Economic Orientation of China - Essay Example

?International Business Case Study: China Table of Contents Table of Contents Background 2 Political Factors 2 Legal Framework 3 Economic Factors 34 < http://www.saylor.org/site/wp-content/uploads/2011/02/Economic-Growth.pdf> 4 Some of the factors that have contributed to the rapid growth include favourable economic policies, prioritising and promoting the growth of the local enterprises and government investment. 4 Economic Policies 4 Prioritising Local Enterprises 5 Government Investment 7 Technology 8 Recommendations 9 Focusing On Political, Economic and Technological Factors 9 Rebalancing Strategies 10 Globalisation and International Integration 10 Resource Competence and Analysis 11 Implementing Sustainable Economic Development Strategies 12 Conclusion 13 References 13 IMF, World Economic Database (2005). GDP Accumulated Growth, in percent, constant prices. < http://www.saylor.org/site/wp-content/uploads/2011/02/Economic-Growth.pdf> 14 International Business Case Study: China Background The growth of the Chinese economy has captured global attention, especially due to its 15-year sustained progress. The miraculous economic prosperity started in 1979 with the implementation of Xiaoping's economic reform policy. This earned China the status of being the world’s fastest-growing economy. Such growth is difficult to achieve considering that the country’s population comprises one-fifth of the world’s population. The following essay explores the reasons behind Chinese rapid economic growth and offers explanations focused on political, economic and technological factors. Political Factors The focus on political factors involves the analysis of the Chinese constitutional system. The Chinese government is a communist regime. The country is governed by a sole political party; Communist party of China. The communist administration has the power to control all business activities undertaken within the Chinese territory. This implies that the establishment of an international business venture in China directly promotes growth of Chinese economy and enhances the stability of communist government. However socialist, the stability of the Chinese government enhances economic growth because all efforts are geared towards economic prosperity rather than resolving political issues as is the case in democratic economies (Business Monitor International, 2008). The low public involvement in decisions involving business activities indicates that the favourable strategies formulated by the communist government have the ability to promote economic proliferation more effectively compared to democratic economies. However, this form of business control may be ineffective because lack of public contribution may have adverse economic setbacks that may cause instability in the present and future economic orientation. Legal Framework Additionally, the Chinese legal framework is moulded on a communist perspective. This discourages international investors because their democratic views may conflict with the socialists’ perspectives leading to uncertainty (Avusgil, Knight and Riesenberger, 2011). The weak inconsistencies and wording between local and national regulations makes Chinese laws subject to interpretation. The judicial system is also unreliable as most judges are vulnerable to discrimination. This may force them to make unlawful rulings on cases related to business issues. Such legal malpractices amount to lack of freedom in making international business decisions. However, China government has adopted trade ad investment legislations that ensure investment fairness for both international and local companies. One of the strategies involved in levelling the business playing field is decentralisation of international trade business activities. This provides a fair autonomy for international companies to make independent decisions related to business activities upon investing in China. Decentralisation has led to the current increase in the number of joint business ventures in China. Another strategy involved in the rapid Chinese economic growth is the presence of economic freedom. Economic Factors The economic orientation of China has rapidly improved immensely compared to that of the other countries. The diagram below illustrates the changes in the GDP of various nations overtime compared to that of China. The diagram below is an illustration of the GDP real growth rates in major countries form 1990-1998 and 1990 to 2006. China is portrayed as having recorded the highest growth rate compared to other countries. < http://www.saylor.org/site/wp-content/uploads/2011/02/Economic-Growth.pdf> Some of the factors that have contributed to the rapid growth include favourable economic policies, prioritising and promoting the growth of the local enterprises and government investment. Economic Policies The economic policies of the Chinese government are framed to suit the requirements of the World Trade Organisation (WTO) because it is a signatory to WTO agreements (Cheung, 2008). This factor provides an opportunity for foreign companies to engage in commercial activities in China. However, this opportunity may experience drawbacks because the government signed the agreement recently in an international environment loathed with trade barriers and restrictions. Such drawbacks are related to institutional problems such as cultural and cognitive, normative and regulatory institutions. Assessment of regulatory institutions in China indicates that the government lacks codified guidelines on proper governance of institutions; this exposes them to arbitration and distortive implementation of business laws. Corruption and network of relationships have monumental negative impact on the normative institutions (government included). This arises due to changes in the business operations meant to align their activities with the local business culture. Focus on the cultural and cognitive perspective of the business institutions confirms that China business environment is much superior to other international markets e.g. European business environments. This is because business conflicts are effectively resolved through informal means. This negates the inadequacies associated with formal paradigms of