China - a General Analysis

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CHINA AND INTERNATIONAL BUSINESS

by John Child

Oxford University Press

Contents
Introduction3
1. China’s Growing Role in International Business4
1.1 Trade5
1.2 Inward Foreign Direct Investment (FDI)6
1.3 Motives and Entry Mode8
1.4 Outward FDI11
2. China As An Environment For International Business13
2.1 Market Access14
2.2 Growing Competition16
2.3 Institutional Environment18
2.4 Forms of Business20
3 Implications For International Business Analysis21
3.1 The Role of National Institutions21
3.2 A Formal Analysis of China's Environmental Complexity523
3.3 Strategies for Handling Environmental Complexity25
3.4 Internationalization of Chinese Firms27
3.4.1 The Latecomer Perspective27
3.4.2 Institutional Analysis and the Role of Government28
3.4.3 Entrepreneurs and Institutions29
3.4.4 The Liability of Foreignness30
3.4.5 Modes of Engagement between Chinese and International Firms30
NOTES33
REFERENCES34

Introduction
THIS article discusses China's growing role in international business. It begins by describing developments in the country's inward and outward foreign direct investment [FDI] and the forms adopted for such investment. China is both a host environment and active player in the international economy which has become both hugely significant, and which poses new challenges for international business analysis. We continue by considering the kind of environment that China presents for international business, one in which the state continues to be closely involved. In the last section of the chapter, we turn to the implications China has for international business analysis, concerning the role of national institutions, the strategies available to foreign investing firms for coping with environmental complexity, and issues posed by its patterns of outward FDI.

1. China’s Growing Role in International Business
China requires special consideration for a number of reasons. With 1.3 billion people, it is the world's most populous nation, the second largest economy when adjusting for purchasing power, and projected to become the largest before 2040 (Goldman Sachs 2003). The country's sheer scale and diversity make it an economic region in its own right. China's political economy is also quite distinctive. It is pursuing its own mode of transition from socialism through policies and institutional arrangements that are to a large extent sui generis.' This transition includes a progressive engagement with international business. China's scale and growing involvement with international business mean that it cannot be ignored, especially as the ideological and institutional differences between China and other major economic powers create numerous difficulties (Smith 2007). As an environment for foreign-investing firms, China presents an unusual degree of complexity and uncertainty that does not necessarily favour the strategies multinational enterprises (MNEs) pursue elsewhere. Many firms are disappointed with the returns they have secured from this investment and some have withdrawn. At the same time, Chinese firms investing abroad have sometimes run into problems including local political resistance. Moreover, China is becoming an increasingly powerful competitor in international trade, and there is a rising number of international trade disputes between China and Western countries (Hufbauer, Wong, and Sheth 2006). China's role in international business presents a challenge both for practice and theory.

1.1 Trade
Under China's programme of economic reform, launched in December 1978, the country has grown rapidly and progressively entered the world economy. It has frequently recorded double-digit annual economic growth-achieving this for five consecutive years to 2007-and by mid 2007 was accounting for around 10 per cent of the total growth of the world economy.' The size of China's economy overtook that of Germany in 2007 to become the...
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