Over the last few years, China’s reputation as a global business hotspot has greatly increased. Large and medium businesses have expanded their capital involvement in China to have a share of its lucrative market.
This rush for China’s market can be attributed to steady economic growth, favorable business environment, relatively low production costs, and sound economic policies. What exactly are businesses operating in China faced with legally, economically, politically, and culturally? What are the requirements for investing in China?
Economic aspects of doing business in china
The Chinese government embarked on economic reform program in 1978. This program was to ease years of state control of major productive assets. The program aimed at liberalizing foreign trade activities and investment, relaxing of price control on products, encouraging and facilitating education of its work force, and investment on industrial production (Bramall 364).
This strategy seems to have worked considering China’s current economic growth. After the launch of the ambitious program, China’s real economic growth shot to an average of 9 percent as compared to the 6 percent before 1978. In most of the peak years after 1978, the growth actually reached 13 percent (Bramall 366). It is not only China’s economy that has greatly improved, but also her capita income, which has almost quadrupled.
The growth has thus seen improvements in infrastructure development and provision of social amenities, which has attracted many investors in the region. However, operations of many business establishments in the region face many economic challenges, which if not considered may throw them out of business. The economic factors that influence business operations are Foreign Direct Investment, Inflation Rates, Infrastructure, and Currency & Exchange Rate.
Foreign Direct Investment
China’s economic reform process has concentrated on promotion of Foreign Direct Investment. The process has changed the way many countries and investors view China as an investment destination. In fact, in the recent years, China has become the main destination for Foreign Direct Investment (Swaine 186).
Of the 500 World’s leading companies, 450 operate in China. The Chinese Foreign Direct Investment policies started changing in the late 1970s. In 1983 for example, the government made a new policy that allowed joint ventures in which foreign capital was involved (Swaine 219).
The government also set up Special Economic Zones in Shenzhen, Shantou, Zhuhai, and Xiamen to aid trade. The biggest stride was yet to come when the People’s Republic of China passed a law that legalized Foreign Direct Investment. The legalization of Foreign Direct Investment has led to a tremendous increase in number of firms operating in China. Most of these firms, according to Jolly, are profitable (45).
In 2006, business environment eased further when the Chinese National Development and Reform Commission formulated a plan for better management of Foreign Direct Investment. The plan proposed a significant reduction on restrictions on holding of domestic firms by foreign investors. This encouraged even more investors in the country.
According to Morrison, inflation is a“sustained increase in the prices of goods and services” (244). Increase in inflation results to a correspondent increase in wage of employees. This affects businesses as it cuts into their earnings, which may force investors to shy away from a region. According to Feyzioglu & Willard, chinese inflation in 2006 was at 8.5% (24). However, the rate was last reported in October of 2011 at 5.5% (IMF 25). This reduction in inflation has created a favorable business environment.
The Chinese government has heavily invested in the development of infrastructure. However, this is not adequate as energy resources, transport network and communication facilities available do not match her population. Despite undertaking major highway construction, the country’s human development index still stands at 0.777 (International Monetary Fund 23).
Poor infrastructure development has adverse effects on business operations (Cole 425). Poor road network for example, affects business operations by slowing distribution of goods and increasing the cost of transportation. Frequent interruption of electricity supply also hurts business operations by reducing output resulting in low profit margins.
Currency & Exchange Rate
Chinese Yuan has tremendously appreciated over the last few years. In 2008 alone, the Yuan appreciated 21% against the United State’s dollar (Morrison 24). A move widely criticized by the Obama administration citing manipulations. The appreciation makes exports to other countries expensive which reduces the customer base for businesses involved in production of export. On the other hand, it makes imports cheaper for businesses importing labor and raw materials from other regions.
The Legal Aspects of Doing Business in China
Overview of business legal environment
The legal requirements of doing business in a country are the regulations set by the country’s government for investors to abide by to avoid arrest or business fines arising from noncompliance (Jolly 179). Breaking some of these laws may even lead to complete closure of business. The level of foreign direct investment in a country is greatly dependent on its legal environment.
Investors want certainty in their operations and are therefore more concerned about transparency, efficiency and reliability of the legal system within which they conduct their businesses. However, a lot characterizes doing business in China concerning legal system.
