China’s Investment Environment

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Table of Contents

Introduction
Brief overview of China’s investment climate
Analysis of China’s investment climate
Conclusion
References

Introduction

Over the past century, the human race has dedicated a vast proportion of the available resources to the efforts of self-actualization in terms of development politically, socially, economically and technologically. To provide a means for measuring the progress made, means have been developed through which progress in these sectors can be analyzed and monitored all the while checking on the possible ramifications that can arise from any selected course of action.

This paper shall focus on the environmental aspect of economic development. It shall dwell on the various factors used to monitor and analyze economy growth in various economies. Much of the discussion shall concentrate on Chinas investment climate to evaluate whether it offers a feasible ground for foreign investments.

However, it is a known fact that FDI’s have resulted in positive results as is illustrated by Jiang (2005) who asserts that the social welfare of the host country is much improved. This is mostly because of the technological transfer that the local suppliers gain is adopted which in turn improves productivity and quality all the while increasing the GDP of the host country and their ability to compete in the global scene.

Brief overview of China’s investment climate

According to the World Bank (2002), the Chinese economic progress over the years has been remarkable with the country experiencing increased manufacturing and service industry potentials. This has been because of rapid technological advancement brought in by FDI’s, and the increase use of labor-intensive techniques of production.

Analysis of China’s investment climate

Investment climate as defined by Eng (2005) refers to the quality and quantity of investment flowing into a given area. It depends on the expected returns that an investor hopes to get and the uncertainties that surround these returns. To ensure that an investment yield the expected results, a cost benefit analysis (CBA) and a SWOT analysis may come in handy. To effectively carryout these analyses, there are components that need to be assessed as pertaining to the economic environment of the host nation (Eng, 2005).

First, an investor has to evaluate the macro/ country level aspects that may affect the economic well being of the nation as regarding to foreign investments. These include level of political stability, national policies on trade and foreign investment, entry and exit barriers, labor market flexibility and the availability of financial services (Liaw, 2007). These factors determine the efficacy of the regulatory framework that the host nation has adopted in regards to foreign investments and at the same time act as incentives to potential investors.

Secondly and no less important is the physical and financial infrastructure that a host nation has to offer. These include but are not limited to, roads, power, adequate communication networks, banking and finance, mobility and availability of skilled personnel and the endowment of technological skills (Hsu & Zang, 2007). China’s economic growth from the 90’s has undoubtedly suggested that it has most of these features in its investment climate and that there is still significant room for improvement.

International integration is another great indicator to economic success. China’s entry into the WTO is a commendable trait to its international outlook. Using different measures such as the openness to trade (size of imports and exports) and the level of distortion (tariff rates and dispersion) it is evident that China has an efficient framework when it comes to promotion and encouraging foreign investments.

This is because the greater the level of openness, the higher the chances of economic growth which china is at the forefront among its peers (developed nations). In addition, FDIs and trade are good indicators to the level of integration that a host country possesses. According to Jiang (2004), net FDI has increased considerably over the decades from as low as $2.7 billion in the 90s to $37 billion in 2000. The figure has stably grown since then making China the preferred investment harbor for foreign investors in Asia.

In addition, china has reduced tariff rates from 49.5% in the 80s to 16.8% in 2000 (World Bank, 2002). This was an incentive to promote and encourage more trade with other nations. This has resulted to an increase in trade from 15% in the 80s to nearly 50% in 2000. The value of imports and exports has also increased significantly.

As regarding to the infrastructure, china ranks as one of the countries that has adequate infrastructure in Asia. Pereira (2003) articulates that businesses in countries that have poor infrastructure have extra operation costs in terms of receiving and sending information, receiving supplies and accessing markets. This makes such countries unfavorable for foreign investors and deters entry by potential investors to the same.

In a World Business Environment survey conducted in 2007, business executives and various foreign firms stated that the infrastructure does not pose any obstacles to the operations and growth of their businesses (OECD, 2003). In addition, there were clear suggestions that China’s infrastructure was better than that of Brazil or India and was above average in comparison to that of many Asian countries.

China connects to the rest of the world through its efficient shipping and state of the art port functions. According to data from the US customs, china has a relatively large shipping cost advantage in comparison to other countries such as Brazil, Indonesia and Thailand.

In regards to the level of bureaucracy involved in custom clearance, china has the least complications as compared to other countries such as Thailand and India. On average, clearance at the Chinese ports takes an average of 9 days as compared to 14days in India. These well-maintained ports and effective shipping services ensure that china connects to the world market.

Telecommunication plays a very vital role to the nation’s infrastructure. Over the past few decades, there has been a steady increase in the penetration of telephone use in china. This is very good progress considering that communication is important to the success of international business.

By 2001, china had the most mobile phone subscribers in the world. This means that communication in this region is up to date and the resources needed to facilitate the same are available. In addition, the induction of the internet in the business world has been working well in China. The availability of these resources makes China good investment places for investors of foreign descent.

