International Business Environment - China - Case Study Example

International Business Environment Name Course Lecturer Date Executive Summary Perhaps no investment opportunity in the world has captured the minds of foreign investors in the last two decades more than opportunities in china. While there have been buzz about the investment opportunities in china, there are understandable and undeniable facts that explains the buzz and attention. China is not only home to 20% of the world population (1.35 billion people), but also the second largest economy in the world as well. There have been urbanization in china, roughly half of Chinese population live and work in cities. Cities are developing and increasing rapidly, this is increasing growth in infrastructure, services and commerce. The urbanization creates a lot of opportunities. Despite the obvious opportunities in the China market, there are several challenges and risks facing investors willing to invest in this market. China has a communism form of government. The government controls all sectors in the economy, this presents a challenge due to bureaucracy and favourism. This report provides a critical evaluation of the Chinese market. The report provides the opportunities available for this company, the report also provides a discussion of the risks and challenges that the company is likely to face in venturing in this market. Conversely, the report evaluates the critical aspects of international business environment such as political, legal, culture, foreign direct investment, economic prospects, ethical practices, stability and investment climate. Table of Contents 1.0Introduction 1 1.1Basic Demographic 2 1.2 Geographic 2 1.3 Political-Economic Profile of China 3 1.4 Legal system 4 2.0 Macro and Institutional Factors 6 2.1 Economic Status 6 2.2 Country Openness 9 2.3 Macro Level Political and Social Context 10 2.4 Product market 11 2.5 Labour market 12 2.6 Capital market 12 3.0 Trends, Challenges and Opportunities 13 3.1 Opportunities and Challenges 13 3.2 Ethics and CSR 14 3.3 International Trade Picture 14 3.4 Foreign Exchange 15 4.0 Analysis and discussion 16 5.0 Recommendations 17 6.0 Conclusion 18 7.0 References 19 1.0 Introduction The foreign markets presents a good invest opportunities due to various factors such as low tax rate, low cost of capital, high rate of return, stable political and legal system, growing and promising economy and many other reasons. Nevertheless, it is very important to analyse the risks that may arise in foreign country before placing a portfolio. The first process in investing in foreign country is evaluating the country risks that may affect the investment. These risks determine if it is wise or not to invest in the country. This report provides an evaluation of various risks in China to determine if it is wise to set up a manufacturing and marketing plant. After the analysis, the report indicates if it is good for BlueScope Steel to set up a manufacturing and marketing firm in china. Country Context 1.1 Basic Demographic China has undergone demographic transition more rapidly than any other industrial economy in the world; the economy is undergoing transition in demography due to its aging population as Fu (2008) observes. One of the greatest contributors to the demographic shift is the one child policy in china. This policy has made the number of dependants on a family to decrease while number of people working has increased. Economists assert that this ‘demographic dividend’ may have accounted for up to six percent (6%) of China’s economic growth in the last decade (Thun 2006). However, there is a steady increase in aged persons in china. The working people are retiring while there is much smaller generation of single children to support its aging population. By July 2014 china had a population of 1,355,692,576 people; it is the most populous nation in the world (Xing 2014). The dependency rate in china is 37.4 percent. Importantly, the country has an urban population of 50.6 percent. This is important as it indicates that most people have basic education (Fu & Balasubramanyam 2005). Another advantage of the Chinese large population is that it provides a ready market for the company products. There is ready market for the company products. 1.2 Geographic China is located southeast of Asia, it is along the Pacific Ocean, and it is the world’s fourth largest country behind the Russia, Canada and United States. China has a highly diverse geography with plains, river deltas, hills, deserts, high plateaus and mountains. Equally, it has varied climate ranging from subarctic in northwestern china to tropical in the south. Its geography makes it to have uneven population distribution. Roughly 94 percent of the Chinese population lives in the eastern third of the country. The most economically developed parts of the country are around the coastal regions (Hale & Long 2006). The Chinese geography represents a good opportunity for this company to venture in the Chinese market. Besides readily available and cheap labour, the country is strategically located. It has a very large coastline of 18,000 kilometers. It also has developed rail transport, these offers cheap means of transport of raw materials and finished products. The country also boarders more than 14 Asia countries and shares a coastline with other nine countries. Geographically, it is strategically placed to reach out to all Asian countries, Russia (Chen et al., 2011). The company will benefit by getting cheap transport of its finished products and raw materials. It will also benefit from reliable access to available market. 