Problems arising from China’s legal environment
The Chinese government has done a lot in its attempt to make China a preferred destination for investors. Nevertheless, flaws exist in its legal system that hinders foreign investment. The result of this is increase in cost of foreign business, which dampens the morale of foreign investors. Since joining the World Trade Organization, China has passed many laws and revised several existing ones to improve its legal environment for foreign investment (Nolan 73).
Despite the effort, legal challenges to foreign investments still exist. The first and most significant problem arising from Chinese legal framework is the lack of clear and defined legislation to control market behavior. Despite the threats posed by monopolistic activities and unfair business behavior, there is completely no anti-trust law in China. Interestingly, the legislation in place only controls unfair competition and is only applicable to retailers completely ignoring the threat from producers.
Secondly, entering the Chinese market through mergers and acquisitions is a complicated process that is next to impossible. This is because the current Chinese laws that govern mergers and acquisitions require the involvement of many government departments, each having its own legal procedures and requirements. This process may take too long thereby wasting precious business time.
Thirdly, there is an argument that the principals of trade laws are strong, but weak on enforcement. Often, the interpretations of these laws are arbitrary and flexible to certain quarters. A clear example of this illustration is taxation law. According to the Chinese legislation, all businesses, foreign owned and domestic, must pay sales, consumption and value added tax.
However, it is the implementation of this law is worrying. While all the tax categories are treated as a single entity for domestic businesses, they are separate entities for foreign businesses. The result is higher taxation for foreign investors. This practice amounts to unfair treatment of foreign owned businesses, which have to contend with the taxes.
Another challenge of doing business in China is the cost of the legal process involved. For a business to get a certificate of incorporation or a license, there are several departments and agencies, which it must get their clearance. Since these departments and agencies are in different regions, travel and fee requirements take a lot of money. This eventually increases the cost of business establishment.
Additionally, uncertainties in the Chinese market force businesses to spend more on hiring legal experts. Having noted earlier that the application of business laws is arbitrary and flexible in China, business owners take a lot of precaution by hiring competent lawyers to represent their interests, if a legal suit is raised against them.
There is also the issue of “hidden rules.” These are the incidences when written laws are not followed and completely different sets of unwritten barbaric laws are used. These laws have become the order of the day and any business that fails to comply faces grave consequences. Foreign investors therefore operate with a lot of fear, which is not healthy for business.
Political Aspects of Doing Business in China
General overview of political effects on business operations
The prospects of doing business in a particular region may be very attractive, but investing in such regions could be disastrous if the regions government activities are anti-foreign investment. Similar threats face businesses that operate in regions characterized by political uncertainties.
Political environment has a big impact on distribution, sales and promotion of a company’s products (Saber 102). Therefore, every company that desires to invest in foreign country must keenly monitor the political climate of the country and consider the possible effects of change in government.
This is because business policies and attitude towards foreign investors change with a change in government. These changes can be either in favor of foreign investment thereby offering attractive opportunities or against it thereby introducing stringent measures such as import quotas and increased taxes.
In cases where a government owns business in a certain sector of the economy, such sectors become a preserve for the government’s business activities. Therefore, if an investor desires to establish a business in such a line, he or she must bear in mind the possible challenges arising from complete control of the sector by the government such as restriction of marketing activities.
A host country’s political stability plays the biggest role in investment decision. Any threatening political activity may push investors out of a country’s market. Political instability indicators include continued demonstrations, violence, labor disruptions, and frequent regime change.
The risks associated with political instability are referred to as political risks (Harms 42). The risk level of a company is directly proportional to its investment. A company that has invested heavily in a particular region faces high political risk as compared to ones that have invested little money.
The Chinese case
China is a single-party socialist state. The constitution of the country provides for the leadership structure of the Community Party. The Community Party controls the state and its leaders influence government policies. This control is exercised at two different levels, at the Central People’s Government and Provincial and Local Authorities.
Laws of the communist government are made by the people’s congress. Since the public directly elects members of the congress, their legislative proposals are highly influenced by public opinion. This is because they will always try to please the public to win re-election.
The laws enacted by the Communist Party regarding foreign business operations in China have had a great effect on businesses. The selective application of these laws has worsened the situation for foreign investors. The political scenario in China affects businesses through government structure, political risk factors, and human rights violations.
The political system of governance in China provides for existence of a single party ruling the state. Any consultation and constitutional review takes place under the watchful eyes of the party’s leadership. Even though other political parties may take place in constitutional discussions, it is the decision of the ruling Communist party that counts. Such a system is prone to infringing the rights of citizens and foreign businesses. Over the years, the system has remained rigid to changes, which has made the business environment unfriendly.
