CASE INSIGHT ANALYSIS:

THE BUSINESS ENVIRONMENT OF CHINA:

CHALLENGES OF AN EMERGING SUPERPOWER

Main Issues in the Case:
The case begins as of its current revision in 2009 in describing China as having
become a victim of its own population growth despite hyper FDI (Foreign Direct
Investment) capital infusions to the tune of $82.7 billion in 07 and $92.4 billion in 08 (a
whopping increase of 11% in just 1 year!).
In the midst of social issues such as poverty China had two main economic
challenges facing it:
1) To create over 100 million jobs by 2013
2) To increase by factor of four or quadruple its 2008 GDP from 6% of the world
total to 24% by 2020.

China has been doing better than most developing countries, but needed to make a
full concerted return to economic growth, due to an overall slowdown caused by the global
financial crisis which impacted its bottom line slashing growth 39% from its 07 figure to
8% in 09. Other main obstacles to economic growth in the past were Chinas closed policy
to trade and traditional closed-mindedness due to a common distrust of the ways of the
West, fear and suspiciousness about the intentions of foreigners and foreign trade. The case
presents that throughout history, this culminated into conflicts such as the Opium Wars
(1839-1842, 1856-60) with the British and the Boxer Rebellion (1899-1901), an
underground movement that sought to fight against the influences of the foreign devils
which ended in a death toll of tens of thousands of many foreigners and Chinese alike.
The CCP (Chinese Communist Party) also did not manage to resuscitate the needed
economic reform through its political leader Mao Zedong, whose party seized control in
1949 and formed the PRC (Peoples Republic of China). The Great Leap Forward
instituted by him in 1958 with its focus on land distribution and commerce reform did not
allow China to gain much momentum in terms of prosperity because the CCPs onus was on
central ownership, land redistribution and centrally determined pricing rather than what
was actually required a market oriented approach, with prices determined by the market
along with openness to competition. Researchers discovered in studies later on that the
Cultural Revolution and Great Leap Forward by Mao achieved quite the opposite, a great
one step forward and two steps back because its effect was a shrinking of more than 50%
of GDP by 1978. Deng Xiaoping, an inspired leader, took over in 1976 and in 1979
implemented several reforms and gave China what it really needed- economic and political
change in four key areas:
1) Agriculture, 2) Government institutions, 3) State-owned enterprises (SOEs), 4)
Trade and investment. Dengs main accomplishments and brief summary analysis of how
each of these economic reforms that helped transform Chinas economic infrastructure are
below. These four components align and connect it with Chinas growth goals described in
the first section of this summary.
1) Agricultural reform: Dengs policy allowed rural farmers output produced above
quota at prices determined by the open market and instituted the Household
Responsibility System. This system allowed leases of land parcels, producing
incentives for production- which then gave birth to TVEs (Township & Village
Enterprises) which fostered greater employment and savings among rural
townships and allowed them to operate efficiently like small companies and
compete with one another. TVEs employed 129 million Chinese by 1995.
2) Govt Institutions: Introduced the value-added tax, which increased standardization
/ equality of tax treatment among all firms, domestic & foreign. This resulted in
recentralization and monetary control / prevent bank overdrafts to SOEs and other
needy domestic firms.
3) SOEs Govt transitioned them from less competitive to more competitive entities
4) Trade and Investment: Deng decreased import tariffs and instituted FTCs (Foreign
Trade Corporations) and increased domestic participation in foreign trade by
increasing the offices of 12 to 5,075 by the mid 90s. Created SEZs (Special
Economic Zones)which allowed foreign investment this change removed any
direct and indirect barriers to foreign investment because these zones enjoyed
preferential tax treatment, exemption from the central plan and policies that
previously served as barriers to FDI. Dual exchange rate system implemented also
gave domestic firms with foreign operations the ability to keep their receipts at
preferential rates.
While Dengs strategies worked quite well to further liberalize Chinas economic and
political policy through a comprehensive list of changes and reforms, what sustained it after
Dengs death in 1997? It was involvement in the WTO modifying its traditional
practices(ie dual-pricing), lowering tariffs, and continuing economic policy reform. And, as
FDI continued to increase, the countrys continued reform in this area set the stage for
China to grow as a true player from 2002-2006.
Chinas economic performance subsequently on the GCI (Global Competitiveness
Index) of the World Economic Forum in 2008-2009 with a ranking of 30 out of 134 nations
underscored its ability to operate efficiently in trade, innovate and enhance its total of 12
pillars (of competitiveness). In comparison to the others in which it had been grouped:
India (rank=50), Russia (rank=56) and Brazil (rank=64), it proved to be superior in all
economic areas comparatively and marked it as an efficiency-driven rather than factor-
driven economy.
However, as evidenced by the iron-rice bowl effect, China has much to do in the
social area of reforms to further allow its society to grow and prosper. Some of the social
challenges resulted largely from its large population and income redistribution from higher
income geographically condensed to its lower-income geographically dispersed class. For
example, urban workers earned 3.4 times in comparison than rural workers and
government sponsored poverty-reduction programs could not target the poorer classes
effectively. Other problems of growth they face now are cultural and viewing each other as
the enemy racial (ethnic) discrimination, religious discrimination exists, despite the
economic disparity between the risk-taking urban dwellers vs. the culturally,
hierarchically, Confucian-centric rural Chinese. Overall though, despite these cultural
issues, Chinese innovations and through local industry: STIPs (Exhibit 6), Cluster
Development and low-cost labor have furthered its economic growth despite its stated
labor challenges.
The Key questions I would like to raise are:
i. Why does China see as its main ally of growth- SOEs that compete with FDI-based
firms, even as FDI-companies have benefited Chinese in greater job creation?
ii. Who/what does China fear as its real economic competitor and barriers to its
economic growth past 2010? Is it inflation and the rising cost of market prices?
iii. Does China feel that it is truly threatened by a burgeoning population? Why do they,
when in fact they can put more of its skilled labor force to work and be competitive
overseas in contract-based firms that fund money back into the economy?