How the rise of China is re-shaping the business environment for MNEs (multi-national enterprises)

What are the implications for MNEs?


Essay, 2012

14 Pages, Grade: A - 70


Excerpt

Table of Contents

List of abbreviations

List of figures

1. Introduction

2. Main body
2.1. The rise of China
2.2. Chinas impact on global economy
2.3. Risk and Opportunities for MNEs in China

3. Conclusion

4. List of References

5. Appendix

List of abbreviations

List of figures

Figure 1: The World Bank (2011) Gross Domestic Product (GDP) based on current US$, own figure

Figure 2: The World Bank (2011) Total reserves (includes gold) based on current US$, own figure

Figure 3: The World Bank (2011) Gross Domestic Product (GDP) per capita based on current US$, own figure

1. Introduction

Nowadays, it is scarcely possible to trade commodities all over the world without anyconstraints. Thus, the increasing flow of information has taken control inside the world economies and created one global market, where multinationalenterprises in different countries interact with each other. In addition to that the view of the world has changed in the spot light ofglobalisation.

One cannot deny that one country, China, plays a decisive role in this complex scenario and is re-shaping the business landscape strongly. The results are shifting productions, technologies and knowledge to achieve higher profits and market sharesto maximise shareholders wealth.

The competitiveness leads to a rat race, in where contemporary enterprises haveto readjusttheir business strategies.

This essay spars with the topic:

“How the rise of China is re-shaping the business environment for MNEs (multi-national enterprises); what are the implications for MNEs?”

The structure of this essay refersto the main causes of the rise of China and particularto the economicimplications on global economy and for multinational enterprises (MNEs).

Moreover, the essay will examinethe different entry barriers on the Chinese market and outline in this context the opportunities for MNEs.

Finally, the conclusion will summarise the main points and take a firm stand.

2. Main body

2.1. The rise of China

“America is practically owned by China”

( Tom Winnifrith, CEO Rivington Street Holdings, 2010)

This quotation from the article in the U.S. Newspaper Moneynews by Dan Well (2010) identifies a suitable example of how the world’s biggest economy is freighted on the influence of China.One of the biggest driversfor this situation is the growth of world economies, in which it is possible to arrange cross-border trades and there are no limits in terms of distance, time, financial means and linguistic barriers.These processes can be consolidated under the noun of globalisation (Hill, C. W. L., 2010, p.4). As Johnson and Turner (2010) point out, there are five different drivers for globalisation:

1. The changing economic paradigm – from demand management to neo-liberalism
2. The spread of international governance and regulation
3. Finance and capital spread
4. The diffusion of information and communications technology
5. Social and cultural governance

These globalisation drivers led to a crucial growth of trade within the countries and they have built a strong fundament to extend in business. Moreover the globalisation has been boosted also the growthof MNEs. As Hill (2010, p.20) says “a multinational enterprise is any business that has productive activities in two or more countries” and the implications for MNEswill explained in the following paragraphs.

However, according to the World Factbook publication (Central Intelligence Agency, 2011)a comparable key figure is the Gross domestic product (GDP), which identifies the value of all final goods and services within a nation in a given year and it is preferred by many economists when measuring the economic power of nations.

Figure 1: The World Bank (2011) Gross Domestic Product (GDP) based on current US$, own figure

As shown in figure 1, the World Bankattests that the GDP per current US$ of China has grown tremendously over the last decade.[1]

As well as the globalisation another reason for the rise of China was the entry in the World Trade Organization (WTO)in 2001,in accordance to the WTO Membership Information (2011).

In addition to that China adopted an open door policy since the late 1970s to promote international trade, foreign direct investment (FDI) and the activity in the world economy with major reforms in 1979, 1988 and 1992 to reach the requirements of the General Agreement on Tariffs and Trade (GATT) and the WTO(Cai, Smith and Xianquan, 1996 p.1, pp.79-84).

