Nowadays China has become one of the hottest market places all over the world. From the viewpoint of the investors, China seems to be the most potential market with the huge market and attractive economic situation. The apparent result is the increase in number of foreign investments put into China, besides that the Chinese government also releases some favorable policies to attract the investment from overseas. For the foreign investors who want to get into this fruitful market, it is necessary to have the general information about what is going on in the market, the situation of the market and culture issues. This paper will give some ideas about the market situation in China as well as some issues related to how to do business in China.
People: With the giant size compared to other nations, China is more than a country; even the U.S is contributed by 50 states united under the Federal Laws but still each state has its own rules to govern its citizens, but a convergence of many states under one legal system, one name which is People’s Republic of China. Of course, it would create more difficulties for China as a whole in the field of governing the country with the size of whole Europe continent regarding of variation of 56 ethnic groups. From the business point of view, the diverse of languages and social customs changing from region to region is seen as one of the awkward situations for investors in the case of expanding business over the country.
The dialects should also be recognized; when moving from one region to the next one, people are using the same language but with different dialects. With the population of 1.3 billion, China is the most ideal market for foreign investors who are interested in the Chinese market. Accompanying with the promise of wide market, the disadvantages resulted from this market also emerge. For instance, the different customers’ taste from different markets requires various strategies in order to get into the specific markets which means investing more money to survey the different market for the same product. The gap between the rich and poor are easily recognized in China in each region.
The disposable income varies from different classes requiring the sensitive marketing method in order to catch up with the choice of customers based on the purchasing power they have. Different levels of disposable income can affect consumption of one kind of commodity, take the example the annual income of a middle-class in China is around 1200Eur, purchasing an expensive car is out of their reach or even they want to purchase a car, a BMW is not a perfect choice for them. However, it doesn’t mean that BMW in particular and luxury commodities don’t have the share in Chinese market, they are just consumed in different regions in China.
Religion: As most Asian’s belief strongly affected by religion, Chinese people are not an exception. Superstition is the exact word to describe the Eastern people from the view of Westerners. Date and time would be important for Chinese to begin some special events like opening a shop, wedding, or putting the foundation stone for a construction project. It is just one of the most frequent customs the Chinese practice in daily life and be seen as normal without notice of superstition.
Culture: Corruption is the most attention-driven to the foreign investors. It may effect to the business by many ways. Some people say that it is a bad norm in society but some don’t because they can get benefits from it. Even the Chinese government is trying to release policy in order to get rid of corruption but it is really an impossible mission now. The Chinese see it as a normal practice in society and hardly changeable, it is one of the deep roots existing in normal life and people accept it. For the hierarchy of bureaucracy system in China for a long time, officials seem to have more power and substantial financial well-being.
It is a normal story happening daily, there is a story going like when a junior bureaucrat from Beijing arrived at his new assignment as a middle-level local official in Sichuan province, his close subordinates instructed him in the local norms for taking bribes. They told him how often he could become ill and how often he could accept invitations to ribbon cuttings, both being occasions at which he could accept gifts, without, as long as he was politically loyal and doing a good job, worrying about being accused of corruption. In addition, he learned that these gifts could amount to as much as $10,000 a year, which would be much more than his nominal salary.
If you want your work to have been done first or with prior benefits. You’ve got it if you know the rules and have social relations with officials responsible in your local area. Anyway, the governmental system is trying their best to reduce the level of corruption in the system as well as purging the bad elements in party system.
Connection is also one of the most important things that should be mentioned. Chinese people don’t easily deal with strange person for the first time. It takes time to develop the relationship and gain the trust from the other. But once you obtain others’ trust, your business will go smoothly. That’s why it is essential to have local representatives or local partners to aid with your business.
One more typical problem that many foreign enterprises entering China are worrying about is piracy. Psychologically, Asian people like cheap and new commodity. Anything considered hottest in the market, they want it and easily find in the black market. Films, movies, computer software and many other luxury commodities are having the same fate. This habit can be derived from the customs of likely running after the fashion and brand name.
Especially young Chinese who run after phenomenon fad, they don’t have much money to buy expensive stuff with recognizable brand name and easily get rid of “old stuff” (just after 2 or weeks) when a new fad is coming. Consequently, it is understandable for the reason why piracy has the room to bloom in China and in Asia generally. It is amazing to know that you can buy a perfect Switz watch with the price of one-tenth compared to a real one and not just one, a bunch of it all around the market.