conflict resolution. Additionally, informal means of resolving business conflicts enhances trust which is an eminent factor in the establishment of productive business relationships. Systemic integration into the WTO guidelines implies that the company will still continue to face economic challenges within the course of transformation. Such challenges include management of environmental degradation, curbing extreme levels of rural urban migration and demographic pressure. Prioritising Local Enterprises The Chinese government’s approach of enhancing protection and prioritising the local companies over international firms discourages foreign investors (Fan, Ravi and Xiabo, 2009). Nevertheless, the local business ventures harness this opportunity to expand investments and compete favourably with international firms; enhancing economic progress. The Chinese international trade regulations are formulated depending on the "Foreign Trade Law of the People's Republic of China." The stiffening legal environment provided by the restrictions presents challenges to investment. The Chinese government’s attitude portrays a love-hate relationship with the Western countries i.e. the country is yearning to acquire the western technology but reluctant to adopt democracy. This poses challenges to the international companies used to democratic business environments. However, the popularity of imported products among the local middle class enhances trade as multinational companies capitalise on customer needs to create a competitive edge. For instance, studies have shown that the middle class prefer purchasing products possessing attributes of the western culture than the ones denoting the local culture. This enhances fair competition between local and international products. The economic factors are related to the high population that expands the economic orientation of the country and its membership to world trade organisation. Traditional reduction in investment freedom in China contributed to a hasty growth of the Chinese companies. A combination of factors that amounted to reduced investment freedom include import and export restrictions and bans, non-transparent tariff classifications and state trading in certain products while sidelining others. Investment freedom has also been curtailed by issues related to protection of intellectual properties and biased subsidies. However, the Chinese government realised that the focus on the growth of the local enterprises alone is not sufficient to enhance growth. Therefore, the government adopted strategies aimed at transforming the business environment. Lifting bans and revising restrictions improves accessibility of the local market by international companies and promotes direct foreign investment (Headey, 2008). Other strategies adopted to enhance business freedom in China include supermarketisation and opening of the market to foreign multinational corporations. This has created favourable business terms that ease investment in China. For instance, it takes 37 days to establish a business venture in China compared to the global average of 38 days (Heilmann, 2008:1?26). Influx of foreign investments led to capital inflows and expansion in international trade. Increased foreign exchange inflows led to development of Chinese economic provinces such as Taiwan. These have largely contributed to the rapid development of Chinese macro-economic orientation because such hubs provide additional strategic locations for investment. Government Investment The government is currently investing $175 billion for environmental improvements as stipulated in the environmental policy. This is because the current ecological degradation due to enhanced economic development is posing a danger to future economic growth; especially due to the deterioration of economic relationships. The immense use of coal to satisfy the current energy requirements has made China the second world largest producer of carbon monoxide (Countrywatch.com, 2008). The Chinese market is huge due to the high population; the 2010 Census report denotes a whooping 1.4 billion citizens. This market has the potential to attract investments and eventual economic development. The economic segmentation in terms of regions has enabled the country establish economic hubs that controls the economic activities in various geographical subdivisions. For instance, every province possesses a capital that controls the economic orientation of the surrounding regions. Therefore, foreign companies target these capitals to invest and take advantage of the surrounding regions. The current trend in rural-urban migration reveals that the urban regions in China are being packed with a horde of urban consumers. Investing in such locations ensures maximum economic benefits. One of the key challenges that the Chinese economic system faces is related to imbalance. The imbalance in the growth model is largely a product of global financial crisis. The imbalance is signified by the high savings rate with low consumption rates and more exports. The imbalance in the economic model of China takes the form of long-term reliance on low-cost labour, deficient of home grown brands, innovation and technology and low-value added manufacturing (Dwayne, Brandt and Giles, 2005:769–824). The imbalance is also structural whereby the south-eastern coast is economically stable compared to the interior regions. Majority of the resources are controlled by state-owned companies. Careful inspection of the Chinese economic model proves that it is asymmetrical. Understanding of such challenges by the investors enables them to devise coping strategies for economic proliferation. The rapid economic growth is also a factor of technological advancement. Technology The application of information technology level in China is growing rapidly and attaining the standards of global efficient economies. The rapid growth in economy has made the Chinese government apply improved technology to promote output in all economic sectors. Chinese leadership considers improvement in technology as the central aspect of modernisation plan of the country. The positive reception of technological advancement in China has been confirmed by 2000 research statistics that posits that the internet usage