Term Paper: Vision Report on Business

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Vision

Report on business

Report on doing business between developing and developed

The current paper is a report on assessment of scope of business development in Chinese Textile sector by UK Multinational Firm. The researcher has analyzed the current state of Chinese economy, infrastructure, rules and regulations for Foreign Direct Investment as well as cultural and economical conditions in order to decide whether the UK-based multinational firm should export its products or establish operations in China.

In addition to this the author explored the potential for investment in Garment Sector assessing the laws for investment as well as availability of infrastructure and labor in this sector. The researcher has also described potential risks foe establishing business in China.

Investment in China

Foreign direct investment (FDI) is defined as investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. In the highly interconnected and globalized current world economy, FDI plays an essential role in international business such that it is the largest source of external finance for developing countries, where FDI inward stock amounted to about one third of their gross domestic product (GDP) (UNCTAD, 2011).

Among the many developing countries seeking economic growth from FDI, China is undoubtedly the most successful one, as it has been the biggest developing host country in the world since 1993 and considered to be the most attractive FDI destination (WTO, 2011).

Since Deng Xiaoping announced economic reform and "Open Door" policy to attract foreign investments in 1979, FDI enjoyed unprecedented growth in China, as many multinational enterprises (MNEs) benefited from the preferential treatment from the Chinese and local governments. Others, however, experienced foreseen and hidden difficulties, some of which stemmed from ideological, cultural, political system, and economic differences (Luo, Y., 2000).

After decades of devastating foreign invasions and chaotic civil wars, the Communist Party of China (CPC) leader Mao Zedong proclaimed the establishment of the People's Republic of China (PRC) in 1949. China went through a series of dramatic social and political changes since then, including land reform, the Great Leap Forward movement (1958-1960), "Three years of natural disasters" (1959-1961), the Great

Major hurdles and hidden problems accompanied the rising growth rates. The unemployment rate, after a major decrease in the 80s, rose continuously in the 90s, worsening the shrinking domestic market situation. Almost half of state-owned enterprises (SOEs) were reporting losses and carried huge amounts of bad loans, burdening the already crumpling banking system. To alleviate these problems, Zhu Rongji proposed a dramatic reform plan to privatize SOEs by selling, merging and closing the vast majority of SOEs in 1997. In 2000, China claimed success in its three-year effort to make the majority of large SOEs profitable at the expense of millions who were laid off their SOE jobs. Despite Zhu and his successor's effort to provide financial safety nets for unemployed workers, social instability and extreme frustration from laid-off workers cast a heavy shadow over the claimed successful SOE reform.

Proletarian Cultural Revolution (1966-1976) and subsequent recovery (1976-1978) (Bailey, P, 2001) in line with the accumulated fast economic growth, living standards continued to improve. In the decade between 1990 and 2000, household income and expenditure per capita increased 4.1- and 3.7-fold, while savings creased more than 8-fold other indices also increased, including housing, public transportation, education, health care and pension insurance. Most prominent are the ownerships of motorcycles and cellular phones, once considered rare commodities becoming common items. The new dream of "three durable goods" in the late 1980s and early 1990s, i.e. color televisions, washing machines and refrigerators, came true in just a few years for most urban Chinese, many of whom also acquired a wide range of other consumer goods such as DVD players, cellular phones and computers at the same time. During 1990-2001, the number of refrigerators, color TVs and cameras owned per 100 urban households doubled, meanwhile one third of the urban population enjoyed air conditioners and cellular phones. Living conditions in the rural areas improved even more greatly. The ownership of refrigerators and color TV increased more than 10 folds, while that of washing machines increased more than 3 folds. In 2001, one quarter of rural households owned a motorcycle. However, as compared with the urban population, rural Chinese were still in a plight.

