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China: Big Opportunities, Complicated Risks

Critical Analysis of the case


China was functioning in an autarkic manner from 1949 till late 1970s,
and it was having self-sufficient economy relied on their own resources.
CCP (Chinese Communist Party) believed that interaction with
foreigners will corrupt china’s politics and their culture. So, this was the
reason why China prohibited foreign direct investment and restricted
foreign trade. Later in 1978, Chinese China was facing economic
struggles so their leaders started the Law on Joint Ventures Using
Chinese and Foreign investment and opened their markets to the world.
This change has led to free market principles shaping China’s business
environment. China has been growing strong since this change over the
past three decades, and has prospered more from globalization than any
other country .China’s per capita income increased from $200 to $1000
between 1990 and 2000.And in from $1000 to $5000 between 2000 and
2010.
China’s economy is booming through its manufacturing and foreign
trade.China’s investments with foreign countries and joint ventures
continue to increase since the 1980s, when many companies started their
operations in china.In 2016 ,total FDI in china was $2 trillion with more
than 6,00,000 ventures.
There were few main factors for companies rushing to do business in
China.
1. Market potential in which China had 1.34 billion people, and its
economic growth increases its potential in the market.
2.The growing economy leads to growing income power and will lead to
an overall increase in consumer spending.
3.Infrastructure buildouts which had been a trillion dollar investment in
behalf of China into its country through highways, dams, power plants,
communication networks, and many more.
4.Ingenuity and innovativeness in the people of china which led to more
number of new products and services.
All these factors are pillars for China’s strategy, as a country ruled by
communist in which have large control over what happens in the
country.The factors represented are attractive to a foreign company or
investor, but China’s political and legal systems made business
operations hazy & frustrating. Overall, China “currently practices a
system of state capitalism whereby the government manipulates market
activities to achieve political purposes”. Therefore, there may be
advantages in doing business in China, but some companies may fall to a
disadvantage in China under certain circumstances. In some cases,
companies simply abandoned their business norms from the west to
become successful in China.Many western firms like Mobii , ABB,
Google, Best Buy started their operations or purchased big stakes in
Chinese companies but later due to political problems and legal
difficulties they either sold their stakes or reset their strategies. In China
to incorporate our own business, must inform every details about the
business, like how your’e planning to do it,how much your’e
investing,job opportunities and many more. The legal and governmental
structure in China has been tough on foreigners since the beginning of
time.
The differences between the United States and China’s methods of doing
business overall functioning of government in each country. People
don’t have the level of freedom that the United States have, freedom of
speech doesn’t exist because of China’s Communist party regulating
people’s lives. In china, even though the central authorities may appear
to be all powerfull ,but the politics of local fiefdoms often subvert their
authority, to the dimay of foreign investors.China poses legislative
gaps,hazy interpretation and lax enforcement.Legislation is chock-full of
ambiguities .China’s biggest problem is in their concept of legality but
in western legal systems its more transparent and administered by public
officials.China’s legal practices , along with the difficulties in their
political norms challenges MNEs. Counterfeits and patents and
trademark violations are common and sometimes encouraged in China,
leading to companies losing billions of dollars annually, and this is all
because of the lack of enforcement of foreign laws that China enforce on
their manufacturers. It is said that in Shanghai “we can copy everything
except your mother” clearly a lack of consideration and interest in
enforcing protection of intellectual property. Overall China is a country
with great economic potential, but has many flaws in enforcing law and
abiding by the rules of the World Trade Organization, in which express a
lot of complicated risks but overall big opportunities for foreign
companies and investors.

Problems

1.Political and legal problems:


Political and the legal system makes business operations a frustrating
process. In china there exists state capitalism which where the govt.
manipulates the market activities to achieve political goals. So, MNE’s
doing business in china find themselves at disadvantage. All the
companies who wants to start a business on china has to clearly state to
different levels of officials (national, provincial and local) how their
investment will grow capital formation in china, how it will promotes
exports ,number of job creations and inflow of latest technology. If the
officials are satisfied with all the above factors then only a company can
start their business.

2.Bureaucratic system (rule of man):


China has a central govt. which actually does not reach province easily
and the rule of the man prevails in areas due to which different foreign
investors have to face difficulties related to the local policies and rules.
Central has no control over the province which can be stated from the
fact that when central sends officials to investigate illegal pirating of
CD’s local governs block their access to factories. Moreover,Chinese
folk warns the mightiest dragon cannot crush the local snakes.
3. The Industrial law is not precised and strict in china
:
China had no formal legal systems in 1978 when it launched one of their
greatest campaigns of legal reforms. Still, china poses legislative
gaps,hazy interpretation and lax enforcement.Legislation in china is
fully choked with full of ambiguities.The CCP has the legitimacy ,to
operate above the law.So, basically there is no rule of law in china.

4. Illegal practices are still going which is troubling


MNEs: MNEs relentlessly complains about theft of their intellectual
property by china.And the FBI estimates that American companies are
losing hundreds of billions annually to counterfeiting.China is the
biggest source of pirated goods. A reports says that almost 90% pirated
goods seized are originated from china.But still china is encouraging
these kind of activities.

5. Damaging the brand image and reputation:


Because of the piracy many of the leading brands of other countries are
losing their brand image and their reputation in the market.

Recommendations
1. Government need to toughen the stance and strengthen the laws .

2. Government need to pass the strict laws with severe punishments


against the counterfeiting activities.

3. Companies are advised to provide more physical security to avoid the


counterfeiting .
4. Companies can license their product or the technology with patents.

5. Companies must research everything about the political, social, legal


and cultural factors to avoid losses and for the stability in the market for
longer period.

6. There must be formal legal system with authorities at different levels


like national, state and local and coordination between the different
levels must be followed.So, there must be rule of law not rule of man.

7. Chinese govt. Policies must be little bit lineant towards the foreign
investor so more number of investments will happen and more
opportunities will be given ,which will help local residents of China.

Conclusion

China has long lisiting of political difficulties and legal disappointments


,why do foreign companies are still investing in China ?
Ans- Opportunities in China,why more companies are ready to invest-
1.They have a steady GDP growth.
2. Their economy is booming in the market.
3. They have huge supply of natural resources.
4. In China cheap labours are easily available which can work in both
the shifts without much demands. So , the company can run 24/7.
5. The spending power of consumer is more and increasing.
6. Their business environment and investments are improving
constantly.

References
1. www.prezi.com
2. www.slideshare.net