International Business - Doing Business in China - Essay Example

Doing Business in China

Introduction

Doing business on an international scale requires a comprehensive understanding of the business environments of particular countries. It gives helpful information that can be used by the management in operational and strategic decision-making (Hill, 2013). Venturing into a particular country requires prior research on the business components such as the political, legal, monetary, social, or cultural factors and the various challenges of doing business there. This paper explores the business environment in China with particular focus on the political, legal, economic and social environments. Additionally, this paper will examine the challenges and opportunities of doing business in China.

Political Environment

The political environment in China is characterized by sets of informal and formal regulations within which a firm must operate. The government and the legal fraternity set the regulations. The Communist Party of China (CPC) leads the Chinese government. The political system is structured such that there is multi-party cooperation, self-governance at the basic level and regional ethnic autonomy overseen by the Communist Party of China (Collins & Block, 2007). The other eight political parties are involved in the discussions concerning China’s state of affairs. This implies that the CPC gives representatives from other entities a chance to participate in the evaluation of policies concerning the cultural, social, political and economic affairs. The political consultation occurs in the Chinese People’s Political Consultative Conference (Collins & Block, 2007).

Political risk

The political risk in China is high. There is always a possibility of the Chinese government engaging is nationalization of industries. There are also other risks associated with the government policies such as contract repudiations, confiscation of business property, currency inconvertibility and expropriation. China possesses a risk to the employees of a business through kidnappings and other forms of personal harm. The business is also likely to struggle with extortion attempts. The most notable risk associated with the government of China is exclusive to the country. It involves constant conflicts between the local or provincial authorities and the central government regarding the application of various business laws. This is caused by ambiguities in some business policies. The ambiguity puts business operating in China at crossroads regarding the applicable business laws.

Political stability

Various occurrences in China have put a high level of uncertainty in making business investments in the country. An example of a past influential politically-motivated occurrence is the Tiananmen Square Massacre (Atma Global (Firm), 2013). However, there has not been major politically-motivated occurrences since the massacre to scare investors permanently. Currently, there is no strong indication that the political establishment in China will push to discourage foreigners from doing business in China. However, foreign investors cannot be assured that political stability is guaranteed.

The freedom of the Chinese people has increased dramatically over the years. Currently, the Chinese have more personal freedom and social mobility that grants them greater job, housing, employment, informational and educational choices (Hill, 2013). The Chinese government has also ratified civil and criminal laws that provide security to the people. The endeavors of the Chinese government to care for the people is a positive step in promoting political stability in the country.

Human Rights

The Chinese political establishment lags behind considerably in the observation of human rights. The government is highly intolerant of dissent. There are many cases of reported human rights violations in the form of torture, forced confessions, violation of privacy and worker rights and limitations of press freedom. The government of China monitors journalists and other political influencers. Businesses should observe the track record and the inclination of the Chinese government towards business activities that criticize its policy standpoints.

Legal Environment in China

The Chinese Legal System

The Chinese government adopted a socialist legal system after the founding of the People’s Republic of China. The legal system relies on the constitution that is made up of administrative directives, written laws and regulations (Atma Global (Firm), 2013). According to the Chinese Constitution, the people exercise the political power from bottom up. This is done though the representative people’s congress starting from the local authorities to the provincial and national levels. The Chinese policy making tends to be uniform and centralized in most of the times (Atma Global (Firm), 2013). However, it is also diverse and decentralized at times. This creates some dissonance in the Chinese legal system that confuses business entities.

The National People’s Congress (NPC) has the power to make amendments to the constitution. It also possesses the power to enact laws that govern the civic, criminal and state departments. The NPC has a Standing Committee that is tasked with interpreting, enacting and amending the laws that are not handled by the NPC itself (Collins &Block, 2007).

