Doing Business in China
The report focuses on the economic, political, social and cultural environment of doing Business in Asia and more specifically China. To the foreign investors, China comprises one of the most attractive places to do business in the world. Essentially, the essay focuses on the macro-environmental factors of doing business in the region. The analysis is critical for foreign investors to help them make decision-making regarding how to operate the business, management processes and the barriers to such (Ambler, Witzel & Zou, 2008). From late 1970, the country has grown to gain a strategic position among the strongest powers in the world such as the United States, Britain, France, Japan, and others. This has boosted its international business standing. The factors mentioned above have significantly improved and became accommodative to both local and foreign investors. The main reasons why investors seek to invest their business capital in China is due in large part to the nature of the market size, the ability to procure labor at low cost and the possible growth in the next decades (Reuvid & Yong, 2006). China has increasingly becoming intertwined with other nations of the world regarding how business is done and therefore opened itself to cross- border business activities. For foreign investors, they have to deal with seen and unseen challenges, and this makes it complicated to manage business outside the social, political, economic and cultural barriers.
People's Republic of China
According to Mundial (2013), The People's Republic of China as recognized by the United Nations is a sovereign country found in the East of Asia. Regarding population, the country is the world's most populous nation with estimated population of over 1.35 billion. Politically, People’s Republic of China (PRC) is governed by Communist Party, the only single party. The government is based in Beijing the capital city of China mainland. The government exercises jurisdiction over five autonomous regions, twenty-two provinces, and four municipalities namely Beijing, Chongqing, Shanghai, and Tianjin which are controlled by the government. Further, there are two self-governing regions namely Macau and Hong Kong.
Internationally, China is recognized as a nuclear weapons state with one of the world's standings army and the huge defense budget. The PRC joined the United Nations and has been a member since the early 1970’s. Before, it was ROC which was a permanent member and therefore represented the country in the U.N. Security Council. Further, China is a member of other formal and informal international organizations such as Shanghai Cooperation Organization, BRICS, the World Trade Organization, APEC, G-20, and BCIM (Mundial, 2013; Reuvid & Yong, 2006).
Political Factors Affecting Foreign Business in China
The political factors of a particular country are given a lot of weight by foreign investors of a country. This is because all the government policy and actions significantly have a bearing on the business because all local and international must adhere to the laws of the land (Quer, Claver & Rienda, 2012). Therefore, foreign business managers should devise ways of formulating company policies which are in line with the national policies. Luo, Xue & Han, (2010) argues that, the political environment in many respects has a significant impact which affects businesses in a myriad of ways. For example, the policies of a government toward international owned businesses contribute to the risk factor and could occasion major loss.
Besides, business owners need to understand that the politics of the nation can alter the results of a company. As such, it is important for business managers to have a strategy in dealing with the possible outcomes of politics. Therefore, before investing in China, it is paramount to understand that any Changes related to political factors can vary from economic, social and legal and a mixture of other elements (Chen & Young, 2010). For example, political factors of any countries include a tax increase or decrease which can affect companies disproportionately and the effects are direct to the businesses. So, when investing in a foreign country, the investors must always understand the revolving political factors such as the possibility of Government interventions and roles in interest which impact the demand patterns of the company.
To understand the politics of China, and how it can affect the business decision, it is important to comprehend the hierarchy of Decision-making in the political arena. As mentioned The Communist Party of China is the ruling political party and Central Politburo Standing Committee (PBSC) is responsible for making the most influential decision such as foreign policy. The body is led by the President Xi Jinping, Premier of the State Council, Chairman of various agencies such as the National People’s Congress (Hill, Cronk & Wickramasekera, 2013). There is also other members such drawn from National Committee of the Chinese People’s Political Consultative Conference, Central Secretariat of the Communist Party of China, Central Commission for Discipline Inspection and the State Council of the People’s Republic of China. The decision making has a bearing on how the policies are formulated and the nature of implementation.
The report explores various political factors which have an impact on China. The focus is the Government regulations and the legal issues likely to affect the establishment and operation of the business. The former relates to formal and informal rules that the firm must observe because of the influence impact the country. Scholars such as Deresky, (2017) argue that the political force in the country is yet to settle because of the heavy emphasis on the development of e-commerce rules and policies. Another focus is the legal framework which is perceived to be in the initial stage. China lacks a required vast experienced in the drafting e-commerce regulations. Specifically, the weaknesses are in the protection of intellectual property rights, tax. Other areas which are still considered underdeveloped includes privacy, validating electronic contracts, use of digital signatures, and consumer rights (Santoro, 2015).
