Foreign Direct Investment in Emerging Markets in China - Essay Example

?Introduction Economists have supported foreign direct investment (FDI) arguing that it is the best form of capital creation in the long run. The economists have supported their argument based on the fact that foreign direct investments are best because of development of technology brought in by foreigners. Additionally, management skills from foreign investors are implemented to the host country. Foreign direct investments (FDI) have been viewed as the best financing tool in the emerging markets. As stated above, emerging markets create new technologies which can increase productivity and create new jobs in the host country. Countries globally are developing by encouraging foreign direct investments (FDI). They are doing this in order to increase their economic strength and move forward economically. Emerging markets have developed in various countries especially developing countries. Emerging markets attract FDI based on the mode of the economy in terms of development, political and market share. This paper explains foreign direct investment (FDI) in emerging markets and focuses in China as one of the emerging markets encouraging FDI. Justification of the Topic Foreign direct investment (FDI) in emerging markets is chosen as the topic of study in this article. FDI relates to an investment done by a firm in a foreign country. The foreign firm does the investment for creation of commodities. FDI is encouraged by the availability of factors of production, markets share and flexibility of economy. Foreign direct investment (FDI) is taken to by the big firms to the developing countries mostly the emerging economies. This is seen as a change from the previous act whereby most firms in developing countries were investing in their own countries. The rise of foreign direct investments on emerging markets has been increasing since 1980. The same factors noted above increases the rate of FDI in emerging markets. Despite the movement of investors to new markets, they consider capital for investment and management technique since they are operating in a foreign country and political stability (Cavusgil et al 2002). From research, it can be noted that the percentage in 2007 rose to US$2 trillion from FDI. This shows that there is high dependency of emerging markets by FDI. Resmini (2000) adds that increasing FDI has been seen in the developing countries. The idea is supported by various factors including the cost of labour, political stability, stable financial institutions and stable economies in the host countries. The author explains further that investors have been able to view and analyze the above mentioned factors to conduct investments in emerging markets. Some of the emerging markets have not been exploited because of the countries’ political instability, poor financial regulations and weak development shown by workers. FDI on emerging markets has also be supported by the changes in various countries whereby the investors have are able to acquire state owned items, which has been happening in various countries especially Asian and Latin American countries. The fact is that the investors in the above mentioned countries are able to obtain the assets because of financial crises which have recently hit the countries. Furthermore, the inventors in those markets are encouraged by cheap and available labour. Despite the search of strong financial institutions and stable economies by the investors in emerging markets, most of the emerging markets have got the above disadvantages as compared to developed countries. FDI investing in the emerging markets are not the same with the FDI in developed countries. They use different strategies to counter the difficulties in the developing countries to increase their investments. One of the strategies is the provision of lower wages to the workers since they are operating in unstable economies. Emerging markets are currently the sources to the growth of most countries’ economies. This can be evidenced from the current growth seen in countries like China, Brazil, South Korea and India. The countries mentioned above have been able to maximize their economy despite their small per capita GDP. They have done so by the creation of economic reforms which can make them increase economic stability and growth to merge as strong economic nations. The countries mentioned above have also had support in terms of labour and market due to the high population they have, for example, countries like China and India have the highest population rate. With this high rate of population, emerging markets have been stable as compared to other countries despite the 2007-2009 economic crises. This is not to say that economic crisis did not have effects on emerging markets of the above mentioned countries but the effect was small as compared to other countries (Beausang 2012). The promoters of FDI have been targeting countries having high growth potentials. FDI has also been a supporter to developing countries. They have done so by giving the developing countries resources and increasing innovation. Innovation has been encouraged in the emerging markets through FDI because the investors give a country an opportunity to learn to work on something new. Goldstein & Razin (2006) gave analysis of FDI on emerging markets in various countries including China, Brazil and Russia. The authors explain that the countries mentioned above have had different trends in terms of FDI in emerging markets. FDI on emerging markets in those countries have since increased since the year 2000 with some of the countries acting as both outflows and inflows of FDI in emerging markets. The authors show from their research that since the growth of FDI in emerging markets in China, the country has been steady in terms of growth of FDI in emerging markets. Additionally, China acts as an inflow and outflow of FDI. Other countries such as Brazil are the main is acting as a FDI inflows. FDI is encouraged by different factors, with the availability of labour in the host country mentioned above as one of main factors. They are other factors like availability of market in