1. Introduction – China is one of the oldest civilizations of the world, and the oldest continuous running civilization. The country’s contributions to the world in the field of arts, science and trade have been numerous over the centuries of its existence. However 19th and 20th century saw the country being beset by civil unrest, famines, military defeats and foreign occupation. China came to be under the autocratic socialist rule of Communists after World War II, under the leadership of Mao Zedong. While this ensured China’s sovereignty, the rule imposed controls over the everyday lives, a system that exists even to this date. However, late 1970s saw a change in rule with successor Deng Xiaoping, who with other subsequent leaders focused on market-oriented economic development, which led to the output of the country be quadrupled by the year 2000. This led to a dramatic improvement in the living standards and increase in personal freedom for a majority of the population, though political control is still tight (Central Intelligence Agency, 2007). This paper will be giving an analysis of the political, economic and cultural environment of the country and its impact on the international business chiefly concentrating on Foreign Direct Investments, FDI.
2. Political Analysis – China has a communist style of government, which is seen by many foreign countries as being too restrictive. While the country is certainly better than what it was in the 1970s, the government is still unpredictable when it comes to policies. However, Chinese government is extremely committed towards economic growth at the national level, the proof of which can be seen in the enviable figures of growth for the country (Shirk, 2007, p. 42-43). Foreign companies also enjoy equal status as the domestic companies for taxes, expenses and other benefits; however, the government keeps a close watch on the foreign company’s operations and profits. In addition, the procedures for foreign investors in establishing investments in China are extremely complicated. There are also risks due to the single-minded market-oriented reform, the rampant corruption and increasing social unrest (Morton, Lewis, 2004, p. 266). Finally, the inter-government relations between China and Australia, though are cordial, are at a very initial stage (Thomas, 2004, p. 69). All of these factors raise the risk for an Australian firm intent on investing in China. However considering that China is still the topmost country in the world w.r.t. to FDI inflow, and has the production offices of almost all big corporations from all parts of the world; the risks are well-worth taking.
3. Economic Analysis – The economic growth of China started since the reform practices started in 1978. The growth rate has been steady between 6-10% (Wu, 2004, p 1-2), and IMF predicts that the country will sustain its growth in the years to come (Xiaouchuan, 2008, p.3). The exports and import growth stand at 20% and 18% respectively (Worldbank, 2008, p. 3, 8). However, China in recent times has seen high levels of inflation, tight currency-exchange control, unemployment, and an unhealthy shift of labor from villages to urban towns. Also Australia’s investment in China has been extremely low, to the tune of less than $100 million. This is because historically Australia has not been a large exporter of FDI, and whenever it has done so, the host countries had been developed countries (Ma, Yang, Zhang, 2008). Hence, it might be easier for an Australian firm to invest because the Chinese government would definitely be welcoming. On the other hand the lack of experience combined with a disadvantage of having almost no peers, might pose a problem.
4. Cultural Analysis – One of most important reasons why many firms invest in China is the availability of a large labor pool and the extremely low labor cost. The country has the largest population in the world, 1.3 billion (WTO, 2008), which accounts for one sixth of the population. Over the years, China’s labor force has also become skilled because of the inrush of industrial set ups from many foreign companies. However, the main problem that companies face is the cultural differences between the host country and Chinese labors (Song, Garnaut, 2007, p. 151). Many countries have strict requirements, specially relating to work quality, reporting, and IP issues, which does not work at all with the Chinese labor force, because of the failure to understand the consequences (Earnshaw, Pennington, 2005, p213). Also while the economic development in China has been enviable, the economic development has been concentrated only in few parts of the country. Hence any new company investing the country needs to look into this aspect. Most of the companies do this by going set by step into their set ups first starting by either employing the services of a local consultant or by partnering with a local firm.
5. Potential Opportunities – China offers major opportunities for Joint ventures and direct investment in the area of energy, communication, and transportation. The access to the ventures is easier via equity and contractual ventures. The country has a huge manufacturing base and is rich in natural resources such as oil and coal (Kerkhoff, 2006, p. 69). Following the economic slowdown in US, and its corresponding effect on Chinese economy, the government would be extremely interested in soliciting investments from developed countries other than US. China has been a part of WTO, and due to the Open policy, the country is no longer isolated from the trade rules of the world (Cheng, DeLisle, Brown, 2006, p. 229). All these factors make the investment in the country extremely lucrative.
