This essay will discuss, analyse and contrast the distinct regimes of each nation with regard to their positive and negative aspects from the viewpoint of a potential foreign investor wishing to do business in either of these states. Each political regime creates opportunities and threats for potential businesses and a thorough understanding of these characteristics is increasingly important for any organisation wishing to become successful in a global market.
This essay will begin by defining, discussing and comparing the essential features of the two disparate regimes, followed by considering several elements of each including government controls, social economic figures, taxation systems and political stability before concluding on which businesses would be strategically preferred in each of these two powerful economic nations. According to Kitschelt (1992, 1028), political regimes are “rules and basic political resource allocations according to which actors exercise authority by imposing and enforcing collective decisions on a bounded constituency”.
The united states is a constitutional republic which subscribes to the ideologies of a liberal democratic nation characterised by “free and fair elections” and a “competitive political process” Walecki (2003, 1), with its market operating on a capitalistic, neo-liberal level that favours de-regulated government controls and according to (Campbell and Pederson 2001, 5) “free-market solutions to economic problems, rather than bargaining or indicative planning…”.
Such a society is marked by features such as freedom of speech, investment from the domestic and international market, a generally high standard of living and high personal income tax. In contrast the Peoples Republic of China (PRC) which was traditionally a communist nation until the economic reforms in 1978 onwards attempted to ‘modernise socialism’ to capture the effectiveness of the market and reform the economy.
They are currently a single party socialist republic with the official term for their mixed economy known as ‘socialism with Chinese characteristics’ which was described by Gabriel (2006) as a: new economic strategy based upon decentralisation of control over the state owned enterprise sector, expanded market transactions to replace command and control allocation, dismantling of the rural commune system (completed in 1985), increased use of material incentives in workplaces, and ultimately, upon the modernisation of the Chinese economic infrastructure (as well as military infrastructure).
Rather than being rigidly hierarchical and authoritarian, which is often the assumption, political power in China is now diffuse, complex and at times highly competitive (Martin 2010). Since 2002, the PRC has actively sought out private entrepreneurs and accepted ‘Wholly Owned Foreign Enterprises’ (Klaric 2009) albeit with some restrictions into its market. Political stability is an important consideration when operating any business, the last thing a company wants is to have its profits marginalised or completely removed by new regulations from the state.
While the United states as a liberal democracy allows for the benefit of conflicting ideas, strategies and competitive markets, its competitive nature of political pluralism also means that a company operating within a politically sensitive industry (such as timber harvesting) may quickly find itself under new regulations imposed by an incoming government taking advantage of voters tendency towards ‘green’ policies.
In contrast, the PRC, operating under a single party does not have the same incentives to bow to popular political pressures. However, it was displayed clearly during the Global Financial Crisis (GFC) and noted by (Curran and Von Acker 2010, 185) that in times of crisis the PRC will tend to “retreat from the privatisation of the economy for a significantly increased state intervention”, including such measures as ordering the mainly state owned banks to cut the size of oans granted to private enterprises (Wang and Iftikhar 2010). This kind of government control can have negative impacts on business but are sometimes considered as an acceptable trade-off, as in the case of the compulsory minimum wages set and tightly controlled in the United states by the federal government and set in the PRC by autonomous provinces and municipalities, which allows for corruption and abuse by domestic and international business.
While the Chinese market promises cheap land and labour, it must be understood that recklessly abusing such activities will tarnish that rare commodity that is brand image. For some, such as Hitachi the offer is simply too tempting to refuse and they take advantage of what Barboza (2006) describes as the “cheap land and labour” and the “factory system where young workers essentially march to their jobs every 8 hours, often from company owned dormitories nearby”.
Another important consideration when deciding where to locate a business is the relevant tax systems and levels in the corresponding nation. As well as standard taxation rates is the possibility of whether a nation will offer any special tax considerations or ‘tax-holidays’ which can help an emerging business to establish itself in a foreign market or a saturated market where to dominant player would otherwise have had the ability to force out a fresh competitor by temporarily lowering its prices or by other discriminatory means.
The Taxation levels will directly affect the levels of Foreign Direct Investment (FDI) which itself plays a significant role in the development of a nation. Dickson (2007) notes how since 2002 China has encouraged entrepreneurs within its borders and on march 16, 2007 they adopted the ‘Enterprise Income Tax Law of The People Republic of China (draft)’ which established the tax rate at 25% for both domestic and foreign companies.
This compares favourably with the US system, which can tax up to levels of 38% for large organisations. The same piece of legislation in China allows for technology enterprises to “enjoy special tax incentives” (Klaric 2009), to encourage market growth and technological development, though it must be noted that in this case, as it appears in many others, the incentives come with a trade off in financial security as intellectual property rights are not guaranteed and need to be specially sought after and acquired.
The final aspects examined in this essay are some of the standard economic indicators like the Gross domestic profit (GDP), GDP per capita, individual income statistics and a look at foreign and domestic consumption rates within each country. No business is exactly alike to another and these are important figures when determining which business type will succeed in which nation. If we consider the real GDP as an indicator of economic growth, an average over the last 3 years places China ahead on roughly 9% versus Americas’ 1. %, this suggests that there are opportunities for profit by organisations wishing to develop ‘factory floor’ operations in China’s rapidly expanding markets. It would be unwise however to consider these figures alone, viewing the GDP per capita ($48,100 – $8400) we can see that the average United States consumer is likely to have a substantially larger consumable income, if a company wished to settle itself and sell to the domestic market it would likely be more successful in the US.
As affirmed by (Curran and Von Acker, 169) “domestic consumption remains low and growth, in large part, depends on exports, making China continually vulnerable to global downturns”. The political and economic environment inside the United States and those within the Peoples Republic of China are at opposite ends of a diverse global spectrum. Both of these two different types of political regimes have advantages and disadvantages.
China will allow for the utilisation of cheaper labour, lower tax and tax incentives while impinging on intellectual property rights, rights of the company to manage how it deems appropriate without state interference and in an increasingly socially responsible world and perhaps tarnish the reputation of your business if it is seen to take advantage of those without well protected human rights.
Whereas the United states offers the security of a far more transparent legal and economic system, the right to manage a company in whatever way you choose as long as it complies with the restrictions of its increasingly deregulated market, with the drawbacks of increased labour, property and taxation costs. A company within America is surrounded by a large and available consumer market while a business wishing to develop with China would much more likely need to take advantage of local cost advantages and export to the globe.