1.3 Political-Economic Profile of China China has a combination of political authoritarianism and economic liberalization. The Chinese government allows public policy making. It has government controlled but relaxed political and economic institutions. It retreats from economy; china is a very strong reformist state as Mathur & Singh (2013) notes. The country's political system affects the capital, labour and product market. The government does not allow workers to form trade unions in the labour market, this affects the wage level. To venture in this market, it is essential to identify the country's power centers like civil society, bureaucracy, and media. This would enable this company to figure out checks and balances. The political system is centralized with the national government having complete control of the economy (De Brauw & Rozelle 2008). 1.4 Legal system There is a lot of regulatory framework in china. Regulation reforms take place unevenly and gradually. Registering and incorporating a business in china takes at least eleven procedures, this takes around one month. There are a lot of bureaucratic handles, they add to the cost of acquiring a license (Cheru & Obi 2010). On the other side, the country has flexible labour regulations. There is no consistent enforcement of the labour laws. The government provides electricity subsidies and large fossil fuel; it also supports agriculture by providing subsidies (Mathur & Singh 2013). There is erratic legal involvement in china for foreign firms; this makes some foreign firms abandon their ventures in the county. China has a very strong government and limited individual rights. The government remains a dominant force, it controls two third of the Chinese economy. Essentially, china has a socialist market economy. It portrays a combination of authoritarian form of government with market oriented economy. Economic system Understanding the Chinese government regulations and policy is critical for this company. Although the country's entry to the world trade organisation helped to liberate its trade involvement, it still regulates heavily some industries. There are several limitations to foreign companies’ involvement in some industries. As such, this company should be very keen in choosing the right mode of entry in the Chinese market (Heckman 2005). Chinese laws treat Chinese and foreigners unequally, or more accurately, treat Chinese nationals and legal persons, including those established by foreign investors, less favorably in terms of the establishment of enterprises and income taxes than foreign investors coming directly from abroad. If the justification for the preferential tax treatment is to attract more foreign investment to China, it is hard to conceive of any legitimate reason not to grant Chinese nationals and legal persons the same rights as to the establishment of enterprises. This is because foreign investments may not necessarily benefit from, or may even be harmed by, such discrimination against Chinese nationals and legal persons. According to Article 2 of the WFOE law, a foreign investor directly coming from a foreign country may establish a wholly-owned foreign enterprise in China as a sole shareholder, and this enterprise may be granted the status of legal person. Some of the state-controlled industries are telecommunications industry. No foreign investor is allowed to establish a telecommunications company or business in china unless it gets to a partnership with a local firm. Political system The political system in china is socialism; this is a combination of market and command economies as well as state intervention to the market mechanisms. China has made progress in allowing market oriented economy where forces of supply and demand regulate the market. However, it still has state intervention in some sectors and industries. Although there is state interference in business, it is not as much and not in all industries. It has key state owned corporations in telecommunications and energy industries. 2.0 Macro and Institutional Factors 2.1 Economic Status China is the second best economy in the world; the country is a huge consumer as well. The country has an economic freedom score of 52.7, this means that it ranks at number 139th freest economy in the world. The Chinese government has increased freedom and made modest improvements in fighting corruption, increasing business freedom as well as labour freedom (Kothari et al, 2013). China has achieved impressive growth in GDP based on greater integration and economic reforms in to world trading as well as its financial system. China now rivals the United States in terms of manufacturing and industrial sector (Kuijs 2005). It has a nominal GDP of USD9.2 billion. The country was able to weather the global financial crisis more than any other leading economy (Dunning 2013). It has been recording trading surplus every year from 1994. This has enabled its foreign exchange reserves to skyrocket to USD4.0 trillion in 2014; its current account has bold control. This means that it lacks the freedom to convert its local financial assets in to foreign financial assets though exchange rate determined by the market rate (Bijian 2005). China recorded a GDP growth of 7.7 percent in 2013. However, this slowed down to 7.4 percent in 2014. It is also expected to slow down to 7.0 percent in 2015 according to the revised forecast. The economy has enjoyed decades of growth hovering around 10 percent. The diagram above indicates annual GDP growth of china, India and United States. Among the three leading economies, china has the highest GDP growth. The current forecast of 7.0 GDP growths is the country lowest in years. The diagram above shows the GDP growth targets and real GDP from 1995 to 2014 of the Chinese economy. China has very high purchasing power parity. The country surpassed the United States as the largest economy based on purchasing power parity. By PPP measure, it has the largest GDP. The economy reached $17.6 trillion, this represented 16.48 percent of the world’s purchasing power adjusted GDP. Purchasing power parity is the best way to compare the size of economies, exchange rates are very volatile and they do not reflect the true cost of services and goods (Aiken et al., 2013). The Chinese economy is growing at a very high rate; this is a very good business opportunity for investors as they will be able to take advantage of the growth to establish business in the country. The figure below indicates the performance of the Chinese economy based on purchasing power parity. The economy is surpassing the United States as the largest economy (Fu et al., 2007). China does not score well in global competitiveness index. The country went down two places to number 23 in 2013. This means that china still has to polish its ability to create as well as maintain an environment that sustains competitiveness of its enterprises. In 2014, china ranked at number 28 in terms of global competitiveness index. This means that the country's drivers of productivity and prosperity are decreasing (Wei 2014). On corruption index, China fell 20 spots in 2014 according to the corruption rankings by. The rankings provided by the transparency international indicate that china ranks at number 100 down from 80 in 2013 (Greenaway, Guariglia & Yu 2014). Besides the bureaucracy in incorporating a business, the cost of the same is high as well. Positively, the Chinese government has launched campaign aimed at weeding out venal corrupt officials in the government. This is a great step in increasing effectiveness and reducing the cost of doing business in the country (Wang 2013). 2.2 Country Openness China is a very attractive market for foreign direct investment. The country's sustained high economic growth rate as well as the expansion of the domestic market is opening the economy for FDI (Seo 2013). These explain the country's attractiveness as FDI destination. China attracts more than USD106 billion in foreign direct investments. However, foreign investors have reservations. This is because of the uncertainty about china's willingness to provide a level playing field. This makes investors to temper their optimism of potential investment returns. Moreover, foreign investors regularly complain of difficulties in doing business in china. They face several difficulties in the country's current investment climate. Such challenges include weak intellectual property rights protection, lack of transparency, favourism of the local firms and unreliable legal system. China has a regulatory and legal framework that promotes investment in specific industries or regions that the government wishes to develop. It restricts foreign investment that it deems to be of no national interest or that will increase competition with state owned monopolies (Donald et al., 2014). The government indicates that it welcomes foreign investment. It seeks to promote foreign and local investment in high valued sectors such as technology research and development, manufacturing, modern services and clean energy technology. In this case, our company is seeking manufacturing and marketing opportunities in china. This presents a good opportunity as the Chinese government does not hold any restriction for any manufacturing investment as indicated above (Morck, Yeung & Zhao 2008). 