In a speech to a business audience there, Immelt pointed to China as a tough business environment and a problematic place to invest, especially for foreign firms. Is this assessment accurate?
On the face of it, Immelt’s assessment is correct. For foreign companies, China is still a relatively difficult place to invest. But conditions for investment in China deserve a closer look. Significant problems, such as the protection of intellectual property rights, selective enforcement of laws and regulations and opaque processes for company registrations, visas and work permits persist. Many issues, such as those relating to government procurement, are actually the result of foreign firms’ being allowed access to previously closed business sectors. Put in its proper context, China’s business environment has not deteriorated; many difficulties encountered are actually by-products of the Chinese economy becoming more open to foreign investment.
Two factors remain at work in China that affect the environment for foreign businesses; structural change, and the global financial crisis.
On structural change, the increase in wages and the corresponding development of infrastructure have reduced China’s previously abundant supply of cheap labour, and have increased domestic consumption. As a result, foreign businesses have both won and lost. Foreign investors in the labour-intensive export sectors have been disadvantaged. But foreign investors able to capitalise upon increased domestic consumption have benefited. The volume of foreign direct investment coming into China rose for ten successive months through to May 2010 and may top $US100 billion this year.
As for the impact of the global financial crisis, since the crisis the state sector has advanced while the private sector has retreated. In China, the stimulus that followed the onset of the global financial crisis was huge. The state sector received the lion’s share of the stimulus. Private businesses, both domestic and foreign owned did not receive their fair share. But it was domestic private firms that were squeezed hardest, as they struggled to apply for loans from cash-strapped state-owned banks. In contrast, foreign businesses seeking to expand in China seldom rely on Chinese sources of funding and thus were less affected.
Would an advancing state sector dampen foreign firms’ enthusiasm towards investing in China? The answer to this question, according to some contributors to the debate, is yes. A recent EU survey indicates that, as a result of greater state activity, some businesses have already hardened their attitudes toward investing in China. But despite his critical comments in Rome, Immelt’s speech at the Shanghai World Expo belies any broad trend. Immelt’s vision for GE in China appears to be expansive, clear, and ambitious. His strategy is to sink deeper roots in China through localisation, capacity building, and joint ventures with China’s state-owned enterprises. In the future, Immelt also wants to promote ‘reverse innovation’ whereby appropriate Chinese business models and technologies are applied to the rest of the world. Although difficult to gauge clearly, it seems Immelt’s perspective is shared by most other influential business leaders.
China has emerged from the global financial crisis better than any other major economy. A sustained high level of growth, expanding domestic market, and rapid structural adjustments have increased China’s bargaining power. For instance, China has long seen technology transfer as one of the benefits of foreign businesses entering its market. When China was mainly used as the world manufacturing factory, many foreign businesses could get away with putting in very little technology, a situation that is now changing.
China’s increased bargaining power should not be confused with a more troublesome investment environment. Although hardly perfect, conditions for direct investment in China continue to get steadily better.
Dong Dong Zhang is a Canberra-based analyst. The views expressed are the author’s own.
Since when is providing manufacturing jobs for Chinese workers such a bad thing that foreigners must make up for it by also transferring technology?
Reading through the vast sweep of Chinese economic and industrial policy (in Chinese) over the past two decades, one sees an increasingly palpable resentment toward foreigners. There is a sense of “us versus them” in which Chinese policymakers accuse foreigners of having a “monopoly” in industries in which foreigners *collectively* hold more market share than Chinese. Nevermind the fact that the foreigners are all competing fiercely against each other for market share!
Having been able to spend its way through the global financial crisis, China has emerged with a new-found swagger. While China is welcome to feel good about itself, it should not expect other countries to give in to economic bullying. Global economics requires a lot of give and take. If China is no longer willing to give, it will constantly find itself running into walls.
You’re absolutely right that the situation is far more nuanced than a simple yes or no answer. Whether doing business in China or any other foreign country, it helps to have local partners (or a business partner/affiliate with local partners) who will help you navigate cross-cultural relationships.