Business Environment - China vs India
‘For Australian businesses looking to expand their operations overseas, China is a more attractive location than India.’ To what extent do you agree with this statement? Justify your answer.
Introduction
In the year 2007, China and India ranked first and second respectively in the list of ideal foreign direct investment (FDI) destinations, according to A T Kearney, a global strategic management consulting firm (The Press Trust of India Limited, 2007a). The two nations, because of their similarities in geopolitical, economic and demographic aspects, are often compared with each other. To determine which one is more attractive for businesses to expand to, this essay will examine the business environment of both countries from the following perspectives: political/legal, economic, socio-cultural and technological.
Political/Legal
China and India both have ponderous bureaucracy systems created by history and tradition. Since the opening of China’s market to foreign investors in 1978 and India in 1991, they have been gradually moving from centrally planned economic system towards decentralisation. However, besides their continuous movements in order to provide businesses a better environment, significant problems still exist.
In realising that foreign investments are the key source of the nation’s economic rise, the Chinese government has given special preferences to foreign investors (Financial Express, 2006). This is mostly done through reduction of most favoured nation (MFN) tariff rate. In India, on the other hand, fair competition exists between domestic and foreign investors. Although the Indian government states that it aims to reduce its MFN tariff rate, which currently doubles the rate in China, to other ASEAN country levels, it is in reality a big challenge because a large portion of the nation’s tax revenue comes from customs tariffs (Henley, 2004).
Many developed and developing countries want to protect their own industries such as India who is still reluctant to give foreign firms greater access to its economy, as shown by the political row over its much delayed decision to open up the supermarket sector to global giants
Secondly, the existence of merchant may maintain the stability in border areas (South-East). And the oversea trade is also an extremely part of the tribute system that can display China’s powerfulness. Lastly，the author calls for lax of business environment and tax policy with the expectation of trade
Rigid restrictions such as stipulated employment guarantees, investment commitment, partial local ownership, and management teams staffed with nationals may be demotivating factors. However, regulations such as maintaining limited state ownership can be an advantage as it can transfer networking assets, reduce political opposition and regulatory problems (Fattouh, 2013).... ... middle of paper ... ...
I found this article "Foreign direct investment: Companies rush in with the cash" on the financial times website (www.FT.com) published December 11, 2002 written by John Thornhill. The reason for choosing this article is my personal interest in the Chinese economy and its attractiveness to the foreign investors. Apart from the foreign direct investment this topic has also helped me in understanding the impact of Chinese economy on the global market.
...irect control of foreign interests, absolute and comparative advantages and sometimes the strength of ties with major foreign markets. The problem of geographic and economic distance is one that is not solved easily. There must be a cross-border trade in goods and services and this could be done with little direct involvement abroad. Businesses may also be able to systematically work local markets abroad by establishing branch offices in the given country. There is also the option of investing in an existing firm abroad, which minimises the risk involved. Ideally, investor motives will broadly match the requirements of target countries or firms, with the interests of the latter focusing on expanding production capacities, enhancing productivity growth, benefiting from employment opportunities and getting access to technological know-how (A. Breitenfellner, 2008).
The culture in India possesses several features that influence costs of doing business, and enterprises’ potential for economic development, and business practices. With regard to starting one’s own business, such practices as nepotism and gift giving are the norms of business operation (Ardichvili et al., 2011). This deep-rooted cultural tradition of gift-giving, bribes and widespread bureaucracy and corruption account for fairly high cost of entry level into the business world and make it harder for new entrants as well, as a result making business environment highly bureaucratic and non-participatory (Lindsay, 2012). Additionally, Indian business culture places high value on nepotism, friendship, clanship, and favors (Ardichvili et al., 2011). Such practices make it hard for new entrepreneurs to enter the market and succeed. Another cultural trait that characterizes majority of India people is the inclination to avoid risk taking and the desire to stay on a safe side. Also, traditionally, the Indian government acts as a gatekeeper than a facilitator of business development (Makhlouf, 2010). Considering the impact of examined aspects of Indian culture on business, the conclusion can be made that the influence of Indian culture increases the costs of doing business, hinders economic development and entrepreneurship initiatives, and contributes to unethical business practices.
