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China’s Expansion
in International
Business
The Geopolitical Impact
on the World Economy
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Yingqi Wei
Business School
University of Leeds
Leeds, UK
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further a field.
China’s Expansion in
International
Business
The Geopolitical Impact on the World
Economy
Peter Baláž Stanislav Zábojník
Department of International Trade Department of International Trade
University of Economics in Bratislava University of Economics in Bratislava
Bratislava, Slovakia Bratislava, Slovakia
Lukáš Harvánek
Sberbank CZ
Praha 5, Praha, Czech Republic
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Introduction
China is a sleeping giant. Let her sleep, for when she wakes she will move the
world.
Napoleon Bonaparte. [Landau, E., 2006]
Introduction
Lately, numerous different theories, expert opinions and views on the
Chinese economy and its position in the world economy have been pre-
sented. It is logical because China has become one of the leaders of the
world economy in a relatively short period of time, and there is every
indication that it will become a new hegemon. Much less known are the
circumstances that have got China to such an admirable developmental
trajectory. It is, however, a logical consequence of China pushing forward
long-term strategic initiatives through trial and error and with the pres-
ence of lucky coincidences. This effectively combined the natural com-
parative advantages and national specifics of China which attracted a
large amount of foreign investment with new opportunities that emerged
on international markets.
In many cases, the Chinese government was forced to sacrifice the liv-
ing standard of some demographic groups and regions, and even make
various serious macroeconomic decisions which, for example, reduced
vi Introduction
the final consumption or have had a negative impact on the living condi-
tions of the population. Most of these measures would be absolutely
unfeasible in the European Union or the United States and, therefore,
when they were successfully implemented in China, it was possible just
because the historical transformation of this economy was accepted by
the whole society and the set targets were adopted by the vast majority of
China’s population.
An indisputable advantage of the strategic measures taken was the
willingness of the population to cope with a number of unfavourable
consequences of economic reforms and the implementation of huge
projects whose subsequent impacts were painful, but later they showed
their positive influence on improving the overall living conditions in this
country and its subsequent expansion. National paternalism and humil-
ity, which are immanent to Chinese Neo-Confucianism, were essential in
this case. Therefore, the impact of this philosophy of life has turned out
to be more remarkable and well timed than in all other Asian economies
at the turn of the millennium. Its effectiveness in the second decade of
this century, characterised by a fast-growing capital accumulation, boom
in social freedoms, enormous urbanisation, modernisation, a massive
increase of the domestic consumption, and a rapid upsurge in education
and culture, would drop significantly under other conditions, and we
can only speculate whether the necessary long-term growth rate would
be achieved. Z. Weiwei (2017) described these developments briefly: “It
is undeniable that China’s success over the past three decades is insepa-
rable from the organic combination of these factors. Chinese cultural
heritages, socialist traditions as well as useful elements from the West and
other civilizations.”
It is clear that China’s ability to link its own advantages with a tremen-
dous effort to return to its historical positions in a relatively short period
of time, along with the changes that have taken place in the rest of the
world economy, has created a decisive algorithm for its economic success
and the progressive consolidation of the global dominance of this coun-
try. China’s economic satellites—Hong Kong, Singapore, Macao and
Taiwan (the Greater China region)—are all pieces of this jigsaw puzzle,
although there is an ongoing and unresolved political antagonism in the
case of Taiwan. Mainland China has defined new roles in the interna-
Introduction vii
References
Bibliography307
Index329
ix
List of Figures
Fig. 1.1 The flying geese paradigm of the Asian economic development.
(Source: Kwan, C.H., 2002, p. 2) 10
Fig. 1.2 Profit and profitability of TNCs (bil. $ and %). (Note:
Profitability calculated as a share of net income in total turn-
over. In this graph, the economic results of the 2498 largest
TNCs were calculated. Source: UNCTAD, 2012, p. 17) 23
Fig. 1.3 GDP growth of China (%). (Source: According to the
Statistical Yearbook, WB—World Bank, 2017b) 25
Fig. 2.1 Flying Geese Model of the Asian economic development.
(Source: Kwan, C.H., 2002, p. 2) 66
Fig. 2.2 The development of employment in China by sectors (%).
