BUSINESS IN CHINA

Running head: BUSINESS IN CHINA
BUSINESS IN CHINA
Name of the Student
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Authors Note

1BUSINESS IN CHINA
Since the last few decades, China has risen from poor developing nation to a great
economic power. Till the year 1978, China was under the scrutiny of Chairman Mao Zedong and
directed a planned economy (Gan, Hernandez, and Shuang 2016). Majority of the country’s
share output was controlled and directed by the state. During the period of 1950s, all Chinese
individual household were taken together as large communes. Within the period 1960 and 70s,
the central government has undertaken large-scale investments both in human and physical
capital to support the increasing trend of industrialization. Foreign invested firms and private
enterprises were usually barred. The major of the government was to make the economy of the
country relatively self-sufficient. The foreign trade policy was only limited to such goods that
could not be generated or obtained in China. According to Liu et al. (2014) such kinds of policies
were the major cause of distortions in the economy. Most of the economical aspects were
managed by the central government and hence there was no mechanism in market to allocate the
resources.
China’s reform and urbanization was initiated after 1978 due to the practice of dual- track
price liberalization. According to Zhao (2016), the rise of village enterprises, township and
opening to various international trades was very major step taken by China. The dual track price
liberalization and rise of township enterprises made the state-owned enterprises to face major
competition. On the other hand, according to Hong and Jinfeng (2016) the development of
international trade made the domestic firms to face major competition. With the rise in
competition after the reform, the firm’s incentives for adopting modern technologies also
increased at a rapid pace. The political system of China is centralized in nature, which allows the
country for regional competition and experimentation. During the period of reformation, various
technologies were imported by China from the western countries rather than from Soviet Union.

2BUSINESS IN CHINA
As per the Chinese government statistics, the real GDP of China grew at an average
annual rate of 6.7% from the year 1953 to 1978 (Cho and Candy 2014). Earlier in the year 1979,
China started launching various economic reforms methods. The central government started
initiating ownership and price incentives for the farmers. These practices enabled the farmers to
sell their portion of crops in the free market. Moreover, the government also established four
major SEZ (special economic zones) for attracting investment from foreign countries, importing
high-tech products and boosting exports of China. The local middle income citizens were also
encouraged to initiate their own businesses. Various additional reforms were made in several
sectors with the main motive to decentralize the economic policy making. Economic controls
related to various enterprises were given to local and provincial governments. This was usually
allowed to compete and operate on free market principles instead of guidance and direction of
state planning. Moreover the state price controls on various products range were slowly
eliminated. According to Mitchell, Marie and Allen (2014) a country may be identified as
middle-income status for a prolonged period unable to transform itself to a high income status.
This phase is usually called the ‘middle income trap’.
A middle income country cannot easily be able to compete with a low income country as
the wage rate is too high in middle income country. On the other hand, according to Newell et al.
(2016) middle income country is unable to compete with high income countries as the
development and research capacity of a middle income country is too low. For a period of more
than 30 years of high growth China is currently considered to be upper middle income nation. As
per the World Bank, in the year 2016 China’s per capita GDP was ascertained to be 8,123.2
dollars. China’s growth process is a major process of integration involved into a greatest

3BUSINESS IN CHINA
economy in the world. China has a population size of over 1.3 billion; therefore the level of
nation’s integration into the world is very unprecedented in history.
Feldman (2016) commented that nation’s with high income status usually avoids the
middle-income trap. Large countries are unable to rely on only service sector. Therefore it
becomes necessary to develop and adapt innovative technologies that are vital for the growth of
manufacturing sector. This would help the country to avoid the middle- income trap. As per Yen,
Dorothy Ai-wan and Abosag (2016), China avoids the middle-income trap by the development
of technological capacities and manufacturing sectors. The opposition of Industrialization by the
various land owners in China was quiet impossible due to land reforms in 1950. Before 1978,
huge capitals were accumulated due to the sacrifices made by the citizens. After 1978, due to
adequate development in the manufacturing sector resulted china in becoming a middle-income
country. In the recent times, China has huge income inequality. China will be able to avoid the
middle-income trap by providing free resources access, reducing income inequalities,
opportunities to its citizen and building crucial innovative capacities.
On the other hand, Macve (2015) has argued that by the development of interest group
can harm the economic growth in a stable society. Interest groups such as landowners can
deliberately harm the manufacturing sector development in various countries. The government of
the country if proved to be weak would be unable to implement significant policies related to
industrialization. The country’s manufacturing sector would therefore be easily captured by the
interest groups. Though the concept of middle income trap could be considered to be
controversial but there is a high rise in the theory of middle income trap (Wang, Rong and
Yanhong 2014).