Country Analysis of China - Case Study Example

Country Analysis Name: University: Course Title: Instructor: Date: 1.0 Introduction The advent of globalisation has driven most multinational corporations (MNCs) to explore new markets outside their traditional home countries. This they attain through green field foreign direct investments- FDI or joint ventures (Borensztein, De Gregorio & Lee, 1998, p.116). However, this has to be conducted with caution through thorough analysis of macro factors so as to gain insights on possible risks & possibly inform on entry, competitive & marketing strategies (Peng & Nunes, 2007). International business person or multinational corporations seeking to venture into foreign markets outside their home countries have take into consideration various macro factors that highly influences the operation of a business. This is anchored on the fact that each country is unique in its own right in regard to economic, political, legal, socio-cultural beliefs, labour environment, industry & policy factors, customer & competitive factors. These factors are likely to influence industrial relations strategy, competitive strategies, market penetration strategy and so on. As such the principal aim of this report is to outline contemporary information on unique challenges of doing business in China. 2.0 China 2.1 Economic & Political Climate Consistent reforms introduced in 1970s have seen the country grow to be the second largest world economy (Zhu, 2012, p.103). After the demise of Nationalist Party rule 1912-1949, in came the China Communist Party led by Mao Tse Sung (Byrne, 2007, p.18, 24 & 25). This revolution has shaped the political & economic ideology of China up to present (Reuvid, 2011, p.8). The approach adopted seeks to have hands on approach in controlling the subjects by making it substantially hard to draw distinction between political party and government activities through concentration of the power at the top (Dillion & Dillon, 2008, p.12-13). The intertwined relationship between the political party and the state that does not draw a boundary between the two is one of the undoing of the country in relation to business environment for most international investors. This depicts a country that political ideologies influence and override rule of law in dealing with issues. For instance, the Cultural Revolution that was initiated to rid off the country elements of capitalism that saw the country be subjected to international isolation as result of human rights abuse, detention without trial and destruction of properties has not faded away despite the reforms that have been initiated since 1978 (Yu, Zhong & Liao, 2010, p.333). As such, international business men should be aware of the policy as it means that government as a wider say in most business. This implies laissez faire policy or free market economy is not guaranteed. For instance, the government has a huge bearing on the economic activities of the country through State Owned Enterprises - SOE (Zhang & Freestone, 2013, p.77-80). Thus, the unique challenge to foreign investors is the government controlled economy as embodied in socialist market economy ideologies trough SOE as opposed to free market. 2.2 Legal issues The mainland China has made progress towards attaining the rule of law. However, this is a new concept that started taking root in 1979 (Gewirtz, 2002, p.604). As opposed to the rule of law, the focus of the country has been on rule by man principles when they assign a role to personal virtue (Jenco, 2010, p.182). According to Chen (1999, p.33), “rule of law is seen as bourgeois and inconsistent with the principle of the leadership of the Communist Party”. Presently, the approach by China Communist Party is to “rule the country according to law, and construct a socialist rule-of-law” (Chen, 1999, p.16). The above has implication to foreign investors owing to the fact that theoretical presuppositions of the rule of law are not likely to be followed. For instance, with such lacuna, due process is not likely to be followed as procedural justice is likely to be neglected in favour of substantive justice. Judicial independence is treated as bourgeois and inconsistent with communism (Chen, 1999, p.32-33). Equally under their regulatory regime, Chinese laws categorises businesses activities for foreign investors as prohibited, restricted and encouraged (Sweeney, 2010, p.211). As such the investment option in the country by a foreign can be highly limited especially if it falls within prohibited or limited. For investor willing to venture into Chinese market, it is prudent to be aware of these legal constraints. For instance, a foreign investor not to clash with the kind of jurisprudence exist in the country, one should align to the expectations of Communist Party government. Secondly, any investor should not make a blind investment through green field venture, but should first consult various, relevant government offices, legal experts and international trade facilitators on the ventures that are preserved for local corporations and those that foreign investors can venture into. The other legal issue that is a challenge to most foreign investors is the tough approach towards business ethics, quality, bribery and corruption. Most firms with origin in Western countries have been a victim to the tough sanctions employed by Chinese authorities. A case example is the experiences of GlaxoSmithKline Company 2001 bribery scandal. 