The Rise of China and the Subsequent Re-Shaping Of Business Environment for MNEs (Multi-National Enterprises) - Essay Example

The rise of China and the subsequent re-shaping of business environment for MNEs (multi-national enterprises) 1 Introduction Globalisation, which is the primary force behind driving the present world economy, is best defined as “the process through which an increasingly free flow of ideas, people, goods, services and capital leading to the integration of economies and societies” (IMF, Globalization: A Framework for IMF Involvement, 2002). Even though this is not a new phenomenon, the recent globalisation trend has led to substantial development and changes in the arena of global commerce, flow of capital, and movement in human resources. Modern era globalisation has taken its present shape due to three primary reasons: technological innovation leading to worldwide networking and integration; global integration of emerging economies of developing countries; and opening up of by previously closed economies of countries like Brazil, India and China (BERR, 2009, 1). MNEs (Multinational Enterprises) are the product and the most visible aspect of globalisation (Pitelis, and Sugden, 2000, 72). A  MNE controls material production and/or provides services to a large number of countries worldwide. MNEs conduct their operation (material production) in one country, which is generally termed as the ‘host country,’ while base their management activities in another country, referred to as the ‘home country.’ Some of these MNEs are large and powerful, often operating with budgets that are more than the GDP of some of the developing nations in the world (Gabel and Bruner, 2003, 2-3). The emergence of MNEs along with globalisation is evident when we find that during the 1970s there were around 7000 MNEs, which at the turn of the century skyrocketed to around 60000 (Roach, 2005, 24-28). Around the same time, we find that the world’s largest MNCs and MNE’s (top 1000) accounted for almost 80% of the global industrial production, while the top 100 corporations and enterprises were responsible for 4.3% global GDP (ibid, 31-34). At the core of globalisation and the rise of the MNCs and MNEs, is the emergence of China, as an economic power; and this article will examine the rise of Chinese economy and its particularly good relationship with various MNEs, and the recent break in this ‘good’ relationship leading to re-shaping of business environment for the MNEs in China. 2 Discussion 2.1 MNE’s and their strategies Multinational corporations tend to induce strong influence on local economic conditions of their ‘host countries,’ while also affecting the global economy, and owing to their large assets they are often in a powerful position to play an important role within the arena of globalisation and international relations  (Gabel and Bruner, 2003, 2-3). Governments at the national and local levels often put up a competition to bring in MNEs and subsequent FDIs, resulting in increased national/local employments elevated tax revenues, and enhanced economic activities. In order to lure the MNEs the governments often offer incentives  in the form of subsidised tax rates, subsidies in infrastructural development, all time governmental support, and even in the form of loosening up of stringent environmental norms and relaxing labour regulations. These measures of attracting MNEs are often labelled as a ‘race to the bottom,’ (Scram, 2000, 91) and criticised by the economists. However, Jagdish Bhagwati, a renowned economist, has contended that in countries that have relatively lax environmental norms, low labour wages, and little or no social protection of the local labourers, MNE’s use a strategy known as the 'race to the top' (Bhagwati, 2004, 122–195). Here the MNE’s while viewing low labour wages, tax subsidies as being of relative advantage, Bhagwati refutes the claims of other economists that all MNEs deliberately choose countries that have poor working standards or have less stringent environmental regulations or poor labour standards (ibid). Here he states that that since MNEs are primarily profit-oriented they are bound to have some sort of functional efficiencies, that would comprise of high standardisation levels. Thus, the MNEs have a production procedure followed internationally, even under rigorous jurisdictions like US or Japan. Even though these MNEs generally pay the workers in developing countries less than their counterparts in the developed nations, however the former workers get paid the many times more than the local labour rates (a premium of almost 10-100%) (ibid).  Owing to their large size, MNEs are often in a position (and they quite often use this power) to threat to withdraw from the market, leading to strong effects on the host governmental policies. This way the MNEs can force the host government from bringing in unfavourable policies or regulation’s. MNEs also use the strategies of lobbying, and patenting their products, to retain their market share and power, within the global market. 2.2 Rise of China The 2010-11 financial reports showed that China is the second largest trading nation (after US) while predictions revealed that there will be a constant rise in China’s trade figures (Zinzius, 2004, 5). China’s rise in the list of the world trading nations has been considerable, considering that it occupied the 32nd position in the list in 1978, from where, within the next 20 years, it climbed to the 10th position (ibid). Its GDP rates which had shown a slight decline during the world economic recession of 2007-08 (though the loss was absorbed within its economy, has again picked up from 2009, placing it second only to US (Gross domestic product 2009, PPP. 2010). China is also figured as the world's fastest growing economy, and “from 1989 until 2010, China's average quarterly GDP Growth was 9.31 percent reaching an historical high of 14.20 percent in December of 1992...China's economy is the second largest in the world after that of the United States. During the past 30 years, China's economy has changed from a centrally planned system closed to international trade to a more market-oriented that has a rapidly growing private sector. A major component supporting China's rapid economic growth has been exports growth” (Trading Economics, China GDP growth rate, 2010) (as shown in Fig 1). Fig: 1 China’s GDP growth rate. After a decline in the 2007-08 economic recession the figures are again rising 2009 onwards (Source: Trading Economics, 2010). 