Individual Assignment Report 1. Executive summary China has long been a destination for foreign trade investment.

The inflow of foreign direct investment (FDI) in China from 1995 to 2006 increased dramatically from 41.8 to 69.5 billion dollars (World Investment Report, 2007). This review aims at critically analysing the political economy (political, economic and legal systems) which positively and negatively affects FDI in China. 2. Table of content Page 1. Executive summary 2. Table of content 3. Introduction 4.Political Economy Analysis Political Economy Analysis Table 4.1. Political system 4.2. Economic system 4.3. Legal system 5. Recommendation 6. Conclusion 7. Reference list 1 1 1 2 2 2 3 4 4 4 5

3. Introduction - Background of the country: China is a leading economy in Asia with GDP growth of under 8% in 2012 and a population of more than 1.3 billion people (Central Intelligence Agency, 2013). The market-oriented reforms and opening-up policy which were launched in 1978 have resulted in high economic growth and a comprehensive economic transformation. Over the past decades, real GDP in China has averaged 9.5 %. The reforms have encouraged foreign investment, reduced poverty and especially, heighten Chinas status in global stage. - Reasons for investing in that country: FDI in China fell by almost 4% in 2012 (Qingfen & Jiabao, 2013). Specifically, the Ministry of Commerce announced that FDI fell in 2012 by 3.7% from a year earlier to $111.7 billion due to the effects of the global

slowdown and the Europes debt crisis (Wang & Edwards, 2013). Despite the fact, it is still believed that China is still worth investing in for some main reasons including its economic and political stability, its good infrastructure, its potential market size, its amber human resources, its preferential policies and its openness to regional and international trade. - Purpose and outline of report: This review is hoped to present a clear political economy analysis of China in terms of its overall attractiveness for FDI. The writing has three major sections namely political, economic and legal systems. It is expected that some outstanding benefits, risks and costs of each system would be further discussed.

4. Political Economy Analysis Political Economy Analysis Table Country: China Political Economy Analysis Political system Economic system - good infrastructure - initial economic mismanagement lack - potential market size - financial system is confusing and supporting - amber human resources + low labour cost favours state-owned entities businesses - preferential policies Openness to regional of - political stability - shared cultural background - corruption Benefits Risks Costs

Legal system

and - protectionist policies that favour - Inconsistently Chinese companies at the expense of protected

international trade Regulatory (governments policies toward FDI)

environment foreign ones

intellectual rights

4.1.

Political System

The most beneficial side of Chinas political system is its stability. Political stability could represent predictability and it provides investors a better foresight into the future. China has been successfully led under one party the Communist Party - for some decades. In spite the risk that the shared cultural background with Hong Kong, Singapore and Taiwan Province of

China may prevent foreign investors from entering China, the country has hardly experienced political unrest in the macro level. However, investors in this country have also been suffering from corruption. China ranked 80/174 and earned a score of 39 in Corruption Perceptions Index 2012 (Transparency International, 2012). The low corruption perceptions index implies a high cost placed on foreign funded companies in operating their businesses in China. 4.2. Economic System

There are many benefits arising from the economic system. The first attractiveness is Chinas good infrastructure. Empirical studies have confirmed that the provinces with better infrastructure systems are more likely to attract FDI (Cheng & Kwan, 2000). The second benefit is Chinas potential market size and the prospects for growth that result from this size. China has a huge market of more than 1.3 billion people and the middle class has dramatically grown from the Reform in 1978. Furthermore, China has affluent human resources including both highly skilled labour force and basic labour force. Such human resource reserve can meet all demands of FDI. Although the empirical evidence is to some extent mixed (Chen, 1996; Cheng & Kwan, 2000), abundant supply of cheap labour does play an important role in attracting FDI to China and in the distribution of FDI throughout regions. Another benefit in the economic system is Chinas preferential policies to attract FDI including tax concessions and privileges for foreign investors. Here it is also a lack without mentioning WTO Agreement on FDI. From the time China joined WTO (December 2001), it has made substantial commitments in trade and investment liberalization. There are also risks involved in the economic system. One example was the economic mismanagement which occurred in the initial stages of the Reforms. At that time, Chinese authorities believed that FDI might negatively affect the state control. As such, initial law and regulations towards FDI were too restrictive and many bureaucratic and legal problems emerged. Another risk is the fact that the financial system is confusing and favours stateowned enterprises (Bremmer & Zakaria, 2006), which makes it very difficult for foreign investors, especially the newly-arrived ones. Chinas lack of supporting business like logistics and distribution may cost investors since many multinationals rely on strong distribution channels. In a Chinese distribution system, the superior features of a foreign funded companys product might never be explained to

