The Market Economy of Small and Medium-Sized Enterprises in China - Literature review Example

Introduction Small and medium-sized enterprises (SMEs) contribute significantly to the overall economy of china. Majority of SMEs in china are privately owned. China has created general and particular trade policies and regulations to enhance their growth and development. In the last two decades, SMEs in china have become a significant part of the economy under a number of supporting policies and an expanding market economy. According to Zhao (2007), support from the government as well as an expanding market economy have substantially contributed to their growth particularly in terms of income, employment opportunities, export expansion and economic structure optimization. Currently, SMEs in china are responsible for more than 75% of employment opportunities in urban centers and nearly 60% of the GDP (Zhao, 2007). For a period, majority of scholars have agued that organizational theories and models designed for large organizations could be directly applied to SMEs (Boyd & Nicolo, 2005). But in recent times, industry players have clearly demonstrated that there is a big difference between the SMEs and large organizations as indicated by Paulson (2008). This is because SMEs are confronted with numerous obstacles as opposed to large organizations. These obstacles are listed by Antkiewicz & Whalley (2005) to include lack of funds and socialized services, less access to market and poor management among others. The main purpose of the present paper is to examine trade policies in china and their advantages and disadvantages to small and medium-sized enterprises. With examples, this paper will also explore whether there are foreign small or medium-sized enterprises in china. It will also examine the key issues that china needs to address to enhance the growth of SMEs. Laws and Policies Concerning the Promotion of SMEs SMEs are the backbone of the Chinese economy according to study findings by Antkiewicz & Whalley (2005); Dunaway & Li (2005) and Lardy (2002). In view of this revelation, China has put in place trade polices and regulations that help in promoting their growth and development. These policies are geared toward improving their operational environment and increasing employment in both urban and rural areas as indicated in a World Bank report (2008). They are also aimed at exerting their significant influence on national economic and social development (Wang, 2004). At the present, majority of provinces and regions in China have formulated their administrative rules and regulations for enhancing the development of SMEs as noted by Paulson (2008). Moreover, the corresponding authorities and departments of the national government have issued several documents covering market access, the fiscal financial mix, enhancement of government control and administration, technological innovation, development of global markets and creation of service systems for SMEs (The World Bank, 2008). The government of China has developed legislations, policies and regulations related to the growth of small and medium-sized enterprises. The Small and Medium-size Enterprise Promotion Law was enacted by National People’s Congress in 2003 according to reports by Paulson (2008). This law supports the SMEs by enhancing their operational environment, maximizing the use and provision of financing and other essential social services (Paulson, 2008). Securities Law and Cooperation Law was revised in the same period to offer small and medium-sized enterprises unbiased position and treatment in accordance to the law (The World Bank, 2008). In 2006, the Program of the 11th Five-Year Plan of Development of the National Economy and Society raised the specifications to implement the project supporting SMEs. In accordance to the corresponding legislations and regulations, an RMB 3.51 billion special support funds were issued by Ministry of Finance (MOF) toward improvement of small and medium-sized enterprises. These funds were intended to benefit SMEs in a number of ways such as in technological updates, specialization, expanding markets and facilitating an enabling environment (Wang, 2004). These facts represent a solid ground for improvement of small and medium-sized enterprises. China’s Trade Policies In the last two decades, China’s trade policies have transformed remarkably. This is attributed to the opening-up, participation in APEC as well as China’s accession to the World Trade Organization (WTO) (Bhattasali et al, 2004). This in essence led to the elimination of trade barriers and reductions of tariff levels. As an example, zero tariffs on raw materials imports started in 1999 to supplement the local supply as espoused by Mattoo (2003). The World Bank (2008) argues that these changes in trade policies have resulted in considerable shifts in trade flows. Currently, China is an important link to a broad, finished product chain globally. A rapidly increasing share of raw materials sourced or imported into China is in the form of finished products as indicated in study findings (Agrawal, 2001). China’s export market growth is reported to have been driven substantially by finished products such as paper and a plethora of other products (Ash & Vojislav, 1996). This trend is in line with the Government’s efforts to limit exports of raw material and promote exports of finished products. In fact, Harper & Roy (2000) claim that nearly all of the in China products come from SMEs. A recent research effort reveals that majority of enterprises across all sectors of the economy in China are SMEs (Zhao, 2007). The study also observed that SMEs played a vital role in exports in China. With the accession to the world trade organization (WTO) and favourable export and global market exploitation policies, Chinese small and medium-sized enterprises are reported to have become ever more involved in the international market (Bhattasali et al, 2004). Even though VAT rebates are slowly being removed particularly on products such as timber and pulp, it is anticipated that they will remain in place for the near future on finished to promote exports of the same goods (The World Bank, 2008). Any further reductions of VAT rebates on finished goods are anticipated to be marginal. This will be for the purposes of increasing the industrial organization according to views proffered by Ianchovichina & Martin (2001). Additionally, China is said to have lately modified her global trade policies. In 2006 for instance, China reduced the VAT rebates on a number of products. This is illustrated in a report saying that her VAT rebate for furniture reduced from 13% to 11%, resulting in the rising of production costs (Zhao, 2007). As a result of this, producers are compelled to increase product prices or lose some profit margin. Some studies document that the mean profit rate of majority producers in China range between 5 and 8%. Many SMEs consider VAT rebates as their chief