China: An Evolving Business Environment - Research Paper Example

China: An Evolving Business Environment STATEMENT OF THE PROBLEM Business groups are common enterprise structures in China. Business groups are collections of independent organizations that have operations in local and international markets which have ties through many different formal relationships (Khanna and Yafeh 332). Business groups usually have a main parent company that controls many subsidiaries. They are either controlled vertically (centralized), horizontally (decentralized) or connected with a common social purpose through informal relationships. Chinese business groups are much different than the Western corporation or conglomerate. In countries such as the United States or the United Kingdom, corporate businesses have several company units that are controlled by different management teams within each business unit. Business groups however operate under only one management system and team that is controlled by the parent organization (Khanna and Yafeh 333). There is little diversity for business group units and they are very bureaucratic with much corporate red tape. In the year 2000, business groups gave China 60 percent of its total product and industrial output. Today, this number has increased. Therefore business groups are highly important to the economic success of industry in the country over that of smaller to medium-sized businesses. The problem is that business groups are almost always controlled by the government. Business groups do not have the independence in decision-making that American corporations are given and the government regulates these groups. Traditional Communist values are still part of the Chinese government system and it is common for government to appoint Communist Party members to the governance boards of business groups. The government even makes sure that business groups have policies that demand the business gives support for the Communist Party financially and strategically (Huang and Orr 109). Government ownership of business groups and its regulations prevent smaller organizations from being developed to build a more positive competitive environment. Because of this, many business groups operate in oligopolies where there are very few sellers to service many different buyer markets (Boyes and Melvin 148). In the oligopoly, high prices can be set that are unfair for Chinese consumers and it provides less-diverse product outputs to improve human lifestyle and welfare. Therefore the main problem is that government will not let go of their strong influence in regulating and controlling business which has large impact on the economic strength of the country and the well-being of society stakeholders. A HISTORY OF THE PROBLEM In the mid 20th Century, Chinese government began to see industry being developed and become successful economically. Holding onto old style Communist values, which want the government having the most control and power distance from society, the government was afraid that businesses would become independent of government control. Therefore, between 1970 and 1990, growth in business groups was witnessed in the country as a direct result of government investment. The Chinese government began giving companies much financial capital so that they could grow as a result of direct government investment. China developed what is known as a command economy as a result, where a central government power sets prices and supply instead of being set by market forces (Gorman 43; Myant and Drahokoupil 138). This was done by buying the majority of stock with companies that had once been independent of government. It was also done by giving companies so much financial investment that business groups were not able to rely on any other force for funding but government. Between the 1970s and 1990s, there was a very undeveloped baking and lending market so it was only possible for businesses to grow by receiving money from a controlling government (He, Mao, Rui and Zha 171). With growth in business groups controlled by government, smaller and mid-sized companies that wanted to have their own control and governance were driven out of the market. They could not compete with these powerful business group organizations being supported by government. The weak financial market in China gave business groups much more authority and leverage. They were able to create barriers to other alternative lending companies and banks. This gave struggling smaller businesses no option but to fail or get financial support from government. This would, however, have put government in control of their businesses like that of the business groups. EFFECTS, IMPACTS AND CONSEQUENCES FOR CHINA A main issue caused by government ownership between the 1970s and 1990s was that business groups were not concerned about the consumer stakeholder. The main goal was to earn profit as a means of giving the government better revenues and power through finance. For example, the government currently owns the four main automotive companies in China. These include Dongfeng Motor Group, SAIC Motor Group, China Changan Auto Group and First Automobile Works. Price setting was not done by market forces, but through government policy and authority. These major business groups were not concerned about competitive pricing only having unrealistic profit desires. This was causing consumers to be price-conscious and they were therefore not demanding vehicles (Holweg, Luo and Oliver 2). The problem in this case was that it prevented development of roadways and other transport infrastructure, making it difficult to move products and services from urban areas to rural areas. This again harmed the economic strength of the country compared to other Western nations. This made the country not good for foreign direct investment and reduced competitiveness internationally. Also, with government having control over these business groups the country had a very immature and unprofitable capital market. Western companies being