The Opportunities and Challenges of Western China

As the cities along the east coast of China become ever more crowded with MNCs and their domestic competitors, expanding business operations into western China presents new opportunities and challenges in the battle for the Chinese market. One of the strategic options a MNC needs to implement in order to compete against their domestic rivals is to dramatically reduce costs. Capitalizing on the lower cost of labor in western China would be one way of doing this. Expanding business operations would also allow a MNC to expand its market coverage and build its brand in other parts of China. Although the standard of living is lower in western China, the presence of MNCs and efficient domestic businesses should help to raise the standard of living over time and by lowering the cost of its products more Chinese will be able to afford international brand named goods.

The Chinese government has also recognized the importance of expanding the economic benefits provided by MNCs and their domestic competitors in order to reduce the income gap between the citizens of eastern and western China. There is real fear among Chinese party officials that resentment will develop and spread among the residents of its western provinces if they feel they are being left out of the economic gains being realized in eastern cities. According to a January 31st article on ChinaBiz.com.cn entitled “China to increase investment in rural areas,” China’s central government plans on increasing its investments in rural areas by more than 100 billion Yuan ($13.9 billion) this year, bringing its total investment to 520 billion Yuan in 2008. The money will be used to fund infrastructure projects in water, gas and electricity, as well as provide improved agricultural technology. Such infrastructure improvements will also expedite the westward migration of both MNCs and domestic firms into western China.

Although the expansion of MNCs and their domestic competitors into western China will not happen overnight, it appears that this will be a logical progression as the cost and competition of doing business in eastern China will continue to rise. In order to expedite the process, the Chinese government could take further steps to create an atmosphere more conducive to business by providing incentives for MNCs and domestic businesses to expand westward. They could also encourage the residents of western China to form more competitive networks, thereby becoming more familiar with a market-based economic system and raising their standard of living.

As MNCs are being forced to establish economies of scale due to the efficiency of their domestic competition, establishing business operations in low-cost western China appears to be a solid business strategy. The Chinese government will have to ensure, however, that the appropriate infrastructure exists to make competitive business a real possibility and, as we have seen, they appear to be taking steps to ensure that this becomes a reality. It is also in the best interest of the Chinese government itself to ensure that the income gap among its citizens does not become too large that it creates feelings of resentment or, more dangerous, revolution.