Why Has China Favoured Inbound FDI - Assignment Example

Why Has China Favoured Inbound FDI? Regular economic development, liberal savings systems, operational flexibility and de regulation are the aspects to help raise the inflow of foreign direct investment (FDI), which can be perceived as any form of savings to earn interest in ventures outside of the domestic territory of the investor. China is one of the largely attractive locations for FDI in the recent days. FDI is possibly a vital thing that contributes to globalization of international wealth. China is a major host country in the world for such investments. Recently china has build up over $500 billion in FDI. China becomes a hot favourite for investment in the sectors of cooperative enterprises, joint ventures. “According to Zhang (2005), the impact of the overseas Chinese on China’s FDI inflows can be seen at least in two ways. First, the overseas Chinese invest in China based on language and historical bonds; accordingly they possess advantages in operations in China. Second, the overseas Chinese act as a bridge through which foreign investors understand the Chinese culture.” (Devinney et al 2010). The country, however, did not allow solely foreign-owned ventures earlier, and they had limitation of technological support. This situation has now changed and through export from other countries they now have all the infrastructural facilities. China has now removed many limits, which were also different from their WTO promises and encouraged foreign-owned ventures to guide in higher technology and add to their export quantity. Thus, only foreign-owned enterprise under joint venture model is the most accepted structure of FDI in China. There are a mixture of FDI available in China and the most common among them have been the Equity Joint Venture, Co-operative Joint Venture, and, to rising quantity, completely Foreign Owned Enterprise. However, they have a viable system of legislation and ground rules for creating such ventures and suitable government approvals and business licenses are mandatory. Hong Kong and East Asia are the main sources of FDI in China. Presently Taiwan is also a major source of China’s FDI with increasing amount of investment. Taiwan positions as the second place of FDI in China. “During the past two years, the government has been working to reform the foreign investment approval system. The approval procedure for five categories of foreign investment has now been vastly simplified, as the central government has allocated significant approval power to its local counterparts.  For foreign investment projects with a total investment amount below $300 million and categorized as “encouraged” or “permitted”, the approval power is now with the local government. Previously, the threshold was at $100 million.” (China Strives to Further Improve Foreign Investment Environment, 2010). The Chinese rules require thorough checking of foreign companies, more on policy making. The government also puts inconsistent efforts to improve the guarding of academic property rights, which is a matter of chief concern for foreign investors. Recently, China customized its rules of indigenous innovation programs. These modified rules eschew past regulations that brands have to first be registered in China to be considered as indigenous innovation. They also stipulate that a product must possess technology that matched global standards. In the present year China is positioned as the 2nd mostly smart country for FDI. The Chinese government’s attempt to rationalize FDI support processes and to attract foreign capital will further speed up the country’s development into a nationally motivated economy. Foreign capital in china has played a main role in the economic development and improved the standards of living. FDI can make overall fiscal improvements rather than just assist to resolve the capital scarcity problem in a developing nation like China. 2. Critically evaluate the costs and benefits of using the FISC approach to market entry for; a, the overseas MNE and b; the Chinese economy. “The modern business enterprise has no place to go but everywhere.” (Devinney et al 2010). Chinese economic condition was comparatively inactive and incompetent until a few years before. However, at present, China reigns as a major economic power and also it keeps improving, which will lead to substantial increases in US- China economic ties. Many economists consider that the main factors of the growth of Chinese economy are large-scale capital investment and rapid growth in productivity. Both factors are related to each other very closely. Higher economy will improve the output and increase in resources for additional investment. This means the economic conditions are expected to provide a suitable climate for foreign investment. “More recently, China has moved into other sectors with a major technological content, such as chemicals, and even into leading-edge sectors (ICT, biotechnologies) and research and design activities (electronic components).” (Handbook of research on European business and entrepreneurship: towards a theory of internationalization, 2008). As part of the economic growth in China it has become a global trading force and world’s largest beneficiaries of foreign direct investment. Thus, through improvement in all aspects of economic condition the standard of living of cities in China has significantly improved and same is the case with consumer consumption and capital investment. The implementation of highly developed technology and resources will further allow the Chinese government and business community to tap their potential to an optimal level. Conditions for trade and investment are highly favourable in the country at this juncture. As there is a growing demand for capital, Chinese investors institute foreign operations for