German FDI in China - Case Study Example

German FDI in China By Word count Contents Contents 2 0 Foreign Direct Investment involve a country investing heavily in another country for the purposes of gaining the entry into a foreign market without having to export their products to that county. German for instance has increased its FDI in China making it the largest trading partner to China from Europe. This paper seeks to discuss the German’s FDI in China with relation to the benefits that has accrued to German thereafter. In doing this, this paper will focus on the history of German’s FDI. In addition, the paper will look at factors facilitating FDI in China, the challenges and future of Germans FDI I n china. 2.0 Introduction Trade relations between Germany and China are expanding steadily over the past few years. Moreover, more than 1,500 German companies are currently represented in China. In 2002, China overtook Japan as Germanys most important trading partner in Asia. Additionally, the volume of trade with China amounted to 28billion euros, while the figure was slightly lower for Japan which was at 27 billion euros (Frenkel and Stadtmann, 2003). In 2003, this gap widened further. China’s accession to the World Trade Organization (WTO) in early 2002 marked the start of a process to undo trade barriers and significantly improve access to the China’s market. The opening of this rapidly growing market of 1.3 billion people has lured in an enormous number of companies and investors from all over the world, including German firms (Frenkel and Stadtmann, 2003). Not surprisingly, there has been a boost not only to trade relations but also to German foreign direct investment into China. As an emerging market, China is benefiting from the flow of goods and investment from abroad which will support future growth. Up to 2003, German companies had invested an estimated Euro 7.9 billion in China. Although this constitutes a large increase from 1995’s figure of EUR 800 m, German investments in China account for only 1.2% of total German FDI. According to the Bundesbank, the bulk of German FDI still goes to the EU and the US, each attracting about 40% of the total (Hilpert and Haak, 2002). For a while, there was an obvious bias in favor of the US. In Asia, the focus of German investors rests no longer just on Japan but increasingly also on China. . 3.0 Literature Review The methodology that will be employed in this research is use of data from government and international organization for reference. In addition, the economic condition of Germany and that of China will be studied with more emphasis on the number of Foreign Direct Investment of Germany in China. During the research process, data from UNCTAD, WTO and other banking agencies including government regulatory bodies will be used as the basis of conducting the research. (Hilpert & Haak, 2002). Moreover, the approach used will be analytical and critical analysis of the available data regarding Germany’s Foreign Direct Investment in China. The applicability of this approach is that it helps determine the exact figures that relate to Germany’s Foreign Direct Investment and thus offers a precise method of conducting the research. However, this method limits the scope of the study to only the secondary data and does not give room for using the primary data that are the main indicators of Germany’s Foreign Direct Investment in China (LaFleur, 2010). 4.0 Analysis Process 4.1 German FDI in China China has been voted by the UNCTAD as the third receptor of FDI making it register high growth of capital inflows into the country. This has made China to become a preferred destination for countries who are interested in gaining for the FDI returns. Moreover, countries have expressed investment in FDI within China to the extent that China has become a preferred world market for FDI investment. For instance, Germany has Germany heavily invests in china to the tune of 7.9 Billion euros. This was an increase in investment for 800 million Euros in the year 1980 by 2003. Moreover, an analysis of the performance of Germany’s FDI in China shows a potential increase in the investment in FDI for the next couple of years (Tang, Selvanathan, & Selvanathan, 2012). 4.2 Diversity of German FDI in China The trade interaction involving Germany and China has received a big boost in the recent years with China surpassing Japan as preferred investment and trading partner. This move has seen over one thousand five hundred Germany companies being established in China. It was also established that multinational trade between China and Germany recorded 28 billion euros. This success was attributed to the action by China to join the World Trade Organization that saw the removal of trade bottlenecks and barriers that prevented international trade. In addition, the China’s market was eventually opened to the public (UNCTAD, 2007). This saw China becoming a preferred destination for the investors. Moreover, the availability of ready market as a result of the high population in china gave way for investors and government entities to commit their foreign direct investment to china. This move has seen China luring several investors, companies and countries making it become very industrialized (Frenkel & Stadtmann, 2003). 