Page 48 - DMGT547_INTERNATIONAL_MARKETING

Unit 2: World Trade Organization

Notes
While China steadily adopted the principles of free trade, it modified its practical aspects.
As a rule, China restricted imports and foreign companies found FDI to be a more realistic
way to serve the Chinese market. Moreover, while China let foreign investors propose
their preferred mode of entry, it applied stringent criteria through an extensive review
process. Specifically, the Chinese Ministry of Foreign Trade and Economic Cooperation
(MOFTEC) or provincial-level authorities with jurisdiction over certain types of
investments reviewed each foreign investment application to determine whether the
investment was in the best interest of China, i.e. whether it helped capital formation,
promoted exports, created jobs or transferred technology. Chinese officials negotiated
with each potential investor to try to improve its potential contributions. The Chinese
rejected many proposals that offered insufficient benefits. Foreign companies would endure
protracted negotiations (often spanning several years) with Chinese companies and
provincial authorities before presenting an application to MOFTEC. The growth of FDI in
China in the face of the laborious entry process testified to companies’ desire to operate in
China. Multinational Enterprises MNEs coveted China’s market for several reasons,
including:
Market potential: China has about 1.3 billion inhabitants. A Monsanto spokesperson
summed up this allure by stating, “You just can’t look at a market that size and not·
believe that eventually a lot of goods are going to be sold there. One aspirin tablet
a day to each of those guys, and that is a lot of aspirin.”
Market performance: China’s purchasing power has been increasing because of its
strong economic growth. This growth has translated into the consumer spending on
necessity and luxury products. Economists project that China will soon be the largest
economy in the world as measured by its purchasing power.

Infrastructure: China is in the process of spending more than $1 trillion on
infrastructure projects, including dams, power plants, subway systems, highways
and railroads.
Resources: China has an immense pool of inexpensive and productive labour as
well as rich supplies of petroleum and minerals.

Strategic positioning: Many companies see investment in China as a crucial part of
a global strategy, particularly given its status as the world’s final big growth market.
Explained one analyst, “If you want to survive, you have to be global, and China is
a part of the global economy.”
Over time, the Chinese government has encouraged foreign investment—albeit only in
certain sectors of the economy and only subject to evolving constraints. Early on, the
Chinese government believed that the superior competitiveness of foreign investors would
crush its fledgling domestic firms. Therefore, since the early 1980s, China has provided
special economic zones (SEZs) that offered foreign investors preferable tax, tariff, and
investment treatment as long as they exported all of their output. These incentives were
necessary because the uncertainty of China’s political environment made foreign companies
wary about investing there.
Foreign companies could also establish joint ventures with Chinese companies to sell to
the domestic market. However, the government approved these proposals only if they
served a national priority for which China had to seek outside help. Chinese market-
serving investments were made to improve an existing Chinese product or industry
rather than to launch production of a new product in China. For example, China approved
of a number of joint ventures in the petroleum industry because it considered future oil
sales a high priority for earning foreign exchange.
Contd...

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