PESTLE Analysis - China - Case Study Example

Executive Summary China is the fastest growing economy in the world right now. Almost every foreign company has plans of venturing into China to benefit from the large market. This paper uses PESTLE analysis to highlight the prospects of foreign organizations conducting their businesses in china. Political issues are concerned with policies a government has put in place that regulate business development and maintenance. Political leaders decide on the future of a nation and thus determine goods and services needed in a country (faqs, 2010). Economic factors to be considered include currency exchange rates, Unemployment rates of the country, economic growth, inflation rates and corporate activities (Yan, 2004). An organization must consider the cost of doing business before venturing into a market. Social issues have to deal with language, demand for products, population growth, ethnicity, religion, age, immigration, demographic changes and willingness of people to work for your company. Technological issues have to do with existing and new technologies in the market and how they will affect goods and services offered by a company. Technological advances lead to innovation resulting in reduced cost of operation, improved quality of products and eased processes. Legal factors of a country have to do with laws in place that limit or encourage foreign businesses. These laws dictate terms of service like the kind of employees to have and their minimum wages, the amount of tax to be paid, the share percentage that an organization can hold, land and property ownership rights, price controls and the kind of businesses that foreign companies are allowed to venture into (Studwell, 2003). Environmental factors include the weather conditions of a country, climate change and geographical features of a country. Table of contents 1. Introduction…………………………………………………………………………...……...3 2. PESTLE Analysis……………………………………………………………………….…….3 2.1. Political Environment………………………………………………………………….…3 2.2. Social/ Cultural Environment…………………………………………………………….5 2.3. Economic Environment…………………………………………………………………..6 2.4. Environmental Factors …………………………………………………………………...8 2.5. Technical Environment………………………………………………………………..….8 2.6. Legal Environment………………………………………………………………….……8 3. Conclusions…………………………………………………………………………………..10 4. Recommendations……………………………………………………………………………10 5. References …………………………………………………………………………………...12 1. Introduction China has been a hub of manufacture, import and export for a while now. Its economic progress to being the world’s fastest growing economy is nothing short of impressive. China has exceeded its own expectations and those of other governments (Stuttard, 2000). Businesses are keenly eyeing china as the next big venture because of the 9% per annum growth rate as well as the increase in population. The market base is diverse because of the various demographic units. The Chinese government has tried to open up the country for investors by changing their business policies and joining the world trade organization. Improvement of living standard has led to the emergence of an economically empowered upper and middle class. This has led to increased purchasing power parity by these groups (Chang, 2007). The opening of companies and organizations in the urban areas has led to rural-urban migration making urban areas suitable hubs for business ventures. With a population of 1.3 billion, the highest in the world (Sega, 2011), everyone has an opportunity to buy and sell. Many companies continue to join Chinese markets every day, and this has led to increased competition. This calls for proper research before venturing into a market. The report will outline risk levels of starting a business in China by looking at the various environments and competitive forces that exist there. 2. PESTLE analysis 2.1. Political Environment The people’s republic of China is a communist country under the leadership of the working class ruling peasants and workers (Bergsten, 2009). The government of the day is led by the ruling political party, the communist party of china. Leadership relies on multi-party cooperation and consultation for unity of direction. 2.1.1. Human rights China has continued to violate internationally recognized rights and freedoms. News broadcasts are monitored and restricted to promote government interest. Journalists and internet writers are not free to criticize the government or sensitize people on taboo subjects (Haley, 2004). Non-governmental organizations in China have been trying to push for judicial reforms that will protect religious activists, lawyers, journalists, political activists and other minority groups to little success (FAQS, 2010). The government engages in detention and torture of workers and activists for coerced confessions. 2.1.2. Political risk Foreign organizations must be conscious of the possibility of change in the current business policies due to change in leadership. These new policies can give the government the right to own or co-own your business (Haley, 2004). They can also result in contract revocation or business confiscation. Other issues like inconvertible currencies, inflation and currency devaluation can arise from the political state of the country. Additional expenses can be incurred by the company because of emergencies like kidnapping of personalities working for them. Disagreements between the local authorities and the central government on varying policies has led to a tag of war that leaves businesses confused and frustrated about what policies to follow (Plafker, 2008). 