Is China Attractive for Multinationals

PESTEL Analysis for Foreign Multinationals Doing Business in China
China represents a unique market for foreign multinationals in the 21st century. President Xi Jinping has launched a number of initiatives that look to make China a dominant player on the world stage—such as the One Belt, One Road initiative (Wilson, 2016) and the initiative to trade oil in gold-backed yuan (Jegarajah, 2017). However, China’s initiatives have been backed by an expansion of credit that could threaten to destabilize the nation in the coming years. 2025 represents a pivotal point marking the end of the first quarter of the 21st century. This PESTEL analysis will therefore identify key trends relevant to foreign multinationals doing business in the market and assessing future attractiveness for China.
There are 6 areas of environmental influences that are at work in the macro-perspective PESTEL framework. These areas consist of political, economic, social, technological, environmental and legal factors. The first letters of each of these areas forms to make up the acronym PESTEL. Each element of the PESTEL acts as an interlinking and impactful factor on the others, so that none of them are wholly exclusive independent from the other but rather all are integrated to some extent and work together to provide a total sense of the whole. For example, the political realm will influence and impact the economic realm and vice-versa and the same relationship can be applied to all elements of PESTEL.
P(olitical): The political climate in China is dominated by President Xi Jinping who has led the country into a new era of expansion with a goal of achieving a multi-polar world where partner-nations around the world work together to ensure economic stability for the future. Internally, Xi Jinping is also overseeing reform of the country’s rule of law. Following the disastrous Cultural Revolution of the nation’s last major leader Mao Tse Tung, authoritarianism and tyranny were the hallmarks of China’s domestic policy. That changed in 1982, when the People’s Congress created a new constitution that brought to an end the tyranny expressed by Mao. Since then, judicial reform and constitutional reform have been staples in Chinese politics. China has shifted its attention to focusing more on human rights as well as on enforcing laws regarding copyrights and intellectual property rights. China’s political expressions under Xi Jinping are designed to appeal to a universal and practical mindset so that China can more easily work together with its neighbors, foreign multinationals seeking to do honest business in and with China, and other political leaders looking to effect a more stable world. China is positioning itself to be pro-business especially with those companies that are not hostile to China’s vision of itself as a world leader. By 2025, China’s politics should be leading the development of a global network of allied nations collaborating on developing a fully-integrated web of trade, support, and political partnership. Foreign multinationals interested in doing business with China should recognize that becoming a political partner of China is the first step.
E(conomic): China has revamped its economy, moving away from the Communist ideology under Mao towards a more pro-Capitalist ideology under Xi Jinping. While the country still politically identifies as Communist, its economic actions appear to be more and more pro-capitalist. China is much more of a market-oriented nation today thanks to economic reforms of the past few decades. These reforms are expected to carry over into the coming years as well as President Xi’s political stability affords market players more confidence in the system.
Some drawbacks do exist, however—such as the impact of China’s enormous credit expansion in recent years. China’s growth over recent years (a 2009 economy of nearly $5 trillion) was largely fueled by massive debt increases. Its “ghost cities”—entire urban settings built during this period of economic exuberance but never populated and today sitting silently like abandoned, empty modern-day ghost towns—tell a startling story about the underbelly of China’s economy. Its shadow banking sector has been able to keep the nation’s economy from crashing severely, and as Richter (2017) notes, so long as China’s leaders are able to avert a crisis, its credit situation should improve, which means that investment by foreign multinationals may be still have plenty of upside. Keeping a watch on the current credit situation in China and how the country handles it going forward should be a top concern for multinationals looking to identify key economic trends in China.
S(ocial): China has a population of over 1.3 billion people, which makes it a very attractive market for foreign multinationals. Its growth rate is expected to continue, and by 2025 the population is expected to reach 1.4 billion people. This population is substantial and can be used to populate many a workforce. Chinese consumers are also becoming more open to Western products and services, albeit with an Asian-orientation. The upward trend in population growth means that multinationals looking to expand their businesses into the China should be able to do so and to hire Chinese workers for their production lines at minimal cost since competition for work is so stiff.
The employment trend should also be noted, however. According to Chinese statistics, unemployment is at 4.3%. This figure indicates that there is room for new jobs to come into the country and a multinational that is able to work confidently on the political level with China should be able to benefit at the social level. China is also interested in addressing social responsibility concerns, such as pollution—and multinationals with corporate social responsibility programs would be able to benefit from this trend in China by offering a place of employment that is environment-friendly and responsive to the needs of the local Chinese societies.