Political and legal considerations were given first priority in this analysis with primary emphasis given to whether a country's legal or political system prohibits or impedes foreign investment. If a country's political or legal system discouraged or prevented foreign investment, that country was disqualified from further consideration. Factors considered when assessing the political and legal environment:
Over the last 30 years the world has seen drastic changes in the Chinese way of making business. Nowadays, China has opened its businesses to the rest of the world, especially America and Europe (Teagarden & Cai, 2009). As a result, their economy has increased and the evolution of the companies have changed to be from closed doors to be international and multinational (Teagarden & Cai, 2009). This essay will analyze, first of all, how some Chinese companies have had success abroad, looking at the strategy that they applied to expand and to improve their products. Furthermore, this essay will show examples of successful Chinese firms, such as Lenovo and TCL Group, and how they achieve it.
[6] Kripalani, Majeet & Egnardio, Pete. The Rise Of India. Business Week Online. December 8, 2003. http://www.businessweek.com/magazine/content/03_49/b3861001_mz001.htm
This sort of arrangement not only eliminates hurdles to trade but promote foreign investment as well, not giving room to economies for making use of import tariffs to safeguard their rising industries or their farmers from abundances of inexpensive imports. This trade agreement also contains extra guidelines on investment that poses a possible threat to poor publics' access to public services.
And as China transforms its economy into a ‘socialist market economy’ it is held that the attendant social, economic, and political transformations necessitate that its state controlled IRs system is decentralized and more so, it should be converge with international best practice IR standards (Zhu, Warner, & Feng, 2011). Although the Chinese government has endeavored to reform its labor market, the “deep-rooted national culture and its long history of centralized state power” as exhibited by the tenets of the all-powerful All-China Federation of Trade Unions1925 (ACFTU), has meant that any initiated IRs reform should be “with Chinese Characteristics” (p.128). It is important to note in the 1980/90s most countries in the Western hemisphere and Asia restructured their IRs systems. This episode can be attributed to factors specific to these countries; but owing to the fact that most of Asia’s economies are linked to the global economy, it is posited that this process may not have been coincidental but it was occasioned by competitive pressures in the global labor market (Kuruvilla & Erickson,
Under China-ASEAN FTA tariff elimination covers 90% of the goods traded between China and ASEAN countries. According to this FTA, average tariff rate of China for ASEAN goods would be 0.1% instead of 9.5%. Besides, if we compare China’s FTAs with Pakistan and ASEAN we will find ASEAN at great advantage as there is zero percent duty under China-ASEAN FTA on items which are covered under China-Pakistan FTA where there is some duty. The rate of tariff of plastic products for Pakistan is 5.5% to 6.7% but the same is zero for ASEAN countries. ASEAN has a clear advantage rendering Pakistani products less competitive [18]. This may be the reason why in spite of a gradual rising trend in export, the overall trade volume is very low.
When the new Chinese Government was set up in 1949, the new government faced a lot of problems. First on their agenda was how to re-build the country. As Communist Party of China (CPC) is a socialist party, their policies at the time were similar to that of the Soviet Union’s. Consequently, the CPC used a centrally planned strategy as its economic strategy when it first began. For a long time, the Chinese economy was a centrally planned economy in which none other than the state owned all companies. In fact, there were absolutely no entrepreneurs. As time went on, the problems of a centrally planned economy started to appear, such as low productivity, which was the key reason for restricting the development of China. With the population growing, the limitations of the centrally planned economy were clear. In 1978 China started its economic reform whose goal was to generate sufficient surplus value to finance the modernization of the Chinese economy. In the beginning, in the late 1970s and early 19...
Firstly, what should be noted here is that international trade has been providing different benefits for firms as they may expand in different new markets and raise productivity by adopting different approaches. Given that nowadays marketplace is more dynamic and characterized by an interdependent economy, the volume of international trade has grown substantially in recent years, reducing the barriers to international trade. However, after experiencing the economic crisis that took its toll in 2008 many countries adopted a different approach in terms of trade barriers by introducing higher tariffs in order to protect domestic firms from foreign competition (Hill). Secondly, in order to better understand the implications of the political arguments for trade it is essential to highlight the main instruments of trade policy (See appendix 1).
However, on the other hand, as much as the world trade organization has been committed and determined to form the CNS of trade and commerce for its member countries through policies, it has been exceedingly hard as national interests and policies override the organizations’. This has subsequently hampered the organization’s pursuit to equal development between member states. The concept of FDI has not been fully harnessed due to the complexity found within the concept. It has been felt that host countries have been the key beneficiaries of FDI at the expense of the investor’s country. Profits are ploughed back within the host country’s economy as investors pay licensing fees and other charges to the authorities of the host country with little to plough back to their mother countries. This has hugely compromised the concept of FDI (Helpman, 54).