There is much divergence in assessments of foreign investment in China’s economy (at the beginning of the 21st century – 770.740 billion dollars). There is more precise information about direct investment: its amount exceeded 181 billion dollars over 17 years of reforms. Considering that in 1997-2001 the foreign direct investment accounted for 40-45 billion dollars, by early 2002 their total value was approximately 400 billion dollars. Over seven months of 2002, the foreign direct investment inflow in China’s economy grew by 22% compared to the same period in 2001. Since 2002, the PRC became one of the world’s leaders in attracting investment the total amount of which rose to 52 billion dollars by 2003 (Kivela & Leung, 2005).
Foreign businesses are attracted to China by the opportunity to penetrate into the vast market of the country, develop natural resources, and use local low-cost labor power.
The advantages of the economic and political systems. The events of recent years have shown that the Chinese government continues a policy of deep reforms, encouraging private property, privatizing large state-owned enterprises, while pursuing an active social policy. Amendments to the Constitution gave private companies all the rights in spheres of investment, taxation, land use and participation in foreign trade (Tian, 2007). Obviously, in these circumstances the authorities’ policy to strengthen cooperation with other countries will be improved.
The government assists in creation of the most convenient infrastructure for registering companies and doing business in China. The control and restrictions on business are minimal.
Taxes. An important advantage is the existence of special industrial zones providing various benefits for business development including tax breaks for investors. By the decision of the State Council on December 26, 2007 in the fifth special economic zones (cities of Shenzhen, Zhuhai, Xiamen, Shanto, and Hainan island) and the New Area of Pudong (Shanghai) the special privileges are set for newly created high-tech companies, that is, during the first two years the tax rate is 0%, and in subsequent years it makes 12.5%, while the total income tax rate is 25% (Kim, Wright & Su, 2010).
In Hong Kong, for example, the corporate tax on profits earned in Hong Kong is 16.5%. Profits earned outside Hong Kong are not taxed. There are no capital gains taxes, withholding tax on dividends to be distributed among the shareholders, the sales tax and VAT. However, the taxes on property and stamp duty are collected (Kivela & Leung, 2005).
Salary. If you manufacture goods, in China you can do it with less cost and expense than in most developing countries. Although there is a growth of salaries observed over the last few years, it is still possible to use relatively skilled labor power for about 200-300 dollars per month (Kim, Wright & Su, 2010).
Subsidies. With millions of unemployed in the country the Chinese government and provincial governments are often willing to subsidize the market of foreign companies that want to set up joint ventures in partnership. It is especially true in areas that are specifically designed for economic development, such as industrial areas of Chongqing and Chengdu, where more than 40 thousand square kilometers have been allocated for the massive industrialization (Tian, 2007).
Qualification. The Chinese have not spent the last thirty years in vain. The country has invested heavily in education, and has trained a lot of qualified engineers and scientists. This means that the wages of even highly skilled workers are still relatively low due to the number of graduates trained annually (Kivela & Leung, 2005).
Experience. China offers a wealth of experience in manufacturing, which can be rarely found in other developing countries. The country already produces almost everything that can be produced, except for a few industries (Li, 2001).
Thus, in recent years, China has presented itself as an attractive country for foreign investors, but its attractiveness is not in the presence of a special kind of Chinese socialist economy, but namely in the fact that investments in China bring good returns for investors, even super-returns. However, statistic data show that investments in China over several last years were not as huge as they should be. There are many reasons for that, but one of them is the absence of knowledge about China, including the rules of games in China (Tian, 2007). Businessmen are still poorly orienting in the current Chinese legislation, have difficulties in establishing contacts and finding reliable partners. Look at the numbers: 60% of investors are at risk of losing everything in case they do not have experience of cooperation with Chinese companies. Over 80% of newcomers consistently overpay for products and services at least twice, and 99% of inexperienced entrepreneurs leading business in China start working under contracts that guarantee almost nothing to them (Kivela & Leung, 2005).
Here are some most widely spread problem one may face deciding to work in China (Tian, 2007):
1. On their own behalf, Chinese companies may be selling products they do not produce;
2. Chinese companies can make a contract signed by a usual employee of the company, not the director.
3. Being aware of the poor quality of their goods or services, Chinese companies intentionally make mistakes in the documents to avoid liability.
4. The quality of the goods or services may not correspond to reference samples.
5. Chinese companies may be negligent towards the preparation of documents: the number of possible defective articles may be lowered; the quality of the applied raw materials may be hushed; incorrect product specifications may be stated, etc.
Thus, the main barrier for foreign companies is the local mindset. In the West, entrepreneurs sit down at the negotiating table with a stranger and get immediately ready to discuss business matters. In China, personal relationships should first be established, which later transform into reliable business relations (Tian, 2007).
In addition, China is a large and heterogeneous country. Thus, in the coastal high-tech areas, the cost of production has increased dramatically for the last ten years. Now, it is cost-effective to order large quantities only. In all other cases, it is easier and cheaper to find contractors somewhere else.
There are also the problems of improving people’s living standards and promotion of education. Achievements in improving the people’s material situation are huge, but the country still has a high rate of poverty, especially in rural areas. China has a high unemployment rate, but there is still lack for skilled specialists (Li, 2001). In addition, in terms of restructuring of the company, for example, related to the dismissal of staff, the Chinese subsidiary will be accountable not only to the central office, but the local administration as well. In China, such questions always have to be settled very carefully: one cannot just dismiss fifty workers justifying it by considerations of economic efficiency. Job is considered an important part of life throughout the world, but in China it is of especially great importance.
The fight against moral decay and using power for selfish purposes is regarded in China as a matter of life or death for the Party and the regime. Despite the harsh measures of the authorities, corruption is rampant. In just six years over 120 thousand officials were excluded from the Party for embezzlement, bribery and other forms of corruption (e.g., nepotism); hundreds of thousands of cases are being investigated (Kim, Wright & Su, 2010).
In general, the low cost is considered to be the main advantage of the Chinese industry. At the same time, the cost of resources and manpower is constantly growing, and now some Western companies are questioning the benefits promised by the location of production in China. Differences in social communications, business principles and organizational structure are significant barriers to business expansion in China and establishing relationships with local partners (Li, 2001). On the other hand, despite the fact that the Chinese people will never look at the Western man as an equal, the desire of the latter to join the local culture and etiquette will be appreciated (Tian, 2007). Thus, attracting a qualified Chinese interpreter and a business consultant living in China to the verification process, one will be able to avoid most of similar problems.