Country Risk Analysis-China Essay
Country Risk Analysis-China
With the development of economic globalization, foreign direct investment (FDI) is increasingly being recognized as an important factor in the economic development of countries. Although FDI began centuries ago, the biggest growth has occurred in recent years. This growth resulted from several factors, particularly the more receptive attitude of governments to investment inflows, the process of privatization, and the growing interdependence of the world economy. Team B will perform a country risk analysis to ensure that endeavors of investing into the Chinese markets are warranted.
Initial ScreeningGreater China has been one of the most dynamic areas in the world economy. With the entry of the China into the World Trade Organization, China’s financial markets emerge on the frontier of economic reform and openness. Financial services also provide the most exciting foreign business opportunities in China. However, the recent Asian financial crisis illuminates the problems in China’s state-run enterprises and an ill-functioning banking system.
This paper is looking for the business opportunity of financial services industry in China. It will begin from the review of the emerging economies to explain why the specific region was chose. The research of this paper also includes business analysis in China, a review of profitable industry, the business entry strategy and its functional areas operate in China. At the end, the future strategy and the recommendations will be discussed for the further steps in this investment.
Potentials/FDILooking at the environmental factors of China, the economic development it has undergone in the past 15 years is of increasing interest to marketers. It has developed and continues to grow into a great trading partner. If this growth pattern continues, China will someday have significant economic influence on the world. One reason China could have a particularly large effect is due to the number of Chinese citizens. China supports over 1.29 billion people and this number is increasing by .93%. If the standard of living persists and income levels rise, it would be possible to accept the Chinese as potential consumers that would unlock a huge market of individuals.
The massive population has been a burden on China because the economy, as it stands now, cannot bear to support such a number of citizens. The government is trying to gain control of this problem by limiting the number of children to one per household, with exceptions to ethnic minorities and those living in rural areas. Other countries are offering their services to attempt to control the birthrate by showing the government that population control can be managed without a coercive and involuntary approach. The government has been losing its authority due to political changes and popular resistance that make population standards difficult to maintain. Therefore, some projections still approximate that 1.6 billion will make up China’s population by the year 2025.
Countries wishing to take advantage of China’s emerging opportunities are investing a large amount of time, effort and money in order to access such a vast market. These possibilities were made possible when China started its reform in 1978, opening its doors to foreign investments and trade. This changed a self-reliant central economy into a mixed economy that combined state owned enterprises and private businesses. China could now allow individual citizens to have different amounts of incomes. The results have changed China dramatically making it the fastest growing economy for 15 years. When the reforms began in 1978, 60 percent of the population earned less than $1 a day. Since the reform, GDP has grown steadily by an average of 9 percent. In the year 2000, GDP grew by 8 percent. Currently, per capita is equivalent to $3600 and as the economy continues to expand the purchasing power of individuals will increase as well.
The new economic reform policy intends to reduce central planning and increase business autonomy and spread income. Many problems still exist, despite the success of the policy and rapid economic growth. There is a movement for more privatization of some State Owned Enterprises because many remain unprofitable. In the year 2000, 46.5% of the SOEs were running at a loss. These problems stem from the socialist system that is still in place under their Constitution. Under the Chinese Constitution, it is the responsibility of the government to manage the economy by means of production quotas and price setting. This apparent contradiction between the reform policy and the Constitution (1982) seem to work against each other. China will never succeed at full potential unless it retires the Marxist views and embraces a market directed system.
Economic IndicatorsChina’s economic growth remains quite high due to the large investments from the United States and Europe. The labor sector has a competitive edge with the rest of the globe now, where outsourcing of work to China is a priority among the large corporations. The Second Screening tries to look at more specific types of economic indicators to determine the risk and safety for a foreign company to invest in China, a country that has a communist government.
“According to the World Economic Forum, China has moved up from 33 to 39 in their 2002-2003 Growth Competitive Index while the IMD has mainland China listed as number 12. Summary data can be accessed below.”In terms of trade surplus, there are fluctuations all the time due to the business cycle. Not all cycles of goods and services in China fall into predictable patterns”China’s trade surplus in March fell to $6.9 billion, well below forecasts and down sharply from February’s $23.7 billion surplus, reports AP.
