Challenges Faced by Foreign Seeking to Invest in an Emerging Market - China - Case Study Example

International Business

Introduction

The different levels of the economy in different countries are used in classifying the countries. The classification can be done based on the development level of the country. For example, a country can be regarded as developed or undeveloped. Emerging markets are categorized under the under developed countries classification. This essay discusses emerging markets by focusing on China, one of the emerging markets, in determining the opportunities and challenges that foreign companies would experience when they seek to invest in the emerging market.

Emerging market

An emerging market is a country which can be considered as undeveloped but has a high potential of growing in spite of the risk that may face it and the volatility of the market. However, some of the emerging markets can be considered as developed based on different criteria and views among different individuals. A country can be considered as being an emerging market regarding either numerical or qualitative criteria. Whereas some economist believes that a consideration of the factors that lead to economic growth is important in classifying a country as an emerging market, others believe that is a country should be regarded as an emerging market based on some numerical figures (Ghosh, 2010, p.1). An emerging market focuses more on goods produced than it does on services offered, unlike a modern and developed economy which is more service-focused than it is good-focused. Any country whose GDP-per-capita ratio is any value between two thousand dollars to twelve thousand dollars can be regarded as being an emerging market. The classification of a country as an emerging market is not fixed. A country will not be regarded as an emerging market if its GDP-per-capita ratio goes above or below the upper and lower limit respectively of an emerging market (Ghosh, 2010, p.1).

According to the World Bank, a country is regarded as an emerging market if its per capita income is below four thousand and thirty-four dollars. The emerging market should have an economy that is growing rapidly. The emerging markets have a high volatility. This means that the emerging markets can be able to withstand natural disasters, for instance, tsunamis or droughts. Additionally, the emerging market should withstand external changes to the prices and instability of the domestic policies. Emerging markets are exposed to the risk of unstable currency changes and commodities since they are not powerful enough in influencing the volatility of those factors. Attempts in making changes in the emerging market for the purpose of industrialization lead to the suffering of the population. Eventually, the attempts cause social instability, rebellion, and change of authority. Investors in an emerging market have returns which are more than average (Amadeo, 2016, p.1).

Examples

Currently, these are twenty-one emerging markets in the world. Among them, China and India are the most powerful. The two emerging markets have an output of 15.9 trillion US dollars which is more than that of the European Union at 15.6 trillion US dollars and that of the US at 15.3 trillion US dollars. This indicates that some of the emerging markets are powerful in terms of the economy. Other examples of the emerging markets include Brazil, Columbia, South Africa among others (Amadeo, 2016, p.1).

Challenges faced by foreign seeking to invest in an emerging market (China)

Foreign companies face various challenges when they invest in an emerging market. One of the emerging markets that a foreign company may choose to invest in is China. Some of the challenges that a foreign country would face while investing in China, an emerging market, would be

i. Commercial disputes

Foreign companies seeking to invest in China must be prepared to face commercial disputes. Currently, there is a high number of foreign investors who are investing in China. This has led to increased rates of commercial disputes in the country. To prepare for this challenge, it is advisable for the foreign companies to obtain legal advice which includes the clause on how to resolve disputes (Gov, 2015, p.1).

ii. Pollution

A foreign company seeking to invest in China should be prepared to face the problem of pollution. A recent study showed that the foreign companies in China are experiencing the problem of air pollution. The problem of air pollution makes the foreign companies experience difficulty in recruiting executives to work in the country. The companies are therefore forced to retain their executives. The foreign companies have to pay huge salaries to their executives as compensation for the air pollution effect on them. The high levels of pollution in the country makes it an unsuitable place to work or live and thus likely to discourage the foreign companies (Wong, 2015, p.1).

iii. Problem relating use of IT and the security of data

Foreign companies are likely to experience problems relating to the use of IT as well as exposing their data to threats. Foreign companies in the China too suffer from the negative effects of Internet blocking and censorship. Most websites are blocked in China which is a huge problem especially if the company has some of its function done online. Some of the basic sites such as Gmail and social media sites such as Facebook are blocked in the country. This problem relating to the use of the internet would make it very challenging for a foreign company to operate in the country (Wong, 2015, p.1).

iv. Unwelcomed

A foreign company investing in China faces the challenge of not been welcomed to work in the country. A survey found out that foreign companies are not welcomed appropriately to work in the country like it used to be in the past. This has led to about a third of all the foreign companies in the country to decide not to continue investing in the country in coming years (Wong, 2015, p.1).

v. Labor cost

Foreign companies in China continue to suffer the problem of high labor cost which increase the operational cost of the companies. The foreign companies view this as the biggest challenge that is experienced in China. Therefore, a foreign company intending to invest should be prepared to face the problem of high labor cost (Wong, 2015, p.1).

vi. Complex rules and regulation

Foreign investors in China and their action are regulated by a set of complex rules and regulation. There is no clarity in the rules, and they are inconsistent. Thus, foreign companies are likely to face criminal charges due to lack of comprehension of the rules that govern them (Wong, 2015, p.1).

