Excerpt
Contents List
1. Introduction
2. Political Factors
2.1 China’s Political Development
2.2 Promulgation of Special Economic Zones
2.3 Foreign Direct Investment Policy
3. Economic Factors
3.1 Foreign Direct Investment
3.2 Trade Liberalization
4. Technological Factors
4.1 Research and Development
5. Conclusion
6. China’s Future Prospects
6.1 Sustaining Economic Growth
6.2 Sustainability and Economic Growth
7. List of References
8. Appendix
1. Introduction
In 1817 Napoleon Bonaparte said:
„When China awakens, the world will tremble“.
200 years later China woke up, went through a remarkable development process and is an outstanding emerging economy today. China is the largest country in the world by population, it has more than 1.3 billion inhabitants and its gross domestic product is steadily increasing. In 2013 it received $117.6 billion in foreign direct investments.
This report aims at critically evaluating the political, economic and technological factors that have enabled the People’s Republic of China to become an emerging economy. Furthermore it examines carefully China's economic growth after opening up the economy in 1979. It considers foreign direct investment in the political, economic and technological sectors and shows its importance to China’s development. Finally, a key learning outcome is what recommendations, i.e. future strategic direction, China need to adapt to sustain economic growth?
2. Political Factors
2.1 China’s Political Development
In 1949 the “Socialist era” (Naughton, 2007, p. 51) of the Chinese Communist Party began. Earlier Mao Zedong started the Communist Revolution in connection to introduce a socialist industrial complex through governmental regulation. Consequently, he had the chance to gain control of all political sectors and to adapt the Communist model of the Soviet Union (Naughton, 2007, p. 55). The strategy was to build up China’s then-industry with “most upstream and downstream linkages” e.g. steel, iron and coal industry, this has been achieved by owning all industrial units and regulating the Chinese “price system” (Naughton, 2007, pp. 56-60). Hence China pushed the industry by large investments and at the same time separated themselves from the world market and outside investments. Furthermore Mao Zedong enlarged the economic policy by adding the model of the “regional economic self-sufficiency” (Sylvie Démurger, 2002, p. 12). In other words a province must be self-sufficient in manufacturing industrial goods and food. Between 1953 and 1956 the People’s Republic of China worked closely together with the Soviet Union and invented the “Five Year Plan” (Naughton, 2007, p. 66), it was mainly about increasing the industrial development, moving manufacturing centres from the west to the east and “the transformation to public ownership” (Naughton, 2007, p. 67). In September 1976 after the death of Mao Zedong and the meeting of the “11th Central Committee in 1978” (Naughton, 2007, p. 79), the political transition has started and the “Promulgation of Special Economic Zones”. Today the People's Republic of China is ruled by President XI Jinping, who is a member of the Chinese Communist Party. Every five years the National People’s Congress elects a president and a vice president. Since 1949 the People’s Republic of China remained as Communist state and has 23 provinces and five autonomous regions.
2.2 Promulgation of Special Economic Zones
In 1979 the People’s Republic of China experienced a political turnaround in terms of its economic orientation. After 30 years trying to build up a deliberated economy without any market forces and help from outside, China’s economic growth was bogged down. In July 1979 the “State Council of China” (Ge, 1999, p. 1268) implemented economic zones with additional rights to develop towards a rising market economy. The first economic areas were Fujian and Guangdong, shortly afterwards Shantou of Guangdong Province, Shenzhen, Xiamen of Fujian Province and Zhuhai (for detailed information see Table 1). Ge (1999, p. 1268) states that the ambitions of implementing economic zones were to “experiment with the development of an outward-looking, market-oriented economic system […] [and to] be connected to the outside world”. Every area has been covered e.g. the manufacturing industry and the Research & Development sector. The main focus of the SEZ was on the industrial sector, “domestic enterprises, state- and nonstate-owned alike, were purposely allowed to operate along foreign invested firms” (Ge, 1999, p. 1269). A key aspect was building relationships with other non-Chinese businesses to boost research and development in the technology sector (see 4.1), to attract foreign direct investments and to import and export goods in the Special Economic Zones. In 1980s the Economic Zones expanded to focus on Economic and Technological Zones in coastal cities (examples in Table 1). During the 1990s the major focus was on enlargement of SEZ in coastal harbour cities, capital cities of inland provinces and independent regions (National Bureau of Economic Research citied in Cambridge (Massachusetts), 2002, p.48). The above mentioned strategy is known as the “Open Door Policy” (Sylvie Démurger, 2002, p. 16).
2.3 Foreign Direct Investment Policy
One part of China’s “Open Door Policy” was to become more market-focused and outward orientated. This was achieved by open the market for foreign companies from the west and the rest of the world. While supporters and conservatives had to negotiate about how to keep control and simultaneously attract investments, both parties concluded, where the will for profits and catching up with Japan and the West was leading. At the same time China wanted to control the economy and “the operations of foreign backed projects” (Pearson, 1992, p. 14). The Communist mechanism to control and plan the economy was broadly shaped. Therefore the government of the People’s Republic of China elaborated whole organizations (e.g. finance offices and ministries specialized on foreign direct investments) to control the internal development of foreign investments. China put their organizations into practise in building a “monopoly authority over foreign exchange transactions, and China’s state economic bureaucracy, which traditionally regulated marketing, was in a strong position to allow or disallow marketing by foreign-backed firms” (Pearson, 1992, p. 15). It is crucial to say China wanted to liberate the market for foreign firms to gain economic growth and meanwhile keep control of the progress and benefits of outside parties (Pearson, 1992, pp. 16-28). According to the "List of Three Kinds of Foreign Investment Enterprises in China" examples of foreign investments are “foreign-owned enterprises, cooperative joint ventures, and equity joint ventures“ (Yadong, Shenkar, & Nyaw, 2001, p. 56).
