China and Foreign Direct Investment - Essay Example

Q China and Foreign direct Investment-FDI Introduction The establishment of the foreign direct investment (FDI) is one of the major successes in the Chinese economy over the past ten years. This is indicated by the increase in stock from $ 19 billion in 1990 to $ 300 billion by the end of the year 1999, making China one of the leading developing countries according to the stock of inward FDI. Of all the member countries of Asian Pacific Economic Cooperation - APEC it's only the US that holds a larger potion of the inward FDI stock. China's FDI is mainly comprised of Greenfield investments as opposed to the US inward FDI that is basically the takeover of existing enterprises rather than creation of new enterprises. The greater part of FDI in China has originated from other areas of Asia excluding Japan, Hong Kong which is a self governing region of china has the largest record, however the dominance of Hong Kong is illusory in that much of the FDI is from elsewhere, in fact the stock listed as Hong Kong source FDI in China is just Chinese domestic investment round tripped through Hong Kong. Additional FDI in China listed as Hong Kong in origin is in actuality from a variety of western countries and Taiwan that is sited in China via intermediaries. Unfortunately, published records do not exist to point out exactly how much FDI in China that is supposedly from Hong Kong is in fact attributable to other countries. China and Taiwan Link Foreign Direct Investment in its characteristic structure is described as a company from one country making a physical investment in another country for example building a factory (Allen et al 2005). The definition can also encompass investments made to purchase lasting interests in business ventures operating outside the economy of the shareholder. Over the past decade, the direction of foreign direct investment (FDI) in to and from Taiwan has experienced spectacular changes. Whereas the flow of FDI at best languished, the outflow ascended to extraordinary heights, with 20% of annual growth rate. Seeing that the international competitiveness of labour intensive industries in Taiwan reduced, they have shifted from offshore to cheaper labour cost places (Buckley & Mark 2002). Through this process the mainland especially china, has grown to become the preferred destination for Taiwanese FDI nevertheless considerable flows have also gone to the Americans and to Europe, a detail which has often been disregarded. Meryll Lynch China (ML China) has been the most striking due to its outsized collection of cheap labour, its export advertising strategy which has shared favourably with Taiwan's returns in export-oriented FDI (Allen et al 2005); and the unique customs, language and family association links connecting ML China and Taiwan. Even though Taiwanese FDI in China was formally made acceptable in 1991; ever since 1978 China's policy of drawing flows of FDI had a substantial impact of ML china. In addition some sources report that even before 1991, Taiwanese capital has been moving indirectly to ML china via Hong Kong (Buckley & Mark 2002) An imperative issues concerning Taiwanese FDI in ML China, on the other hand is long term maintainability. Due to the size ( most are small scale) of several of these venture projects and their repeatedly low value added and fundamental technology, they are not in line with ML China's current main concern of increasing the quality of inflows of FDI. This great share of small scale low technology ventures in ML China powerfully contrast to the sizes of Taiwanese FDI projects in other destinations which on average own considerably higher personified technology and possible valued added (Chow 2002). The China Japan Link The current developments in the economic trends have seen Japan and China emerge as the East Asia newly industrialized economies (NIE's) of the region. Other economic powers in the region include Taiwan, Hong Kong, South Korea, and Singapore and are united in an alliance called the Association of Southeast Asian Nations (ASEAN) economies (Allen et al 2005). This has established an economic region which is experiencing a sustainable growth and performance. One of the significant reasons is the Foreign Direct Investment (FDI), Japan, China and the United States are the major economies in the Pacific Basin. The economic relationship between the countries has been the leading motivator of world economy more so with the opening of China in 1979, for these obvious reasons china has become the main attraction for foreign direct investment. By the year 2002, china was the leading recipient of foreign direct investment in the world, attracting inflows from Japan and the US estimated at about $52 billion. The reason why the Chinese are attracting more foreign direct investors is that in spite of its fast growth of China, the country still suffers income inequality across the region. Such inequalities are very risky to the country and could result in political and social unrest and ultimately can cause damage to the economy (Chow 2002). The Chinese government hence, calls for foreign direct investment to the interior and western parts of the country. The investment by Japan could help to reduce disparity and contribute to economic growth in China. The Japan and U.S. investors are attracted to the regions that have large domestic market and a growing local market is essential. The Japanese FDI inflows to China are not only increasing but are getting diverse from manufacturing to other sectors because of the cheap labour resource. On the other hand anew trend of FDI associated with relocation is attracting opposing in Japan (Buckley & Mark 2002). Apart from sector diversity, a geographical shift is also evident with FDI patterns moving from proximate coast to shanghai and Pearl River Delta. There are some significant inconsistencies between Japan and Chinese relationship; it's very had to establish Japanese FDI