comparison of financial system between china and us pdf

Comparison of financial system between china and us pdf

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Financial markets and institutions. A comparison of China and international financial centers

Global Business Strategy pp Cite as. Global business strategies must conform to business environments in target countries and regions. As repeatedly expressed herein, while the world is becoming flatter, there still are significant barriers in the form of national borders.

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Global Business Strategy pp Cite as. Global business strategies must conform to business environments in target countries and regions. As repeatedly expressed herein, while the world is becoming flatter, there still are significant barriers in the form of national borders.

According to the CAGE distance framework, the differences in business environments due to national borders are wide-ranging and consist of cultural, administrative, geographical, and economic factors. These differences may be observed in the languages, religions, economic systems, and living standards present in each country. North expounded on the relationship of these institutions to economic performance North The behaviors of corporations and individuals within an economic society do not necessarily abide by the formal institutions, but they are often determined by informal restraints such as taboos and customs.

This tendency is particularly apparent in developing nations such as China and India because these nations have been slow to enact various rules regarding economic transactions corporate law, contract law for private transactions, property law including intellectual property, etc. Even when laws have been codified, the enforcement of these rules has often been insufficient. China also implemented antimonopoly laws in However, its enforcement makes it appear like the objective is to protect domestic industry and limit foreign corporations.

It would appear that these countries are conforming to global standards by integrating modern legal structures from foreign countries and codifying them into rules; however, because the inertia of informal rules of economic transaction practices and societal behaviors is so strong, the enforcement of rules are quite literally all over the map.

With the help of the WTO and regional economic partnership agreements, an international alignment according to formal economic rules is shaping. However, informal rules such as country-specific societal norms and customs do not change easily, and some doubt the hypothesis of converging into one global system. For example, some countries drive cars on the right side of the road, whereas others drive on the left. There are various theories as to why this difference exists; one of them is that the position of doors in horse-drawn carriages differed in England and France, but whatever the case, there is some historical background for this phenomenon.

However, once a practice like this is set, it is extremely expensive to change and things remain in a state with several equilibriums. Institutions in various countries, including informal institutions, can be characterized as game rules for conducting economic activities. An examination of global business strategy cannot be engaged in without an understanding of these game rules.

In Chap. In this chapter, we progress one step further and consider the impact of institutions in economic society, including unwritten rules, on global strategy.

Codified rules granted contractual authority to companies within this industrial park to use the property for a specific length of time. However, the decision by the government administration can overturn this contract.

These rules are not explicitly codified, but they nonetheless exist. Once events like these occur, they become difficult to solve. Thus, it is important to increase our understanding of institutions, including their informal rules in countries, where a corporation is expanding, to understand possible strategies to avoid risk, or at least to keep losses from risks to a minimum.

In this chapter, we compare and contrast China and India as we consider the relationship between economic societal institutions and global business. First, we examine foreign investment policy differences between the two countries. Further, we examine views on global strategy on the basis of the institutional differences in India and China.

In doing so, we also explain risk management as it applies to global business. Under the patronage of the then Soviet Union, a socialist state was created, but the Cultural Revolution, which lasted from to , caused great turmoil.

As a result, direct foreign investment in China skyrocketed, and the number of Japanese companies investing in China grew rapidly. Each state in India has an independent economic system, and taxes and regulations are extraordinarily complex. In , the regulations were relaxed to allow partial participation of foreign capital, but the impact of that relaxation was very limited compared with China.

Because of the lack of basic infrastructure such as roads and electricity, India has many handicaps as a manufacturing base. Another turning point for direct investment in China came with their WTO membership in Until the s, foreign investment in China was made at the request of the Chinese government authorities. In addition, the WTO membership paved way for deregulation such as the gradual elimination of foreign capital regulations in service industries like finance and distribution, which had a tremendous impact on direct investment.

Liberalization of economy, aggressive implementation of direct domestic investment. Coastal cities opened to foreign investment; creation of economic technology development zones. Implementation of Management Responsibility System to split ownership and management of state-owned enterprises. Authorization for foreign investors to trade shares of publicly traded Indian companies. Acceptance of foreign majority ownerships outside of banking insurance, telecommunications, and private aviation.

