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3.3.2 KEY PLAYERS IN THE WORLD ECONOMY

What will be the likely impact of the growing economic power of China and India on individuals, national and multinational firms in the 21st century?

Main areas for study:

Differences between India and China (for example state ownership of firms) Economic growth and export rates Predicted economic power compared to US and EU Increased purchasing power and foreign investment Implications of India and China population size Barriers to market entry Trade opportunities for UK firms

Introduction:

India and China both are largest populated countries in the world. In recent years India and China are growing economically. These countries are according to their nature in Asia most likely advantageous to many businesses. Other countries like UK, US and some of the other countries like Japan and other European countries are interest in these countries to invest. These countries are becoming specialized economic zones for many countries to operate businesses. India is becoming known as the world’s services provider where as China is known as the world’s factory. During recession time India and China economic power not much affected therefore many countries now focusing on India and China for trading activities. In accordance with liberalization, Globalization, privatization policies undertaken by many countries in this race china is slowly opening its doors. In fact labor resources, infrastructure and other natural resources encourage other country businesses to invest in these countries. Not only that the growing economic power of these two countries influencing other individual businesses, national businesses and multinational businesses. However, there are some differences between India and China these are discussed in the following.

UNIT 3/VILLUFUSHI SCHOOL/BUSINESS STUDIES NOTES Page 1

Students are to briefly consider how firms and individuals may be affected by the growing economic power of India and China. Students should consider how a national business may seek to trade with India and China.

Differences between India and China:

State ownership: China seems to be stuck halfway between a command economy and a market economy, with capital allocation still largely state controlled. But India is following mixed economy system means some businesses are private and some are public sectors. In India private own companies are welcomed unlike china but recently china also opened the door for many private companies.

Sectors: India is becoming known as the world’s services provider where as China is known as the world’s factory. Because china labor sources and other resources most likely suitable for secondary sector where as India providing services because English speaking population is more in India than China. Most of the outsourcing utilized by US and UK from India for example call centers.

Population: India and China together comprise 37.64% (India: 17.14 & China: 20.5) of the worlds population. In both Giants, population growth has been slowing and is expected to continue to do so. China’s population grew by only 0.6 percent a year to reach 1.32 billion10; it is expected to peak in 2032 and decline thereafter11 India’s population grew by 1.4 percent reaching 1.14 billion, urban 27.8% and its growth is expected to slow to 0.7 percent a year between 2030 and 2040 (by which time it will have overtaken China). These trends reflect sharply lower fertility, with people age 15–64 accounting for 71 percent in China in 2005, falling to 69 percent in 2020 and to 62 percent in 2040. The corresponding percentages for India are 63 percent in 2005, and 67 percent in 2020. China’s decline in the work cohort is likely to be at least partly offset by increasing employment participation rates, but India’s younger profile is one reason to believe it will start to close the income gap by the second quarter of the century. China has increased its urban population share from 21 percent in 1981 to 43 percent in 2005 with absolute declines in the rural population. Population level by 2026 (estimated) 1.46billion in china and 1.45billion in India. Population 14 and under (2007) in India 337 million*(note that the number of under – 5s in India is greater than the whole UK population) where as China’s population is 274million. Population aged between 20 – 30 in 2026 (estimated) 190million in china and 240 million in India. (10. A billion is 1,000 millions11. For comparability we use United Nations population projections rather than local ones)

Literacy: The literacy rate level in China is 91%, in India it is only 58% (i.e. 42% of the population cannot read or write). Therefore if the growth rate led to job opportunities for a wider range of people, many would be unable to take up the jobs due to illiteracy. Even though English speaking people are more in India than China.

Government: India is a democratic country where as China is communist country. India is having democratically elected government headed by prime minister. China (now it is PRC – People’s Republic of China) was a Soviet style centrally planned economy.


Language and culture: India is the integration of different languages it is divided into 28 states and each state has its own language as well as different cultures and belief of people. The national language is Hindi and following all the business transactions in English domestically and internationally. China’s national language is Chinese, most likely this is the language used by many people, and English speaking people are less in China than India. Than India China has variety of cultures, mainly they are Buddhists.

Infrastructure: India’s infrastructure is lower than China, for example road transportation such as motorway construction is poor.

Technology: Both countries in technology have some differences China is most suitable for manufacturing units than India where as India can provide services than China. China has advanced technology than India. In India IT developments are far better than China.

Industrial policy: China has centrally organized planned economy system but now it is slowly open up chances to private sector and inviting foreign direct investment. Even China Export market has been increased. India has democratic style of organization and a mixed economy system. In India privatization growing faster than China and most likely service sectors are increasing in India than manufacturing sectors. In 21st century India concentrating to develop secondary sectors even. Therefore both giants are suitable for foreign individual companies and even for multinationals.

Currency and exchange rates: Indian currency is (rupees) abbreviation for rupees: (Rs) for fraction unit (paisa). India is following floating exchange rate system. Indian currency is common every where in India. In conversion US dollars, UK pounds, Euros are acceptable. 1Ruppee = 100paisa. The denomination of Indian currency in notes is Rs1, Rs2, Rs5, Rs10, Rs20, Rs50, Rs100, Rs500, Rs1000, in coins Rs1, Rs2, Rs5. Reserve bank of India operating the currency. Travelers can bring any amount of dollars and Indian rupees can be converted into dollars. China currency is (Renminbi) short official name CNY (China Yuan) abbreviation: (RMB) symbol (¥) monetary unit: Yuan fractional units Jiao and Fen. China is also following floating exchange rates. The currency used in Hong Kong, Macau and Taiwan is different in Hong Kong (Hong Kong Dollar) abbreviation HKD $. Actually Hong Kong has a separate administration and currency but it came back to China recently but it is following Hong Kong Dollars as a currency. Macau currency is Pataca, Abbreviation MOP$. Taiwan currency is New Taiwan Dollar, Abbreviation NT$. Colloquially in Chinese, the Yuan is called Kuai, and the Jiao is called Mao. The conversion among Yuan, Jiao and Fen is 1Yuan = 10Jiao = 100Fen. Currently the paper money is used is 1Jiao, 5 Jiao, 1Yuan, 5Yuan, 10Yuan, 20Yuan, 50Yuan and 100Yuan. The coin used is 1Yuan and 5Jiao. Do not easily accept the money of other denominations. In Hong Kong and Taiwan Chinese currency allowed to use most likely 100Yuan. 5,000 US dollars and 20,000RMB can be taken into China. If the money you take exceeds that limitation, you need to apply for permit. You can apply for a permit in Bank of China. There are no limitations toward travelers’ cheque.


Culture: India has different cultures each state has different traditions and culture where as China has a common culture but according to the regions people believes and tradition is different. India has all communities because of this it is difficult to operate business in India than China.

Economic growth and Export rates: Many analysts argue that India’s economy has failed to live up to its potential, especially relative to other developing countries, such as China, which has a comparable population size, but has enjoyed far greater economic development in recent years. Table 1 indicates that both India and China experienced significant growth in population, GDP and per capita GDP (both measured on a PPP basis), trade, and FDI over the past 13 years. However, on several economic fronts, India lost significant ground to China.

