Business Environment in China - Essay Example

Abstract International business presents a dynamic approach to business as it involves a consideration of varied environments of operation from the mother country. As businesses traverse national and regional boundaries, they face varied cultural, economic, political and legal environments which they have to adapt into in order to succeed. China is an example of a market that has attracted foreign investments since the liberalization of its market in 1979. China has a long history of civilization. The country’s richness in traditions, values and philosophies alludes to the importance of businesspeople understanding these aspects. Coca-Cola, an American-based soft drink manufacturer has had to adapt to the Chinese environment so as to emerge as a leading soft-drink manufacturer in the country. Thus, this paper gives the history and nature of China and its people and the etiquette of business in the country. It further evaluates the cultural, economic, political and legal environment in the country. Using information from various secondary sources, the paper analyses the experience of Coca-Cola in China, as a case study of the impact of a country’s economic, cultural, political and legal environment on international business. The Political and Legal Environment in China China has been governed by the Chinese Communist Party, CCP for about 63 years since 1949 when it assumed power through a civil war victor. Nonetheless, Ambler, Witzel and Xi (2009) observe that there has been tremendous transformation in the political culture and institutions over this period of time. Even though this party upholds a monopoly of power and does not tolerate being questioned, Lawrence and Martin (2013) consider the political system as being neither rigidly hierarchal nor monolithic. This form of centralized government is referred to as Maoism by Peteghem and Zhang (2010). The formal political culture of the Chinese upholds collective leadership, the military as a wing of the CCP and strong legislature on paper but weak in practice. In China, politics go hand in hand with commerce and discipline could be executed by the Communist party. The government of China is largely involved in the primary businesses in the country. Devonshire-Ellis (2011) observed that out of the 46 Chinese companies that were listed in the Fortune 500, 40 were state-owned. This author notes that as soon as a business becomes viable, government interest takes over. Apparently, instead of the returns from these businesses ending up in state coffers, they filter down to state officials (Hamilton & Zhang, 2012). Similarly, to succeed in business, there is need to establish appropriate networks with these officials, referred to as guanxi (Peteghem & Zhang, 2010). This causes difficulties with regards to transparency in China and among the business executives that are engaged in business in the country. This becomes particularly difficult when dealing with the US and EU companies where corruption amounts to a serious crime. China’s legal reform process began in the past about a decade aimed at motivating the opening of its markets having joined the World Trade Organization, WTO. One of the legislative policies of China is to reduce its control over state-owned enterprises (Sweeney, 2010). The authorities of China have the approval process relatively centralized such that it integrates national, regional and local authorities vertically. The law in China distinguishes companies depending on their capital source. Domestic companies typically have less than 20% foreign shareholding while Foreign Investment Enterprises, FIEs could be Foreign Invested Companies Limited by Shares, FICLS, Wholly Foreign-Owned Enterprises, WFOEs or joint ventures. A legal entity would be determined majorly by the kind of investment being undertaken, such as being a direct acquisition or joint venture. Even though the laws of China could allow foreign investors to make a choice from a variety of investment entities, it could occur that the investment destination could be closed or limited. Sweeney (2010) puts this into perspective by giving the three variants of business sectors and activities: encouraged, restricted and prohibited. These categorizations determine whether a foreign investment would be allowed and also to what extent and through what legal entity such an investment could occur. Restricted activities could call for extensive regulatory authorization. The Influence of China’s Political and Legal Environment on Coca-Cola Coca Cola re-entered the Chinese market in 1979. The firm now brags to be the most popular international brand in China and a market leader in soft drinks (Coca Cola, 2013). To succeed in entering the Chinese market, Coca-Cola had to enter into partnerships with government bodies in the 1980s as the beverage industry in China was restricted then. The China National Cereals, Oils and Foodstuffs Import-Export Corporation, COFCO and the Ministry of Light Industries provided the perfect partners. According to Harvard Business Review, HBR (2004), the former