origin through subsidiaries in Hong Kong or other nations of Asia. Currently the Japanese FDI to china are increasing due to the increased growth opportunities that have resulted from countries joining the world trade organization at the end of 2001(Allen et al 2005). The major investors are still coming from the manufacturing sector especially electronics and electric machines. Association of Southeast Asian Nations (ASEAN) In early 1980's, most of the Newly Industrialized economies (NIEs) were being affected by the high cost of labour in terms of high wages and there was need to restructure the economic policies to those that are more capital concentrated and higher value added activities by passing their proportional advantage for labour exhaustive products to the late comers of the ASEAN economies of Malaysia, Indonesia, Thailand and Philippines hence distributing the economic development to the latter. For these reasons China registered very high economic growth through the 1980 to 1990 period (Chow 2002). Throughout the past two decade, China experienced a steady economic growth rate of double digits; this was the raise of China and emergence of a new trend of economic expansion in the region, with even better geo-political and geo-economic implication than the previous trends on the basis of the vast diversity and size of China. The emergence of China as an economic power in the region would ensure that the entire East Asia region sustains the dynamism for the future. To begin with, Japan is the usual economic leader of the group and has in fact been the most important resource of wealth and technology for the other EA economies, the NIEs, China and ASEAN (Chow 2002). The resource oriented ASEAN-four harmonize well with the manufacturing founded NIEs whereas both are also corresponding with the more developed Japanese economy. Subsequently the enormous possible economic growth of China, with its huge resource foundation in addition to varied needs, presents extra opportunities for all. The Global Economy Globalization and the growth in economy has continued to integrate in to the world financial markets, foreign direct investment (FDI) has on the other hand grown by more than 30% per year since the year 2003. The unclear trend in the development of the FDI has shown the importance of sovereign wealth funds, most of which are state owned or controlled, this has prompted the concerned governments including the Unites states of America to change their policies and scrutinize the operations of FDI (Buckley & Mark 2002). In countries like the US and China, the FDI has grown dramatically because, they hold greatest domestic market size in the world and therefore foreign investors are attracted to explore theses markets. China has become the world's most significant economy therefore enabling political and economic stability (Chow 2002). Due to globalization impact such as the removal of outflow capital especially in markets like the Japanese and the United Kingdom has encouraged the flow of funds from these nations to Chinese markets and others including the Unites states. Depreciating of local currency does not make it attractive for investors with appreciating currencies like Japan and Germany to invest for example in the US. Since the US dollar has been depreciating, the Japanese yen and deutsche mark appreciating has an implication that the US assets are cheaper and the earnings from investors in the US would bring very little foreign change (Buckley & Mark 2002). The achievement of emerging economies necessitates a refined understanding of the speedily developing expectations of investors, clientele, governments and the general public both countrywide and worldwide. There are changes that need to be implemented and include sustainability tools and systems meaning that there could be need to completely reinvest and/or reinvent. Emerging economies hence set a good leadership in the field and the strategy development has motivated economic growth (Chow 2002) Q.2 China and World Trade Organization The World Trade Organization (WTO) supervises and liberalizes the international trade; it was established in 1995 and has since the operated to implement the objectives set by its predecessor (GATT) General Agreement on Tariffs and Trade. Chinese accession to the world Trade Organization in 2001 was a very important step in the development of the then seventh world's economy (Allen et al 2005). China became the fourth trading partner to the United States and due to the fact that it was to gain benefits of the multilateral businesses and trade liberalization the requirements. The entry of China in to the WTO had a great impact on the political, economic and legal aspects of the development. This step was the one that brought about the good trade relationship between the Unites states and China in the beginning of the 21st century; this is after 21 years of established diplomatic relationship between the two countries (Buckley & Mark 2002). These two events mark a very important occurrence in the Chinese economy since the other developed countries s led by the Unites Stares could recognize China as an economic power and an equal partner in the developing economic community. This was also the motivating factor for the economic globalization with Chinese currently holding a crucial position in the economic power in global economy. The WTO entry opened up the Chinese market for more international trade and foreign investment as well as the export of Chinese products. Critics see these as a set back to the Chinese domestic companies due to the competition from foreign companies, and they also say that the Chinese manufacturing, agricultural and service sectors might totally collapse. On the other hand economists suggest that the strategy is good for the growth of the Chinese economy and opening of opportunities in the international market. Chinese Entry In 2001 China started it lobby to join the world trade Organization just after it