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Political – Legal Environment of China

Based on Sepehri and Pordeli (2009 cited in U. S. Dept. of States, 2005), since the 1970’s, when China do the market reform that proposed by Deng Xiaoping, it had become clear that the prevailing economic policies had to change and that China had to adopt capitalistic tendencies in its goal towards economic prosperity.

Sepehri and Pordeli (2009 cited in Forbes 2003) stated that, “as a consequence of it market reform; China’s economic growth rate in the past three decades has been among the highest recorded for any country during any period of world history…” This huge achievement of Chinese market reform has successfully become one of the enticements to attract more foreign direct investment venture in China.

The other enticement for FDI venture in China is the tax refund system that China has. Based on Liu (2008), “Tax refund system is vital for a company, since it directly decides the final total costs of one product to an export market, thus decide the competitiveness of one commodity in the marketplace. ” The tax refund system was elaborated in Economic Laws and Regulations of China (Liu, 2008 cited in Law Press, China, 2007, pp. 621-623).

It has elaborated about the entities that eligible for tax refund and the divisions of the tax level Furthermore, “In August 2004, the Shanghai Commission of Foreign Trade and Economic Cooperation (COFTEC), gatekeeper of FDI in Shanghai, issued Examination and Approval of, and the Provision of Services to, Foreign-invested Projects in the Municipality Several Opinions, setting forth more transparent and streamlined approval procedures for the establishment of foreign-invested enterprises (FIEs), and cutting the approval time to 10 working days (as opposed to several months under national law).

Some approvals can even be completed on-line within three working days. A simple registration system for foreign representative office establishment replaces the more cumbersome approval procedures found elsewhere in China. ” (Dudek and Wang, 2005) Apart from the enticement that China has, there are some barriers that Multinational Companies (MNCs) will face on undergoing international business venture in China. The first and famous is the corruption. According to Backman (2008, p. 103), “There is a lot of corruption in China.

Transparency International rated China in terms of its perceived corruption at 70 out of 163 countries in 2006 (a rating of 1 implies little or no corruption). ” With reference to Columbus (2003, pp. 133-4), “With a few officials abusing their power in public administration to get money, FDI has become a hotbed of corruption. ” Corruption will causes the reducing of inward foreign direct investment due to higher sales expenses in the invested country. The other barriers in endeavouring the international business in China are operating right restriction and distribution right restriction.

For the operating right restriction Columbus (2003, pp. 129-30) stated that, “Chinese officials pressure foreign investors to agree to contract provisions which stipulate technology transfers, exporting a certain share of production, and commitments on local content. China restricts the number and types of entities in China that are allowed to import products into China, and foreign companies are not permitted to directly engage in trade in China. ” Whereas, the distribution right restriction is the restriction on most of foreign companies to sell their products directly to Chinese consumers. Economic Environment

Morisson (2009) found that “The global economic crisis began to impact China’s economy in late 2008. After growing by 13% in 2007, China’s real GDP slowed to 9. 0% in 2008 and to 7. 1% in the first half of 2009 (year-on-year basis). ” The global economic crisis not only has a significant negative impact for China’s GDP, but also on the international business venture in China namely FDI. The vulnerability of China’s economic during the global economic crisis will result in the downgrading of MNCs’ confidence level in investing or doing international business venture in China, in which eventually lead to the diminished of FDI inflows rate.

This statement affirmed by Morisson (2009), “China’s trade and inflows of FDI diminished sharply, and millions of workers reportedly lost their jobs. ” In responds to this situation, “The Chinese government has sought to boost the economy by implementing a $586 billion economic stimulus package (largely aimed at infrastructure projects), establishing easy money policies to boost banking lending, and providing assistance to various industries.

Such policies have helped stabilize China’s economy; real GDP is expected to grow by over 8% in 2009—far higher than the expected growth of any other major economy. ” (Morisson, 2009) The success of China in recovering and strengthen their economic environment has gain back the confidence level of MNCs to infuse FDI into China. The other enticement in China economic environment is that the accession of China into World Trade Organization (WTO) on December 11, 2001 (Zumwalt, n. a. ). Zumwalt (n. a) argued that, “WTO membership will make China even more attractive to foreign investors. This circumstance is due to the companies that will benefit from an expanded rule of law as China implements its WTO commitments, particularly those designed to foster the highest degree of transparency and trade-related non-discrimination (Zumwalt, n. a). However, before makes any vital decision, managers of MNEs need to look beyond all the enticement that China has in regards to attract FDI into their country; and starting take into their consideration the challenges in doing international business venture in China.

In refer to Morrisson (2009) statement, “Despite the relatively positive outlook for its economy, China faces a number of difficult challenges that, if not addressed, could undermine its future economic growth and stability. These include pervasive government corruption, an inefficient banking system, over-dependence on exports and fixed investment for growth, the lack of rule of law, severe pollution, and widening income disparities. ” Socio – Cultural Environment Based on Columbus (2003, p. 23), “Asia Direct Investment (ADI) was the dominant source of Chinese FDI activity, particularly Hong Kong direct investment (HKDI) constituted over one half of China’s inward FDI in almost every single year since 1979, which are otherwise not significant international investors. ”

One of the plausible explanations for this phenomenon is cultural similarity. According to Columbus (2003, p. 124), “Hong Kong and Taiwan’s ethnic with China is a unique ownership: both share the same language and culture, which enables investors to conduct negotiations and operations much easier. The other reason is toward the differences in values and norms in work environment. “Western investors who have a tendency to make business practice hurry, impersonal, shallow, and focus on the short-term bottom line can not endure Chinese executives who view business deals too personal, too time wasting, and too inefficiency. ” (Columbus, 2003, p. 124) To conduct international business venture in China, manager of MNCs companies need to take into their consideration in regards to the culture of Chinese society.