monopolized the business of food imports and exports while the latter oversaw the development of local beverage and food industries. Then, Coca-Cola enjoyed limited management control as it could not have the equity majority. However, on the relaxation of bottling joint ventures regulations in 1988, the company acquired larger stakes to gain management control. Through guanxi, the company has established partnerships that have enabled it successfully operate in China. Even so, the company still faces some challenges with its expansion attempts. Acquisitions in China are governed by the Ministry of Commerce, MOFCOM, among other state agencies in China. MOFCOM also acts as the primary antitrust body that reviews cross-border mergers and acquisitions transactions. It was MOFCOM that blocked the attempts by Coca-Cola to takeover Huiyuan, the Chinese juice maker. This being a maiden friendly takeover case involving a foreign company attracted great interest in China. The Huiyuan shareholders had much to benefit from this as Coca Cola offered thrice the company value. The deal would have seen Coca-Cola become a monopoly in the beverage market in China and also eliminate a popular domestic brand (Wong & Cheng, 2009). Despite high expectations for MOFCOM approval, the declinature marked a great move away from market liberalization (Sweeney, 2010). Therefore, unlike in Western countries where Coca-Cola would probably use its market dominance to influence government’s decisions, China did not provide for that possibility. Despite years of heavy investment in China, Coca-Cola still faced obstacles in its expansion strategies. The key political obstacles that Coca-Cola faces in China include corruption, bureaucracy and lack of transparency. Government officials propagate corruption in the name of establishing relationships, in line with their culture. Additionally, foreign investors like Coca-Cola face the challenge of lack of coordination between the Chinese local and central authorities. Lawrence and Martin (2013) observe that this causes the investment climate to become insecure and exhibits the lack of federal structure in the country. China also suffers from a shortage of certified accounting professionals which makes accounting in businesses a challenge. Furthermore, the country is yet to adopt modern financial reporting approaches. Conclusion Coca-Cola, an international soft-drink brand, has had to find strategies to adapt to the Chinese culture. In a country which highly regards the cultures of gift-giving, respect for seniority and punctuality, Coca-Cola has emerged as the largest soft-drink producer with a localized brand. It exhibits greater adaptation to the bureaucratic politics of the ruling communist party, CCP which promotes corruption in the government and upholds the tenets of guanxi. Coca-Cola had to form partnerships with government bodies for successful entry into China. The company has nonetheless failed to make its products appeal to the older citizens and girls as compared to young adults and boys respectively due to the fear of the caffeine in Coke and its weight gain effect. Additionally, the company operates in a highly competitive economy, facing competition from Pepsi Co. and Cadbury Schweppes as its major rivals in the non-alcoholic drinks industry. The legislation of China, specifically the anti-monopoly law, has also limited Coca-Cola’s expansion bid, deterring its takeover bid for local companies. Even so, the company has managed to secure a considerable market share of 46.8% of the total non-alcoholic soft drink market. The firm could be forced to establish itself in new product lines such as drinking water, energy drinks and confections so as to gain a competitive advantage and survive in this highly politicized market. References Ambler, T., Witzel, M., & Xi, C. (2009). Doing business in China (3rd ed.). Oxon, OX: Routledge. Coca-Cola Company. (2013, October 24). Coca-Cola continues strong investment in China with opening of 43rd production facility. Retrieved 17 November 2013 from www.coca-colacompany.com Devonshire-Ellis, C. (2011, April 25). Political influence in China’s biggest companies almost 100%. China Briefing. Retrieved 17 November 2013 from www.china-briefing.com Hamilton, S., & Zhang, J. (2012). Doing business with China: Avoiding the pitfalls. New York, NY: Palgrave Macmillan. Harvard Business Review. (2004). Harvard business review on doing business in China. Harvard Business Press. Lawrence, S. V., & Martin, M. F. (2013, March 20). Understanding China’s political system. Congressional Research Service. Retrieved 17 November 2013 from www.fas.org Peteghem, C. V., & Zhang, H. (2010). An introduction to business in China for managers: Climbing the wall. New Delhi: Marike Smets. Sweeney, M. (2010). Foreign Direct Investment in India and China: The creation of a balanced regime in a globalised economy. Cornell International Law Journal, 43, 207 – 247. Wong, S. & Cheng, W. (2009, March 18). China blocks Coca-Cola’s $2.3 billion Huiyuan bid. Bloomberg. Retrieved 17 November 2013 from www.bloomeberg.com Read More