Risk Analysis of China - Case Study Example

Risk Analysis of China Name Institution Course Instructor Date Table of Contents Executive summary 3 Introduction 3 Country context 4 Macroeconomic and institutional factors 7 Cross-Cultural, Ethics & CSR, International Trade, FDI and Exchange Rate: Trends, Challenges and Opportunities 10 Analysis and discussions 12 Conclusion and Recommendation 13 References 14 Appendices 17 Risk Analysis of China Executive summary Studies reveal that China is the modern production hub of the world. In this regard, China accounts for the highest percentage of production processes compared to other world countries. Factors that favor China’s rapid growth in the production industry include accessibility to affordable raw materials, and adequacy of cheap work-force (Szamosszegi & Kyle 2011, p.10). These factors attract foreign companies that focus on minimizing production costs and maximizing profits. However, it is important for any company seeking to invest in China to conduct a contextual risk analysis. By conducting a risk analysis of China, the company identifies different factors that are imperative in determining its success-ability, competitiveness and performance (Zhu, 2012, p.124). This paper presents a risk analysis report of China by considering key international business environment aspects. The aspects will include but not limited to economic prospects, cultural practices, legal frameworks, ethical practices, political structure and environmental surroundings. Thereafter, the report will provide analytical findings, evaluations and recommendations that are important in making appropriate decision before investing in China. Introduction Business risk analysis is a key undertaking in every multinational business enterprise. In line with new trade theory, business analysis provides an appropriate scale of determining the essence of available opportunities against the prevailing operational threats (Ayyub 2014, p.24). In this regard, China is an emerging market characterized with accessibility to raw materials, availability of cheap labor and availability of consumers, among other factors (Zhou & Poppo 2010, p.861). These factors prompt many multinational companies nowadays to transfer their operations to China. Morschett, Schramm-Klein & Swoboda (2010, p.76) explain that companies need to focus first on determining China’s market risks that can affect the companies’ competencies and competitive advantages (Ayyub 2014, p.54). Research findings show that the determination of risks results in many companies’ high investment in elusive assets such as public relations, product promotion, managerial training, and research and development. These elusive investments are shown to give foreign companies advantage over the domestic companies. However, elusive investments offer short-term solutions. The companies, therefore, need to implement different short-term solutions on a regular basis to maintain a particular competitive position in the market. The implementation of short-term solutions is not only expensive, but also limits the growth of a given company. To avert the limitations and costly nature of short-term solutions, it is necessary for a multinational company to implement long-term solutions. Long-term competitive advantages require a contextual analysis of the risks presented by China’s emerging market (Morschett, Schramm-Klein & Swoboda 2010, p.60). As such, the following section details China’s risk analysis. Thereafter, the ensuing section provides necessary recommendations and conclusions that pertain to China’s risk analysis context. Country context Geographically, China is positioned on the Far East corner of the continent Asia. This geographic position puts it at the center-stage of coordinating all activities that pertain to Far East Asian countries, North America and Australasia. It has a landmass of 3.7 million square miles and thrives on temperate climatic conditions. Alternatively, the country’s demographic infrastructure varies based on the urbanization of a particular region (Long & Woods 2011, p.93). Urban areas have good transport and communication networks. Unfortunately, the case is vice versa in rural areas. Demographically, it is the country with highest number of people (approximately 1.3 billion people) in the world. Recent demographic statistics reveal that most of China’s population is concentrated in urban areas and major cities. The lesser population is distributed in the farming schemes all over the country. The production industry in China employs a large percentage of urban dwellers (Yang, Chen & Monarch 2010, p.482). With regards to Michael Porter’s Diamond Model, industrialization is the key factor that dictates China’s increasing economic development. Politically, the communist party has ruled China for many years. It is paramount to denote that, the communist party holds absolute mandate over the country’s legislative, socioeconomic and cultural providences. This implies that China restricts government transparency (Park 2011, p.5). In doing so, it does not involve the concerned stakeholders in decision making. China’s business bureaucracies promote ‘guanxiwang,’ social network. ‘Guanxi,’ in this case denotes the interactive connection of network entities and particular business stakeholders. Research shows that, foreign investors can evade the communistic bureaucracies by capitalizing on guanxiwang. In other words, guanxiwang promotes corruption in many business dealings in China. Furthermore, it is necessary to note that the government’s communistic ambiguity promotes guanxiwang’s corrupt nature (Li 2011, p.19). Legally, unlike Australia’s economy that