Table 1 Selected Comparative Data for India and China

1990 and 2003

India China India’s Size Relative to China

1990 2003 1990 2003 1990 2002Population (millions) 850 1,062 1,139 1,295 74.6% 74.6%GDP, PPP basis ($billions) 1,189 2,951 1,583 6,675 75.1% 44.2%Per Capita GDP in $PPPs 1,400 2,780 1,390 5,150 100.1% 54.0%Exports ($millions) 17,97

554,000 62,090 438,500 28.9% 12.3%

Imports ($millions) 23,438

68,800 42,354 413,098 55.3% 16.7%

FDI stock ($millions) 1,592 34,559 68,513 490,243 2.3% 7.0%

PPP refers to purchasing power parity, which reflect the purchasing power of foreign data in U.S. dollars.

In 1990, India’s economy (GDP on PPP basis) was about three-quarters the size of China’s, but by 2003 it fallen to 44% China’s size. India’s living standards (per capita GDP on PPP basis) were slightly greater than China’s in 1990, but by 2003 it had fallen to 54% of China’s. India’s exports relative to Chinese exports fell from 29% in 1990 to 12% in 2003, while imports dropped from 55% to 17%. India made small gains in FDI flows relative to China over this period (rising from 2% to 7%); however, the total level of FDI stock in China remains substantially higher than in India. In fact, FDI flows to China in 2003 alone (nearly $54 billion) were 54% higher the cumulative stock of FDI in India through 2003 (about $35 billion). Many economists attribute the sharp widening economic gaps between India and China to differences in the pace and scope of economic and trade reforms undertaken by each country, where China has substantially reformed its trade and investment regimes (which has contributed to sharp rises


in GDP growth, trade, and FDI flows), India’s economic reforms have been far less comprehensive and effective. For example, China’s average tariff has fallen from 43% in 1992 to12% in 2002. India’s average tariff during this period dropped substantially, from 128% to 32%, but still remains among the highest in the world.

China and India share at least two characteristics: Their populations are huge and their economies have been growing very fast for at least 10 years. Already they account for nearly 5 percent and 2 percent of world gross domestic product (GDP), respectively, at current exchange rates. Arguably, China’s expansion since 1978 already has been the largest growth “surprise” ever experienced by the world economy; and if we extrapolated their recent growth rates for half a century, we would find that China and India—the Giants—were among the world’s very largest economies. Their vast labor forces and expanding skills bases imply massive productive potential, especially if they continue (China) or start (India) to invest heavily in and welcome technology inflows. Low-income countries ask whether there will be any room for them at the bottom of the industrialization ladder, whereas high- and middle-income countries fear the erosion of their current advantages in more sophisticated fields. All recognize that a booming Asia presages strong demands, not only for primary products but also for niche manufactures and services and for industrial inputs and equipment. But, equally, all are eager to know which markets will expand and by how much. Moreover, the growth of these giant economies will affect not only goods markets but also flows of savings, investment, and even people around the world, and will place heavy demands on the global commons, such as the oceans and the atmosphere.

Economic Growth

For decades, China and India plodded along under ideologies that favored the visible hand of government over the invisible hand of markets. Their economic systems stifled growth and left both countries poor. In 1980, real per capita income stood at $556 in China and $917 in India.

To jump-start their economies, China and India shifted strategies, letting private enterprise flourish and opening markets to trade and investment. The new policies have led to rapid economic development. China’s real per capita income has grown an average of 8.4 percent a year since 1995, climbing to $4,766. India’s 5 percent average annual growth has raised per capita income to $2,534.

Both China and India have unleashed pent-up economic energy, but they’re not traveling the same development path. China has followed the traditional route, becoming a center for low-wage manufacturing and exporting clothing, toys, electronics and other goods. India has emphasized services, using its large English-speaking labor force for call centers, data-processing operations and the like.


Growth rates give China’s goods-dominated strategy the better track record so far. But India’s approach may pay off better longer term. A look at per capita incomes around the world shows that the wealth of nations eventually depends more on services than industry.

We are interested in the Giants because they are large and growing (and are expected to continue to do so), and because their growth impinges on other countries via their international transactions. This section considers the first of these reasons: How large and dynamic are the Giants, how does their growth compare with others’ growth, and what determines the nature of their growth?

Putting the Giants in Perspective

We start by comparing the Giants with other large economies currently and in 2020. For comparing poverty or even economic welfare across countries, it is sensible to use purchasing power parity (PPP) exchange rates; but for assessing the effect of one economy on another, current actual exchange rates provide a better basis. Such international effects must operate via the international transfer of goods, services, or assets; given that the latter are tradable, their prices do not vary dramatically across countries, so PPP adjustment is not appropriate. The GDP data in table 1.1 suggest that China is perhaps one-sixth as large as the United States in current dollars, and that India is one sixteenth as large. In terms of impact, a given proportionate shock emanating from Germany or Japan would outweigh one from China, let alone one from India.

Table 1.1 Gross Domestic Products in Six Large Economies

Percent

Share of world GDP Average annual Average contribution

(2004 $ and real growth rates to world growth

exchange rates) ____________________ ___________________

Economy 2004 2020 1995–2004 2005–20 1995–2004 2005–20

China 4.7 7.9 9.1 6.6 12.8 15.8

India 1.7 2.4 6.1 5.5 3.2 4.1

United States 28.4 28.5 3.3 3.2 33.1 28.6

Japan 11.2 8.8 1.2 1.6 5.3 4.6

Germany 6.6 5.4 1.5 1.9 3.0 3.3

Brazil 1.5 1.5 2.4 3.6 1.5 1.7


World 100.0 100.0 3.0 3.2 100.0 100.0

Turning to the growth of output and income, China and India have performed very strongly since 1995, especially compared with other large economies (see column 3 of table 1.1). China accounted for 13 percent of the world growth in output over 1995–2004; and India accounted for 3 percent, compared with the United States’ 33 percent, whose slower growth rate is offset by its much higher starting share in 1995. Looking forward, the table projects GDP growth to 2020 based on the World Bank’s central projections for the world economy as of early July 2006. These projections are offered not as pre dictions but as plausible assumptions from which we can start to think about the relative magnitudes of the Giants’ growth.

Table 1.2 Welfare and Trade Changes as a Result of Global Growth, 2005–20

____Welfare_______

2001 US$ % Output Exports Imports

Trading partner billions change (% change) (% change) (% change)

Australia and 285 70.3 66.3 58.2 86.1

New Zealand

China 1,965 146.2 161.9 187.8 167.7

Japan 936 24.5 27.6 87.6 65.8

Hong Kong and 385 83.0 87.3 94.3 94.3

Taiwan (China)

Malaysia 118 126.8 127.8 132.1 136.3

Singapore 76 89.4 105.9 156.5 150.5

India 631 116.5 124.4 189.9 151.4

United States 5,838 58.4 60.8 67.1 65.6

EU25 and EFTA 3,191 40.2 41.1 38.6 42.4

Note: EFTA = European Free Trade Association; EU = European Union


Which has been growing faster?




