China's Potential for Foreign Direct Investment: An Inclusive Assessment

This report provides an inclusive assessment of China’s potential and opportunity for Foreign Direct Investment (FDI). It includes a comprehensive PESTLE analysis of the political, economic, social, technological, environmental, and legal factors affecting China's economic growth, along with relevant recommendations to improve its global trade services.

Running head: INTERNATIONAL BUSINESS ACROSS BORDERS
INTERNATIONAL BUSINESS ACROSS BORDERS
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Executive Summary
China's intensifying position in international trade has attained considerable amount of
importance since its succession in the World Trade Organisation (WTO) in 2001. China's rapid
economic growth has been enhanced by the rapid progress of foreign trade. The exceptional
trade development can be recognized to several factors in particular its profuse labour resource,
major influence of Foreign Direct Investment (FDI) along with trade liberalization. China has
liberalized its products and services in order to align with its plan in the regional trade agreement
(RTA) as well as with its significant commitments towards strategic trade policy which has been
efficiently facilitating to the expansion of the country's economic standard by making it the
second largest financial system in the world. The paper has provided inclusive insights about
China's increasing economic growth along with its existing financial services and foreign
exchange rates which have been facilitating the country to develop as an emerging market for
international trade and commerce. In addition to this a comprehensive PESTLE analysis has
revealed the political, economic, social, technological, environmental as well as legal factors
which are benefiting as well as affecting the economic growth of the country and has further
provided relevant recommendations in order to help China improve its global trade services.

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Overview of China’s Economy...................................................................................................3
Pestle Analysis.............................................................................................................................5
Strategic trade policies in China for International Trade.............................................................8
Foreign currency and exchange influences on China’s Financial System..................................9
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

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Introduction
China is identified to have a remarkable period of significant growth shifting from a
centrally organised to a market based financial system. In recent times China is considered as an
appointment income country comprising multifaceted developmental needs whereby bank or
other financial organisations continue to serve a major developmental role. Reports by Allen and
Gu (2015) have revealed China's rapid economic growth in 7 years with its Gross Domestic
Product GDP to have risen by around 7% in 2017. Furthermore, it is recorded to be the first time
since 2010 that the pace of China's economic growth raised rather than facing reductions (Allen
& Qian, 2014). As a result China's financial system is recognised to be the second largest in the
world. According to Allen and Gu (2015) the growth of China's GDP has brought the country's
economy to around two-third of the dimension of the United States economy last year along with
the current rate which has the propensity to overtake it within the next decade. The purpose of
the following report is to provide an inclusive assessment of China’s potential and opportunity
for Foreign Direct Investment (FDI).
Discussion
Overview of China’s Economy
With a population of around 1.5 billion, China is identified as the second largest financial
system and thus is increasingly playing a decisive role in development as well as in the global
economy (Allen & Qian, 2014). This has led China to be the largest single contributor to world
economy growth since the international financial crisis occurred in 2008. In the view of Wang et
al. (2018), China’s current poverty standard reveals a populace of over 55 billion financially
marginalised section in the rural areas in 2015. However rapid economic ascendance has created
certain challenges which include high level of inequality along with rapid urbanization with

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criticality related to environmental sustainability as well as external financial imbalances.
Furthermore according to Brunnermeier, Sockin and Xiong (2017), the country has been
encountering certain demographic demands concerning an ageing population along with the
internal migration of labour. These factors result to an increase in the need of important policy
adjustments for a sustainable growth of China's economy.
China Financial Overview
Source: (Allen & Qian, 2014)
Chen and Zha (2018) have further revealed that China's 13th five year plan from 2016 to
2020 forcefully seeks these areas of challenges. Furthermore it accentuate the growth of services
and measures in order to attain environmental as well as social imbalances and establishing