2.1.3. Political stability Questionable events like the Tiananmen massacre reflect political instability in China. The United States government has been in continued talk with the Chinese government, with the aim of trying to address human rights issues in the country. However, the Chinese government has been non-committal to these talks (State, 2009). This attitude has created fears among foreign investors. There are fears that the Chinese government is not willing to protect foreign investor’s properties as it does for local investment. 2.2. Social/ Cultural Environment China has the largest population in the world summing up to 1.3 billion with an estimated annual growth rate of 15 million. The government has tried to promote the one child per family initiative by providing more opportunities for a child in every family. Family planning education and birth control measures have been made accessible to deal with the ever growing population and the quality of life among the current population (Stuttard, 2000). 2.2.1. Ethnicity and language China consists of divisions of people; native Chinese people, the minority groups and five other autonomous regions. The native Chinese people originated from the historical Han dynasty while the five minority groups originated from the larger and prominent minority nations. The other minority group consists of 22 provinces inhabited by the other minor nationalities (Chang, 2007). The differences in geography have not resulted in particular racial differences among the Chinese. The Chinese have a high regard for culture and will accept an individual or company as part of them if they learn their culture. The minorities form a mere 6.7% of the total population (Seligman, 1999). However, the country cannot exclude them from decision making because of the geographic location of their territories. The Chinese government has put measures in place to ensure equity in resource allocation and opportunity distribution between the Han and the minority groups. Political opportunity is equal among the groups; as a result, the minorities are part of the administration system. Minority group interaction with other neighboring countries such as Russia, North Korea, Kazakhstan, Thailand, and Myanmar is critical and thus should be guarded (China, 2010). It is necessary for China to ensure a good relationship with the neighbor countries, otherwise; they will strain relations with the minority groups leading to political instability in the whole country. The national language is Mandarin, a dialect of Putonghua which is one of the minority groups' native language. Other minority groups are encouraged to learn it (Seligman, 1999). 2.2.2. Religion Religion in China is detached from government concerns. People are free to be in any religion they want. Recognized religions include Catholicism, Buddhism, Taoism, Islam and Protestantism. However, religion outside government restrictions is subject to intimidation and even detention (Clissold, 2006). 2.3. Economic Environment China is viewed as a suitable place to set up manufacturing industries by many international organizations. This is because although the labour cost may be relatively equal to those of other developing countries, the manufacturing cost in China is one of the lowest (Yan, 2004). 2.3.1. Good infrastructure and availability of raw materials China has good infrastructure; raw materials for production and most of its population are trained in technical skills. The speed of supply through various channels like water, rail, road and air in China is relatively higher compared to other manufacturing countries (Bergsten, 2009). 2.3.2. World Trade Organization China joined the world trade organization in 2001 (Plafker, 2008). This move led to adjustment of policies to comply with the trade organization’s requirements on member countries. Chang (2007) states that China now had the obligation of treating other member states well regarding trade issues. They had to do away with double pricing for goods sold in china and those meant for export. Agricultural produce was not subsidized because price controls were no longer applicable. 2.3.3. Foreign Direct Investment China is the leading country in attracting international investments across the world. Foreign investments account for 27% of the total production and 4% of the total tax revenue collected (Plafker, 2008). Companies operating in China sell both to the local and internal market. China provides foreign capital to companies investing in high technology industries, infrastructure development, and environmental protection among other exclusive ventures. 2.3.4. Inflation Rates Inflation rates in China have been reducing considerably due to the improving quality of life which has improved the purchasing power of most of the people. The expansion of the local market has led to a reduction in exports thus reducing cost of exports. The prices of commodities have reduced because of a ready market at home (Goodman, 2009). 