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Contents

Chinese Market- Potential for Western Investment: ...................................................................... 2 Economy Outlook: ....................................................................................................................... 2 Consideration while entering into new markets: ............................................................................ 2 Market Assessment: ........................................................................................................................ 3 Business Case Development:........................................................................................................... 4 Chinese government policies: ......................................................................................................... 5 CHINAS STATE CONTROLLED ECONOMY ................................................................................ 5 Chinas State Capitalism .......................................................................................................... 5 FOREIGN COMPANIES IN CHINA .............................................................................................. 5 Uncertainty of Investment Climate: ............................................................................................ 5 Regulatory obstacles ....................................................................................................................... 6 Foreign exchange ........................................................................................................................ 6 Financing ..................................................................................................................................... 6 Comparison between China and West: ....................................................................................... 6 Difference between Chinese and Western Region business culture: ............................................. 6 Asian Culture: .................................................................................................................................. 8 Guanxi .......................................................................................................................................... 8 Guanxi Predictors: ....................................................................................................................... 9 Managerial Implication: .................................................................................................................. 9 References: .................................................................................................................................... 10

Chinese Market- Potential for Western Investment:


China is one of the promising lands for western opportunities. The prospect lies in its huge market of 1.3 billion consumers, a low labour cost for manufacturing firms and currency depreciation against Dollar value. The progress Chinese economy made is remarkable. Their rapid growth in urban areas increase the market size for globally produced luxury goods. As per calculations, China will account for 20% of global luxury goods by 2015 of worth $27 billion.

Economy Outlook:
The major difference between Chinese economies to western economies is the gradual growth rather than multiple increases in numbers, as witnessed in European market. This helped China survived the global economic downturn in 2008, with a mix of monetary, fiscal and bank-leading policies. GDP Growth: Chinas GDP grew 9.2 percent in 2009, 10.3 percent in 2010, and 9.2 percent in 2011. U.s Exports: U.S. exports to China increased to $ 100 billion in 2011, up from $91 billion in 2010. Market for U.S Products: U.S. exports to China increased to $100 billion in 2011, up from $91 billion in 2010. Second largest Trading Partner: China is the second largest US trading partner, after Canada. U.S agricultural, fisheries and forestry exports were at their highest point of $21.9 billion in January to December 2011. (1) This statistical analysis of growth potential seems lucrative for every investor. However, few considerations need to be made before implementing the decision. China is a new market in terms of business environment, corporate culture, and customer readiness.

Consideration while entering into new markets:


Few considerations need to be made before the decision of investing into new foreign market. Specifically for a western firm it is necessary to analyze the factors inside out in order to grasp the business functions and conditions in China. They should analyze factors on two levels; Firm-specific consideration: ,mode of entry, time of entry, and firm size Country-specific considerations; host nation and home nation, economic distance, cultural distance, country risk, and country openness

An assessment flowchart provides information to gain a birds eye view of market entry.

market assesment business case development implementation strategy


Market Assessment:
Market Analysis:

legal and regulatory assesment market assesment entry barrier assesmet market attractiveness entry mode selection strategic planning

China is a part of Asia Pacific Region. This region is showing promising growth potential as markets of western countries are now getting at point of saturation. With exposure of information, and increased consumer size from middle-income range this region has been A listed on western countries. Countries like Japan, Hong Kong, Singapore and Taiwan have shown increased productivity in terms of foreign investments, creating market for foreign products. They are now a integral segment of global corporations. China is also one of the promising lands. Entry into Chinese market is now a critical matter for the success and survival of many organizations. 400 of Fortune 500 companies are currently working in China. In 2005, China managed in attracting about $1 Billion per week in Foreign Direct Investment. As stated in Asian Venture Capital Journal, venture capital in Chaina was approximately US $ 1.17 Billion in 2005 from $325 million in 2002. This reached its pinnacle with 54 deals valued at more than $ 480 Million in second quarter of 2006 alone. Legal and Regulatory Assessment: China is different from its other regional countries as it is now following a more open approach towards FDI than before. However, there is high state intervention when considering with its western counterparts. China, in order to utilize its growth potential entered in to World Trade Organization in 2001 and offered its market for foreign investors, which provide other companies, and industries room for growth. Chinese government revise rules for industry opened for investment since there are few industries that are critical to local government and are limited to foreign investments.