Legal issues in international business in China

Doing business in China faces some legal issues concerning the form of representation, certification, registration and licensing requirements, business scope, intellectual property rights, tax and import duties and labor law compliance (Taylor, 2012). Distribution of products by a company operating in China requires some form of representation to attain its objectives. Businesses may choose to establish their entities in China or find distributors in the country. However, setting up an entity requires approval by the Chinese authorities. The decision regarding the form of representation impacts the tax burden of a particular business in China and in the native country. Businesses must also approach the relevant Chinese authorities to get the registration, certification and licenses to operate in China. There are various registration and licensing requirements for different products. For example, a foreign company dealing with food products in China must abide by the provisions of the Chinese Food Safety Law established in 2009 (Taylor & Block, 2007). The registration documents define the business scope. The Chinese authorities determine these legal bounds that monitor the operation of a business. The Chinese legal structure provides for the protection of trademarks, patents, and copyrights. However, companies should devise a good action plan as China is notorious for violation of intellectual property rights. The Chinese law also imposes taxes based on the structure of business transactions (Atma Global (Firm), 2013). The Chinese authorities have a 17% V.A.T tax and import duty. These taxes affect the cash flow of a business in China. Enterprises in China must be aware of the tax regimes and rules in China. China has labor laws aimed at protecting the employees. The Labor Contract Law of 2008 requires written contract between employers and employees (Taylor, 2012). Any violation of the contract attracts penalties against the employers. The Chinese Labor Law stipulates the presence of three types of contracts namely project based contracts, open-ended contracts and fixed term contracts. There are situations where the law requires companies to issue open-ended contracts to employees who have been in service for more than 10 years (Taylor, 2012).

Legal Risks in China

One of the most notable risk comes from violation of copyright laws. There is ineffective enforcement of the intellectual property protection laws in China. This leaves the business with extra efforts to secure its intellectual property such as sensitive product information (Hill, 2013). In addition to the violation of intellectual property rights, regulatory risk is high due to the unpredictable approval process. Numerous restrictions and bureaucracy issues affect the operations of businesses in China. The interpretation of the regulations also changes from place to place. It not only wastes business time but also proves costly (Hill, 2013). China has also started designing and implementing protectionist policies to safeguard domestic industries from foreign competition, particularly in legal services, construction, engineering and banking. The policies present obstacles for business aiming to venture in China.

It is risky to use the Chinese judicial system to settle disputes. Although China is a signatory of The World Trade Organization (WTO) that puts pressure on it to abide by the business laws and transparency, there are considerable risks associated with relying on the Chinese judicial system solely (Collins & Block, 2007). There are few judges in the Chinese judicial system who have the experience of handling business disputes. Some judges are considerably under the influence of powerful interest groups or the government to rule in their favor (Atma Global (Firm), 2013). It is also problematic to enforce court rulings, especially in bankruptcy cases. The domestic entities and interest groups prove too powerful to challenge in the compromised judicial proceedings. Businesses must be aware of the legal risk before investing in China fully.

Economic environment

The Chinese economic performance has changed significantly since the adoption of capitalistic ideologies in 1978. There have been major economic reforms such as collectivizing of agriculture, gradual liberalization of prices and fiscal decentralization (Collins & Block, 2007). The government accorded businesses freedom that led to establishment of private enterprises in the manufacturing and services sectors. However, China’s economic landscape is still dominated by businesses owned by the state (Collins & Block, 2007). The reforms over the years have also prioritized the diversification of the banking system. The latest economic reforms in China are known as the Five-Year Plan that put emphasis on increasing domestic consumption to decrease the dependence on exports (Atma Global (Firm), 2013).

Main products and Services

China is rich in natural resources. It ranks first in the amount of proven deposits for twelve minerals namely vanadium, rare earth, magnesite, tungsten, antimony, fluorite, pyrite, zinc, titanium, barite, graphite and plaster stone. It also has other important minerals such as mercury, tin, molybdenum. Additionally, China has the largest hydropower potential in the world (Collins & Block, 2007).

The manufacturing sector is the biggest contributor to the nation’s GDP. Other major industries in China are textiles and apparels, chemicals, fertilizer, petroleum, food processing, consumer products, automotive, telecommunications equipment, armaments and transportation equipment. The services sector is growing rapidly because of the emphasis on domestic consumption in place of exports (Organisation for Economic Co-operation and Development, 2015). The Chinese government supports the services sector through low taxation. Agriculture has remained strong in China since the economic policies of 1978. Agriculture accounts for about 10% of China’s GDP (KPMG, 2015). It is the world biggest producer of agricultural products.