thrives on defined business laws (strictly regulated and constitutionalized business laws); China’s business-economic regulatory compliance remains undefined (Liu 2011, p.292). Due to lack of definition, China’s business regulatory law contains several loopholes. Different entities exploit such loopholes, thereby promoting inequities such as production of counterfeit products. As a member of the World Trade Organization (WTO), China needs to enact and implement laws and patents that protect Intellectual Property Rights (IPR). However, the legal system of the country is yet to embrace WTO’s jurisprudences. That is why there is high rate of counterfeiting and stealing of technology in China. On the other hand, it is important to note that the Chinese’ Confucius teachings promote individual sharing. That is the reason why the Chinese justify their counterfeiting approaches as a way of sharing product technology and providing affordable products to the impoverished Chinese population (Guthrie 2012, p.93). Also, the same teachings promote the use of any tactics to win a particular competition. These tactics are known as, ‘war art,’ they prompt the stealing of technology. On the other hand, global statistics show that China is the second country in the world economically. Its economy is increasing steadily with Gross Domestic Product (GDP) of approximately 10%. Basing on GDP, recent research indicates that China applies the neomercantalism theory. Whereby, it holds the first and the second position when it comes to exportation and importation of products respectively (Hering & Poncet 2010, p.145). In addition, it is the world’s largest reservoir of foreign currency. Despite the recent slowdown in economic growth, prospects show that by 2018 China’s economy may surpass that of United States (US). The recent economic slowdown reflects China’s economic instability state. China’s economic instability results from inconsistent changes of trade, fiscal and monetary policies, among other major economic aspects. High dependency of China’s economy on exports plays an important part in maintaining the Yuan exchange value against the US dollar. In addition, financial analysts suggest that the dollar undervalues the Yuan by a 40% approximated margin. Therefore, if the exchange rate of the Yuan against the US dollar improves in the near future, many foreign investors may accrue high profits (Park 2011, p.17). The following section contextualizes on the variables that dictate China’s economic risk analysis. Macroeconomic and institutional factors The past 10 years have seen the steady growth of China’s GDP from 2% to over 10%. It is a remarkable achievement that shows high possibilities of China’s GDP surpassing that of US in the near future in terms of purchasing power parity. Its GDP is characterized by an increase in number of middle class earners, who record an annual per capita income of 5000 US dollars. The increase in GDP and per capita income contributes to China’s global competitiveness index. However, the policy-induced state of economic instability attributes to the slow growth of China’s GDP (Li 2012, p.57). Alternatively, despite the enactment of strict anti-corruption laws, it is possible to admit that GDP’s slow growth results from China’s high rate of corruption. The possibility relies on the undefined nature of China’s business regulatory system. The undefined regulatory system contributes to the country’s economic ambiguity and bureaucracy. The ambiguous state affects Foreign Direct Investment (FDI). Whereby, it is hard for foreign investors to conduct direct business activities in China (Luo, Xue & Han 2010, p.78). China’s government restricts any foreign business to operate independently. As such, it requires every foreign investor to contract domestic enterprises or form business partnerships with domestic enterprises. However, the ambiguous nature of its economic system restricts acquisition of local enterprises, limits the implementation of new ideas and discourages the use of foreign intermediary partners (Kotabe, Jiang & Murray 2011, p.168). It is easy to deduce China’s economic ambiguity by assessing the country’s business regulatory directives. Business regulatory directives constitute IPR protection, media’s sovereignty, political accountability, and organizational auditing frameworks. Apart from economic ambiguity, China’s sociocultural practices such as strong beliefs in Confucius teachings tend to hamper the establishment of proper IPR protective jurisprudences. Moreover, the socioeconomic setting and communistic bureaucracies limit media’s sovereignty (Logan 2011, p.88). Also, there are laws that restrict internet accessibility. Such restrictions and limitations negatively affect the usability of product promotion approaches in certain contexts. Finally, it is true to state that China lacks political accountability and proper auditing frameworks due to inadequate legislative openness and high rate of corruption (Chen, Sun & Wu 2010, p.157). Apart from legislative ambiguity, consumer behavior, sociocultural practices, institutional barriers, information adequacy, availability of raw materials and presence of intermediaries influences China’s economic product market (Hering & Poncet 2010, p.158). The conservative nature of Chinese societies prompts a consumer behavior that is dictated by usefulness and affordability of particular products. Report findings attribute the recent increase in information adequacy and raw material availability to China’s globalization steadiness. However, institutional barriers are limiting research and development studies that are paramount in understanding China’s product market. It