source of profit constitution (Paulson, 2008). Therefore, reducing rebates have endangered the survival of SMEs and will perhaps drive them out of a market according to postulations by Grant et al (2005). Additionally, prospects regarding the exchange rate signify an additional risk factor. A recession in the US monetary policy could lead to further sharp declines in the US dollar (Corden, 2007a). The major effect of a sheer decline of the dollar would weaken export and investment growth of the world economy as stressed by Grant et al (2005). The appreciation of the RMB against a depreciated dollar would have same adverse effects for the Chinese small and medium-sized enterprises, leading to a reduction in foreign demand and exporters’ profit (Paulson, 2008). The recent international economic crisis has produced considerable negative effects on the Chinese small and medium-sized enterprises. So as to stabilize the exports of products, the policy on product VAT rebates was amended three times and the result is that VAT rebates have been increased for a number of commodities. The property law of the People’s Republic of China was adopted in 2007. The law provides for protection of private organizations and helps to harmonize and enhance reforms while improving the market mechanisms. Improving SMEs’ access to markets The government of China has intensified its efforts to improve the current capacities of small and medium-sized enterprises by facilitating their access to the market and information. The government has further financed their social service networks to facilitate access to information and encourage their relationship with primary producers who are the farmers (Grant et al, 2005). It has also made efforts to facilitate SMEs’ access to trade fairs and improve communication among technical, business development and financial services (Paulson, 2008). Moreover, the government of china has actively supported SMEs to help them introduce superior technologies and manufacturing processes and equipment, enhancing their relationship with large organizations. Additionally, the government has made efforts to increase their cooperation with foreign countries and international institutions through fair and exhibitions. Labour Issues SMEs will be an integral part of China’s transition to an urban and industrialized state. This is because they have greater potential as a means of creating enormous employment opportunities and inspiring rural economic growth (Grant et al, 2005). Small and medium-sized enterprises are labour intensive and require considerable labour inputs. They also enjoy considerable labour cost benefits and access to cheap raw materials, a fact that has been a major driving force for majority of sectors in China. The government of China has paid special attention to using its advantage in terms of labour resources and has thus been seriously exploiting the actively developed labour-intensive businesses (Corden, 2007b). This is because these enterprises enjoy relative advantages in the fact that their products are in great demand on the market, specifically private and self-employed enterprises as well as SMEs with vast employment capacity. The Labour Contract Law of China which was enacted in 2008 offers protection and stability to workers and employers alike. The legislation has elucidated the method of ascertaining workers pay, introduced minimum wages and revised legal provisions regarding training, trade unions, termination of labour contract and contract mandates among others (Corden, 2007b). Additionally, the government of China has actively promoted the growth of training opportunities for the workers in SMEs. This has been through creation of specialized technical service institutions, offering special funds and providing professional training opportunities (Paulson, 2008). Key Opportunities and Threats in the SME Sector In the recent past, China’s economic growth underwent considerable transformations such as the RMB appreciation, implementation of the new Labour Contract Law, great increases in the costs of raw materials and energy (Grant et al, 2005). Moreover, the recent economic downturn as a result of current global economic crisis has added great pressure on the growth of SMEs in China. However, SMEs currently enjoy greater opportunities which can be facilitated by adequate financing, socialized service system, more accessible and abundant material resources, all contributing to the formation of an enabling environment favourable to SME’s development (Corden, 2007b). The costs of the raw materials in China have increased considerably, hence directly raising the cost of production borne by small and medium-sized enterprises. Being at the lowest level in the industrial chain and having weak bargaining power, SMEs are not able to add increased production costs to the prices of the finished goods when the costs of raw material increases (Grant et al, 2005). This in essence has eroded their profitability and even resulted in the collapse of several enterprises. The present global financial crisis has negatively impacted the Chinese economy, hitting SMEs very heavily in particular. As a result of this crisis, many SMEs have to lower production or close because of insufficient capital occasioned by increasing salaries, high prices of raw material prices as well as declining demand (Liedholm, 1991). The government’s response to the crisis has been effective in fostering short-term growth except not substantially enough to ensure sustainable long-term economic growth. Foreign small or medium enterprises in china These are the small or medium-sized enterprises established in China by foreign organizations or individuals in accordance with Chinese law with all the capital exclusively provided by foreign investors (Shah & Bethesda, 1995). With respect to China’s law on foreign enterprises, these businesses must contribute positively to the economy of China. They must also meet some conditions, one of which is to utilize advanced technology and equipment as well have almost all their finished goods being export oriented (Zhao, 2007). Foreign businesses in china are generally registered as limited liability Companies. There are various foreign small or medium-sized enterprises that are established in china including businesses from nearly all countries of the world. In registering a business in China, investors need to know the procedures governing the registration of foreign-funded enterprises in the country. The first step is to choose proper projects. Non citizen wishing to form joint ventures in China should also consider the choice of appropriate co-operation partners as indicated by Wang (2004). In selecting the investment projects, individuals can either choose investment projects proposed by institutions across China or they can propose investment projects by themselves (Wang, 2004). For wholly foreign owned business, the individual must seek approval from the government of