2.3 Socio-Cultural Environment Socio-cultural factors socialises individuals through various meaning making platforms and thus, impacts on their purchase and consumption patter (Jones, 1983, p.465). In this regard, a discussion on national culture especially collectivism is integral. The critical points to be considered are PRC conditions, Confucianism and Chinese stratagems (Ghauri & Fang, 2001, p.307). However, the most impactful is the Confucianism which has given birth to a social construct known as guanxi (Wilson & Brennan, 2010, p.653). For a successful venture in China and Multinational Corporation wishing to venture into Chinese market needs to form a venture with local enterprises. The plausibility of the later proposition is anchored on the fact that it is difficult to comprehend and internalise Chinese culture. This scenario is made complex by the fact that it is not easy handling governmental and legal issues in China even for large multinational enterprises. Therefore, owing to the social capital that local corporations are endowed with, they readily act as intermediary to the foreign investors by connecting them to influential individuals in control of power such as government officials (Wilson & Brennan, 2010, p.653 & 654). Hence in china, guanxi creates a compulsory business and business relationship that obliges foreign multinational corporations to have linkages with local ones (Gellerstam & Wiesner, 2011, p.17). From the above realisation, guanxi impact on business and business relationships in China. This is because commercial law barely existed as commercial law is perceived as an exhibition of bad faith. Therefore these businesses derive their commitments from relationships and trust derived from guanxi (Gellerstam & Wiesner, 2011, p.18). Gellerstam & Wiesner (2011, p.18) notes that ‘business transactions in China will possibly involve meeting obligations with individuals who have no direct connection to the matter at hand’. He equally indicates that ‘in the collectivistic Chinese culture the decision-maker may be the network as a whole, not just one single person’. Subsequently doing business in china as influenced by guanxi is based on personal relationship/ social capital as opposed to corporation to corporation relationship. This means that the business and business relationship in China is influenced by interpersonal relationship/ social norms as enshrined in guanxi as opposed to where commercial law/ rules/ legal contracts defines the business and business relationship. This implies that in China firms place emphasis on initial building of relationship which is then to be followed by good business transactions. On the opposite, in AWestern countries business transactions/ relationship rotates around doing transaction first and the subsequently developing relationship after successful transactions (Heywood, 2008, p.42 & 43). This implies that for a foreign business to gain foothold in Chinese market, it has to have a local point person as opposed to wholly owned Greenfield subsidiary. Indeed, Mulok & Ainuddin (2010, p.27); Kumarasinghe & Hoshino (2009, p.3) affirms this observation by noting that certain section of the research has proved that ‘wholly owned subsidiaries would perform as the best, followed by joint ventures and acquisitions’. On the other hand he observes that certain faction of research have observed that joint ventures with local firms that have local knowledge is the sure path to success (Kumarasinghe & Hoshino, 2009, p.3). 2.4 Managerial, Human Resource and Labour Environment The country is known for low labour cost (Adams, Gangnes & Shachmurove, 2004). As such foreign investor is guaranteed of low labour cost and that is why most productions centres for MNCs are outsourced or located in China. Industrial or employment relations in the country are governed Labour Law 1995. While the government is slowly relinquishing its centrally planned employment relations, it still has a significant role through labour contract law, employment promotion law and labour disputes mediation & arbitration law. Equally, local government are instrumental in facilitating consultation between unions and employers in development of collective contracts (Ali, 2005, p.4). As such the implication is that while collective bargain is allowed in the country, foreign investors have to be ware of government intervention role in employment relations. As such in event of any industrial dispute between employer and the employee, a foreign investor should seek help from local government to arbitrate the dispute. This based on the realisation that labour relations are centralised in china and the government has core role in determining labour issues as opposed to western approach that is centred on individual bargain as informed by performance-based system and collective bargain informed by trade union driven industrial relations. There are various human resource practices unique to China that can present a challenge to a foreign investor especially to those who are accustomed to western ideologies of managing human resource. The first unique challenge is seniority-based wages and promotion as opposed to performance-based pay and promotion systems. The second issue is the lifetime employment. In this regard, most Chinese organisations have the cultural tendency of hiring young graduates whom they continually refine their skills and retain them for a long period of time up to retirement as opposed to western style of hiring (Ornatowski & Team, 2012). Finally, as opposed to the view that company employees are resource and need to be managed, Chinese view employees as family that need to be developed as opposed to managing (Pudelko & Harzing, 2010, p.4). The above realisation is a pointer towards a greater difference in how the human resource and management perceive employees. As such it is critical for new investors to align to these systems by finding a balance between western-world oriented human resource management and Chinese approach that sees employees as part of the system that should be continually be developed not under commercial relations, but under social perspective. This calls for implementation of policies such as work-life balance and a combination of performance-based pay and promotions with seniority based wages. 