Competitive advantage of china


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Competitive advantage of china

  1. 1. Competitive Advantage of China:Why China?If China can transform itself from an impoverished country to a world superpowers in20years......imagine where they will be in another 50.Market Size:1.3bpopulation, 655murban (~50%)•485mwithaccesstointernet, 135mmoreininternetcafes•800mmobilesubscribersbetweenChinaMobile&ChinaUnicom•44.5xgrowthinGDPsince1985, aimtosurpassUSGDP~2020Inflation Rate in China:Even since the last few years inflation in china is under control which is around 2.15% averageso that we can say that there are very chance of demand and supply gap in china because of thelarge scale production it issue to satisfy the local demand as well as feeling the internationaldemand of several countries many countries are directly or in directly depended on chinaBalance of payment:Even since many years the current account is in surplus it is there due to large scale productionand exports to other countries and due to that itsforeign exchange reserves are also increasing and due more and more companies are investingin china its FII’s and FDI is also increasing which directly affect the balance of payment of chinaand due to these reasons current account balance is in surplus.Currency Appreciation:The local currency is appreciating since few years which shows the sign of increase in exports toother countries and due to that many companies are setting up their plant in china so that theycan easily sell to other countries at very cheaper rate as compare to their competitors in that
  2. 2. particular countries, because people will try to buy the product which is cheaper and qualitativewith quantities products. And due to that many Indian companies are setting their units in chinaand exporting in India.Gold Reserves:Even the gold reserve is also increasing with china which is a good sign for any country becauseit shows that china is now becoming self dependent and now require less help from thedeveloped country and it happen due to several favorable policy of Chinese government.FDI in China :Due its liberalized policy investment from the foreign countries is increasing in the form of FDIthat is the companies are investing in setting up a Greenfield units or investing in domesticcompanies this had happen due to several tax relief policies as well as low cost of productionmore and more companies are investing in china and these are the reason why FDI in china isincreasing.FDI and MNC:•China has absorbed huge amount of foreign investments.•Billions of dollars and 350,000 foreign-invested enterprises•Between them, McDonalds and Kentucky Fried Chicken have almost700 branches.•Kodak has half of the market for film and photographic paper, with Fuji holding most of the rest.• Procter & Gamble is the biggest seller of shampoo, while foreign manufacturers, led byMotorola, Ericsson and Nokia, have 95% of the market for mobile phones, the worlds biggestmarket in terms of handset sales.28•Coca-Cola says that China is about to become its biggest Asian market. Some estimates putforeign involvement at about one-tenth of the whole economy.•In China, annual exports are equivalent to at least 23% of GDP,making China the worlds ninth-largest exporter.
  3. 3. Investment Opportunity:•Negotiation with Govt. to get tax benefit: Even the MNC can bargain with the local governmentand can get more tax benefits by accepting certain norms of the Chinese government.•Priority sectors include transportation, communications, energy,metallurgy, construction materials, machinery, chemicals, pharmaceuticals, medical equipment, environmental protection and electronics.•China encourages reinvestment of profits. A foreign investor may obtain a refund of 40 percentof taxes paid on its share of income, if the profit is reinvested in China for at least five years.•Where profits are reinvested in high-technology or export-orientedenterprises, the foreign investor may receive a full refund. Manyforeign companiesinvested in China have adopted a strategic plan which requires reinvestment of profits for growthand expansion.Labor Force:Due more labor in china it is quit cheaper as compare to other countries like India and even due toincrease in literate labor production of the company is cheaper and even quality is maintained due toliterate labor and even capital-intensive firms are also increasing in china which are technology based.External Debts:And due to lot of investment and increase in foreign exchange external debtor the country reducetremendously and due to that current account becomesurplus and by this there is fewerburdens on the local public and their consumption also increases due to this
  4. 4. Factors That Drive Investment in ChinaForeign direct investment (FDI) represents capital invested in a country that providesmanufacturing and service capabilities for both native consumers and world markets. FDI isinstrumental in bringing goods and services to the global marketplace, and the influx of foreigninvestment not only displays investor confidence in the business and the geopolitical climate ofthe host country, such capital also links national economies.The benefits of FDI flow to both the supplier of capital as well as to the host region. China is onecountry that has stepped up to capitalize on these benefits. According to Chinas commerceministry, FDI in 2010 surpassed $100 billion for the first time. Over the entire year endingDecember 2010 inbound FDI increased 17.4% to $105.74 billion. And FDI of $116 billion in2011 at record.FDI In Chinaseveral factors affect the amount of FDI that pours into China: 1. Capital Availability In the early 2000s, China overtook the United States as the worlds largest recipient of foreign capital. FDI is comprised of capital that an outside investor is willing to place (and risk) within a local region. Conditions in the global capital markets and general economic environment play a role in determining the flow of FDI into China. A thriving global economy, capital markets and business environment create large swaths of investable capital, a portion of which is converted to FDI. Large amounts of investable capital that proportionately overwhelm the number of sound local investment ideas can cause institutional, company and individual investors to invest their wealth in emerging and developing markets. 2. Competitiveness Chinas attractiveness as a destination for investment capital rests on its development of infrastructure, resource availability (physical and labor), productivity and workforce skills, and the development of the business value chain. The level of maturation of these elements can make China more attractive for FDI relative to other nations, such as India, that compete and vie for the same investment capital. A growing and developing economy requires infrastructure and resources in order to facilitate the sale of goods and services. Lower transaction costs, due to the maturation of these elements, enables investors to earn returns on their investments as their enterprises are able to generate profits. Roads, highways, bridges and other forms of physical infrastructure should be present, maintained and provide sufficient safety for the transportation of goods as well as for the commute of employee.
