China is, currently, the second largest economy after the United States. It is also the fastest growing economy with a consistent growth rate of about 10 percent per annum (Kotabe, Jiang and Murray, 2011, pp. 166-176). Due to its large economic base, China remains the largest exporter, as well as, the second largest importer of various capital and consumer goods in the world. China boasts of a high “per capita GDP of $ 7,544” (Kotabe, Jiang and Murray, 2011, pp. 166-176), according to 2010 estimates. It is believed that the Chinese economy is likely to surpass that of the US if it maintains its rapid growth. Industrialization and wealth is, however, concentrated in major Chinese cities compared to its rural areas. The significant economic achievement of China has drawn the attention of both foreign countries, and multinational corporations. This means that, today, China has a greater influence on the world economy than it had before. This paper seeks to analyze how the rise of China is influencing the business environment for multinational enterprises (MNEs). The implications of Chinese economic power on MNEs will also be discussed.
China’s Influence on the Business Environment
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Following the effects of the recent global financial crisis, most multinational corporations from both developed and developing countries are emulating their Chinese counterpart’s strategies (Kotabe, Jiang and Murray, 2011, pp. 166-176). This is based on the fact that China was not severely affected by the financial crisis, despite its integration with western countries. Chinese companies have been able to maintain low production costs through innovation. In order to compete with the Chinese companies, most multinational enterprises are adopting cost leadership strategies that are similar to those of Chinese corporations. Through massive investments in research and development, China has been able to develop new production technologies. Similarly, it has been able to develop business infrastructure such as transport and communication systems. Consequently, the MNEs operating in China can take advantage of new technologies to increase their productivity.
Cost of Production
China has one of the largest and highly skilled populations. Through effective human capital development, the large population is able to supply skilled labor at low costs (Sachs and Woo, 2009, pp. 1-50). The cost of energy is also low in China compared to other developing and developed countries. Through its financial muscle, China has made massive investments in cheap sources of energy in overseas countries. Such investments include drilling of oil in Africa, and coal mining in Australia. China has strategically chosen controlled market based economy over extreme capitalism. This means that regulation in China focuses on enhancing the growth of local industries. Thus, such regulations may be entry barriers to foreign multinational enterprises. China has a stable political environment (Robin, 2008, p. 67). Besides, it has been able to develop strong political ties with most developed and developing countries. Thus, China is able to import cheap raw materials by negotiating trade agreements with its trade partners.
Economic Integration through Funding
In the last two years, China has “lent more money to developing countries than the World Bank” . Most of the funding from China is used to implement projects that are meant to enhance its economic integration with the rest of the world. For example, Chinese funds have been used to increase China’s integration with Asian and African economies through energy and infrastructure development. Such integrations will enable China to have a greater control in the world market than it has today.
Internationalization of the Renminbi
China has an ambitious plan to internationalize its national currency, renminbi. Since the renminbi has always been under valued, its domination in the world market will significantly reduce the cost of Chinese exports. Foreign multinationals will, thus, find it difficult to maintain their market shares. At the local level, the appreciation of the renminbi against the dollar has reduced the competitiveness of MNEs whose supplies come from China. This is because any raw material or parts from china is now expensive. This leads to high prices of the final product.
Implications for the MNEs
First, the rapid economic growth in China presents an expansion opportunity to MNEs. Currently, 400 out of the 500 ‘Fortune 500’ companies have already invested in China in order to increase their market shares (Carlsson and Nordegren, 2005, pp. 21-40). The attraction of China is based on the fact that it has a large population with a very high purchasing power. This means that there is a high demand for both capital and consumer goods in China.
Second, the robust economic growth in China is a source of growth for MNEs. To begin with, China has chosen to directly fund MNEs engaged in infrastructure development, and energy production. Such investments act as positive externalities, in terms of low cost of energy and good infrastructure, for MNEs in China (Arora & Vamvakidis, 2004, p. 89). Research and development in China also provides innovative production alternatives for MNEs to increase their productivity.
Third, the integration of China with developing countries, coupled with the ability of its local firms to maintain low production cost, has increased the visibility of Chinese products in the international market . This means that MNEs from western countries are facing cut-throat competition from their Chinese counterparts. Chinese companies are, currently, acquiring overseas firms, thereby reducing the market shares of western MNEs. Most investors are redirecting their funds from the poorly performing western MNEs to Chinese firms. This trend, further, increases the competitiveness of Chinese firms at the expense of MNEs.
Finally, most MNEs have had to rethink their operation strategy in response to China’s rapid economic growth. At the center of MNEs dilemma is whether to adopt a cost leadership strategy or a differentiation strategy (Amstrong, 2009, pp. 120-127). This is based on the fact that, unlike western MNEs, Chinese corporations have been able to simultaneously implement both differentiation, and cost leadership strategies. Thus MNEs that are not able to compete with the Chinese firms along the dimensions of low prices, and high quality will find it difficult to withstand competition in the world market.
The above discussion indicates that China is bracing itself to become the next economic power by maintaining its current rapid economic growth. China’s economic fortunes have had a significant impact on the business environment for MNEs. China has, specifically, had a great impact on the world market structure, the cost of production, strategy formulation, and selection of trading partners . These impacts have both positive and negative implications for MNEs. MNEs seeking to join the Chinese market will benefit from a high market demand. At the international level, however, the MNEs will face intense competition from Chinese firms. Besides, the MNEs that are not able to compete with Chinese firms will have to either close their operations or look for alternative markets.
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