Nonetheless, China has recently overtaken Japan to become the second-largest world economy and according to Reuters by Wang and Wheatley (2010) China is on its way to become the world-largest economy around 2025. The other side of the coin is, however, that China is still a developing country and as Anderlini (2010) identifies, China´s GDP per capita is e.g. less than a tenth of the US GDP.[2]

Another reason for its imposing rise is the instrument of the balance of trade. As Heckscher (1935, p.196) suggests amonetary surplus would emphasise the wealth of a nation and therefore a nation’s nature is to export more than import. The international trade theory of the mercantilism is not a theoretic framework and in accordance to Hill (2010, p.163) some critics objective that China has a neo-mercantilism to keep their currency, Renminbi, low to sell more goods to the US and other economies to amass the above mentioned trade surplus. Moreover Atkinson (2008) points out that China’s mercantilism system is to be affected from stealing intellectual property,tariff and non-tariff measures to reduce import activitiesand at least to boost their export with subsidising.

2.2. Chinas impact on global economy

The ways China influences the world economy are many-sided. One argument to support this assumption is the main idea of the neo-mercantilism system which was already described in paragraph 2.1.

Korinek and Servén (2010) are convinced that China uses the balance of trade to amass a surplus of huge stock of foreign reserves. Furthermore they point out, that a nation’s wealth is driven by boosting exports and restricting imports. To illustrate this point one possibility is to undervalue the Renminbi against the US Dollar to keep the Chinese production cheap and to be more competitive than foreign companies. Moreover companies try to exploit this incentive to relocate production plants to China and at last to reduce the total cost of a single unit (Kumar, S., Nansen, J. and Zampogna P., 2008, p.1875).

Figure 2: The World Bank (2011) Total reserves (includes gold) based on current US$, own figure

As shown in Figure 2 the World Bank attests that the total currency reserves of China are more than the US, Japan and Europe combined together and this is an evidence of their economic strength.[3] However, China takes advantage to invest in their state-owned enterprises. This can be illustrated with an article by Palmer (2011) in the news agency Reuters in where he relates to the Fortune Magazine’s 2011. In accordance to that article China has61 companies in the 500 largest companies in 2011. In year 2005 it were only 16.

The next argument that needs to be point outis the Chinese investment policy. China uses the amassed trade surplus to boost MNEs, the most are state-owned, with the instrument of FDIs. An article by Davies (2009) in the China Daily newspaper highlights that China’s FDI outflow has in 2008 with $ 52,2 billion nearly doubled in comparison to 2007 with $ 26,5 billion. China can therefore use the financial means to invest in strategic companies across the globe.

Nevertheless, China uses the economical might tofight likewise against foreign protectionism and import taxes. As Rappeport (2011) from the Financial Times points out, China tries to nip every protectionism stance in the bud for example with the US border tax on carbon sensitive materials.For that reason the competitiveness of Chinese in specific industries will be not restricted.

Another reason for Chinas impacts on global economy are export policies with rare earths. Current export curbs of these important raw materials are responsible for a source of serious concerns in the global economy. A Financial Times (2011) report queries that these rare earths are necessary to produce nearly every electronic component in the high-tech industry and almost 97 per cent of the world share were mined and controlled in China. Moreover China can use this economical might to browbeat other countries e.g. Japan, who needs the rare earths for their own industries and companies. Another article in the Financial Times by Hook (2011) attests that China controls the rare earths under three state-owned miners and that China is going to reduce the output for export strongly.

2.3. Risk and Opportunities for MNEs in China

Let us start by considering the facts. China has developed an enormous market for MNEs with more than 1.3 billion potential customers. The increasing wealth of China leads to a higher sustainable demand on commodities. In a country of extremes, with gathering pace of urbanisation, there is a big opportunity for MNEs to maximise their profits (Cui and Liu, 2000, p.57).

