Chinese Diverse World of Business Organizations - Essay Example

There have been a variety of entry mode choices in China available since the implementation of the first “open door” policy of 1979, with the continuous momentum of foreign direct investment (FDI) (Charles, 2005). Interestingly, by the end of May 2000, the contractual FDI in China had totalled $623 billion in 349,500 investment ventures (Charles, 2005). Moreover, the influx of FDI fuelled rapid economic growth, creating jobs and technological change to the country. The figures in 2000 coupled with China’s desire to close the economic gap with other developing nations led to the Government driven “Western Development Strategy” as part of the tenth fie year plan (2001-2005) covering six provinces.. Notwithstanding the economic policies favouring commerce and FDI, the OECD in particular have regular reported on challenges facing FDI in China’s regional development and the focus of this analysis is to critically evaluate the various types of business organisation and entry modes into the Chinese Market. Whilst foreign investors are ultimately autonomous on the mode of entry into the Chinese Market from equity joint ventures (EJV), wholly foreign owned enterprises (WFOE)and contractual or cooperative joint ventures (including licensing and technology transfer agreements) joint exploration, and co-operative development; it has been submitted that the reality of entry into the market has been challenging in practice (Luo, 2000). Since, the late 1980s the predominant mode has been EJVS and WFOES (Luo, 2000). Until 1996, EJVs were the most popular entry vehicle, however the last decade has seen the proliferation of WFOES (Charles, 2005). Between 1993 and 1997, the actual use of WFOEs in China grew at an annual rate of more than 25 per cent while EJVs grew by only 6 per cent (Rugman & Hodgetts, 2003). This indicates a fundamentally changing dynamic of the way China is attracting foreign investment, with WFOEs becoming dominant entry mode into the market (Charles, 2005). This is significant in placing a foreign company at a competitive edge in the market. Arguably, the causal effect is the disappointing performance of EJVS in China, the expectation that performance problems will accelerate along with the perception that foreign investors dissatisfaction is unlikely to change unless competitive compromises are given (Charles, 2005) . Various problems have been associated with the Chinese EJVs, namely joint ownership, which often involves management by at least two parent firms (Grant, 2007). However, with shared management, partners can disagree on just about every aspect and thereby paralyse decision making (Child et al, 2005). Indeed, it is evident with Sino-foreign decision making and business practices, whereby social and cultural differences contribute to the intrinsic flaw in the “today’s mercurial Chinese Markets” (Ping, 2001). Indeed Ping refers to Vanhonacker’s reports that Lucent Technologies saw its share of the market for optical fibre transmission equipment in China decline from 70 to 30 per cent in 2000 (Ping, 2001). Ping argues that the key reason is that Lucent’s business relied on EJVs in China and because of shared operational control management, it had to negotiate technological change in a product with a local partner. Therefore if a local partner proves uncooperative, such internal problems cannot be address quickly enough to ensure minimum damage to market entry and market position in a foreign territory (Ping, 2001). Additionally, the involvement of local partners often exacerbates the effect of China’s narrow business licences and prohibits JVs from consolidating distribution of their various products (Ping, 2001). Moreover, an EJV in China cannot sell anything other than its own products; a company with several EJVs therefore often has to set up multiple marketing and distribution systems to serve the same customers, making economies of scale, overheads and scope difficult to achieve and effectively operates as a disincentive to operate in China. Indeed, Ping argues that Sino-foreign EJVs are essentially characterised by differences in a partner’s strategy objectives (Ping, 2001), which is evidenced by the lack of success in Chinese EJVs. This further undermines part of the five year plan as the primary motives for the Chinese entering into an EJV are to obtain technology, capital, management expertise, and short-term success (Ping, 2001). The aim of foreign investors is to gain market access to China with long term goals and growth, therefore the competing interests of both parties is creates a tension from the outset. Equity joint ventures are equity sharing arrangements between two partners or a consortium of three or more partners, whereby the risk of joint venture entity, profits and losses are shared in direct correlation to their equity ownership (Charles, 2005). Equity joint ventures are further considered to be a relatively risky entry mode to the Chinese market as they are inherently dependent on the success of the relationship with the managers from another company in a local territory (Luo, 2000). Conversely, EJVs may reduce the risk because local Chinese partners may help foreign companies understand how to be more successful in the Chinese Business environment and understand the nuances and differences in local markets (Boilon & Michelon, 2000). Alternatively, wholly owned entry modes include the development of subsidiaries either from scratch using a Greenfield approach, or through the acquisition of existing Chinese companies (Charles, 2005). Moreover, it has been argued that since the wholly owned strategy mode of entry has been legally acknowledged by the government in China, there is been a sharp proliferation of FDI (Charles, 2005). Export strategies are generally perceived as being a less risky method of doing business in China, which is considered to be unstable and difficult. There are two forms of export strategies as part of entry mode strategy. Firstly, home based sales persons to acquire export contracts from China who work as representatives of the foreign companies and build up relations with the Chinese (Grant, 2007). The