Any foreign company seeking to start production in china should consult Foreign Investment Catalogue to identify the encouraged, restricted and prohibited categories.

Business Case Development:


Entry Barrier and Mode Selection: Organizations need to assess the entry modes they hold importance, as it will define any companys operational policies. Organization need to assess their entry mode, as it will dictate their production and marketing strategy. Possible entry barriers are given below:

license and franchise

joint venture

mode of entry

wholly owned subsidiary

export

alliance

Market Attractiveness: China, as discussed above shows a potential for high market consumption, the share of wallet is increasing, with a population of 1.3 billion and highest group of middle-aged consumers it is a promising land for foreign companies.

Chinese government policies:


There exists a vast difference in operation of Chinese government and other governments. These differences exist in policies devised for foreign investment, their outlook on economy. CHINAS STATE CONTROLLED ECONOMY The state remains a significant player in the Chinese economy. State businesses receive more than three quarters of the countrys capital. The state owns more than 65 percent of the countrys fixed assets. Chinas State Capitalism China government policy capitalizes on piling up wealth by manipulating its currency. A large number of western critics have criticized government on preventing the appreciation of Chinese currency against other. Thus, disrupting the global trade balance. However, china after joining WTO which prevents protectionism, loosened its foreign investment policy. Companies now have the privilege of setting up their own enterprises in local environment and utilize the means to operate it. FOREIGN COMPANIES IN CHINA With the new foreign policies, China witnessed a large number of globally present organizations entering their proximity. U.S. companies with offices in Beijing include Google, Microsoft, FMC, Cigna, Unisys, and General Electric. U.S. companies with major production facilities in Shanghai include DuPont, Rohm & Haas, and General Electric. As of early 2010, Fortune 500 companies had 98 research and development facilities in China. Foreign companies in China include Coca Cola, Pepsi Cola, Nike, AT&T Corp., Bristol-Myers Squibb Co., Citibank, Morgan Stanley & Co., Volkswagen AG, Unilever, Toshiba Corp., Matsushita Electrical Industrial Co., General Motors, and Frances Citreon, Philips Electronics, Cisco, Microsoft, Motorola, Samsung Electronics, NEC, Proctor & Gamble, Wringley and Hitachi Ltd. These foreign companies have introduced Chinese government to new sets of rules and regulations. Chinas growth potential influences foreign investments to market their product. These foreign investments have transformed Chinese policies of foreign investment and their outlook on MMNCs in particular.

Uncertainty of Investment Climate:


After the investments from foreign companies and entrepreneurs, and high growth opportunity there still exists an uncertainty of the investment climate in China. This is primarily because of the unwillingness of Chinese government to offer a level playfield to the investors. There are certain un-defined set of rules that hinder investors. These include industrial policies that protect and promote state-owned and other domestic firms, equity caps and other restrictions on foreign ownership in many industries, weak intellectual property rights (IPR) protection, a lack of transparency, corruption and an unreliable legal system.

Regulatory obstacles
Foreign exchange
Chinese liberalization of policy is witness in its forex market as well. However, in the coming years, government would gradually open its financial system and will continue to do so as and when trade and investment increases. Chinese currency hold a significant importance as it is very stable and problems caused by fluctuations will not be witnessed. This had led other countries to setup their production and at times whole supply chain in China due to low Yen to $ value and reduced cost of labor. This is the reason labor intensive manufacturing cells are operating in China mostly.

Financing
Financing is a serious challenge posed to other corporations. There will be gradual expansion in the available option for financing specifically for FIEs. The administration of foreign funded banks have aided in providing financing solutions and alternatives to FIEs.

Comparison between China and West:


The basic structural difference that exists is the capital market structure of both the countries. US market is predominantly stock-centered. In this scenario, large corporation are present instead of larger banks. However, in case of china it is mainly bank centered. These banks tend to hold significant stakes in local firms and serve as their board of directors. This is a varying difference among both the countries capital structure.