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targets in order to successfully reduce population level and further to raise the efficiency level of
energy and other forms of resources and to expand the social protection (den Elzen et al., 2016).
Thus the annual growth target in the 13thfive year plan is around 7% further signifying the
rebalancing of the financial system along with a significant focus on the quality of growth, while
still preserving the objective of attaining a moderately prosperous society by the next 2 years
(Allen & Qian, 2014).
China's 13th Five Year Plan from 2016 To 2020
Source: (Brødsgaard, 2016)
Pestle Analysis
It has been noted by several reports that China is an economic and political influence and
over the years it has employed a number of initiatives of change and created spectacular

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development in various fields. Thus in terms of nominal GDP China attains a second largest
economic position in the world. The purpose of this article is to evaluate some of China’s
political economic social technological environment as well as legal factors which have been
benefited as well as impacting the country.
 Political- China is identified as a permanent member of the security council of the United
Nations and thus developed as the fourth largest nation in the world by land area.
However Long, Yang and Zhang (2015) has stated that with a consistent political setting,
cost effective labour along with enhanced infrastructure China attains the position as a
vital destination for FDI (Foreign Direct Investment). Such a position has led the country
to achieve a significant record of US$ 139 billion of FDI in 2016 resulting to become the
third largest FDI destination in the world (Wang et al., 2018).
 Economic factors- Chen and Zha (2018) have indicated substantial number of reforms
initiated in the late 1970’s which facilitated China to attain rapid economic expansion.
Furthermore, several global organizations prefer to manufacture their products in China
because of its availability of cheap labour. Though, economical labour is recognized as a
vital source of competitive advantage for the country, Brunnermeier, Sockin and Xiong
(2017) have argued that the rapid economic development has led to a rapid increase in
wages in China. Chen and Zha (2018) have revealed China’s standard wage level tripled
between 2005 and 2016 and currently is recorded to be higher in comparison to Mexico,
Argentina, and Brazil. The average corporate income tax rate is estimated to be around
25%, though the Chinese government has lessened the rate to around 17% for competent
businesses which execute its operations in sectors aided by government (Brødsgaard,
2016).

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 Social factors- Long, Yang and Zhang (2015) have mentioned that China has been
proficiently aiming to eradicate complete poverty or other forms of economic
deprivations by 2020. However, there can be identified certain social challenges which
the country has been encountering currently related to rise in ageing population. Thus,
studies of Brødsgaard (2016) have suggested China to raise their percentage of birth rate
and most importantly invite greater number of foreign workers and improve overseas
business relations.
 Technological Factors- Wan, Williamson and Yin (2015) have revealed that China, to
establish a vision of being global leader in the domain of science and technology aiming
to upgrade its mass entrepreneurship and innovation programme to amplify employment
level and further promote technological innovation and further motivate industrial
expansion. According to Anderson and Sutherland (2015), government of China since
2015 has initiated a range of incentives to raise the mass entrepreneurship and innovation
programme to an increased level along with a wider area of opportunity.
 Environmental Factors- Cai et al. (2016) have stated that high rate of industrial waste;
climate change along with biodiversity loss due to the country’s rapid economic growth
has affected its natural environment. Meanwhile, Long, Yang and Zhang (2015) have
highlighted certain initiatives which Chinese government has introduced to engage public
in environmental protection programmes.
 Legal Factors- Chen and Zha (2018) have identified several laws to regulate
employment practice and international business in China related to labour remuneration
and benefits, employment disputes along with other issues which are efficiently regulated
by the PRC Labour Law 1995, PRC Labour Contract Law 2007 along with other

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governmental regulations.
China's Mass Entrepreneurship And Innovation Programme
Source: (Gosens et al., 2018)
Strategic trade policies in China for International Trade
Shu, He and Cheng (2015) have noted that the incomprehensible trade trend by
predictable trade theory with the increasingly immediate need for government intervention that
requires an advanced theory of international trade. Fratzscher and Mehl (2014) have speculated
that the strategic trade policy based on the framework of monopolistic competition tends to
attract global interdependency of governmental policy as a vital variable into the framework of
strategic trade policy. Shu, He and Cheng (2015) at this stage have noted that the external
environment for China’s export has undergone significant changes whereby the buyer
fundamentally attains greater degree of market power. Furthermore, Cheung and Rime (2014)
have evaluated the influence of strategic trade policy present in the automobile sector of China
and revealed that the optimal tariff has the tendency to raise the national welfare in comparison
to a zero tariff. McKinnon and Schnabl (2014) further posited that although the non-tariff
limitation could decline gradually, the import quota along with import channel management

