Doing Business in China
Doing Business in China
China is an evolving economy that offers lot of market prospects for foreign venture. It is an independent country located in East Asia. Currently China is the world’s most populous country, with its population of over 1. 35 billion. China’s land size is approximately 9. 6 million square kilometers and it is the world’s second-largest country after Russia. In contemporary eras, China plays an important role in calling for free trade areas in the Asia Pacific Region. China proposed a new East Asia Summit (EAS) framework as a forum for regional security issues in 2004.
The EAS, which includes ASEAN along with India, Australia and New Zealand, held its first summit in the year 2005. Since 1978 with the introduction of economic transformations, China today has turn out to be the world’s rapid-growing key economy. China is the world’s second-largest economy together in term of its nominal total GDP and purchasing power parity. As of 2013, China ranked at number 91 at ‘Doing Business’ provided by the World Bank.
Its GDP per capita currently stands at $6,075, while the total GDP sums up at $12. 05 trillion. Although the country has a huge potential for economic progression offering access to a huge market and significant savings in labor costs, cautiousness must be used due to differences in the political and cultural environment that create risk and pose uncertainty for foreign investors. In addition, China is also the world’s biggest exporter and importer of products and goods. China is also a member of WTO, APEC, the G-20, and many others. Not to forget, China has been considered as a probable superpower up to this date.
Regardless of achievement made by China, it encounters a range of obstacles to China’s future economic advancement. To overcome such obstacles, it must maintain a great growth rate, improve the economic system, uphold better international support, and transform the responsibility of China government in its system of economy. As stated in the World Bank recently, China is the world’s third largest trading country, right after the United States of America and Japan. Economic Issues
In recent years, China has become one of the primary selection of the world’s destination of Foreign Direct Investment (FDI), and among the figures counted in its FDI are 27% of the value added production, 4. 1% comes from its national tax revenue, and another 58% or so comes from its foreign trade. This has been proved where more than 190 nations invest in China, and according to a survey done by Member Priorities Survey, most of the multi-national corporations do their FDI in China is because they want to serve its domestic market and the local consumers, not to export back to each of the MNC’s home country.
The Chinese National Development and Reform Commission (NDRC) developed a plan to improvement the foreign direct investment, back in 2006, which stressed the correlation between national safety and foreign investment. NDRC proposed to government of China to slowly decrease its restrictions and limitations on MNCs. MNCs also are being asked by the NDRC to intensify its investment and production in China. The aim of this move is to heighten innovation’s liberation for Chinese corporations.
In addition, foreign investment must be directed at high-technology and manufacturing industries, infrastructure improvement and not to forget the environmentally friendly protection. Figure 1 : Regional share of GDP & resident population in year 2009. Although China’s economy has been liberalized since 1980s, the country still hurts from insufficient number of mode of transportation, communication’s variety, and energy capitals. China also commence the construction of a major highway to link cities in China, in order to provide a world class infrastructure in the coming years.
From this, we can see, it might be costly in term of land transportations for MNCs to conduct its businesses in China. Moreover, currency manipulation undergoes by China back in 2008 is disturbing its own economy. Gladly, the condition has improved by years, and the Treasury Secretary said that the appreciation of the Yuan (Chinese currency) might be a win-win situation for the global’s economy. Figure 2 below shows the Yuan per dollar rates and how China’s currency has moved from 2009 until this year. Figure 2 : Value of China Yuan to US Dollar
In trade, the major industrial exports for China are manufactured products, fabrics, clothes, together with electronic appliances. Thus, if you want to invest in China, these areas are the most profitable for any MNCs to do their business in China. Furthermore, the prominent export materials are magnesium, mercury, tungsten, tin, salt, and antimony. Currently, China is the world’s largest manufacturer of aluminum based on data from China trade. Participation of China in World Trade Organization (WTO) has made China ompetitive in the world’s market. Political Issues As stated in the Chinese Constitution, “China is a socialist state under the public’s democratic dictatorship led by the working class and based on alliance of workers and laborers. ” The government of China contained a system of congresses of the people and multi-party collaboration and soundings of politics under the guidance of Communist Party of China and this following political system in China ensure that CPC maintain its power as the only party in China, which based of the socialist system.
Proceeding into the political risk, the chance of nationalization of industries needs to be taken into account, as this has already happened in 1949. Thus, any MNCs that want to invest in China have to think twice, in which industries are opened to investors, and which industries are closed and prohibited for investors to invest in it. Figure 3 will sum the opened and closed industries for foreign investors.
