FIN535 Assignment 1 MNC Enters China

Assignment 1: MNC Enters China

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FIN535 – International Finance

12/04/2015

Abstract

This paper seeks to analyze the Economy of China as pertaining to entry and operation of Multinational Corporations. It goes a long way in exploring different factors, occurrences and scenarios that have in one way or the other affected the operations of the region in trade.

China has over time grown to be a large economic focusknown globally. Consideredas asocialist model market economy, Chinahas been known as the world’ssecond largest economy estimatedbythe nominal GDP and PPI (Purchasing Power indices) closely following the United States. In the last 3 decades, China has been recognized as the fastest growing economy in the world with constant growth rates of about 10% (Barnett, 1981).

The country also boasts of being the largest industrial manufacturing economy existing, a fact largely believed to be attributable to the cheaplabor available in the country. Over time, as China’s economic relevance grows, so does the global attention to the structural shifts and health of the economy by the key global economies.Since 1980, numerous Special Economic Zones have been established. These economic zones are intended to speak about China’s successful economic experiences to other areas (Lee, 1999).

The Chinese economy uses a five-year plan strategy for economic planning and development. Currently, under implementation is twelfth five year plan that covers the years 2011-2015.

Entering the Chinese Market: A Feasibility Study

Yahoo, a global online search engine is currently not in operation in China having pulled out late last year citing irreconcilable issues that affected their operations and business sustainability. In the event that they wish to enter the market and establish a market for their services, they would need to conduct a feasibility study into the trends and other factors affecting the economic operations of the market (Xiaojuan&Hui, 2004).

The Business Idea

This covers the whole concept of how well the idea of the service they would will to offer to the Chinese market is. They should objectively analyze the market gap existing in the Chinese market in relation to the services they want to offer and how well it blends in filling the identified gap. They also will need to know the market size. It is common knowledge that China has a large population. However, it is not obvious that the whole population would utilize their services. As such, they should conduct a research into finding out what size of the population would actually need their services.

Operational Feasibility.

Market analysis

A market analysis into the pillars of demand and supply would be required. It is of essence knowing the demand trends and factors that affect such Also of importance would be to determine the type of demand that exists for your product or service whether consumer or distributor, and also establish the size of the market and its growth capacity. The supply trends will focus at the life cycle of the industry. The structure, timing and composition of the industry all move along in explaining the supply trends.

The Relationship analysis would also be looked into here, that is, how the various groups within the industry interact. It further seeks to determine the bargaining power of buyers and suppliers, and the possibility of a substitute products or new entrants that would curtail continued business growth.

Competitive advantage analysis

Yahoo will also need to analyze the competitive advantage if any that they may have over and above their competitors offering the same online search services in China, say Bing. They will need to determine what makes Yahoo services more favorable to the consumers that those provided by their competitors. This would help them come up with strategies to win over their competition and easily infiltrate the market and claim their share of the market

Financial feasibility analysis

Finally, a financial feasibility study of the business idea is called for. This process involves doing an estimation of all the costs likely to be spent in comparison to the projected revenue. This includes, among others, estimating profitability, preparing a sales forecast, start-up and working capital requirements among others.

China Risk Assessment

The risk assessment of a country seeks to analyze the perceived risk status of a region or country. The analysis is carried out by measuring various indices as may be appropriate.

Corruption

China, just like many other countries, suffers from intense corruption. In 2013 for instance, the Transparency International’s Corruption Perception index ranked China 80th out of 178 among the most developed countries. The forms of corruption cited included patronage, graft, embezzlement, nepotism, bribery, backdoor deals, and statistical falsification. The greater economic freedom has not done much to slow down corruption; instead, corruption has become more integrated within the systems and more severe both in character and scope. Almost all business deals often involve participation in corruption. This should be a worrying trend to any entity planning to pitch base in China as it implies that its operations would be somehow curtailed with these acts of corruption. Procurement processes are not evaluated on the basis of who offers the best quality at best prices but on the basis of who knows who. That is a poor business habit (Chunfeng, Haihui& Wei, 1999).

Political Stability

The Political risk in China can be viewed as relatively low thus providing a stable and relatively business environment compared to other emerging markets, though the legal and regulatory transparency is a key risk for foreign companies in the region. China also enjoys a relatively low risk for security and crime making it conducive for businesses.The political stability is attributed to the one party system of governance.

Exchange Rate Flexibility

In Chunfeng et al.’s (1999), the currency exchange rate in China is said to have been relatively stable for quite a long time since the China’s governments commitment to implement the stable exchange rate policy in march, 2012. The move was intended to keep the exchange rate of the Yuan at a basic basically stable, appropriate and balanced level. This came after China’s central bank had earlier announced its intentions on June 19, 2010, to further the reform of the compilation mechanism of the Yuan exchange rate to improve its flexibility.