  5. 5. 3. Regulatory Environment When a national government enacts and enforces rules and policies aimed at favoring state entities at the expense of privately held firms, such an environment can be detrimental to initiatives that aim to attract FDI. As such, the regulatory environment can either encourage or impede foreign direct investment in China. Excessive regulations tend to hinder entrepreneurial and commercial activities, as managers and employees must spend more time and money to comply with rules and regulations. If an investor wants to set up a manufacturing facility in China, high start-up costs, legal exposure and other cumbersome compliance items may encourage that investor to set up the facility elsewhere, where the business climate is more conducive to industry. Other types of regulations include mandatory joint venture partnerships in which, together with the foreign investor, the business is required to have a Chinese government agency or local company as a partner. A judicial system that is biased toward protecting Chinese locals - who conduct what are sometimes perceived as unfair, illegal, or unethical business practices - can also contribute to making China a less favorable investment destination. Another regulatory determinant involves the governments promotion of investment activities by providing attractive financial incentives in the form of tax breaks, grants, low-cost government loans and subsidies. Government-sponsored financial inducements provide the possibility of making a business more profitable and in a shorter amount of time.4. Stability Political and economic stability can facilitate an influx of FDI. Stability represents predictability and the opportunity for enterprises to gain better foresight into the future. Alternatively, constant social unrest, rioting, rebellions and social turmoil are settings not conducive to business. Economic instability can also contribute to hyperinflation, which can render the currency virtually obsolete. To encourage FDI, citizens/workers as well as businesses should have a reasonable basis for respecting Chinese law and order. Violence, criminal activity, blackmail, kidnappings, and counterfeit currency and products have all been problems in China that serve to undermine the efficacy of conducting trade activities. The justice system should also have effective mechanisms for reducing, or altogether eliminating, rogue and corrupt elements of law enforcement agencies.5. Local Chinese Market and Business Climate the most glaring aspect of China is the sheer size of its population and market, and the prospects for growth that result from this size. The ability of enterprises - backed by foreign capital - to sell to a sizeable local market makes China an attractive destination for FDI. As the Chinese economy continues to prosper, evolve and mature, higher-end industries such as healthcare, information technology, engineering, robotics and luxury goods, among others, can gain a bigger footprint in China as its local conditions, resources and other FDI determinants are enhanced. Additionally, economic growth and FDI can start a "success domino effect." The more the region attracts FDI, the more it
  6. 6. grows. The more it grows and matures, the more investors are willing to provide FDI. This point underscores the advantage of Chinas sizeable market, which presents growth opportunities in current and prospective commercial activity. The more FDI flows into the country, the greater the economic chain reaction, providing a positive effect to sustain such growth.6. Openness to Regional and International Trade Market openness serves several important roles in attracting FDI. Of critical importance is a business ability to sell its products and services to both local and foreign markets. If Chinese-based enterprises have limited or no access to foreign customers - particularly the United States, Western Europe, Japan and others - then the local market may not be enough to warrant a significant investment in money and energy. Trade barriers such as tariffs are typically viewed as disincentives by other nations. An American product that is subject to high tariffs in China will be less in demand in the Chinese market due to the artificially inflated price. Such actions typically prompt retaliatory tariffs from the U.S. on Chinese products, or in certain extreme cases, an outright ban on certain goods and services. Export-friendly policies, then, can play a major role in deciding whether to invest in China, especially for enterprises that have a large portion of their anticipated market shares located outside of the local market. In efforts to create a more business- friendly environment, regional and international free trade agreements are typically initiated by market-progressive governments as reasonable mechanisms for inducing economic activity and growth.