education sector and other infrastructures. Lack of policies and procedures in these sectors is what leads to this challenge. The reform process has released a set of enterprises. The economic growth of China continued despite of the complexities and inefficiencies in the systems of operations. In order to keep pace with the changing world of economy, local governments in China are finding ingenious ways of circumventing the complex system of rules. Firms have found ways of improving their flexibility by forming closely related companies through splitting up investment projects and bringing them under one umbrella which allows the governments to approve the projects. This has helped the firms to gain favorable treatment from the government. Although this might be wrong in other countries, in China it is seen as a perfect strategy. China is one of the countries in the world with the largest economy. In 1979 exports share of the GDP was 5.5% and ten years later the GDP had grown to 12.6% (Fischer, 1991). Many countries always wonder how exports can lead to such great economic growth. The trick, for example in the case of China to use exports as the only main tool that provides a link between the country and international sources of technology and marketing information. The Chinese authorities also point out that their local or domestic market is small and so they need to rely more on export. (Vogel, 1989) The reduction of the local Chinese market is forced through the growth of local self-governance of firms which makes the authorities overzealous in protecting the local markets. International markets have well been used by Asian governments such as China to improve their economy. China also saw an opportunity in international market and decided to trade with outside world so as to embrace globalization and top up the scales of their economy. The rise in wages and land costs is reducing competitiveness in labor intensive products in Eastern Asia. Development of long term market links and infrastructure improvements creates a bigger advantage in economy growth. In other Asian countries, firms have accepted the lower profitability that they get from exports as compared to domestic market and their governments have been willing to reduce export activities. (Lardy, 2011) In China, the system of pricing for both the domestic and export market has not been easy to make loose. The rigidity and complexity in the matter is too grand. The government allows the foreign funded exporters to access imported materials and equipments duty free while the foreign equity holding gives a free pass for firms to export directly and also allows them to choose export prices. All this freedoms of trade have helped in boosting the country’s economy through exports because it allows exporters to be priced at levels that are below domestic prices. Exports has been promoted and supported through targets, explicit and implicit subsidies. There is a government organ which sits down with the enterprise and agrees on the share of output to be exported although the shares tend to vary from one company to the other but they usually range between 50 to 80 percent. (Crane, 1991) Exporters are still provided tax reductions and breaks when they trade in specific areas. The tax incentives are generally reserved to foreign funded businesses although state owned companies can enter into joint venture partnerships with dormant firms for them to enjoy the benefits. This system of export targeting is expected to seize since the explicit subsidiaries are being phased out and also threat for the implementation of price reforms but tax incentives will take a while to phase out because it is used by the government as a means of attracting more foreign investors into the country. Most enterprises in the country view export as a long-term investment as compared to domestic sales. Through participating in international markets, the firms expect to increase the quality of products which will eventually raise the profits. Local markets are small and consumers are not very selective, so this does not allow learning or exposure which export markets provide for companies growth. According to World Bank (1990), foreign investors are attracted to China because various factors like the stability and complexity of rules. Investors have managed to work around the rigid rules. They made less investments during times of reform retrenchment but have managed to expand faster in favorable periods. Most of the firms which have survived have learnt to work with the policy instability and the rigid rules. The second factor which attracts investors is the labor force in China. China is recognized worldwide as one of the countries which have low waged labor costs. This is usually the main and obvious attraction of investors into the country. Most firms use cheap labor for highly labor intensive places. Over the years, this factor has been challenged because wages have significantly increased in parts of the coastal region of the country. Countries like Thailand and Indonesia for example offer equally low or lower wages than China. The third factor is incentive policies. China provides tax incentives to foreign investors and this has led to a great increase of investors over the years. These preferential policies includes preferential tax rates, duty free import of machinery and equipment, repatriation of profits, duty free import of raw materials and preferential land use terms and rates. This incentives and tax rates do vary from one location or province to the other. Different cities and provinces try to attract investors by minimizing these rates. It has emerged to be a competition between cities. The fourth and last factor is foreign investors themselves. Foreign investors attract other foreign investors. Foreign investors are guided and directed by hope as much as by monetary incentives and infrastructure. (Feng, 2007) Conclusion China has succeeded in competing with countries like Malaysia, Philippines, Thailand and Indonesia for quality foreign investors. China’s ability to attract more foreign investors is very impressive. Currently, the number of processing firms is about 10 times the number of joint ventures. Ines land the processing industries, China provides land and labor while the investors provide expertise, equipment and technology. Raw materials are imported by investors and they also play the roles of marketers for the final products. Countries which are working at building their economies as China has should consider some of the factors that China has used in attracting investors. They should copy the amount of freedom that China gives to its foreign investors. Less rules and restrictions with regard to export commitment and ownership. Special economic zones in cities should be established and this will help in bringing together wealthy investors from around the world and become the sight of industry agglomeration. These economic zones will boost infrastructure development and investment. Countries need to experiment through human capital and labor force, infrastructure and institutional structures for them to realize and maximize their profits and their economy at large. References Cappiello, L. and Ferrucci, G. (2008), “The sustainability of China’s exchange rate policy and capital account liberalisation” Crane, George T. (1991). “Reform and Retrenchment in China’s Special Economic Zones”, in U.S. Congress. China’s Economic Dilemmas in the 1990s: The Problems of Reforms, Modernization and Interdependence. Washington, D.C.: U.S. Government Printing Office. Feng Y. (2007), Productivity growth in Chinese economy and industries, Recent Development in the Chinese Economy, NOVA Science Publishers, Inc. Fischer, William A. (1991). “China’s Potential for Export-Led Growth”, in U.S. Congress. China’s Economic Dilemmas in the 1990s: The Problems of Reforms, Modernization and Interdependence. Washington, D.C.: U.S. Government Printing Office. Lardy, R. N (2011). Sustaining China’s economic growth after the global financial crisis. New York. Mahtaney, P. (2010) India, China and globalization: the emerging super powers and the future of economic development. Malaysia: Center for academic information services The World Bank. (1990). “China: Direct Foreign Investment.” World Bank. UNDP (2005). Human Development Report. New York: Hochestetter Printing Company Vogel, E.F. (1989). One Step Ahead in China: Guangdong under Reform. Cambridge: Harvard University Press. Read More