Foreign Direct Investment in China

YR 12 Economics Assessment Task 1

Extended response A

As a Foreign Direct Investment (FDI) consultant, a feasibility report has been undertaken to provide strategic information of the possibility of FDI in China. The South East Queensland (SEQ) Sheet Metal Company have been contemplating FDI in China, and have employed the FDI consultancy to analyse FDI as an economic strategy in general, and the opportunities available in china. This will provide valuable information and advice to company directors along with suggestion on how to overcome the various pitfalls associated with FDI. (Stimulus Booklet)

FDI is the investment by foreign companies in to the international market, which actively involves them in managing local subsidiary companies or the management of their own. The trade between two countries are large contributing factors towards investment and further affect the success and profitability of the business throughout the entire term of establishment. Therefore the success of FDI in any country is directly in fluctuation to the countries trade agreement and all-round economic health. FDI for any business is a feasible and profitable consideration, which could initiate the development of new technologies and new international relations that will strengthen economic ties with existing trade partners. (Stimulus Booklet)

The history of China’s Economic prosperity has varied over time but during the last 40 years, drastic changes have occurred. During modern times the economic growth and decline will directly affect firms FDI in China. In the past China has suffered huge losses in resources and labour due to their own inefficiencies and political barriers, which set back progress and continued to ignore obvious signs of a falling Soviet Union’s diminishing economic foothold. (Stimulus booklet) These foreseeable implications were ignored and during and between 1958 to 1962 China suffered a great famine and massive economic decline due to the Great Leap Forward suffering losses of up to 9 million people. (D.A.King, 1998) Since the death Mao Zedong the Peoples Republic of China (PRC) have initiated strategies to improve Chinas economy by introducing features of the market system that most western countries use, under the leadership of Chairman Deng the successor of Mao Zedong. After the death of Chairman Deng new reforms have continually been added to further encourage the Chinese economy into new sectors appealing to foreign investors, capable of inducing large injections into the local economy. The trends and characteristics of the Chinese economy over the last 2 decades indicate huge growth and continual growth and expansion of the Chinese market. (Economic Systems)

Main considerations for FDI in China are due to recent trends and existing trade agreements between Australia and China involving vast amounts of base metal commodities, which are increasingly being exported to China. Following recent data, China’s booming economy has fuelled new demand highs and massive increase in price of non-agricultural commodities, which in turn are required to satisfy the demand for more steel to build infrastructure, industry and high wealth commercial offices that are being erected all over China’s east coast hot spots. A potential and lucrative market entry strategy, worth considering is offering SEQ Sheet Metal Company a complementary manufacturing plant to add value to raw materials shipped to Chinese plants.

(The Australian 12/05/04)

The analysis of the internal strengths and weaknesses and external opportunities and threats (SWOT), aspects of a firm’s strategic planning, future growth and efficient development of FDI, is important information needed to make justifiable decisions based in the requirements set by the SEQ sheet metal. (Exporting to the future) The obvious strengths that could be taken into consideration are as follows:

o Highly qualified experts trained in Australia
o Motivated investors
The weaknesses that may be encountered are as follows:

o Lack of cultural knowledge-may cause weak bonds between employees and can lead to employees being offended
o Language barrier- communication barriers, cause inefficiencies through misunderstandings
o Poor anticipation of local labour inexperience- untrained personnel will cost time and money to train
o Poor co-operation- leadership, friendship and team bonds may not be formed
o Inefficient recourses to set up efficient production
The external opportunities and potential of FDI in China are as follows:

o Vast supply of resources- large import of commodities
o Cheap labour
o Importing base materials from home
o Larger market to effectively meet