Economic Risk

China has a strong economic appeal that renders the economic situation favorable for many businesses. The favorable situation stems largely from the high domestic demand from the big population (Atma Global (Firm), 2013). China has a comparative low economic risk because of the huge market potential. However, the economic situation is highly dependent on the political and social stability.

The Chinese government has a high external and public debt. However, the economic situation is likely to be stabilized by the vast foreign exchange reserves and domestic savings that can cover the debts (Organisation for Economic Co-operation and Development, 2015). China is expected to continue with its robust growth although it is currently experiencing an economic slowdown.

Monetary Environment

Currency system

The People’s Bank of China, under the guidance of the Chinese State Council oversees China’s monetary policy. It ensures that there is financial stability and curtails financial risks. Every year, the State Council sets the targets for Consumer Price Index that dictate inflation, credit growth, money supply and GDP. In 2012, there was a major policy rate that put the lending rates at 6% and it has remained at that rate since then. Money supply in the country is influenced by the 20% reserve requirement for major Chinese lenders (KPMG, 2015).

China puts the holdings of its currency, Yuan, at artificially low levels. The Chinese authorities engage in currency manipulation when they are concerned with exports. For example, the Yuan appreciated significantly against the dollar in 2008 but the government curtailed its progress due to concerns about the dwindling levels of exports (Taylor, 2012).

Currency Risk

The People’s Bank of China puts a rigid control of its currency to protect the economy. This control-minded approach is dangerous because it can push the global economy into a recession (Taylor, 2012). It allowed a big fall in the Yuan in 2016. The bank’s actions put uncertainty in investors as they struggled to grasp the goals and objectives of the The People’s Bank of China (Taylor, 2012). Following the unpredictability of the Yuan, it is risky for businesses to venture in the country.

Trade Environment

Exports and imports

China is among the top exporters of industrial goods. China’s main industrial exports are textiles, manufactured goods, electronics and garments. It also exports minerals such as magnesium, molybdenum, salt, tungsten, manganese and mercury. China also exports the highest amounts of aluminum in the world. In the year 2015, China imported products worth $1.682 trillion which represents 9% of the total global imports (Organisation for Economic Co-operation and Development, 2015). Most of the imports are meant to support China’s factories. China’s importation of raw materials drives the global prices up which supports a number of developing nations. Its main imports are electronic equipment, oil, machines, pumps and engines, technical and medical equipment, ores, ash and slag, vehicles, plastics, organic chemicals, oil seeds and copper. Most of these imports come from Asian countries and account for an estimated 50% (KPMG, 2015).

Trading partners

China’s main trading partners in exports are the United States, Hong Kong, Japan, South Korea and Germany. They account for 17.7%, 13.3%, 8.1%, 5.2% and 4.1% respectively (Organisation for Economic Co-operation and Development, 2015). Other essential trading partners are Singapore, United Kingdom, Netherlands and India. Its main import partners are Japan, South Korea, Unites States, Germany, Malaysia, Brazil and Saudi Arabia (Organisation for Economic Co-operation and Development, 2015).

Trade Agreements and policies

China is part of several regional agreements to streamline trade. China has entered into free trade agreements (FTA) with several countries such as South Korea to promote bilateral trade. China and Australia have established the China-Australia Free Trade Agreement (ChAFTA) that promotes economic cooperation and reduction in tariffs in the agreed sectors (KPMG, 2015). It has also entered into agreement with several Asian countries such as Thailand to reduce tariffs commodities (KPMG, 2015). This has not only improved the economic ties in the regions but also served as a platform for strengthening of diplomatic ties.

Cultural Environment

China is the most populous nation in the world. It expands significantly each year because of the dwindling death rates. Doing business in china is subject to cultural factors such as cultural values, religion, and ethnic and language groups.

