The Competitive Advantage of China - Essay Example

China Competitiveness China's buoyant growth rates coupled with low inflation, very high savings rates and manageable levels of public debt have boosted China's macroeconomy. However, a number of structural weaknesses need to be addressed. These are the main issues that emerge from the case study. The main issues, thus, are:China has shown considerable progress in improving local competition among industry and development of industrial clusters - a key factor for global competitiveness according to Porter.

Yet, it is ranked as a difficult place to do business in by local as well as foreign companies. The country is ranked very low on considerations of favoritism in government decision making (Rank 43rd), ethical behavior (47th) Intellectual property protection (58th) and auditing and accounting standards (95th). These are artificial constraints and businesses have to be more innovative (manipulative) to succeed.The extent of sophistication of China's competitive advantage was quite poor, the country being ranked at 59th on this factor.

Its competitiveness is based more on providing cheap labor and natural resources rather than unique and sophisticated products, technologies and processes. The country's state owned enterprises and the banking sector are still in deep trouble, government intervention to protect these lead to skewed decisions. Levels of financial intermediation are low and the state has had to intervene from time to time to mitigate the adverse effects of a large, non-performing loan portfolio. Added to this is the artificially fixed exchange rate that has remained unchanged at 8.

28 Rmb/US$ in the period under review. Floating of the Yuan to see its market driven level shall have major repercussions on the economy as it likely to appreciate considerably making Chinese products more expensive and allow competition from other countries.In terms of consumer sophistication China ranked 42nd; and only 64th in terms of the extent to which its domestic consumers actively demand the latest products, technologies and processes. China has low penetration rates for the latest technologies.

This has resulted from the suppression of domestic demand during the communist regime, as demand starts to percolate downwards the industry is pushed to meet demand for normal goods to meet domestic demand. This places industry at disadvantage since on one side it is unable to meet local demand, for sophisticated and luxury goods, which has started emerging in the larger cities on the other hand they are unable to meet the requirements of sophisticated international markets that demand quality.

Despite being a world supplier of cheap and skilled labor its own unemployment figures show increasing trends. In the period 1999 to 2003, while the GDP rose from $3653 billion to $4910 billion on PPP basis the unemployment rose from 7.4% to 10.1%. This trend is due to the development of the SEZ's that enjoy tax benefits and exemptions that are not available to other industries making them superficially more competitive and concentration of employment opportunities in small areas. In addition, migration of industry from low technology (and high labor content) to higher technology areas has affected employment rates.

Given the issues highlighted above, the Chinese government and the bureaucratic machinery that drives the economy shall need to consider several questions. Answers to these questions will have to be found if the economy has to continue to grow at the phenomenal rates currently being achieved. Some of these questions are:Provide a level playing field for all industry. Fair competition, with the survival and prosperity of the most capable and innovative needs to be ensured.Shedding the Public sector is one of the most difficult tasks ahead.

These industries have historically provided employment (iron rice bowl), housing and other infrastructure. Privatization and disinvestment are obviously not easy to achieve.Banking will need to be restructured and privatized. The currency will have to be allowed to find its own level in a free market. These issues have to be addressed even if the change comes gradually.Agriculture that contributes only 15.4% to the GDP provides employment to 76% of the workforce. This sector will have to be strengthened to continue to provide bulk of the employment especially as industry moves towards sophistication.

This will help address the non availability of purchasing power in the hands of the indigenous population and bring customer sophistication.Finally, Industry has to move toward producing and marketing higher end products that will allow for providing competition to foreign companies in the local market as well as the global markets.