Assess how the rise of China is re-shaping the business environment for MNEs.

What are the implications for MNEs?


Essay, 2011

12 Pages, Grade: 2


Excerpt

Table of content

1. Introduction

2. Global economy

3. The rise of china

4. China is re-shaping the business environemnt for MNEs

5. How MNEs cope with Chinese Regulations

6. Conclusion

Reference list

1. Introduction

The aim of this paper is to outline how the rise of China is re-shaping the business environment for multi-national enterprises (MNEs) and how this is affecting their businesses. The aggrandisement of China to become the second-largest economy in the world occurred already in 2010 and this year it has been estimated that the People’s Republic of China will outrun the United States of America as the biggest manufacturer (Hout and Ghemawat, 2010, p.95). Due to their economic power, the Chinese government is also gaining more political power, which shows the willingness of China to contribute to the Eurozone’s bailout fund (Anderlini, 2011a). Moreover, this shows the significance China has as an economic region for the MNEs. Although the initial approach was primarily to get access to low-wages labour in order to economise the manufacturer cost, this has recently experienced an enormous turnaround. Many enterprises no longer just seek the advantages of low-labour cost in China, but to a greater extent MNEs emphasise the “purchasing power [which] continues to increase [and so] their population is becoming important consumer markets as well” (Cavusgil, Ghauri and Agarwal, 2002, p.2). At the same time China has been undergoing a movement towards a new stage of development. A shifting from a successful low- and middle-tech manufacturing economy to a sophisticated high-tech one has been seen and, as Hout and Ghemawat put it, this has been achieved “by cajoling, co-opting and often coercing Western and Japanese businesses” (2010, p.96). Even though China seems to offer a great opportunity for MNEs to produce and to sell their products, still the MNEs are facing huge challenges due to the provisions of national law.

2. Global economy

The world economy has been changing for many years and there has been a shifting of both markets and production to the emerging markets. This process is called ‘Globalisation’. The term ‘Globalisation’ exists since the 1960s. It became popular in the 1990s owing to “an international political movement opposing “globalization” [and] has gained many adherents” (Krugman and Obstfeld, 2009, p.6). Despite this, the process of Globalisation has helped many poor countries to emerge from poverty and to participate in international trade. During the 1990s many major free trade agreements were instituted, which accelerated the process of globalisation. One of the most remarkable is the so-called Uruguay Round agreement establishing the World Trade Organisation in 1994 and the extension of trade liberalization (Krugman and Obstfeld, 2009, p.6 and p.232).

As Sideri (1997, p.38) defines it, “Globalisation is essentially a process driven by economic forces. Its immediate causes are: the spatial reorganisation of production, international trade and the integration of financial markets.” The fragmentation of production into multiple partial operations in different countries around the world has been underpinned of cheap transportation and improving communication networks (Sideri, 1997, p.38).

3. The rise of china

China has been the greatest beneficiary of globalisation in the past years. Although China is a single-party state governed by a communist party, they launched market-oriented reforms in 1978 (Hu and Hafsi, 2010, p.294). These reforms are the origin of China’s economic miracle, which granted farmers limited property rights and permission to sell anything they produced. Consequently, this led to prospering domestic trade, hiking agricultural productivity and increasing rural incomes. Further reforms were introduced which eased migration and industrialisation as well as investing in manufacturing sectors (Anderlini, 2011c). This trend is shown in the diagram below, which illustrates China’s scorching pace of growth in recent years.

Title (China’s scorching pace of growth)

illustration not visible in this excerpt

Source: IMF WEO (2010) cited in Tese, 2010, p.97

Many European and American enterprises appreciated the potential in the Chinese economy and gradually shifted their production to the Far East in order to benefit from this low-wage country. Primarily China is known for their cheap exports that were built on cheap capital, cheap energy and cheap land (Anderlini, 2011c). It also could be argued, that one reason for the success of China’s exports is based on their undervalued currency, which makes Chinese export so competitive (Beattie, 2011). However, the government realised that they are not able to compete with the United States to become the biggest economy in the world, if their only industry focus relies on cheap products. In addition, current disillusionment has set in because, despite the fact that China has a massive trade surplus with the West, the greatest profits still have been earned by foreign MNEs rather than by Chinese companies (Hout and Ghemawat, 2010, p.97). Therefore a change from a low and middle-tech manufacturing economy to a sophisticated high-tech economy has been essential. Accordingly, the Chinese government has set-up plans to boost their R&D expenditures form the current level of 1.7% of GDP to 2.5% of GDP by 2020 (Hout and Ghemawat, 2010, p.95). The increase in R&D expenditures alone will not be sufficient in order to change the entire economy. Furthermore, the government needs to attract foreign MNEs, which not only seek the opportunity to produce in a low-wage country but, frankly, have the confidence to establish their R&D centres there as well.