Increasing purchasing power and foreign investments:

Increasing purchasing power: in recent years India and China economically grown and people purchasing power also increased. Now the percentage of population below the poverty line in both countries has been decreasing. Both countries are developing education and mostly concentrating on urbanization and industrialization. People attitudes, styles have been changing. Furthermore both countries are highly populated countries in the world. Employment rate has been increasing even more to increase employment both countries liberalized the policies and mostly inviting foreign investments.

Evaluation:

Advantages DisadvantagesMore demand for the goods and services Competition will be higher because customer

bargaining power will be more.Employment will be more because of firms high productivity

High inflation may arise because of high employment and customer purchasing power so firm’s cost of production increases.

More profits and businesses can maximize the sales. Firms can charge premium prices.

Customer may demand more where firms may not supply required quantity and quality.

Businesses have the chance of expanding the business.

Firms may be enforced to use high technology and expertise which will increase the cost of the business.

Foreign Direct investment:

Foreign direct investment occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country.

Or

FDI refers to the purchase of a significant stake in the ownership of a foreign company in order to gain a certain degree of management control.

FDI takes two forms. The first is a green – field investment, which involves the establishment of a wholly new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country.

(some of the examples in world wide FDIs : Star bucks a coffee retailer of USA invested in Japan in 1996, FDI by Volvo a Sweden car manufacturing company in south Korea, it acquired of Samsung’s money losing construction equipment division. Toyota, Larsen and Turbo a cement company, Mercedes Benz etc., in India)


Foreign Direct investments in India:

FDI has helped the Indian economy grow, and the government continues to encourage more investments of this sort – but with $5.3 billion in FDI in 2004 India got 10% of the FDI of China. Foreign Direct Investment in India has played and important role in the development of the Indian company. FDI in India has enabled India to achieve financial stability, growth and development. Mostly foreign companies are interested in India because of the resources availability and low cost of production. For example Hyundai, the automobile giant from South Korea, has chosen Chennai in India for its new car manufacturing plant. Skilled labor at low wages, location of auto parts manufacturers such as Wheels India, Brakes India, Sundarm Fasteners, Sundaram Brakes, Bimetal Bearings, Tafe, and India Pistons in and around Chennai, guaranteed power supply, cheap land and proximity to sea port have attracted the plant to the capital city of Tamil Nadu.

This money has allowed India to focus on the area that may have needed economic attention, and address the challenges the country. India has continually sought to attract FDI from the world’s major investors. In 1998 and 1999, the Indian government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors. FDI investments are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in the defense, nuclear, railway, coal or mining industries. A number of projects have been announced in areas such as electricity, roads and highways, with opportunities for foreign investors.

The Indian government also provided permission to FDI’s to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign eaquity of INR 1,500 crores, ($352.5m). Currently, FDI is allowed in financial services, including the growing credit card businesses. These services include the non – banking financial services sector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that stipulates that these banks must be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile communication sector can also be purchased. By 2004, India received $5.3billion in FDI, big growth compared to previous years, but less than 10% of the $60.6 billion that flowed into China.

In 2007, India’s GDP was $1.237 trillion, which makes it the twelfth-largest economy in the world or fourth largest by purchasing power adjusted exchange rates. India’s per capita income of $1043 is ranked 136th in the world. In the late 2000s, India’s growth has averaged 7.5% a year, increases which will double the average income within a decade. Unemployment rate is 7% (2008). Previously a closed economy, India’s trade has grown fast. India currently accounts for 1.5% of World trade as of 2007 according to the WTO. India’s total merchandise trade (counting exports and imports) was valued at $294 billion in 2006 and India’s services trade inclusive of export and import was $143 billion. India’s trade has reached as share 24% of


GDP in 2006, up from 6% in 1985. Though the government had set a target of $35 billion FDI for 2008 – 09, it looked rather ambitious in the wake of the global downturn.

Foreign Direct Investments in China (Peoples Republic China):

China is a member of the WTO and is the world’s third largest trading power behind the US and Germany with a total international trade of US $ 2.56 trillion. Its foreign exchange reserves have reached US$ 1.9 trillion, making it the worlds largest. It is among the world’s favorite destination for FDI, attracting more than US $ 80 billion in 2007 alone. The PRC’s success has been primarily due to manufacturing as a low – cost producer. This is attributed to a combination of cheap labor, good infrastructure, medium level of technology and skills, relatively high productivity, favorable government policy, and some say, an undervalued exchange rate. Dumping has become a major source of dispute between the PRC and its major trading partners – the US, EU, and Japan. India’s FDI is only 10% of China in secondary sector.

Since liberalization began in 1978, the PRC’s investment economy has grown 70 times bigger and is among the fastest growing in the world. It now has the world’s third largest GDP at $ 4400 billion, although its per capita income of US$3,300 is still low. The primary, secondary, and tertiary industries contributed 11.3%, 48.6% and 40.1% respectively to the economy. PRC’s economy is second only to the US at $7900 billion. The PRC is the fourth most visited country in the world with 49.6% million visitors in 2006.

Korean company Samsung will make major part of its memory chip, home appliances and digital media to China to compete with HP and Dell. LG produces Plasma display in China, NIKE shoes are manufactured in China.

Challenges to China: After liberalization, China is characterized by fixed exchange rate, high allocation for capital formation and control by Communist party. Foreigners were allowed for equity partnership, investment and have improved foreign trade. FDI and GDP. The challenges to China are:

1. Rapid industrial growth may result in high inflation rate (above 5%) and this is called overheating of economy. China has inflation of 6%.

2. There shall be balanced growth with industrialization – reducing poverty population, narrowing income gap between rich and poor as well as supporting agriculture as basic industry. Such initiative that includes the lower strata in development is termed as ‘inclusive growth’.

3. Managing currency to float freely.

Problems hindering India: Why does India, with a stable democracy and a smoother approval process, lag so far behind China in FDI amounts?


1. Poor infrastructure: road system lags behind China. India’s spending on infrastructure is 20% while it is 40% for China. India has a democratically elected government where people to spend for immediate needs.

2. The narrow education system: whereas the literacy level in China is 91%, in India it is only 58% (i.e. 42% of the population cannot read or write). Therefore if the growth rate led to job opportunities for a wider range of people, many would be unable to take up the jobs due to illiteracy.

3. Indian exports are $26billion deficit where as surplus by $179billion in China.4. Inflation rate fluctuates in India. It was 8% in 2007, 12% in 2008. Due to government

initiatives inflation came down to minus 0.3%.

Evaluation of FDI:

Benefits to host country:

Resource – transfer effects: Foreign direct investment can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available and thus boost that country’s economic growth rate. The accompanying country focus describes how the Venezuelan government has been encouraging FDI in its petroleum industry in an attempt to benefit from resources – transfer effects. This transfer of capital, technology, and management resources was also an important feature of Volvo’s acquisition of Samsung’s excavation business, and it is one reason the Irish government has been so keen to encourage FDI.