(Source: WB, 2017) 75
Fig. 2.3 Economically active population in China (mil. of inhabit-
ants). (Source: KPMG, 2013) 77
Fig. 2.4 Research and development expenditures of the selected coun-
tries (in % of GDP). (Source: Own processing according to
the WB, 2016) 80
Fig. 3.1 China foreign trade ($ mil.—left, in %—right). (Source:
UNCTADstat, 2016a) 103
Fig. 3.2 China-EU trade flows and balance. (Source: EC, 2017b) 135
Fig. 3.3 Import of the Greater China region from EU-28 ($ bil.).
(Source: UNCTAD, 2017b) 139
xi
xii List of Figures
Fig. 3.4 Export of the Greater China region to EU-28 ($ bil.). (Source:
UNCTAD, 2017b) 140
Fig. 3.5 China-Japan trade ($ bil.). (Source: UNCTAD, 2016b) 151
Fig. 4.1 Six economic cycles of China’s economic growth. (Source:
NBSC, 2018; KPMG, 2018) 169
Fig. 4.2 The breakdown of China’s GDP growth by the main contrib-
uting factors. (Source: NBSC, 2018; KPMG, 2018) 171
Fig. 4.3 The relationship between the economic growth and FDI of
China. (Source: Calculation based on the data from
UNCTAD, 2018b) 171
Fig. 4.4 FDI inflows—world versus China (in $). (Source: Calculation
based on the data from UNCTAD, 2017b) 174
Fig. 4.5 The growth of FDI in China. (Source: MOFCOM, 2018 and
KPMG, 2018) 175
Fig. 4.6 The comparison of the regulative restrictiveness in China and
the EU. (Note: Index value 1.0—liberalised sector, 0.0—reg-
ulated investment in sector. Source: KPMG, 2018) 177
Fig. 4.7 China’s investment environment according to the GCI
(2017–2018). (Source: GCR/WEF, 2018) 178
Fig. 4.8 China’s FDI outflows. (Source: Data from UNCTAD, 2016a) 186
Fig. 4.9 The territorial structure of China’s OFDI (2009–2012).
(Source: Calculations based on the data from the Rhodium
Group and AEIHF, 2018) 192
Fig. 4.10 The sectoral structure of China’s OFDI (2005–2009). (Source:
Calculations based on the data from the Rhodium Group and
AEIHF, 2018) 193
Fig. 4.11 The territorial structure of China’s OFDI (2009–2012).
(Source: Calculations based on the data from the Rhodium
Group and AEIHF, 2018) 196
Fig. 4.12 The sectoral structure of China’s OFDI (2009–2012). (Source:
Calculations based on the data from the Rhodium Group and
AEIHF, 2018) 197
Fig. 4.13 The territorial structure of China’s OFDI (2009–2012).
(Source: Calculations based on the data from the Rhodium
Group and AEIHF, 2018) 200
Fig. 4.14 The sectoral structure of China’s OFDI (2013–2017). (Source:
Calculations based on the data from the Rhodium Group and
AEIHF, 2018) 201
List of Figures xiii
xvii
xviii List of Tables
1.1 Introduction
Ubiquitous globalisation has become the most significant socio-economic
phenomenon of the second half of the twentieth century, bringing sig-
nificant changes to each of the territorial components of the world econ-
omy and new developmental impulses to its individual market segments.
Its continuation in this millennium was also similar in spirit, and there-
fore, some authors call the period the stage of deep globalisation or super
globalisation (J. Pravec, M. Šikula, etc.). With the fall of communism
and the expansion of capitalism, globalisation has spread to the rest of the
world from Central Europe through the former USSR to China. Such
naming of a set of fundamental and even historical system changes may
now be exaggerated, but it mainly indicates the fact that it penetrated all
the pores of economic life and significantly influenced every world terri-
tory and region. When future historians and leading experts will evaluate
the first two decades of this millennium in their economic theses, they
will probably not be able to use any less modest naming of the crucial
driving force of development processes in the world.
threshold, that is, the stronger willingness to submit, for example, to dif-
ferent structural manoeuvres to the detriment of the growth of their own
standard of living and the improvement of working conditions. In the
economic environment of developed market economies (DMEs), such
approaches would not be possible and would provoke a violent reaction
that would result in far-reaching political and socio-economic shocks. In
the case of Asian countries, however, they ultimately had a significant
impact on overcoming crisis situations. Their overall success and contin-
ually better position in the world economy were the results of their better
adaptation on the new situation.