vii. Take over ones’ business

A Foreign company seeking to invest in China faces the challenge of losing their company to someone else. Some people use chops or official documents or both in taking control of a company without the owner of the company being aware of what is happening. Foreign companies are particularly at a more risk of losing their companies especially if the company is not regularly checked. In preparedness for this challenge, foreign companies should consider preventing the access of chops to people who cannot be trusted and should only be used for the purpose of the implementation of the job (Gov, 2015, p.1).

viii. Threats

Foreign investors are faced with the challenge of being threatened by Chinese investors. Violence threats to the foreign companies are popular in the country. Conflicts between foreign and the domestic investors can last as long as several days and weeks in which the police will not join in to solve the matter. In facing this challenge, foreign investors are required to report the threat to the local police in the nation who will in turn issue the foreign investor with a police report (Gov, 2015, p.1).

ix. Risk associated to the proposed law

Foreign companies investing in China are exposed to the risk associated with a certain proposed law in the country. The proposed law requires that any no company should have a corporate structure. Apparently, there are many foreign companies operating in China which have a corporate structure, and soon, the operation of these companies might be illegal (Millman, 2015, p.1).

x. Bans

Some of the foreign companies investing in China are exposed to the risk of being banned from operating in the country. Such companies include the media who are faced with the challenge of being prevented from making online publications. However, Chinese companies will continue to do their online publication without any intervention to them. This depicts that foreign companies are not only exposed to the risk of being banned but also unfair treatment (Matharu, 2016, p.1).

xi. Restrictions on foreign companies investing in the country

In the past, China has been observed to restrict foreign companies from investing in the country. This has been a huge problem for the foreign companies that have been seeking to invest in China. However, recently the country declared to lessen their restriction to the foreign company investing in the country, something that the foreign companies in the country are hopeful that it will be implemented (Xinhua, 2015, p.1)

Opportunities of Investing in China

In spite of the many challenges foreign companies experience as they invest in China, there is a wide range of opportunities that foreign companies can benefit from in China. An emerging market is a good place to invest in for foreign companies. Some of the opportunities that foreign company can benefit from in China include;

i. Access to China’s stock market

Foreign investors seeking to invest in China are provided with the chance of accessing the stocks market of China. This will not only benefit the foreign companies but the country in improving its economic growth. Foreign investors are allowed to invest in various companies in the country. China has allowed the buying of shares in the country for the foreign companies (Hunter, 2014, p.1).

ii. High profit expectations

Foreign companies are likely to benefit in terms of profit when they invest in China. The Chinese market is one of the most promising among other emerging markets. The market has a fast growth rate as compared to most other countries in the world. In spite of the challenges such as increased competition in the country and labor cost, foreign companies operating in the country have recorded high profits (Denyer, 2014, p.1). It is expected that the country’s economy will continue to grow even in the future and thus foreign companies are assured of continued profits (Wall, 2013, p.1).

iii. Reduced taxation

Foreign companies benefit from the opportunity of reduced taxes on the profits that they make. The previous tax rates were reduced by about fifty percent in an effort aimed at encouraging more foreign investors to invest in the country. Reduced taxations have made the foreign companies record high profits in the country as well as encouraging them, to expand their investment in the country (Davies, 2012, p.1).

iv. Good market

The high population in China provides a good marketing opportunity for the products that a company would produce. Motivated by this factor, most foreign companies have been observed to be attracted to China since the number of potential customers is high. A high number of customers increases the profit earned by a company (Wordwide-tax, 2016, p.1).

v. Advanced technology

The advanced technology in China is an opportunity that the emerging market provides to foreign investors. Advanced technology helps a company in improving its productivity whereas reducing its operational cost. The advanced technology in China has provided a good investment opportunity especially for manufacturing and energy companies among others (Shira, 2013, p.1).

vi. Conducive environment for business

China provides a good environment for foreign companies to do their business. One factor which has contributed to the creation of a good environment for business is the political stability in the country. Every investor prefers to invest in a place where the probability of disruption is low, for examples, lack of constant conflicts and violence (Wsj, 2014, p.1).

vii. Reduced cases of corruption

China provides foreign companies with the opportunity of doing business in an environment where corruption cases are minimal. Corruption has negative effects on business. The Chinese government has launched anti-corruption campaigns which have contributed largely to the reduction of corruption in the country. Some of the actions the Chinese government has done towards fighting corruption is expelling corrupt government officials. The fight against corruption in the country favors the foreign companies seeking to invest in the country (Gov, 2015, p.1).

Conclusion

Clearly, in spite of an emerging country having many challenges to foreign companies seeking to invest in them, they are good places to invest. However, the foreign companies must be prepared to face several challenges. For instance, when a foreign company wishes to invest in China, which is one of the emerging markets, then the company should be ready to face commercial disputes, effects of corruption, threats, bans, and complicated rules among other challenges. A company investing in China is presented with remarkable opportunities such as a good market for the products, advanced technology, reduced taxation among other factors. Based on the weight of the opportunities and that of the challenges, it is advisable for a foreign company to invest in an emerging market.