China’s Current Foreign Investment Environment
China’s Current Foreign Investment Environment
Since the reform and opening up, China’s utilization of foreign investment is developing constantly. Along with the continuous improvement of the investment environment, the scale of foreign investment into China has been continuing expanding, which making China became the world’s second largest inflow of funds country. In the backdrop of China’s own economic development, in 2010, China became the second largest economy in the world, with a 5878. 6 billion dollars GDP at the same year.?
Inside the country, foreign investments forming a large-scale foreign economy, and made important contribution to China’s economy and pushed it into the international economic system. I would like to talk about my own views about China’s current foreign investment environment, and analyze its opportunities and challenges. The quality of investment environment is directly related to the ability to attract high-quality foreign capital investment. Investment environment affected by many factors, and these factors work together, such as national macroeconomic policies, the basic anagement system of national government, the level of infrastructures and so on.
First, I’d like to analyze the advantage of China’s current foreign investment environment, which directly related to the opportunity for China to attract foreign investment. Advantage: Good economic environment A country’s economic environment determines the future direction and development of the country’s economy, while China is in a good momentum of economic development stage. China’s macro-control policies become more and more mature after years of development, and have accumulated a lot of valuable experience.
These policies have played a catalytic role for the country’s overall economic development. In order to develop an opening-up economy, in 2001, China became a member of the WTO, provided a good opportunity to make China’s economic more opening to the outside world and provide better investment environment. By accepting new things and developing China’s own economic growth model, the level of China’s economic grows rapidly. China has a strong domestic purchasing power, which reflects China’s huge market size and market potential.
According to the effective demand theory of Keynes, due to the economic crisis, there is a lack of effective demand in western countries. Effective demand makes up with consumer demand and investment demand. Diminishing marginal propensity to consume, diminishing marginal efficiency of capital and liquidity preference is the three major social and psychological factors resulting in lack of consumption demand and investment demand, and then reduce the investment rate in developed countries.? Thus, more foreign investors would turn to find a better place to invest, it is the opportunity of China’s foreign investment environment.
Advantage: Stable political environment Since China’s reform and opening up, people’s living standards continue to improve, China’s international status and international influence also has been enhanced at the same time. China could maintain a stable developing social environment. This is the basic guarantee of the investment environment. For example, the reason why Wal-Mart invested a large amount of money on shopping plaza, Sam shops, and community shops in China, is that Wal-Mart believed China has a stable political and social environment. A stable political and social environment is an important factor that can nsure the safety of foreign investments. Advantage: Acceptable infrastructure China has the world’s largest infrastructure construction.
After years of development, the level of China’s infrastructure has been significantly improved. For example, the government invested a lot of money on the construction of transportation, electricity, water, and natural gas supply. The ability to provide materials and efficient transportation are favorable factors for attracting foreign investment. For example, Wal-Mart relies on its efficient logistics and distribution, and Wal-Mart decided to locate its distribution center in Tianjin.
Tianjin is a coastal city, it not only reflects the natural advantage of Tianjin, but also reflects that in recent years, Tianjin’s tremendous achievements in constructing infrastructure. Advantage: Abundant labor China has the largest population in the world, and also provides a lot of cheap labor resources. Companies could enjoy cost advantages because of the cheap labor cost, especially in labor-intensive industries. China also has a comparative advantage in labor-intensive industries. Wal-Mart has 50,000 employees in China.
The company gives their employees necessary training to meet the needs of high-tech industries and enjoys low cost of labor. Labor and capital are substitutes. In China, Wal-Mart’s development relies heavily on a lot of cheap labor. Imagine Wal-Mart has such a large number of employees in developed countries, the labor cost is much higher than in China, therefore, the actual profit must be affected. In this way, invest in China is a good choice for War-Mart. I have talked about the advantages of the foreign investment environment in China, and then I would like to talk about the disadvantages.
Disadvantage: The laws of the market economy system are not perfect China joined the WTO in 2001, which means that China can be on an equal footing with the developed countries. However, China’s current economy is a market economy with Chinese characteristics, which has some differences with the mature market economies in developed countries. China’s market economy has been accepted for a short time, with little experience, many laws and regulations are unreasonable. China’s legal basis, the legislative process, operational mechanism is still not completely turned to erve market economy.
Some existing laws and regulations confront with the principles of market economy. In terms of implementation, many laws and regulations are not uniformed in the implementation process, which have caused lots of problems for foreign investors. The imperfect legal system also affects employee’s rights. For example, Wal-Mart, Dell, Kodak and other foreign companies are refused to establish union in China. Actually, there are few laws to protect employee’s rights in China. These foreign companies are not afraid of these imperfect laws.
Foreign companies like Wal-Mart, has a long operation history in many countries around the world, has many experiences of how to deal with workers in many countries, the legal basis in China is still very weak. Disadvantage: Low government efficiency Bureaucracy and corruption is a significant problem of the government. In the Chinese government system, the institutional settings are bloated, some department’s functions are unclear, policies and regulations are not uniformed between the various departments. These problems are particularly serious in recent years, greatly limits the improvement of the foreign investment environment.
Foreign investors lack of a complete understanding of the Chinese government, they will face a lot of problems but do not know how to deal with it. Disadvantage: The low efficiency of the financial sector According to a survey conducted by the World Bank, China’s financial resources are concentrated on state-owned enterprises. For some companies with high potential, especially for some small and medium-sized private companies, they can not get strong financial support from the bank in a short time. Lack of support also leads these companies to the slow development or even the bankrupt. This is also a disadvantage to foreign investors.
Foreign investors in China want to get the financial support have to face cumbersome procedures, mainly because of the financial institutions system is not perfect. At the same time, the interest rate is not determined by the market, which limits the flow of credit funds to the foreign companies, the private sector, and small enterprises. Disadvantage: The investment environment and labor distribution has regional differences China has large land area, but because of the natural causes, history and other factors, the investment environment and labor distribution are various from region to region.
In the southeast coastal areas, infrastructure, labor resources, and policies are attractive to foreign investors. In the central and western regions, due to the geographical conditions and the limitations of natural resources, economic development is relatively slow, the policy is not attractive to foreign investors. For example, Wal-Mart opened 191 stores in China are mostly located in the southeast coastal areas. As shown below: Wal-Mart China mainland outlets maps Disadvantage: Resources and environmental constraints China is a big country. However, the resources for every person rank very low around the world.
With the economic development, social development and the improvement of the consumption level, there are some limitations in the energy, land and other natural resources. China’s economic growth mainly depends on high pollution industries, and has not fundamental changed. Environmental pollution makes retail enterprises such as Wal-Mart faces a lot of problems in the procurement process. A lot of goods can not enter the mall because of the pollution. China’s foreign investment environment and also be limited, therefore, the transformation of economic growth mode is the top item of China’s current economic development. Summary
In summary, the entry of foreign capital is an inevitable trend in China, which has made more demands on China’s investment environment. How to use the opportunities and advantages of the China’s investment environment are important issues need to be considered by the government. Only by analyzing the advantages and disadvantages of China’s investment environment, developing relevant policies and regulations, increasing the anti-corruption efforts and transforming the economic development mode, China could improve the foreign investment environment to the next level. In this way, China could receive a more important role in the world economy.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 13 November 2016
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