Forelgn Direct Investment in Chinsa Beginning in the late 1978, China\'s leaders
ID: 1115113 • Letter: F
Question
Forelgn Direct Investment in Chinsa Beginning in the late 1978, China's leadership decided to move the economy away f centrally planned socialist system to the one that was more market driven. The reut been 40 years of sustained high economic growth rates annually. Tis growth attracted substantial foreign foreign investment increased to an 1990 and then of around 8-10%, companded westment, Starting ho. tiny base, annual average rate of $2.7 bilion between 1583 second b a surged to $40billion annualy in the 1990s, making China the recipient of FDI inflows in the world after the United States. The growth has nward investments into China hitting a record $128 billion in 2014 (with another $103 billion going into establishment of more than 300,000 foreign-funded enterprises in China. The total Hong Kongl. Over the past 20 years, this inflow in Mainland China grew from almost nothing in 1978 to $1.1 trlion in 2014 trillion of FDI stock was in Hong Kong). people, oina represents the world's largest market. Historically, impo ethani- difficult to serve this market via exports, so IFD was required id a The reasons for this investment are fairly obvious. With a population of more Organiation in 2001. As Notwltstanding tarnff ras entenprises thars into the country's huge potential. China joined the world Trade result, average tariff rates on imports have fallen from ISA % to about reducing the tarff became a motive for lnvestment in China (although at above the average of 3.5 % found in many developed nations) country to build GUANXI, the crucial relationship networks. Furthermore relatively inexpensive labour and tax incentives, particularly for many firms believe that doing business in China requires a subst themselves in special economic zones, makes China an attractive base from Asian or world markets with exports (although rising labour cost in China this less important) which to serve are now making Less obvious, at least to begin with, was how difficult it would be for foreign firms to d business in China. Chian may have a huge population, but despite decades of rapid growth, is still relatively poor. The lack of purchasing power translates into a relatively immuture market for many western consumer goods outside affluent urban areas such as Shangha conduct business transactions, and shifting tax and regulatory regimes Then there are problems with local joint venture partners that are inexperienced, opportunistic, or sinply Other problems include a highly regulated environment, which can make it problenatic to people to reduce costs, his Chinese partner hired them ll back the nest day, When he inquired why they had been hired back, the Chinese partner, who was operate according to different goals. One US manager explained that when hbad o20 explained that as an agency of the government, it had an "obligaton t rcr To continue to attract foreign investment in late 2000, the Chinese govenmert committed itself to invest more than $800 billion in infrastructures projedts ove Further commitments were made in the late 2000s. This investment has tad 10 years improved the nation's poor highway system. The government has been pursuingaExplanation / Answer
a) Location specific advantages in China are:
(i) With apopulation of 1.3 billion people Hina represents the world's largest market.
(ii) Historically import tarriff made it difficult to serve this market via exports.
(iii) A combination of relatively inexpensive labour and tax incentives particularly enterprises that establish themselves in special economic zones.
b) The ownership advantages of apple investing in China are uge customer base of china and business friendly environment in China
c) Costs and Benefits of FDI to China as host country are:
Benefits:
(i) High economic growth : 40 years of sustained high economic growtharound 8-10% compounded annually.
(ii) Capital inflow for building infrastrycture development.