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would have safety effect on the automobile sector. In addition to this, Gosens et al. (2018) have
asserted that a R&D subsidy would be superior to an export subsidy in the automobile sector;
however the financial support received from government has been estimated to be lower in
comparison to the optimal subsidy. Furthermore, the moderate intervention of the government in
trade can be viewed in varied sectors of China and thus will successfully enhance the level of
national welfare. Fratzscher and Mehl, (2014) have noted that while the calibration method has
been widely approved in assessing the impact of strategic trade policy in China, it does not
necessarily signify real world implications in market. Reports of Wang et al. (2018) have
revealed that China has raised its R&D investment significantly and developed as the second-
highest R&D investment country in the world. In 2017, the rate of electronic information
products exportation has augmented by 32% further estimating for 45% of the foreign trade
along with the level of contribution of R&D to the export growth which was estimated to be 38%
(Brødsgaard, 2016).
Foreign currency and exchange influences on China’s Financial System
Comprehensive research of Gosens et al. (2018) has indicated that since development,
China financial system along with foreign trade has attained substantial trade surplus along with
foreign exchange reserves. The constant appreciation of the RMB (Renminbi) has created a
significant impact on China's economy. Nevertheless the currency approval has served
contributory role for the import and an adverse impact on exportation, yet the RMB appreciation
(Yuan currency exchange) on China’s financial system has been considered to be advantageous
for its overseas trade market (Wan, Williamson & Yin, 2015). Shu, He and Cheng (2015) have
revealed that with the inclined shift of sectors in order to promote developments in China, certain
adjustments of industrial structure along with the up gradation of its products are created.

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However the appreciation of the RMB tend to stimulate technological advancement and further
augment the added value of products export enterprises instead of encouraging low prices to
attain the market (McKinnon & Schnabl, 2014). It has been noted that the appreciation of the
RMB has destabilized the price advantage of domestic products in the large-scale market to
productively improve the product in the international market share in which the domestic
manufacturers must change the developmental method of trade and depend on selling cost
effective transfer to superior quality, advanced technology in order to sustain China’s significant
shift from trading influence to trade power (Fratzscher & Mehl, 2014). However, on the other
hand McKinnon and Schnabl (2014) are of the opinion that the approval of the RMB to raise
China's exportation commodity prices in foreign currencies critically destabilize China's export
price competition benefits also creates challenges for the nation to develop a successful overseas
trade alliance. Furthermore, appreciation of the RMB results to the increase of China’s export
product price resulting product backlog along with the decrease in new overseas investment
Cheung & Rime, 2014). In addition to this, Shu, He and Cheng (2015) have speculated that the
approval of the RMB will not only increase threats of the outbreak of economic crisis in China
but will further drive the country to face profit decline and pose adverse impact on the global
export markets competitive ability.

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RMB Appreciation on China’s Financial System
Source: (Gosens et al., 2018)
Conclusion
On a concluding note, China should take into consideration the significance of regional
trade agreements (RTA) that is an advanced and hidden form of strategic trade policy and further
implement this crucial policy in the process of import and export trade. However if China intends
to use the strategic policy, the method choice of the strategic trade policy along with the impact
of strategy trade policy would further show their reliance on the ‘spillover’ impact as well as the
on inclusion of worldwide R&D. Additionally as an emerging international market, China has a
time-consuming method to institute a well-organised market system by connecting several
industrial policies such as the strategic trade policy which would be decisive for the Chinese

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government. As RTA recently emerged as a chief strategic trade policy instrument, China must
efficiently consider the importance of Regional Trade Agreements regarding who is taking
strategic trade policy as it may be liable to generate the chain outcome. In addition to this, as
several trade associates have been efficiently fixed in a range of regional trade agreements the
country must emphasize on importance of strategic trade policy through a unilateral approach.

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