International Asia Pacific Business - Essay Example

International Asia Pacific Business Introduction Organizations or firms cannot remain “static”. They has to keep on moving breaking ‘boundaries’ bothgeographically as well as economically, to actualize the opportunities and emerge successful. That is, with every firms wanting to expand their geographical reach and make an imprint in various markets, there will be enough opportunities for it, to initiate an entry into a foreign market. To initiate and actualize the entry, firms have to set targets and formulate various strategies according to the situation prevailing in those foreign markets. While formulating the strategies, the organizations’ leader and the management team will firstly look at the factors that may aid them to make a successful entry. After analyzing the positive factors, the firms will or should have to analyze the challenges that may impede its entry. As every foreign market or country will have different political, social, economic conditions as well as different customers, competitors, prospective employees, etc, etc, there will be many challenges, which will block the firms’ success. Also, there will be country specific challenges as well as industry specific challenges in those foreign markets. For example, the Asian country of China has some distinct aspects, which will surely act as a challenge for the new firms, who are planning to enter it. Likewise, the retail industry in China also has some inbuilt challenges, which may impede the foreign invested retail firms, who may plan to make an entry into China. So, this paper will analyse and asses the challenges faced by Foreign invested Retail firms in China. Regulations In the earlier decades, the cheap Chinese products only entered various countries’ markets. But, now seeing the potential of the Chinese economy and the market many foreign firms or foreign invested firms have entered or entering the Chinese markets. The other thing, which is enticing the foreign firms including the retail firms, is the huge population, which translates into the biggest market of the world. “Most of the world’s major global retail firms are desperate to grab a slice of the world’s largest and most rapidly growing emerging market” (Gamble, 2006). Apart from these two important aspects (high economic growth and huge market), the main thing that allows the foreign firms to enter China including its retail sector is the relaxation of many restrictions imposed by the Chinese Government. China being a Communist country functioned behind an “Iron Curtain”, restricting the foreign firms to protect the home-grown firms. But, due to globalization and the resultant economic growth, the government saw the full potential of the Chinese market. “Rising prosperity and a rapidly commercialising economy have transformed China into the world’s most important emerging market “(consume.bbk.ac.uk). So, Chinese government started to allow the entry of foreign firms including the foreign invested retail firms, which made its first entry in 1992. But, the main decision of the Chinese government which worked as the catalyst for more foreign entry is the relaxation of the restrictions, which was brought about by China’s entry into World Trade Organization. “Multinational retailers have built up their presence in China since foreign participation in the sector was permitted in 1992. This investment is likely to increase substantially now that China has acceded to the World Trade Organisation and controls that have limited foreign investment in the sector are due to be removed by 2005” (esrcsocietytoday.ac.uk). But, even with all these favourable situations, the foreign firms entering China were challenged, restricted and regulated by the Chinese government and also by certain other factors. That is, even while allowing the foreign retail firms, the Chinese government’s policies and the existing local conditions challenges the retail firms and restricts it from becoming a success. Taxation The main challenge comes in the form of a new tax regime, which has taken away the privileges enjoyed by the foreign firms. The main aspect of this new tax regime is foreign invested firms including retail firms and other Chinese-foreign joint ventures have to pay the land-use tax, equal or more than the Chinese companies. Before the introduction of this regime, the foreign firms are exempted from paying land-use tax, and were allowed to function and raise infrastructures on non-taxed lands. But, under the new regime land-use or property-tax rate will be equal for both the local and the foreign developers, with the foreign firms’ tax requirements tripling from the old rate set in 1988. That is, “in large cities the annual property tax rate will range from 1.5 yuan to 30 yuan (19 US cents to $3.85) per square meter depending on its location and type of use. In medium-sized cities the rate will range from 1.2 yuan to 24 yuan per square meter, in small cities the rate will vary from 0.9 to 18 yuan and counties, townships and mining areas property will be taxed at a rate of between 0.6 yuan to 12 yuan per square meter per year” (atimes.com). This increase in land-use tax will surely be a challenge for the retail firms, as they have pay higher taxes according to the location of their stores. That is, retail firms will mostly want its stores to be located at prominent spots in cities or towns, so that maximum people can have access to it. This is the feature of retail stores all over the world. So, if the foreign retail firms in China choose prime locations in big cities or towns, it has to pay a higher land-use tax. This will downsize their profits compared to earlier years. So, the introduction of the new tax regime will be a major challenge for all the retail firms operating in China, and also for the firms who are thinking of entering the Chinese market. Another tax related challenge is also on the horizon for the foreign firms operating in China. That is, income