PESTEL Analysis of China - Case Study Example

PESTEL Analysis of China Name Institution Course Date PESTEL Analysis of China Introduction Globalization has brought about many opportunities for organisations to expand and grow in other countries that have favourable political, social, technological, and economic factors (Bernard et al., 2007). Before, expanding to foreign markets, companies should analyse the country they intend to invest their activities especially the respective industry. PESTEL Analysis is used to analyse factors that make a country either favourable or unfavourable for companies (Bernard et al., 2007). The positive and negative effects of a country on companies will be established through external analysis (Bernard et al., 2007). Based on factual information, this assessment will point out the factors that should be taken into consideration by companies intending to start business in China. It will cover six factors in the PESTEL Analysis including legal, political, economic, social, environmental and technological factors. PESTLE Analysis Political Factor China is said to have a strong and enhanced political system which has boosted its economy (Lu et al., 2008). Currently, several rules and regulations have been passed in the country which has assisted in strengthening the power and economy of China. The country is considered among the few countries with effective and operational policy that favour investors who invest money in different sectors of the country (Lu et al., 2008). The government also has invested a lot of capital and time in developing e-commerce that is beneficial to companies. The government is also committed to ensuring businesses in the country flourish and production of different products increase (Lu et al., 2008). Every industry sector in China has a strong and operational political support which has enabled many companies in China to flourish (Lu et al., 2008). In addition, in recent years, there has been some riot and political instability in the country which has created instability for foreign organisations (Lu et al., 2008). However, the government has taken initiative to prevent further instability and create a safe and stable environment for foreign companies. Economic Factors In the recent years, the economy of China has flourished and has increased the growth rate of GDP (Allen, Qian and Qian, 2005). The country has a remarkable rate of saving, skilled manpower and extensive export business that add up to the success of the country. The already experienced economic development can have a positive impact of small and medium-sized enterprises (Allen, Qian and Qian, 2005). The GDP increase is adding value to the people in China and is aggregating the consumer purchasing power. Many local and foreign companies are benefiting from the available cheap labour. Although China has an excellent economic growth, it is faced with high inflation rate, high interest rate as well as increases prices of properties (Allen, Qian and Qian, 2005). In addition, the reserves of banks in the country are high which negatively affects the operations of companies. Social Factor The demographic pattern and change in the fluctuation in age distribution can play a fundamental role on the social aspect of any country (Brandt, Hsieh and Zhu, 2008). Demographic pattern can change the social aspect of a society and social behaviour together with family size can affect aspects such as lifestyles, education and religion. China is known to have a literacy rate of about 90% which has brought about a positive economic growth of the country (Brandt, Hsieh and Zhu, 2008). In addition, China has a population of about 1.3 billion which makes the country overpopulated. The country has tried to control its population by executing strict birth limitation policy (Brandt, Hsieh and Zhu, 2008). The population size supplies an abundant workforce. However, the huge population has contributed to high unemployment level of about 4.3% (Brandt, Hsieh and Zhu, 2008). In addition, the government of China recently increased the minimum wages that has brought about challenges to employers who are required to pay their workforce more than before. This brings about a decrease in business profit. Technological Factors Technology is one of the major factors that have produced organisational change in Chinese Companies (Brandt, Hsieh and Zhu, 2008). Over the years, there have been new technological developments and many companies have opted to adopt this changing technology with an aim of increasing productivity. There are a number of technological factors that contribute to the distribution mechanism, purchasing process, production process and development of new product (Brandt, Hsieh and Zhu, 2008). In China due to the growth of e-commerce, consumers prefer to do shopping online such as the use of online sites like Taobao, the latest e-commerce in the country. E-commerce in China has changed the behaviour of consumers as they prefer getting their desired products at the comfort of their homes (Bernard et al., 2007). However, China is faced with a huge problem. It lacks a safe and secure online payment system which brings about uncertainty to the consumers and long-term orientation. In addition, the Chinese market is said have a low-slung credit card penetration which is one of the most widely used means of payment in China and across the world (Bernard et al., 2007). Companies perceive the online credit card system as less which brings about low usage and penetration in the country. Environmental Factor In China, every company in any industry sector is required to take into consideration the environmental requirements (Bernard et al., 2007). Companies in the country are bound by regulatory scrutiny from Environmental Protection Agencies concerning the conduct of their services. Green issues also have affected the operations of companies in China. The environmental factor basically has a huge impact on companies. The development and advancement of technology in China has made it easy and speedy to protect the environment (Bernard et al., 2007). The increase in the use of e-commerce to do shopping has helped a lot as people can do their shopping in their homes and avoid using many vehicles to go visit physical shops. This has reduced air pollution which can have an adverse effect on the environment (Bernard et al., 2007). China is considered one of the most attractive markets for foreign companies due in part to its lenient environmental rules and regulations. Legal Factors As e-commerce is blossoming, there are new legal frameworks in place to guide the operations of companies. In order to encourage foreign investments, China has established a new law system (Allen, Qian and Qian, 2005). The government has issued a number of rules that guide the establishment, operation and termination of companies. Some of the rules governing companies include the Law on Wholly Foreign-Owned Enterprises, the Income Tax Law and Laws on Foreign Investment among others (Allen, Qian and Qian, 2005). These laws act as a protection mechanism for both legitimate domestic and foreign investors (Allen, Qian and Qian, 2005). In addition, China has the most attractive tax incentive array in Asia. This has led to many establishments of foreign companies in the country. However, companies are faced with strict tax laws and regulations which require them to pay the full amount in time. In order to promote foreign investment in the country, China has favourable entry regulations (Allen, Qian and Qian, 2005). Foreign companies can enter the Chinese market without any huge restrictions. Conclusion PESTEL Analysis is used to determine whether a country has favourable or unfavourable conditions for success. China generally is considered a favourable market for foreign companies. It has a strong political system that has favoured its economic growth, e-commerce development and foreign investments. The economy of China is strong with excellent GDP growth. This is attributed to huge number of skilled manpower, high rate of savings and excellent export business. However, it is faced with high inflation and expensive properties. The large population in the country has detrimental effect on employment level. Technological development in the country is enhanced but companies and consumers complain of unsafe and insecure online payment system. The environmental and legal factors favour the operations of both domestic and foreign companies. References Allen, F., Qian, J. and M. Qian. (2005). Law, Finance, and Economic Growth in China. Journal of Financial Economics , 77, 57-116. Bernard, A. B., Jensen, B., Redding, S. J. and P. K. Schott . (2007). Firms in International Trade. Journal of Economic Perspectives , 21(3), 105-130. Brandt, L., Hsieh, C. T. and X. D. Zhu. (2008). Growth and Structural Transformation in China. In L. Brandt, & T. Rawski, China's Great Economic Transformation (pp. 683-728). New York: Cambridge University Press. Lu, F., G. Song, J. Tang, H. Zhao, & L. Liu (2008). “Profitability of China’s Industrial Firms (1978-2006)”. China Economic Journal, 1(1), pp. 1–31. Read More