The People’s Republic of China (PRC) tops the list of the world’s most populous nations. As of 2020, the Chinese population was slightly above 1.4 Billion (Paul 79). The high population translates into a substantial domestic market, attracting investors from different parts of the world. Foreign Direct Investment (FDI) is a form of investment where a company invests in a foreign land guided by the nation’s business laws such as taxes, incentives, and other relevant business regulations. Globalization has opened up markets and enabled investors to navigate different markets worldwide as long as they conform to the host country’s FDI regulations (Cook 183). A foreign investor in China will only succeed if he complies with the business trade regulations in China.
The Rule of Law in PRC
China has a comprehensive legal framework that categorizes specific issues under different jurisprudence for hearing and determination. Though the ruling communist party can influence a decision, it cannot impose a verdict without a thorough constitutional review. The rule of law prevails in most decisions guiding people’s activities and expected conduct. Chinese use the constitution as the prime tool to run the country’s affairs and make most decisions like FDI, conflict resolution, and mergers. Cascading the dominant Confucian doctrines and the legal provision in the country offers a holistic way of managing the country’s affairs (Paul 57). To a large extent, China is guided by the rule of law, and a foreign investor must abide by the law to succeed.
Chinese Law of Foreign Direct Investment
The exponential growth of the Chinese domestic market attracts investors from within and from different parts of the world. When the foreigners navigate the Chinese market without proper regulations, it may be a prerequisite for chaos and instability. China had to formulate laws to guide foreign investors to transact efficiently for a successful symbiotic relationship between the investor, the locals, and the Chinese government. Before the new FDI laws took effect on 1st January 2020, China had strict rules restricting foreign investors and favored domestic companies (Meltzer et al. 151). China faced international criticism, which forced it to change the FDI laws to encourage foreign investment.
The new FDI law consists of six chapters that encourage the foreign industries to invest in China by offering them protection and conducive tariffs. Unlike previous tariffs, which charged foreign investors higher taxes above 40%, the tax reduction to 25% encouraged most foreign companies to invest in China (Cook 179). The law further removed previously enacted restrictions on entities considered too sensitive to be handled by foreign investors. The new law positively impacted the country as Chinese FDI increased by 6% in 2020. A revenue rose to USD149 billion compared to USD141 billion in the preceding financial period (Su et al. 47). Any nation can improve its revenue by formulating policies that encourage foreign investors.
Opportunities and Challenges for the American Investor
The promulgation of the new FDI law in China presents American investors with multiple business gaps. The removal of restrictions on niches perceived to pose a threat when opened up to foreign investors widens the investment spectrum. With the enormous domestic market, industries like IT and processing opening up give Americans a place to invest. The new FDI law further removed the complex procedures and bureaucracies required to support the country, making it easy to identify a market gap and move quickly. The transparent regulations further enable American investors to expect and prepare in advance.
However, the cultural difference between the countries poses a serious threat to the investors since a minor cultural breach may make the investor termed an outsider. Still, the option of merging with a domestic market to leverage the cultural competence of the native company is restricted by the strict merger laws. Since China is highly discouraging monopolies, the merger process is prohibited by law. The American investors must be culturally competent to avoid being termed an outsider by the market.
Recommendation to the American Investor
The American Investors can only navigate the Chinese market if they employ locals in the decision-making levels of the organization. The local managers who are aware of the Chinese domestic market will help the management committee make decisions that are in tandem with the legal requirements and less likely to make mistakes. The dynamic nature of the Chinese market requires a leader who has vast experience in dealing with the country’s regulation authorities (Meltzer et al 141). The American employee can take other positions in the business, but the locals should occupy the positions which require a regular meeting with the regulatory bodies. The locals may further offer goodwill when marketing the products to the people as they share culture, traditions, and beliefs.
Further, the American investors must constitute a Research and Development (R&D) Department. The R&D will research the cultures, customs, and trade union terms in the region. The knowledge enables the company to offer reasonable employment terms to the Chinese locals, which conform to their trade unions, like eight hours a day and forty-four hours per week. Paul claims that “failure to research and align business strategy to Chinese cultures and customs will be a prerequisite for losses” (69). Once the research is conducted, the management must conduct cultural awareness training for all the workers in the company to align all the organizational activities to the customer’s culture.
Works Cited
Cook, Ian G., and Yongjiang Wang. “Foreign direct investment in China: Patterns, processes, prospects.” Dynamic Asia: Business, Trade, and Economic Development in Pacific Asia. Routledge, 2018. pp. 177-208. Web.
Paul, Justin, et al. “New and novel business paradigms in and from China and India.” European Business Review 2020. pp.47-93. Web.
Meltzer, Joshua P., and Neena Shenai. “The US-China economic relationship: A comprehensive approach. 2019. pp. 17-34. Web.
Su, Chi Wei, et al. “Policy turmoil in China: a barrier for FDI flows? International Journal of Emerging Markets 2021. pp. 23-66. Web.