Why MNCs are scrambling for China
An AT Kearney report in 2004 indicated that China was the most favorable FDI destination in the world. This meant that more and more businesses preferred to invest in China more than any other Nation in the world (AT Kearney 2004). What could have been the elements of the Chinese market that would have favored this result? One thing that was cited as an incentive to the attracting of the multinational investors was the market size of China. It was noted that China offered the best market and the fastest growing for manufacturing and consumer markets. With population of more than one billion people, China provided the best consumer market for any company.
The development of the private sector is another thing that has attracted more MNCs to invest in China. The Chinese government, in order to attract foreign investments, has put in enough effort to ensure that private companies and other projects are run free from government involvement. Through this, the business environment is made favorable because the companies are given opportunity to operate under the market forces and not government influence (Saalman 2004).
Political stability is another factor that has attracted MNCs in China. Most MNCs target regions that exhibit forms of stability that is free from skirmishes and corruption scandals. Though democracies may be viewed as most stable forms of political systems, MNCs do not prefer them. This is because democracies give the workers freedom to form unions, work stoppages, rioting and protesting. MNCs therefore prefer authoritarian governments like China. This is so because these forms of political systems experience little resistance in accomplishing government directives. A good example is given of the Chinese government’s directive to ban inexpensive cars on the streets because of their high pollution rates. It took only a few months for the directive to be achieved (Saalman 2004).
Favorable Chinese infrastructure has also attracted the investments of MNCs. Transport systems including viable roads and water ways can act as an incentive to MNC investments. This interspersed with good factories provides linkages between regions that is necessary for transportation of products from one region to another. Other infrastructural factors include dependable electricity, water supplies, and sanitation facilities among others. Presence of these infrastructural facilities in China made it easier for establishments of companies. It encourages cheap goods due to reduced costs of transportation and production (Saalman 2004).
Another aspect of China that has led to many multinational companies scramble for its market is the accessibility to foreign markets. Working in China gave any company a wide range of export choices due to diverse associates and interests in the Chinese market by many other countries and multinationals (AT Kearney 2004).
The government incentives by the Chinese government are favorable to the establishment of MNCs in China. A good example is the tax incentive that has been used to woe investors into China. The standard tax in China is 30%. As an incentive, the government can reduce the tax to as low as 15% to companies that are marked as “technologically advanced Enterprises,” Carnes (2009). In addition, companies that increase their capital base through reinvesting of their profit domestically get a 40% refund of the total amount that had been charged in terms of tax. These lucrative incentives are not only offered by the central government but also the local governments offer their own local incentives so as to attract foreign investments to their regions.
Ideologies, political systems and their effects on MNC operations
Luthans & Doh (2004) define ideology as “ideas reflecting beliefs and values influencing behavior/culture of nations and political systems. This can be classified in three major categories. These are:
This is the type of ideology characterized by capitalistic societies. The main idea is the freedom of people to pursue their economic and political goals without being interfered by the government. This can be done through the provision of free markets. In these types of political and economic systems, there is evident progress in that the private ownership of property gives an incentive for people to work harder to achieve their ambitions. The society therefore attains an elevated standard due to the freedom given to the individuals to pursue their goals economically.
This is the type of ideological system that puts less emphasis on the individual in terms of struggling to achieve the economic goal. Individual’s desires are viewed to possess less importance as compared to the general good of the whole society. The goals of each society differ from one another. This causes a difference in the rigidity of collectivism. The best example of collectivism is fascism which includes nationalism, authoritarianism, corporatism and militarism.
This could see as the moderate form of collectivism. It greatly characterized by government ownership of all institutions. In this ideological system, the welfare of the society surpasses individual interests’ therefore making profit a second hand consideration. Countries that have this form of ideologies are Cuba, North Korea and the People’s Republic of China. While democratic socialism is considered the most moderate form of socialism, communism is considered to be the other extreme.
The ideologies of a nation are the basic foundations from which the political system is built. It is from these ideologies that a government can be oppressive to its citizen or give the citizens a favorable environment encouraging them to pursue their ambitions economically and politically. As a result, two political systems are formed. These are
This is the type of political system that dwells in the hands of the people. They can control it directly or indirectly through elections. In this system, there has to be more than one party which gives the citizens the rights to choose from the several available a government of their choice. It is therefore the responsibility of the chosen government to conduct its affairs according to the desires of its citizens. The elected leaders are directly answerable to the people who elected them.
This political system is characterized by one party which has powers over all the aspects of human life including their political and economic endeavors. The dominant party thus controls even the opposition through suppression. This is easily achieved through the suppression of the media, and political representation.
China has, for a long time exhibited the collectivism ideologies which eventually gave birth to a totalitarian political system. This meant that most of the institutions were owned by the government. The individuals were not given the right environment to pursue their economic goals. This meant that that penetration into the market by the multinationals was difficult. It was therefore important that the political system be changed in order to liberate the market giving individuals freedom to engage in business activities without being restrained by the government. As shown in the example above, individualism promotes hard work and thus giving incentives for individual efforts to attain the desired goals. This could not only be favorable to the domestic investors, but also foreign investors in terms of MNCs and other forms of Foreign Direct Investments.