Capital: Many MNEs (multinational Enterprises) by virtue of their large size and financial strength have accesses to financial resources not available to host country firms. These funds may be available from internal company sources, or, because of their reputation, large MNEs may find it easier to borrow money from capital markets than host country firms would. FDI by foreign firms is partly based on the belief that they have access to capital resources that any country needed.

Technology: Technology is required for developing national economic strength. Some countries with less technology can rely on FDI which can provide technology. It is not just transferring technology only once but updating and bringing new technology also possible from FDI.

Management: Foreign management skills acquired through FDI may also produce important benefits for the host country. Foreign managers trained in the latest management techniques can often help to improve the efficiency of operations in the host country. For example this was a factor in Volvo’s acquisition of Samsung excavation business, when Volvo’s managers took actions to improve the operations and efficiency of the acquired unit.


Employment effect: Another beneficial employment effect claimed for FDI is that it brings jobs to host country that would otherwise not be created there. The effects of FDI on employment are both direct and indirect. Direct effects arise when a foreign MNE employs a number of host country citizens. Indirect effects arise when jobs are created in local suppliers as a result of the investment and when jobs are created because of increased local spending by employees of the MNE. The indirect employment effects are often as large as, if not larger than, the direct effects. For example, when Toyota decided to open a new auto plant in France in 1997, estimates suggested that the plant would create 2,000 direct jobs and perhaps another 2,000 jobs in support industries.

Balance of payments effects: Given the concern about current account deficits, the balance of payments effects of FDI can be an important consideration for a host government. There are three potential balance of payments consequences of FDI.

First, when a MNE (multinational enterprise) establishes a foreign subsidiary, the capital account of the host country benefits from the initial capital inflow (a debit will be recorded in the capital account of the MNEs home country, since capital is flowing out of the home country).set against this must be the outflow of earnings to the foreign parent company, which will be recorded as a debit on the current account of the host country.

Second, if the FDI is a substitute for imports of goods or services, it can improve the current account of the host country’s balance of payments. Much of the FDI by Japanese automobile companies in the United States and United Kingdom, for example, can be seen as substituting for imports from Japan. Thus, the current account of the U.S. balance of payments has improved somewhat because many Japanese companies are now supplying the U.S. market from production facilities in the United States as opposed to facilities in Japan.

Third potential benefit to the host country’s balance of payments position arises when the MNE uses a foreign subsidiary to export goods and services to other countries. For example the Chinese subsidiaries of foreign multinational primarily Nokia, Motorola, Ericson, and Siemens – accounted for 95% of China’s exports.

Effect on competition and economic growth: Economic theory tells us that the efficient functioning of markets depends on an adequate level of competition between producers. When FDI takes the form of a green – field investment, the result is to establish a new enterprise, increasing the level of competition in a market and thus consumer choice. In turn, this can increase the level of competition in a national market, thereby driving down prices and increasing the economic welfare of consumers. Increased competition tends to stimulate capital investments by firms in plant, equipment, and R&D as they struggle to gain an edge over their rivals. The long term results may include increased productivity growth, product and process innovations, and greater economic growth. For example South Korean retail sector following the liberalization of FDI regulations in 1996. FDI by large Western discount stores, including Wal – Mart, Costco, Carrefour, and Tesco, seems to have encouraged indigenous discounters such as E-


Mart to improve the efficiency of their own operations. The results have included more competition and lower prices, which benefit South Korean consumers. WTO restrictions also prevented the host countries businesses by monopoly power of FDI’s.

The costs of FDI to Host countries:

Adverse effects on competition: The subsidiaries of foreign MNEs may have greater economic power than indigenous competitors. If it is part of a larger international organization, the foreign MNE may be able to draw funds generated elsewhere to subsidize its costs in the host market, which could drive indigenous companies out of business and allow the firm to monopolize the market. Once the market is monopolized, the foreign MNE could raise prices above those that would prevail in competitive markets, with harmful effects on the economic welfare of the host nation. This concern tends to be greater in countries that have few large firms of their own (generally less developed countries). It tends to be a relatively minor concern in most advanced industrialized nations.

This competition arises if FDI in the form of green – field investments (own establishment) should increase competition, it is less clear that this is the case when the FDI takes the form of acquisition of an established enterprise in the host countries. If foreign company acquires and merges with two or three companies of the host country, the competition will reduce in the host country. For example, in India, Hindustan Lever Ltd., the Indian subsidiary of Unilever, acquired its main local rival, Tata Oil Mills, to assume a dominant position in the bath soap and detergents markets. It also acquired several local companies in other markets, such as the ice cream makers Dollops, Kwality, and Milk food. By combining these companies, Hindustan lever’s share of the Indian ice cream market went from zero to 74%. However, domestic competition authorities have the right to review and block any mergers or acquisitions that they view as having a detrimental impact on competition.

Adverse effects on the balance of payments: The initial capital inflow that comes with FDI must be the subsequent outflow of earnings from the foreign subsidiary to its parent company. Such outflows show up as a debit on the capital account. a foreign subsidiary imports a substantial number of inputs from abroad, which results in a debit on the current account of the host country’s balance of payments. To control this government of the host countries should take necessary steps otherwise it is an adverse effect for host country.

National sovereignty and Autonomy: Some host governments’ worry that FDI is accompanied by some loss of economic independence. The concern is that key decisions that can affect the host country’s economy will be made by a foreign parent that has no real commitment to the host country and over which the host country’s government has no real control. This happened when U.S. invested in France. Tesco operations in China affecting the autonomy of China.

Culture and less demand for domestic commodities: Foreign goods demand may increase and most likely people may buy foreign goods than domestic goods therefore less demand for the


domestic goods. It will affect the self employed businesses. May be because of the influence of the foreign country goods and services people of host country culture may affect adversely.

The benefits of FDI to Home countries:

1. The capital account of the home country’s balance of payments benefits from the inward flow of foreign earnings. For example, A Sweden company Volvo’s investments in South Korea are the earnings that are subsequently repatriated to Sweden from Korea. FDI can also benefit the current account of the home country’s balance of payments if the foreign subsidiary creates demands for home country exports of capital equipment, intermediate goods, complementary products, and the like.

2. Benefits to the home country from outward FDI arise from employment effects. As with the balance of payments, positive employment effects arise when the foreign subsidiary creates demand for home country exports of capital equipment, intermediate goods, complementary products, and the like. For example, Toyota’s investment in auto assembly operations in Europe has benefited both the Japanese balance of payments position and employment of Japan, because Toyota imports some component parts for its Europe based auto assembly operations directly from Japan.

3. Benefits arise when the home country MNE learns valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home country. This amount to a reverse resource transfer effect. Through its exposure to a foreign market, an MNE can learn about superior management techniques and superior product and process technologies. These resources can be transferred back to the home country, contributing to the home country’s economic growth rate. For example, one reason General Motors and Ford invested in Japanese automobile companies (GM owns part of Isuzu, and Ford owns part of Mazda) was to learn about their production processes. If GM and Ford are successful in transferring this know how back to their U.S. operations, the result may be a net gain for the U.S. economy.