primary advantage is the low risk as no capital investment is required at this point, therefore it enables the market to be tested and early pullout with minimum financial consequence. However, the downside of this export strategy is that foreign exporters are often unwilling to stay behind the contract and there is no room for building up a relationship with the Chinese and as the Chinese company has a permanent presence in China, it is arguably better to utilise a Chinese distributor (Rugman & Hodgetts, 2003) With regard to contractual joint ventures, in China, in addition to the problems of EJVs mentioned above, whilst termed as “joint ventures” these are more akin to licensing agreements as foreign companies will not take up ownership in ventures with the Chinese (Grant, 2007). Licensing agreements and technology transfers are common examples and often with the payment of a one off license fee and royalty payment structures. Alternatively, the advantage of the contractual joint venture is the low risk to foreign companies (Grant, 2007). Most foreign companies involved in these ventures are likely to recover the cost from the up front fee. There is however opposition from the Chinese and foreign companies to this approach as the Chinese prefer to work with foreign companies who have taken some ownership in the venture to ensure national benefit, therefore this clearly impacts co-operation and royalty payments under a contractual joint venture (Grant, 2007). Additionally, many foreign companies believe that taking minority interest in a joint venture with Chinese is disadvantageous due to the clout of major shareholders, which again sets up this medium as potentially obstructive to effective FDI from the outset (Charles, 2005). This is further compounded by concerns regarding intellectual property protection as there is little protection for foreign technology in the Chinese market (Luo, 2000). The concern regarding technology control and the imposition of controls over is a valid concern for foreign companies because this practice could eventually result in new international competition for the foreign companies who were putting up technologies in this pool (Rugman & Hodgetts, 2003). As mentioned above, EJVs are encouraged by the Chinese government as these provide great benefits to the Chinese economy and standard of living for Chinese (Luo, 2000). Therefore notwithstanding the inherent power struggle issues raised by this mode of entry, the Chinese government offers the most incentives for this particular mode of entry such as land, factories and tax concessions (Luo, 2000). This benefited the Chinese with higher incomes, long term technologies and strategies and have learned western management skills that can benefit China in the long term (Charles, 2005). However, the main concern from a foreign company’s perspective is finding suitable partners in China and most available partner organisations in China are state owned companies, which imports the inherent problems of the political and legal framework directly into an FDI initiative (Pei, 2008). These Chinese parent companies, mainly state owned companies and government departments can exercise controls on the joint venture and bring management philosophy into the business, which is creates a breeding ground for conflict (Pei, 2008). Additionally, foreign company concern is the lack of control on investment in China and Chinese have in certain cases ceded control to foreign companies even when they had majority ownership of a venture (Pei, 2008). However, such moves are subjective and inconsistent in practice and are motivated by economic goals and not by any establishment of a consistent framework within which to enter the market (Pei, 2008). On the other hand, whilst foreign companies prefer to use wholly owned subsidiaries, the common problems underlying all of the possible entry modes into the Chinese market are cultural differences, foreign exchange, quality of local employees, training needs of the Chinese, the high cost of doing business in China and intellectual property (Luo, 2000). Accordingly, notwithstanding the economic drive towards globalisation and proliferation of FDI, many barriers operate to effective FDI in China, which is inherently rooted in the entrenched political framework wanting to retain tight controls, which is intrinsically paradoxical with a capitalist market (Pei, 2008). As such, this effectively narrows the wide range of entry modes into the Chinese market with the selection of an adequate and worthwhile entry strategy proving a difficult task. Indeed, aside from the Chinese business and political environment, some foreign companies have expressly referred to the local Chinese business environment as “hostile” to foreign enterprises (Grant, 2007). This is further compounded by the instability of the Chinese infrastructure evidenced by recurrent policy alterations and lack of effective enforcement provisions for the protection of technology transfer. To this end, it is submitted that ultimately any entry strategy for business in China requires a subjective risk assessment from the business perspective going forward. BIBLIOGRAPHY Aziz, (2001). China’s Provincial Growth Dynamics. IMF Working Paper Ben-Porath, Yoram (1980). The F-connection: Families, Friends and Firms and the Organisation of Exchange in: Population and Development Review Volume 6 pp.1 -30 Boilot, Jean-Jospeh; Michelon, Nicolas, (2000). The New Economic Geography of Greater China: China Perspectives Volume 30 W. L. Charles (2005). International Business. McGraw Hill Robert Grant (2007). Contemporary Strategy Analysis: Concepts and Techniques. Wiley-Blackwell. Yadong Luo (2000). How to Enter China: Choices and Lessons. University of Michigan Press. Minxin Pei (2008). China’s Trapped Transition: The Limits of Developmental Autocracy. Harvard University Press. Deng Ping (2001). WFOEs: The Most Popular Entry Mode into China. Business Horizons: 01 July 2001. Alan Rugman & Richard Hodgetts (2003). International Business. Prentice Hall 3rd Edition. OECD (2002). Foreign Direct Investment in Chinas. Prospects and Policy Challenges. Available at www.oecd.org/dataoecd Read More