China and the World Economy - Case Study Example

China and the World Economy Name Instructor Institution Date Chen & Tian (2011) observed that since 1990, China has advanced into one of the world’s fastest-growing economies, a success that The Economist calls the nation’s “great leap forward”. After 1994, the country’s actual GDP per capita developed at an amazing average rate of 12.4 percent annually over this time, whereas real fixed asset per capita grew by 14.8 percent annually. China quickly rose to be the global fourth biggest economy when a real total GDP grew from 542.5 billion U.S dollars to 2.61 trillion US dollars in a period of 10 years, the country followed U.S., Japan, and Germany. The 2005 reports that focused on purchasing power parity showed that China’s aggregate GDP of 8.16 trillion US dollars even surpassed Japan and rose to become the world’s third-biggest economy, behind the U.S. and the European Union. This signifies an outstanding success given that China only ranked No. 10 in the globe in 1992. This quick growth was as a result of intense structural reforms. There are two most significant structural reforms that were put in place in the financial state-owned industrial sector and financial sector (Palley, 2008). The restructuring of the financial sector is commonly referred to as “a crucial element of a long-term growth strategy”, whereas the restructuring of the state-owned industrial sector is commonly perceived to be as one of the main issues in China’s economic improvement. There are several factors that lead to a fast growth of the economy. Foreign direct investment (FDI) is capital that is invested in a nation that offers manufacturing and service abilities for the world and native consumer markets. This has played a major role in China’s rapid economic growth. FDI is the contributory factor in bringing goods and services to the international marketplace. The entrance of foreign investment displays investor confidence in the geopolitical and trade climate of the host nation (Chen & Tian, 2011). Capital Availability At the start of 2000, China surpassed the United States as the world's major beneficiary of foreign capital. The FDI included of capital a foreigner investor is ready to partake in a local sector. Different factors in the global capital markets and the economic situations are very critical in defining the flow of FDI into China. Business environments, capital markets, and a thriving global economy provide favorable conditions for a large volume of investable capital which can be converted to FDI. A lot of investable capital that is normally in excess to local investment concepts can make businesses and private entities to invest their capital in young and emerging markets. Competitiveness According to Autio, Sapienza & Almeida (2000) China has an attractive business environment and it’s preferred for investment because of the resource availability both physical and labor, development of infrastructure, output and workforce skills, and the growth of the business value chain. Such kinds of elements make China more attractive to international business in relation to other countries, such as Brazil and India, which compete for the same investment capital. A developing and growing economy requires a better form of resources and infrastructure in order to enable the sale of goods and services. Fewer transaction costs, because of the maturation of these components, ensure that investors earn big profits on their investments as their businesses can generate profits. Different forms of infrastructures such as bridges, highways and roads should be available, well maintained and offer enough safety for the transportation of goods and services. Another important component for attracting FDI is the presence of low-cost, trained employees who have the necessary skills, proficiencies to manufacture, create and provide goods and services that can compete in global markets (Palley, 2008). Regulatory Environment When the government enforces rules and policies which favor state organization in preference to privately owned businesses, such environment can bring negative impacts that are intended to attract FDI. In reality, the regulatory environment in national governments can either boost or hinder foreign direct investment in China. Too many regulations tend to hamper commercial and entrepreneurial activities, since the owners and employees of firms must spend a lot of money and time to comply with the set rules and regulations. If a proprietor wants to establish a manufacturing firm in China, legal exposure, high start-up costs and other cumbersome unfriendly conditions may inspire that investor establish the facility somewhere else, where the business environment is more favorable to industry (Abramson & Ai, 2009). Other types of rules and regulations include compulsory joint venture partnerships in which, requires the foreign investor to partner with either local venture or government agency. A judicial structure that is biased toward protecting Chinese locals who conduct what are sometimes perceived as unfair, illegal, or unethical business practices can also contribute to making China a less favorable investment destination. A different regulatory factor involves the state's campaign of investment undertakings by offering greater financial incentives such as grants, tax breaks, subsidies and low-cost government loans. Government-sponsored financial incentives provide better environments of making a business more profitable within a short time (Autio, Sapienza & Almeida, 2000). Stability Economic and political stability can enable an entry of FDI. The country’s Stability represents certainty and the opportunity for businesses to gain better premonition into the future. On the other hand, constant social unrest, rioting, rebellions and social turmoil