Authorization for foreign investors to trade shares of publicly traded Chinese companies. However, a closer examination reveals that Chinese investments cover a breadth of industries ranging from manufacturing industries such as automotive and electronics to retail and financial services.

Indian investment, on the other hand, is primarily in the automotive industry. The following year the Joint Management Law the Sino-Foreign Mutual Corporate Investment Law was passed, creating institutional foundations for enticing foreign firms through the introduction of foreign capital, transfer of technology, and promotion of exports.

In addition, in , the Chinese government established four economic zones—Shenzhen, Zhuhai, Shantou, and Xiamen—to experiment with economic development models to attract foreign firms.

The government developed infrastructure to lure foreign firms to these zones and implemented preferential policies such as tax breaks for these firms. In , the country opened 14 coastal cities to foreign investment, including Shanghai, Tianjin, and Dalian, and in , regional restrictions on independent investments by foreign firms were lifted through the passage of the Foreign Enterprise Law. Between and , the Chinese government began opening up domestic markets with the goal of acquiring WTO membership, and also started liberalizing trade by implementing measures such as reducing tariffs.

In , China became a member of the WTO, and with further loosening of foreign capital restrictions in the service industries, China saw a dramatic rise in the amount of direct investment. The methods of capitalization in China include independent foreign capitalization wholly owned firms and joint capitalization in the form of a joint venture with a Chinese firm.

Until the s, direct investment in China was often done at the request of local governments, and many of those investments were made as joint ventures with local firms. However, with China joining the WTO in , the country gradually eliminated restrictions on foreign capital.

This relaxation applied not only to the manufacturing industry but also to service industries such as distribution and finance, with many industries freely able to decide whether to create a wholly owned subsidiary or joint venture. However, it is important to note that industries such as the automotive industry, which are viewed as strategically critical by the Chinese government, have their own rules. In January , the government enacted a labor contract law that improved worker compensation, as well as a new corporate income tax law that eliminated preferential income tax breaks on foreign firms.

Given the reductions in preferential policies for foreign capital, the rise in labor costs, and a stronger Chinese currency, foreign firms are beginning to change their investment strategies in China.

Deregulation in India began in when Indira Gandhi became the prime minister. The automotive and electronics sectors were pioneers in this deregulation. Suzuki used it as a chance to acquire a leg-up in the market, creating the Maruti Suzuki joint venture with the state-owned Maruti Udyog Limited.

While Toyota, Mazda, Mitsubishi, and Nissan formed joint ventures and technological alliances in the commercial vehicle market in India, their results were poor and they were forced to exit the market. In addition, deregulation in the s was done in an extremely closed market, with extraordinarily strict regulations on trade. The tariffs were high and limits were placed on import volumes.

All imports of consumer goods were forbidden; imports of capital goods, raw materials, and work-in-process goods were sometimes allowed, but import licenses were required for any goods that could be manufactured domestically. From early s, India worked to rebuild the country by implementing new economic policies. The country first improved its trade system, aiming to liberalize trade by gradually abolishing import licenses and reducing tariffs.

Further, authorization for direct foreign investment, while varying by industry, was granted automatically to a certain extent, and the time it took to obtain authorization shortened. At the same time, investors from foreign institutions were allowed to trade shares of public companies. However, the Indian government did not begin its full-scale analysis to entice foreign capital until after the year India had a strong aversion to foreign capital because of its days under the British colonial rule, and the deregulation of foreign investment was only gradually accomplished.

In doing so, industries not on a government list were automatically granted investment approval. In addition, industries such as electric transmission, financial services, and real estate were deregulated in The aggressive investment by foreign firms that occurred beginning in was because of policy measures that were put in place in India at that time.

Further, India enacted an Economic Zone Law in , and as a result, hundreds of plans for construction are said to currently exist throughout the country. These economic zones have the aim of spurring exports and consist of many wholly owned subsidiaries of foreign concerns across a range of industries.

The companies in the economic zones enjoy preferential treatment under the tax system. However, despite having received permission to do so, only a portion of the zones have undertaken construction, with many unable to establish construction plans because of local resistance. Both China and India began as countries during the latter half of the s, and both countries modeled their economic policies on the planned economy of the Soviet Union that existed at the time.

For different historical reasons, both countries had completely closed their doors to the outside world at the time of their independence: China due to international political tensions between east and west, and India due to its past as a British colony.

