3.2 key players in the world economy


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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?

Implications of their population size, economic growth and export rates, increased purchasing power and foreign investment, predicted economic power compared with US and EU, barriers to market entry, trade opportunities for UK firms, differences between China and India, for example state ownership of firms.

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3.2 key players in the world economy

  1. 1. Key Players in the World Economy1|Quazi Nafiul Islam – www.studenttech.co.cc 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?Overview 1. China and the implications of its: a. Population b. Economic growth c. The influence of: i. Increased purchasing Power ii. Increased FDI (Foreign Direct Investment) d. Predicted economic power in comparison to the USA and EU e. Barriers to entering Chinese markets f. Trade opportunities 2. India and the implications of its: a. Population b. Economic growth c. The Influence of: Figure 1 - Deng Xioaping was the Chinese leader i. Growing purchasing power that introduced capitalistic reforms in China ii. Foreign investment d. Predicted economic power in comparison to the USA and EU e. Barriers to entering the markets of these economies f. Trade opportunitiesChinaBackground Information • China is the fourth largest country by landmass and has a population of 1.3 Billion people. • China was originally a state-run economy, but after the death of Mao Zedong, his successor, Deng Xioaping introduced major economic reforms that changed it from a state-run economy to a more capitalist economy. • This saw the making of megacities like Shanghai, which were close to the sea. • However, the interior provinces of China still remain very Figure 2 - Click Image to know more about China poor, with little education.
  2. 2. 2|Quazi Nafiul Islam – www.studenttech.co.ccEconomic Growth Figure 3 - Chinas GDP growth in comparison to the rest of the world. China became the worlds second largest economy shortly after 2009. • China has been booming for the three decades. Economic growth has been constant around 10 for a very long time. These double digit growth rates make China a very lucrative business to settle in. • However, high growth rates are normal for a developing economy, but to have double digit growth rates for such a prolonged period of time is truly remarkable. • From this economic growth, the population of China has benefitted greatly, their incomes have risen and the past famines that had plagued china are now a thing of the past.The Influence of Purchasing Power • Purchasing power is measured by the purchasing power parity: an exchange rate that allows the accurate comparisons of purchasing power. It is used because prices for specific products such as food vary considerably between countries and consequently the purchasing power of a sum of given money. • Much of rural China still remains poor, even though there has been dramatic change over the past few decades when China first adopted Capitalism. • Overall, the massive increase in total GDP has helped China. • Cities such as Shanghai and Guangzhou have very wealthy citizens, facilitating the growth in demand for luxury goods.
  3. 3. 3|Quazi Nafiul Islam – www.studenttech.co.cc The Influence in Increased Foreign Direct InvestmentFigure 4 - As can clearly be seen in the Graph, FDI in China has sky-rocketed after 2004. Foreign Direct Investment has helped China reach those double digitfigures as well as make its labour market more skilled due to technology transfer. More Information of Chinese FDI→ Foreign Direct Investment (FDI) is the inflow of foreign wealth into a nation. This can be in the form of capital such as manufacturing plants or other production facilities. It may be associated with outsourcing of production in countries with lower input costs or it may be directed towards production of foreign markets. • FDI has poured into China as soon as it had adopted Capitalistic reforms; business became more lucrative in China and the cheap unskilled labour that China provided was ideal for manufacturing plants. • FDI led to Technology Transfer, when countries with limited access to technology acquire expertise when Multi-National Companies locate there. Gaining access to new technology was one of the key aims of the Chinese government when economic reforms were introduced; the reason why MNCs had to set up a joint venture with a Chinese company. • This resulted in the availability of more skilled labour in the Chinese market due to Technology Transfer. The increase in skilled labour lead to great production efficiency in China. • As a result of more technology and information coming into China, China began to develop more sophisticated products like electronics and photovoltaic cells (solar cells). Companies such as HUAWEI (Networking Electronics producer) and Suntech (Solar Cell producer) not have become MNCs as they operate in different countries.
