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FDI is instrumental in bringing goods and services to the global marketplace, and the influx of foreign investment not only displays investor confidence in the business and the geopolitical climate of the host country, such capital also links national economies.
The benefits of FDI flow to both the supplier of capital as well as to the host region. China is one country that has stepped up to capitalize on these benefits. Over the entire year ending December inbound FDI increasded International investors need to be aware of the staggering correlation between tax rates and economic performance; see How International Tax Rates Impact Your Investments.
FDI is comprised of capital that an outside investor is willing to place and risk within a local region. Conditions in the global capital markets and general economic environment play a role in determining the flow of FDI into China.
A thriving global economy, capital markets and business environment create large swaths of investable capital, a portion of which is converted to FDI. Large amounts of investable capital that proportionately overwhelm the number of sound local investment ideas can cause institutionalcompany and individual investors to invest their wealth in emerging and developing markets.
The level of maturation of these elements can make China more attractive for FDI relative to other nations, such as India, that compete and vie for the same investment capital.
A growing and developing economy requires infrastructure and resources in order to facilitate the sale of goods and services. Lower transaction costsdue to the maturation of these elements, enables investors to earn returns on their investments as their enterprises are able to generate profits.
Roads, highways, bridges and other forms of physical infrastructure should be present, maintained and provide sufficient safety for the transportation of goods as well as for the commute of employees.
Another component for attracting FDI involves the availability of low-cost, skilled employees who possess the necessary aptitudes, experience and proficiencies to create, manufacture, and provide goods and services that can compete in global markets. As such, the regulatory environment can either encourage or impede foreign direct investment in China.
Excessive regulations tend to hinder entrepreneurial and commercial activities, as managers and employees must spend more time and money to comply with rules and regulations.
If an investor wants to set up a manufacturing facility in China, high start-up costs, legal exposure and other cumbersome compliance items may encourage that investor to set up the facility elsewhere, where the business climate is more conducive to industry.
For a counterpoint to this articles, see Free Markets: Other types of regulations include mandatory joint venture partnerships in which, together with the foreign investor, the business is required to have a Chinese government agency or local company as a partner. A judicial system that is biased toward protecting Chinese locals - who conduct what are sometimes perceived as unfair, illegal, or unethical business practices - can also contribute to making China a less favorable investment destination.
Government-sponsored financial inducements provide the possibility of making a business more profitable and in a shorter amount of time. Stability Political and economic stability can facilitate an influx of FDI.
Stability represents predictability and the opportunity for enterprises to gain better foresight into the future. Alternatively, constant social unrest, rioting, rebellions and social turmoil are settings not conducive to business.
Economic instability can also contribute to hyperinflationwhich can render the currency virtually obsolete. Violence, criminal activity, blackmail, kidnappings, and counterfeit currency and products have all been problems in China that serve to undermine the efficacy of conducting trade activities.
The justice system should also have effective mechanisms for reducing, or altogether eliminating, rogue and corrupt elements of law enforcement agencies.
Hedging against currency risk can add a level of safety to your offshore investments. Local Chinese Market and Business Climate The most glaring aspect of China is the sheer size of its population and market, and the prospects for growth that result from this size.
The ability of enterprises - backed by foreign capital - to sell to a sizeable local market makes China an attractive destination for FDI. As the Chinese economy continues to prosper, evolve and mature, higher-end industries such as healthcare, information technology, engineering, robotics and luxury goods, among others, can gain a bigger footprint in China as its local conditions, resources and other FDI determinants are enhanced.
Additionally, economic growth and FDI can start a "success domino effect. The more it grows and matures, the more investors are willing to provide FDI. The more FDI flows into the country, the greater the economic chain reaction, providing a positive effect to sustain such growth.
If Chinese-based enterprises have limited or no access to foreign customers - particularly the United States, Western Europe, Japan and others - then the local market may not be enough to warrant a significant investment in money and energy.A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries.
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