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Rise Of China And Case Study Of Veolia And Colgate-Palmolive

Essay by 24  •  June 1, 2011  •  4,751 Words (20 Pages)  •  833 Views

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Contents

1.0 Section One1

2.0 Section Two

- 2.1 Introduction

- 2.2 Veolia

- 2.3 Colgate-Palmolive

3.0 Bibliography

Appendices, A

1.0 Section One

China is emerging as a growing economy, which is becoming more attractive for foreign investors and in particular, large multi national companies. It is seen as the fastest developing country, and is emerging as the new superpower. There are many factors that have led to China becoming a more appealing country for foreign investment.

The People's Republic of China is a State of Asia and was founded in 1949 by Mao Zedong. Since then it has been controlled by the Chinese communist party (CCP). It is actually the most populated country in the world with over 1.3 billion people.

The history of Chinese politics has always been temperamental. After the death of Mao Zedong, the 1980's was an era of political unrest. During Mao's reign, he had managed to stabilise the country which had been severely damaged from two generations of war and social conflict. He undertook a massive economic and social reconstruction and started to try and restore the economy. Before his death, there had been a massive power struggle, culminating in the death of Lin Biao, a prominent rival of Mao. After Mao's death, the ensuing power struggle caused civil unrest in the country.

Throughout the decade, there was an improvement in the general standard of living, but political dissent was rife in this time. When Zhao became General Secretary, he championed economic and political reforms that were heavily critical. This coupled with growing economic hardship, led to the Tiananmen Square massacre, where students campaigned against corruption and defences of freedom. It caused martial law to be declared and military units to be used to clear the demonstrators.

The CCP always wanted a progressive opening of the Chinese market in order to create a middle urban class (15% of the actual population) and improve the standards of living (which happened as annual income increased a lot, more consumers, better healthcare leading to longer life, improved educational system.) Other key elements of the strategy included the creation of small to medium sized companies in light manufacturing and services, more investment and an increasing trade with foreign countries. The outcome was that for the last 20 years, China managed to keep rates of 10-11% of sustained high economic growth each year.

Though many criticize those reforms for the increasing amount of pollution, a 'creeping' corruption, unemployment rising and a bad gestation of the state enterprises. This situation is potentially threatening for the stability of the regime. Even though the country has entered a global economy, the CCP keeps an exclusive control of it and maintains a repressive political aspect towards groups against its ideas.

Corruption and unfairness is a worry as a foreign investor, as they could be vulnerable.

An important point to demonstrate the extent of corruption in China is that "97,260 party members were disciplined for pocketing bribes, gambling with public money, abusing land rights for other charges, according to the party commission" (Financial Times Feb 14th, top of pg 7). If they treat public money in this manner, then foreign money is likely to be treated in the same way, and this can be very worrying for any potential foreign investors. However, China is setting up agencies to fight this corruption.

Throughout the 1990's to the present day, the Chinese government reduced its control over the private life of the Chinese people and have moved away from communist and socialist ideologies (planned economy) towards a market orientated economy. It is now an economical war, not a political war. The change from a command style economy to a more market orientated gave people 'freedom' but still controlled by the government. This was the starting point where FDI came in. Most of FDI in China is from Green-field investment. It accounts for 90% of it which proves that foreign companies mustn't necessarily go through acquisition and can just establish a brand new operation in an area where no previous facilities existed.

Now the question which arises is: what would we consider to be pivotal in the decision of companies in investing in China, what makes it so appealing to invest (and locate) and which obstacles/problems can be encountered in doing it?

To start with, China has a very cheap labour force as there is scarcity in jobs and so quite a lot of the population are unemployed (4.2% which comes to more or less 50 million unemployed). Due to the increase in FDI in China, the cost of living has increased. This has had a knock on effect and increased reliability and efficiency amongst the workforce, due to increased education and skill. This means that as well as benefiting from the low labour costs, you are also benefiting from an increase production efficiency and competence.

China has a population of 1.3 billion (1/5th of world population and a workforce of 700mn). The average Chinese worker earns 40 to 50 cent an hour. In comparison to the US, the average worker gets paid 9 times this on purchasing power parity. This is a huge saving and a sure reason of why China must be so popular to invest into. On another note, as China has the biggest consumer demand on the planet, MNE's can try to appeal to astoundingly large consumer market.

Furthermore, the Chinese Government has aided in the increase of FDI and appeal of China through the reduction of taxes. Tax barriers that had, in previous regimes, been impenetrable have come down greatly. Firms get preferential treatment in western regions, and even more if they promote trade. This is so that the west can develop and is given the resources it so desperately needs. This has been in order to improve the infrastructure in less developed parts of China (unlike for companies located in SEZs, Special Economic Zones like the Hainan province, Schenzen and Shanghai). This is appealing to firms as they can allocate

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