Being a Chinese infers subscribing to cultural values that define the Chinese system. The Han Chinese are the most authentic ethnic group. Other minor groups have developed their Chinese identity through contact with the Han. The Chinese government has established legal guidelines to protect all Chinese people regardless of their ethnicity or language (Collins & Block, 2007). The ethnic tribes live harmoniously. The government has made headway in promoting the economic status of the minority Chinese groups.

Despite the diversity of the Chinese, they share common cultural values. The most notable values are self-restraint, self-reliance, value for family and respect for the social hierarchical structure. There is a cultural expectation for a Chinese offspring to thrive in society and for the parent to lay the groundwork for the resulting success of the child.

China has five main religions namely Islam, Buddhism, Catholicism, Taoism and Protestantism. There is regulation of worship and religious groups in China. A general Chinese religious element focuses in the power of yin and yang (Collins & Block, 2007).

The cultural dimension of Chinese people favors collectivism as opposed to individualism. The collectivist culture prioritizes loyalty and respect. The Chinese culture inclines heavily towards fostering of strong relationships characterized by a duty to others.

The cultural status of China demands that businesses integrate the aspects of punctuality, respect and care. The people view them as a virtue and they are likely to do business with business entities that reflect and respect the values of their culture (Atma Global (Firm), 2013).

Challenges and Opportunities of Doing Business in China

China’s population continues to grow. This increases the market potential for businesses with the intention of venturing in China. Additionally, the government shows commitment in streamlining the economic policies to favor increased trade. The Chinese government has been increasing its negotiation with regional countries and its major partners to ease trade through free trade agreements and trade incentives such as reduced tariffs. This economic inclination offers businesses an opportunity to establish their presence in China. The government is also engaged in simplifying the legal requirements and enforcement of business laws. This endeavor will reduce the legal risks that bring ambiguity.

The major challenge for doing business in China is the high levels of uncertainty in the monetary and fiscal policies. The currency is volatile in recent times. This offers little guarantee for return on investments for investors in the country. The People’s Bank of China is not clear on the policies it intends to take to reduce the currency risk in the country. Businesses are likely to reconsider investing in China due to this economical factor. In addition to the currency risk, China’s law enforcement is problematic. It is challenging to have straightforward enforcement in situations where the state and local authorities become entangled in legal disputes. The governments’ policy dimension of protectionist strategies is also challenging as it renders the endeavors of business to compete in the Chinese market futile.

Recommendations for Success

Any business aiming to succeed in China needs to invest in research for due diligence and any other helpful information such as the legal landscape. The Chinese market is complicated. The cost and complexity of operating in China implies that the risk is high. Companies should not compromise on getting information regarding the market aspects. Additionally, companies should explore market strategies that are most appropriate for the Chinese market. For example, a company can choose between establishing its offices in the country of engaging a distributor in China. This can be based on cost, market reach and time elements.

The Chinese prefer doing business with the entities they know. It is crucial that businesses use an intermediary to venture into the Chinese market. The business should also focus on creating healthy business relationship with the consumers (Collins &Block, 2007). The businesses should beware of the existing bureaucracy which may increase the time take to build formal business relationship with the consumers. As such, business should be patient while operating in the Chinese market.

The cultural aspects play a big role in the success of a business. This demands that businesses operate in a manner that conforms to the cultural inclinations of the target market. This entails making informed products that suit their specific needs. It also requires businesses to operate in a manner that shows respect to the people and their cultural virtues such as punctuality. Appealing to the cultural values of the Chinese consumers attracts consumer loyalty that contributes to the profitability of the business positively.

Conclusion

China is a global powerhouse in business potential. It has a large population that provides a large market for businesses. The government is relatively stable and the economic policies and cooperation is development-oriented. Its legal environment has provisions for business operations although it is riddled with ambiguities regarding interpretation and enforcement of laws. Its cultural environment is unique. Businesses must observe the unique cultural and legal aspects in China before making investment decisions in the country. They must also consider the associated risk in the country’s currency. Overall, China presents a good business opportunity for businesses that employ good due diligence before venturing in a market.