2.3 Macro Level Political and Social Context The protection of the property rights is crucial to economic success. Although china has strategically placed itself for great economic growth rate in coming years, there are a number of social, political and economic problems that create a bottleneck in sustaining the high economic growth. To maintain the high growth and its position as the second largest economy globally, it must work to improve efficiency in production factors. The development and resurgence of the private sector in china has been crucial to its economic success (Kelley & Shenkar 2013). There are property rights and laws in the Chinese constitution; they are the basic law for protecting and regulating property rights. The constitution is the fundamental law in china. The protection from the constitution provides a precondition as well as base for protecting property rights as Mathur & Singh (2013) asserts. The state protects the rights of people to own lawfully earned income, houses, savings and other property. The government permits the private sector to exist and own within prescribes of the constitution. Essentially, there is good protection of private property rights. This is very important for this company; it would ensure that the company property and premises are protected. China has a controlled and restricted media freedom. There is strict constrains on print media. However, there is less control for business publications. Private sectors are allowed to print, advertise and use media to market, promote and develop their organizations. It is generally significance for the company to involve and consult lawyers and private property specialists; this will enable to formulate strategy for the market in the country (Hu & Xu 2013). The accountability of the Chinese politicians is increasing. The current government is very keen on ensuring efficient and transparent leadership for propelling the country to more economic success. The government is increasing checks and balances to prevent corruption and increase transparency. These aspects are very important as they would ensure that this company will not be harassed by the local authorities (Thun 2006). 2.4 Product market There is availability of consumer taste and purchasing behaviour. There are various agencies and institutions that provide unbiased information for consumers. There is also accessibility of raw materials and intermediaries as well. China is one of the countries with huge source of raw materials, the transportation of the raw materials is also cheap as there are good and cheap road network, rail and water transport. For this company to establish successfully in the Chinese market, it is important to develop strategies for conducting business in this market that are different from those used in Australia (Kelley & Shenkar 2013). The strategies should focus on the local market as Tang, Selvanathan & Selvanathan (2008) recommend. 2.5 Labour market In spite of its large population, it might be difficult for this firm to hire experienced and skilled workers, quality of talent is hard to ascertain. There are relatively few recruiting agencies. China has a good education system with quality education. The official language in china is Chinese although there are other languages; English is also common among the literate people. Nevertheless, there is cheap and readily available labour (Aiken et al., 2013). 2.6 Capital market The Chinese government provides credit facilities to business in the country. The capital market is remarkable, it lacks sophistication. Apart from the government controlled regulators, there are not many reliable intermediaries such as credit rating agencies, merchant banks and investment analysts (Kothari et al, 2013). This makes raising debt or equity capital locally a problem since they do not have access to accurate information (Wei 2014). 3.0 Trends, Challenges and Opportunities 3.1 Opportunities and Challenges There are a host of opportunities in this market. The dramatic growth is increasing demand for manufacturing products. Foreign companies are grappling with how best to satisfy this demand for products of all kind. There is high expansion of the consumer class. The second and third tier cities are opening up to franchising. These are ripe opportunities for exploitation by this company (Hexter & Woetzel 2013). However, there are challenges as well. The savvy domestic entrant and favourism of the local firms is hindering foreign investment. Investors are also concerned about the high rate of intellectual property theft (Wei 2014). Lack of developed financial market where foreign companies can raise capital is also a big challenge. Lack of strong management skills by the local managers is a challenge (Dunning 2013). There is also a challenge of finding and evaluating licensee candidates. Foreigners struggle to learn the way of conducting business in china due to the Chinese culture; Chinese people keep their cultural practices. There are administrative difficulties and changing legal context (Buckley, Wang & Clegg 2007). 3.2 Ethics and CSR As indicated above, the protection of intellectual property rights is uneven; this is a challenge to this company. China ranks lowly in transparency, there is much control of information by the government. There are incidences of intimation of foreign nationals as part of business dispute with the Chinese partners. This is not ethically right as any business dispute should be resolved amicably with reprisal and intimidation. It is very important for this firm to be careful of the partners it gets in to contract with in china, such partners that would not put the company under undue pressure or intimation. There are no explicit laws governing CSR in china. However, it is important for the company to consider support a CSR initiative as a means of giving back to the community. 