Business in China

Challenges facing foreign firms in

China
Present by:
Gerry Miteva
Iona Birnie
Kit(Shunjie) Ou
Geri Pancheva
Nikola Ninov
Ivan
 Presentation Structure
 Introduction

 Role of State, FDI & Joint Venture

 Challenges facing foreign firms in China:

HRM/management problems (e.g. Wal-Mart)
Infrastructure
Communication/culture
Political environment, Legal Issues
and Corruption

 “Despite the challenges…” positive examples

 Potential future challenges

 Conclusion

 Bibliography
 Introduction
 China: The fast growing economic since 1979
 Deng XiaoPing’s “The Four Modernistaion”
Agriculture
Industry
Science
Technology
 Open Door Policy
 Chinese Market
 Role of State
 Control over the social,
political and economic areas
 Regulation of the press and
religion
 Deng XiaoPing aimed to:

- Open the Chinese market

- Make China a modern
industrial nation
- Improve the relationships
between China and the outside
world
 Role of State

 The Government sets prices and tariffs

 Restrictions in some industries
 Lack of transparency
 Corruption
 China in WTO 2001
 increased transparency

 freedom

 opening to the West

 China today

Source: Charles Hill, “Global Business Today” (2008)

 Foreign Direct Investment- FDI

 Occurs when a firm invests resources in business activities

outside its home country
 Attractiveness
 Biggest market in the world
 Cheap labour
 Tax incentives
 Disadvantages & Challenges
 Policies on attracting FDI

Source: Charles Hill, “Global Business Today” (2008)

 Foreign Direct Investment- FDI

Five reason of Chinese authorities care about the concerns of Foreign

Enterprises:

1. They want FDI to keep coming

2. Distinction between Chinese and foreign firms is disappearing
3. Number of domestic firms want reforms as do FIEs, in order to compete
4. China needs to play by international rules in order to nurture its access to
foreign market which drawn attention to the concerns of trading partners
5. Technocrat in Beijing know they must deal with these problems if China’s
economy is to be competitive
 Joint ventures
A firm jointly owned by two or
more otherwise independent firms

Disadvantages:
 Loss of control
 Shared profit

Advantages:
 Expertise
 Lower costs
 Access to greater marketplace

Source: Li Zhang ， 1995

 HRM/management problems

 Before 1980s
 life-long employment
 high job security, employment
rate and welfare, low wage
and productivity.
 After 1980s to 1990s
 Chinese HRM policies
Change
 HRM/management problems
 Challenges of the personnel management in foreign firms:

- Deal with the reginal government

- Eg. Wal-Mart joint-venture in China
 Influential people in the local where the firm operated
 human resource management
- Hire local employee
- Little experience in the competitive market environment
- Poor work habits
- Skilled individuals are in great demand and not able to keep skilled workers
- Difficult to apply the local management method 
 Thus one of the biggest challenges for foreign firms in china is the recruitment,
development and retention of a competent workforce
 Infrastructure Challenges
 Advanced infrastructure - six of the world’s ten longest bridges and
it boasts the world’s fastest train
 However two-fifths of villages lack a paved road to the nearest
market town
 America for example has roughly the same land area, however 13
times greater population, and still has more developed infrastructure
 Although billions of dollars invested into Chinese infrastructure,
large foreign firms still face the challenge of carrying out successful
business
 Communication/Culture Challenges