Costs of FDI to the Home country:

1. The capital account of the balance of payments suffers from the initial capital outflow required to finance the FDI. This effect, however, is usually more than offset by the subsequent inflow of foreign earnings.

2. The current account of the balance of payments suffers if the purpose of the foreign investment is to serve the home market from a low – cost production location.

3. The current account of the balance of payments suffers if the FDI is a substitute for direct exports. For example, insofar as Toyota’s assembly operations in the United States are intended to substitute for direct exports from Japan, the current account position of Japan will deteriorate.


4. With regard to employment effects, the most serious concerns arise when FDI is seen as a substitute for domestic production. This was the case with Volvo’s investment in South Korea and Toyota’s investments in Europe. Therefore one obvious result of such FDI is reduced home country employment. If a country suffering from low employment it is a serious affect otherwise not. For example, one objection frequently raised by U.S. labor leaders to the free trade pact between the United States, Mexico, and Canada is that the United States will lose hundreds of thousands of jobs as U.S. firms invest in Mexico to take advantage of cheaper labor and then export back to the United States.

India and China population size implications: In both Giants, population growth has been slowing and is expected to continue to do so. China’s population grew by only 0.6 percent a year during 2000–05, to reach 1.32 billion; it is expected to peak in 2032 and decline thereafter. India’s population grew by 1.4 percent in 2000–05, reaching 1.10 billion, and its growth is expected to slow to 0.7 percent a year between 2030 and 2040 (by which time it will have overtaken China). These trends reflect sharply lower fertility, with people age 15–64 accounting for 71 percent in China in 2005, falling to 69 percent in 2020 and to 62 percent in 2040. The corresponding percentages for India are 63 percent in 2005, and 67 percent in 2020. China’s decline in the work cohort is likely to be at least partly offset by increasing employment participation rates, but India’s younger profile is one reason to believe it will start to close the income gap by the second quarter of the century. China has increased its urban population share from 21 percent in 1981 to 43 percent in 2005 (Cooper 2006), with absolute declines in the rural population. Moreover, much rural employment is nonagricultural.

Both China and India have made significant advances in basic education in the last two decades. In 2000, adult literacy was 84 percent in China and 57 percent in India, and youth (ages 15–24) literacy rates were 98 percent and 73 percent, respectively. Moreover, both countries are accumulating human capital rapidly, with secondary school enrollment rates of 50 percent and 39 percent, respectively, By 2005, India was producing 2.5 million new university-level graduates per year, 10 percent of whom were in engineering; China produced 3.4 million graduates, including 151,000 with postgraduate degrees. By 2004, approximately one-fifth of the relevant age cohort in China was entering tertiary education, although, as noted above, the cohort (a group or set of people) itself is already beginning to decline. The prodigious growth in the number of graduates in China and India presages a significant increase in the Giants’ shares of world skills and, hence, changes in their comparative advantages. The McKinsey Global Institute (2005) has suggested, however, that only about 10 percent of Chinese and Indian graduates currently would meet the standards expected by major U.S. companies; and, although undoubtedly this will change over time, at present one should not think of most of these graduates as very highly skilled workers. Turning to physical capital, the GDP-weighted average rates of gross capital accumulation were 42 percent and 24 percent for China and India, respectively, over 1990–2003. China’s higher rate partly reflects its more capital intensive


structure and investment in infrastructure (including housing), and helps explain its faster growth.

Evaluation:

Advantages DisadvantagesMore market for the businesses because purchasing power of the people has been increasing and per capita also increasing.

Due to increase in population many of them in both countries are below the poverty line so purchasing power may not be more

Skills may be available in labor market for the businesses any way in both countries labor is cheap so cost of production will be less

Different cultures and different attitudes of the people may lead to problems to the businesses.

In both countries urban population increasing there fore businesses may get skilled people. That means human capital will increase.

More population leads to industrial disputes because of unemployment problems, job insecurity as well as if any business wants to introduce technology resistance from the employees

Education levels are improving therefore businesses will get qualified people. For example IT services in India, English speaking people are more in India where as in China also technical skills are increasing most of the people are interested in jobs (i.e. age group between 15 – 64)

Local communities pressure regarding employment, pollution from the factories so firms may not earn profits as they expect.

Increase in population needs and wants will increase due to this reason excess demand may happen so firms may not be able to supply the items. Customer bargaining power increases.

Barriers to market entry:

China:

1. Foreign investors are still required to obtain approval for their intended projects from the Chinese government authorities and to deal with the state bureaucracy.

2. There are shortages of people with business skills3. Consumers incomes are very low (but in recent years it has been increased so now it is a

little advantage for foreign companies)4. Although legal protection of intellectual property was introduced in 1988, counterfeiting

is commonplace5. Imports into China are subject to tight quota and licensing agreements, and usually have

to go through the state Foreign Trade Corporation (which takes care of all customs formalities).

6. Currency exchange problems and there is an endemic (commonly found in a specified area or people) shortage of foreign currency.


7. There are limited advertising agencies and market research firms and lack of well developed transportation infrastructure or distribution system. PepsiCo an American company discovered this problem at its subsidiary in Chongqing. The city and its surrounding regions, contains over 30 million people, but according to Steve Chen, the manager of the Pepsi subsidiary, the lack of well – developed road and distribution systems means he can reach only about half of this population with his product. But infrastructure development is better than India.

8. Highly regulated environment that can make it problematic to conduct business transactions and shifting tax and regulatory regimes. For example, recently Chinese government suddenly scrapped a tax credit scheme that had made it attractive to import capital equipment into China. This immediately made it more expensive to set up operations in the country.

9. Commercial laws are frequently imprecise. China continue to struggle with corruption and bureaucracy and enforcement of Intellectual Property Rights remains poor

10. Constraints to growth, environmental stresses, governance factors, labor regulations, socioeconomic inequalities means the gap between the urban rich and rural poor is huge.

11. Different cultures and languages even now people are traditional so it is difficult to assess the customer. The Cultural Revolution produced a generation of people who lack the basic educational background that is taken for granted in West. Because of the country’s past, few local people understand the complexities of managing a modern industrial enterprise. Then there are problems with local joint – venture partners who are inexperienced, opportunistic, or simply operate according to different goals. For example one U.S. manager explained that when he lay off 200 people to reduce costs, his Chinese partner hired them all back the next day. When he inquired why they had been hired back, the Chinese partner, which was government owned, explained that as an agency of the government, it had an “obligation” to reduce unemployment.

12. Trading blocs like ASEAN and AFTA (Asean Free Trade Area) and political affairs such as state ownership

13. People literacy rate is more but very few can speak English and less likely IT professionals are available for the companies than India. There are also difficulties finding qualified personnel to staff operations. In fact China has 91% literacy rate but skilled people are less than India.

