Introduction
The People’s Republic of China initiated far reaching reforms in its external sector in 1978. The country instituted broad based macroeconomic reforms and restricting programs. This has contributed to the rise of its GDP, global share of trade, and investment in the last two decades (Kraay, 2000, pp.545). There has been rise in productivity levels (Lai, 2003, pp. 26).
Beginning 2000, China was considered the most attractive investment destination for foreign direct investors (UNCTAD, 2002; UNCTAD, 2004). Modernization in china has not only been enhanced by inflow of foreign direct investment (Das, 2007, pp.285), but also by the domestic private sector (Das, 2001, pp.44).
This report will illuminate the attractiveness of China as the potential investment destination for foreign direct investment and a market for manufacture goods. The report will also give a summary of the country considered as the best investment destination, the countries favored for export, the reasons for the choice, and finally why other countries were rejected as places for doing business.
A research by A.T. Kearney on FDI confidence positions China as the best country for foreign direct investment (A.T. Kearney, 2010). The report also shows that executives are currently wary of making investments in the country due to the economic climate.
The executives were optimistic that the uncertainties that characterized the world economy were to ease come 2011. The uncertainty, the report revealed, made many companies that were interviewed to postpone their investment plans. Other reasons why these companies postponed their investments were due to difficulties associated with accessing credit facilities.
China still remains the best investment destination for foreign investors ahead of the US and India (Das, 2006). It has held the position from 2002 (GBPC, 2004). Brazil and Germany complete the five best investment destinations for foreign investors.
The report showed the United Kingdom as the most striking exemption because of its reliance on financial services hence its exposure to current world economic down turn. Investors were more optimistic about the future outlook of China. The report shows that the country had a confidence index of 1.93 in the 2010 FDI Confidence Index.
Experts have repeatedly predicted the possibility of services and hi-tech sectors seeing the biggest inflows of capital from abroad.
China’s dominance as the most attractive investment destination as the world slowly recovers from global economic doldrums was confirmed by both the United Nations Conference on Trade and Development (UNCTAD) and renowned economists. Beijing has continued to push for China’s industrial upgrading and relocation (Siyu, 2010, p.1).
Her foreign direct investment inflows to service industry and high technology are expected to remain bulky in the years to come. The director of investment and enterprise division of the UNCTAD opined that China boasts a bright future with regard to attraction of Foreign Direct Investment flows.
The ministry of commerce indicated that China’s foreign direct investment jumped 18.6 per cent year-on-year in the first seven months to $69.2 billion in 2011. Foreign investors are estimated to have set up 15600 new projects during the first seven months of 2011(Siyu, 2010, p.1). This was a percentage increment of 8% compared to the previous years.
According to the World Investment Report released by UNCTAD, China’s global foreign direct investment volume rose by 5 per cent year-on-year to $1.24 trillion by the end of the year 2010. This figure was 15% lower than the average volume of $1.472 trial that was realized before the world financial crisis. The figure is also 37% lower than the peak volume of $1.971 that was realized in 2007 (Siyu, 2010, p.1).
The World Investment Report of 2011 also indicated that developing countries with promising economic growth were also major recipients of Foreign Direct Investments. Investments in these countries were channeled to new manufacturing projects. China registered a stronger FDI flow recovery relative to other countries bearing that its FDI surged by $17.4 from 2009 to $105.9 billion in 2010.
This was the first time the FDI went past the $100 billion mark. In 2009 there was a 2.6 per cent decline according to Chinese Ministry of Commerce. The Ministry of Commerce also indicated that the foreign direct investment that was channeled to service sector jumped by 28.6% to $48.7 billion in 2010. This figure accounted for 46.1% of the total FDI earnings. 2010 saw the manufacturing sector absorbing $49.6 billion up 6% year-on-year (Siyu, 2010, p.1).
Central China registered the most notable increase in FDI growth on geographical basis and this is exemplified by a 28.6 percent increase to $9.02 billion. According to China’s Ministry of Commerce, West China registered an increase of 26.9 per cent year-on-year while the eastern region registered a 15.8 per cent increase from 2009 (Siyu, 2010, p.1).
Hao Hongmei of Chinese Academy of the International Trade and Economic Cooperation observed that the different increases in different regions and sectors were occasioned by China’s policies geared towards accelerating industrial relocation and upgrading the country’s industrial structure.
Over the years, the Chinese government has been steadfast in initiating policies that seek to upgrade the country’s industrial structure. This comes under the backdrop of rising costs of labor, appreciation of the Yuan, and other factors that put tremendous pressure on the manufacturing sectors that are found in China’s coastal regions.
The government has since started encouraging investors to set up industries in central and eastern China which boasts of abundant labor hence low operational costs.
In fact, Lian Ping, the Chief Economist at the Bank of Communications has repeatedly reiterated that the service sector in eastern China stands to benefit from the government’s policy due to an increase in foreign direct investments. However, China’s global FDI inflow in service sector continued to fall sharply in 2010 accounting for 30 per cent of the total figure.
