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China officially referred to as the People`s Republic of China is an Asian giant with an area of about 9.6 million square kilometres. Its capital is located in Beijing, and Shanghai is the largest city. The main language spoken in China is Mandarin Chinese. Hence, the officials of PAG in China should be conversant with the language. China has the highest population in the world with a total of about 1.35 billion people signifying a large market that PAG can draw. The country has been under the communist government since its famous leader Mao took office and transformed the Chinese economy (Sanderson & Kentor 2008).
Quantitative Analysis on the Chinese Economy
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There are several factors that attract more and more investors into the Chinese economy. Cumulative appreciation of the renminbi from 2005 to 2008 against the USD was about 20%. In the year 2010, China was the world’s largest exporter showing the country’s significance in the world economy. The Chinese economy started peaking up in 1970s. In 1978, the economy achieved a twofold increase in numbers. Since that time, the Chinese economy has been a powerful force to be reckoned with. In the year 2001, the Chinese economy overtook the Japanese economy and became the second largest economy in the world. Since that time, it has held its position in the global economy (McKinsey & Company 2004).
In the year 2003, the gross domestic product (GDP) in the Chinese economy was 4157.8 billion USD, which represented 10% economic growth over the previous year. The gross product per capita was at $3217. In the following year, the economy grew by 10.1%, and the gross domestic product also grew to $3614 up from $3217. Afterwards, the gross national income of the Chinese economy stood at $3608. This trend has been on the rise, and the economy achieved 14.2% economic growth in the year 2007. This was the highest economic growth for China in the twenty-first century. Its gross domestic product increased to 7338.7 billion USD according to the World Bank and the International Monetary Fund Report on its economic growth. The gross domestic product per capita had already grown to $5554 from $4749 in the previous year. The gross national income also followed the trend growing from $4776 in the year 2006 to $5595 in the year 2007. In the year 2008, the economic growth rate dropped to 9.6%, but the gross domestic product and gross national income were both on the rise. The country recorded the gross domestic product of 8219.0 billion USD. The gross domestic product per capita and gross national income per capita rose to $6189 and $6232 respectively (Harvard Graduate School of Business Administration 2005).
By the year 2010, the Chinese gross domestic product had surpassed ten billion USD to stand at 10085.7 billion USD. The gross domestic product per capita stood at $7519 from $6786 experienced in 2009. The economy of China is expected to grow by 8%. The World Bank forecasts economic growth of 7.7% and 8.1% for the next year. The purchasing power is also growing as evidenced by the World Bank and WTO reports. In the year 2003, the purchasing power index of the Chinese yen in respect to the USD was at 3.27 and has been on the rse since that point, reaching 3.95 in the year 2010. The constant rise of the gross domestic product per capita is a reflection of the increasing purchasing power of Chinese citizens. Hence, it indicates a rise in consumer demand for products. This shows the potential of the Chinese economy and predicts a bright future for it. Its well-developed infrastructure and the huge market derived from its large population are among the main reasons why investors are extremely interested in investing in the country. Its membership in the World Trade Organization is also another incentive for attracting foreign direct investment. Nevertheless, the economy faces mammoth challenges (Meyer & Shen 2010).
Challenges Facing the Chinese Economy
Reduced Economic Growth Rate
The Chinese economy has recently experienced a slowdown in its economic growth rate. The massive economic growth rate of 14.2% experienced in the year 2007 has proved futile to sustain. In the year 2008, the economy grew with only 9.6%, and it went down to 9.2% in 2009. Although the rate rose to 10.3 in the year 2010, the economy grew with only 9.2% in 2011 according to the IMF reports. In the year 2012, the IMF predicts that the Chinese economy will grow at 8%, which is still a commendable rate. This shows inconsistency in the economy’s growth rate. Hence, it cannot be easily predicted. This fluctuation makes the creation of new jobs for its large population a difficult task for the Chinese government. It also led to decrease in domestic demand owing to reduced domestic savings (IMF 2012).
Growth of Public Debt and High Inflation Rates
Another serious challenge experienced by the Chinese economy is the increase in public debt and high inflation rate in the country. The Chinese public debt has been inconsistent. In the year 2005, the public debt fell by 3.69% and declined further by 8.21% in the year 2006 according to the IMF and the World Bank reports. In 2007, things turned around, and the public debt increased by 21.3%. However, it declined by 13.41% in 2008. In the year 2010, the public debt rose by 91.45%, which was at an alarming rate. By the end of 2011, the public debt was 43.5% of the gross domestic product of the Chinese economy. This shows the unpredictability of Chinese public debt. The rate of inflation also stood at 5.4% in 2011.
Corruption and Governance Concerns
The Chinese economy has not been free from corruption and poor governance, which have a negative influence on the economic growth of the country. Many foreign investors have opted to invest somewhere else because of rampant corruption experienced in the Chinese markets. Political instability and poor governance are other major challenges for the Chinese economy. The constant riots and human rights abuses in Tibet, which is a territory of China, have been the issues of concern for many investors, who are interested in venturing into the Chinese market.
Mode of Entry by Foreign Direct Investment
PAG must carefully consider the mode of enntry into this market because each mode has different financial implications. Exporting will be the best, when the exported goods are of high value and fetch high prices in the market. For PAG, this option will not be the best because the goods are relatively cheap. This may have adverse financial consequences for the company. Another risk of exporting the goods is stiff competition that PAG is likely to face from local goods. Thorough advertisement will be needed. Hence, the cost of operation will be high. This will not be ideal for cheap household goods. License will be the most optimal mode of entry into this market. The advantage of this is that the companies, which are licensed to produce goods on behalf of the foreign investor, have already had an elaborate distribution system. In addition, they have a wide customer base in existence. Therefore, the market for products will be guaranteed. It will also cut down advertising expenses. Goods will be more appealing to customers, who will view them as products of their home company rather than foreign firm. Existing companies have the necessary technological knowhow. Hence, PAG will not be required to incur large expenses on infrastructure and technology.
However, PAG has to ensure compatibility of the production technology used by the licensed company in order to guarantee that the quality of its products is not compromised. Launch of a new plant is another viable option. The Chinese government offers tax incentives to foreign investors, who are willing to construct new plants in the economy. This will make the cost of starting a new business in China cheap for PAG. Another advantage of Greenfield investment is that the cost of transportation associated with exports will be eliminated. However, Greenfield investment will take PAG more time before it starts its operations in China (The US-China Business Council 2012). Acquisition is also viable, but it can have negative economic implication in the short run. The cost of acquisition can be high. Compatibility between acquired and parent companies may be lacking as they are exposed to different cultures. The other risk that PAG possibly will face in acquiring an existing firm is the changing perception of customers. They may view the acquired business suspiciously negatively affecting the sales of PAC.
Political and Cultural Impact on FDI in China
The political climate is more favourable than ever for foreign investment nowadays. The introduction of tax incentives to foreign investors by the Chinese government is one of the political decisions to promote foreign investment. There are several reforms that have been made in order to encourage FDI. However, the abuse of human rights by the government, especially in Tibet, should be taken into consideration. The Chinese people are very hard working. They tirelessly contribute to the economic prosperity of China. They have a welcoming culture that is conducive to foreign investors. However, corruption is still rampant in this country, which may hinder the performance of PAG in the new market. The perception of foreign companies as a threat to their local industry is another hurdle in the economy. Thus, PAG must carefully select the most appropriate mode of entry in order to avoid direct conflict.
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