Example: In 1992, McDonald’s Corporation opened its first restaurant in Beijing, China, after a decade of market research. The restaurant, then the largest McDonald’s in the world, was located on the corner of Wangfujing Street and the Avenue of Eternal peace, just two blocks from Tiananmen square, the very heart of China’s capital. The choice of location seemed auspicious, and within two years sales at the restaurant were surpassing all expectations. Then the Beijing city government dropped a bombshell; officials abruptly informed McDonald’s that it would have to vacate the location to make way for a commercial, residential, and office complex planned by Hong Kong developer Li Ka Shing. At that time, McDonald’s still had 18 years to


run on its 20 years lease. A stunned McDonald’s did what any good Western company would do – it took the Beijing city government to court to try to enforce the lease. The court refused to enforce the lease, and McDonald’s had to move.

India:

1. Weak infrastructure – This is perhaps the most significant challenge that affects MNC’s operations on a day-to-day basis and includes such factors as poor roads, inadequate airports and port facilities, and inconsistent and relatively expensive power supply. so many foreign companies may face problems regarding distribution of goods and services.

2. The narrow education system means nearly 42% of the population can’t read and write. So many would be unable to take up the jobs due to illiteracy.

3. Culture and tradition of the people and different languages. 4. Tariffs and quotas for import and export. Indian tax system is more complex.5. Local competition for foreign investors6. Resistance from local communities for example UK retailer Tesco as entered into

China but finds it difficult to enter India due to resistance from traditional shop owners.7. Electricity and water supply scarcity may also cause of barrier to entry foreign firms.8. Though it is a democratic country and moving towards free market environment but

government policies regarding repatriating profits and other restrictions may also reasons for barriers to entry. State government intervention as well as central government intervention will be more in business activities.

9. Terrorism, social violence, political affairs of the country.10. Difficult operating environment – Mainly brought about by government policy and

processes, procedural bottlenecks, and the legacy of cumbersome labor laws11. India continue to struggle with corruption and bureaucracy and enforcement of

Intellectual Property Rights remains poor. Intellectual property protection in India is weak. India seems to be far behind in protecting intellectual property. It is indeed unfortunate that the Indian law does not allow second use patents and discourages patent protection

Trade opportunities for UK firms:India:

1. Britain ruled India for 150 years, so there must be trade links remaining.2. The off shoring opportunity India accounts for roughly 65% of the global off shoring

market and is expected to grow at 50-60% per annum for the next 5 years. Off shoring provides a fast growing and increasingly important opportunity for MNCs. It is mainly derived from India’s largest asset – its people. India is the largest English-speaking nation in the world with the second largest pool of scientists and engineers (second to the US). Companies are able to realize significant cost savings by utilizing the highly qualified labor force at attractive rates, and translate this into an important competitive advantage. The cost of a highly qualified engineer/ scientist in India is less than $20 per hour, as compared to over $40 per hour in the US or EU.


3. IT development in India could provide software engineers and excellent managers4. GDP and per capita increasing therefore people purchasing power increasing; it is an

opportunity for UK business. India’s vast population is increasing its purchasing power While 50% of the population was classified in the low-income bracket in 1994-5, this proportion is rapidly declining, and is expected to account for only 17.8% of the population by 2006-7. At the same time, there is a rapid shift from the low-middle classes to the burgeoning middle class, and an even faster increase in the sizes of the high and upper middle class, fuelling growth in the economy. Even more pronounced is the growth of a niche ‘super-rich’ class, now estimated to comprise of over 100,000 households with net worth of >$1 m each. The growing size of the middle and higher consumer classes with increased income and paying capacity has spurred an increase in consumerism and brand consciousness. Companies have been taking advantage of dramatic growth in such consumer markets as automobiles, motorcycles, computers, durable goods, and cellular communication – all exhibiting compounded annual growth rates (CAGR) of 6%-29% from 1996 to 2011(estimated). The domestic market opportunity will further be boosted by a likely increase in propensity to spend and by the growing consumption by the young generation in India.

5. For Individual business India may be better bet. For a young British company lacking export experience, it would probably be easier to break into India than China because of fewer language and cultural barriers. For example Britain has only 5% share of Indian imports.

6. India lacks an effective manufacturing sector, so it may be a perfect place for British Manufacturing exports or for setting up new factories.

7. India is the world’s leader for outsourced back-office services, and increasingly for high-tech services. Moreover India is fastest growing free market democracy

8. Industrial licensing, import permission, technological tie ups, capital issues, foreign investment encouragement, MRTP(monopoly restrictive trade practices) clearances are advantages to Britain Firm to operate in India.

9. Natural resources of India could also be benefited for British firms. For example to acquire raw materials or even for primary sectors India is better place.

10. Communication network has been developed so for British firms it is easy to operate in India.

11. The reforms process adopted by the Indian government in response to these problems is now firmly in place. Significant progress has been made in liberalizing the external sector- thus allowing freer flow of capital goods and raw materials – opening up the financial sector, and reducing customs duties. Second phase reforms that are in the making include lifting restrictions on FDI, simplifying tax and tariff regimes, and opening up markets for competition.

12. The benefits of India’s human capital extend beyond cost: Many MNCs are seeking India for the superior management and technical talent base that it offers. Over 100


MNCs have set up R&D facilities in India and many have placed Indian talent in key positions in their organizations both locally and globally.

13. India is also emerging as the manufacturing and sourcing location of choice for various industries India is considered a low cost leader in such areas as steel and metals and a regional base for the high quality production of some manufactured goods such as automotive components, engineering equipment, power equipment, and medical systems.

14. Many European MNCs have been successful in India - both in relation to other Indian companies in the same sector and benchmarked against their average global performance. These companies have recognized the tremendous potential India has to offer as a sizeable, growing market and a sourcing point for global competitive advantage, and view India as a business opportunity that they cannot afford to forego. EU companies already make up 50% of all MNCs operating in India and a multitude of other EU companies are actively planning to enter the market.

15. They will also exhibit significant variation in incomes between rural and urban areas, and between fast growing coastal regions and inland areas. Their rapidly growing middle classes are already a large consumer market in their own right and will account for the bulk of their four fold increase in real consumer spending over the next twenty years. These households aspire to developed country standards of living and demand world class goods and services.

China

1. China has been more successful in attracting foreign direct investment – GDP and per capita is more, and has been willing to open sectors such as autos and retailing to foreign investment which India to this day has kept closed to foreigners. • It has been, and remains, a one-party dictatorship that can in most cases ignore or over-ride public opinion (unlike India); • because it is except for some outlying areas) essentially a mono-cultural society with a single national language and no strong religious beliefs (unlike India); • And because it has a long tradition of strong central government (in contrast to the more powerful position of India’s States)

2. China is an easier place to do business than India, despite the more widespread use of English and the legal system inherited from Britain – for example according to the World Bank it takes 75 days and costs 55% of per capita income to register a business in China, cf.126 days and 97% of per capita income in India;

3. China has achieved higher literacy rates (90%, compared with 61% for India), with little difference between men and women, and more favorable health outcomes (life expectancy at birth of 71 in China, compared with 64 for India; infant mortality rate of 29 per 1000 live births in China, compared with 93 in India);

4. Manufacturing, where productivity gains are typically fastest, has accounted for 50% of China’s GDP over the past decade, as against 25% of India’s;


5. China’s superior per capita GDP growth performance than India has stemmed from its greater success in lifting labor force participation, and in sustaining faster rates of productivity growth than India and rapid growth in exports of high technology products from China made by the Chinese subsidiaries of companies such as Samsung, Nokia and Motorola.