Initially, globalisation processes were thought of as the most friendly to
DMEs. They have had the necessary lead over their potential economic
competitors from other territories due to historically accumulated opera-
tional capital, extensive macroeconomic experience and more dynamic
economic growth, and the resulting positive effects on the functioning of
so-called governance structure. In order to make more effective use of their
own national comparative advantages, they have sophisticated their own
industries on a long-term basis and continuously improved the overall
organisation of economic life. Externally, they have built up their bilat-
eral and multilateral foreign trade relations to gain a better access to the
comparative advantages of other countries, and by mutually exchanging
such benefits, they have mastered the shortcomings of their own limited
production profile. To that end, the work of various international organ-
isations has been adapted to coordinate these processes and to overcome
the emerging problems. The whole process logically resulted in high
intensity and the resulting stability of bilateral socio-economic ties
between individual DMEs, and it has ever more consistently reflected in
the deepening of the various forms of international cooperation and, sub-
sequently, the expansion of the specialisation of business entities oper-
ating there.
Gradually it has been shown that the advantage does not have to be the
main reason for initiating redistribution processes in international pro-
duction but that other preconditions that affect the production process
in a significant way are successfully applied. The main one is a growing
expansion of the interests of trans-national corporations (TNCs), which
have been more flexible and more vigorous in the pursuit of their global
1 China and Its New Position in the World Economy 5
but not all were successful or reached the implementation stage. This has
ultimately been reflected not only in their economic results but also in
their positions on international markets.
Apart from the fact that a similar share of energy and other inputs is
generally needed for the production of a given product in individual
countries, which makes it possible to conclude that their final price
should be comparable and hence should take into account similar costs
of their inputs, the market confirmed that, for example, there was only a
relatively small impact on the demand for consumer products whose
prices rose almost two-fold in the period of oil shocks. In the case of
higher value-added or high-technology products, their price growth was
significantly higher, yet the demand was much more willing to adapt.
The counter-reactions to the extraordinary situation on the interna-
tional energy markets in the first half of the 1980s did not take long to
come. Until the drop of the so-called swing producer status (end of 1985),
which was Saudi Arabia’s last individual effort to keep them at around
$35/bbl. In the case of OPEC members, efforts were made to preserve
the unity of petroleum cartel interests under the control of TNC’s strate-
gic interests. TNCs bought most of the oil and the so-called downstream
business (oil transport, refining and subsequent production of fuels, semi-
finished products and finished products), which brought more benefits
than the extraction of relatively expensive crude oil.1
The relatively unified reactions of national governments and the TNCs
in the first half of the 1980s focused their reform efforts in two main
directions. The first was the effort to compensate systemically for losses in
the decline in economic growth, whether it was its pace, employment or
stability of positions on foreign markets, by enforcing various measures
aimed in particular at saving of the expensive energies and looking for
cheaper substitutes. New fossil fuel fields, as well as other suppliers out-
side of OPEC, were used. The second was the liquidation or downsizing
1
Moreover, in DMEs, national representations have intensively used all forms of permitted and
unpermitted support of these corporations, whether it was related to investing abroad, know-how
or transferring entire production lines from domestic factories to the Asian subcontinent. While
this often has been at the expense of the employment level in the parent countries or the growing
government deficit, they have nevertheless encouraged the TNCs’ penetration into new markets
and political development has continued to be under their control.
1 China and Its New Position in the World Economy 7
2
Mainly in Angola, China, Egypt, Malaysia, Mexico and Oman.
3
While the United States relied heavily on the promotion of Reaganomics to restore its position in
the field of high-tech applied in the military and service industries, Germany and other European
powers have focused on traditional measures related to energy savings and reducing energy unit
consumption. Japan, dependent on oil and gas imports, pushed to implement measures related to
the growth of labour productivity and the transfer of its technological apparatus to countries with
lower costs. The disintegration of the coordinated effort of OPEC to maintain high oil prices was
due to the inconsistency of the members of the cartel in promoting high prices and their individual
effort to obtain extraordinary benefits by undercutting these prices.