T(echnological): China is advanced in terms of computer technology, information technology, and biotechnology. Chinese innovation is at the forefront of the world in terms of technology in many respects. Its trans-Pacific network is a testament of the influence that China’s focus and emphasis on technology has achieved. China has invested in a space program, has invested in its military, has invested in oil technology, and has invested in digital security. The Science and Technology Agreement signed between the West and China is one example of how China is willing to cooperate with its partners on advances in technology, how to use technology, share it, and extend it in the coming years. With China focused on developing renewable energy, foreign multinationals looking to take advantage of this interest in preserving natural resources and creating a safer environment will find a greater welcome in China than corporations that show no interest in addressing local concerns of this nature. Technology, society, politics and economics are intimately bound together in the 21st century and China, showing itself to be a 21st century leader recognizes this fact and embraces it. China’s “Spart Plan,” begun in the 1980s, has resulted in more than 50,000 information technology projects seeing development across the Chinese countryside, integrating the rural communities with the urban ones. Billions have been invested in the “Spark Plan” and high-tech development has been a crucial platform in the Chinese renaissance that has occurred in recent decades.
E(nvironmental): Environmental issues continue to plague the country and its recent industrial rise has resulted in a great deal of pollution. China has also depleted its natural resources during its expansion. Current estimates put China among the world’s top producers of carbon dioxide, which is considered a factor in the onset of global warming. Climate issues such as global warming are receiving international attention from nations around the world. The Paris Accord is one example of how important environmental protection is to the leading countries and China is currently one of the worst offenders. Seven of the ten most polluted cities in the world are located in China and hundreds of Chinese cities suffer from moderate-to-severe pollution levels. Water pollution is a major problem in China, as most of the country’s rivers suffer from pollutants. Clean water is not easily obtainable for everyday life and this should be a concern for any foreign multinational, as water is an essential necessity and any business that looks to produce in China will have to address the issue of water safety, for consumption as well as for how it deals with its own contaminants.
Because clean and safe water is so scarce in China, water conservation is important. China is currently attempting to address the issue by diverting water from the Yangtze River to its northern cities where water is desperately needed. Cities like Tianjin and Beijing are two examples of urban areas that stand to benefit from this diversion plan—but the water pollution problem will not be solved in this manner. Pollution and clean-up costs are already measured at upwards of 10% of China’s GDP every year. By 2025, that percentage could be another 5% higher. The longer it takes for China to get its environmental issues under control, the worse it will be for the overall economy, and that could play a large part in how business and politics mingle in the coming years.
China has made an effort to address these issues: its role in the Asia Pacific Partnership on Clean Development helped to bridge the gap between producers and government agencies looking to implement more environmental-friendly policies. The Beijing Olympics showed what China is able to do when it invests substantially in clean-up—however, investment is costly, and foreign multinationals may be able to leverage some form of investment in clean-up as part of their corporate social responsibility in the country.
L(egal): China has been more disposed towards foreign investment for a number of decades now and from a legal standpoint there are several laws that support this disposal. The Law on Chinese-Foreign Equity Joint Ventures, Contracts and Wholly Foreign-Owned Enterprises provide guidance for the country should deal with foreign multinationals. These laws are helpful for forming of businesses and plants in the country and serve to provide clear rules and regulations on how to companies should proceed to the founding of their facilities.
Another important legal trend is Chinese tax law. Currently China offers very attractive tax incentives to companies looking to produce in China. Tax breaks are a routine incentive for the promotion of foreign investment in China. Compared to other nations that are relatively unfriendly to business in taxation terms, China can be viewed as a boon for big business. For foreign multinationals, China is attractive from a taxation perspective and should continue to be so for the foreseeable future, as tax laws on one of China’s most attractive assets for businesses.
References
Jegarajah, S. (2017). China has grand ambitions to dethrone the dollar. It may make a
powerful move this year. Retrieved from https://www.cnbc.com/2017/10/24/petro-yuan-china-wants-to-dethrone-dollar-rmb-denominated-oil-contracts.html
Richter, W. (2017). China is facing a mounting debt problem. Retrieved from
http://www.businessinsider.com/china-facing-mounting-debt-credit-problem-2017-8
Wilson, W. (2016). China’s huge One Belt, One Road Initiative is sweeping Central
Asia. Retrieved from http://www.heritage.org/asia/commentary/chinas-huge-one-belt-one-road-initiative-sweeping-central-asia