Entry into Chinese Market - Case Study Example

?Entry into China Organizations in any sector to survive and succeed have to expand its geographical and economic limits, without remaining “inert”. Organizations including retail firms cannot always depend on its domestic market to optimize its growth, and instead has to enter new territories or countries to tap good opportunities there. “Given the recent acceleration of the globalization process, successful firms cannot afford to wait until the home market becomes unattractive, but must take proactive actions to capture the benefits of operating around the globe.” (Mellahi, Finlay and Frynas, 2005, p.8). When they decide to enter newer countries, firms have to analyze both the opportunities as well as challenges, so that those challenges can be effectively managed. The first aspect they will have to analyze is the entry mode, so they can pick the best entry mode which has minimal risks, and this applicable to retail firms as well. In addition, they have to focus on the economic and legal aspects that could aid as well as impede them. China is one country, which has optimal opportunities for all firms including the retail firms like the fictional firm of Pesco. This paper will discuss the advantages as well as the disadvantages of entering China by the firm Pesco, focusing on the feasible entry modes, and how Pesco can or have to manage the economic and legal aspects. With the onset of globalization and the opening of the Chinese markets in 1990s, foreign firms particularly retail firms are more than eager to enter to tap the large prospective customer base. China being a country which runs on Communist principles, for most part of the 20th century, China raised an “Iron Curtain” and restricted the foreign firms’ entry, thereby protecting the indigenous firms. However, with globalization providing more opportunities to firms, and with its entry into WTO, Chinese government started to allow foreign firms into its territory. “Indeed, if we can identify a single moment when the ­Western-­dominated Globalization 2.0 gave way to Globalization 3.0, it may have been when China acceded to WTO membership on December 11, 2001” (Walker, n. d). Due to these developments, China particularly started lessening its trade restrictions particularly in the retail sector. The foreign firms for their part are enticed by the huge population of China and how they can be tapped as a huge customer base. “Most of the world’s major global retail firms are desperate to grab a slice of the world’s largest and most rapidly growing emerging market” (Gamble, 2006). In addition, the sizable sections of this population have high purchasing power. As the Chinese economy as a whole, is improving optimally, it has resulted in the accentuation of its citizens’ purchasing power, and for the retail firms including Pesco, this can be huge advantage. Because of this favorable business environment in China, Pesco can open its retail outlets. When it comes to the entry mode, Pesco can enter in the form of wholly owned subsidiaries. This entry mode can provide many advantages for Pesco, including in the economic and legal sphere. However, there are risks as well, when this mode is adopted. The first advantage Pesco can garner if it uses the wholly owned subsidiary option and not the joint venture option is the benefits from the new tax regime. The main feature of this new tax regime is that foreign firms as well as foreign firms having joint ventures with Chinese entities have to pay land-use taxes, which is equal and even more than the indigenous Chinese companies and foreign firms’ subsidiaries. That is, in under the earlier favorable tax regimes, the foreign firms including joint ventures were given exemptions from the land-use tax, and were also given permission to construct infrastructures on non-taxed lands and function in them. However, in the new tax structure, foreign firms’ tax payments have been even tripled from the old rate. That is, “in large cities the annual property tax rate will range from 1.5 yuan to 30 yuan (19 US cents to $3.85) per square meter depending on its location and type of use….townships and mining areas property will be taxed at a rate of between 0.6 yuan to 12 yuan per square meter per year” (“Foreign firms in China to lose tax privileges”, 2007). This increase in land-use tax will surely be a disadvantage for joint ventures and advantage for subsidiaries. The other legal advantage is when Pesco enter as a wholly owned subsidiary, it can protect its technology and other organizational concepts. That is, foreign firms entering China should be aware that its joint ventures with local firms could lead to leakage of knowledge. Even though, there are intellectual property rights provisions in WTO, the local Chinese firms after entering a deal with foreign firms and getting access to all their technology, could break the joint venture and could form association with competitors. One of the examples is Beijing Jeep, established by Beijing Automotive Works (BAW) and American Motor Corporation (AMC) in 1983. Some Chinese managers who received training in AMC moved back to BAW, which formed a new joint venture with Hyundai (Yeung, 2006). In this aspect also, joint venture option appears to be risky and the option of wholly owned subsidiary appears to be feasible for foreign firms entering China. Contrastingly, the aspect in which the subsidiaries, will be at a disadvantage or risky, when compared to joint ventures, is regarding the role of employees and managers. That is, foreign firms including both joint ventures and wholly owned subsidiaries will be composed of workers from two national categories. The employees from the parent country, where the firm is usually headquartered or based are called Parent Country nationals (PCNs). The employees from the host country where the firms may be located are called host country nationals (HCN) (Scullion and Collings, 2006). In the case of joint ventures, the distance between the two groups will be minimal, but in the case of wholly owned subsidiaries the distance could be broader. That is, in joint ventures, foreign employees or PCNs and Chinese employees or HCN will be allocated appropriate tasks with many chances to cooperate. This divergence at the same time association in times of need will help the firms to maintain cordial relationship between the two groups of employees. But, in the post-WTO period and in the case of subsidiaries, the managerial positions are mostly held by PCNs coming from the parent companies, with the Chinese employees working under them. As the Chinese are not that outgoing and also fiercely independent, supervision by a foreign managers could not be a smooth affair. In that case, subsidiaries could face disciplinary related problems. However, when it comes to training the employees (important for improving the potential of Chinese employees), wholly-owned subsidiaries will be an advantage for Pesco. In joint ventures, the training programs can be inhibited by the need to bargain with the Chinese partners, who could avoid giving importance to HRM issues and also hesitate to sanction the finances needed for the training. On the other hand, if Pesco enter China as a wholly owned subsidiary it can themselves decide the budget of the training and importantly the content of the programs, aiding full development of the local employees. When one focuses on economic issues, corruption appears to be a major impediment for the foreign retail firms including Pesco. Most of the government departments particularly the ones dealing with the foreign investments are viewed to be involving in corrupt practices. So, Pesco has to be careful in dealing with these departments, and should have every document in correct place, so that the officials cannot reject it with one excuse or other, just to earn bribes. From these analyses, it is clear that Pesco can enter China in the form of or through the option of wholly owned subsidiary. References “Foreign firms in China to lose tax privileges.” (2007). Atimes. Retrieved from: http://www.atimes.com/atimes/China_Business/IA04Cb04.html Gamble, J. (2006). ‘Multinational retailers in China: proliferating “McJobs” or developing skills?’ Journal of Management Studies 43 (7):1463-190 Mellahi, K., Finlay, J and Frynas, J. G. (2005). Global Strategic Management, Oxford University Press, USA Scullion, H and Collings, D. G. (2006). Global Staffing. Routledge Walker, M. (n. d). Globalization 3.0. Retrieved from: http://www.wilsoncenter.org/index.cfm?fuseaction=wq.essay&essay_id=358325 Yeung, H W-C. (2006). Handbook of Research on Asian Business. Edward Elgar Publishing. Read More