6. China has undertaken legal reforms needed to attract foreign firms. The country also announced its plans to lift restrictions on foreign investment in retailing, including those on foreign ownership and number of branches. This would help china fulfill its commitments of opening its markets as per the WTO regulations.

7. Communication and infrastructure facilities are more than India. Most likely secondary sectors are suitable to locate in China. Therefore British secondary sectors can enter into China than India.

8. China is the place where businesses can operate with low cost because combination of cheap labor and tax incentives, particularly for enterprises that establish themselves in special economic zones, makes china an attractive base for British firms can gain the benefit of low cost manufacturing and retailing.

9. Chinese have created incentives for foreign companies to invest in China’s vast interior where markets are underserved.

10. China is one of the few economies in the world that continues to enjoy economic growth, Chinese exports continued to grow even after 11 September 2001. This shows that China’s macro economy is very strong, which is important because it means that business can feel confident about plans to expand.

11. Inflation is low, China has larger surplus on its balance of trade with America than Japan, and the exchange rate is stable. The micro economy is also strong. Businesses can enjoy massive external economies of scale.

12. Membership of the WTO also helps in creating economies of scale. Before 2001, multinationals would not have been able to set up wholesale, retail, distribution and after sales networks. Such a system was banned, but it is now legal under WTO trade rules. This explains why Wal – Mart invested heavily in China over the last 2 years, as it is now able to replicate its American model in an equally vast market.

13. Business will also find it easy to finance expansion locally. Like other Asian societies, there is an emphasis on saving rather than spending.

14. They will also exhibit significant variation in incomes between rural and urban areas, and between fast growing coastal regions and inland areas. Their rapidly growing middle classes are already a large consumer market in their own right and will account for the bulk of their four fold increase in real consumer spending over the next twenty years. These households aspire to developed country standards of living and demand world class goods and services.

15. Deng Xiaoping enacted China's first Jaw on Sino-Foreign Joint Venture Enterprises and established three special economic zones (SEZs) in Guangdong and one in Fujian. These


SEZs offered foreign investors a flat tax rate of 15 percent of net earnings, some limited foreign exchange retention privileges and lower land usage fees.

Examples: Under the following some of the examples have given about UK and US and other countries examples. This indicates the opportunities for other countries investments in India and China.

1. UK retailer Tesco as entered into China but finds it difficult to enter India due to resistance from traditional shop owners.

2. Kingfisher owns a successful chain of DIY (do it yourself) shops in China

3. Wal – Mart is China’s eighth biggest trading partner.

4. Volkswagen sells more cars in China than in Germany

5. Coca – cola in India

6. Pepsi in India

7. Outsourcing from UK and US in India. For example call centers.

8. Coventry – based Oleo international is a British company that has built up successful exports to china. In 2004 the Chinese government announced a £100 billion investment n its railways, including the construction of its own, Chinese – built ‘bullet’ trains. So Oleo a world leader in energy absorption equipment – saw its chance. It makes very advanced shock absorbers for railways carriages, these enable passenger trains to start up and stop with minimal bumping of passengers. This company set up in Shanghai and invited Chinese officials to come and visit the Coventry factory. China was building its own track and trains, but still valued the British company’s design and engineering expertise.

What are the reasons India and China economically powerful?

1. China’s infrastructure development and educational systems.2. India’s educational system and services availability3. Encouraging foreign direct investments in both countries.4. More exports from China specifically manufacturing items, where as services from India5. In China employment for example 400million people are working therefore increase in

per capita, In India most of the outsourcing jobs made country economically strong.6. Cheaper cost of production encouraged many firms to develop the base in India and

China7. Industrialization drastically improved in both countries.8. China’s productivity and India’s IT attracted many foreign companies which really

helped these countries to grow economically.


9. Profits remitted abroad by foreign investors have increased continuously in recent years, with the amount rising from US$17 billion in 1995 to US$27.7 billion in 2001.

10. Both countries balance of payment is surplus more services are exported from India and more outputs exported from china

11. Government policies regarding tax systems, and businesses operations made both countries to attract more inflows.

12. Huge population and their purchasing power due to increase in per capita made these countries strong. Than India China has potential growth in manufacturing sector.

13. Natural resources availability, English speaking people more in India developed both manufacturing and outsourcing businesses. But China less cultural disparities than India and availability of labor forces made manufacturing sector strong.

14. Stronger India after Global Recession: Indian economy entered into growth phase in 2003 and grew consistently at 8-9% growth rate till 2007. In 2008-9 there was deceleration in the growth rate because of the global recession set in. Outsourcing industry that provided good Philip to the Indian GDP suffered causing IT industry to go down. But India itself has grown at very high speed during the last four years putting it many other industrial sectors such as Automobile, telecommunication, oil & gas to achieve word scale. These industries will sustain the domestic BPO sector and let India sustain its growth after the recession ends by 2010.

Advantages and disadvantages for MNCs in India:

Advantages:

Large market potential because per capita increased and GDP also growing more over large population

Labor competitiveness means cheap labor and skilled people are available Piaggio established that its localized product of the same quality could be produced at 30-40% less cost in India as compared to Europe.

More jobs available in the market it is advantages for MNCs. It is a global market place wide marketing opportunities for large companies. Infrastructure is not much developed like China but to the extent it can be an advantage

for MNCs Relaxation of export procedures, advantage of repatriating profits by MNC. Domestic companies’ competition is less so growth for MNCs is possible. Local people good at administration, English speaking people are more so

communication is effective in the organization. Young Vibrant Population Companies incorporated in India treated as Indian companies for taxation Government inviting FDI’s and rules are relaxed regarding FDI’s, All investments are on

repatriation basis Original investment, profits and dividend can be freely repatriated Multinationals from advanced economies can compete against local firms using better

technology. Finally, multinationals often have the advantages that come from economies


of scale and economies of scope. The ability to produce more efficiently due to having larger operations and the ability to transfer resources across company areas produce a strong competitive advantage for multinationals

The Indian market is essential for European Union (EU) companies Large and growing domestic market; increasing purchasing power and consumerism. Provides opportunities for competitive advantage (low cost sourcing of products and services; exceptional quality; intellectual skills; etc).

Leveraging India’s resource base to derive additional value for the corporation: These companies have succeeded in adding value to their corporations by engaging in such activities as R&D, manufacturing, BPO and sourcing from India. For some companies, this has become a key competitive strength, differentiating them from global competition.

Disadvantages:

Intellectual property protection in India is weak. India seems to be far behind in protecting intellectual property. It is indeed unfortunate that the Indian law does not allow second use patents and discourages patent protection

Difficult operating environment – Mainly brought about by government policy and processes, procedural bottlenecks, and the legacy of cumbersome labor laws. Trade barriers One of the most common reasons for the creation of trade barriers is to encourage local production by making it more difficult for foreign firms to compete here.