3. Economic Factors
3.1 Foreign Direct Investment
In 1979 China opened its economy, foreign direct investments increased steadily “from $1.23 billion in 1986 to $92.40 […] billion in 2008” (Liu & Daly, 2011, p. 15). Recent research on foreign direct investment in China (worldbank, 2010) has revealed foreign direct enterprises execute more than half of China’s imports and exports. As mentioned above most common types of FDI are “equity joint ventures (EJVs), wholly owned foreign subsidiaries (WFSs) and joint sea oil exploration and exploitation agreements (JSOEEAs)” (Kamath, 1990, p. 111). Within an equity joint venture both parties are part of a limited liability corporation and divide revenues, losses and risks. In case of a WFSs the foreign investor(s) bear the corresponding costs in providing the total amount of capital. Further WFSs are mainly located in China to use Chinese assets and in accordance submit to their predetermined laws and regulations. To explore and exploit gas and oil fields in China JSOEEAs were established in connection with a contract with the Chinese government. By taking a closer look towards “the composition of FDI inflow to China […], foreign investors tend to invest proportionately more in secondary sector (Manufacturing) rather than primary (Agriculture) and tertiary (Service) sectors” (Liu & Daly, 2011, p. 15). Between 1997 and 2008 the manufacturing sector got around 60% of the FDI inflow, meanwhile the agricultural sector got 1.5%. Reasons for the massive gap between the primary and the secondary sector are low labour wages and little material costs in the manufacturing industry. “They provide for 30% of Chinese industrial output, and generate 22% of industrial profits while employing only 10% of labour” (Worldbank, 2010) – this shows how far foreign direct investments have promoted China’s economic development. By increasing Gross Fixed Capital and Gross Domestic Product it has made a strong contribution to the Chinese Economy. The figure shows the outstanding amount of FDI inflow in China. “Global FDI inflows increased by only 2% in 2004, while China registered an inward FDI growth rate of 13%. […] China is now the world's largest developing country FDI recipient and the world's 2nd largest FDI recipient overall after the US. By way of contrast, FDI inflows into India were only US$5 billion in 2004.” (Whalley & Xin, 2009, p. 124).
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Source: NBSC citied in Georgia (US), 2005, p.643 and Whalley & Xin, 2009, p.124
Summing up the People’s Republic of China had an incredible growth and kept a continuing 10 percent growth rate in the last 30 years (Worldbank, 2010).
3.2 Trade Liberalization
Before 1979 China has been “one of the world’s most economically isolated economies” (Naughton, 2007, p. 378). Today investment and trade are closely related and after opening China’s economy the liberalization of its foreign-trade system has begun. Firstly it was introduced in the Special Economic Zones (e.g. Guangdong and Fujian – Table 1) in 1984.
The process of shifting “the old foreign trade monopoly” the government developed a concept where the major aspects have been devaluating the Chinese Yuan to attract export and import and increasing the amount of companies. These companies were allowed to export their products (Naughton, 2007, pp. 382-385). In 1980 the overvaluation of Chinese Yuan has pushed off exports radically. Consequently foreign companies have not seen any value in producing their goods and exporting them. “By 1986 the value of the Chinese currency had declined to about 3.5 to the dollar” (Naughton, 2007, p. 383) this represented a devaluation of 60%. Through the independency of “former national trade monopolies” local governmental offices and SEZs were allowed to set up foreign trade companies (Naughton, 2007, p. 384). Therefore foreign trade companies, which were state owned, had the right to export. Resulting from the FTCs China kept control and at the same time attracted foreign investors. All these factors contributed to China’s current position as the World Export Leader. China’s exports increased from 167.97 to 2071.32 million US Dollars between January 2000 and January 2014. China had made a rapid progress in the last years.
4. Technological Factors
In the period from 1952 to 1980 “there was nearly no technological progress” (Wang & Yao, 2002, p. 33). Through shifting China’s economy from being planned and socialistic to liberating and capitalistic, it attracted FDI. One of the main reasons of attracting FDI was to acquire innovative technology and then create local innovation competence. For example the arrangement of a contractual joint venture includes the transmission of technological knowledge while China provides materials, land and plants.
4.1 Research and Development
The process of Research and Development describes the method in gaining new knowledge with the help of research tools, scientists and academic researcher. Furthermore it is interesting to see how FDI affects the R&D sector and how knowledge can be spilled over. Firstly, foreign investors bring in elaborated technologies and then local companies adapt them. Secondly, local companies hire a skilled labour force and benefit from their know-how. Thirdly, the “demonstration effect on local R&D activity” (Cheung & Lin, 2003, p. 26). Foreign-owned technologies can motivate local researcher to generate products, which are closely related to the foreign products. As foreign products had been tried out, the chance of having a misleading research decreases. From that point of research, local scientists innovate the existing product. In addition “vertical spillovers can then enhance the innovation capability of local suppliers” (Cheung & Lin, 2003, p. 26) e.g. labour force training and knowledge transfer. The success of R&D and inward FDI on innovation can be measured through patent applications. In 1984 after China invented a legal system for patent applications, intellectual property rights patent applications have tremendously increased.
In 1985 less than 5000 patent applications of residents were handed in, compared to the amount of 415,829 patent applications in 2011. This graph shows the tremendous development of the Research and Development sector in China and the number of patent applications by non-residents has not been included yet. In the future China has the chance to form a basis for the future technological development without external help.
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Source of data: data.worldbank.org
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