is deducible that China’s product market is not well understood, thereby forcing business to operate on projected strategies (Guthrie 2012, p.201). On the other hand, China’s labor market is characterized by affordable and adequate supply of work-force. Many foreign investments in China tend to target the semi-skilled work-force. As such, minimum wages of semi-skilled laborers are promptly increasing. The increment is due to high demand of labor and the government’s enactment of policies that focus on improving laborers’ working conditions (Yang, Chen & Monarch 2010, p.502). As a result, any potential foreign investor needs to consider the possibilities presented by China’s unstable state of the economy. Otherwise, China’s surplus supply of work-force reduces individual wages and limits transferability of labor. On the downside, semi-skilled work-force lacks professionalism that is important in entrepreneurial innovation, productivity and performance. Inadequacy of professionalism results from the China’s underdeveloped education system. The educational system is characterized by limited access to advanced training in languages and technology. Lack of language training prompts the Chinese to converse in their respective dialects. Foreign investors find it hard to effectively communicate with Chinese workers (Hering & Poncet 2010, p.145). Ineffective communication hampers teamwork, organizational training and conflict resolution. Finally, communistic bureaucracies promote inefficiency of China’s capital markets, especially the banking system (Park 2011, p.13). Recent media reports show that easy loaning is changing the spending nature of Chinese people. Unfortunately, many loans are spent on the purchase of extravagant utilities. The end result is that, the loaned individuals do not work to save, but they work to pay bank loans. In addition, payment of loans leaves individual with less amount to spend on other products. Prospects show that the banking systems are doing so to encourage domestic investment that is important in developing the country’s economy. However, easy loaning portrays that China’s banking system is weak. Such weaknesses imply that the banking system is failing to control monetary inflow and outflow. Cross-Cultural, Ethics & CSR, International Trade, FDI and Exchange Rate: Trends, Challenges and Opportunities With regards to Long & Woods (2011, p.72), Chinese people believe in a hierarchical type of cultural organization. In this type of culture, the manager’s mandate is to issue instructions that are strictly followed by the workers. The issuance of instructions occurs in a vertical manner. Studies show that the hierarchical management culture is effective in achieving organizational goals. The hierarchical culture is supported by Chinese societal teachings that insist on according respect to community leaders. Regardless of its social approach, the culture discourages innovative development and exemplary organizational performance. It does so by limiting inclusion of employees in the decision making process (Kotabe, Jiang & Murray 2011, p.175). Ethically, Chinese people value human life over the power of law. That is why they can violate IPRs and justify their actions. In justifying their action, they consider IPRs violation as a necessary undertaking in provision of affordable products (Trappey, Wu, Taghaboni-Dutta & Trappey 2011, p.53). WTO mandates its member states to enact laws that protect IPRs. China enacted such laws; however, lack of legislative transparency limits the applicability of such laws (Zhou & Poppo 2010, p.862). Lack of transparency promotes unethical actions that go against the directives of the international product life cycle theory. The unethical actions include violation of IPRs, product piracy and counterfeiting. There is need for the Chinese government to adopt systems that promote business ethics. Likewise, China’s international trade picture reiterates the framework of comparative advantage model. As such, the trade picture shows factors that attract foreign investment. Such factors include minimal government taxation, economic growth consistency, workforce affordability, high import and export rate, and adequate supply of raw materials. That is why many foreign investors are willing to risk the rampancy of IPR violations, in order to benefit from the above-noted factors (Trappey, Wu, Taghaboni-Dutta & Trappey 2011, p.54). Besides, China presents a business tolerant environment that is characterized with good relational connectivity to external markets such Australasia, Africa, Europe and North America. These are main factors that attract foreign investors. Apart from international trade picture, there are concerns over China’s foreign investment approach. According to Luo, Xue & Han (2010, p.68), despite China taking the second spot globally as one of the country’s that highly encourage FDI, many foreign investors have suffered heavy losses. The occurrence of such heavy losses tends to defy the monopolistic advantage theory. This is because; the losses are linked to poor strategic planning. The FDI’s constraints occur due to legislative ambiguity and communistic bureaucracies. Basing from the Australian market, business regulatory systems favors FDI and eliminates intermediaries that are common in unstructured Chinese market (Firth, Mo & Wong 2012, p.58). In terms of foreign exchange, China holds the largest reserves for foreign exchange. With these reserves, China trades fairly with other foreign exchange. In this regard, many foreign enterprises in China are listed on major world stock markets such as the New York Stock Market Exchange (NYSE). It is even prospected that China’s currency is the main threat to the stability of the US dollar in the near future. Analysis and discussions From the analytical context, it is clear that China’s economic market presents certain business opportunities. Due to the increasing urbanization and middle class earners, China’s economic market favors lifestyle-based foreign investments (Li 2012, p.75). This is because; many middle class earners are enthusiastic with modern trends of lifestyle. Such trends of life enable middle class earners to attain a certain ‘identity.’ In other words, many middle class earners in China are likely to align their self image with lifestyle-based trending products’ image. With regards to factor proportions theory, the lifestyle-based trending products that are likely to align with China’s middle-income earners’ consumerism image are Australia’s beef brand, namely, ‘Atron Enterprises Spring Grove pasture-fed branded Beef.’ This beef brand is one of the quality Australian beef branded products produced by the renowned Atron Enterprises. China’s market shows the beef brand’s success potentiality based on the available market on analyzed opportunities discussed earlier in the country’s context. The opportunities for the beef brand’s success-ability are based on fact that the Chinese market encourages food business diversification and competitiveness; defines the domestic and international economic trends; enhances infrastructural development; provides low risk of business indebtedness due to high reservation levels of foreign exchange, and finally, promotes risk sovereignty (Morschett, Schramm-Klein & Swoboda 2010, p.63). Risk sovereignty implies that there is local containment and denomination of China’s public’s debt. On the contrary, by choosing to invest in Atron Enterprises Spring Grove pasture-fed branded Beef, Atron Enterprises need to anticipate various market weaknesses or challenges. These challenging weaknesses can promulgate into market risks and later on, affect the sales of the beef brand. In this regard, the challenging weaknesses include social unrest threats due to increase in socioeconomic inequalities; unpredictability of the current slow GDP growth; high rate of aging that is reducing labor affordability; unprecedented environmental challenges; uncertainty of credit dynamism due to weak banking systems, and finally, infringement of IPRs and competition from high number of foreign enterprises (Shen, Antonopoulos & Von Lampe 2010, p.256). By weighing the strengths of presented opportunities and challenging weaknesses in the above context, there are high success possibilities of directly investing in Chinese market. The investment product, in this case, is the Atron Enterprises Spring Grove pasture-fed branded Beef. In a nutshell, although China’s market presents few challenges, it provides high success-oriented opportunities for beef branded products. Conclusion and Recommendation The paper presented a risk analysis report of China by considering key international business environment aspects. The aspects included economic prospects, cultural practices, legal frameworks, ethical practices, political structure and environmental surroundings, among other aspects. Thereafter, the report provided analytical findings that established China as a suitable market for foreign beef branded products investment. However, there are several recommendable directives from the analytical findings. Basing on its geographic and demographic details, China presents a potential market for high consumption of products. However, unlike westerners that take pleasure in spending, Chinese people are well-known for their high saving capabilities. It is critical for foreign investors to consider China’s geographic and demographic challenges. Apart from geographic and demographic considerations, anyone aspiring to invest in China needs to develop a Guanxi. Guanxis are inapplicable in western investment approaches because, western approaches rely on constitutionalized contractual regulations. However, Guanxis pose a challenge to foreign investors in China. They are time-consuming, exploitative and sometimes fraudulent. To avoid such challenges, foreign investors need to hire domestic guanxiwang experts with good relational connections. By considering the above-discussed content, it is justifiable that every foreign investor needs to factor in the economic steadiness of China. References Ayyub, BM 2014, Risk analysis in engineering and economics, CRC Press, Boca Raton, FL. Chen, S, Sun, SY & Wu, D 2010, ‘Client importance, institutional improvements, and audit quality in China: An office and individual auditor level analysis,’ The Accounting Review, vol. 85, no. 1, pp. 127-158. 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Yang, DT, Chen, VW & Monarch, R 2010, ‘Rising Wages: Has China Lost Its Global Labor Advantage?’ Pacific Economic Review, vo. 15, no. 4, pp. 482-504. Zhou, KZ & Poppo, L 2010, ‘Exchange hazards, relational reliability, and contracts in China: The contingent role of legal enforceability,’ Journal of International Business Studies, vol. 41, no. 5, pp. 861-881. Zhu, X 2012, ‘Understanding China’s Growth: Past, Present, and Future (Digest Summary),’ Journal of Economic Perspectives, vol. 26, no. 4, pp. 103-124. Appendices Appendix 1: Summarizes China’s Main Macroeconomic Indicators Appendix 2: China’s Economic Rebalancing Appendix 3: Opportunity Risk Matrix Appendix 4: China’s Demographic Infrastructure Appendix 5: China’s 2014 Productivity Trends Appendix 6: China’s Economic Analysis Appendix 7: China’s Sample Import to Export Ratio Appendix 8: China’s 2010 Demographic Distribution Appendix 9: China’s GDP 1980-2014 Read More