Another unique political risk in China is the continual clash between China’s central government and the regional governments over applicable laws. The outcome of this conflict, is making it challenging for MNCs working in China to recognize and identify which rules are applicable, and which rules are not. Moving on towards the political stability in China, it still remains a big question to the foreign investors as the Tiananmen Square massacre has scared of foreign businesses and a big drop in many areas can be seen, which include foreign investment and tourism.
At the same moment, China’s improvement in its economy since 1978, the lives of its citizen has improved drastically, an increase in social movement, and stretched the area of personal freedom. What this meant is that people can enjoy wider travel’s freedom, more and more employment opportunity, and access to information, although it is not very opened yet. Moreover, in latest years, China has passed new laws which include the criminal and civil laws to protect citizens and foreigners. Cultural Issues China’s population is estimated to be around 1,360,691,561 as of this year, and expected to be increased rapidly in times.
This rapid growth of population in China is because the death rate among its citizens has dropped drastically in recent years. To cater this increased population crisis, the central government has encouraged the one-child family program. Advice of family planning and birth-control are provided by the government itself. Although most of the world see Chinese culture as an extremely complex one, but most scholars around the world come up to an agreement that even though it is diverse, many Chinese shared the same characteristics.
These same characteristics are based of the Confucian philosophy influence which becomes the core of most Chinese today living in China. One of the most significant values in its culture are the importance of family, classified structure of common life and the importance on hard work along with accomplishment. The Chinese culture can be sorted as collectivist, since in many ways, the family unit takes superiority over its individual members in a family and the children must not answer back to the elders.
Looking into Hofstede’s cultural factors which are measured on five dimensions, which are power distance, individual versus collectivism, masculinity versus feminity, uncertainty avoidance and long-term orientation versus short-term orientation, tables below are the results of China’s assessment. Cultural Dimensions| Results| Power Distance| The less powerful members of organizations and institutions (like the family) accept and expect that power is distributed unequally.
On the collectivist side, we find societies in which people from birth onwards are combined into strong, cohesive in-groups, often extended families which includes uncles, aunts and grandparents which continue protecting them in exchange for absolute loyalty. China rank 10th in the Individualism ranking. This may be attributed, in part, to the high level of emphasis on the collectivist society imposed by the communist rule compared to the values of individualism. The low individualism ranking also demonstrates a close and committed group orientation, either the family, extended family, or extended relationships.
The society fosters strong relationships where everyone takes responsibility for fellow members of their group. Masculinity vs Feminity Hofstede’s study revealed that women’s values differ less among societies than men’s values and men’s values from one country to another contain a dimension from very assertive and competitive and maximally different from women’s values on the one side, to modest and caring and similar to women’s values on the other. Ranked at 66th, China is a masculine society –success oriented and driven.
The need to ensure success can be exemplified by the fact that many Chinese will sacrifice family and leisure priorities to work. Service people (such as hairdressers) will provide services until very late at night. Leisure time is not so important for them. An example is the migrated farmer workers will leave their families behind in faraway places in order to obtain better work and pay in the cities. Uncertainty Avoidance It indicates the extent to which a culture programs its members to feel either uncomfortable or comfortable in unstructured situations. Unstructured situations are novel, unknown, surprising, and different from usual.
Uncertainty avoiding cultures try to minimize the possibility of such situations by strict laws and rules, safety and security measures, and on the philosophical and religious level by a belief in absolute Truth. People in uncertainty avoiding countries are more emotional, and motivated by inner nervous energy. The opposite type, uncertainty accepting cultures, are more tolerant of opinions different from what they are used to; they try to have as few rules as possible, and on the philosophical and religious level they are relativist and allow many currents to flow side by side.
Ranked at 30th, China has a low score on uncertainty avoidance. Chinese are comfortable with ambiguity; the Chinese language is full of ambiguous meanings that can be difficult for Western people to follow. Chinese are adaptable and entrepreneurial. At the time of writing the majority (70% -80%) of Chinese businesses tend to be small to medium sized and family owned. | Long-term orientation vs short-term orientation| Both rated values of this dimension are found in the teachings of Confucius. However, the dimension also applies to countries without a Confucian heritage.
Ranked at 118th, China is a highly long term oriented society in which persistence and perseverance are normal. Relationships are ordered by status and the order is observed. Nice people are thrifty and sparing with resources and investment tends to be in long term projects such as real estate. Traditions can be adapted to suit new conditions. Chinese people recognize that government is by men rather than as in the Low LTO countries by an external influence such as God or the law. Negotiation At negotiating stage, both buyer and seller have to come to an agreement on how the deal ended and what will the price be.