4. China is re-shaping the business environemnt for MNEs

The rise of China has attracted many investors, buyers and MNEs incipiently because of the “predicted endless supply of cheap, pliant labour; virtually free land; cheap and easy credit from state-owned banks; and heavily suppressed costs for inputs such as power and water” (Anderlini, 2011c). This assumption, however, has been proven erroneous. The wages, especially in traditionally low-wages sectors, recently have been increased, which has been forced by China’s policy to double wages in five years time. As a result, textile companies have been confronted with workers who are demanding increasing salaries. These companies reported an ascent of 20% every year, which has them seeking new opportunities in countries such as Thailand, Bangladesh and Vietnam (Jacob, 2011). In a similar vein, this turning point has not been limited to the textile industry, but also in the latest figures of China’s exports of light-manufacturing products to the US and Europe (Jacob, 2011). The drawing below supports the turning point in the light-manufacturing sector:

Title: Turning point

illustration not visible in this excerpt

Source: UBS (2011), cited in Jacob, 2011

Chinese policies of increasing wages have the intention to get rid of low-wages and polluting sectors and the notion to develop China towards a high-tech manufacturing economy. In achieving these targets the government realized that mainly two major criteria are missing. They have a lack of both skilled workforce and technology knowledge. Apart from capital, which is readily available, these two factors are the main criteria towards a sophisticated high-tech economy (Buckley, 2007, p.116).

Nevertheless, the government has been implementing new policies that should ease the shortage of knowledge. Since 2006 the Chinese government has sought to appropriate technologies from many MNEs in different branches of industry, such as power generation, high-speed rail, information technology and air transportation (Williamson and Raman, 2011, p.110). These new policies have had many implications on foreign multi-nationals. Companies were forced to adhere to a high degree of local content in goods, which were produced in China and were forced to transfer proprietary technologies from foreign companies to their joint ventures with China’s state-owned enterprises (SOEs) (Hout and Ghemawat, 2010, p.97). These new stipulations are complex and ever-changing and they put MNEs into the position to decide whether they want to adhere to these regulations and get access to the world’s fastest-growing market or refuse and lose out on these opportunities such as Google did (Tese, 2010, p.97).

The reason for implementing these steps is quite simple. The Chinese approach in trying to create, catch up or even compete with foreign multinationals in respect to technology invention was inherently unsuccessful (Anderlini, 2011b). Accordingly, the government designed a three-pronged plan, which tends to help local companies to create advanced technologies.

Firstly, the government assures to be buyer and seller at the same time in appointed key industries. This will be accomplished by keeping ownership of customers and suppliers alike. Furthermore, this empowered the role of the government in equipment purchases, technology development and sales. Secondly, in order to generate economies of scale and economies of competence and learning, some small manufacturers were forced to merge into a few national champions such as Aviation Industry Corporation of China (AVIC). Finally, MNEs often were forced to collaborate with these national champions and to form joint ventures with them. Further, the multinationals were constrained to transfer the latest technology to the joint ventures in order to receive current and future business opportunities. MNEs, which do not adhere to these regulations, are simply excluded from state-financed projects and are not considered for further purchase orders from SOEs (Hout and Ghemawat, 2010, p.98).

[...]

Excerpt out of 12 pages

Details

Title
Assess how the rise of China is re-shaping the business environment for MNEs.
Subtitle
What are the implications for MNEs?
College
Heriot-Watt University Edinburgh
Grade
2
Author
Year
2011
Pages
12
Catalog Number
V181660
ISBN (eBook)
9783656048299
ISBN (Book)
9783656069522
File size
942 KB
Language
English
Tags
MNE, Multi national enterprises, China, Strategic, AVIC, Globalisation, VW
Quote paper
Sebastian Kress (Author), 2011, Assess how the rise of China is re-shaping the business environment for MNEs., Munich, GRIN Verlag, https://www.grin.com/document/181660

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