5.0 Results and Discussion Research has shown that German remains the world’s preferred trade partner to China. Moreover, German has heavily invested in china that any other country not only in Europe but worldwide. It is the sixth in terms of volume of investment in china globally. The total Germany investment in china represents a twelve percent of Germans’ foreign direct investment. This is a huge figure of 7.9 billion euros that has been tremendously increasing from 800 million euros in the past years. By 2003, German had strongly settled on china as a potential destination for all its foreign direct investment. Majority of the Foreign Direct Investment in China are in the manufacturing industry. German has heavily dominated the China’s manufacturing industry with automotive firms, chemical production, electrical industries and mechanical engineering works. Companies like Volkswagen, Siemens and Bayer were the pioneer industries in China and have been in the China’s industry for the last one hundred years. Additionally, German has placed its Foreign Direct Investment in the service sector following the opening up of the China’s service industry to foreign investment. This is attributed to the World Trade Organization convention that closed all bottlenecks and opened all doors for foreign investments. The China’s service industry has been registering an influx of foreign companies investing in the service sector, thus an increase in Foreign Direct Investment of other countries. Germany specifically has several service industries in China ranging from banking, insurance, consultancy and other services. Both retail industries and whole sale industries with Germany’s origin like the Allianz have dominated the China’s service industry. Moreover, logistics firms like metro and DHL have also found market in china. In addition travel firms with Germany origin like the TUI have also found an investment opportunity in china. This has been blended by the largest Germany banks in China’s market. Almost 80% of the investments in china are of germen origin. However, of great importance is to note that majority of these investments are in the manufacturing sector, transformative ventures and service industry. 6.0 Drivers of Germany’s Foreign Direct Investment in China. The massive foreign direct investment by Germany’s in China follows number of factors that attract the foreign investor. More specifically is the attractive China’s market that offers certain features only unique to China and not available in many other market place. This factors have heavily contributed towards the domination of China’s market by Germany thus leading to an overall high Foreign Direct Investment by Germany in China. 6.1 Availability of Ready Market The availability of ready market is a major contributor to the increased German’s Foreign Direct Investment. China is the most populated country in the world with over 1.3 billion citizens. This provide a huge market potential for all goods and service produce in the country. Moreover, the prospective consumer index is almost 76 million people who rely on other goods and services apart from the most essential products. 6.2 Low Cost of Production The cost of production in china is relatively low compared to the cost of production in other countries including Germany. This has led to reduction in cost of establishing an assembly line especially for the manufacturing firms. This means that companies will find it relatively cheap to set up assembly lines and manufacturing plants in china than any other country. 6.3 Removal of Trade Bottlenecks The opening up of China’s market to the public after the ratification of the World Trade Organization also paved way for foreign direct investment to become successful in the country. The greatest beneficiary to this move has been the German’s Foreign Direct Investment that has greatly dominated the China’s market. The WTO saw China’s register a rapid economic growth despite the Asian economic crisis that almost brought Asian countries to the ground. This made Germany to increase their hope of gaining in the China’s market, thus upscaling their FDI in china. The overall benefit of the WTO was provision of a large scale attractive investment opportunities for German’s Foreign Direct Investment. 7.0 Challenges to Germany’s FDI in China The German’s Foreign Direct Investment in China has faced equal challenges. These challenges have continued to discourage the success of foreign direct investment in china. This factors are related to the general economic and political statues of china in relation to other countries that express their interest in the China’s market. The challenges have been as a result of several bottlenecks and regulations that are being put in place by china to regulate their market from foreign domination (Fink & Maskus, 2005). 7.1 Inadequate Communication Lack of knowledge contributes to poor communication on information regarding the investment opportunities in china. This has led to an increase in a number of German firms shying away from investing in the China’s market. Moreover, the frequent uncertainties relating to legal structures and the regulations on intellectual property is a major hindrance to smooth investment in china. In addition, there is limitation to the extent of transparency in the China’s market with relation to data of supplier, customers and preferences in the market. In addition, it is difficult to ascertain the proper market segment to invest in thus hindering the whole process of investing in China (Hoeck, 2008). 7.2 High Cost of Industrial Inputs The cost of inputs in China is relatively high than other countries. This has facilitated by the high legal and professional fees needed by other government regulatory agencies. Moreover, logistics and frameworks that aim to promote regional protection has made it difficult for German to smoothly invest in china. The price of electricity is also on the rise thus discouraging further investment. The raw materials are proving a hard nut to crack for mots industries thus slowing down the rate of Foreign Direct investment by the companies with German origin. For instance, the increase in electricity demand was % in the year 2013 making it difficult for companies to continue their operations. This has made the competition in the market very tough thus pushing out the German firms who cannot survive the competition out of the China’s market. 8.0 The Expectations of German’s Foreign Direct Investment in China The German Foreign Direct Investment in china is contemplating a better status in the next years. This is seen by the economic analysis that reveal how promising the China’s market is performing. There are a lot of factors that has to be considered when determining how promising the China’s market is to the future of the German’s Foreign Direct Investment. 