The fixed exchange rate system has since stabilized the value of the Yuan against the currencies it is pegged to. This has made trade and investments easier and more predictable. It has also to a large extent checked on inflation in the country (Zhang, 2001)

Regulatory Oversight

China has been known to have tough and strict regulatory and framework systems. It was not much of a surprise when the country’s banking regulator closed in on the country’s 68 trust companies to be prepared to fund or sell their stakes as the defaulted risks rose in the high-yield investment industry valued at about $1.9 trillion.

Media Freedom

In the People’s Republic of China, until the 1980s, almost all media outlets in Mainland China were under strict control and supervision of the state. Independently owned and operated media outlets only began to emerge at the beginning of the economic reforms, although the state-run media outlets such as CCTV and People’s Daily continue to hold significant market share.

The media being an avenue to share news and information, the government’s hindrance to its freedom of reporting meant that they only reported that which the government approved and felt was “safe” for the citizens and businesses within its jurisdiction.

As such, I can conclude that the business environment in China despite having a couple of flaws is still largely viable for businesses that would like to base in the country. This is so because the downfalls existent are outweighed by the benefits that can be derived.

China Versus the U.S. on the Hofstede’s six (6) key cultural dimensions

The republic of China is an economic giant in its own very right. Compared to the US on the Hofstede index, its performance is quite stunning as seen below;

Power distance

It measures equality of power in society and how much people are willing to allow or give in to superiority. Countries with high scores tend to operate with power being given to the top few, with little room for lower rank intervention. Low scoring countries either spread power through delegation or encourage input from more levels of society (Hofstede and Bond, 1984). China has a high ranking of 80 than US’s 40 which means the power distance remains high in business and in society in general. This means that people are less willing to challenge authority that is likely due to old communism beliefs, which still have a strong influence on people’s behaviour. China continues to receive criticism for not taking human rights seriously.

When doing business in Chinaone must be aware of this large hierarchy gap. It is often hard to move up on their corporate ladder compared to other cultures.

PDI suggestions going from USA to China:

In China, greetings are always done in age order, so ensure the eldest in the room is greeted first.

Status is very important in China so do not call someone by their Christian name until they invite you to do so. Instead, always address them by using their full title, eg Dr or Professor.

Ensure your business cards have your full qualifications on.

If any large announcements to general staff are needed, request a senior member of management do it.

Use power to exercise authority

Tell subordinates what to do – do not expect them to work it out themselves.

Individualism

Itrefers to how independent people are. Countries with high scores indicate people are self- motivated, more self-reliant and self-concerned whereas countries with lower scores suggest citizens conform to society’s norms and consider group needs as more important than their own(Hofstede and Bond, 1984).

USA scored 91 points on individualism, the tendency of people to look after themselves and their immediate family only. That score is 78%higher than China score for individualism. Therefore, USA has a highly individualistic society. In such cultures individuality, independence, and self-determination are valued.Trompenaar agrees that Americans place high priority on looking after themselves and their immediate family. At work, however, Americans jointly assume responsibilities and achieve goals in groups. Negotiating decisions is often referred to committees.

Hofstede found that wealthier countries tended to have higher scores in Individualism (Hodgetts et al, 2006) however, given that China is now the second largest economy in the World and their IND score is only 20 Hofstede’s theory can be disputed. This may be attributed, in part, to the high level of emphasis on a Collectivist society by the Communist rule, as compared to one of Individualism. Confucianism also plays a large part as Chinese place value on long term satisfaction than short-term greed (Hofstede and Bond, 1984). Harmony is achieved by giving “face” to others and avoiding losing your own “face.”

In collectivist cultures such as China, people work together in groups and often put the needs of that group ahead of their own personal wants. They embrace shared responsibility.Chinesebusiness habits tend to stay with the same partners or suppliers to keep loyalty and not deteriorate relationships. So when doing business with others it is a good idea to select a good strong partnership that has potential to last a long time. It is looked down upon if you frequently change business partners.

IDV suggestions going from USA to China:

Focus on how change is good for the group (appeal to the common interest).

Allow the group to formulate and ask questions.

Allow the group to consult with each other and spend time working out their responses, questions, and concerns

Aim to build lasting relationships

Try working through an individual or an organization who introduces you formally–Chinese like to work with people they know

Avoid asking pointed questions

Do not expect decisions made at meetings as meetings are merely forums for exchange of information

Allow time in meetings for team members to consent and consult

Standing out from the crowd can be viewed as very negative and result in personal difficulties, therefore try to blend in with the group and put their needs first.