6. Problems – An unspoken rule of investment in China is that, the investing company must be looking into long term profits, since the policies of the country make it difficult for non-Chinese companies to make money. The reporting standards and accounting standards are not very high as compared to other developed countries. Also there is a marked lack of a proper legal structure in the country. The cultural differences are immense which might be a major hurdle to overcome even after hiring Chinese managers. The advertising market is also uncertain because of the strict restrictions of the government (Chunsheng, 2007). The protection of intellectual property is also a major issue in the country. While the labor force is increasingly improving in quality, the country still faces a lack of skilled labors. The primary reason for this is because the education level of the country is low with the adult illiteracy rates between 10-20% (World Bank, 2007, 138-139). Finally, the country’s infrastructure chiefly road transport is poor and has been long seen as an impediment to opening up the country’s interior to development (Chunsheng, 2007).
7. Conclusions and Recommendations – The paper above describes the exiting business environment in China. It can be seen that while the doing business is extremely lucrative, the existing policies and the socio-economic structure make the environment unpredictable, which make it difficult for any company to succeed all too soon. In addition, the country’s extremely different cultural practices are also a headache for many new companies, at times they become too difficult to cope up with. Also the country’s extremely restrictive public environment is also a downside for companies doing business in China. However, the statistics of FDI present a different side of the story, with the massive input of investment coming in. This clearly indicates that companies can survive in the country provided they are extremely careful, follow norms, and more importantly are in close contact with other companies who have previously done business in the country. Some of the recommendations for a firm to invest in China are as follows:
Look for a local partner or hire a local consultant before entering the market to be aware of the exact impact of the existing environment and also how to cope up with it
The business must be established in the already developed regions of the country, regardless of the low cost for other under-developed regions. This is because the region might have extremely poor infrastructure, such as power supply and transport, regardless of assurances from various sources
The labor force must be a combination of local and Australian managers, so that each is aware of the cultural difference, and the expectations. Also IP issues must be sorted out strictly.
Central Intelligence Agency, (2007), “The CIA World Factbook 2008: 2008”, Published:
Published by Skyhorse Publishing Inc., ISBN 1602390800, 9781602390805
Cheng T, DeLisle J, Brown D, (2006), “China Under Hu Jintao: Opportunities, Dangers,
and Dilemmas”, Published: World Scientific, ISBN 9812563474, 9789812563477
Chunseng Z, (2007), “The Weaknesses of China’s Boom Economy”, 13th June 2007,
website accessed on August 3 2008, http://www.managementtoday.co.uk/search/article/664367/the-weaknesses-chinas-boom-economy/
Earnshaw G, Pennington M, (2005), “China Business Guide 2005: The Top Source of
China Business Information for 15 Years”, Published by SinoMedia (Holdings) Co. Ltd., ISBN 9889825414, 9789889825416
Kerkhoff G, 2006, “Global Sourcing: Opportunities for the Future China, India, Eastern
Europe–How to Benefit from the Potential of International Procurement”, Published: Wiley-VCH, ISBN 3527502327, 9783527502325
Ma, Yang, Zhang, (2008), “Australia’s Direct Investment in China: Trends and
Determinants”, Economic Papers (Economic Society of Australia), March 2008, website accessed on July 6th 2008, http://findarticles.com/p/articles/mi_m0PAO/is_1_27/ai_n24379881
Morton WS, Lewis CM, (2004), “China: Its History and Culture”, Published: McGraw-
Hill Professional, ISBN 0071412794, 9780071412797
Shirk SL, (2007), “China: Fragile Superpower”, Published: Oxford University Press US,
ISBN 0195306090, 9780195306095
Song L, Garnaut R, (2007), “China: Linking Markets for Growth”, Published: ANU E
Press, ISBN 1921313382, 9781921313387
Thomas N, (2004), “Re-Orienting Australia-China Relations: 1972 To the Present”,
Published: Ashgate Publishing, Ltd., ISBN 0754632458, 9780754632450
World Bank, (2007),”Building Knowledge Economies: Advanced Strategies for
Development”, Published: World Bank Publications, ISBN 0821369571, 9780821369579
World Trade Organization, WTO, (2008), “China: Trade Profile”, April 2008, website
accessed on August 3 2008, http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=CN
Wu Y, (2004), “China’s Economic Growth: A Miracle with Chinese Characteristics”,
Published: Roultedge, ISBN 0700717285, 9780700717286
Xiaouchuan Z, (2008), “Seventeenth Meeting: Statement by Dr. Zhou Xiaouchuan
Governor of the People’s bank of China at the seventeenth Meeting of the International Money and Financial Committee Washington D.C.”, April 12th 2008, website accessed on August 3 2008, http://www.imf.org/External/spring/2008/imfc/statement/eng/chn.pdf