raw materials that are completely or mainly exported to the home country. This is no exemption for Chinese multinationals, which are paying more attention to purchase highly developed technology and manufacturing experience in different industries particularly from the U.S. On the other hand, firms and other investors from different countries are entering in Chinese market. It is critical for foreign investors and companies to describe their average and long term goals and select the right foreign investment alternative system of business in China. Foreign investment in China has its own legal necessities, profit and advantages. Foreign investors are banned from equity accomplishment or asset achievement involving domestic companies, which are occupied in industries in which foreign investment is prohibited. An M&A transaction can only be carried out in a compulsory or approachable industry where the bulk possession attention or control remains with Chinese shareholders. Foreign owned enterprise or joint venture can normally apply to set up a branch in another locality in China after it has fully paid up its registered capital. The establishment of a Joint Venture has been the most common form of foreign investment in China. “MNE is a system of interrelated activities, both internal and external to the ownership boundaries of the firm.” (Dunning 2010). There are different overseas subsidiaries invested by Chinese MNEs. Unlike the MNEs from developed countries, Chinese MNEs with high R&D intensity are more likely to set up international joint ventures. Joint ventures, for instance, are popular in China because there are direct or indirect government rules requiring them in some circumstances. At first, some Chinese multinationals invest in overseas countries to get hold of natural resources or maintain the export markets. On the other hand, they may use the current situation as a means to get better global market position by obtaining new resources of competitive benefit. Some of the Chinese investments in Hong Kong and in other countries are also motivated by the desire to acquire modern technology. Recommendation as to whether Foreign Investor Shareholding Corporation (FISC) is an appropriate method of entry. The above study reveals the fact that FISC is the apt method for entry of the overseas MNEs intending to invest in China. It provides or facilitates easy flow of foreign investment or the new entry in a multinational level. FISC can now organize activities and develop their business in this fertile market. Another additional benefit of the FISC is that it permits the Chinese political establishment to give confidence in manufacturing reforms and measures to boost the economy. Many of the economists feel that, the economic condition mainly affects in the entry but in case of the FISC approach it makes route for many to obtain a good platform. It is the responsibility of investors to comply with all relevant laws. Foreign investors in resource-based ventures are encouraged in China. These relate to investment in the mining and petroleum, agriculture, livestock, fisheries and forestry sectors. Conclusion: China has introduced foreign direct investment more than 20 years ago and has increasingly followed foreign investment by changing its FDI policies. The Chinese companies want opportunities abroad because domestic rivalry is becoming more intense. Global mixing is the key feature for some foreign firms investing in China. This implies that the country is a very significant market and investing here is a good option for a company’s international plan. In conclusion, foreign firms do not simply come to China to get the advantage of any single location factor, but are more significantly focused by a countless and often conflicting and competing reasons. Reference List China Strives to Further Improve Foreign Investment Environment, 2010. [Online] Proactiveinvestors.co.uk. Available at: http://www.proactiveinvestors.co.uk/columns/arc-china-weekly-bulletin/3107/china-strives-to-further-improve-foreign-investment-environment-19312.html [Accessed 5 December 2010]. Devinney, T. et al., 2010.The Past, Present and Future of International Business and Management (Volume 23 of Advance in International Management). [Online] Emerald Group Publishing. Available at: http://books.google.co.in/books?id=lXRHaoegX8gC&pg=PA106&dq=Hennart,+J-F.+(2009)+Down+with+MNE-centric+theories!+Market+entry+and+expansion+as+the+bundling+of+MNE+and+local+assets,+Journal+of+international+Business+Studies,&hl=en&ei=5O79TMT_PILprAeWs_2WCA&sa=X&oi=book_result&ct=result&resnum=1&ved=0CCYQ6AEwAA#v=onepage&q=Hennart%2C%20J-F.%20(2009)%20Down%20with%20MNE-centric%20theories!%20Market%20entry%20and%20expansion%20as%20the%20bundling%20of%20MNE%20and%20local%20assets%2C%20Journal%20of%20international%20Business%20Studies%2C&f=false [Accessed 8 December 2010]. Handbook of research on European business and entrepreneurship: towards a theory of internationalization, 2008. [Online] Edward Elgar Publishing. Available at: http://books.google.co.in/books?id=OsAMhoDSFQwC&pg=PA659&dq=Sharma,+V.M.,+%26+Erramilli,+M.K.+(2004)+Resource-based+explanation+of+entry+mode+choice,+Journal+of+Marketing+Theory+and+Practice,&hl=en&ei=8gT-TLyJKMa8rAfIytSCCA&sa=X&oi=book_result&ct=result&resnum=1&ved=0CCkQ6AEwAA#v=onepage&q=china&f=false [Accessed 8 December 2010]. Dunning, J.H., 2010. New Challenges for International Business, Research: Back to the Future. [Online] Edward Elgar Publishing. Available at: http://books.google.co.in/books?id=0FFgPQ3jxIoC&pg=PR21&dq=Cantwell,+J.,+Dunning,+J.H.,+%26+Lundan,+S.M.+(2010)+An+evolutionary+approach+to+understanding+business+activity:+The+co-evolution+of+MNEs&hl=en&ei=Hwz-TJasFsirrAfwlp29CA&sa=X&oi=book_result&ct=result&resnum=1&ved=0CCkQ6AEwAA#v=onepage&q=MNE&f=false [Accessed 8 December 2010]. Read More