potential customers. Lack of competent local suppliers may dramatically affect a foreign companys competitiveness. (Williamson & Zeng, 2004) 4.3. Legal system

One prominent benefit of the legal system is its openness to regional and international trade.
Market

openness serves an important role in attracting FDI. Additionally, regulatory

environment acts as a driving force in getting more FDI to China. Thus, it can be argued that preferential legal policies have helped China gained a lot from the globalisation process by allowing reforms to happen smoothly and by attracting FDI which contributes to output growth. Nevertheless, the legal system now in China is still far from ideal for FDI as there is always a threat of protectionist policies that give local companies more advantages over the foreign ones. In addition, the legal system in China has been considered as ambiguous, and legal disputes are often handled through personal contacts rather than formal contracts as is the case in many Western countries such as Europe or America. This increases the likelihood that a trading partner will opportunistically and purposefully break a business contract for its sake. Apart from those legal risks, foreign investors in China are painstakingly challenged by the inconsistently protected property rights. It is reported that protecting property rights is still on the rough way to be fully implemented and that property right protection is lacking in China (Li, 2004). This serious lack in far trade may result in negative outcome: foreign investors deterred from China and will relocate their investments to the countries of which property rights are largely known as comprehensive and efficient. 5. Recommendation The analysis review has brought the review to its final recommendation: China is still worth investing taking into consideration that the strengths could make up for and outweigh the weaknesses in the political, economic and legal system. However, cost and risk analysis should also be foreign investors priority whenever they decide to direct their capital to China. 6. Conclusion Though currently experiencing a fall in FDI, China is still expected to be a good destination for FDI due to its overall attractiveness in which most important benefits are market size, human resources and political and economic stability. For a developing economy like China,

FDI is a key factor in placing the country in a competitive spot in the global market place. However, in order to maintain its attractiveness, certain strategies must be in the authorities careful consideration. 7. Reference list
Bremmer, I., & Zakaria, F. (2006). Hedging Political Risks in China. Havard Business Review, November 2006, 22-25. Central Intelligence Agency. (2013), from https://www.cia.gov/library/publications/the-worldfactbook/geos/ch.html Chen, C. (1996). Regional determinants of foreign investment in Mainland China. Journal of Economic Studies, 23(1996), 18-30. Cheng, L. K., & Kwan, Y. K. (2000). What are the determinants of the location of foreign direct investment? The Chinese experience. Journal of International Economics, 51(2), 379-400. Li, S. (2004). Why is Property Right Protection Lacking in China. California Management Review, 46(3), 100-115. Qingfen, D., & Jiabao, L. (2013). FDI sees 1st decrease in 3 years amid slowdown. China Daily. Retrieved from http://www.chinadaily.com.cn/china/2013-01/17/content_16128881.htm Transparency International. (2012). Corruption Perceptions Index 2012, from http://cpi.transparency.org/cpi2012/results/ Wang, A., & Edwards, N. (2013). China Jan FDI falls, reflects global firms' caution, cheaper rivals. Reuters. Retrieved from http://www.reuters.com/article/2013/02/20/china-economy-fdiidUSL4N0BK0XO20130220 Williamson, P., & Zeng, M. (2004). Strategies for Competing in a Changed China. MITSloan Management Review, 45(4), 85-91. World Investment Report. (2007).