Multinational businessWeek 9 lecture

Multinational business in China

China-People’s Republic of China

Total Population - As on September 2013 - 1,362,391,579(1.3 Billion)

Total Workforce – 820 million (Approx.)GDP - 8,226,885 Millions $GDP Per capita - 6,091 $9.7 % growth in GDP

History

Communist take over in 1949Cultural Revolution in 1965-70Mao dies in 1975Deng became leader in 1976In 1978 reform program announced-

‘Two Systems, One Country’

‘Two Systems, One country!’

It is a constitutional principle formulated by Deng Xiaoping, the Paramount Leader of the People's Republic of China (PRC), for the reunification of China during the early 1980s.

He suggested that there would be only one China, but distinct Chinese regions such as Hong Kong, Macau, and Taiwan

These countries could retain their own capitalist economic and political systems, while the rest of China uses the socialist system.

Under the principle, each of the three regions could continue to have its own political system, legal, economic and financial affairs, including external relations with foreign countries.

Taiwan could continue to maintain its own military force.

‘Two Systems, One country!’

Program encouraged,The formation of rural enterprises and private businessesliberalized foreign trade and investmentRelaxed state control over some prices and invested in industrial production and the education of its workforce

By nearly all accounts, the strategy has worked spectacularly.

Chinese Growth in last two decades

China has tremendous growth from 1978 with the reform program ‘Two Systems, One Country’

Per Capita income has increased eight times from 1980Pre-1978 China had seen annual growth of 6 percent a year Post-1978 China saw average real growth of more than 9 percent a year with

fewer and less painful ups and downs. In several peak years, the economy grew more than 13 percent.

Few analysts are even predicting that the Chinese economy will be larger than that of the United States in about 20 years.

Why China has done so well?

• An IMF research arrived at a surprising conclusion1. Capital accumulation:

1. growth in the country’s stock of capital assets such as new factories, manufacturing machinery and communication system

2. Increase in productivity of Chinese workers1. During 1979-94 productivity gains accounted for more than 42 percent of

China's growth and 2. by the early 1990s had overtaken capital as the most significant source of

that growth.

Why China has done so well?

This marks a departure from the traditional view of development in which capital investment takes the lead. This jump in productivity

originated in the economic reforms begun in 1978.

How Productivity inject the growth?

Chinese productivity increased at an annual rate of 3.9 percent during 1979-94, compared with 1.1 percent during 1953-78.

By the early 1990s, productivity's share of output growth exceeded 50 percent, while the share

contributed by capital formation fell below 33 percent. Analysis of the pre- and post-1978 periods indicates that the market-oriented

reforms undertaken by China were critical in creating this productivity boom.Prior to the 1978 reforms,

nearly four in five Chinese worked in agriculture; by 1994, only one in two did.

Why the productivity boom?

Exactly how did China’s economic reforms work to boost productivity, especially in an economy skill burdened by extensive government

control?

How Productivity inject the growth?

Decollectivization and higher prices for agricultural products also led to more productive (family) farms and more efficient use of labor.

Together these forces induced many workers to move out of agriculture.

The resulting rapid growth of village enterprises has drawn tens of millions of people from traditional agriculture into higher-value-added manufacturing.

How Productivity inject the growth?

• Post 1978- greater autonomy to enterprise manager• free to set their own production goals, sell some products in the private

market at competitive prices, • grant bonuses to good workers and fire bad ones, and • retain some portion of the firm's earnings for future investment

• Greater room for private ownership of production• Privately held business created jobs• Developed much wanted customer products• Earned hard currency through foreign trade• Paid state taxes.

Foreign Investment and Growth

By welcoming foreign investment, China's open-door policy has added power to the economic transformation.

Cumulative foreign direct investment, negligible before 1978, reached nearly US$100 billion in 1994; annual inflows increased from less than 1 percent of total fixed investment in

1979 to 18 percent in 1994. This foreign money has built factories, created jobs, linked China to

international markets, and led to important transfers of technology.

Innovation and growth

Innovation system in China has undergone considerable change and its innovation performance has improved noticeably.

Gross expenditure on R&D (GERD) increased consistently from 0.73% in 1991 to 1.5% of GDP in 2008, the equivalent of around 13% of total OECD GERD.

China has invested extensively in human resources in science and technology (HRST) in recent years.

The number of first-stage university graduates has almost tripled since 2000.China’s innovation policy, put forward in the Medium- and Long-Term Plan of Science

and Technology Strategic Development: 2006-2020, aims to achieve an innovation-oriented society by 2020.

Some recent policy actions, such as increasing export rebates, reducing property transaction taxes and interest rates, will help stimulate the domestic market.

Rural and Industrial Reforms

The success of the rural reform from the late 1970s to the early 1980s resulted in a temporary surge in Total Factor Productivity (TFP) in agriculture.

Second, industrial reforms provided individual firms, managers, and workers with greater incentives to improve efficiency, and especially township-village enterprises (TVEs) achieved higher efficiency levels and TFP growth than state firms.

Labor force

Rising labor force participation rates, improvements in educational attainment, the transfer of labor out of agriculture, and the narrowing

the technology gaps between China and developed economies also contributed to the TFP growth.

Efficiency and Growth

The restructuring of China’s economy and efficiency gains have made it the world’s second largest economy after the United States.

Average annual GDP growth was 13% between 2000 and 2008, but slowed to 7.8% in 2009.

GDP per capita was around 14% relative to the United States in 2009 and its urban unemployment rate was around 4.3%.

Capital Accumulation

After a recession in 1989-90, China’s leadership signaled its long-term commitment to market-based reforms, and investment accelerated reaching 43.5% of GDP in 1993.

Gross capital formation rose from 36% in 2000 to 43% in 2003 — about 5 percentage points above China’s 1978-2003 average (Shane and Gale, 2004). All this investment meant that GDP grew by over 9% per year from 1995.

Capital Accumulation

Two aspects of central government policy since the mid-to-late 1990s supported this extraordinary investment growth.

First, key input prices such as land, electricity, and other utilities, including water, were kept low through subsidies and controlled pricing.

Second, cheap finance was channeled into industry, particularly to SMEs and other large companies, often effectively at zero cost.

Allocation and Utilization of Capital

About two-thirds of China’s investment has been in construction of infrastructure such as roads, dams, public buildings, and other facilities.

Most of the remainder is in machinery and equipment (Shane and Gale, 2004), mostly manufacturing;

agriculture, which produces 15% of GDP, is getting only 2% of investment.

Conclusion

China has had one unorthodox reform after another with short-run gains in productivity.Structural reforms with longer-run effects have been delayed in the process. China’s growth-strategy since the mid-1990s has emphasized capital formation at the expense of efficient allocation and utilization of production factors, which has led to a slowdown in TFP growth.