  4. 4. 4|Quazi Nafiul Islam – www.studenttech.co.cc Predicted Economic Power in comparison to the USA and EUFigure 6 - The ten largest economies in the world in 2050, measured in GDP nominal (millions of USD), accordingto Goldman Sachs. Bigger Picture → • The USA has a far higher GDP than China for the time being but China has a far higher growth rate. Predictions state that China will overturn the USA by 2040, and is currently the second largest economy. However right now as China becomes more developed, will growth rates reduce? Read more → • China right now has the largest car market in the world. Read more → o Such fast-rising car sales will put a great pressure on its roads and other infrastructure in the future. • China is already ‘economically colonising’ Africa to make sure it has the resources to sustain strong economic growth in the future. But opinions differ on this matter. None the less, China is making strong advances in order to secure African natural resources. • This is a developing topic, but facts are that America has the largest economy by far, but China is still growing at a rapid pace. • The shift in power due to the growing influence of China has made China a key market for most Multinational businesses. • China is also investing heavily into education and research facilities due to the massive inflow of foreign currency. China is trying to make something similar to the Ivy league in America; C9 League→ • Due to these high growth rates, Chinese are becoming richer and are demanding better foods such as meat and fish. • China is making its business more competitive and transparent through the introduction of regulatory commissions as well as privatisation of SEOs (State Owned Enterprises); reducing corruption at the same time. Figure 5 - China vs. USA. Bigger Picture→
  5. 5. 5|Quazi Nafiul Islam – www.studenttech.co.ccBarriers to trading in China • China unlike India was not a colony of the British; it lacks able English speakers, making language a barrier to trade in China. China is ripe for investment so these English speaking Chinese managers are in short supply and are likely to be expensive. • Intellectual copyright laws are not properly enforced in China, so software makers and music companies will have a very difficult market to sell to. • Markets can suddenly fluctuate due to changes in government’s economic policies; the government of China has a massive influence on the market because a large portion of the businesses in China are SEOs. Investors have to understand a whole new set of the monetary, regulatory, and legal issues that are involved as the Chinese government has a lot of say in the economy. • China has no nationwide credit database, so it is difficult to assess consumers’ credit- worthiness. • China is undergoing rapid social and economic change; a widening disparity between haves and have-nots could cause significant upheaval. • Multinationals often must compete against local players with lower cost operations and lower prices. • The diversity of the Chinese market is significant, requiring a variety of products to meet segmented needs. • Infrastructure is less developed than in US, making transportation a challenge: especially legal and banking infrastructure. • Conducting market research and identifying market sectors is extremely difficult due a language and cultural barriers; an advert may be culturally offensive to the Chinese. More→Trading Opportunities • China is a fast growing market with both enormous landmass and population; there are plenty of customers in China. • Growing car market means that it gives a larger market for car manufacturers to sell to. • There is a lot of interest in foreign education, as many Chinese students are now opting for foreign degrees from countries such as Australia and the UK. • As China is becoming richer there is growing demand for processed foods such as meat and fish. • Wine is also becoming something that rich Chinese are wanting. • Large increase in income has led to the demand of luxury goods.Please note, that more comparisons will be made in the India section of these notes, to give youguys a comparative understanding of these two competing nations.
  6. 6. 6|Quazi Nafiul Islam – www.studenttech.co.cc India Background Information • India is also a very large nation; 7th largest by landmass and with a population of 1.2 Billion. • The Indian subcontinent was colonised by the British and India remained a colony for 200 years. As a result the economy was crippled although the British did establish an administration system and rail transport lines (which was to transport Indian natural resources). o However, this is now giving India an edge over China because it has more English speakers; its markets are more accessible. • India was later broken up into the Muslim half (Pakistan) and then the Hindu half (Present India). Pakistan then broke Figure 7 - Click to get more details in India up into Bangladesh and Pakistan. • Right now India has a much lower HDI than that of China. The higher the HDI the better. HDI is a composite index of life expectancy, education and standard of living.Figure 8 - Human Development Index: Trends 1980 - present Figure 10- Human Development Index: Trends 1980 - present
  7. 7. 7|Quazi Nafiul Islam – www.studenttech.co.ccEconomic Growth • After India received independence it adopted socialist principles aiming to reduce the rift between rich and poor. It also believed greatly in the idea of self-sufficiency. o This caused few private industries to grow as there were many restrictions and formalities. • Domestic markets in the 1980s were guarded by trade barriers; the government hoped that this would give domestic businesses protection: markets were not open. This in turn attracted little FDI and thus no technology transfer. Growth was slow in the 1980s and the majority of Indians were very poor. • In the 1990s government control over businesses were removed. As a result export as a percentage of GDP increased, making India an open economy: an economy in which exports and imports form a significant part of the GDP. • India now has about 50% of the global market for outsourced IT and business services, made possible by its English speaking population and good education system. • India also has great human capital as there are many unemployed graduates in India with growing industries in pharmaceuticals, electronics, cars, aerospace and biotechnology.The Influence of increasing purchasing power Average annual growth of real Per Capita GDP,PPP,2007 per capita income, 1990-2007 China US$2,753 4.5% India US$5,383 8.9% Source: UN Human Development report,2009 • India has a strong and growing middle class meaning that the overall purchasing power of India is increasing. This means that it will be more lucrative for car manufacturers, luxury goods producers as well as electronics manufacturers to start selling here. Increased purchasing power has also resulted in more FDI into India. • However most 40% of the Indian population live in the poorest states and 25% of the Indian population live under the US$1.25 poverty line.
