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Multinational firms date as early as 19th century. Multinational enterprise as a word appeared around nineteen sixties to separate the link between companies and direct business set ups as investments. Multinational enterprises are organizations that have their home country in one nation, and operate under the jurisdiction of another country. Multinational corporations are therefore, defined on the basis of jurisdiction and eminent conflicts emanating from jurisdictional wrangles. The foreign direct investment which characterizes multinational enterprises is under the whims and control of political figures from the mother countries. The study of multinational enterprises laid emphasis on capital flow to organizations and business transactions based on foreign direct investment policies. (China Year paper, 1997-1999) This draws major attention on the comprehensive financial, non financial, political and social impacts of multinational corporations on home nations and host countries.
Globalization is the rootedness and interconnectedness of global phenomena. A web that encompassing similar and un-similar social, economic, political, and cultural phenomena in the global perspective. The size, shape and positional domain of density in the global arena, and the transnational web of complex networks and relations between international organizations, states, societies, government institutions and multinational enterprises define what globalization is. International engagements are beyond social, economic, political associations and interactions. These interactions follow the order of clearly established, demarcated and separable financial economies and national governments. Multinational enterprises are state firms with clear operations for home nation and participate in international activities requiring gate pass to frontier functions. (Buckle, 1982)
Firms especially from developed societies take advantage of opportunities available beyond their borders. This is done through foreign direct investment. China, the emerging market in the world in 21st century is not left behind in the scramble for direct foreign investment. The country has vested a lot in the foreign direct investment, being the second recipient with the largest investment. This paper is therefore, going to focus on the foreign direct investment and study the factors responsible for the burst of FDI in China. There are several firms operating in china majorly motivated by several factors responsible for them to undertake the FDI. Results have shown that the geographical niche of the market is a major reason for the undertaking of foreign direct investment mostly for firms with mother countries in the United States. ( Brogan, 1997) Asian companies and businesses operate in local, export minded activities making them to rely heavily on the low cost of labor as a boost for foreign direct investment.
China and Multinational Enterprises
Foreign direct investment has seen exponential growth in the past few years. FDI has surpassed world production of goods and services and trade. China is the largest beneficiary of foreign direct investment surpassing United States as the host nation. The nation has attracted several multinational organizations, this occurred because of the nation’s adoption of open-up policy in the mid twentieth century. Investments by foreigners in china as played a key fundamental roles in the financial growth of china. China was the recipient of startling US$54.6 billions in foreign direct investment in 2004, as reported by world investment report for the year 2003. The national development reform commission of china, a top planning economic organization reported a whooping US$64 billion worth of foreign investment in china. (China Year Book, 2002) This was a 14% increment over 2004. The investments that came because of contracts were US$152.3 billion in the year 2004. Foreign capital has helped china to surpass many economies from the west in foreign and direct investments. In the current global economic standings, china is rated as an economy in top three and has a potential of overtaking the United States. This is attributed in larger extent to foreign direct investment and policy making by the Chinese authority that encourages internal investment and growth. (Dun, 2004) The entry of china in the world trade organization, a body controlling all the global economic transactions is a clear indicator that the trade will play important role in the nation’s financial and economic growth. In this new international opportunity for economic investments in china, Multinational enterprises (MNCs) investments in china are majorly attracted by the availability of conventional benefits like low costs of labor. Critics argue that some of these multinationals operating in china functions to meet the problems posed by both international and national competition. MNCs make up 27% of china’s value added tax and 0.5% of taxation. MNCs export around 58% of the china’s total services and goods accounting for 12% of the internal employment. The nation’s attractive foreign investment policies, low and inexperienced labor force, rapidly expanding purchasing power and attractive investment space, particularly after the nation’s entry into the WTO in the year 2002, have provided the platform and made the nation a preferred destination for international investment. (Brogan, 1997)
Opportunities for Multinational Enterprises following the Rise of China
Foreign direct investment in china peaked at around 1990s. This is in comparison with the slow growth of 1980s. Many foreign investors showed interest to invest in china and the largest inflow of foreign direct investment did not take place due to poor infrastructure. The steady growth of foreign direct investment started taking shape in the year nineteen ninety two due to the expansion of economic zones by the Chinese government from five to fifteen cities. Foreign direct investment incentives attracted more foreign investors. China became the largest host nation for foreign direct investment among the emerging economies and developing nations. Since the year 2001, china has become the number one nation whose foreign direct investment has been growing exponentially. The massive investment in china by multinational companies can be seen as a platform for global expansion of multinationals. FDI in china is a share of both emerging nations and the world’s experience for a long period. Local factors in china are attributed to the country’s foreign direct investment growth process, making the national to be seen as well equipped with advantages for attracting foreign direct investment as compared to other nations yearning for FDI. (Cliff, 2004)
China has several merits and attractive advantages believed to be the most important factors in the determination of foreign direct investment. These determinants can be classified as macro, micro and strategic plans that determine the operations of multinational enterprises in china. Macro determinants are concerned with the organization’s ownership and specific merits like product differences, and the capacity of the company. (Anderson and Wei, 2003) Micro determinants are concerned with the market capacity and the development of the host nation, measured in gross domestic per capita. Exponential economic growth may result in the creation of large local businesses and markets. Other macro factors include political situation in the host nation, taxation regime, value of the currency and foreign exchange among other factors. Strategic factors determining the growth of multinational enterprises in a nation include those long term factors like safeguarding the existing international markets, diversification of company’s activities, establishing proper rules and regulations for the firm’s long term operation in the host nation, and complementing other modes of investment. (China and America Trade Analysis, 2001)
China has reported significant growth in growth domestic per capita; this is measured in terms of market size. The expansion of Chinese market has resulted in significant inward expansion of foreign direct investment. Exponential economic growth and expansion in market economy in china has created large local markets and business environments for international firms to invest in the nation. (Chen, 2001) Growth in GDP and wage system and expanded market size in china are the most significant economic determinants for the multinational enterprises in china. Positively existing relationship between inward foreign direct investment and market size attracts many nations especially United States and Hong Kong to invest in the republic. The available huge market for both consumer and industrial goods has attracted many nations to invest in china. This is due to shifts from export minded investment to inward consumption investment provided by the Chinese economy. Multinational enterprises are concentrated in china due to available market for their products.