3.3 International Trade Picture China has a surplus trading balance; it has a positive current account. This means that it exports more products than it imports. China has trade agreements with more than 27 Asian countries making it to be the biggest trading block. The country has other trading agreements with Russia, almost all African countries. It is a member of the world trade organization (Hale & Long 2011). For example china a free trade agreement with Australia called China – Australia free trade agreement (ChAFTA) signed in November 2014. China ia the largest export market for Australian products and services. Moreover, china has free trade agreement with new Zealand called New Zealand – China tree trade agreement (NZ-China FTA), this agreement facilitates and liberalizes trade in services and goods, other notable trade agreements are ASEAN – China free trade area effected on January 2010, China free trade agreement with gulf cooperation council members, and China Switzerland free trade agreement. These are just but few examples of international trade agreements that china has with world countries. The trade agreements boost its export as they open new markets for its products and services. The consumers and firms have better choices of products at lower prices. 3.4 Foreign Exchange The official currency used in china is Renminbi or Yuan. The Chinese government keeps the value of the currency low so as to encourage investors to venture in the Chinese market (Xing 2014). It also makes it cheap for investors to export their products. The government exercises control over its currency and exchange rates (Buckley et al., 2007). 4.0 Analysis and discussion Essentially, this report provides a very good insight of how PURA brand can utilise the Chinese market to produce and market this milk brand. PURA milk is one of the largest milk brands in Australia. The company supplies large percentage of milk products in the Australian market. The company has no operations in the Chinese market, this represents a prime opportunity for the company to introduce PURA milk brand in the Chinese market. The company produces various PURA milk products such as PURA skimmer, PURA HiLo, PURA Light Start, PURA café, PURA Tone, PURA Gold, PURA Boost, PURA HeartActive, PURA Kids and PURA New. China presents a very good opportunity for this company to set up a milk producing plant. As indicated in this report, the Chinese market is developing and it presents this firm with an opportunity to tap it and contribute to the growth. Milk is a product that is used daily in the households. It is used as food, drink and as ingredient for making various types of food stuffs. Besides being a rapidly expanding market, it is not affected by financial crisis. There is strong potential, potential partners and wealth of employees. This is not forgetting low cost production. Besides being a favourable manufacturing environment, china has a ready market for milk. The economy is growing at 7% every year. The Chinese population is increasing as many people move from lower class to middle class and higher class aided by the rapidly growing economy. There is ready market for PURA milk in that it will be purchase daily by families, hotels, restaurants and food stores. 5.0 Recommendations Before venturing in this market, it is important for this company to take appropriate legal advice including dispute resolution clauses and governing law clauses in contracts. This would enable the company to plan in advance how, where and under what law any disputes will be resolved. The Chinese law has restrictions on commercial related dealings. As such; any dealings need to be drafted carefully. Foreign contracts and dealings are not enforced by Chinese courts. To succeed in the Chinese market, it is important for this company to follow these recommendations’ To modify its business model for the Chinese market, it is essential for the company to adapt to the voids in china product market and its inputs. To maintain its core business propositions even as it adapts to the Chinese business model, the shifts should not be too radical. Being too radical will make the company to lose its advantage of global branding and global scale. 6.0 Conclusion Making the first steps in venturing in the China market is intimidating for any company; there are endless series of potential pitfalls to be concerned about. Although there are many challenges and obstacles in succeeding in this market, the rewards and benefits of successfully navigating this difficult course are immense. The china economy continues to grow at a tremendous rate; it is becoming more open to foreign firms. The rewards increasingly outweigh the challenges of venturing in the china market as indicated by this report. As such, the company should prepare to venture in this market. 7.0 References Aiken, M., Lu, W., & Ji, X. D, 2013, the new accounting standard in China: Perspectives on accounting and finance in China, 159. Bijian, Z, 2005, China's" peaceful rise" to great-power status: Foreign Affairs, 18-24. Buckley, P. J., Clegg, L. J., Cross, A. R., Liu, X., Voss, H., & Zheng, P, 2007, The determinants of Chinese outward foreign direct investment: Journal of international business studies, 38(4), 499-518. Buckley, P. 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