Other than the factors mentioned above, business from other countries seeking to invest in China needs to explore myriads factors. From the last decades, the Chinese government has been working on the scenes to rebalance the national economy from heavy dependence on investment-led growth to one that is geared toward consumption (Lu, Filatotchev & Wright, 2014). To this effect, focus on innovation on consumer products and services is a huge opportunity for foreign companies to invest in China. However investing in China is roughed with challenges. The World Bank in 2015 report on the ease of Doing Business report put the country way behind others in position 84th globally (Deresky, 2017).
Economic Factors affecting foreign investments in China
According to Gilpin (2016), this decade China’s economy has grown and expanded significantly regarding Gross Domestic Products. China economy surpassed all other nations and came second to U.S. economy due to myriads of factors such as increased deposits from savings, the growth of skills among the population, and development of export business and rural and urban development. For example, in 2012 GDP had a significant growth thus hitting $7.20 trillion while the U.S. is said to have achieved $14.99 trillion in the same year.
Economic development of any country generates massive impact on the small scale and large corporations and their actions. Evaluation of China’s economic outlook and specifically GDP indicates that majority of the citizen is helping the economy grow because they are adding more values. This resultant effects of this are increased and increasing consumers’ purchasing power (Gilpin, 2016). For the industries, there are more benefits due to comparatively and relatively lower cost of acquiring labor in China. This is evidenced by the setting of regional branches of one of the America’s leading firm in the phone industry such as Apple because they have accessed to skilled and cheap compared to the mother country and other nations in Europe (Chow, 2015).
Also, Cuervo-Cazurra, Inkpen, Musacchio & Ramaswamy, (2014) argues that the rate of economic growth rate is impressive even though pundits project it can slow down. For instance, there are some worrying signs and trends such as high inflation rate, skyrocketing property prices which can hamper the development and lower investment appetite. For example, The People’s Bank of China in the recent years has been increasing the interest rates and the reserve required by commercial banks to operate in the country.
Social Factors affecting foreign business in China
The social and cultural factors in the country are of great significance due to the constant demographics change. For instance, in China, there has been a steady population growth, distribution, and fluctuation of age. Therefore, this has an effect on and possible societal values and cultural trends. In this context, social behaviors and the size of the family has an impact on how decisions are made. Besides, there are other social factors which are relevant to the business such as religion, consumer lifestyles, immigration, and education. Reflecting on these issues, China can be said to have collectivistic culture. However, this measurement is derived from Geert Hofstede’s value dimensions (Liu, Hodgkinson & Chuang, 2014).
It is important to note that, literacy level in China is very high because it is more than 90%. The government put emphasis and prioritizes education, and this is the reason why the majority are literate (Wei, Zheng, Liu & Lu, 2014). On the other hand, the country being one of the populous in the region has more than 420 million users. This has been facilitated by adequate internet connection and access, and therefore consumers often go online to shop. For instance, Taobao is the largest local e-commerce online platform where the population goes to online to look for merchandise in many online sales of the point (Daily, 2015).
As technology continues to advance it is evident that the volume exchanged through the platforms is expected to continue to swell shortly. It is a fact that E-commerce has revolutionized the way in which local and international shoppers perceive shopping but this is not without some challenges. For instance, some considerable possible online shoppers fear real or imagined risks, and this makes them go for real shopping where face to face contact takes place (Zhang & Wang, 2014). Regarding social environment in China, foreign will not have a problem accessing literate and skilled employees to feel the gap needed. The huge population in the country is a ready market for the companies, and the community has embraced the use of the online platform to procure product online. This means that the organizations can have both physical and online store to maximize their sale thanks to internet connectivity to millions in the country (Fan, Ju & Xiao, 2016).
Cultural climate in China
The Cultural environment is for foreign business when they want to set businesses in China. For instance, it helps in shaping workers behaviors, expectations and further determines the management styles and the way in which the population interacts with foreign entities operating in the country (Li, Lin, Doss & He, 2016). Liu and Stening, (2016) explains that the cultural environment in China is strictly controlled by more than 2500-year-old philosophy developed by Confucius. The teachings value the interaction between individuals and groups following a hierarchical structure similar to that in the organizations. The philosophy is far much different from that of western countries and therefore means the management styles are different.
Therefore, business planning to operate such a cultural environment market with collective individualism must understand the values of cooperation, status quo, hierarchical structure, and the situation where decision-making follows a careful analysis of the issues at hand (Yang, 2016). Western owned enterprises from Europe and the U.S. are more likely to encounter enormous challenges about the cultural environment due to the nature of the workforce. One of the cultures to consider when investing in China is Guanxi, and this is because China’s society is relationship-oriented.
