Economics Essays – China Economy System

China Economy System

The Appropriate Entry Model for IT Enterprises in China to Go Overseas

Chapter 1 Introduction

1.1 Chapter Introduction

China’s integration into international economic, political and cultural relations is a vivid illustration of today’s globalized world. As an emerging economy, China puts increasing emphasis on developing its innovation system, which is having a major effect globally. Chinese research has been restructured several times in the later years. The number of institutions has been reduced and the quality improved.

International cooperation is encouraged, and China is performing well on indicators for scientific publications. In January 2006 China approved a new 15 year plan for research with the ambition of making China a knowledge and innovation based economy by 2020. From an investment of 1.34 % of GDP in 2005 the goal is 2.5 % in 2020. China is today the fourth largest economy in the world. China’s goal is to continue its growth by investment in science and technology.

1.2 Research Background

1.2.1 Trends in Chinese economic development

The communist revolution in China signalled the beginning of a structural development that should continue through dramatic steps and policy changes. In 1952, 60% of GDP was related to agriculture. Similar to the Soviet development China embarked on an industrialization process that changed the economic structure in a profound way.

By 1978, agriculture’s share of GDP has dropped to ca 35%, while industry and construction has increased from 10% to some 40%. And by 2003, after more than 20 years of liberalisation and introduction of a socialist market economy, the GDP structure is made up of 14. 6, 52,2 and 32.2 % respectively for the primary, secondary and tertiary sectors (Maddison 1998, Lundvall 2006).

During the past decades, China’s economy has grown almost 10% year on year, supported by an openness to trade that is illustrated well by the fact that by 2004 the imports and exports averaged 35% of GDP. The growth pattern has been export led supported by dramatic integration in the world economy. The structure of exports has gradually changed, from primary products making up more than 50% in 1980 to less than 10% in 2002, and the share of manufactured goods reached 90% (Lundvall 2007).

Still, the employment structure has not changed to the same degree, and employment in the agricultural sector remains at approx. 50% of the labour force. Hence, the economic development is much based on investments in fixed capital and corresponding productivity growth (ibid). But this fact also illustrates the critical need for job creation to sustain improvements in living standards.

The second structural change is the progressive opening of the Chinese economy to foreign trade and investment. China’s average tariff rate fell from above 40% in the early 1990s to 15% at present. Since1979, China has received a cumulative USD 347 billion in foreign direct investment (FDI). In recent years, foreign investment has averaged 4-5% of GDP. While the bulk of FDI has come from Hong Kong, Chinese Taipei and other Asian countries with large ethnic Chinese populations, main OECD countries have important roles as source of FDI and technology transfer to China.

FDI has been largely concentrated in coastal provinces, which feature special economic zones (SEZ), and to manufacturing industry, including increasingly high technology sectors, such as ICT and telecommunications. Consequently, foreign invested companies play an increasingly important role in the Chinese industry and exports, despite the fact that key strategic industries are still closed to FDI.

The opening to international trade and investment has increased competition, spurred the growth of domestic labour-intensive industries and helped to develop China’s exports. Consequently, China has emerged as an important trading nation, with total trade in USD 474.3 billion, accounting for around 4% of the world trade in 2000. Since 1994, China has consecutively run annual trade surpluses amounting to 245 bn$ a year pr august 2007, which led to a growing foreign currency reserve, one of the largest in the world.

Foreign enterprises in China have also been instrumental in developing China’s export industries, particularly in recent years as FDI inflows have shifted toward capital- and technology-intensive export sectors. Foreign investment has also helped to raise industrial productivity and to improve industrial technology, know-how and worker skills. However, trade and investment liberalisation are not sufficient to improve China’s industrial competitiveness, which is dependent on extensive restructuring of firms and reallocation of resources, and technological upgrading.

1.2.2 The Chinese innovation system: a changing environment for foreign business

One of the marked changes in China over the past decades has been the revitalisation of the science and technology system. In fact, the reforms that have change China during this period have included deep changes in the science, technology and innovation system, as this system was seen to play a key role in the modernisation of China.

The early reform Four Modernisations included deep changes in four sectors, one of them was in science and technology. The changes that were induced from the early 1980’s were in particular directed towards revamping the system after decades of mismanagement through relying on the Soviet model and through the devastating Cultural Revolution.

The most notable change in the Chinese innovation system has been the commitment to invest in R&D. From a R&D/GDP ration in 1995 of only 0.6%, this ratio reached in 2005 1.34%. This is remarkable given the fact that the average economic growth rate has been some 10% over many years.

R&D spending has increased by an annual rate of 19% since 1995. So even if the Chinese R&D system may still be small on many accounts, the rate of change and growth on some indicators point to a shift also in a global context that is remarkable.

However, contrary to the typical picture in OECD countries, the R&D efforts are mainly development activity. Some 70% of the R&D is experimental work, while only 6% is basic research. Only a few universities perform substantial R&D, and although a major research organisation like the Chinese Academy of Sciences has been restructured and reformed, the profile is one of too little basic research.

The Chinese economy has undergone a broad structural change from agriculture to manufacturing and services as measured in GDP. However, this has not been followed by a similar shift between the sectors in terms of employment: About 50 % of employment is still in agriculture. Over the years, there has been a tremendous growth in high-tech exports, supported by high inflows of foreign direct investment and even related imports.

