Autor/es:
Claudio Boada Pallerés
Ponente/es:
Claudio Boada Pallerés
Lugar:
FDI in China
19th Annual Conference of Internal Network of Private Business Organizations
–FDI in China-
(Haikou, China – Nov. 2, 2005)
Opening Ceremony
Good morning. Distinguished attendees, ladies and gentlemen, on behalf of Círculo de Empresarios, and its 230 members, it is a pleasure for me to address this audience on the prominent topic that I have been assigned to comment on.
“Transnational Corporations and China’s Development”
I would like therefore to start by thanking the organization of the Conference for this opportunity to speak today.
For those of us who believe in the benefits that can derive to society from the existence of solid private business organizations, and are also convinced of the role of entrepreneurs to improve prosperity in the communities where they belong, this is a great opportunity to speak. Therefore, additional thanks to the Organization.
China started in 1978 the process of reforming its economy, and for more than 10 years now, the Chinese Government has been determined to turn China into a free market economy, at a pace which no other economy in history has ever even attempted. There is still way to go, but China’s economic achievements since 1992 are very impressive, and highlight the skill with which its leaders have managed the change process. And not only the process should be commended, but also the pace of change and its rhythm, so that stability continues to have top priority.
Some years ago, the growth rate was seen as a prime target in itself. Today, President Hu Jintao and Prime Minister Wen Jiabao, in a very sensible way, give priority to a more balanced growth, so that it benefits a larger population in a more diversified geography, within China.
To say that China is a big market is stating the obvious. To say that China is not only a big, but also an important market, no matter what definition we use, is again stating the obvious. And a third obvious statement is to say that the Chinese market is different from the United States or Europe. To date many large corporations have already established their presence in China. By a recent account, 480 of the Fortune 500 companies have either manufacturing facilities or other type of permanent base in China.
And there is no question that these Transnational Corporations are a factor in the transformation that China is undergoing. A transformation, the speed and scale of which have never been seen before. And this has created for these companies enormous opportunities, and also significant challenges. The opportunities are perhaps easier to identify, but the challenges to overcome is where Executive Committees and Boards of Directors no doubt spend most time.
Looking into the present, I can see many other important corporations asking themselves what strategy should they follow in relation to China. Staying out of China is not an option for a company that wants to be a truly global player. For many reasons, but China’s development being one of them, the world will be a different place businesswise in 5-10 years. Furthermore, clients, suppliers and even financial analysts who cover these corporations expect them to have defined a strategy for China.
And the first question that I believe arises among those potential newcomers is “are we late to the party?” Having not made the move already, “is it better to catch up now, or to wait until meaningful experiences from first comers can be analysed with sufficient perspective?” And, in any event, “what issues should be addressed to overcome the challenges that I was referring to at the beginning of these words?” The last one is probably the most common question given that for the majority of those companies the only option, as I said earlier, is to have a presence in China.
From what I have seen, it probably makes sense that the Boards of Directors of Transnational Corporations who are considering making an investment in China cover the subjects that I will mention below.
Most, or may be all of the topics that I will mention I am sure that have been identified by the Chinese Authorities and, most probably have therefore been either addressed already, or are in the process of being so. But perhaps it is useful to briefly discuss some of them.
Let me start by praising China’s entry to the WTO (World Trade Organization), which has reduced in a major way regulatory barriers to foreign companies in many industries, or will do so in the future. On the other hand, two aspects should be considered; first we have seen Western protectionist pressures recently; and secondly, there is no secret that local companies, some of them State owned, and with seemingly unlimited access to cheap capital, have entered markets “en masse”, creating some difficulties to the foreign players.
When you make a significant investment far away from your worldwide headquarters, it is no surprise that ways and means related to information, both internal and to third parties, as well as accounting practices are debated. The consensus is that China’s largest companies have listed their shares on international exchanges, and publish reliable financial statements. These good practices should now permeate the corporate tissue, so that medium size companies follow the pace of their larger counterparts. Risk evaluation of a good local partner requires accounting disclosure certified by reliable auditors, ability to communicate with management teams and market participants, as well as independent industry data where feasible.
Legal and regulatory aspects are always, and rightly so, prominent themes for discussion, when a company plans a foreign investment, regardless of where the money is going to be put to work. China is no exception, and again WTO helps in this respect, and it is recognized that the Chinese Government has expended significant effort to enforce its protection of, for instance IPRs (Intellectual Property Rights). I am sure that the work will continue in the right direction towards addressing specific aspects, that have to do perhaps with culture and ideology in this domain.
Quality of infrastructure, or more so the lack of it, is many times determinant when the time comes to make a decision on a foreign investment. Let me tell you that in 2004, amongst China’s top 100 exporters, half were foreign-invested enterprises, and they were all electronic/information technology companies. This shows that Transnational Corporations went to China not only because of the large domestic market, but also because they valued highly the favourable manufacturing infrastructure, the favourable policies towards FDI, and the competitive and skilled labour.
A most important issue where things cannot go wrong is what sort of leaders should be hired to run the Chinese operations of Transnational Corporations. Other related aspects refer to people retention and people development.
As a Spanish citizen allow me to express my pride for the work being done at CEIBS (the China Europe International Business School) by professor Pedro Nueno as President, and by the Spanish corporations and institutions that sponsor this effort, with a very remarkable success.
It is no surprise that local talent is seen as best to fill sales and marketing roles, as well as human resources responsibilities and Government affairs roles. The last one is of utmost importance for those Corporations where the regulatory environment has a major business impact.
According to a survey by a major Global Executive Search Firm, Transnational Corporations are eager to give locals the opportunity to hold executive positions. To this end, the pool of local talent is expanding and locals are learning fast. And they do so because China produces annually 4.5 million college graduates, under an education system that is at par with those of Japan and Korea. When recruiting, those Corporations have in addition the opportunity to hire Western trained Chinese students, who return to China to pursue employment opportunities.
As for the English language abilities, suffice to say that today almost as many Chinese study English as a second language, as there are English speakers in the U.S., Canada and de U.K. combined. Again, there is here room for improvement when dealing with smaller Chinese Corporations, or travelling to non coastal areas. The only concern for these with long term settlement aspirations is the fact that population is ageing rapidly, since within the next decade, China’s working-age population will likely start to shrink.
My last comment has to do with the fact that China is projected by many to become the world’s second largest economy within the next ten years and, as mentioned earlier, the country is becoming more and more integrated into the global trading system.
The Chinese consumer will move from what in modern world are basic necessities such a TV’s, computers, cellphones and electricity, into cars, leisure holidays, credit cards and insurance. China will thus increasingly develop competitiveness in the services sector, and will advance further in the Research, Development and Innovation fields.
In summary, the Boards of Directors of the Transnational Corporations who are planning to come to China may in my view want to study in depth aspects related to Intellectual Property Rights, other regulatory aspects, assessment of western protectionism, ageing population and financial and capital markets development, and will praise, no doubt, the structural reforms, which are going well, the government policies to continue the opening and reform processes, and to ensure the stability, the legal framework to sustain private enterprise development, the strong GDP growth, the high FDI, the good basic education and the increasing pool of talent being developed.
Finally, and as you may know, the next Annual Conference will take place in Madrid in Oct. 2006 and it is my pleasure to invite you all to attend. Details will follow in due course. We at Círculo de Empresarios will do our best to be up to the high standard that we see here today, and look forward to your visit next year. Thank you very much.
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