The document discusses factors to consider for multinational companies investing in China. It outlines China's encouragement of foreign direct investment and the attributes of its market, currency, and trade environment. The essay also examines political, employment, cultural, and social implications for long-term investment projects in China. Key factors discussed include import/export restrictions, labor laws, currency value manipulation, hierarchy-based business culture, and differences between national and local regulations.

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Deveye Hademeon
American Intercontinental University
Unit 4 Individual Project
FIN630-1203A-05: Global Financial Management
Project Type: Unit 1 Individual Project
July 1, 2012

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Abstract
Global expansion has become a core business strategy for companies around the world in the
necessity to increase their operation fields and maximize their revenue. Over the last decade,
essentially between 2000 and 2010, the number of corporation that expanded their business
across their national borders is considerable. Although this business practice carries some risks
and disadvantages, it’s necessary to mention that the list of companies trying to go global or at
least operate internationally is so long. For that reason the concept of global expansion as a form
of business investment has become an object of study to promote its understanding and the
knowledge of the factors associated.

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Among factors that contribute to a particular country’s economic growth need to be
counted foreign investments. In fact countries are interested in making it easier through policies
and regulations arrangements for multinational companies to make investments in their
economies. Nevertheless, it is very important to acknowledge the fact that multinationals are also
interested in investing in foreign countries to growth their own revenues and market shares. Over
the last decade one of the countries that have interested American and Europeans firms for
foreign investment is China with its large market. In a brief description, the purpose of this essay
will consist in presenting the Chinese market with the attracting advantages it offers. That brief
description will be followed by the factors that need to be understood and be taken into
consideration when a firm is interested in starting long-term investment projects in China.
Among others, those factors that will be exposed count import/export restrictions, labor relations,
supplier financing, tax rules, depreciation schedules, currency properties and restrictions, and
sources of short-term and long-term debt.
It becomes evidence that no one can talk about the global economy without referring to
China. Actually known as the People’s Republic of China, that country is part of the East Asia,
covering over 9.5 million kilometers squares with a population of over 1.3 billion people. Being
the world’s most populous country, China serves as a large market, reason why it attracts many
multinational companies in term of business investment. After its adhesion to the World Trade
Organization in 2002, China opened a free trade area in the Asian market and became a “heaven”
of international investments. Nevertheless, it’s necessary to have some knowledge of the country
as a market as well as of the factors that govern it.
The first attribute of the Chinese market is the “disposition of China in encouraging
foreign direct investment (FDI).” FDI consists of capital investment made by a multinational

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company in another country, an investment that gives that company a measure of control over its
operations In the host country. According to Eun and Resnick (2009) that type of investment
“…involves the establishment of new production facilities in foreign countries, to include the
merger and the acquisitions of existing foreign businesses.” In fact, since its adhesion to the
World Trade Organization, “China has remained a primary recipient of the world’s destination of
FDI in recent years, where FDI accounts for 27% of the value added production, 4.1% of
national tax revenue, and 58% of foreign trade” (Fogel, 2010) for companies in different
countries throughout the world to include the United States, the European Union; even Asian
countries invest in China by outsourcing part of their business productions. The motive is that
China have developed a FDI management plan in 2006, instructing the Chinese Government to
gradually relax restrictions on foreign holding of domestic enterprises in the necessity to
motivate foreign investors in directing their capital towards high-tech industries, modern service
industries, high-end manufacturing, infrastructure development, and ecological or environmental
protection, and to set up production, assembly, and training institution within the territory.
The other attribute is the local currency and its exchange rate. The Chinese currency, the
Yuan has dominated trade transactions in China even in cross-border trades where that currency
is rivaling the U.S. dollar as Chinese officials are interested in seeing their currency play a bigger
role in cross-border investments. The Yuan is impacting foreign investment because it has been
manipulated and continues to be manipulated by the local officials to be held at a lower level in
the exchange market. In fact, after its appreciation of 21 percent against the U.S. dollar at the
beginning of the third quarter in 2008, the Yuan went flat as desired by the country’s authorities
in the necessity to encourage exports. A depreciated Yuan had and continues to have a big
impact on the world economy, reason why President Obama and his administration urges