2.3 MNE’s in China Such high economic growth rates, along with minimal labour costs, and large heretofore-untapped market resources, had attracted attention of many well-known MNEs, which eventually led to large FDI into China. MNE’s like Unilever, Procter and Gamble (P&G), Coke, Siemens, ABB, HP, and Motorola, until recently were well established in China. The reforms that attracted these MNEs included rapid de-bureaucratization of the trade and commerce segments, various fiscal reforms, formation of an export-processing segment with subsequent reforms in the unilateral trade tariffs, and finally China’s entry into the WTO member fold (Devlin, 2005). Primarily there were certain disadvantages while conducting businesses in China, which were mostly cultural and history based, like language problems or problems in perspectives while developing business relationships. However, the advantages that comprised of extremely low labour wages, and the government’s willingness to remove barriers in order to bring in more FDIs, far outweighed the cultural and historical barriers. In a relationship between MNEs and a State, there are two general viewpoints. One viewpoint, which is the ‘state in command’ perspective, shows the state having an upper hand in the relationship. The second viewpoint is the ‘MNC/MNEs in command,’ where the companies become all powerful, due to their huge assets (Blanchard, 2007, 67). It has been seen since the death of their Communist leader Mao Zedung, and the subsequent opening of their markets by his predecessor Deng Xiaoping in 1976, the MNEs had “been vigorously tapping into China's vast market andbenefiting from the country's fast economic growth. They have attracted numerous Chinese professionals with competitive salaries; handsome benefits business training opportunities, andthe possibility of an overseas assignment” (Wencong and Jing, Positions at foreign firms less attractive, 2011). At this time, the second perspective where the ‘MNC/MNEs in command’ was more relevant in the context of China, where the MNEs were in a position that was more powerful. However, in the recent times, there has been a clear turn of events, where the MNEs located in China are now facing various kinds of problems and are clearly in the process of reframing their strategies or of even changing their location (Jacob, China Wage rises bring shift in production, 2011). At this moment, the first perspective (‘state in command’) is slowly gaining a clearer view in China, where domestic production is slowly taking over market competition from the MNEs. This is evident when we read in a Chinese newsfeed that claims “Now, in a changing business sphere where big Chinese companies rise both domestically and internationally, Chinese employers have begun to offer similar benefits, making fresh university graduates and senior executives alike, view Chinese enterprises as a legitimate, even preferable career option” (Wencong and Jing, Positions at foreign firms less attractive, 2011). Thus, we find the MNEs are now facing increased competition not only from other MNE’s located in China, but also from domestic companies, leading to a situation where there are too many players within a single market arena. After the global economic downturn of 2007-08, many of the MNEs have cut down on their expenses, which in turn have led to decreased salaries for the local labourers. This has led to many workers leaving the MNEs, and joining the domestic companies that are now well established and offering better pay packages, with better working conditions than they had a few decades ago. The demand for better wages has also forced some of the MNEs to look for locations that are more favourable. This is again evident in a news report which states, “China may be famous as the workshop of the world, but one Hong Kong lingerie maker has found Thailand a more alluring destination, as companies increasingly shift production to countries with lower wages” (Jacob, China Wage rises bring shift in production, 2011). The low wages paid to the Chinese employees in comparison to their western counterparts working in China within the same MNE, have created a feeling of dissent among the Chinese employees, which is also another reason for their leaving these companies and joining the domestic ones (Rein, How Multinationals err in China, 2007). Thus, in the recent times it is quite evident that under the changed market scenario, China does not appear as a lucrative site for the MNEs. To survive in China they must look for changes in their business strategies, by offering better pay packages (not a high possibility, in view of the recent economic crash), competing with the domestic corporations through new marketing plans, retraining their existing employees to handle the competition better, or either moving out of China to a more favourable place, to conduct their businesses. 3 Conclusion The MNEs have long conducted their businesses in China, earning huge profits, primarily owing to low labour rates, and almost non-existent domestic competition. However, under a changed scenario, in the recent times we find that Chinese workers are now demanding better wages, at par with their foreign expatriate employees. Now domestic Chinese companies are challenging the foreign MNEs, by luring away their employees through better salary packets and improved working conditions. This entails that in order to survive in China the MNEs must either change their business strategies, or move away from China to a more suitable location. References BERR., 2009. Economics Paper No. 5: China and India – Opportunities and Challenges for UK Business. London: Department for Business, Enterprise and Regulatory Reform. Retrieved from,  http://www.bis.gov.uk/files/file50349.pdf. Bhagwati, J., 2004. In Defense of Globalization. Oxford: Oxford University Press. Blanchard, J., 2007. China, Multinational Corporations and Globalisation. Asian Perspective, Vol.31, No. 3, 67- 102. Devlin, R. (Ed.), 2005.“The Emergence Of China: Opportunities And Challenges For Latin America And The Caribbean” Inter-American Development Bank. Gabel, M., and Bruner, H., 2003. Global Inc., An atlas of the Multinational corporations. New York: New Press. IMF, 2002. Globalization: A Framework for IMF Involvement. Retrieved from http://www.imf.org/external/np/exr/ib/2002/031502.htm Jacob, R., 2011. 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