free of government control relied strongly on the stock market to raise capital and expand. In China, with 60 percent of large businesses owned by the state, there was little need for capital market growth since companies could get funding and finance directly from the government. This did not allow stakeholders to build a better financial portfolio through company stock ownership. Therefore, there were problems with massive gaps between the rich and the very poor. There was basically no middle class that helps Western countries gain more revenues and buy products so commercialism was muted by lack of a strong capital market. Having strong Communist beliefs in the business at the very highest levels was also not a good situation for the country. Citizens were being shown many Western values and starting to get American-made products that made them want to be free of government controls. Communists believe that there should be a classless society and a fair distribution of resources (Yang 25). But the government was only concerned about their profit opportunities and ownership of business. The government was actually creating a situation where there were massive class divisions. This angered Chinese citizens who wanted real Communist values to give them a better quality of life. This is why the world saw many different Chinese uprisings, such as Tiananmen Square in 1989 where many rioted to demand less government oppression and more freedoms (Cunningham 17). Communist government was afraid of the influence that capitalistic countries were imposing on the country’s citizens so the government was able to have more control by preventing competition in the country. Consumers had to buy most of their products from output given by business groups owned by the government at unfair pricing and without options. Between the 1970s and 1990s, there were still 70 million Communist Party members in the country that were gaining much more authority on corporate governance boards at major companies. At the time, the country had not set codes of ethics for governance activities which gave Communist Party board members much more opportunity to promote the needs of the government instead of consumers. In U.S. companies and those found in the United Kingdom, many companies make strategic decisions that give thought and concern to stakeholders. This was not true in Chinese business groups during this time period. Communists were making decisions about raw materials purchases, total output of products and even distribution of finished goods. This is not common in more successful Western corporations. All decisions were made for profit purposes and government support which was causing many poor Chinese citizens to grow even poorer and have less quality lifestyles. ECONOMIC IMPROVEMENT ANALYSIS As part of making sure that business groups and government could grow and profit, the government began to accept free trade agreements with many countries. It was realized by the late 1980s that the country was not fully competitive with stronger and more diverse corporations from Western nations. At the same time, business groups could only grow so large and government revenues were being shrunk because new businesses could not develop and compete with business groups. As a result, the government had no choice but to build a stronger capital market from the ground up so that smaller and medium-sized companies could begin giving the government more revenues. By 1990, private businesses not controlled by Communist valuing government were allowed to issue common stock shares to the public (Liang and Useem 2). When the government realized this would give them a better financial position, it spread to larger businesses. By the year 2008, the growing capital market had 540 different private and state owned businesses listed on the Shenzhen Stock Exchange. The capital market had grown by nearly 800 percent between 1990 and 2008 and was valued at one trillion RMB (Liang and Useem 2). This opened the doors for other companies to finally be able to compete with business groups and still have their own independence from government Communist interests. The ability to raise capital through stock allowed businesses to grow and produce more output. It also provided more government finances that finally were put into building a better infrastructure so that distribution of products could finally reach undeveloped areas and rural areas. This created a new middle class as job opportunities opened and local communities benefitted from growth in consumerism. ANGLO-AMERICAN GOVERNANCE CHANGES Growth in business competition and infrastructure now suddenly made China an interesting opportunity for foreign direct investment. Many businesses that were now free of government controls to the level of business groups started using the Anglo-American model of corporate governance. This model provides protections for shareholders and stakeholders which makes companies report their finances more accurately and be subject to governance boards that are regulated by other supervisory boards. Businesses based on influence from Western business leaders and practices now made strategic decisions that gave consumers better quality of life through corporate activities. Even though the government wanted to have control over all industries and business types, the country had no choice but to remove some of its regulations on business if the economy was to be supported. With government supporting new free trade ideas, the country was in a much better position for economic growth and building welfare programs that helped citizens. International competition had been outperforming Chinese company strengths. If the country was to be a trade partner internationally, build a stronger economy, and improve consumer lifestyle, the country had to bring capitalistic values and systems into the business world (Degen 95). With businesses seeing the advantages of using the Anglo-American model of governance for business, it is providing more economic wealth