One of the main aspects is the attitude of human resources that may affect their working behaviour. Backman (2008, pp. 75-6) found that “Chinese graduates are good at following instructions and are hard-working. They are not good at teamwork, sharing information with colleagues, dealing with ambiguity, and undertaking tasks that call for creativity. ” Managers in China need to be aware of this and be prepared to implement training programs that foster teamwork and creativity. “It is an enormous task that requires expatriate managers to be patient and nurturing, and have strong mental skills.

Individuals who do not have these skills should reconsider taking an assignment in China. ” (Backman, 2008, p. 76) Technological Environment and Local Infrastructure Nowadays, China is on its way to become the world’s factory hub. To achieve this objective, China needs to have a competitive advantage so that it can differentiate them selves from any other country. The competitive advantage is also become an imperative requirement to attract more MNCs to do international business venture notably FDI in China.

Based on China Knowledge Online (2010), “Low labour and land costs are often cited as China’s main competitive advantages. However, they are not the only factors that have helped make China the world’s largest factory. In fact, in comparison with other developing countries around the world, China’s wages and land costs may not be the lowest. One of the advantages China enjoys over its competition is a relatively high standard of infrastructure. This not only makes massive production possible, but also facilitates the transportation of raw materials into the country and finished products out to the world.

Based on China Knowledge Online (2010), China infrastructure is including seaports, airports, expressways, railways, and telecommunications. For its seaports, China Knowledge Online (2010) stated that, “China’s seaports have been the most important gateways for its foreign trade. Currently, the nation ranks first in the world in terms of both cargo throughputs by weight and by the number of containers handled”. Moreover, in the other sector of infrastructure, China’s airports play a significant role in the fast growth of both passenger and cargo turnovers (China Knowledge Online, 2010).

China Knowledge Online (2010) identified that, “The rocketing growth of foreign trade coupled with the booming domestic economy has generated great pressure for improvements to China’s domestic transportation system. Roadway systems have played the most important role in container transportation… The improvements expected to boost the economic integration among different regions across China tremendously. ” Moreover, the China’s railway systems play a very important role in bulk cargo and passenger transportation.

Its successfully achieve the third ranking in the world (China Knowledge Online, 2010). And at last in regards for China’s telecommunication, China Knowledge Online (2010) stated that “knowing the importance of telecommunication services, China has been paying close attention to this sector of its economy. The Chinese telecoms network features a large network capacity and many high speed connections. It covers the entire country with optical cables as the mainstay, and satellite and digital microwave systems to supplement the system. However, to make a decision in regards to do an international business venture in China, MNCs manager need to look broader into the other main aspects such as the Chinese skilled labour. In the contrary, despite the high standard of the China’s infrastructure, Chinese labour skill is still in the low standard. As what Bakcman (2008) stated in his book, “China has plenty of workers. But few are management material. Fewer still are creative, lateral thinkers. ” This phenomenon will cumber some the adoption of new technology that may introduce by the MNCs to aid the employees in their work.

And eventually, it will lead to the failure of the company operation process. Recommendation Based on the PEST analysis of China that mentioned previously, the author proposed MNCs manager that intended to do international business venture, notably FDI in China to invest their asset in the labour – intensive manufacturing sector (e. g. textile and clothing, food processing, furniture). This recommendation is made based on the author analysis on the Technological Environment and Local Infrastructure, in which it is stated that the China has a plenty of labour but lack in the labour skills.

Since high technological skills labour is not an imperative in the labour – intensive manufacturing, the author perceived that it is the most suitable sector for the MNCs to instil their FDI in China. Moreover, by look at the Socio – Cultural analysis that stated previously, the author proposed MNCs in Asia region to more vigorously conduct FDI in China. It is recommended due to the ease of conducting FDI based on the Asia unique similarity in values, culture, and norms in the business environment.

This similarity will aid the MNCs in Asia region to communicate well with the Chinese, and will eventually result in the successfully FDI venture. Summary Nowadays, China is successfully become one of the countries with a high and stable rate of economic growth in the world. This situation is in consequence of the market reform that China conducts over decades ago. The market reform that China conducts is intended to build an open economic through inviting companies to invest in international business venture in China such as FDI. In this regards, FDI is becoming the core in the economic growth in China.

Moreover, today’s China is in their on-going effort to become the world’s factory hub. This condition is an opportunity for MNCs in manufacturing industry to conduct FDI in china. However, before make the decision to conduct FDI in China, MNCs have to look at China’s PEST analysis and take it into their consideration. The managers of MNCs need to evaluate PEST analysis in depth and thoroughly so that it can help the managers to make a better decision for the FDI venture in China, and ultimately will lead to the success of the future MNCs FDI venture.

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