However, due to the Chinese economy at present is largely a state-directed one, the significant role the state plays in directing the investment activities of private and state owned enterprise through industrial policy and in regulating business activity can not be underestimated. These efforts will greatly undermine the expected fruition of the foreign makers if an utter liberalization is carried out.
The Chinese should use the regulations as tools to ensure the stability of the infant automotive industry, particularly, the measures which are drafted for capital controls to restrict the unlimited growth of the MNCs, avoiding the total loss of the domestic automobile manufacturers. Some of the measures recommended by previous researchers are that introducing measures to trim overcapacity in auto sector and promoting local brands, which is indeed necessity for domestic auto manufacturers.
Such moves will greatly steer the stability of the car sector. The negative impact of the liberalization brought to the domestic makers can be greatly neutralized because of the subsidiaries of the central and local government and the incorporation among the state owned car makers. Besides of the inclined and favourable policies, it is also no secret that state-owned enterprises (SOEs) in China have received substantial subsidies from government budgets.
(Richard 2005) Besides, because of the restrictions of the government policies, direct factories of the foreign makers are not allowed. The joint ventures are good sources for the incrementing of the empirical experiences and the R&D capabilities. The support, both of regulatory and of financial, from the Chinese government, will greatly subdue the pressures of the domestic makers in the liberalization process. Although in the liberalization process, these subsidiaries are strongly restricted according to the play rules, the Chinese carmakers can still receive supports.
In many cases, the local government's support, which is not directly restricted from international pressure, is the major contributes. China has been pursuing an 'open and reform' policy for two decades now. It has made remarkable progress in trade liberalization in recent years as it attempts to meet the requirements of the World Trade Organization (WTO). Since the adoption of the Harmonized System (HS) code in 1992, there have been four rounds of significant tariff cuts. The average tariff rate was reduced from 43.2 percent in 1992 to 17 percent in 1997.
At present it is about 13 percent, close to the average level for developing countries. The Chinese government sticks with its promises to eliminate the tariff and non-tariff barriers. Yet, the government also makes unrelenting resolutions to protect the infant auto industry, such as policy instruments to encourage localization, and the levels of tariff on imported components would be reduced, and non-tariff barriers for certain types of imported cars.
The Chinese government has gradually liberalized its auto market to fulfil its promises on the entrance of the WTO. Actual steps have already been stepped forward, as the pressure from external entities. Removal of Non-tariff Barriers: In addition to the reduction of tariff levels, China has also removed some significant non-tariff barriers (NTBs) on certain areas to fulfil the promise of entering WTO. From the above analysis, it can get much useful information to guide car industry development.
When it takes the Chinese specific context, these advantages and disadvantages would take new appearances. However, there are still some basic standards to consider when making entry mode: core competence and the pressure to decrease costs (Charles, 2001). As it said before, the technique environment make any companies which possess technique advantage in energy-saving and reduce cost would probably consider direct investment.
Also if the foreign car company could enjoy its core competency from its global logistics or other management levels, then the expansion into china may be the joint venture form. As for the second standard of reducing cost, facing china's low labour cost, this would almost be a good choice to any big foreign car enterprises. Certainly, if the foreign company is not big enough to hold that risk, then different choice of entry mode still means much difference in reducing cost.