Difference between Chinese and Western Region business culture:


It is important to identify the cultural difference that is present in this case. European culture even though when considering different countries tend to have minor differences among each other therefore organization scan easily adjust to the new environment. However in this scenario it is very important to analyze the prevailing cultural differences in order to reduce the cultural shock. These differences are present on an individual level as well as on corporate level. Individualistic Vs Collectivist: Chinese culture is more collectivist in nature. Team members and relationship on personal level with them is essential in Chinese culture as opposed to US or western culture. This implies that western managers working in Chinese culture should emphasize on teamwork and group making since productivity and job satisfaction is linked with their approach towards it. Management style:

Chinese practice philosophical-style corporate culture. They follow an inside out approach, which is characterized by soft dealing with employees, and contradictory set of rules, and flexible approach towards handling issues. In comparison to west which has more rigid and defined set of rules, and defined management style which is followed by the management system. Lack of Rule-of-Law Tradition: As opposed to western society, in China traditional values hold more importance than written sets of rules. Personal connections and relationship are superior to any set of defined rules. This may act positively for westerners by leveraging the personal relationship for survival of their organization. Explained below are cultural values that pre- dominantly differs in both regions. These range from day to day activities to the conduct of an individual. The vast difference suggests that it important to train employees according to the work environment.

Cultural Values Logic Communication Identity Agreement / Disagreement Thinking Punctuality Respect Business Relationships Decision Making Openness Conflict Resolution Time Horizon

West (US / Europe) Linear (direct associations) Explicit or direct, verbal, likely to speak their mind

(China / East Asia) Spiral (roundabout and subtle) Implied or inferred, nonverbal, subtle

Individualistic, independent, Group orientated, values values freedom harmony and stability Argumentative, verbal Rule or law orientated, detailed, analytical, logical Start and end on time Success, achievement, wealth Superficial, contractual, economics come first Distributed authority, fast, proactive, planned Open to alternate ideas Legalistic, confrontational Short term (think per Difficult to say no, nonverbal Context or situation specific, holistic, intuitive, big picture Appointment times flexible Seniority, wisdom, ability Personal, long lasting, relationship comes first Manager has final say, slow, considered, impulsive Receptive but superficial Mediation through 3rd parties Long term (think years

quarter) Risk / Spending

ahead)

Risk-takers, spend for today Risk-avoiders.

Asian Culture:
Cultural differences influence performance and outlook of the business. It is very important to analyze the existing cultural difference and its influence on any business in the environment. Asian culture derives its root from spiritual and religion mostly. There is a profound impact of Islam, Buddhism, Confucianism and they cast shadow on ethical values of society. They translate the custom of living, management of people and relationship at all level. For a western organization and management, it is important to analyze the key factors that hold high value in Chinese culture. Chinese culture has a Confucian inspired way of living and is widely practiced in corporate culture. They focus on maintaining relationships at inter personal levels, building and maintain relations are key aspect in any Chinese culture. This concept is known as guanxi, kankei and inmak respectively.

Guanxi
. China is a relationship-based society. Relationships extend well beyond the personal side and can drive business as well. This stands in sharp contrast to the West where relationships have less importance One of the most important cultural factors in China is guanxi (pronounced guan shi) Guanxi also known as connection network in English (Buttery & Leung, 1997). The understanding of this basic phenomenon is important to survive in Chinese market as it serves as a standpoint of their culture. Guanxi is being analyzed in detail and capitalized for much needed influence in Chinese market, in building and fostering relationships and establishing the political capital required to operate locally. Westerners must pursue the habit of practicing Guanxi in order to sustain their economic survival in china. For western organizations, Guanxi translates into building and managing social relationships with those individuals who have a high influential power. These will lead organizations to create a linkage in Chinese environment. . Since China focuses on relationship building, it extends well beyond the personal side and can drive business as well. This stands in sharp contrast to the West where relationships have less importance. With guanxi, a person invests with relationships much like one would invest with capital. In a sense, it is akin to the Western phrase, "You owe me one."