for citizens. Government loosening its regulations and authority through policy development has given more accountability to the Board, managers and executives of Chinese companies. Now, there is a set code of corporate conduct that has been written and supported by government as companies move toward the Anglo-American governance model. Now, the Chief Executive Officer and Chief Financial Officer, as well as the Board, are seen as fiduciary agents. This is a legal relationships between the shareholder and the company insiders. Now, companies have a duty of care to shareholders and to breach this duty can lead to fines and even imprisonment of executives that do not comply with the law for fiduciary responsibility. Now, companies have to agree that their financial reporting is accurate and regularly audit the organization for fraud and accounting practices. Where once the government was the only real source of reporting which led to corruption and lack of concern for stakeholders, now Chinese businesses act responsibly. This avoids such situations as that with the U.S.-based Enron that nearly crumbled an industry. CAPITAL MARKET GROWTH ADVANTAGES The government also realized that it could not be the only supporting agency for businesses. With high investment in infrastructure and welfare programs, the government was not able to provide the same type of capital for business groups that it once had during the 1970s and 1980s. Foreign companies that were now operating in China were demanding more lending opportunities and banking opportunities at the same time. The government had no choice but to create policies that would allow government to invest in setting up a more solid lending industry. This created many alternative lending systems for growing smaller and larger-sized businesses and further reduced the authority and strength of government as a regulator. With better lending services and banking services in the country, output increased for finished products which was no longer being price-set by government and managers and governors of these businesses could finally make their own decisions about supply chain and distribution. Factories and assets were now being owned by private businesses that had power and finance. This was a more capitalistic method of running businesses where these assets are controlled and managed by private ownership (Durloff and Blume 38). China was now competitive locally and internationally by having government much less involved in business decision making. ENVIRONMENTAL PROBLEMS AS A RESULT OF POLICY Even though businesses were not under less government control and allowed to make their own decisions in many industries, growth in industry and business began causing human health problems in the country. The government began creating policies that were supporting of business growth (since it gave the government better financial positions). However, the government was not, in the 1990s and 2000s, creating environmental protection policies that made businesses comply with regulations. With much more than just large business groups dominating the competitive market, growing private owned industries were allowed to dump pollutants into rivers and lakes and even human sewage. Today, the one-third of the country’s citizens are struggling to find access to fresh drinking water (Xu 2). In modern society the government is trying to undo this damage, but the smog problems and pollution problems continue to be a major issue in the country. The government does not want to invest its resources into environmental clean-up and companies state they cannot afford this so they continue with the practices. As a result, the government had to come up with some level of strategy to improve human welfare and curb pollution caused by unregulated businesses. Today, 70 percent of the country’s fresh water sources are polluted. The government is spending billions of RMB on building new dam systems as a means of routing fresh water to citizens. Today, the country now has 25,000 different dams that have been built by government investment, which is the largest dam infrastructure in the entire world (Xu 2). However, this policy of government investment in dam building is not effective and is causing even more problems in the nation. Dams are forcing many millions of people to migrate to new locations as it cuts off their own freshwater sources. It is also leading to farmland losses in some areas where the dams have been built, which impacts agriculture output and the ability to feed people using local sources. Today, in 2014, the government is finally working with companies to improve ecological sustainability to control pollution, however the damage caused between the 1970s and 2000s is significant and very harmful to human health. Even Western companies that have subsidiaries in China are not regulated to control their pollutant outputs and contribute to this mess. This is an example of where policy development for improving business growth and development of new businesses other than business groups has been somewhat of a failure. Again, government is directly responsible for harming the citizen stakeholder by trying to protect its own financial interests firstly. In fact, the smog problem in China is so bad that it actually shut down city activities in an urban center with over 11 million people (Rose 2). POLICY RECOMMENDATIONS The Chinese government must begin adopting environmentalism policies that are like those of Western countries. With pollution and human health issues being considered a real crisis in the country, government must spend resources on clean-up practices and forcing companies to take some level of financial responsibility for this effort. By forcing compliance, clean-up can occur faster and not strain the government that is already invested heavily in many different programs and constructions. Clearly, current government policy that attempts to use infrastructure changes, such as dam building, is not enough for giving better human health and