2.5 Industry and Policy Factors While the country has a liberalised approach, most of its industrial policy towards foreign direct investment is informed by import-substitution approach as opposed to export oriented industrialisation (Macdonald, 1997, p.11). This seeks to protect domestic industries and reduce reliance from developed nations. This is why they prohibit foreign direct investment via automatic route into some sectors of the economy -protectionism (Sweeney, 2010, p.225). The critical industry policy that the government had advanced in past years is through State Owned Enterprise so as to control the market under socialist market economy (Zhang & Freestone, 2013, p.77-80). However, from 1980s the trend is slow changing and the country is moving towards market economy and is presently ranked the second largest economy (Zhu, 2012, p.103). Equally the country’s industrialisation policy is import-substitution oriented (Macdonald, 1997, p.11). This is why for FDI industries are categorised as prohibited, restricted and encouraged (Sweeney, 2010, p.211). As such the unique issue is the controlled market through government intervention as opposed to free market economy and limited entry areas/sectors. For instance, the industrial policy prohibits foreign direct investment via automatic route into some sectors of the economy such as banking and atomic energy. It equally caps the stake an FDI can have in certain sectors of the economy such as telecommunication, pharmaceuticals and mining. As such, such limitations might not augur well with foreign investors as it limits their options. To overcome such challenges and operate in Chinese market so as to fit within the import-substitution policy, new foreign ventures should clearly seek clarification on prohibited direct investments. Secondly, foreign investors should opt to other strategies such as acquisitions and having joint ventures with local companies or state owned enterprises so as to cushion them against such adverse measures. The other option is to have board representative by native Chinese or have subsidiaries. While import-substitution policy has been the earlier focus of the country, China is gradually embracing export oriented growth strategies/ industrialisation also referred to us as export substitution (Bown & McCulloch, 2009). This is informed by the urge to specialise in exporting goods that the country has a higher comparative advantage allowing it to open up her domestic market to foreign competition while equally being allowed to access the foreign market of these other countries (Karunaratne, 1980, p.217). This presents a unique challenge to most foreign investors who may wish to invest in Chinese economy as their focus should be on the products that the country has no comparative advantage as opposed to those that they have comparative advantage such as automobile and electronics. Such strategy thus limits the various businesses that foreign investors can venture into in Chinese. 2.6 Customer and Competitive Factors China is known for successfully capturing export market as result of devalued exchange and extremely low labour cost. Equally, the country has ability to churn products that meet global standards owing to foreign direct investments and joint ventures (Adams, Gangnes & Shachmurove, 2004, p.1). Thus, the unique challenge to new entrants is to conform to such standards. For instance, the country displays high level of consumer ethnocentrism especially when they believe the products are in contradiction with their cultural belief, artefacts and expectations. It observed that Chinese customers are unique group. They have higher preferences to product associated with home grown companies at the expense of multinational corporations. It is observed that Chinese consumers are ethnocentric in their decision making while opting for products in regard to those from foreign investments and domestic companies with the later having a favourable standing. The country display high level of resistance to foreign investment through limiting practices (Chen, 2005). The above indicates that while attempting to venture into Chinese market, it is prudent to engage in mass customisation to suit their local tastes. It is equally important to brand and advertise in a customised pattern so as to elicit sense of belonging. To overcome such challenges, it is critical to adopt local names that resonate with the consumers and it is integral to tactfully choose names and symbols that do not contradict their cultural beliefs, pride and nationalism. In terms of competitive factors, the competition in China is tilted in favour of the locally owned industries. This is mostly informed by past experiences and the belief that if they open much of their economy to inward foreign direct investment most of their companies are likely to be taken over by world largest economies. As such under state-led development platform, there are exclusionary laws and regulations that can marginalise foreign investment and hence, not creating even play field for competition. 3.0 Conclusion The aim of the report was to outline the unique macro challenges in China and how these issues might impact on foreign investor wishing to venture into these markets. The report established that the country has unique challenges that are likely to impact negatively on direct foreign investors. In china there are issues of social market as opposed to free market economy that is impacting on foreign investors especially those from free market economy. The government has a strategic role in the planned economy through State Owned Enterprises. The country has a strong social capital reliant on guanxi social network making market penetration a difficult encounter for foreign investors and thus need to seek for local partners. Thirdly, the country displays a slow pace of adopting rule of law. This is a critical concern in an environment where rule of law is not likely to be upheld in within the context of commercial relation. Fourth, the country has a unique human resource management system and industrial relations. The government is a key player in industrial relations and at the same time the country’s approach in managing human capital differs with the western perspective as theirs is not performance based, but on life-long employment and seniority. The final macro-environmental challenge is the industrial policy that is import-substitution approach as opposed to export oriented industrialisation which seeks to protect local industries thus, limiting areas that foreign investors can venture into. As such, any foreign investor has to take cognisance of these prevailing challenges and customise their approaches in line with such expectations. References Adams, G., Gangnes, B., & Shachmurove, Y. (2004). Why is China so competitive. 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