Masculinity

Masculinity looks at how people react to one another. Countries with high masculine scores tend to have a society which respects stereotypical male behaviour: hedonistic, materialistic, dominant, aggressive and competitive, viewing feminine behaviour as weak. Countries with low masculinity scores tend to have strong welfare support and more equality between the sexes(Hofstede and Bond, 1984).USA scored 62 points on masculinity, a cultural characteristic in which success, money and material possessions form the dominant values in society. That score is almost equal to that of China’s 66 score.

Officially, women in China have the same rights as men in the workplace. However, traditional thinking does not sit easily with this notion of gender equality and it is somewhat ironic that the liberalisation policies of the last decade might have reversed many of the advances made by women in Chinese society under the previous hard-line regimes (Hofstede and Bond, 1984).

The value placed on work is similar in USA and China, according to Hofstede, yet all three countries have few women in senior management.

MASsuggestions going from USA to China

Foreign businesswomen will be treated with great respect and courtesy.

They may find that, within a delegation, the Chinese defer to male colleagues regardless of the actual seniority of the western party – the Chinese assumption being that the male will naturally be the decision-maker. Therefore a American woman manager must anticipate this and not be offended by this reaction so she “saves face”

Gradually over time, this apparent sexism will fade if she takes the time and gentle grace to build relationships slowly.

Uncertainty avoidance

As the name suggests, focuses on how and by whom risk is managed. Countries with low levels of uncertainty indicate strong governmental control to maintain as much stability and order as possible for risk elimination. Countries with lower scores tend to allow individuals to manage their own risks, which provide environments with more innovation (Hofstede and Bond, 1984).

China presents a high degree of acceptance of uncertainty, which is a characteristic of a society that does not try to take control of the future, and that is not afraid of unforeseen situations.

Contrary to USA, Chinese society does not feel such an urge to establish strict rules to overcome uncertainty or ambiguity. It is also characteristic of a society that is more tolerant towards opinions, behaviour that are different from its own, and changes. And it is a more meditative society which does not feel the need of controlling its environment.

UAI suggestions going from USA to China

Present a bottom line and an objective, then build your case around questions

Expect frequent rescheduling of meetings. It is a good idea to set up appointments a few weeks in advance and reconfirm 1-2 days before the scheduled meeting

Long-term Orientation

Long-term Orientation concerns how cultures view time and perseverance, whether business and relationships are nurtured over a period of time or if more emphasis is placed on short-term reward. Long-Term Orientation is the fifth dimension of Hofstede which was added after the original four to try to distinguish the difference in thinking between the East and West (Hofstede and Bond, 1984).

China slow and steady wins the race for business deals. Building strong, reliable, lasting relationships is key for the Chinese. A certain amount of trust must be gained before any decision is met. It may take three to four times the length of time to finish the business deal compared to your cultural standards. So if you do not come to a fast agreement, don’t be discouraged, make the client feel comfortable and show your patience. The Chinese never like to rush into things(Hofstede, 2003).

Chinese culture is marked by respect and loyalty, which makes them reliable partners. They favour the interest of the group and in particular are extremely perseverant and formidable business people.

LTO suggestions going from USA to China

This is arguably the area requiring the most attention from aAmerican manager.

Meetings are about building relationships and exchanging information – it is rare for a decision to be made within the meeting. Therefore aAmerican manager must not show impatience.

Use less direct language

Hold back on the truth, to help others save “face”

Build relationships slowly.

Try “gift giving”, as a thank you is often not considered enough, and at worst rude.

Allow the group to consult with each other and spend time working out their responses, questions, and concerns

Likely Problems Posed by Cultural Difference

Context

Levels of context (depth) in communication differ among various cultural cliques. Low-context cultures such as Canada and the US exhibit little or no need for explanation of orders and requests. High-context cultures on the other hand, expect more explanations about orders and directions. A transactional experience between the two groups would need a lot of caution lest a serious misunderstanding ensues leading to even loss of resources.

Cues

These are the little gestures we make in the process of communication. Different cues mean different things in different cultures. So a business communication between parties from different cultures, say, China in Asia and Yahoo’s California in the US would be hindered if a clue used by one of the parties means a totally different from what was intended.

Corporate Space

While many Europeans and South Americans ordinarily kiss business partnerson both cheeks in greeting instead of shaking hands, Americans do an arms-length from business associates. Such practices could affect the nature of business if not considered

Business Viability in China

Having chosen Yahoo’s service of offering an online search engine in China’s market, after the feasibility study carried, I can comfortably reiterate that China would be a good market to invest in.