It was not clear whether the drop in March was the result of government efforts or would have a lasting impact.”(www.metrics2.com)http://www.metrics2.com/blog/economic_indicators/Inflation is something that remains as long as prices keep going up, and there are no controls of prices. The Chinese communist government does have strict controls over the Chinese currency. Its central bank controls the overall balance of payments within the country when dealing with foreign investors, as the United States.
“China’s consumer price index (CPI) rose 5.3 percent year-on-year in July, mainly due to the lagging effect of price hikes at the end of 2003 and one-time factors, said the monthly report released by the National Bureau of Statistics (NBS) Thursday. “The July inflation rate was 0.3 percentage points higher than the 5 percent rise in June, making it the second consecutive month that China’s inflation exceeded 5 percent.
Currency ConvertibilityCurrency in China is called the “Renminbi and although it tries to be strictly controlled by the Chinese government, the currency competes on the world currency market just like the American dollar and the Euro. The currency is tied to the economic health of the country in terms of balance of payments. Sometimes this is difficult to understand because of the globalized world economies today, where every country deals in all of the world’s currencies. International corporation for example can pay for goods and services in any form of currency.
“The official currency of the People’s Republic of China (PRC) is Renminbi (meaning in Chinese: “people’s currency”). The People’s Bank of China, the PRC’s monetary authority, issues the Chinese currency. The official ISO 4217 abbreviation of China’s currency is CNY, but it is also abbreviated as “RMB”. Colloquially, the Chinese currency is also called Yuan and Kuai.”(www.danwei.org)Gross Domestic Product”China is likely to declare itself the world’s fourth largest economy next week, having leapfrogged Italy, France and Britain, after a widely expected revision of its annual gross domestic product figures.”
“Economists say the National Bureau of Statistics (NBS), which is due to release part of the results of its first national economic census on December 20, is likely to put a much bigger figure on the size of China’s services sector. “Political and Legal barriers to doing business in ChinaThe People’s Republic of China is a dichotomy of cultures and lifestyles. While maintaining the culture of an old world, there is a marked representation of Western culture all over the larger cities in the country. However, anyone wishing to do business in China will have to know and understand both cultures, and all the legal and political implications involved in doing creating a successful presence in China.
In China, the first step in doing business is to have a legal framework to operate your business. You need a legitimate platform to launch your business venture. It is not advisable to use proxy or another Chinese company to conduct business in China (www.seve.gr). While the most obvious barriers to doing business in China include tariffs and other financial limitations, there are some non-tariff barriers that could inhibit a business from doing business in China.
Entry BarriersGovernments often provide trade consultations and administrative guidance to companies to facilitate implementation of their respective industrial policies. In some countries the role of government may take the form of a caretaker, coordinator and leader providing guidance, coordination and arbitration. In order to achieve these goals, governments use such tactics as licensing, foreign exchange allocations and quotas. These tactics could interfere with free trade and become a barrier to market entry (www.foxweb.marist.edu).
Profit Remittance BarriersFinancial controls may take the form of exchange controls, multiple exchange rates, and prior import deposits, as well as credit restrictions and profit remittance restrictions. Exchange controls limit the amount of currency that can be taken abroad. Such controls limit the amount of currency an importer can obtain to pay for the goods purchased. It also limits the amount of currency an exporter receives for goods sold and the length of time it can hold the currency (www.foxweb.marist.edu).
Prior to 2005, most businesses in China were state-owned and it was virtually impossible for non-state businesses to enter the Chinese market. However, in 2005, China lifted trade barriers that would allow private businesses to invest in the infrastructure, industry and utilities of China.
Although the government has displayed support for the development of non-state economy in recent years, there are still barriers to the development of the private sector especially in the power and oil industries. Even in Shanghai where the private economy booms, the non-state business often faces many limits from various industries (www.English.peopledaily.com).
Cultural IssuesChina’s estimated population for 2007 is greater than 1,321,800,000 with “a relatively small cohort.” (CIA, 2007) The median age in China is 33.2 (32.7 male and 33.7 female).
Exhibit 1 (CIA, 2007)Life expectancy is estimated at 72.88 years. Seven out of every 1,000 people die each year. Infant mortality rate is 22.12 per every 1,000 births (20.01 male and 24.47 female). (CIA, 2007). The Chinese ethnic population is 91.9% Han Chinese; while the remaining 8.1% is made up of Zhuang, Uygur, Hui, Yi, Tibetan, Miao, Manchu, Mongol, Buyi, Korean, and other.