China. After the approval, the foreign investor is required to conduct a feasibility study as a second step in the registration. The third step is signing of contracts and charters of association as well as relevant formal approval. The last step is the registration of the name of enterprise to protect the name to be used (Wang, 2004). Key issues that china needs to address The government of China can play a significant role in promoting the growth and development of small and medium-sized enterprises. It must improve laws, policies and regulations regarding small and medium-sized enterprises by ensuring an equitable positioning and treatment for SMEs by law (Paulson, 2008). The government should also provide funds that can help SMEs to improve access to market and new technologies in addition to carrying on regulation policies that ensure security of tenure ownership and transaction system (The World Bank, 2008). It must also simplify the bureaucratic registration and operational procedures related to small and medium-sized enterprises so as to promote value adding opportunities. The government should establish a public finance system and improve the tax and fee system by encouraging all kinds of social capital flows into the sector. It should also provide series of needed preferential tax regulations for small and medium-sized enterprises. It should also formulate financing channels and insurance for SMEs by increasing the number of financial institutions involved in indirect finance apart from the state (Baviskar & Atwood, 1995). The government should revise direct financing initiatives such as IPOs and cooperation bonds thereby expanding their insurance through to greater participation and less risk. The government of China should facilitate small and medium-sized enterprises access to the market and to new information by harmonizing trade policies to build their capacity in facing the effect of globalization. Moreover, it should set up a sound evaluation and governance system with reference to industry norms, environmental pollution and employment (Dunaway & Li, 2005). There is need for china to continue enhancing the openness of its trade policies and practices. This should build on the existing efforts to revise, amend and harmonize its trade related laws (Corden, 2007a). The government of china should continue minimizing regulatory and other obstacles to trade, particularly customs procedures, technical rules, standards and certification practices among others (Boyd & Nicolo, 2005). It should also consider lifting foreign trade and investment restrictions and the enactment of further international standards in the small and medium-sized enterprises. China should be more strategic in its manufacturing sector to compete effectively in the global economy. For a long period, China’s trade policies have overlooked strategic considerations. Unfair competition among its exporters has resulted to substantial loses and has boosted foreign anti-dumping arrangements as noted by Grant et al (2005). The country’s exporters should be supported by sound trade policies that will enable them compete effectively in the global market. Presently, Chinese small and medium-sized enterprises have been negatively impacted by globalization and lack of access to foreign markets as demonstrated by the fact that only few cases of successful mergers and acquisitions have been carried out in the last 30 years (Lardy, 2002). A lack of proper institutions has made its enterprises less competitive in the international market. The country has failed to offer a sound trading bloc for its businesses to date. A new strategy should focus on creating competitiveness for the international trade environment (Ianchovichina & Martin, 2001). China’s international trade has increased rapidly in the recent past and majority agrees that this enhanced trade has created jobs for the people of China. But the increased export trade has considerably negatively impacted the welfare of her people. Employees in Chinese industries are poorly treated in terms of wages, health insurance and working environments. Further, China has adversely impacted environment as a result of her industrial development. It may take a long period of time for china to resolve these complex and broad issues. Indeed, China has played a significant role to the world via exporting its products which have been of superior quality at relatively cheaper prices (Mattoo, 2003). However, the concern is that these products sell at higher prices in China compared to foreign countries. In the same vein, global brands particularly luxury goods are priced high in China than in western countries. This aspect has some political undertones since trade is naturally trade political (Ianchovichina & Martin, 2001). The country’s future trade and investment policies should act as its national strategic interests within the WTO international regime (Grant et al, 2005). In the meantime, the country must hasten her economic transformation via structural organization and expansion of local demand. Future policies must tackle trade concerns and enhance the profitability of Chinese enterprises. Since trade is political by nature, China’s future trade policies should serve her national strategic interests within the WTO multilateral regime. Such policies must be multilateral as well as regional in origin. Meanwhile, China must accelerate her economic transformation through structural diversification and expansion of domestic demand. New policies must address business concerns and improve the profitability of Chinese small and medium-sized enterprises. An effective trade policies and regulations will help the country build a sound reputation in the international market and serve the country’s national strategic interests (Wang, 2004). Conclusion Small and medium-sized enterprises have significantly contributed to economic livelihood and local employment in the republic of China. SMEs have become an integral part of the economy and their growth and development requires an increase in competitiveness in addition to favourable conditions like trade laws and policies, financial incentives and industrial associations (Zhao, 2007). SMEs are the backbone of the Chinese economy and this is why the country has put in place trade polices and regulations to promote their growth and development. The present global financial crisis has negatively impacted the Chinese economy as mentioned in earlier paragraphs. The government of China can play a significant role in promoting the growth and development of small and medium-sized enterprises. For one, the government must improve laws, policies and regulations regarding small and medium-sized enterprises by ensuring an equitable positioning and treatment for SMEs by law (Zhao, 2007). The government should provide funds that can help SMEs to improve access to market and new technologies. References Agrawal, A. (2001). 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