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continually China to reconsider the value of its currency and to make every effort to have the
Yuan appreciated for as mentioned by the U.S. Treasury Secretary, “the appreciation of the Yuan
could be a win-win situation for the world’s economy.” (Fogel, 2010) Nevertheless, a
depreciated Yuan will advantage foreign companies investing in China when it comes to convert
their capital assets into their own currencies.
Trade also needs to be considered as a factor impacting foreign investment in China. The
exchange of goods and services in the Chinese market is made in form of import and export
through cross-border trades based on various trade agreements existing between the country and
its economic partners that include the U.S., the E.U., Japan, countries of East Asia, and countries
in Africa that become an open market for products manufactured in China.
Political implications need to be considered as well due to the fact that China has in place
policies and regulations that might lead to the naturalization of industries operating on its
territory. This situation forces many multinational companies to operate in the Chinese market
through mergers with local companies, fostering its business policies that can lead and in fact
had led in the past to the risks of confiscation, expropriation, currency inconvertibility and
contract repudiation. It’s necessary to consider also the constant battle between the central
government and the provincial and local governments over applicable laws, whether they need to
be observed or not, making it difficult for companies operating in China to know exactly what
the business rules are (Chang, 2009).
Employment in China is another picture to look at when expecting to invest in business in
that country. In 2008, the Chinese federal government had adopted a new labor to protect
employees from being abused by their employers. Before then, the employment law in China

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was liberal, giving companies the opportunity to abuse their employees, to discriminate against
them based on some social factors such as sex (situation that was preventing women workers to
be treated equally to their men coworkers). China’s tendency to “…shift toward capitalism and
to promote its economic growth had attracted the world attention toward labor laws and
regulations in that country, forcing the government to trig the new labor laws that are strictly
enforces in its business environment today.” (Villa da Costa, 2009) The new provision requires
that job offerings be done on contracts that should not be signed by anyone under age of 18 (this
to suppress minor employment that was going on decades ago); “the contract must include
details such as job description, working hours, and compensation, and it must be created during
the first month of employment, to adopt more transparent principles in support of positive
employer-worker relations.” (Villa da Costa, 2009). Employees are required to be insured, and
the insurance of employee injury specially is reserved to the country’s institutions, and should
not, in any case, be provided by private insurers like it’s in the United States. Thus, in case it
happens, injury to employees where there is a lack of insurance can lead to criminal prosecution
against the employer.
Cultural values and social behaviors also play an important role in the Chinese business
environment as factors contributing to business emancipation in China. The main attribute is that
“the Chinese culture and society are defined as collectivist in that the most important values
include the importance of the family, the hierarchical structure of social life, the cultivation of
morality and self-restraint, and the emphasis on hard work and achievement to contribute to a
social development.” (Fogel, 2010) In other term, the Chinese society values family and social
unit over individual expectations. Indications of social and cultural factors in China show high
“power distance” ranking, sign of high level of inequality of power and wealth within the

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society, a high “long-term orientation” as Chinese like willingly to overcome obstacles with time
and strength, a low “individualism” ranking due to the existence and predominance of
communist rules to foster a collectivist society where everyone takes responsibility for fellow
members of their group based on loyalty and strong social relationship. These indications
determine Chinese’s attitude in seeing foreigners as representing their company rather than
themselves. Rank is thus very important and one thing to keep in mind during business
interactions is rank differences and hierarchy, although the preference of face-to-face meetings
predominates over writing and telephone communication. Also, it is important to see and take
into account the demarcation between social and business relations; intertwining the two can
cause drastic failure in business process in China.
Conclusion
The different attributes that govern a long-term investment in China are regrouped in
three categories. There are thus economic implications, political implications, and socio-cultural
implications. For Acme considering making a long-term investment in a country like China, it’s
necessary to take into account each of these implications to determine in which way they will
advantage or alienate the company’s investments. These factors enumerated here are just few
among others, and a thorough market research might require sending a representative on the
ground to experiment the way the business life is ruled in China. Business benchmarking is also
a good suggestion, as it will help in learning about the way these factors have in one or other way
help other companies during their business expansion into the Chinese market.

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References
Chang, G. g. (2009). China Political Risk Management. Retrieved June 29, 2012 from
http://www.chinariskmanagement.com/Political.html
Eun, C. S. & Resnick, B. G. (2009). International Financial management (5th Ed.). McGraw-
Hill Company, Inc., New York, NY.
Fogel, G. K. (2010). Business Environment in China: Economic, Political, and Cultural Factors.
Retrieved on June 28, 2012 from the EBSCOhost Database.
Villa da Costa, M. (2009). Employment laws in China. Retrieved on June 30, 2012 from
http://www.internationalhrforum.com/2009/05/04/employment-laws-in-china/