For the Western businessperson who wants to conduct business in China, the culture is one of the most important aspects they should take into consideration. The East and the West have so many differences in the social customs based on different roots of culture. Be aware of the social customs is always a good practice when dealing business with Chinese people. You can find some remarkable points in doing business in China in the Appendix part.
Establishing the types of operation
The fist step of entry strategy into China is setting the representative offices. Through the representative offices, the foreign enterprises have opportunities gradually to get involved into the market by engaging in the limited ranges of activities. Representative offices in the China are prohibited from engaging in “direct business activities” which include such activities as direct sales, production and manufacturing. A representative office may be fined or ordered to cease operations if it has violated the prohibition to carry on direct business activities. This kind of establishment just has the right to engage in some activities without limitation like:
- liaison with potential Chinese customers on behalf of its overseas head office and other companies;
- hosting of delegates from its head office;
- liaison with Chinese government organizations;
- collection of data and appointment of local market study organizations to undertake market surveys for its head office;
- promotion of trade name;
- market research and business development; and
- management of warranty and after-sale services.
Foreign direct investment
Principal vehicles for foreign investment in China are known as the Sino-foreign equity joint venture enterprise, the Sino-foreign cooperative joint venture enterprise and the wholly foreign-owned enterprise. These investment vehicles are collectively referred to as foreign investment enterprises (FIEs). Each kind of investment has its own feature and specific requirements. Depending on each kind of business operation and the purpose of the foreign investor, selecting the type for future organization is the most considerably concerned to business. Defining the differences between each type of business based on the law regulation can help investor choose the proper type of operation for their organization.
In joint venture, both equity and cooperative, the same regulation is applied but still there is one distinguishing feature of cooperative joint venture different from equity joint venture. That is the parties may agree on an arrangement for sharing profits and losses which need not correspond with the ratio of the parties respective contributions to the registered capital (as is required in the case of equity joint ventures). Greater flexibility is also allowed in the form of permitted capital contributions. For the lack of space in this paper, we can not give more details about all the requirements as well as feature, in short words the joint venture type of organization can be seen simply as:
- a cooperation between foreign enterprise and Chinese partner
- the share of foreign investor at least accounts 25% of the registered capital of joint venture
- benefits and losses are responsible for both parties relatively to the share of capital
- terms of operation determined by the joint venture parties
- treatment of asset upon dissolution decided by the portion of capital contribution from each party
China has been one οf the most promising countries in regards to their economic growth. Since the Open Door Policy adopted by Deng Xiaoping, China has become a more important trader in the global market. Numbers οf foreign groups now are setting overseas headquarters there due to the huge potential οf this developing market.
Chinese economic performance in recent years has impressed the entire world. A key contributor is the large inflow οf Foreign Direct Investment (FDI). In 2002, China took the USA’s place as the world’s largest recipient οf FDI with a total foreign investment οf 82,770 million dollars.
Increasing competition from counterparts such as India and Malaysia has urged the Chinese government to offer more attractive incentives to lure foreign investors. Since becoming the member οf WTO, China has been seeking to further improvement for the investment environment. On the other hand, Chinese government still remain the restrictions on the form οf ownership οf FDI. At the beginning οf the ‘open door policy’, Chinese government restricted the share οf the foreign investors in a company, maximizing at 25% and the director should be a Chinese. Therefore, the form οf joint venture was the main form οf FDI.
In 1985, it accounted for over 60% οf the Foreign Investment. From 1998, Chinese government has been released the restrictions on foreign joint venture gradually. By 2000, the wholly foreign owned enterprises excesses the foreign joint venture reached to about 80% οf the total foreign investment. Although the business environment in China is becoming more and more flexible, some industries are still restricted to the foreign investors by Chinese government, such as medicine and telecom. (Daniels 1-7)
On 11 December 2001, China became a member οf WTO. The entry οf WTO has boosted China’s economic growth and advanced its legal and governmental reforms although it took 15 years’ negotiation. However, without government intervention, this could also bring harmful effects to China’s development.
China used to charge very high tariff on importing products, however, after join the WTO, China agreed to reduce import tariffs substantially on over 150 leading European exports – machinery, ceramics and glass, textiles, clothing, footwear and leather goods, cosmetics, wines and spirits. Agreed tariffs are down to 8-10%.
China will have the largest consumer economy by 2021, according to World Bank estimates, and, as its economy continues to grow at rates as high as 20 percent annually, the demand for prestige and luxury goods is increasing among Chinese women.