Guanxi comprises of interactions and network which is vital for the operation of the business. By building Guanxi, the firm reduces the inherent risks, setbacks and other failures (Fisman, Shi, Wang and Wu, 2017). This is because the Chinese like to deal with organizations led by the people they are familiar to and those who can be trusted. To this respect, businesses can prefer to form a partnership with the locals and more so interpersonal relationship before setting the company together. The more the interconnections are dark, and with many intersections with the society, the easier it is to conduct business in the country (Yen, and Abosag, 2016).
Chinese employees are used to the culture which does not allow them to report any problem arising in the working process. However, some situations warrant them to report, and this happens in cases only when probable and possible avenues get exploited and where there is an existing option. The culture is encouraged by State-owned firms because they have tolerated the culture and also there is no demand for them to take any responsibility (Farh and Cheng, 2014). The primary factors that encourage this are because the organizations guarantee their job and in the case of financial government challenges, there will be a government bailout. Therefore, they are not likely to take any initiative for a business situation.
When setting a factory in China, there is a need to understand the meetings between business partners when making a deal. For instance, in China, foreigners when people are meeting for a business encounter, there is need to display a high level of respect and sincerity. On the other hand, there are issues of Handshaking which has to be done lightly and exchange of information such as business cards and use of English language for foreigners. More often, when they start a relationship they seek to build it more to make it last longer and rather than business association, the objective is to preserve it longer. Besides, western investors must understand that Chinese business people operate do not rush to make a conclusion. To this effect, one must know that it will take quite a considerable time and number of meetings before reaching any final idea is reached. There can also be a delay in making progress because their focus is long-term oriented and driven by deep commitment.
However, in the contemporary business setting the culture is considerably changing due to some changes which have allowed private firms to operate in many sectors of China's economy. However, due to an increase in unemployment in the country, this has led to job insecurity and therefore means the situation is changing slowly (Farh and Cheng, 2014). Therefore foreign business should not have a course for worry because capitalism is slowly taking center stage and tilting the culture into their favor. With the increase of globalization and the rise of business in China foreign market are finding it more attractive and entrepreneurs all over are setting companies to reach the domestic market. However, some due to a poor understanding on the issue of cultural factors face myriads of barriers when dealing with the current environment. To realize successful investors need to respect and adapt to China’s long culture which is rooted hundreds of years ago (Stahl and Tung, 2015).
The paper has explored China's business climate as dictated the political, social, economic and cultural factors. The idea of foreign companies deciding to enter China’s market can be termed to be attractive due to changing economic prospects, continued reforms by the political decision makers, friendly social environment and unique cultural factors. However other factors such as culture cannot be altered easily, as it primarily derives its principles from Confucius philosophy and this makes it virtually impossible to influence it. Therefore for foreign companies, the viable option includes understanding how to abide by the political climate and responding to the social environment. For instance, the management according to the nature of employee’s relations with the company should not expect workers to come with an initiative.
The economic environment of the country is somehow tough to the foreign businesses, but things might change from the long term. For instance, the uncompetitive practices, interest rate across many sectors of the economy appear to it will not change in the short term but expected to be supportive in future. Further, to minimize the reputational risks at the home country, there is need to adhere to the issues of corporate social responsibility standards and ensure fair practices in China. There is also need for the management to come up with strategies aimed at further recruiting and training employees at all levels. This is meant to fill the skill gap to help the workers carry on with the programs successfully.
Because of the issues of Safeguarding intellectual property rights when operating in the country, there is need to be cautious. For example, it is necessary to take care when transferring proprietary information with the Chinese partners working in the country. This is because there is a high likelihood of that information to be stolen and this can be solved through patenting, and releasing the existing computer code for public use, initiating business alliances and partners to encourage joint production. For political reasons foreign owned businesses should devise their exit strategy despite high hopes for the country remaining very competitive, sweeping political changes poses a danger to enterprises.
In conclusion, based on the analysis of political, social, economic and cultural factors it is arguable that China is has a relatively favorable environment to invest. However, there are challenges which emanate from political uncertainties in the way policies are formulated, high-interest rates and tax which hampers setting and development of business as well as high challenges of starting a business. Management leading these companies should focus on understanding the macro-environment of a country where the investors plan or wish to start a business. Despite the massive economic development and relatively favorable political environment, there are myriad of challenges which stand in the way such as lack of trust. Other issues include the lack of secure and reliable online payment platform for consumers and enterprises. For foreign companies, there is a lack of proper legal protection and rampant corruption in the government. All these factors combine create some level of uncertainties for the market players.
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