8 P. Baláž et al.
1.1.1 T
he External Preconditions of the Emergence
of the Chinese Economy
When the first oil shock broke out in 1973, and the price of oil rose
from about $1.9 to more than $14/bbl., world markets saw this change,
but there was an optimism that the world economy was in a good shape
to successfully keep up with this cyclical fluctuation initiated by an insig-
nificant regional conflict. Similarly, M.A. Adelman or renowned institu-
tions like IMF and the OECD pointed out various reasons why this
market failure would have only a limited time span, and afterwards, oil
prices would recover to previous levels. When the expected change did
not come until 1978 and the influence of the OPEC oil cartel on the
international markets was further strengthened, the second oil shock
broke out. Oil prices went up to $35/bbl. and forecasts of renowned
experts and consulting firms changed significantly. They admitted that
the reasons for the cost of this raw material to grow further existed, and
its supply on the market may be limited and there was a theoretical pos-
sibility that its price could reach a new peak in the future.
Many companies that had so far relied on a drop-in oil prices exhausted
their internal reserves and ceased to be able to produce at prices that
could be absorbed by the market, thereby increasing their business risks.
This forced them to consider major changes in their operations and began
to look for ways to keep themselves in the market. One of them was the
shift of production to the regions with a cheaper labour force. Their view-
point varied only gradually though. Some direction was given by the
decisions of large companies, especially TNCs, to move their investments
in Southeast Asia. However, the transfer was not acceptable to all compa-
nies at that time due to the need to build new logistics networks and new
production facilities, which were costly and involved considerable risk.
Therefore, it required a change, not only to the strategies that had been
implemented but also to rebuild their traditional markets and to re-link
them to their international production and sales chains.
Dozens of industrial centres and free trade zones in Hong Kong and
Singapore have thus become the first business incubators and the tangible
outcome of focusing on the economic interests of foreign companies in
the region. However, to date, they have only been deployed on their
coasts, where the operational costs have been acceptable, and the mobil-
ity of these capacities has been sufficient in the event of potential changes
in the economic or political situation in the region. It has also been
10 P. Baláž et al.
important that since the start of their operations, they have received posi-
tive support from the receiving territorial units and have been given vari-
ous incentives and measures to facilitate the start of such entrepreneurial
activities.
The analyses have confirmed that successful long-term development
trajectories in Southeast Asia, starting with Japan, then NICs1, NICs2
and later eventually China itself, have been in many ways similar in
nature and have common ideological roots. One of the most widely
accepted studies attempting to explain the common developmental par-
allels of Asian countries on the basis of the historical principle relies on
the influence of the so-called flying geese paradigm. It confirms that their
developmental trajectory as well as certain stages of restructuring were
similar: They lie in the “Ability to apply dynamic comparative advantages
applicable specifically only to the conditions of the national economies of
East Asia, as part of their development process of catching up with devel-
oped metropolises” (Kasahara, 2004, p. 6). The assessment of their grow-
ing economic status is based on the theoretical views of K. Akamatsu. The
paradigm represents a transformation of the central comparative advan-
tage, representing a shift from the advantages resulting from the pre-
dominant factor of labour to the capital factor. Figure 1.1 shows the
alternation of growth and declines in the competitiveness of individual
Asian economies as a continuous curve moving from one country or
group to another, while not losing their internal continuity and support-
ing each other. At the same time, any different national economy that is
not a traditional part of the flock is prevented from entering this chain
(Akamatsu, 1961, pp. 196–207).
Fig. 1.1 The flying geese paradigm of the Asian economic development. (Source:
Kwan, C.H., 2002, p. 2)
1 China and Its New Position in the World Economy 11
4
Some experts are of the opinion that its rapid development has nevertheless disrupted the order of
“flying geese patterns.” It has long been led by Japan followed by the tigers, and the rear section
consisted of China. It has been boosted by the massive inflow of FDI since the late 1990s, not only
in labour-intensive sectors but also in technology-intensive industries. It still retained the produc-
tion on a lower technological level. It reduced the economic lag, but enhanced its competitiveness
among other members of this flock in the region, reducing their chances to move ahead in this
group and take the lead (White Paper on International Trade, p. 14).
5
Since its establishment in 1949, Taiwan has been a politically and economically extended centre
of political, military and economic interests of the United States. For this reason, a significant
proportion of FDI have been expanding their Asian activities to this island during this period. In
principle, this was a modern country that offered all the necessary benefits to foreign investors.
Over time, several of them moved to Hong Kong, which became part of the People’s Republic
China (PRC) in 1997. In this way, they avoided the risks resulting, for example, from unresolved
political relations with China.
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