Mounting international pressure has now brought changes to the Republic of China. According to Kearney (2009), the liberation of the market and other market elements have made China the most favored FDI destination in the world for the last three years. But how has the political system of China contributed to the operations of the MNCs?
The political system of the government can directly affect the MNC operations within its territory. This is possible through policies that the government puts up to encourage foreign investments. For example, taxation on foreign investors can play a great role in their investment decisions. Special tax reductions under some conditions can attract investments. A good example is China’s reduction of taxes on technology oriented companies and companies that re-invest their profits.
Other policies like opening up the market by encouraging free market can also encourage MNC investments in a country. By joining the World Trade Organization in 2001, China opened up its markets to other members of the Organization and also allowed its citizens to export their goods to other countries. In 2000, before joining the WTO, China’s FDI inflows accounted to US$40.8billion. In 2001, they joined the WTO during the time when global economic status was not promising. Compared to other investment option, China’s market looked more lucrative and thus attracted more investors. Some of the sectors which had died like the service sector were revived by the foreign investors. This increased their FDI inflow from 2000’s US$40.8 to US$52.7 in 2002. This means that the government’s decision to change its policy on the liberation of the market attracted foreign investments (HKTDC 2009).
Other government policies that can affect the environment into which MNCs operate is the release of government enterprises to share holder corporations. In 2005, China started a privatization effort that was aimed at giving power to the individuals in terms of running business enterprises. The 1379 companies listed on the two stock exchanges in China boasted several State owned companies which accounted to a total turnover of US$300 billion. Among the most affected in terms of privatization are the State’s power generating firms, telecommunication firms and even companies involved with natural resources. An investment symposium held in June 2003 in Jiangsu province revealed that more than 72 contracts worth US$2.2 billion had been signed giving state owned enterprises into private hands (Cheng 2005).
Privatization of State owned enterprises was also instrumental to the making a favorable environment for the MNCs. Before this reform, the banking sector was completely under the control of the government. The influence of the central government forced the banks not to operate basing on the market forces principles. It was the decision of the State to decide on how the interest would be allocated to the enterprises. The banks were forced to finance the State owned enterprises by providing loans which were never repaid. In 1998, the enterprises owed the banks more than $250 billion in terms of bad debts. Therefore, the privatization of State owned enterprises allowed the banks to operate according to the market principle forces and not financing according to the political orientation. This also opened their banking sector to foreign competition. With competition came quality services that eventually attracted the MNCs (Morrison 1998).
Government regulations can adversely affect the environment in which the MNCs work. Strict regulations that are based on benefiting the government at the expense of the MNC will always discourage the FDI prospects. In China, before joining the WTO, there were three categories of regulations (Long 2004). These were:
This policy stated that, “FDI shall be able to keep a balance of exchanges, or make sure the proportions of their domestically made products in the total number of products reaches a certain benchmark, or a certain percentage of their products must be exported.” This compulsory regulation was eliminated after China joined the WTO because it was found to be inconsistent with the WTO’s Agreement on Trade Related Investment Measures.
The overall aim of the neutral regulations was to ensure that the playing ground was level for both the MNCs and the local industries. Any re-exportation was subject to tariff and VAT exemptions. This was meant to give the Chinese companies a fighting power in the overseas markets.
These regulations were voluntary. Companies were encouraged to adhere to them for their own benefits. One of them was the export regulation which stipulated that an enterprise had more than 70% of its products aimed for export was entitled to 50% waiver in corporate income tax.
Availability of labor is instrumental to the day to day activities of the multinationals. It is therefore the responsibility of the government to ensure that most of its citizens are given training so as to be able to provide skilled labor. This is one of the efforts that the Chinese government has embarked on doing. The Chinese government made, as part of its reforms, a decision to retrain its workers to meet the required international level (Long 2004).
AT Kearney. (2009). “China and India Jockey for the Top Most FDI Destination Globally.” Web.
Carnes, D., (2009). “Investing in China- Tax Incentives Offered by Chinese Government.”
Cheng, E., (2005). “China: Privatization Extends to Key Sectors.” Green Left online. Web.
Doh, J.,& Luthans F. “The Political, Legal and Technological Environment.” International Management.
HKTDC. (2009). “Foreign Direct Investment in China.” Economic Forum. Web.
Hodgetts & Luthans. (2003). “International Managements.”
Long, G., (2009). “China’s Policies on FDI: Review and Evaluation.” Peterson Institute for International Economics. Web.
Morrison, W., (1998). “China’s Economic Conditions.” CRS Issue Brief. Web.
Saalman, L., (2004) “The Fdi Paradox: China’s Socialist Market and the ‘Develop the West’
Campaign.” Monterey Institute of International Studies. Web.
Williams, D., (2008). “China.”