in China registered an appealing membership of sixteen million users (Jefferson, 2008:167?209). The mobile phone subscriptions have also sky rocketed to 461 million. Growth in the application of technology in commercial activities in China indicates that the foreign companies have the opportunity to invest and harness technology in the enhancement of business operations. Additionally, this signifies enhancement in ICT market. Although Chinese companies are struggling to catch-up with technological changes, the progress is rapid because these firms are mimicking technological advances from the western countries and combining it with the low-cost manufacturing. However, mimicking and copying are only applied for a certain period after which high sophistication levels allows them to innovate and create their own technology. The development and spread of the new technology among Chinese companies levels the playing field for all market players, giving them a chance to establish competitiveness in relation to their competitors. Chinese companies have also embarked on research and development to enhance innovation (Keyser, 2003). Most economic agents have established their own innovation ecosystems and enhanced the quality of their products through enhancing creativity in products and processes. For instance, focus on innovation has led to advancement in technology areas such as wind turbines, nuclear energy, fuel cells and high speed trains. The political elite are also considering revision on laws governing foreign investments. According to Bush (2008) the Chinese government is currently ratifying the laws governing international trade. One of the laws revised by the Chinese government is the Law of the People’s Republic of China on Chinese-Foreign Contractual Ventures. This portrays the willingness of the Chinese government in promoting foreign investments. Recommendations Focusing On Political, Economic and Technological Factors The future strategic progression in China should be based on the focus in political, economic and technological factors. The analysis of the three factors in eminent considering that China has undergone massive economic changes since 1979. Currently, business firms in China are allowed to operate and interact on free market principles in contrast to traditional arrangements. This calls for the firms to analyse the business environment. The flawless that characterise Chinese economic and social orientation should be eliminated to give people the political and economic freedom. One of the distinct elements of human progression is offering people an opportunity to make decisions and plan for their own lives. This promotes participation; enhances and sustains economic progression. Participation should be enhanced through focus three central planning mechanisms; devolved planning of production, allocation of materials in a decentralised pattern and strategic management of expenditures and revenues. Decentralisation gives economic autonomy to the people through granting rights of economic choice and market economy (Zhang, 2006:713?726). This provides the incentives required in improving their income. Additionally, this will enable the small-scale enterprises set-up profit generating arrangements with the government, make reasonable decisions on selling and buying in response to the marketing signals and control fringe benefits. The country should balance its economic growth model. Rebalancing Strategies Rebalancing strategies should be applied to transform and rectify the aftermath of the financial crisis that brought an imbalance in the Chinese economic model. Rebalance will entail a shift from dependence on the advantages in labour costs and refocus attention on innovation and creativity, reliance on high-end technology and precision manufacturing (Wild and Wild, 2011). Rebalance should enable the country shift from low-end imported products and establish one’s own brand that assists in setting-up improved marketing channels. Rebalancing should target local customer or public loyalty towards locally produced goods. The country should reduce its overdependence on exports and investment to stimulate internal economic growth. The economic transformation should enhance transformation from land-intensive and energy-intensive growth model to an environmentally viable and energy efficient model. Rebalancing will promote the formation of a new business environment with new business model that possess the force that shape the future. Response to market changes and utilising the emergent business opportunities will enable the Chinese economy to be competitive. However, the country will not avoid the risk if rebalancing is left in the hands of economist and scholars alone or the concept exposed to political criticism. China should focus on globalisation and international integration. Globalisation and International Integration The current rapid growth in the Chinese economy is largely due to globalisation and international integration. Economic globalisation provides an opportunity for sustained economic growth. Future economic progression will be realised if the Chinese government develops the right attitude for pursuing the marketing economy, respecting the marketing rules and active engagement in the global division of labour. The rapid economic growth should guide the nation in taking a wider view of expanding the development space, taking more responsibilities in the global economic affairs and redefining its current position in the global business system (Griffin and Pustay, 2010). Impediments to future prosperity and sustenance of economic progression cannot be achieved if China does not focus on external global business instead of laying all its attention on the internal strategies. China should further take advantage of the current instability in international business to redistribute its resources and expand global business operations to enhance growth. The country should focus on the mismanagement mistakes that led to financial crisis and establish efficient for improvement and rectification. This will help in curbing any crisis that may compromise future economy prosperity. The local enterprises should also re-adjust their macroeconomic growth models to sustain growth. The old