aid. Even though it is giving citizen stakeholders more fresh drinking water, it is changing the agriculture and farming abilities of local citizens. There needs to be more cooperation with businesses and government to give a better national situation with pollution control and better corporate practices for environmentalism. It is further recommended that the government have more policies that give foreign businesses tax incentives and other reasons for wanting to invest in the country. More levels of competition in certain industries, such as automotive, would make sure that pricing is fair to consumers. It would also provide the government with more financial resources that could be used to improve human welfare and quality of lifestyle. The government should be providing support for environmentalism in the country while creating laws that make companies take a more active role in responsible business and waste disposal systems. Many companies from foreign nations are looking for new places to set up their businesses at low cost. China is now set up to be a business environment that can give foreign companies better profit chances and opportunities for better income growth. The country government should be working with international politicians and businesses to work out a foreign investment strategy with promises that they will be free of certain tariffs and taxations for a specific period of time. Many other nations around the world have done this and have attracted many other interested businesses and improved their gross domestic product in the process. Finally, corporate policy should force senior managers at a company to work as expatriates in foreign firms. Even though some parts of capitalism are being put into business policy, the country still suffers from business leaders that want bureaucratic systems to control employees. By forcing managers to work in foreign businesses with decentralized structures, companies in China can have more competitive advantages by using HR strategies successful in Western countries. This would be most beneficial in state-owned business groups that are still in operation in the country today. By showing managers used to working in centralized businesses how to develop employees and gain their commitment, companies can make sure that employee stakeholders have better lifestyles and help businesses be more innovative in competitive environments. CONCLUSION As shown by research, the main problem with China has been government influence in controlling businesses. This has built many poor outcomes on the country’s infrastructure. It has also given consumers much less options and opportunities that continued to create big divisions between the rich and the poor. It was not until government was forced to stop buying up major business stocks and begin letting private ownership take over that the country found a much better economic situation and competitiveness against international companies. The study found that the most important gains in policy address were better quality of lifestyle for consumers in the country and more product output that helped to build more positive economic conditions. Government pull-out of businesses in the same way they had done between the 1970s and 1990s was the main reason why the capital market increased and companies did not have to get funding from the government anymore. There is much less oligopolistic business activity in the country which also gives consumers fairer prices and better product opportunities to build a better lifestyle. If the government had not taken capitalism ideas into its Communist methods, the country would still be suffering from poor economic conditions and the country would not be as competitive in the global market as it is today. The main concern in China was a controlling government that cared only for its profit success as a main goal. Today, this is not as bad as in previous years and now companies can make better decisions that help everyone instead of only rich people and the government. If the policy recommendations given in this report are followed, China can better service all of its stakeholders. Fortunately for the citizens of the country, the government is much less involved in business and everyone gains as a result of these actions and changes. WORKS CITED Boyes, William and Michael Melvin. Economics, 6th ed. USA: Cengage Learning, 2005. Print. Cunningham, Phillip J. Tiananmen Moon: Inside the Chinese Student Uprising of 1989. Lanham: Rowman & Littlefield Publishers, 2010. Print. Degen, Robert A. The Triumph of Capitalism. New Brunswick: Transaction Publishers, 2008. Print. Durlauf, Stephen N. and Lawrence E. Blume. The New Palgrave Dictionary of Economics. London: Palgrave Macmillan. Gorman, Tom. The Complete Idiot’s Guide to Economics. New York: Penguin Group, 2003. Print. He, Jia, Xinyang Mao, Oliver M. Rui and Xiaolei Zha. Business Groups in China. Journal of Corporate Finance. 22 (2013): 166-192. Print. Holweg, Matthias, Jianxi Luo and Nick Oliver. History of China’s Auto Industry. 2008. Web. February 24, 2014. Huang, Richard and Gordon Orr. China’s state-owned enterprises: Board governance and the Communist Party. The McKinsey Quarterly. February, 2007. Print. Khannta, Tarun and Yishay Yafeh. Business Groups in Emerging Markets: Paragons or Parasites? Journal of Economic Literature. 45.2 (2005): 331-372. Print. Liang, Neng and Michael Useem. Corporate Governance in China. January 27, 2009. Web. February 24, 2014 Myant, Martin and Jan Drahokoupil. Transition Economies: Political Economy in Russia, Eastern Europe and Central Asia. Wiley-Blackwell, 2010. Print. Rose, Adam. China Smog Emergency Shuts City of 11 Million People. Reuters. October 21, 2013. Web. February 22, 2014 Xu, Beina. China’s Environmental Crisis. Council on Foreign Affairs. Last Updated February 5, 2014. Web. February 27, 2014 < http://www.cfr.org/china/chinas-environmental- crisis/p12608> Yang, Dali L. Remaking the Chinese Leviathan. Stanford University Press, 2004. Print. Read More