Political – Legal Environment of China
Based on Sepehri and Pordeli (2009 cited in U.S. Dept. of States, 2005), since the 1970’s, when China do the market reform that proposed by Deng Xiaoping, it had become clear that the prevailing economic policies had to change and that China had to adopt capitalistic tendencies in its goal towards economic prosperity. Sepehri and Pordeli (2009 cited in Forbes 2003) stated that, “as a consequence of it market reform; China’s economic growth rate in the past three decades has been among the highest recorded for any country during any period of world history…” This huge achievement of Chinese market reform has successfully become one of the enticements to attract more foreign direct investment venture in China. The other enticement for FDI venture in China is the tax refund system that China has. Based on Liu (2008), “Tax refund system is vital for a company, since it directly decides the final total costs of one product to an export market, thus decide the competitiveness of one commodity in the marketplace.” The tax refund system was elaborated in Economic Laws and Regulations of China (Liu, 2008 cited in Law Press, China, 2007, pp. 621-623). It has elaborated about the entities that eligible for tax refund and the divisions of the tax level Furthermore, “In August 2004, the Shanghai Commission of Foreign Trade and Economic Cooperation (COFTEC), gatekeeper of FDI in Shanghai, issued Examination and Approval of, and the Provision of Services to, Foreign-invested Projects in the Municipality Several Opinions, setting forth more transparent and streamlined approval procedures for the establishment of foreign-invested enterprises (FIEs), and cutting the approval time to 10 working days (as opposed to several months under national law). Some approvals can even be completed on-line within three working days. A simple registration system for foreign representative office establishment replaces the more cumbersome approval procedures found elsewhere in China.” (Dudek and Wang, 2005) Apart from the enticement that China has, there are some barriers that Multinational Companies (MNCs) will face on undergoing international business venture in China. The first and famous is the corruption. According to Backman (2008, p.103), “There is a lot of corruption in China. Transparency International rated China in terms of its perceived corruption at 70 out of 163 countries in 2006 (a rating of 1 implies little or no corruption).” With reference to Columbus (2003, pp. 133-4), “With a few officials abusing their power in public administration to get money, FDI has become a hotbed of corruption.” Corruption will causes the reducing of inward foreign direct investment due to higher sales expenses in the invested country. The other barriers in endeavouring the international business in China are operating right restriction and distribution right restriction. For the operating right restriction Columbus (2003, pp. 129-30) stated that, “Chinese officials pressure foreign investors to agree to contract provisions which stipulate technology transfers, exporting a certain share of production, and commitments on local content. China restricts the number and types of entities in China that are allowed to import products into China, and foreign companies are not permitted to directly engage in trade in China.” Whereas, the distribution right restriction is the restriction on most of foreign companies to sell their products directly to Chinese consumers.
Morisson (2009) found that “The global economic crisis began to impact China’s economy in late 2008. After growing by 13% in 2007, China’s real GDP slowed to 9.0% in 2008 and to 7.1% in the first half of 2009 (year-on-year basis).” The global economic crisis not only has a significant negative impact for China’s GDP, but also on the international business venture in China namely FDI. The vulnerability of China’s economic during the global...
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