In line with the rapid growth of the domestic economy, FDI also boomed in this stage. After Deng's 1992 Southern Tour and the subsequent improvement of the general investment environment including the previously discussed FDI-friendly laws and regulations, there was a 150% increase of FDI flow in 1993, making China the largest developing host country of FDI since then, a qualitative change from years of accumulated quantitative changes since 1979. From then on, five consecutive years of double-digit growth led to an overall FDI stock in 2000 three times of that in 1993. In 1998, authorities significantly streamlined the FDI approval procedures by removing the requirement that projects larger than $30 million be reviewed by the central government (Huang, Y, 2003) FDI significantly enhanced China's export capacities, with an annual 15% growth rate between 1990 and 2001. The situation of negative balance between import and export was also changed, bringing substantial amount of foreign exchange reserves.

Dunning (1977) proposes three pre-conditions (necessary conditions) for a firm to become a multinational enterprise (MNE), which are better known as the OLI framework, that is, ownership, location and internalization advantages. An ownership advantage refers to some intrinsic characteristic of a firm that leverages its investment abroad, for example, patent, trademark and managerial expertise. A location advantage is better known as the "proximity-concentration hypothesis" (Brainard, 1997), which refers to the decision between FDI and exports. Directly investing and producing in a host country outweigh producing domestically and exporting to that host country, when trade barriers and trade costs are high or when the factor prices are low in the host country. Lastly, an internalization advantage concerns the tradeoff between FDI and licensing arrangements. Even if producing abroad is more profitable than exporting, a firm still needs to make a choice between FDI and licensing some foreign firms in the host country. A firm internalizes its foreign production and becomes an MNE, when FDI is more advantageous than licensing arrangements. Most theoretical and empirical studies on MNEs thereafter are based on Dunning's framework.

3. China's Favorable environment for Investment

Hu's political agenda sought to maintain social stability to further economic development and sustain Chinese culture to enrich national sovereignty. The Hu-Wen administration aimed to lessen inequality and change the previous "pursuit of GDP at all cost" policy (Kimber, D. And P. Lipton,2005). They focused on the gap between rich and poor and uneven development between the interior and coastal regions. They aimed at robust development of the welfare and social insurance system. They believed in a sustainable model of growth and envisioned China's future in a "Scientific Development Perspective." Hu called for the modernization of the Party and increase in government transparency and openness to the public. He ordered publication of many Party meeting details and cancelled many traditional Communist extravagances. Hu emphasized the importance of democracy and political reform, which was unprecedented in the Party history. Hu also provided strong moral guidance to Chinese public by promoting "eight honors and disgraces," which stressed traditional values and selflessness, in an attempt to correct the lack of morality in Chinese with eyes only on monetary gains for more than two decades. Such actions led to an unprecedented increase in Chinese nationalist sentiment, which sometimes turned out to be more challenging than the government expected democracy and political reform, which was unprecedented in the Party history. Hu also provided strong moral guidance to Chinese public by promoting "eight honors and disgraces," which stressed traditional values and selflessness, in an attempt to correct the lack of morality in Chinese with eyes only on monetary gains for more than two decades. Such actions led to an unprecedented increase in Chinese nationalist sentiment, which sometimes turned out to be more challenging than the government expected.

Internationally, Hu actively advocated China's "peaceful development" and strongly opposed the "China Threat" view. He also aimed to form more diverse alliances with other countries in contrast to Jiang's U.S.-centered foreign policy. China also took more responsibilities in international issues such as the "North Korea" talks, anti-terrorism and globalization.'

4. Reforms in Legislation

Since the "rule of law" was written into the Constitution in 1999, the legal system in China has also made substantial progress under Hu's leadership. China's accession in the WTO also greatly enhanced the sophistication of the legal system.

New laws and revision of existing laws and regulations greatly increased in accordance with WTO's legal requirements. Most significantly, the Constitution was amended in 2004 to guarantee private property and human rights, arguably a sign of Chinese democracy. Property Law was also promulgated in 2007, further safeguarding private property. A handful of other laws were also published (Clarke,2007). It is therefore safe to say that China now has a civil… [END OF PREVIEW]

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