2.4. Environmental Factors China’s economic growth has produced beneficial effects on almost every sector except the environment. Manufacturing demands raw materials from the environment, but since the environment does not recover at the same rate as the harvesting of those resources; it has led to environmental degradation (Chang, 2001). China’s membership and recent commitment to the Kyoto protocol has made it conscious of carbon footprints produced by companies in manufacturing and transportation. Environmental management has been decentralized from the central government to local offices. Each province manages its environment with guidance of the policies passed by the government. The public has been urged to participate in observing environmentally friendly rules for their own benefit. Restrictions have been put up to counter company’s overreliance on coal for energy production. The government is encouraging the use of natural sources of energy like solar, water, wind and natural gas. 2.5. Technical environment The need to cut costs in manufacturing with increased efficiency has led to technological advancements. China is one of the leading countries in innovating new technologically powered equipment like the robots that recognize and understand verbal commands in a variety of languages. The people of China appreciate new technologies in the market (Bergsten, 2009). 2.6. Legal environment 2.6.1. Laws Laws governing foreign investments in China have been outlined clearly. It is mandatory for any foreign company to study the laws of a country they wish to invest in before they commit (Haley, 2004). The laws affecting businesses in China include industrial policies, tax and financial policies, and regional policies. 2.6.2. Business Policies Companies wishing to be part of the Chinese market can do so by establishing representative offices. These offices are part of the parent companies in their registered country. They can also form Sino-foreign equity joint ventures with other Chinese companies. This arrangement allows a company to buy and own land, construct buildings and to hire Chinese employees. Another way is through the wholly foreign owned enterprise which gives full control to a company. The company is in China by virtue of foreign investment only (Studwell, 2003). 2.6.3. Regional policies Every province has its own local rules "in addition to the rules set" out by the central government (Plafker, 2008). Some rules may apply in one region and not in another, businesses must be aware of the differences. 2.6.4. Tax policies These are the rules governing revenue collected from a company to the government. Haley (2004) explains that the amount of returns filed depend on the size of the company, the origin in terms of nationality and the nature of the business. 2.6.5. Industrial policies These are the policies governing industrial processes and functions like community service, energy regulation, location of industries, clean up regulations among others. 3. Conclusions The prospects for businesses looking to open companies in China look great. The country has a large population which is a ready market for goods and services in the market (Goodman, 2009). The improvement of living standards has increased the purchasing power of the Chinese people thus controlling factors like inflation. Government commitments towards improving infrastructure will ensure efficiency in supply chain as well as in the construction of companies. China’s joining of the World Trade Organization has led to friendly policies, which are favorable, for foreign investors. The agreement to give an equal chance to investors from member countries as local businesses has made competition fair to all. The removal of dual pricing has also helped create a wide export market for Chinese products (Stutard, 2000). Despite some instances of human rights violation in China, the overall rating of the stability and safety of the country is worth trying. The absence of ethnic, racial and religious discrimination has made the environment stable (Seligman, 1999). 4. Recommendations Interference from the government is not overboard and besides it is easier for a company that incorporates Chinese culture to be accepted. Since the people regard their culture highly, an organization should try and promote their culture by hiring Chinese workers and by associating with prominent people who can make market their presence and endorse their products. An organization should be ready to comply with tax, regional, industrial and business policies required by the Chinese government (Plafker, 2008). Production must be in line with regional and environmental policies. Politics in China is on the low and does not interfere with organizational management in most cases except in extreme cases involving mistreatment of workers. Working closely with locals will earn a company the public’s trust and approval. If all these factors are carefully considered, success in the Chinese market is almost guaranteed. 5. References A Practice of Licata Risk Advisors. N.d. 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Chinese business etiquette: A guide to protocol, manners, and culture in the people's republic of China. London: Grand Central Publishing. Studwell, J. 2003. The China dream: The quest for the last great untapped market of the earth, England: Grove Press. Stuttard, J. 2000. The New Silk Road: secrets of business success in china today. Canada: John Wiley & sons. US Department of State, 2011. Background Note: China. [online] (updated 6 Sep 2011) Available at: [Accessed 6 November 2011]. Yan, R. 2004. Harvard Business Review on Doing Business in China. Boston, MA: Harvard Business School Press. Read More