was established with the United States playing a critical part in the lobby. Before being admitted to the organization, the Chinese were required to meet some conditions according to the regulations of the trade organization (Chow 2002); 1. China Was required to lower its tax tariffs on imports 2. China was also required to give authorization to foreign investors to directly market their products in the China's household market 3. China was to open the information and communication plus their financial sectors to the foreign investors hence facing competition from abroad. Since China was committed to implementing its economic policies, it agreed to reduce tariffs on agricultural products by the year 2004(Buckley & Mark 2002); to lower tariffs on industrial products from 35% to 17% in span of five years, this implied that foreign manufacturers including automobile firms would manage to market their goods directly to local consumers without having to face the Chinese trade organization restrictions and regulations. The foreign investment into the financial sector was allowed to own up to 40% of the commercial Bank's shares and the communication sector offered up to 48% ownership though foreign banks were encouraged to offer services in local Chinese currencies to the domestic ventures (Allen et al 2005). Other beneficiaries were textile industries, architecture and various consultation companies as the lower tariffs would increase imports of both agricultural and industrial products. The first impact of the implementation of the WTO requirements such as lower tariffs, encouraged foreign investors hence increasing competition by the foreign ventures on the economic structure, industrial sectors and governmental versus non-governmental sectors. China entry in to the WTO enabled speedy decline of the agricultural sector but encouraged development on the communication and financial sectors (Chow 2002). State sector reduced considerably compared to non state sector attracting foreign competitors as a result of lower tariffs hence more foreign investors are attracted to the Chinese. Regional Implications of China Entry to WTO There are several ways in which the accession of China to the world trade organization (WTO) has affected the economies of the Southeast Asia. They include; 1. Ready and cheaper accessibility to the Chinese local Market 2. Improved and Enhanced competitiveness in the regional market 3. There was development of some competition with Chinese in the third markets 4. Foreign investment in China Has expanded with potential outward investment from Chinese as well China has been the leading trend setter in the development of the East Asia economies including other industrialized nations, in the year 1997, close to 60% of the Chinese imports were sourced from other East Asian nations. The ASEAN member countries enabled exports growth to 390% to China and these nation's shares in the China's total import rose from a staggering 6% to 9% in 1999(Chow 2002). Most of the economies around south East Asia are benefiting from reductions in export prices as China implements the regulations of the WTO. Global Implications of China Entry to WTO The requirements of the WTO to reduce unilateral trade has encouraged liberalization, such modifications in the millennium has reduced trade barriers throughout the whole world. China being an important exporter of manufacturing products could benefit from such agreements as the case of all imports and exports tax would be reduced by close to 50% between 2000 and 2010. Reduced tariffs on imports greatly stimulate trade among countries and China benefits from the international trade liberalization, increased volume of production (Buckley & Mark 2002). The goals set to reduce both imports and export tariffs and elimination of non tariff barriers to trade are to be accomplished by the year 2010, according to the targets of the world trade organization. Imports in certain manufacturing fields would increase in most of the world's most stable economies like US, Western Europe, South east Asia other partners of China like Japan. China and Global Labour Pool The inflow of capital markets to China and India to benefit from the low wage employees has seen some improvement in the wages in those countries and consequently increased economic growth and the real earning by the citizens is also high (Allen et al 2005). The emergence of China in the global economy motivated many developing countries while on the other hand it has turned them from low wage competitors of the developed countries to the High wage competitors of China and India. Developing countries are no longer producing and developing low value, generic low wage products as predicted by the World Bank and International monetary fund (Chow 2002). The doubling-up of the international otherwise called global labour force posses a threat to the survival of the US and other developed countries. It brings a down ward force on employment and wages of the unskilled workforce through trade and immigration. Conclusion The impact of the Chinese accession to the world trade organization (WTO) will is gradual because the economic and political policies of different countries are quite different and not due the reasons that the agreement terms are gradual. Drastic changes in the economic sector may create a level of unemployment that is politically troublesome, and failure of local manufacturers. Economic growth is a collective responsibility and strategies such as FDI play an important role though China encourages inwards FDI and its outward FDI are mainly acquisitions of the regional Asian countries and rich regions of Africa. References Allen F. Jun Q & Meijun Q. (2005). 'Law. Finance. And Economic Growth in China'. Journal of Financial Economics, 77; 57-116 Buckley. P.J. & Mark C.C. (2002). The Future of the Multinational Enterprise.2nd edition, 2002, Palgrave. Chow G.C. (2002). China's Economic Transformation.Oxford.Blackwell Publisher. Read More