Characterized with an exceptionally large population, there would be a readily available market. Accompanied with the right strategy and management team, market infiltration and conquering would be less hectic and promising. The large population would also provide the much needed labor but at low costs. This reduces the companies spending even as the profits rise (Ralston, Holt, Terpstra& Kai-Cheng, 1997).

The comfortable operational environment brought by political stability also goes a long way into the business establishment. The relatively flexible legal framework also ensures the businesses intending to set up camps in the country find it easy

The Dollar versus Yuan Exchange Rates

Over the last 24 months, that is, from August 2012 to present, the exchange rate between the US Dollar and China’s Yuan has been on a rather rising mode. The month of August 2012 closed with 0.157200 USD exchanging for 1 Chinese Yuan. The rates kept increasing in small almost constant intervals to the end of 2012 and all through 2013 where the year closed with 0.164640 USD exchanging against 1 Yuan. The year 2014 has however this far displayed a twist of events with the rates falling rather than rising between the months of Feb to date. The month of July for instance closed at 0.161289 USD exchanging against 1 Chinese Yuan.The Economic variables that most likely initiated the changes in the rates are among others;

Economic Performance through Political Stability

A country as China, having had none major conflicts in recent times and enjoys a stable economy attracts foreign investors. The investors feel safer investing their resources in such countries than in countries perceived to have more political and economic risk. This explains the steady rise in the exchange rates over time.

Differentials in Inflation

Following the Chinese government’s commitment to maintain the value of their currency at a relatively stable level, inflation was greatly curbed. This exhibited a rising currency value of the Yuan, as its purchasing power increased relative to the Us Dollar (Chen, 1975).

Public Debt

The fall in the exchange rates in the first half of 2014 might be as a resultCountries will engage in large-scale deficit financing to pay for public sector projects inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real dollars in the future.and funding by the government. While such activity models the domestic economy, countries with relatively large public debts are less attractive to foreign investors because large debts encourage inflation.

Hedging Foreign Exchange Risks

Multinational companies having their operational regions across borders always are faced with the risk at the point of currency exchange. This results from the fluctuations in currency values as compared to others. These fluctuations more often than not cause unfavorable effects to businesses.Hedging out is then a risk mitigation financial instrument that shields businesses against such effects. It derives its value from an underlying asset.

The two common hedges available to business entities are forward contracts and options. The major difference based on who derives the benefit of a favorable movement in the exchange rate, A forward contract will close into an exchange rate today at which the currency transaction will occur at the future date while an option sets a fixed exchange rate at which the company may wish to exchange currencies. If the existing exchange rate is more favorable, the company would then opt not to exercise the option.

In conclusion

It is worth noting that despite the numerous challenges that China faces, it still stands as a favorable business environment both for new entrants and those who wish to expand their operations in the labor rich market.

References

Barnett, A. D. (1981). China’s economy in global perspective. Brookings institution.

Chen, C. N. (1975). Flexible Bimetallic Exchange Rates in China, 1650-1850: A Historical Example of Optimum Currency Areas. Journal of Money, Credit and Banking, 359-376.

Chunfeng, B. W., Haihui, W., & Wei, Z. (1999).Application of Combining Forecasts in Credit Risk Assessment in Banks…(5)[J].Journal of Industrial Engineering and Engineering Management, 1.

Hodgetts, R., M., and Luthans, F., and Doh, J. P. (2006). International Management. 6thed. New York: McGraw-Hill

Hofstede, G., and Bond, M. (1984). Hofstede’s culture dimensions: An independent validation using Rokeach’s Survey’ Journal of Cross-Cultural Psychology, 15(4), pp. 417-433.

Hofstede, G. (2003). Culture’s consequences: comparing values, behaviours, institutions, and organizations across nations: Second Edition’ SAGE, Los Angeles.

Lee, L. O. F. (1999). Shanghai Modern: the flowering of a new urban culture in China, 1930-1945. Harvard University Press.

Ralston, D. A., Holt, D. H., Terpstra, R. H., & Kai-Cheng, Y. (1997). The impact of national culture and economic ideology on managerial work values: A study of the United States, Russia, Japan, and China. Journal of International Business Studies, 177-207.

Xiaojuan, J., &Hui, L. (2004). Service Industry and China’s Economy: Correlation and Potential of Faster Growth [J]. Economic Research Journal, 1, 4-15.

Zhang, Z. (2001). Real exchange rate misalignment in China: An empirical investigation. Journal of Comparative Economics, 29(1), 80-94.