Scenario analysis 2022 : potential political risks facing foreign investors in the PRC

[摘要] ENGLISH ABSTRACT:Since the beginning of the economic reforms in 1978, the People's Republic of China (PRC)has attracted continuous interest from foreign investors, both in the form of foreign directinvestment (FDI) and international trade, making the PRC the second largest host of FDI inthe world. Despite occasional declines in foreign investment, foreign investors remain veryinterested in the long-term prospects for doing business in the country. The PRC's phenominaleconomic growth, large consumer market, the accession to the World Trade Organisation(WTO), and the government's commitment to open markets, economic reforms, andrestructuring of the economy are amongst the factors that continue to attract foreigninvestment and trade.Despite the huge market potential and strong desire by foreign investors to do business in ThePRC, the track record of foreign companies and investments in the country have at best beenmixed. While some foreign investors have reaped large profits, others have failed to meettheir performance targets. Foreign investors have faced a number of problems that are notmarket or trade related, but associated with economic, political and social trends anddevelopments, including corruption, nepotism, crime, poor infrastructure, a depleted bankingsystem, inefficient legal system, unemployment and poverty. Therefore, it is not surprisingthat many foreign investors are asking themselves whether the benefits of doing business inthe PRC are worth the risks.In an increasingly uncertain and instable international trade and investment environmentpolitical risk assessment and management have become essential components of anyprofitable foreign investment strategy. Consequently, numerous political risk-rating agenciesand a large number of both qualitative and quantitative risk assessment methods haveemerged over the years. There is, however, neither general consensus regarding the definitionof political risk nor a comprehensively systematic method of conducting political riskassessment. The definitions of political risk include a wide variety of indicators, ranging fromgovernmental actions to all non-market developments. The number of methods available forpolitical risk analysis range from informal, unsystematic assessments by a few individuals toformal, systematic, and sophisticated risk analysis models. There are, however, somesimilarities. The main objective of political risk analyses is to describe, explain, and forecast political conditions and events that affect the interests of foreign investors operating abroad orplanning to enter a foreign market. In addition, political risk analyses attempt to forecastlosses, and recommend means of managing the risk, avoiding the losses, and seizing theopportunities.Scenario planning is one of the qualitative methods used to analyse political risk. Scenarioplanning, however, differs from most other approaches as it does not try to accurately predictwhat will happen in the future or to provide the right tool for foreseeing the futuredevelopments, but to offer a range of possible futures. The underlying assumption is that thefuture cannot be forecast or predicted with certainty, but that the very process of thinkingabout the future and exploring the implications of possible future scenarios may have aprofound impact on foreign investment and trade.Scenario planning is a method that provides insightful information necessary to understand,anticipate and respond to change and uncertainty in the future PRC. The development of four20-year scenarios in this study demonstrates that the prospects for foreign investment can beboth positive and negative. When the economy continues to grow strongly, and thegovernment is able to maintain a stable environment and successfully implement thenecessary changes foreign investors are expected to reap the desired benefits. However, if theproblems facing the PRC at the moment further deteriorate foreign investors could expectincreased risks, and the possibility of failure.

[发布机构] Stellenbosch University