China's economy during the past 30 years has changed from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy. Reforms started in the late 1970’s to include the gradual liberalisation of prices, economic decentralisation, increased autonomy for state enterprises, the foundation of a diversified banking system, the development of stock markets, the rapid growth of the non-state sector and opening to foreign trade and investment.
By the second half of the 1980s, China's participation in international organisations, including the World Bank and the International Monetary Fund, reflected the two primary goals of its independent foreign policy: furthering domestic economic development through co-operation with the outside world and promoting peace and stability by cultivating ties with other nations on an equal basis.
By the end of 2003 China had experienced a robust growth rate of more than 9% and a major urban building boom, resulting in part from the migration of rural inhabitants to the cities (22 cities had more than 2 million residents) and had signed a trade pact giving Hong Kong businesses greater access to China's markets. Today China is the largest emerging market in the world with estimates, based largely on past growth rates, showing China to be the second-largest economy in the world after the US.
The unparalleled size of China's markets has always been the target of multinational corporations and more recently, as government policies and cultural attitudes in the region continue to evolve, the strategies of multinational companies have changed as well. The creation of domestic capital markets, increasing access to foreign capital, legal changes in corporate structuring and the sale of shares in state-owned enterprises have all contributed to the development of a business-oriented society with increased opportunity for MNCs.
The Chinese government is encouraging investment with various incentives and foreign investments are pouring in at the rate of about US $20 billion every year. A recent article in the Financial Times takes an in-depth look at some of the key influences and challenges currently facing domestic companies versus MNCs in Asia. It seems that MNCs such as Apple, Sony, L’Oreal, Proctor & Gamble, Applied Materials, and Tokyo Electron that set up shop in Asia, tend to dominate high price, high performance industries where investment in R&D and advertising play a critical role.
In contrast, slower moving industries, where production is a high percentage of prices and factory-capital intensity is high, tend to be dominated more by domestic companies. Some reasons for Foreign Firms to Invest in China include:- Opening Market - The positive development trend of the Chinese economy provides a huge development potential for foreign investments. As the Chinese government adheres to the guideline of expanding internal demand, continues to implement the positive financial policy and steady monetary policy, and further expand the opening to the outside world China will improve and maintain a strong momentum of growth.
Political Environment - China has a stable political situation and is now recognised as having a policy for encouraging foreign investments. For some time now, the Chinese government has devoted much attention to and welcomes foreign investments in China, while continuing to improve the investment environment and protecting the legal rights and interests of foreign investors. Economy - Unlike most countries in the world, the Chinese economy is not in recession, indeed rather the reverse with analysts predicting China to be on track for a solid 6% expansion.
Even if the economy was to experience a downward slide as of December last, China boasted $1. 95 trillion in foreign reserves, which if necessary, the government could utilise to sustain economic growth. Broad Market Potential - With China's economy growing, the potential of domestic market is enormous with good return on investment. China exhibits strong attractiveness to numerous foreign firms, including multinational ones, under the current circumstances of accelerated adjustment of industrial structure worldwide.
Workforce - Advantages in work force include large numbers of skillful workers, technicians, and managers, together with what employers will find to be a low cost labour force. These advantages will exist for a long time, thereby attracting multinational companies to transfer their production and processing bases to China continuously. Personal savings - Unlike Americans that spend more than they earn, the Chinese save an amazing 35 cents on every dollar. While this provides a cushion against a slowdown it is also an enormous opportunity for future growth.
As China’s economy develops the Chinese will get comfortable spending more of their hard earned cash. Experience - Foreign firms' experience of successful investments in China during the past twenty years of China's reform and opening strengthens foreign investors' confidence in investing in China makes it among the first choice of places for foreign investors to invest in. As China prepared to host the 2008 Olympic games massive construction projects got underway throughout the country with the upgrading of roads, railways and airports which will be of benefit to MNC’s establishing businesses there.
Over 200 new cities and 5,000 new towns were constructed and forty one airports renovated or constructed. The influx of foreign investment is resulting in most municipal governments in China building high tech parks to attract MNCs to their cities, creating a wealthier population, resulting in middle and upper income sectors. Decades of remarkable economic growth have brought dramatic transformations to China and present unlimited opportunities to MNCs.
Today, China is reaching out for a greater role in interational affairs and accession to the World Trade Organisation is a significant occurrence. It would now seem that China's emergence as a global economic and political power is accepted as inevitable. China is changing as they are poised to become an economic superpower profoundly affecting the globally competitive capabilities of small and multinational corporations alike. China offers astonishing growth and exploding domestic market promise and MNCs will see and focus their opportunities in this market.