tax exemptions given to the foreign firms will also be a thing of past, as the Chinese Government plans to withdraw it, in the coming months of 2008. “Later this year a new corporate income tax structure is expected to be passed and implemented that will see foreign and domestic firms taxed at the same rate, ending years of special corporate tax breaks for overseas firms” (atimes.com). Regional fragmentation of the tax structure is another tax related problem which is hampering the currently functioning retail firms and could also challenge the new firms. Regional fragmentation of finance regulation and importantly tax laws creates a kind of regional protectionism so that a foreign company with joint ventures in several locations may have to make a separate payment from each venture to the supplier (Huffman, 2003). Corruption Even though China is accelerating at a fast rate, the internal factor of corruption is impeding its flow and has turned out to be a major challenge for the retail firms. “With its economy soaring at around 10 percent a year for nearly three decades, China’s ascendance seems unstoppable…Behind China’s dynamism, however, lurk many dangers that could derail the Middle Kingdom’s re-emergence as a great power: environmental degradation, population aging… and, above all, endemic corruption” (Pei, 2007). Many Chinese departments particularly ones dealing with the foreign investment have become corrupted, with the government officials manning these departments openly demanding bribes. So, with corruption expanding its tentacles throughout China, the foreign firms think twice about entering the market. The existing companies also find the ritual of bribing the government officials an irritating at the same time costly exercise. Retail firms have to maintain contact with the government officials, and importantly give them bribes at appropriate times. Then, only the firms can establish their retail stores in the needed locations with the necessary clearance. If the retail firms refuse to give bribes to the government officials, the officials will place continuous and difficult obstructions. That is, the local Chinese officials who are not given bribes could expose western retail firms to potentially vast environmental, human rights, and financial liabilities. Also, the retail firms’ intellectual property rights or other product rights will be at risk because unscrupulous government officials routinely protect Chinese counterfeiters in exchange for bribes (Pei, 2007). These corrupt practices could be one of the difficult challenges for the retail firms. Advertising The challenge, the retail firms will face in the marketing sector, particularly in the advertising front is the lack of quality advertising agencies in China. That is, the local Chinese advertising agencies, which were catering to the local companies, are not equipped to handle the needs of the foreign retail firms. Because of which, they are not able to fulfil the firms’ needs and importantly were not able to reach the intended customers. “Advertising agencies and media companies, which did little but complain about the lack of “good people” in China, are finding themselves in a development gap with their clients and advertisers” (Guérin, 2005). Wal-Mart faced this exact challenge, as it was not able to hire an apt advertising agency to work on its stores’ advertising campaign. The other challenge, the retail firms will face in the advertising front is that, China being a huge market geographically and demographically with the people living all over the country, it is not possible for Wal-Mart to actualize a single advertising strategy for the whole country. So, the retail firms have to localize its advertising strategy and focus only on the stores in specific localities, without pan-national look. But, this localization strategy will surely increase the cost factor and will make it difficult to build a strong brand all over China. Talent When firms are established on foreign shores, it would have ‘collage’ of workers. That is, foreign firms including retail firms will be composed of workers from two national or country categories. The employees from the parent country, where the firm is usually headquartered or based are called Parent Country nationals (PCNs). The employees from the host country where the firms may be located are called host country nationals (HCN) (Scullion & Collings 2006). These two groups of workers will normally be recruited by the foreign firms, to fulfil needs and also as a form of necessity. That is, retail firms in any foreign country including in China are some times ‘forced’ or duty bound to recruit employees from the host country. Apart from fulfilling the unwritten rule of giving employment to the locals, this recruitment procedure will also benefit the retail firms in other ways, by providing them surplus and some times cheap labour. But, in China, recruiting the local employees has become a challenge because of the lack of qualified labour. That is, the Chinese labour is not equipped to handle the necessities of the retail firms because of their lack of people skills. So, many retail firms including Wal-Mart are struggling to find the required labour and talent to function successfully. “To succeed in China, Wal-Mart had to expand its model and bring not only good ideas and cash but also its human capital to develop its local business” (Guérin, 2005). Market place The Chinese market for retail firms have been on the positive side. That is, even with these above mentioned challenges, some favourable factors are aiding and will also aid foreign retail firms to achieve success. Actually, the retail sector has good opportunities, brought out by the increased buying power of the Chinese people. “China retail industry has been showing upward trends for quite some time now. Growth in this sector is particularly spurred by the changing buying patterns of consumers and rising per capita income in the country” (newswiretoday.com). Many