and familiar business models are not effective in the current competitive markets. Search for new marketing model is imperative in the survival and success in the current economic environment. The enterprises should be built on the premise of five development elements namely the quality of personnel, leadership abilities, organisational structure, technology and the criteria for measuring success. The country should focus on resource and competence analysis. Resource Competence and Analysis This strategy enables business firms to identify and understand the value of the company resources, competencies and capabilities. Resource and competence analysis promotes coordination in complex and adaptive situations as well as presenting the required insights necessary in the provision of the required information on the global economic direction. Research in the current economic trend in China indicates that most decision makers are applying strategic tools to boost efficiency more than creativity and innovation. This leads to conflict between creativity and logic, emergence and deliberateness. This indicates that managers should be encouraged to promote creativity and innovativeness (Wall, Minocha and Rees, 2010). Most strategic decisions in China are based on strategic tools derived from Western countries. This implies that domestic application of these tools will depend on the level of creativity failure to which the strategy will not be successful. Economic stakeholders should push for setting of optimum prices that are fair to both customers and the companies. The right price enhances business activities because both the buyers and sellers will be willing to trade based on the ability of the market to fairly satisfy their needs. Satisfied buyers and sellers promote business activities and enhance sustained growth. China should enact strategies aimed at amending the stalled relations with its neighbours such as Japan. Strengthening relationships with the western governments alone is not enough to utilise future international interlinks in promoting economic progression; economic solidarity with the neighbours is also eminent. Future economic prosperity is built on the premise that the local people should be economically enhanced. More attention should be directed to the poor, retired, disabled and laid-off. The Chinese government should increase the provision of staple food and economic promotion to the local people to enhance their economic capability and strengthen the economic status of the rural and urban population. The country should be ready to implement sustainable economic development strategies. Implementing Sustainable Economic Development Strategies Chinese business stakeholders should prioritise issues such as carbon emissions, reduction strategies, environmental protection and sustainable development (Daniels, Radebaugh and Sulivan, 2011). Chinese economic prosperity in the future will be dependent on the country’s strategies geared towards reducing harm to the environment. Short-changing the environmental health for development is unsustainable because it directly affects human health. Excessive exploitation of natural resources leads to possible exhaustion of natural resources thus compromising the future production. Sustainable development in China should go beyond protection of the environment or resources. Ensuring economic growth involves addressing issues related to corporate institutions and business culture, promoting the enterprises’ civic consciousness and their attitudes to social responsibility and moulding networks to promote social responsibility. Conclusion Economic progress should focus on political, economic and technological factors. The political factors encompass economic freedom and the favourable constitutional system that promotes trading activities. Economic progression is related to the high Chinese population and membership to world trade organisation membership. Sustaining economic growth requires creativity, innovation, brand-building and adopting customer-friendly attitudes. References “China Business Forecast Report” (2008) Business Monitor International 1st Quarter. Avusgil, S.T., Knight, G.A. & Riesenberger, J.R. (2011) International business: the new realities, Upper Saddle River, N.J., Pearson Education. Bush, N. (2008) ‘Anticipating Chinese Antitrust Policy’ China Business Review, January-February 2008. Cheung, S. (2008) “The Economic System of China,” Paper presented at the 2008 Chicago Conference on China’s Economic Transformation, pp. 14?18.  Daniels, J.D., Radebaugh, L.H. & Sulivan, D.P. (2011) International business: environments and operations, Boston, Pearson. Dwayne, B., Brandt, L. & Giles, J. (2005) “The Evolution of Income Inequality in Rural China,” Economic Development and Cultural Change, vol. 53, no. 4, pp. 769–824.  Fan, S., Ravi, K. & Xiaobo, Z. (2009) Regional Inequality in China: trends, explanations and policy responses, Rutledge, forthcoming.  Griffin, R.W. & Pustay, M.W. (2010) International business: a managerial perspective, Harlow, Pearson Education. Headey, D.D. (2008) Book review of ‘One Economics, Many Recipes: Globalisation, Institutions, and Economic Growth’ by Rodrik, D., Journal of Development Studies, vol. 44, no. 3, pp. 449?458. Heilmann, S. (2008) “Policy Experimentation in China’s Economic Rise,” Studies in Comparative International Development, vol. 43, no. 1, pp. 1?26. IMF, World Economic Database (2005). GDP Accumulated Growth, in percent, constant prices. < http://www.saylor.org/site/wp-content/uploads/2011/02/Economic-Growth.pdf> Jefferson, G.H. (2008) ‘How Has China’s Economic Emergence Contributed to the Field of Economics?’ Comparative Economic Studies, vol. 50, no. 2, pp. 167?209.   Keyser, C. (2003) Professionalising research in post?mao China: the system reform institute and policy making. New York, M.E, Sharpe. Wall, S., Minocha, S. & Rees, B. (2010) International business, Financial Times/Prentice Hall. Wild, J. & Wild, K. (2011) Pearson College Div? International Business with MyIBLab:Global Edition, 6/E? Zhang, X. (2006) ‘Fiscal Decentralisation and Political Centralisation in China: Implications for Growth and Regional Inequality’ Journal of Comparative Economics, vol. 34, no. 4, pp. 713?726.  Read More