the host countries. FDI in emerging markets is also encouraged by free trade. The main idea is that trade agreements create larger markets. Large markets are the main targets of the investors. Labor can be available but the investors encouraging FDI have to consider the cost of labor. Availability of materials and resources are also some factor behind FDI in emerging markets, which can be evidenced by the large inflows of FDI on emerging markets in countries like China and not much in Brazil. Furthermore, investment in emerging markets is decided by the stability of the financial institutions, a concept based on the 2008-2009 financial crises. Investors in emerging markets have seen the increasing problems in emerging markets. This has made them have less interest in some countries like Latin America as compared to countries like China (Morck et al). Justification of the Selected Country In this paper, emerging markets in China in relation to FDI will be used. China is one of the biggest fast growing economies in the world. The economic growth of China started in 1978 after the economic reforms made by the country which have seen more change and increase in economic activity by the end of 20th century. The economic reforms are the main item which drove the Chinese economy to the top level. This can be compared to other countries which were at the same level with China before 1978 whereby Chinese started implementing economic reforms. Countries like the Soviet Union were at the same level with China but now China is far ahead economically. Tisdell & Chai (1997) explain that economic reforms implemented by the Chinese before 1978 made changes which would have been a different technique if the previous reform of social economic had been used. The social-economic system is seen to have brought political instability which interferes with the economy as evidenced by the Soviet Union economy. China is the most populous country in the world. The country’s economic activity has overtaken other developed countries like Germany to be the second largest economic country after the USA. Chinese economic growth has done much to its population. According to Worm (2008), about 1.2 million people in China have moved out of poverty because of the country’s growth in the economy. This has happened despite the country’s disparity in terms of economic growth that has seen high differences between the poor and the rich. Additionally, the countries Gini coefficient was 0.46 as of 2006. This shows that there is a high rate of inequity in terms of income distribution. But as stated above, the country has managed to pull 1.2 million people out of poverty. Furthermore, China has been the best for marketing and industrial development. The fact is that the country has attracted many investors. At the beginning of 2002, the country was the best place for foreign direct investment (FDI). Additionally, Worm (2008) shows that the country is a manufacturing hub for most electronic items. The country produces half of the electronics items sold in the world. For example, China manufactures approximately more than half of all the cameras sold in the world. This figures show that the country has attracted many companies dealing with electronics more so the investors on the same companies. This clears the evidence which had shown that the country is a place for FDI. The author explains further that most of the industries in China are owned by foreigners. The country, despite being a developing country in the year 2006, received more foreign direct investments (FDI) than all other developing markets. This made the country to be among the highest exporter in the world. The fact is that in 2007, foreign direct investments (FDI) which has constituted more manufacturing companies in the country made the country the second biggest exporter in the world in 2007. Some of the big companies such as Wal-Mart have invested in the country and have their products manufactured there and exported to other countries. FDI is a boost to the economic growth of China. At first, before investors entered the country approximately 30 years ago, the country was only relying on agriculture. After 30 years, the country had grown to even host the world biggest games like the 2008 Olympics. Such events were the main attraction to the country. Investors entered the country for exploration and investment. China’s economic growth has seen the country make more in dollars with an approximation of 3 trillion dollars in foreign investments (Morck et al). Critical Evaluation of China with Regards FDI From the previous study of China it is clear that China is the best country for FDI. This has been promoted by the emerging markets in china. In the next study on this paper, exploration is done on emerging markets in China in relation to foreign direct investments (FDI). China is the top country in Asia in terms of FDI followed by Singapore. The capital inflows into the country are more in comparison to the size of GDP. Despite the Asian crisis which brought down the economy of most countries, China still maintained higher FDI inflows to its emerging markets. Comparison between Asia and other continents shows that Asia is still the highest destination for investors contributing to FDI. The main attraction point is China. Several factors have contributed to FDI and development of emerging markets in China. These factors have made the country different from other emerging markets throughout the world. There have been changes in China since 1978 when the market reforms were established and implemented as mentioned earlier. In 1990, China saw the fall of communism, a situation which helped the country improve in its economic activities. Additionally the economic reforms opened free trade, the fact is trade barriers were eliminated by the reforms implemented by the Chinese government. Additionally, international capital inflows increased due to removal of barriers limiting inflows to China emerging from overseas. The mentioned reforms increased the economic activity of the country which saw the formation of China’s infrastructure. The economy of the country gained from the economic reforms, advanced