Cost of operating businesses in china is another determinant for rapid foreign direct investment in the country. Low labor cost attracts foreign investors in investing in the developing nation. Low cost of labor is further augmented by cost of transportation and low productivity. There exist a positive relationship between cheap labor and internal foreign direct investment in china. The low wages paid to laborers in china plays significant economic role in determining existence of multinational enterprises in china. (Carson, 1978) Many studies have shown that china’s cheap labor force attracts several multinational companies to bring their investment to mainland china. Cheap labor available in china in the manufacturing companies like assembly points for automobiles, transport and communication machines among other industries. Electronic machines and telecommunication companies from Hong Kong and Singapore have capitalized on the available cheap labor in china for both local and international competitive merit. China’s cheap labor for international companies has been challenged by the emerging cheap labor from neighboring nations like Vietnam, India and Laos. The above nations have available cheap labor and have adopted various policies to attract foreign direct investment. (Buckle, 1979)
Political factors plays significant role in determining the firm’s capacity to invest in foreign markets. Political anarchy and instability in the host nation discourages the flow of foreign direct investment. China has been stable politically, the communist government of china has ensured the existence of peace in the nation and this has attracted many nations to invest in china.
Geographical locality and proximity of the host nation plays a significant role in determining the rate of investment. This is because the company is salvaged from incurring the extra cost in communication and leadership uncertainty. Geographical proximity reduces monitoring and surveillance costs, transportation cost and exposure of international companies to risks. In a theoretical perspective, the greater the distance between the home of the investor and the host nation, the lesser the foreign direct investment. (Calla and Cassidy, 2003) Several multinational enterprises in china are funded by capital from neighboring nations like Singapore and Hong Kong. These nations are influenced by geographical proximity. Investors from Taiwan located their firms in eastern china and the investors from Hong Kong located their firms in southern china. This is because of the short proximity of the said nations to eastern and southern china respectively. Multinational enterprises from the west operating in china can be supported by the advanced telecommunication and transport system that reduces the distance factor.
Foreign direct investment in china is influenced and motivated by many factors. The exponential market growth and its capacity to cater for the needs of multinational enterprises is the major determinant for multinational companies to operate in china. (Calvet, 1983) Other factors include low labor cost, good exchange rates for foreign currencies, remarkable high investment returns, government policies and incentives that attract foreign companies, political stability and peace in the region, globalization initiative by the nation, interconnectedness of the Chinese government with global economies, the advanced technology in china, weak industrial infrastructure in china among other factors have facilitated the growth of multinational enterprises in the region. (Deng, 2002)
Obstacles and complications in Chinese investment space include the following; political animosity, unappealing foreign trade policies, weak regulations on the operations of companies, poor banking systems, inadequate foreign capital, hurdles and barriers in the application processes, poor legal systems. Low output in production and parallel development in business programs. The obstacles serve as hindrance for economic and financial investment. Some of these obstacles are short lived while others have long term implication in the investment industry in china.
The future of china as a financial hub and center for multinational enterprises is well established. The nation will soon surpass United States and will control the major industries with global outlook in the world. (Buckle, 1996)
Locating factors that attract foreign direct investment in china, factors that inhibit the establishment of such firms and the future of the host nation as a player in the multinational enterprises is difficult task. China’s large market economy has been embraced as the major determinate in the establishment of multinational enterprises in the nation. Other factors like huge population, fast growing economy and being a member of world trade organization are best bet for foreign firms to operate in china. Global integration, government incentives and low labor cost attracts foreign investors to china. China therefore, has been touted as the fastest growing economy in the twenty first century and will control virtually all the economies of the world. This is a clear indication that china is the best and very important market for doing business. Investing in china is part of the company’s global strategy as globalization takes center stage.