The report found that 54 percent οf Chinese women like to buy only luxury and prestige brands when it comes to purchasing beauty and fashion items. Chinese women are highly aware οf beauty products from Lancme, Chanel and Christian Dior, with 89 percent οf those surveyed saying they desired Lancme products, but only 45 percent ever having purchased them. Though 85 percent οf Chinese women are aware οf Chanel, only 28 percent have purchased the products.
The demand for luxury and fashion products isn’t the only thing that has increased over the past few years in China. The demand for nonsurgical cosmetic procedures has gone up, as well.
“While in the West, brands use sex appeal in their marketing and advertising campaigns, this is not effective within the Chinese market,” Clarke said. “Advertisement campaigns that work best in China use words such as ‘purity,’ ‘innocence,’ ‘femininity’ and ‘softness.'”
China’s membership with different organizations
When we think οf globalization in relation to trade, WTO is one name that leads the rest. China became a member οf WTO on 17th Sep 2001. Thus with this agreement China has to decrease its tariffs on agriculture products by 15% and for services by 8.9%. But it also gets access to other members market at a lower tariff rate. Thus capitalizing on this China has increased its export figures immensely. Also China has been involved with other trade agreements that are οf equal importance. China has signed the Framework Agreement with ASEAN on Comprehensive Economic Cooperation with the aim οf establishing China-ASEAN Free Trade Zone in 2010. The Shanghai Cooperation Organization is also forging closer economic links alongside with cooperation in security issues. China is also a member οf APEC. All these important organizations have certainly helped China in their move towards a better economy. (Hill 9-10)
China adopted a financial system based mainly on banks i.e. it has a bank-based system. The central bank οf china supervises and controls the economy οf the country with the cooperation with state banks, featuring the separation οf commercial finance and policy-related finance.
A bank-based system may present advantages and disadvantages for a country. A benefit is that banks becoming stronger and stronger in the country and are able to finance new starting enterprises. On the other hand, if banks are strong enough, then there is a danger οf acting for their own weal e.g. setting high interest rates. According to the open door policy, a number οf international banks have been permitted to open their doors in major cities in China. The role and participation οf international banks in China’s financial system is limited, but it can be very important and greater in the future as the people οf Republic οf China begin to borrow from abroad.
Business Culture in China
According to international business leaders, the difference in Chinese and other cultures are the greatest challenge to doing business in China. Coping with cultural differences was ranked as the first concern among business people. Other challenges included international trade dispute affecting business partners and intellectual property issues. ‘Although the international business community has made great strides in understanding China’s tradition, it is still important to be sensitive to the issues raised by cultural differences.’
Most westerners, when preparing a business trip to China arm themselves with “a handy, one-page list οf etiquette how to carry a boatload οf business cards and bring their own interpreters”, that’s what Chinese tipsters say. However, such advice wont sustain the kind οf prolonged year in, year out associations that Chinese and western business people achieve. In fact, breakdowns between foreigners and Chinese business people happen time after time. The main cause of οf failure is that οf the westerners, to understand the much broader context οf Chinese culture and values, a problem that too often leaves western negotiators both confused and flailing.
The cultural influences outlined on the PowerPoint will give a clearly defined set οf elements that underpin the Chinese negotiating style. Many foreigners often find these elements as confusing, but to ignore them at any time during the negotiation process, the deal will easily fall apart.
The structure οf most Chinese negotiation teams, especially during earlier stages οf negotiation, includes a team leader, and members from functional area who usually have no decision power. The table summarizes the aspect οf the Chinese group dynamics. During the process the individual members are not encouraged to be creative or to take the lead. Questions have to be directed to the team leader first, who in turn will direct the question to specific team members.
People from different cultures behave and interact differently, because their minds were programmed differently. Western companies doing business in China have observed that the Chinese have a set οf distinctive patters on communication, interaction, negotiation and decision making that is different from westerners.
The difficulties experienced by western firms in negotiating with the Chinese are legendary. While cultural differences can intensify difficulties in negotiation, it is by no means the case that all difficulties are necessarily attributed to cultural differences.
Daniels, J.D.& Radebaugh, L.H. (2001)International Business: Environment and Operations.10th Edition. London: Prentice Hall.
Hill, Charles W. L., (2005) International Business : Competing in the Global Marketplace, Hardcover, 6th edition
Hill, Charles.W.L. (2003) International Business: Competing in the global marketplace. 4th Edition. London: McGraw-Hill.