Against international outcry, cases of human rights violations in China are on the rise (Kent 34). There have been cases of long detentions without trial, administration of torture, poor prison conditions and brutal treatment of prisoners, forced confessions, and infringement of basic human rights. Many journalists, religious activists, and internet writers have thus found themselves behind bars for highlighting human rights violations in China (Kent 36).
These outright human rights violations affect business operations adversely. It is difficult for a business to operate freely in a country that does not respect even the basic rights of its own citizens. A company may have to pay hefty fines against its employees without any good reason, fail to meet production targets if any of its employees are arrested, or even close down due to continued harassment of its managers.
Political risks activities
There are many political risks associated with running a business in China. In 1949, China nationalized several foreign and privately owned businesses (Zhou 36). Zhou states that, “The central government underwent a state building process, in which it centralized the control of resources and its power through collectivization and nationalization, especially in urban China.
He further clarifies that in 1950, the Chinese government completed the nationalization of foreign-owned companies operating in China (36). Nationalization is not the only risk foreign owned businesses face in China. There are also the threats of confiscation and contract repudiation. With the loose political laws that hardly protect human rights, businesses in China face the threats of kidnapping and torture of their employees.
The main political risk of operating business in China is attributed to its form of governance. China’s political government is comprised of the central government and the provincial and local governments. These factions are in constant battle when it comes to implementation of the rule of law. Interestingly, companies intending to operate in China must seek and secure the permission of the two factions. This is a complicated process considering that the observance of law by the two factions can at times be parallel.
The political stability of China has greatly increased. Many villages have conducted elections thereby opening space that is more democratic. The reduction in the number of businesses witnessed after the Tiananmen Square massacre is now reversing (Malik 50). The massacre sent panic among foreign business owners making many reduce their operations or withdrawing completely from Chinese market. Despite the current assurances and the unlikelihood of such recurrences, business people must still watch out.
Cultural Aspects of Doing Business in China
Overview of how culture affects business operations
Culture is very important to business because it influence individuals buying behavior, affects demand for specific products, and brand image. Every business must be able to understand the cultural orientation of its customers to maximize on its sales.
The Chinese case
In 2005, China’s population was 20.6% of the world’s population of 6.322 billion (Mirza 468). Despite government intervention to control population growth, China’s population has continued growing though at a slower rate. Currently, China remains the most populous nation in the world.
With this population comes an extensive market for international companies. As companies scramble for the Chinese market share, they soon realize the need to understand and embrace the culture of the Chinese to win their trust and make sales. The main cultural influences in China include Taoism, Confucianism, and Buddhism (Tang 65).
The business in China is mostly relationship driven. Therefore, doing business in China demands developing a good relationship with the people and understanding their culture. It is hard to make a sale by simply presenting a product to potential buyers without developing the relationship first.
This is contrary to western cultures where businesspersons make sales first and then develop relationship later. Understanding of Chinese culture and its influence on business operations require analysis of cultural elements such as ethnic language groups, social structure, religion, education, economic philosophy, and political philosophy.
Ethnic Language Groups
China has no race divisions. Rather, being Chinese is considered a cultural concept. Therefore, if an individual can speak Chinese, behave like a Chinese and have a cultural orientation that is Chinese like, he qualifies to be Chinese. This concept if adopted by business people can help them blend well and do business with ease in China.
There are small ethnic groups that have interacted with the Chinese for years. These groups have become part of the Chinese population through assimilation. Even though they constitute only 6.7 percent of China’s population, ignoring them can be dangerous for any business that operates in China.
Chinese culture is one of the most complex and diverse in the world. Social life hierarchy, importance of family, emphasis on hard work, and cultivation of morality and restraint are the core values of Chinese culture. The family is often given preference over individual decisions and desires, which portrays the society as collectivist. The Chinese believe in success through harmony. Therefore, any business that operates in China must learn to engage in activities that aim to promote peaceful coexistence among members of the community.
The official religious groups in China include Islam, Buddhism, Taoism, Catholics, and Protestantism. Each of the religious groups is unique in principals and beliefs. These beliefs may have adverse effect on consumption. Islam for example, prohibits the consumption of pork. Therefore, before venturing into the market with pork products, a firm must carry out research and find out the profitability level of operating in the country after sidelining the Muslims.
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