Since western organizations do not invest time and money in creating personal contacts and harvesting feeling for mutual growth, this might cause hindrance if cultural adoption does not take place while operating in Chinese market. Any individual or organization that tends to deviate from the norms defined by society is looked down upon and is not accepted widely in society. Hence, western organizations need to transform cultural habits, build upon the Chinese Guanxi n order to penetrate in local environment. As observed in Chen and Chen (2004) organizations should focus on creating a closer Guanxi net; maintaining inner circle and bridging psychological gap between themselves and their Guanxi person.

Guanxi Predictors:
Trust and feeling are the basic predictors of quality Guanxi. Building trust in Chinese culture is difficult since they lack in general trust among larger collectives. For creating a quality Guanxi, companies are required to obtain services of middle person that serves as an intermediary between the foreign company and local vendors, suppliers and bodies. These intermediaries will create inner circle for organizations to create a personal level contact and build upon them in order to generate trust. Cultural differences exist in every part of world. It is managerial responsibility to assess the difference and prepare accordingly.

Managerial Implication:
China is vast land with ever changing landscape; therefore, steps need to be taken to fore see these changes. There are different options available; organizations need to perform a rigorous SWOT analysis in order to testify the most suitable one. Because of de regulation and liberalization the competition is getting tough therefore market requirements and landscape would be further evolving. Interpersonal relationship building is important feature in Chinese society. This holds opposite for west therefore HR transformation is required to better suit the local atmosphere Finding intermediaries that might act up as Guanxi is necessary to flourish in Chinese environment. Guanxi requires exchanges of favor and enhancing social status of other party therefore adequate training to sustain both of these should be provided. In Chinese culture, negotiations are relationship based rather than transactional in nature. Proper understanding of cultural differences is important to fully utilize the economic growth potential in host country.

References:
1- Li, J. Managing International Business Ventures in China (Elsevier, 2001) 2- FOREIGN COMMERCIAL SERVICE AND U.S. (2012). Doing business in china. Available: http://export.gov/china/build/groups/public/@eg_cn/documents/webcontent/eg_cn_0 25684.pdf. 3- Barkema Harry G..John H.J Bell and Johannes M. Pennings (1996), Foerign Entry, Cultural Barriers, and Learning, strategic mangament Journal, 17(2), 151-66 4- Paul wang, Susan K. Kilgore, Key Consideration for Inbound M&A in ChinaPortfolio Media Inc. Law 360 5- Ahlstrom,D,Young,M, and Nari,A, (2002), Deceptive managerial practises in China. Business Horizon, Vol 45 no 6 pg 49-59 6- mark hedley. (2012). entering Chinese Market. Available: http://www.b2binternational.com/assets/whitepapers/pdf/china_market_entry.pdf. Last accessed 27 april 2013. 7- OECD Secretary General. (2012). Economic Survey of China. Available: http://www.oecd.org/economy/. Last accessed 27 april 2013. 8- Keegan, W.J. . (1997). Market Entry Startegies. In: not available Global Marketing Management. 2nd ed. London: Corporate Document Repository. chapter 7. 9- Wade, R. Governing the Market: Economic Theory and the Role of the Government in East Asian Industrialisation (Princeton University Press, 1990) 10- unknown. (2011). Monetary and financial stability. Available: http://www.bis.org/country/cn.htm. Last accessed 30 March 2013. 11- Black, B and Gilson, R (1998) Venture capital and the structure of capital markets, banks versus stock market, Journal of Financial Economic, Vol 47 No3 pp43-77 12- Yan, Y. (2004) Foreign Investment and Corporate Governance in China (Palgrave, 2004) 13- Pearce, R. (ed) China and the Multinationals (Edward Elgar, 2011)* 14- Chen,M (2001), Inside Chinese Busines: A Guide for Manages Worldwide, Harvard business School Press, Boston MA 15- Goa,G,Ting-Toomey,S and GudyKunst, W (1996), Chinese communication Process The handbook of Chinee Psychology, Oxford University Press, Hong kong, pp 135-58

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