Environment problems pollution, disposable of waste etc., Bureaucratic hurdles and government processes resulting in a difficult operating

environment. Low average disposable income, a highly dispersed population and distinct tastes from the rest of the world. Weak infrastructure in terms of roads, power, telecom, and port facilities.

Shortages of skilled labor are generating double digit wage growth, while infrastructure often fails to keep pace with economic growth. Combined with

Exchange rate appreciation and higher transport costs, India’s low cost advantage is being eroded.

Advantages and disadvantages for MNCs in China

Advantages

Moving to China would help them save cost of production as it is lower by 40 per cent than in India. The increased off-shoring of production activities in order to take advantage of lower labor costs.

The Chinese market provides important export opportunities for the firms. Investors favor China over India for its market size, access to export markets,

government incentives, favorable cost structure, infrastructure, and macroeconomic climate

It is also potential market for many MNCs like India for example Wal – Mart is the largest retailer in China. It is because people purchasing power has been increasing.


GDP growth, China exports growth attracting many companies moreover developed infrastructure also one of the advantages for the MNCs

Government policies, trade liberalization, WTO legislations made trade easier in China. It could be an advantage for the MNCs in regard to import and export as well as resources transfer.

More educated labor force available for MNCs. The large pool of cheap skilled labor will provide them with efficient workers, again reducing cost of production.

MNCs by their technology can dominate the local firms. Cheaper location availability and low inflation rates will enable firms in China to buy raw

materials cheaply domestically and will reduce their cost of production. Expansion may allow MNCs in China to exploit economies of scale further, again

reducing their average costs and enabling prices to be kept low, making them competitive on international markets.

Cultural shifts, coupled with rising disposable incomes are driving a shift in the pattern of consumer spending

Disadvantages

Inadequate infrastructure Crime and Theft Government Instability Inflation Foreign Currency Regulation Poor Work Ethic Inadequate Education Tax Rates, Tax Regulations Restrictive Labor Requirements Policy Instability: The government’s all pervasive role in the economy means that

policy uncertainty is a real challenge for businesses operating in China. Access to Financing: Despite the huge size of its financial and banking sector, the

dominance of directed lending to state owned enterprises in China is crowding out private sector investment. As a result, business access to finance in China is severely constrained.

Intellectual property law is weak. Although they are starting to make inroads into the problem, protection of intellectual property rights remains a major issue for firms operating in China. With the state of enforcement measures lagging behind that of the law. Court procedures are cumbersome and non-transparent, sometimes taking years to reach resolution.

China's Economic Growth Benefits the World

----Guo Shuqing, deputy governor of the People's Bank of China and director of the State Administration of Foreign Exchange, told the press that the sustained and rapid economic growth Of China, a developing country with a huge population, is conducive to the economic development of its neighbors and the worm at large.


China has witnessed sustained and rapid economic growth and a good situation in the balance of international payments and foreign exchange earnings, in spite of global economic recession. Some overseas personages worry that the increasing share taken by China's exports in the international market may blunt the competitive edge of other countries' exports, thereby adversely affecting their economic growth. Some people even claim that China is exporting deflation to the world through dumping huge amounts of low-priced commodities in the international market. Guo Shuqing, deputy governor of the People's Bank of China and director of the State Administration of Foreign Exchange, retorted that China's exports take up only a small proportion of developed countries' GDP. Moreover, processing trade exports make up more than a half of China's total exports. Chinese enterprises, mainly taking processing fees from this kind of exports, have no power to set prices for final products, and therefore can hardly affect the price levels of importers. Guo noted that viewed from various aspects, the sustained and rapid economic growth of China, a developing country with a huge population, is conducive to the economic development of its neighbors and the world at large. First, China's labor cost is low. The low price of China's export commodities can enhance the real income level of the people of importing countries, stimulate the growth of consumption in other fields and propel the economic growth of these countries. Second, the import of large quantities of primary and light industrial products from China is conducive to the industrial restructuring and economic progress of developed countries, as the two can take advantage of each other's economic strength. Third, China's economic development has enhanced the country's demand for imports, which has expanded the exports of other countries. Last year, China's imports from ASEAN, Japan, Russia and Australia increased by 34 percent, 25 percent, 6 percent and 8 percent respectively over the amount in the previous year. This resulted in China's trade deficits of US$7.63 billion, US$5.03 billion, US$4.89 billion and US$1.26 billion with respective countries. In the first two months of this year, China's foreign trade exports and imports increased by 32.8 percent and 57.1 percent respectively, leaving a trade deficit of US$560 million. In the first two months, China's imports from the United States, Japan, the ROK, EU and ASEAN rose by 37.8 percent, 58.4 percent, 75 percent, 43 percent and 71.9 percent respectively over the amount in the same period of last year. Following China's economic development and the growth of the Chinese people's purchasing power, the world will gain increasing benefits from the swiftly growing Chinese market. Take Southeast Asian countries for example. The fluctuation on their export market used to greatly exceed that on the global market. In recent years, however, along with the growth of their exports to China, the fluctuation on their export market has been reduced considerably. Fourth, the surplus in the current account may bring along the outflow of a certain amount of capital, which will increase China's investment in other countries' assets. Fifth, China's economic development has provided overseas businesses with broader prospects for investment in the country. Profits remitted abroad by foreign investors have increased continuously in recent years, with the amount rising from US$17 billion in 1995 to US$27.7 billion in 2001.

On the exchange rate of the Renminbi (RMB), Guo said last year, owing to the downslide of the exchange rate of the US dollar in the international market, China depreciated the exchange rates of the RMB with the currencies of some of its main trade partners, which only narrowed the range of the appreciation of the RMB against these foreign currencies, but did not reverse the trend of the overall appreciation of the RMB. The exchange rate of the RMB with the US dollar has basically remained stable--a policy adopted by China since the outbreak of the Asian financial crisis. This, however, has not changed China's managed floating exchange rate system based on the supply and demand in the market. Practice proves that this exchange rate system suits China's current economic development stage, the bearing capacity of enterprises and the financial sector's supervision and regulation level, and conforms with China's national conditions. It is beneficial to China, Asia and the world at large. It also helps propel foreign trade, lower enterprises' costs of production, attract overseas investment, implement the central bank's monetary policy, and curb


the trend of deflation. Guo stated that China would continue to implement the managed floating exchange rate system based on market supply and demand on the premise of maintaining the basic stability of the RMB exchange rate, timely improve the RMB exchange rate formation mechanism, and complete the foreign exchange market. In addition, efforts will be pooled to coordinate interest rate and exchange rate policies so as to promote the coordinated development of domestic and global economies.


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biznuzz.weebly.combiznuzz.weebly.com/.../8/42184325/31.3.2_china__india_… · Web viewFor example the Chinese subsidiaries of foreign multinational primarily Nokia, Motorola, Ericson,