MNCs should decide if they want to set up a new joint venture or wholly-foreign owned enterprises to take over the seller’s business in China, or to purchase equity interest of the business. The deal structure is particularly important from tax perspective. The tax costs bear by the buyer and seller vary significantly which have a big influence on the final cost of the deal. During the negotiating process, an excellent advisory team can be a strong asset, which is to manage the financial, legal, tax and valuation issues that will determined the right price and structure of the deal.
The main reason why deals did not go well in China is the incapability to link and associate the price expectations between foreign buyer and local seller. In this situation, an adviser will come in handy to manage valuation and contract term negotiation. For closing the negotiation, buyers need to ensure that all require approvals have been issued all relevant supporting documents are correct and agreed upon by both buyer and seller. Both parties in this negotiation need legal advisers to draft and finalize the sales and purchase agreement.
This document is a detailed contract that contains the transaction details during the due diligence process. For example, it contain rights to protect the buyer from any unexpected post-negotiation results. Business Ethics In order to have a very successful FDI in China, MNCs must apply this business ethics in their daily business life, or else, they will have a big problem upon them. The important practices to be a business standards within China, is by having a local Chinese employee to be the face of your company’s code of ethics.
Secondly, make sure the code of ethics are translated into the native language in China. Double check the translation to ensure it is fully accurate and correct. Next, is by having a common ground. Most of the values, for example the significance of family are common in Chinese culture, where you must respect the elders or seniors in the organization. During the training sessions, discuss scenarios that could happen in China. Don’t just translate any cultural situations into the local language. Consider reframing some of a large, international company’s core values to align with local cultural values.
For example, in a culture that values community, focus on the community aspects of the company’s values. Not to forget, focus on the sustainability of the company, so employees understand the advantage of following the code of conduct. What works and what doesn’t work in China? What works are MNC’s can simply translate the company’s code of conduct into the local language. The CEO and other leaders should mention the code of conduct in everyday discussions about business, not just in one annual training presentation. Local management too should understand that the corporate code of conduct is part of their everyday job.
What doesn’t work is a code of conduct that is written in English and not translated into the local language, or that has a lot of references to other countries’ laws and regulations, will not be effective overseas. What partially works is that it is vital for a high-level official from headquarters to visit the company’s Chinese offices and introduce the code of conduct. But this is only a first step. Without follow-up from local managers, employees may receive the code politely, then revert to old ways of doing business as they are not being forced upon and opt for a status quo since they are comfortable with it.
Core values are important in China, but it’s also important to remember that people in different cultures may interpret them differently. MNCs can try separating core values, such as fairness or integrity, from the specifics of how those values are implemented. The values themselves are probably shared among cultures, but how they are put into practice may vary. Conversation is critical to making sure your shared core values create an ethical culture. Regularly engage both managers and workers in overseas offices in discussions about how to best implement the core values.
The most effective processes and procedures to detect ethical and compliance problems are to remember that despite what MNCs intend in their policies, being a whistleblower is frequently very difficult. Consider separating the reporting process for whistleblowers from the HR and legal departments. Allow employees to report concerns to someone with direct access to the board of directors. In addition, a few MNCs create a regulator position that is filled by a senior manager for a year. This person helps resolve concerns about company practices.
For a code of conduct to work for MNCs in China, it requires a quick yet thoughtful response to complaints. A “ready, fire, aim” approach will be just as harmful as not taking complaints seriously. Have investigations conducted by people with experience and training in conducting complex investigations. Lastly, try to understand the business model and being willing to ask questions, which is one way to catch problems early. An executive who knows the business well will know to ask, for example, how the business just landed a big contract it had never before been able to get, or why business in a particular region increased so much ore than in others.
If it looks too good to be true, start asking questions. It may not be true. Conclusion Leading business in China can be difficult due to the many indecisions and differences in the economic, political, and cultural environment. The Chinese prefer doing business with MNCs they know, so working through an intermediary is crucial in China. Business relationships are built formally. It is important to be persistent as it takes an extensive amount of time to build business relationship which is also bound with enormous government bureaucracy.
The Chinese see foreigners as representatives of their company rather than as individuals. Rank is extremely important in business relationships and you must keep rank differences in mind when communicating. The Chinese prefer face-to-face meetings rather than written or telephone communication. Meals and social events are not the place for business discussions but social etiquette is important to follow. Some of the cultural values that govern business practices relate to setting up appointments one-to-two months in advance and preferably in writing.
The Chinese view punctuality as a virtue. Arriving late is an insult and could negatively affect your relationship. It is important to pay attention to the agenda as each Chinese participant has his or her own agenda that they will attempt to introduce. You are also advised to send an agenda before the meeting so your Chinese colleagues have the opportunity to meet with any technical experts prior to the meeting. To conclude, it is important is to learn about cultural and political differences and their impact on business practices and business conduct in China.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 19 November 2016
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