transport networks were created and formation advanced information technology. The above developments improved production, communication and management of different companies from different locations (Calomiris 2013). Furthermore, China being one of the top emerging markets has given the investors to invest in significant sectors which improve the transport and communication in the country. The investment on communication sectors by the investors is because they are driven into by the size of the population using communication gadgets such as mobile phones. China with its large population in the world means that the country has the highest and growing number of mobile phones. With this large population and removal of barriers by the Chinese government due to implementation of economic reforms, a high number of investors are flowing into the country for investment (Chen 2011). The population size of China being the largest favours businesses because it provides market for commodities. Most companies have moved from other emerging markets to China to set up companies and factories there. FDI to Chinese emerging markets is also supported by the high competition existing china. This because of moves by companies to China as stated above, their move to Chinese emerging markets because other companies are relocating there or they had already move. The fact is that the size of the population encourages the relocation by companies from other emerging markets because they want to fight for one market share provided by the size of the population. The Chinese large population provides markets for goods manufactured by firms which have invested in the country. This is possible because of removal of barriers which previously limiting access to markets or sale of goods to the population. This has encouraged FDI and led to the movement of investors from other emerging markets to the country (Sinha 2008). Top of Form Bottom of Form Furthermore, the economic growth of the country has led to high development of Chinese owned companies. One significant company which has grown is the Lenovo Company; the company bought the famous company IBM which had some of its companies all over the world especially the developed countries. The takeover of IBM by the Chinese company Lenovo made the country the most attractive to foreign investors. This is because the country already has the biggest companies (Morck et al 2008). Cultural relationships and ethnic similarities between Asian countries and China is the promoter to the movement of FDI to Chinese emerging Markets. Investors from countries like Hong Kong, Taiwan, Malaysia and other close countries have moved to China to invest in emerging markets. FDI from those countries were motivated by high competition in China, availability of markets and economic reforms made by the Chinese government to support economic development. FDI in emerging markets in China is encouraged by cheap and available labor. High population creates high chances of finding workers. The country sees the high number of graduates annually flowing into the markets for job opportunities. FDI firms take this advantage to increase their growth in business. Additionally, the cost of production of commodities by FDI in emerging markets in China is low because of available labor encouraged by the large population. FDI in emerging markets is mostly motivated by the low production cost. Labor is one of the costs of production. Additionally, FDI in emerging markets in China requires less cost for provision of training for workers to motivate them and encourage productivity (Amann & Cantwell 2012). Conclusion From the study, FDI is the most important aspect for economic development in developing and developed countries. FDI in emerging markets is seen to be driven by the cost of production, free movement of trade and the availability of market. From the study of China as one of the great emerging markets it is clear that such factors have led to promotion and movement of FDI from other emerging markets to China’s merging due to the availability of factors of production and others mention above. Political stability is also seen to favour FDI in emerging markets; stable countries have high chances of receiving more FDI. Government participation in creation of safe environments for business also favours FDI in emerging markets. This has been done in countries like China whereby the government enacted market reforms to increase participation of foreign investors in the country. China moved to market driven economy from the previous economy where most of its work was planned by the government. This an important factor to note and has seen China and other countries improve in attraction of FDI in their emerging markets. References Amann, E & Cantwell, J 2012, Innovative Firms in Emerging Market Countries, Oxford University Press, United Kingdom. Beausang, F, 2012, Globalization and the BRICs: Why the BRICs Will Not Rule the World For Long, Palgrave Macmillan, Great Britain. Calomiris, C, W, 2013, China's Financial Transition at a Crossroads, Columbia University Press, New York. Cavusgil, S., Ghauri, N., Agarwal,R 2002, Doing Business in Emerging Markets-Entry and Negotiation Strategies, Sage Publication, London, Poillon. Chen, C, 2011, Foreign Direct Investment in China: Location Determinants, Investor Behaviour and Economic Impact, Edward Elgar Publishing, UK. Goldstein, I and Razin, A, ‘An information-based trade off between foreign direct investment and foreign portfolio investment’, Journal of International Economics, vol. 70, pp. 271–295. Randall Morck, R, Yeung, B and Zhao,M 2008, ‘Perspectives on China’s outward foreign direct investment’, Journal of International Business Studies, vol. 39, pp.337–350. Resmini, L 2000, ‘The Determinants of Foreign Direct Investment in the CEECs ,’ Economics of Transition, Vol. 8, no.3, pp. 665–89. Sinha, S, S, 2008, Comparative Analysis of FDI in China and India: Can Laggards Learn from Leaders?, Universal-Publishers, USA. Tisdell, C, A & Chai, C, H 1997, China's Economic Growth and Transition: Macroeconomic, Environmental and Social/regional Dimensions, Nova Publishers, USA. Read More