Critically discuss the reasons why China has attracted such huge amounts of foreign direct investment (FED) over the last 30 years. Carefully evaluate the alternative investment patterns that are emerging to challenge this. Foreign direct investment is when companies or individuals from one country invest directly to a company based in a different country. L China was for many years the country attracting the largest amounts of FED, amongst developing countries but according to Forbes in 2012 it surpassed the United States to become the country attracting more FED than any other country in the world.
This essay will look into the reasons that China has attracted such large amounts of foreign direct investment within the last 30 years. Finally in this essay the alternative investment patterns that are emerging will be evaluated. The main reasons that China has attracted such amounts of foreign direct investment are: China’s openness to international trade, infrastructure including transportation and technology, resource availability in both labor and materials, as well as efforts by the Chinese Government to attract and promote FED.
Many countries are predicted to attract large amounts of FED within the ext years including the IN 1 (next eleven) while also totally different markets compete for investments and challenge the rise of China’s foreign direct investment attraction. Firstly, the reasons that China attracts FED will be analyses and finally alternative investment patterns that challenge China’s attraction to foreign direct investment will be evaluated in the essay. China’ openness to international trade and willingness to reduce tariffs has had a vital role in the rise of FED attraction to the country.
Governments of China foresaw the opportunities that could arise for the country’s economy and exploited the emend for foreign direct investment to the country by becoming more export- friendly. China has reduced significantly the tariff barriers in the asses, in order to ensure lower prices within the local market and interest more foreign companies to invest in China. With the formation of the SEAN free trade area in Asia, China’s entry to the World Trade Organization in 2001 and establishment of free trade agreements, China has become more export-friendly and has managed to attract more trade activities.
That enables China to export goods to Europe and the Americas rather Han selling them only in local markets, which offers great opportunities for more sales. Thus, foreign companies are attracted to invest in China since they anticipate sales both outside the local markets as well as within those markets. The location and huge size of the country territory has also contributed to this since it allows China to export to the rest of Asia, Europe and the Americas. Researches have proved that countries with advanced infrastructure succeed at attracting foreign direct investment.
China’s level of transportation is very high with many railways, roads and water transport being available. This makes it easier for FED in China By Nikolas materials to be transferred for production and then goods being sold within local markets or exported to other foreign markets. Transportation is a very important aspect when any company decides where to locate their facilities, especially plants and factories. High quality of transportation can save money and time by transporting raw materials and finished goods faster and at low prices, which are is a very important asset for any business.
Telecommunication levels are also important for companies deciding to invest, since communicating and completing various cuisines activities are made easier and can be proved time and money saving. Another sign of China’s high-level infrastructure is the rise and development of the high technology industry. Chinese Government has targeted to develop the high-tech industry by offering incentives to anyone who plans to invest in that industry and generally, they strongly promotes it. That is a clear indication of China’s advanced technological infrastructure.
China’s infrastructure as a country is clearly advanced and continues to improve until now, this is an important reason that many litigation companies to be attracted and to strongly consider China as a candidate for future investments. One of the most important factors of attraction of FED is China’s availability in resources, both labor and resources. China is the most populated country in the world with 1. 34 billion people. Also, the average salaries in China are low especially in comparison with countries like United States, United Kingdom and the rest of Europe.
That gives great availability and the option to select workers for any company that decides to invest in China. Government of China during the last years has given read emphasis on educating its people and has increased the mandatory education years. That means that besides having great availability of workers with low salaries, worker’s education is at a sufficient level and that gives great potential for any companies that wish to expand in China and recruit their workers, since productivity can be high with a small amount of money being paid for salaries.
There is also great availability in natural resources in China. China is the greatest producer of coal, producing almost half of the total of coal produced in the whole world. Also China reduces great amounts of iron and various minerals, which are used as raw materials for many factory processes. China’s high level of transportation is vital here, since those resources can be transferred very fast and at reasonably low prices.
So China offers great availability in both labor and natural resources, which is crucial for any company considering to invest in the country, since not only high levels of production with low salary costs can be achieved but raw materials used for production can be easily be obtained from within the country, which is cost and time avian. Thus China’s geographical and demographic aspects offer many advantages are main contributors for attracting foreign direct investment from multinational companies.
Another factor that makes China a desired destination for multinational companies to invest in is the growth of China’s economy during the last years and the size of the country’s population, which increases the size of the markets available. China not only has a population of 1. 34 billion people but its economy has experienced a rapid and huge growth, which means that its people have more purchasing power. Increased purchasing power in addition with the size of the market, offers great opportunities to any company that considers investing in a foreign country like China.