China is, in reality, under one party rule of the Communist Party. On the other hand, India chose the path of democracy and elects its central and local government leaders by popular vote.

This difference in political structures leads to very different investment environments from the perspective of foreign firms. This question captures the essence of institutional differences between China and India. Under the leadership of Deng Xiaoping in the s, China aggressively pursued policies to open itself to foreigners. This was carefully done by first examining the results of experimental policies in certain regions, and then determining it to be the path to take for the entire nation.

In addition, India dramatically reformed its trade system in the s, gradually opening its doors to the outside world. However, this was done as a decision to rebuild after running budget deficits, a decision that was forced upon them because of the fear of impending bankruptcy. One can easily imagine that because of its history as a British colony, the national sentiment was to oppose opening the country to foreigners. In these circumstances, a strong motive such as a national crisis was necessary to promote the path to reform.

Let us examine the political systems of China and India in greater detail. While these nine are ranked, decisions are made by a majority vote. The top ranking member is the head of state. Personnel decisions such as the heads of local administrative organizations in provinces and directly controlled municipalities are also essentially appointed by the Communist Party, making China a state run by one organization: the Communist Party.

On the other hand, India is a democracy much like Japan. India has many political parties, with candidates from each party competing for seats in the national parliament bicameral parliament, consisting of upper and lower houses.

It is difficult for one party to gain a majority, so coalitions are the norm, with a prime minister selected from among the representatives.

In general, the Indian National Congress takes up liberal policies of economic reform, while the BJP favors conservative policies for domestic protectionism.

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With the increase of global economic integration and the increase of international capital flow, the phenomenon of rising and falling of international stock market is becoming more and more obvious. The phenomenon of stock market linkage has become a very important economic phenomenon in the international securities market. It is the result of domestic financial liberalization and financial internationalization. The linkage between the stock market refers to the stock market between different countries which have a common trend, and there is a strong correlation between different market yields and price fluctuations, which makes the different stock market prices to achieve long-term stable trend. In recent years, the degree of economic integration has gradually deepened, and the form of international division of labor has also undergone major changes. With the rapid development of transnational corporations, the speed and scale of international capital flow are increasing rapidly, and the macroeconomic relations among countries in the world are becoming closer and closer, and the macroeconomic development shows a relatively significant correlation. Especially in the , when the stock market crashed in the United States caused a global stock market decline, scholars began to pay attention to the mutual influence of the capital markets between countries [1].

One of its basic components is the availability of developed national financial markets, actively interacting with similar markets in other countries. As an example, the United States can lead the UK, Japan, in economic development which play an important role the financial markets, and the major cities of these countries New York, London, Tokyo , are the major international financial centers. Cities can be seen as the gateway to the global economy. They are important for the functioning of both national and global economy, since they are concentrated huge financial, informational and intellectual resources, based most of the major industrial, commercial, financial and service companies, specialized credit and financial institutions and banks. In addition to traditional MFC in the last decades of the 20th century a number of new financial centers competing for the role of international.

Financial markets and institutions. A comparison of China and international financial centers

Scientific Research An Academic Publisher. With the increase of global economic integration and the increase of international capital flow, the phenomenon of rising and falling of international stock market is becoming more and more obvious. The phenomenon of stock market linkage has become a very important economic phenomenon in the international securities market. It is the result of domestic financial liberalization and financial internationalization.

The United States is named as the top economic power in 21 of the 34 countries surveyed, while China is considered the top economy in 12 the U. Still, publics are relatively divided, as no more than half name either country as the top economy in most countries. And few consider Japan or the countries of the European Union as the leading economic power. Across many of these countries, too, there is little ambiguity about which country is dominant, with double-digit differences between the shares who choose the U.

For a larger version of this infographic, click here. While comparable in total size, the makeup of each economy is totally different. United States is a sophisticated and highly diversified economy that is based on services, finance, and consumption from the middle class.

China vs. United States: A Tale of Two Economies

Normalizing the data, by dividing the budget balance by GDP, enables easy comparisons across countries and indicates whether a national government saves or borrows money. Countries with high budget deficits relative to their GDPs generally have more difficulty raising funds to finance expenditures, than those with lower deficits. No date was available from the Wikipedia article, so we used the date of retrieval.


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