 Culture is a compound of many factors such as language, religion, the concept

of value, aesthetics, material culture, education and social organisations, and is
influenced by political and legal systems.
 Foreign firms are very sceptical and misunderstanding towards Chinese
concept of value, however respecting the country’s culture would establish
positive grounds for effective communication and successful business
 The long history and the rich culture system form the main characteristics of
China and their attitude towards carrying out business activities; such as
managing a firm’s workforce or negotiations taking place between businesses
 The higher technology, the fast – growing economy and the fast – changing
social environment have confronted people’s concepts and value judgements,
and they have became more open to other cultures
 Political environment, Legal Issues
and Corruption
 Whyte (1974), Chinese group are driven by internal and external political processes.
 Pivotal position for the Chinese leader (Confucian 1983, 12:19, 13:4; Hsiao 1979);
members are expected to show deference to the leader as to maintain the Confucian
principles of harmony and hierarchy (Bong and Wong 1983; Metzger 1977)
 Control, the power to compel is key value of the Chinese political system; Conflict of
socialist’ and ‘developmental’ values
 After 1984, the “Decision of the Chinese Communist Party Central Committee on reform
of the economic system” was adopted, the government’s role has been redefined to
provide guidance, establish a linkage between compensation and productivity, and further
encourage international economic cooperation, including FDI.
 The National People’s Congress (NPC) is the highest-order section in the government.
 The Tiananmen Square incident in June 1989
 Political environment, Legal Issues
and Corruption
 PRC government close monitor and control
foreign investors’ activities through a spate of laws
and regulations
 The Western notion of the Rule of Law is often
subordinated to the will of the the Chinese
Communist Party (CCP)
 Today’s Chinese legal tradition is a collection and
reflection of ideas, Confucian and Legalist
theories, Western and Soviet legal approaches, and
CCP influences, all blended into so called
“Chinese” law.
 China as a particular Communist Party country,
the most important point in the reforms of the law
is whether law should be above or below politics.
It is also clear that the law even in China is always
changing; and investment opportunities may
change with the law as risks and benefits are often
rebalanced in the process.
 Political environment, Legal Issues
and Corruption
 Personal relationships of business in
China could lead to corruptions. i.e.
bribery, abuse personal relationship
with communist party members
( using ‘back-door’ method 走後門 )
 Major International enterprises like
Microsoft, Yahoo and Google have to
agree on censorship before doing
business in China.
 Recent News: Google threatens to
quit China after Chinese cyber-
attacks aimed at human rights
activists (13th Jan 2010)
 Despite the challenges…
 China Shut down training
website for hackers after
Google threatens to quit China
(8th Feb 2010)
 Gordon Brown visited of
China in 2008 of promising
trading between UK and China
 Tim Clissold (one of the first
few investor in China) talking
about ‘Succeeding in China –
the hard way’
 Future Challenges ?
Future Challenges facing foreign
firms in China:
 Property inflation
 Unemployment inflation
 Censorship & Copyright law
 ‘Overheat’ economic
 Control of the government over
the market
 Political conflict between US
and China
Chinese Inflation
 Future Challenges for Business in China

Growing Protectionsist Policies

•The EU has duties on certain goods from China and Vietnam.

•India banned some imports from China for six months in 2009 and now imposes
duties on Chinese telecoms.

•China recently imposed duties on certain Russian and U.S. steel products.

Growing tension between China and USA is a treat to free trade

The most important issue is the Yuan-Dollar exchange rate -> the Yuan is
undervalued (by deliberate actions of the Chinese government) which
negatively impacts the US export to China

Trade disputes between China and USA over exports of different goods (tires,
chickens, steel, nylon, autos, paper and salt) damage the already tense relationship
between the two economic powers.
 Conclusion
 Despite many challenges
facing foreign firms in China,
there are still many potentials
of Chinese markets.
 Foreign firms have to learn
and adapt some of the method
of doing business in China
 Culture awareness is the key
to communication
 Bibliography

 Hill, Ch., 2008, Global Business Today, 5th edition, McGraw-Hill/Irwin

 Dicken, P., 2006, Global Shift: Reshaping The Global Economic Map In The 21 st Century, 4th edition, SAGE
Publications
 Li Zhang, (1995) Scottish Business in China, Strathclyde Business School
 O’Connor, N., 2006, Management Control of Multinational Enterprises in China: A Contracting and
Management Accounting Perspective, McGraw-Hill Education (Asia)
 http://www.accessmylibrary.com/coms2/summary_0286-10656645_ITM
 http://chinabusinessreview.com/public/0309/wal-mart.html
 Budhwar, P. S., (2004) Managing Human Resource in Asia-Pacific, [ ROUTLEDGE]
 Blog: Is China in a Bubble? Available: http://s84684.gridserver.com/?p=3946
 China's property inflation increases to 7.8% in Dec (Jan 2010) Available:
http://www.businessspectator.com.au/bs.nsf/Article/China-property-inflation-increases-to-78-pct-in-De-ZP4
UR?OpenDocument
 Bibliography
 Daniel H.Rosen, (1999),Behind the open door, Foreign Enterprises in the Chinese Marketplace, Institute for
International Economics
 Wang Gungwu and John Wong (1998) China’s political economy, World Scientific Publishing Co. Pte. Ltd
 BBC News: The Google v China face-off (Jan, 2010), Available:
http://www.bbc.co.uk/blogs/thereporters/maggieshiels/2010/01/the_google_v_china_face_off.html
 BBC News: China open to UK business – Brown (Jan, 2008) Available:
http://news.bbc.co.uk/1/hi/uk_politics/7194864.stm
 BBC News: Succeeding in China - the hard way (June, 2004) Available:
http://news.bbc.co.uk/1/hi/world/asia-pacific/3767539.stm
 O’Connor, N., 2006, Management Control of Multinational Enterprises in China: A Contracting and
Management Accounting Perspective, McGraw-Hill Education (Asia)
 Graphies: www.economist.com/ images/20081129/CFN512.gif ; www.tutor2u.net/blog/
files/china_inflation_1.gif
 http://www.strategypage.com/militaryforums/89-79130.aspx
Questions?