However,Ogutcu and Taube (2002, pp.25-27) point out that inward FDIs from foreign MNEs into China enable access to a global market with high potentialgrowth rates.The other side of the coin is, as Buckley (2007, pp.116-188) considers, a foreign MNE can´t access this market easily. For example have MNEspartnership issues regarding to start a Joint Venture (JV) with aninternal partner or to open up a wholly owned subsidiary (WOS) in China. Furthermore the high potential grow rates can berestricted through remitting profits by the Chinese government.

One argument in support of opportunities for MNEs in China is the advantage of low labour costs and also the high availability of human capital in accordance to Ogutcu and Taube (2002, pp.25-27). One should, nevertheless, consider the problem from another angle. Chin has already in some areas a skills shortage and a problem of climbing wages. Buckley (2007, pp.117-118) emphasises this main competitive advantage of cheap workers is beginning to change and has already overtaken India by a substantial value. Jacob (2011) identifies another example in the apparel industry where China’s officials doubles wages every five years. In addition to that there are strong signs that due to the one child policythe workforce is declining every year and thereby the productivity turns down due to fewer women working in factories.

An important opportunity for MNEs is shifting production activities to China to take full advantage of the benefits of currency exchange rates (Kumar, S., Nansen, J. and Zampogna P., 2008, p.1875) and also to take advantage of cheap labour costs(Sun, Q., Qiu L.D. and Li J, 2006, p.42). It is worth stating at this point that due to a JV one partner gains more profit than the other one in terms of know ledge or high technology (Yan and Luo, 2001, pp.119-120). As Buckley (2007, p.119) points out by reason of local pressure and legislation issues the JV is the only useful choice to start business. Moreover in many developing countries like China JVs require many official approvals like permits to start businesses. Duanmu, J.-L. (2011, pp.162-163) founds corruption will be systematically practised in China and effects the business environment. He argues that countries from developed countries with less corruption would rather tend to a WOS than to a JV.

As Emmott (2008, pp.124-129) considers, China is now facing two big challenges, the one challenge is to fight against the rising inflation and the other challenge is the environmental pollution. In addition to that China has to change its environment policy with rising rules and regulations. That effect will undo the competitive advantage of China as production location for foreign MNEs.

3. Conclusion

The arguments that I have presented identify that China is already a world power and that they affect the business environment and especially MNEs strongly.

There are many arguments that support the idea with the influence on global economy through globalisation, an open door policy and the WTO Entry in 2001. In addition to that the balance of trade surplus and the consequential outward FDI demonstrate the current impacts on global economy.

On the one hand China exploits their political might to fight against foreign protectionism but on the other hand they have distinctive protectionism stance to economically force foreign industries to its knees as the rare earths restrictions shows.

Furthermore a contemporary MNE has huge opportunities to start businesses in China through capturing the biggest market on earth. In addition to that the Chinese labour costs are in comparison to other developed countries relatively low. That means shifting production plants to China provides chances but you have to be aware of formation of an enterprise is elaborately designed and corruption still is the order of the day.

However, I think to be a successful worldwide acting MNE you have to seize the big opportunity in Far East. One should not forget that the Chinese economy just started to grow. It just provides a fractional amount of their high potentials for MNEs.

[...]


[1] Please refer to the appendix (Table 1) to overview the detailed database.

[2] Please refer to the appendix (Table 3 and figure 3) to overview the detailed database.

[3] Please refer to the appendix (Table 2) to overview the exact database

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Details

Title
How the rise of China is re-shaping the business environment for MNEs (multi-national enterprises)
Subtitle
What are the implications for MNEs?
College
Heriot-Watt University Edinburgh  (School of Management and Languages)
Grade
A - 70
Author
Year
2012
Pages
14
Catalog Number
V195052
ISBN (eBook)
9783656206262
ISBN (Book)
9783656207771
File size
572 KB
Language
English
Tags
china, mnes, what
Quote paper
Niels Aulich (Author), 2012, How the rise of China is re-shaping the business environment for MNEs (multi-national enterprises), Munich, GRIN Verlag, https://www.grin.com/document/195052

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