Exhibit 2 (Cyborlink, n.d.)Culturally, China ranks highest in long-term orientation. “This dimension indicates a society’s time perspective and an attitude of preserving; that is, overcoming obstacles with time, if not with will and strength.” (Cyborlink, n.d.) Geert Hofstede has conducted many cultural analyses and ranked China the lowest in Asia in regards to individualism. This is thought to be in part to an emphasis on a Collectivist society by Communist rule. Culturally, the Chinese are close and committed to family and relationships and loyalty is considered very important.
Hofstede also noted that China ranks 80 in regards to power distance; while the rest of Asia averages 60 and the rest of the world averages 50. “This is indicative of a high level of inequality of power and wealth within the society. This condition is not necessarily forced up the population, but rather accepted by the society as their cultural heritage.” (Cyborlink, n.d.) In regard religions, China is an atheistic society (94%); while only three to four percent are Taoist, Buddhist, or Christian, and one to two percent are Muslim.
Education in China is very important. “Two years before the dawn of the 21st Century the Chinese government proposed an ambitious plan intended to expand university enrollment to ensure a greater output of professional and specialized graduates.” (Cyborlink, n.d.) The government’s goal is to develop an elite of world-class universities. Today, 90.9% of the Chinese population is literate; however, only 85.5% of Chinese females are literate compared to 95.1% of Chinese males are literate.
The 2006 estimated Chinese labor force consisted of 798 million people with an official unemployment rate of 4.2% for urban areas. Unemployment and underemployment rates for rural areas are considerably higher. According to the 2006 labor estimates, 45% of the labor force was involved in agriculture; 24% industry; and 31% services.
Exhibit 3 (CIA, 2007)Competitive forcesNumber, size and financial strengthWith this being a relatively new product idea there is very little competition. That is not to say that there is no competition. Similar software exists however it does not take into account the end user. Most fashion software is for the designer more so than the consumer. Our software allows people put in there body type and shape and then see how clothes would look on you before you ever step foot in a store.
Market shareWith a very small number of competitors is allows for firms to have very large shares of the market. We understand that being brand new we will not be able to have the entire market, however within the first three months we expect to grow it by a factor three. This is very ambitious but we feel with our strategic partnerships and quality product we should be the market leader within the first 18 months.
Marketing strategiesOur marketing strategy will be to associate our self with an established fashion label(s). We will use there good name to help promote our product as a product extension of the clothes.
DistributionWe will distribute our products through online stores as well as their contemporary bricks and mortar counterpart. We feel this is the best over all solution to get the product into the hands of as many people as possible. The competition utilizes the internet as well as physical stores as well so we must do both as well.
Modes of entryAs for the mode of entry, we have decided that because of the bureaucratic red tape associated with doing business in china it would be most beneficial if we combined our efforts with an already established clothing company. That way we would not have to launch a completely new company however just branch out as a different product line to an existing brand. We will probably use price skimming as this type of software will be aimed at consumers who are willing to pay a premium for fashion. Also they might perceive a lower price as a lower quality product.
An alternative mode of entry could be if we sold our software to multiple clothing makers and allow them to use the software as a tool. This also would eliminate some of the governmental procedures. This solution would also get the product out and into more users. The products of this industry are services, it is extremely important to build good relationship with customer and build customer loyalty in long term. This issue is currently managed by the group successfully. The only challenge is to keep the standard when entering the China market.
In the highly competitive business atmosphere currently occurring in China, there is a large shortage of qualified employees. Many companies are eager to attract as many skilled professionals as possible, especially in financial services industry. Local business giants realize the urgency and magnitude of their needs. Besides the great number of expatiate executives, management-training companies in Shanghai have mushroomed to several thousand to provide the management talent.
In conclusion, with the speed up of world economic integration process and the gradual opening of financial market after China’s entry into WTO, China financial services sector will have to face more powerful competition and challenges from overseas intruders. China will be stepping up infrastructure development and offering equal opportunities to both the foreign banks and the domestics. It also is a greater opportunity for WF to take a step in sharing the market.
China lifts barriers of private business into monopolized industries. (2005). Retrieved April 21, 2007 from http://english.peopledaily.com.cn/200501/20/eng20050120_171269.htmlCIA. (2007, April). China. Retrieved April 19, 2007, from The World Fact Book:https://www.cia.gov/cia/publications/factbook/geos/ch.htmlCyborlink. (n.d.). China. Retrieved April 19, 2007, from International Business