  8. 8. 8|Quazi Nafiul Islam – www.studenttech.co.ccThe Influence of Foreign Direct Investment $160,000,000,000 $140,000,000,000 $120,000,000,000 $100,000,000,000 US$ $80,000,000,000 China $60,000,000,000 India $40,000,000,000 $20,000,000,000 $0 YearFigure 9 - Foreign Direct Investment into India and China over the past few decades. Source: World Bank • Flow of FDI is still slow due to the government still partially believing in self-sufficiency; efforts are being made to increase this. • FDI has increased purchasing power of Indians overall allowing them to purchase more sophisticated goods and services. • Also, technology transfer has helped India’s IT sector grow making it a powerhouse for IT. Bangalore, the IT capital is making able IT engineers. • As you can see, India and China took a big hit when it came to FDI (China’s hit was far more significant).
  9. 9. 9|Quazi Nafiul Islam – www.studenttech.co.ccPredicted economic power in comparison to the US and EU Figure 6 on page 4 gives you a prediction on how the economies of India and China might become if they continue to grow at staggering rates.
  10. 10. 10 | Q u a z i N a f i u l I s l a m – w w w . s t u d e n t t e c h . c o . c cBarriers to Trade • India still holding onto the ideals of self- sufficiency does have many trade barriers installed that make imported goods more expensive. o Foreign companies have to pay higher corporate tax. For normal companies, it is 35% while for foreign companies, it is 40%. • Culture and Language is a big problem in India: India has 23 languages with a myriad of different cultures. • There is still a lot of corruption that persists in India, and this means that setting up businesses and legal formalities take a long time. • Inconsistent Industrial Policy and Rules; Laws, regulations and rules are often and suddenly changed. • Labour Regulations and Protections: Under the Industrial Labour Law, in the case that any company employing more than 100 employees lays off staff, it must first acquire permission from the state government. As it is extremely difficult to obtain such permission from the state government, not only does this regulation directly affect flexible business plan changes, but it also makes business closure difficult. • Foreign companies are limited to the amount of loans they take. • China does not respect international intellectual property laws. • Goods in India are often smuggled from other countries making them cheaper. For a legal business to import and sell foreign goods there are a lot of fees to be paid, which makes them very expensive and does not give them a fair chance at competition. • Foreign investors are barred from investing into key sectors such as agriculture and infrastructure such as transport. • Lack of Infrastructure o Infrastructure in such areas as electric power, roads and telecommunications networks has not been developed and this is the principal barrier to the enlargement of overseas investment in India.
  11. 11. 11 | Q u a z i N a f i u l I s l a m – w w w . s t u d e n t t e c h . c o . c cTrade OpportunitiesTrade still as of now is difficult to carry out in India, mainly because of the protectionist policies thatIndia persists in maintaining, although new opportunities have been created with the incoming ofeconomic reforms in the 1990s. • There is considerable human capital in India and with an English speaking population, it means that skilled labour can be recruited at very cheap wages are the cost of living in India is much lower than that of western nations. • India is a very education-promoting nation, meaning that there are many opportunities for western Universities especially in UK, USA and Australia to make money from Indian students. • International businesses are allowed to own pharmaceutical companies in India meaning that they can take advantage of the location to export to other nations as well as taking advantage of the human capital present in the country.