well-known foreign retail firms have also made a strong presence in China, paving the way for more foreign presence. That is, even though, the foreign firms (who are currently functioning in China) face all the above mentioned challenges, they were able to overcome these challenges and are showing good results. They have been well received by the customers and it shows in the total sales volume as well as in their expansion plans. “Statistics shows, 70 percent of the top 50 retailers in the world have set up footholds in China. Wal Mart has opened 19 chain shops with a goal of 100 shops in China. Carrefour opened four new shops in Jinan and other Chinese cities. Nearly 80 percent of supermarkets, the main channel of retail sales in China, are dominated by foreign retail companies.” (china-embassy.org). “British home improvement company B&Q, have rapidly built up their presence in China since foreign participation in the sector was permitted in 19 operating 31 retail stores across China—from Shenzhen in the south, to Kunming, Yunnan, in the west, and Harbin, Heilongjiang, in the north”(rhul.ac.uk). The other main reason why the Chinese retail marketplace can be considered as a thriving market for the retail firms is, because of the changing priorities of the Chinese people. That is, as mentioned above with growing purchasing power, the Chinese people now want high quality foreign products instead of cheap, low quality Chinese products. So, they approach the foreign firms to buy those products, increasing the firms’ profits and also strengthening its presence. “Ji Xiangqi, chairman of the Shandong Provincial Commercial Group, attributed the thriving growth of overseas retailers to the contradiction between growing domestic demand and the status of small scale, sparse distribution and poor quality offered by domestic commercial departments” (lists.iatp.org). All these factors and happenings are optimizing the position of foreign retail firms both financially and geographically in the Chinese marketplace. Conclusion These positive factors paint a bright picture about the Chinese retail sector. So, if any foreign firms enter that sector, it can achieve good success. In spite of the above discussed challenges, the foreign firms can compete and can reach the expected targets and profits. That is, all the challenges can be over come or minimized to an extent, so the firms can maximize its reach. For example, the challenge of taxation can be overlooked, because firms including retail firms in any country cannot always expect tax-free status or tax holidays all the time. So, in order to profitably compete in the flourishing retail sector in China, the foreign firms should not make any fuss about the new tax regime and instead pay all the taxes aptly. As far as corruption is concerned, it is not possible to change the attitude of the Chinese Government officials. So, the foreign firms wishing to profit can pay some bribes at the needed places, to actualize their plans and importantly to protect their interests from local Chinese threats. The other challenge of advertising and inadequate talent can also be neutralized by bringing equipped human resources from their own country and using them for vital works. These foreign employees can also be used to train the prospective local employees and make them also equipped. This is exactly; Wal-Mart is doing, as it is bringing in employees from U.S. to fulfil the job needs in China. Wal-Mart brought not only their brands and products, but also human capital with their strategy and executives. Also, retail firms from UK and Japan have transferred their parent country management practices and retail concepts to their Chinese subsidiaries. Then, importantly they have trained the local employees in those practices and concepts, so they can get quality and equipped labour for a cheaper price. If all these aspects are taken care, the foreign firms can enter the Chinese retail sector and importantly compete successfully. Reference: atimes.com. (2007). Foreign firms in China to lose tax privileges. Retrieved March 24, 2008. http://www.atimes.com/atimes/China_Business/IA04Cb04.html china-embassy.org. (2004). Foreign commercial giants favor Chinas retail market. Retrieved March 24 2008 http://www.china-embassy.org/eng/zt/1/t142318.htm consume.bbk.ac.uk. Multinational retailers in the Asia Pacific. Retrieved March 26, 2008 http://www.consume.bbk.ac.uk/research/gamble.html esrcsocietytoday.ac.uk. (2008). Multinationals in emerging China should stick to their own ways of managing. Retrieved March 26, 2008 http://www.esrcsocietytoday.ac.uk/ESRCInfoCentre/PO/releases/2008/january/china.aspx gca-sme.net. Foreign invested firms to lose tax, land use privileges. Retrieved March 26, 2008 http://www.gca-sme.net/chance4.htm Gamble, J. (2006) ‘Multinational retailers in China: proliferating “McJobs” or developing skills?’ Journal of Management Studies, 43(7): 1463-190. Guérin, D. (2005). Chinas Rising Advertising and Media Industries. Retrieved March 26, 2008 http://www.danwei.org/media_and_advertising/human_capital_and_chinas_risin.php Huffman, T. P. (2003). Wal-Mart in China: Challenges Facing a Foreign Retailers Supply Chain. Retrieved March 23, 2008 http://www.chinabusinessreview.com/public/0309/wal-mart.html lists.iatp.org. (2004). THE AGRIBUSINESS EXAMINER # 358. Retrieved March 26, 2008 http://lists.iatp.org/listarchive/archive.cfm?id=94145 newswiretoday.com. (2006). Increase In Per Capita Income & Changing Consumer Needs Result in Climb in Retail Expenditure. Retrieved March 23, 2008 http://www.newswiretoday.com/news/8740/ rhul.ac.uk. (2007). Foreign retail firms bring more to China than just ‘McJobs’. Retrieved March 22, 2008 http://rhul.ac.uk/messages/press/message.asp?ref_no=523 Pei, M. (2007). Corruption Threatens China’s Future. Retrieved March 26, 2008 http://www.carnegieendowment.org/files/pb55_pei_china_corruption_final.pdf Scullion, H & Collings, D. G. (2006). Global Staffing. Routledge Read More