As pertaining to the availability and provision of power, China is doing relatively well in comparison to its neighbors. It is a known fact that the access to reliable power and at a reasonable price is a main concern to investors all over the world. This means that the host nation must be capable of producing power efficiently with minimal interruptions.

For example, only 30% of Chinese firms have back up generators as compared to 69% in India. This shows that power in china is largely reliable. On the same note, some firms in China reports that they loose on average 2% of their output because of power failures as compared to 6% in Pakistan and other countries.

By definition, corruption refers to the use of available resources or designated power for purposes other than the intended ones or for personal gains. It is a relative concept because it comes in different forms depending on the situation or action taken. In the current society, this vice has rapidly penetrated the social, political and economic realms and is causing pain and suffering to everyone whom it affects.

Corruption leads to the damaging of the very fabric of society. Corruption undermines the value of democracy and the effectiveness of rules, regulation, laws and policies that govern an institution or nation. As a result, it leads to unequal distribution of political and economical power within the affected society. In addition to this, it also causes social and political instabilities leading to war and tribal/cultural clashes.

Economically, corruption inhibits development through unfair distribution of resources and funds. Additionally, it leads to an increase in prices levels brought about by poor price legislation. China has a high score on maintaining political stability, implementing regulatory policies and curbing corruption. This makes it a great avenue to invest in because such proficiency assures the investors of security, fairness and justice.

Another important aspect worth exploring is the level of barriers involved in the entry or exit of a targeted market. To this regard, China has failed miserably because it has a long process when it comes to the registration and licensing of emerging firms.

On average, China requires the completion of 12 procedures taking up around 92 days to complete in order to register a new firm. This is relatively high because in most countries the procedures and the number of days are usually fewer. However, this is a small price to pay considering the potential benefits that awaits an investor upon entry.

In terms of human resource, skills and technological know how, China is doing relatively well in the provision of quality labor. Putting in mind that it has the largest population in the world; it goes without saying labor in china is in abundance. However, the quality of the labor force is equally as important.

An estimated 16% of the Chinese population is illiterate. Over the past decade, the number of people getting education has increased impressively. Statistics provided by the National Science Foundation indicates that more Chinese students have attained PhDs in engineering and sciences from America over the past decade.

The increased number of higher education institutions in China further supports this fact. In addition, the number of students enrolling in postgraduate education has significantly grown over the years. All these goes to show that there is a well skilled and learned human capital in China. This is very important because having a staff that understands a new business environment plays a vital role in facilitating the success and survival of the new firm.

In accordance to the provision and access to financial services, China has a well-established financial system that caters for both the local and international investors. In most cases, investors will put their money in projects where the expected returns are greater than the costs. Such efficiency in investments is only achievable in countries that have less financial constraints.

As such, the importance of a well –functioning financial system remains invaluable when it comes to foreign investments (World Bank, 2001). Statistics indicate that larger firms have a greater chance of receiving bank loans as compared to smaller firms in China. This is mainly because financiers consider the risks involved and the probability of yielding returns from a potential client. This makes the rates on bank loans much higher so that they can cover the risks depending on the workforce and the return period.

On an unrelated note, it is always advisable to consider a joint venture with the local firms. This is because they have established supply networks, markets factories, trained staff among other aspects. This would greatly reduce the start up costs, marketing and other overhead costs thus ensuring the success of the venture. In addition, it reduces the hurdles faced while registering a new firm.

Conclusion

From this paper, we have seen the various factors that have affected the economic growth of China. A presentation of vivid descriptions and explanations to further help in understanding why and how China is at its current position in terms of economic growth is presented all through the paper.

The government may reduce taxes to encourage investment and use price legislation to reduce inflation. This will improve productivity and in the end, the GDP levels. The banking sector should also find a way to reduce interest rates on loans to encourage borrowing which will also improve the investment portfolio in China. If the recommendations above are put in place, they will go a long way in assisting China as a whole in its road to economic recovery.

Investment decisions are very important in a business setting. In this case, the aspects mentioned in this report are a worthwhile endeavor as they help in the analyzing and assessment of China’s investment climate. As such, it is advisable that all potential investor redirect adequate resources into investigating these factors before making the ultimate investment decision.

References

Eng, J, Y. (2005). China Investment Environment & Strategies: The Key to Winning in the Greater China Market. China: iUniverse

Hsu, C & Zang, W. (2007). The business and investment environment in Taiwan and Mainland China: a focus on the IT and high-tech electronic industries. USA: World Scientific

Jiang, X. (2004). FDI in China: contributions to growth, restructuring, and competitiveness. NY: Nova Publishers.

Liaw, T. (2007). Investment banking and investment opportunities in China: a comprehensive guide for finance professionals. NY: John Wiley and Sons.

OECD. (2003). China in the world economy: an OECD economic and statistical survey. USA: Kogan Page Publishers.

Pereira, A, A. (2003). State collaboration and development strategies in China: the case of the China-Singapore Suzhou Industrial Park, 1992-2002. USA: Routledge.

World Bank. (2001). Improving the investment climate in India, a product of the Private Sector. Washington: World Bank.

World Bank. (2002). World Development Indicators. Washington: World Bank.

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