Doing business in China can be a difficult and controversial proposition for companies in many countries. Yet even with allegations of intellectual property theft, forced partnerships, and strict restrictions on doing business, China continues to attract foreign capital. Why would businesses want to invest in China when there are so many other “business-friendly” countries and financial markets that support foreign investment?

The United States has accuses China from stealing intellectual property American company, the estimated theft US $ 600 billion every year. As a prerequisite for doing business in China, American and other companies may be charged forced transfer of their technology. In addition, regulations can oblige foreign investors partner and set up joint ventures with Chinese companies before they can do business in China.

In 2001, after becoming a member World Trade Organization, China pledged to open up its banking, telecommunications and electronic payment processing sectors. But action in this area has already been taken absent or, at best, halfhearted. China’s telecommunications industry, for example, remains under government control, and the government owns it prohibited Facebook and Google offer their services in China.

What’s in it for investors

Doing Business 2020, a World Bank publication, rating China – in terms of credit availability and ease and size of tax payments – 80th and 105th, respectively, out of 190 countries in the world. It uses 10 other indicators, such as protections offered to minority investors, registering property and enforcing contracts, China rating 31st out of 190 countries in the world for ease of doing business as a whole. In contrast, the US was ranked 6th out of 190, according to the same report.

Besides, doing business in China can risky politically. Negotiations with the Communist-led government can be difficult; it has a political system with a reputation lack of transparency and intolerance for dissent. The nation has important rule regarding capital inflows and outflows which are subject to change without public notification. Corruption is rampant in China, to the detriment of foreign investors such as the United States.

Despite negative business conditions, according to 2020 World Investment Report, in 2018 and 2019, China attracted $ 138 billion and $ 141 billion in foreign investment, respectively. Focusing only on 2019, this massive foreign investment into China exceeds the GDP of all such countries Kuwait – $ 137 billion; Kenya – $ 98 billion; and Venezuela – $ 70 billion. In 2019, China is the world second largest recipient foreign investment, second only to the United States.

A country that plays by the rules

Despite being relatively business-unfriendly, if the world’s 31st country can attract large amounts of foreign investment, surely the world’s No.1 country is sure to do as well as China, if not better. But New Zealand, ranked first in the world for its business-friendly climate, is nowhere near China in terms of foreign investment.

On two metrics – credit availability, which measures how easy it is to get credit; and tax payments, which measures the frankness and size of tax payments made to the country where the business is conducted – New Zealand ranks 1 and 9 In the world. And for ease of doing business as a whole, in contrast to 31st in China, New Zealand ranks first in the world.

Despite that honor, in 2018 and 2019 New Zealand attracted only $ 1.95 billion and $ 5.43 billion, respectively, in foreign investment. In other words, in 2018 and 2019, China attracted 71 times more and 26 times more foreign investment than New Zealand, even though New Zealand is considered a stable democracy with lower political risks than other forms of government and government. the most corrupt country in the world. What explains the huge differences in foreign investment?

Simple math for making a profit

That national market size – or scale – is critical for business. The more consumers a market has, the more products it has the potential to sell. In 2019, China’s population has almost reached 1.4 billion, compared to New Zealand’s population of approx 4.8 million. In addition, if measured by gross domestic product, China’s economy is second largest in the world, compared to the New Zealand economy, which is rating 51. Whether the problem is seen in terms of the number of consumers or the total size of the “economic pie” that is GDP, China’s economy is overshadowing the economy of New Zealand.

This large difference in size or scale is important. Even though China is a significantly less friendly place to do business than New Zealand, it still makes sense for American and other multinational companies to invest in China.

From a financial gain perspective, consider the advantages of companies investing in China. That markup is the difference between the price the company charges for a product and the cost of producing an additional unit of the product. The advantages, then, are simply markup multiplied by the number of products that can be sold. The bigger the market, the more products that can be sold. More sales means more profit. This explains why companies around the world are prepared to tolerate it dubious Chinese business practices and still investing in China.

One example of doing business in China, despite many obstacles, comes from Hollywood. Disney produced “Mulan, “a $ 200 million live-action film that took more than five years to produce. Disney shot most of the film in New Zealand with the aim of releasing it in China, primarily to gain access to that vast market and to maximize profits Disney bowed. on many Chinese demands to ensure that “Mulan” can be released in China without objection from Chinese officials.

Disney’s relationship and concessions with China are examples of why so many foreign investors continue to pursue business in China – profit. Despite institutional restrictions on investment, with access to more than 1.3 billion people, many of whom are potential consumers, and a growing GDP, China is a global market opportunity that multinational companies around the world continue to exploit.

This article is republished from The Conversation under a Creative Commons license. Read original article.