China’s economy is predicted to keep growing as well as to increase GAP for the next years. The reason that this very attractive to possible investors is that besides being able to sell goods throughout the world from China due to location and its openness to international trade, there are also great opportunities for sales within local markets due to huge size of markets and increasing purchasing power of the Chinese people. The regulatory system in China is also contributing to the huge amounts of foreign direct investment in China.
Chinese Governments had predicted the opportunity presented by FED, since it could introduce new skills and know-how besides capital, and by reforming laws and introducing new ones have had an important role in attracting investments from foreign companies. Government has made China an attractive location for FED by reducing taxes and tariffs as well as offering loans and many bonuses to companies investing in China. These preferential policies introduced by the government have made China an investment-friendly country and has contributed greatly in attracting capital by foreign investments.
In the asses where there were no such preferential policies and the barriers and taxes weren’t reduced, foreign direct investment was at relatively low levels for China. That is a clear indication that Government’s efforts to make China a desired location for investments have played a crucial role in attracting huge amounts of foreign direct investment since the asses and until today. Thus, it is obvious that Chinese Government not only made it easier for investments o happen by reducing barriers but it also has tried to promote investments to be made in China by foreign companies.
It offers free ports, reduced taxes and many incentives to companies investing in their country. China recently offers great incentives for the high-tech industry oriented investments with clear desire to promote and expand high-tech industry in China by exploiting the huge amounts of foreign direct investment. Also efforts have been made to promote the idea for investors to invest in more diverse sectors, rather than traditional manufacturing, including automobile and energy.
There are also some laws to protect FED in China, including the security of all participants’ rights and the idea that disputes and contract breaches can be solved with unofficial agreements with no need for legal involvement. So, not only barriers to foreign direct investment have been reduced but also many incentives are offered in order to attract FED and to protect it as well, which makes China a very desired location for foreign direct investment. During the last decade though, there have been some different investment patterns that are emerging and this could challenge and reduce the attraction of FED in China.
The two main ones are, firstly the attraction of FED for similar reasons as China but in other countries like Pakistan, South Korea and Indonesia. The second is attraction of investment in other sectors, which to some degree limits the attraction of capital in China. The reason that multinational enterprises have been seeking for different investment patterns is to find opportunities with lower costs and with more return on their investment. Due to China’s economy and living standards increasing rapidly, salaries and other costs have increased in comparison to previous years.
Thus, some companies may seek to invest in other countries that salaries and other costs will be lower. A possible destination for such investments might be the IN 1 (next eleven) countries (Pakistan, Bangladesh, Indonesia, South Korea, Egypt, Iran, Nigeria, Mexico, Turkey, Vietnam and Philippines). Those countries are predicted by Goldman Sacs Investment Bank to be along with the BRICK (Brazil, Russia, India, China) countries amongst the strongest economies of the world within the 21st century. These countries have the same base that China had, when it started attracting FED.
Large population, high trade activities, very low salaries and good location in order to export and import to the rest of the world. So, since FED in China has faced an increase in costs, many multinational companies might seek opportunities elsewhere and the IN 1 countries are strong candidates. These countries have the base and potential to follow the steps of China and reform their economies, not at the same scale, but still to radically improve their economies and infrastructure to make it a more desired location for foreign direct investment. This could be a direct threat for
China’s attraction of FED, although China has attracted such huge amounts of foreign direct investment, that even a reduction of that amount wouldn’t harm China that much and its economy would continue to rise. Increased costs and more strict law protecting intensive labor in China might cause multinationals to seek for other opportunities to invest in. Not only in the same sectors as they would in China but in different locations, but also for totally different types of investments and in different sectors. Those include precious metals like the extraction of gold and other metals as well as the diamond business in Africa.
Agriculture and investment banking are also investment decisions that could challenge the amounts of FED attracted in China. Although these are totally different sectors, since investments in China will increase in cost due to various reasons, many multinational enterprises will seek for alternative investment opportunities. They might find sectors with lower costs to invest in and the return on their investment could be higher than the return of investing in China. Those are the two different investment patterns that could possibly challenge the attraction of foreign direct investment in China.
Although the rise in costs of investing in China will reduce the levels of attraction of FED, China with its rapid growth has managed to be considered as the worlds’ 2nd most powerful economy after the United States. So, even a fall in FED will not have a significant impact on China’s economy. The reasons of attraction of huge amounts of FED in China analyses above, consist of the most important and vital ones. This attraction led to the total reform of China’s economy and its huge progression in standards of living and its infrastructure.
Although, due to this reform, costs of investing in China have now been increased ND multinational enterprises have been seeking for investments with lower costs and higher return. Different location and different sectors of investing have challenged the level of attraction of foreign direct investment in China, but after the reform of China’s economy, which is considered as the second most powerful of the world, this will have small or no effect at all on China’s economy.