8.1 Corporation by China’s Government A number of positive improvements are to be registered by the Germany’s foreign direct investment in the next years. Several German companies continue to flow into china to make their investment. In addition, the China’s government has embrace the Germany’s Foreign Direct Investment with the share of China’s in Germany’s, Foreign Direct Investment standing at 6%. This is a significance of a good perception for the Germany’s Foreign Direct Investment and it is expected that the China’s government not will encourage lore of the Germany’s Foreign Direct Investment to come up with more industries. 8.2 Scepticism among German Companies. Scepticism has continued to be on the rise among the German firms. In addition, the German companies are not satisfied with the kind of treatments and regulation framework that govern their operations in china. Moreover, there is an increasing concern over the excess capacity of investment in real estate and other sectors like the telecommunications. This makes the German firms speculate the possibility overcrowding of the China’s market, thus reducing the market clientele controlled by specific companies. These overcapacities and other new emerging bottlenecks has led to reduction I the rate of Germany’s FDI in China. The future of Germany’s Foreign Direct Investment has also faced speculation form the slow realization of profit from several investments in China. The bottlenecks, legal regulations and execs incapacities has greatly contributed to less profitability in Germany’s foreign Direct Investment in China. Thus, it is difficult for the Foreign Direct Investment by Germany to be assured of profitability in China’s market. 8.3 Fewer Large Scale Investments However, not all capital investments are equal; some types of investment result in greater productivity than others. In China’s case, the FDI into export manufacturing has had a much greater impact on economic growth than the local investments, especially as regards the creation of employment. (Bergbauer and Park, 2013) note that during the first half of the 1990s, industrial establishments accounted for 84% of all Foreign-Invested Enterprises (FIEs), and 72% of all FDI. This slowed to 73% and 58% respectively in the second half of that decade. Particularly, textile and garment-related industries had 13,000 firms in 1995, accounting for more than 25% of all FIEs and more than 20% of all FIE output. These heavy industries are extremely labor intensive, allowing more China’s to be absorbed into the labor market (Festel, 2005). 9.0 Effects of FDI to China economy There has been a tremendous increase in the German Foreign direct investment in china for a long time leading to increase in GDP of the country by 35%. Moreover, this growth has been steady with ever increasing German’s Foreign Direct Investment in china leading to a GDP of over 2000 Billion Euros annually. However, the German’s Foreign Direct Investment in china has been fluctuating depending on legal and economic conditions prevailing in the, market. It fall during economic crisis and rises in situations of economic stability. The role played by German’s Foreign Direct Investment in China is felt globally with the increased number of exports to the world market. However, the basic principle of German’s Foreign Direct Investment is to achieve infrastructural and capital growth (Dettke, 2009). German FDI in China has increasing the number of domestic manufactures and China’s export volumes by $18 billion, ranked 26th in the world. 47% of these comprised manufactured goods. By 2005, exports had increased to $762 billion, the 3rd highest in the world, with manufactured goods accounting for 93% of these. (Nolan, 2015). Of these exports, 58% were made by German’s FDI, either as joint ventures or as wholly-owned subsidiaries. The 58% attributed to them in 2005 was worth $444 billion (Bergbauer and Park, 2013) This stark contrast in the ratio of exports by FIEs and those by local entities is self-evidence of how FDI has fuelled growth in China. 10.0 Conclusion German has heavily invested in their Foreign Direct Investment in China than any other country form Europe. In addition, German has successfully achieved massive industrial growth courtesy of its investment in China. This has led to development and economic growth of china is a number of ways. The economic development fostered by German’s Foreign Direct Investment has increased capital investment and human capita development. Technological transfer has been achieved through the German’s Foreign Direct Investment in China. Competition has been realized in manufacturing, industrial and automotive sectors. Moreover, the service industry has also seen major competition and growth leading to massive exports from china to the global market. The German Foreign Direct Investment has also seen an increase in the number of human capital migrating to china thus increase the growth of China’s economy. Skills and knowledge has also been transferred to china leading to an increase in productivity. References Dettke, D. (2009). Germany says "no": the Iraq War and the future of German foreign and security policy. Washington, D.C., Woodrow Wilson Center Press. Festel, G. (2005). The chemical and pharmaceutical industry in China opportunities and threats for foreign companies. Springer E-Books. Berlin, Springer. http://public.eblib.com/choice/publicfullrecord.aspx?p=256747 Fink, C. and Maskus, K. (2005). Intellectual property and development. Washington, DC: A copublication of the World Bank and Oxford University Press, New York. Hoeck, M. (2008). Cooperation and technological endowment in international joint ventures: German industrial firms in China. Köln, Kölner Wissenschaftsverl. Frenkel, M. and Stadtmann, G. (2003). 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