are settings not conducive to business. Economic and political instability can result in hyperinflation, which can make any currency essentially obsolete. China has encouraged FDI, locals /employee and businesses to have a rational basis for respecting Chinese law and order. Criminal activity, violence, blackmail, counterfeit currency and kidnappings have been a major problem in China which undermines the effectiveness of conducting business activities. However, the justice system in China have effective instruments for decreasing, or eradicating, corrupt and rogue elements of law enforcement activities (Chen & Tian, 2011). Business Climate and Local Chinese Market The most conspicuous aspect of China is the total size of its market and population, and the higher chances for growth that occur from such size. The capacity of businesses supported by foreign capital to contact the business to a big local market makes China a good destination for international business. As the Chinese economy evolve, mature and prosper, higher-end sectors such as information technology, healthcare, robotics, engineering, among others, can penetrate into a bigger footprint in China because resources, local conditions and other FDI factors are improved (Abramson & Ai, 2009). Furthermore, FDI and economic growth can start a "success domino effect. When a certain region attracts FDI, there are chances for it to grow. The more a section of the country grows and matures, more investors show interest to provide FDI. This situation highlights the benefit of China's sizeable market, which offers growth changes in the present and prospective business activity. The more FDI injected into the country, the better the economic chain action, offering a positive effect to enhance such growth (Autio, Sapienza & Almeida, 2000). Openness to International and Regional Trade Market openness is an important factor in attracting international trade. The most importance part is a when a business is able to sell its consumer products and services to all the foreign and local markets. If the enterprises in China have few or no access to foreign clients especially the United States, Japan and Western Europe then the local market might not be sufficient to ensure a substantial investment in energy and money (Palley, 2008). More trade barriers like tariffs are normally regarded as deterrents by other countries. Most American products that are subject to high tariffs will not be in demand in China because of the artificially inflated price. Circumstances like these typically result to retaliatory tariffs from bigger economies like the U.S. on Chinese products, or in some cases, an absolute ban on particular goods and services. Export-friendly rules and policies, can play a big role in determining whether to invest in China, specifically in businesses that have a large port of their expected market shares in outside of the region market (Tsang, 1998). While trying to create a more business-friendly atmosphere, international and regional global free trade settlements are normally stated by market-developing governments as practical mechanisms for encouraging economic activity and growth. China’s model of development is experiencing many challenges as the country continues to rely too much on fixed assets investments and export and its economy is still questionable when it comes to steering and innovation. The successful evolution of the Chinese economy from the previous fix investment and export driven growth to the one inclined to consumer-led growth is the greatest challenge facing China’s leadership. It is believed that although China has made huge impact since the beginning of the economic restructurings, it is still threatened by many core difficulties such as moderately low per capita GDP, broadening the gap between urban and rural regions, different regions and between the rich and poor. Economists believe that China’s successful economic change to a more consumer-based economy will benefit both the Chinese people and also bring positive impacts to the world’s economy (Abramson & Ai, 2009). Successful economy progress and change towards consumption-based economy give a lot of opportunities for young enterprise in Europe and give them great opportunity to rebalance the world economy. China has to find a lasting solution to self-reliance problem, and it’s significant to take more into account the interest and expectations of others and try to establish a common ground to grow together. China is experiencing a harder quandary between identity as an emerging power and developing country. With China’s economic progress continuing both the emerging and other economic giants are expecting Beijing to take up a bigger responsibilities in supporting and promoting a sustainable global economy. Consequently, China has agreed with the international community and China sees itself and its association with other main players in the emerging world order (Autio, Sapienza & Almeida, 2000). References Abramson, N. R., & Ai, J. X. (2009). Canadian companies doing business in China: Key success factors. MIR: Management International Review, 7-35. Autio, E., Sapienza, H. J., & Almeida, J. G. (2000). Effects of age at entry, knowledge intensity, and imitability on international growth. Academy of management journal, 43(5), 909-924. Chen, R. Y., & Tian, R. G. (2011). The Economic Connections between China and the US: How to Benefit Both Players through International Trading. Undergraduate Research Journal for the Human Sciences, 10(1). Palley, T. I. (2008). Institutionalism and new trade theory: rethinking comparative advantage and trade policy. Journal of Economic Issues, 195-208. Tsang, E. W. (1998). Can guanxi be a source of sustained competitive advantage for doing business in China?. The Academy of Management Executive, 12(2), 64-73. Read More