Hence, the Chinese economy has not been as high-tech as can be seen from the figure below, it can be paraphrased that China as some islands of excellence but that economic miracle stems to some extent from its ability to serve as an assembly workshop of the world.

Hence, there has been more piggyfrogging than leapfrogging in the Chinese innovation system (Economist Nov. 10, 2007): China has made clever use of foreign technology – assembling it, copying it, servicing it and customising it – but their firms have yet to create very much to rival it. However, the system has been capable of providing new combinations and finding new uses of existing technologies, thus pushing architectural innovation that may be scientifically modest, but may be commercially viable (ibid).

1.2.3 The going-out strategy of China

China’s successful story at attracting the inflow of foreign direct investment (FDI) has made headlines in both media and academic circles for years. By 2002, the total stock of FDI inflow amounted to US$ 448 billion (UNCTAD, 2003, p. 259). In 2002, due to the decline in global merger and acquisition (M&A) volume, China surpassed the USA to become the world’s biggest recipient of FDI (The Economist, 6 September 2003, p. 57).

Recent surveys of foreign investors have consistently shown China as one of the top inter-esting destinations for foreign investors (AT Kearney, 2003; MIGA, 2003). Less known is, however, the fact that in parallel with the open-door policy for attracting inward FDI, China has achieved initial success in implementing its going-out strategy, which encourages domestic enterprises to play a part in international capital market and to invest overseas (Shi, 2002).

At the macroeconomic level, the strategy of go-overseas via direct investment is largely in line with China’s persistent trade surplus and positive saving-investment gap (Wong and Chan, 2003). At the firm level, China’s enter-prises have their own strong interest to implement internationalization strategy by the way of overseas investment. As a result, some Chinese brands have achieved considerable success in the global market, which include Haier (home appliances), Konka (color televi-sion), TCL (multi-electronics), Jianlibao (beverage), Tsingtao (beer), Galanz (microwave) and others (Gilmore and Dumont, 2003). Haier Group occupied almost half of the U.S. small refrigerator’s market in 2002.

Galanz, which produces one third of microwave ovens in the world, captured a 40% of European market in 2002 under its own brand name mall refrigerator’s market in 2002. Galanz, which produces one third of microwave oven (Zeng and Williamson, 2003).

According to the Ministry of Commerce (MOFCOM), the successor of the former Ministry of Foreign Trade and Economic Cooperation (MOFTEC), by the end of October 2003 China had set up 7,360 non-trade enterprises overseas with a cumulative investment of US$11 billion mainly in manufacturing and natural resources sectors.

According to the data of UNCTAD (2003), which include trade-related capital movement and is based on balance of payment (BoP) accounting, China has emerged as one of the largest sources of outward direct investment among developing economies. By 2002 China’s outward FDI stock amounted to US$36 billion, accounted for 4.18 percent of the total outward FDI stock of the developing world (118 countries, including the newly industrialized economies), and ranked number 6 next to Hong Kong (US$370 billion), Singapore (US$71 billion), Taiwan (US$60 billion), Brazil (US$53 billion) and South Korea (US$44billion).

In comparison with the feature of outward FDI from developed economies, which has been regarded as having comparative advantages in technology, management and marketing, the feature of China’s outward FDI is to a large extent similar to that of the third world’s multinationals, which is not characterized by technological advantage but advantages in cost and flexibility (Lall, 1983).

However, if paying attention to the specific internationalization process of Chinese multinationals, one would find that they are quite different from their Third-World’s peers. Chinese multinationals typically establish joint ventures with Western multinationals within China before their overseas investment and they often used equity joint-venture and M&A as the ways to directly acquire advanced production, technology and managerial skill overseas (Zhang and van den Bulcke, 1996a; Wong and Chan, 2003).

1.3 The Aims of the essay

Notwithstanding the increasing importance, there has been a lack of research attention on China’s outward FDI in general and internationalization strategies of Chinese companies in particular. In sharp contrast to the huge body of literature on FDI inflow to China, there have been few academic publications on China’s overseas direct investment.

In this paper, a multi-case method was used to analysis the foreign investment climate for Chinese IT enterprises and several Strategies have been put forward to select appropriate entry model for IT enterprises in China to go overseas.

1.4 Layout of the essay

This essay included following five chapters:

Chapter 1 Introduction

This chapter introduced the international business environment background today, and described the general situation of Chinese economic development. Otherwise, the introduction chapter also contained the simple descriptions about the aims or objectives of this essay and the layout of this paper.

Chapter 2 Literature review

This part is mainly related with the previous researches and reviews within the last ten decades, which reported the international business environment and some viewpoints on the entry model for IT enterprises in China to go overseas.

Chapter 3 Research method

This part is designed to help selecting appropriate entry model for IT enterprises in China to go overseas. Generally, there are three main ways to investigate the research goals in the qualitative method including questionnaire, interview, and case analysis. Through the comparison of these three methods, this paper adopted the multi-cases method.

Chapter 4 Analysis

Analysis is the most important for this paper maybe. Because the important findings and discussion is present in this parts for the evidences of competitive Of course, the basic ground for analysis is the multi-cases choosed in the paragraph of research method.

Chapter 5 Conclusion

Some suggestions described and present based on the previous research in order to conclude that this paper could be helpful for the IT enterprises in China to go overseas and achieve successes.