Impact of China’s Business Environment on Multinational Firms

Impact of China’s Business Environment on Multinational Firms
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Impact of China’s Business Environment on Multinational Firms
China has become one of the most preferred destinations for multinational firms around the world. It has grown from one of the least-developed markets to the second-largest economy in the world (Froese et al., 2019). As a large market, it provides multinational firms with opportunities for growth and expansion. The World Bank (2022) notes that China has experienced rapid economic growth due to investments and low-cost manufacturing. However, this growth is also characterized by complexities, and multinational firms face a challenge in maintaining access to China's business environment while managing the complexities.
China's GDP and size make its business environment attractive to multinational firms. According to Woetzel et al. (2023), China now has a GDP of 18%, giving it second place after the United States (US). Continued economic growth will make it irresistible for many multinational firms. Its population also makes the business environment attractive because a larger population powers the demand for products, providing more opportunities for global firms to compete. It is estimated that by 2030, about 50% of China's population will be living in high-income (Woetzel et al., 2023). As the number of people living in high-income increases, China will become a highly attractive market for multinational firms looking to capture these individuals.
However, China’s business environment is also complex and risky, posing challenges to multinational firms. For instance, Dollar et al. (2021) reveal that China's business environment is characterized by growing investment and trade barriers. These barriers result from China's contentious relationships with external trade partners, which continue to interfere with international trade and the ability of multinational firms to operate in China. In recent years, China has experienced rising tensions with Europe and the US (Woetzel et al., 2023). Multinational firms have been forced to re-evaluate their strategy in China because continued trade tensions with major partners such as Europe and the US have dire consequences on firms, including de-internationalization. In addition, these trade tensions disrupt global supply chains. As Blanchard et al. (2021) indicate, many multinational firms have been forced to diversify their supply bases to reduce overreliance on China as a supplier. Multinational firms must also seek opportunities from other countries, which means some will be forced to pull out of China.
Another issue that has made China’s business environment quite complex for multinational firms is China’s regulatory framework. According to The World Bank (2022), China has made considerable efforts in regulatory reforms, but more is needed to ensure its business environment is stable and sustainable. Its regulatory framework, especially around the Internet and technology, has contributed to high uncertainty in the market. According to the International Monetary Fund (IMF) (2022), China's regulatory framework in technology has also ...