The investment report by UNCTAD showed that FDI from China’s manufacturing sector surged by 23% year-on-year in 2010 to $544 billion. Economists pointed that the service sector, unlike the manufacturing sector, may take time to recover from the world economic down turn.
UNCTAD’s report was optimistic that the global economic recovery was poised to continue and that in 2011, the global FDI volume was likely to bounce back to between $1.4 trillion to $1.6 trillion (Siyu, 2010, p.1).
In 2012, the figure is expected to rise to $1.7 trillion and $1.9 trillion in 2013. However, uncertainties that are likely to be encountered cannot be ruled out. Inflation, economic overheating in developing countries and sovereign debt crises, sites UNCTAD, are some of the issues that cannot be wished away just yet. The Chinese Ministry Commerce projects that FDI inflows in 2010 is likely to be exceeded by this year’s inflows.
The Ministry tries to justify this assertion by the surge of 18.4 per cent ($60.9 billion) that was recorded in the first half of 2011. This included the service sector’s $28.1 billion, an increment of 21.4 per cent relative to last year. The manufacturing sector absorbed $28.5 billion, an increment of 15.63 per cent year-on-year in the first half of 2011 (Siyu, 2010, p.1).
In a survey that was conducted by Ernst and Young, titled European Attractive Survey, where 814 business leaders were polled, China became the best investment destination in the world. The survey indicated a withering European market with India coming second.
China’s attractiveness hovered at 40 per cent compared to India’s 25 per cent. The attractiveness of Western Europe as an investment destination has waned since 2006. However, enthusiasm for North America has doubled. China, India, and Central and Eastern Europe are currently being seen as sites to future investments (Inchin, 2010).
China is considered as the best investment destination because of the potential of its internal market, political stability, low cost of operations, and the ease of establishing business enterprises. In fact, China is seen to be the beneficiary of world economic downturn and is becoming one of the emerging world economic powers.
However, the country has locational challenges because it is not economically viable to do business in the coastal regions as compared to central and eastern regions which boasts of cheap labor.
In fact, setting up an industry in the Beijing, Shanghai, or Hong Kong regions will imply severe competition from the already established companies that operate in these regions. It is more advisable for new entrant industries to explore tire-two urban entry strategy so that they can build critical mass before venturing into larger markets.
China has a total of 49 cities with an estimated population of 1 million people. Investors are so skeptical about investing in Europe because of worries associated with debt crisis in the Euro zone, unemployment, and weaker investments. Banks in the Euro zone are very cautious when it comes to lending.
This resulted into a 2.6 drop in China’s FDI because the country is the third largest foreign investor in Europe (Inchin, 2010). China’s cash strapped firms that were operating in Europe were severely impacted on by the recent world economic crisis.
Summary
China is the best investment destination because of the political stability it has enjoyed over the years, there are no bureaucratic hurdles when it comes to establishing businesses, it has liberal policies that spur growth besides, the country has a sizeable labor force leading to a low cost of doing business.
Because of China’s large population, the rate of consumption of manufactured goods is likely to be high. It is likely the best place to export manufactured goods.
Other than China and India, it is not advisable to do business in the Euro zone as it is currently facing debt crises occasioned by difficulty in accessing credit. Their financial markets are so open to world economic crises.
Conclusion
China is the best investment destination for individuals contemplating foreign direct investment in a foreign country free from the world economic crises. Even for individuals searching for foreign market for their industrial products, China still is the most preferred destination bearing that it has over 49 cities each with a population of over one million.
Another factor that makes China the best destination for foreign direct investment is the political stability she has enjoyed over the years. Moreover, there are no bureaucratic procedures involved in setting up business.
Individuals who may not be very comfortable with China can contemplate investing in the Indian sub-continent which closely follows China in FDI confidence index. Other developing economy that is worth investing in is Brazil. For an emerging consumer goods company that sells sports clothes that are standardized, China should be the best foreign destination for Foreign Direct Investment.
Reference List
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Das, D.K. (2006). China and India: A Tale of Two Economies. New York: Routledge.
Das, D.K. (2007). Foreign Direct Investment in China: Its Impact on the Neighboring Asian Economies. Asian Business & Management, 6, pp.285–301.
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Inchin. (2010). China remains’ most attractive FDI destination, India fourth worldwide. Web.
Kraay, A. (2000). Household saving in China. World Bank Economic Review, 14(3), pp.545–570.
Lai, P. (2003). Foreign direct investment in China: recent trends and patterns. China and the World Economy, 8(2), pp.25–32.
Siyu, Z. (2010). China attractive FDI destination. Business Daily, 23 Aug. pg.1
United Nations Conference on Trade and Development (UNCTAD). 2002. World Investment Report 2004. New York: UNCTAD.
United Nations Conference on Trade and Development (UNCTAD). (2004). World Investment Report 2002. New York: UNCTAD.