Investing in China Research Paper

Total Length: 3299 words ( 11 double-spaced pages)

Total Sources: 20

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International Business

Introduction

As a Western manufacturing company of English Language products considering a major investment in one of the BRICS countries—preferably China—it is advisable that the company first possess an assessment of the feasibility of achieving the company’s aims in a country like China, which currently is in a trade war with the U.S. that shows no signs of letting up. Moreover, an examination of the overall context of globalized society in the 21st century will help the company to determine whether this investment would be particularly strategic at this time or not. While the general business environment in China (in the widest sense) is positive, there are a number of obstacles that Western companies face when attempting to enter the Chinese market. Cultural and institutional challenges make up the bulk of these obstacles, but, as other companies have overcome them in the past with the right approach, it is not impossible that this company should achieve the same.

This report will (a) give advice on the general business context internationally and nationally, (b) advise on entry mode and why this entry mode was selected, (c) advise on dealing with institutional and cultural differences as well as opportunities and challenges between the host and home countries, and (d) base all advice on theory supported by academic literature, evidence-based practices, relevant data, and statistics wherever applicable.

Context

Global

Altbach (2004) points out that “English-language products of all kinds dominate the international academic marketplace” (p. 11). Journals, books and other popular media formats in which English-language products are produced and disseminated can be found virtually everywhere in the world. Part of this expansive reach of English is the fact that approximately at any given time in today’s globalized world, there are 1.5 million students who are studying in some discipline outside of their native countries (Altbach, 2004). 80% of all international students, moreover, hail from developing countries—which means English is not their native language and yet it is more than likely the language in which they will pursue their education (Altbach, 2004). Bolton (2008) notes that the English language is particularly popular in Asia with more than 700 million English language learners from India to the Far East. This means means that there is certainly a market for English language products in the East. In China, specifically, it is estimated that some 500 million English language learning students (Bolton, 2008). With a population of 1.3 billion, roughly one-third of the nation’s people are engaged in some form of English-language learning.

National

As Pan and Block (2011) note, English is a “global language” viewed as such in China, where this company’s English language products are intended to be sold. Thus, there is certainly a market and a demand for this type of item among Chinese consumers. The Chinese people are, moreover, very forward-looking (Agnew, 2012) while simultaneously holding on to its traditional aspects and cultural traditions. This means that at one and the same time the Chinese are willing to spend a great deal of time and energy on learning while also keeping a safe distance between their culture and the culture of the West: in other words, the two are not the same—and the attempt by Mattel to sell its American Barbie products in China showed the extent to which the culture clash between China and the West exists (Lyles, 2008). Nonetheless, because English is recognized as a “global language” the product itself which this company aims to produce and sell in China is not likely to be met with the kind of indifference or scorn that Mattel faced when it entered the country. China is, after all, one of the largest countries in the world in terms of sending students to the West (Altbach, 2004). In short, there is a great deal of national interest in China in having access to the English language. Likewise, with China’s economy growing at an exponential rate in the 21st century—10% year over year in recent years (Bolton, 2008)—there is a great economic advantage to entering the Chinese market. This market, moreover, is fertile: “by 2020, it is estimated that 300 million, or 40 per cent of the Chinese population [will] be in the middle class” (Bolton, 2008, p. 8). As part of the middle class, these 300 million Chinese consumers are also more than likely to be English-language learners—and indication that the market for English language products in China is ripe.

Entry Mode

Options

Options for entry mode into China include: entering the market by way of establishing contracts with distributors, suppliers, licensees and/or franchisees (Brouthers & Hennart, 2007). Other options include establishing the firm itself within the country, establishing subsidiaries for sales and/or manufacturing either via joint venture (JV) or through a WOS—wholly owned subsidiary. At the turn of the 21st centuries, foreign companies were “generally free to choose their mode of entry into the Chinese market from among such forms as equity joint ventures (EJVs), wholly foreign-owned enterprises (WFOEs), contractual (or cooperative) joint ventures (including licensing and technology transfer agreements), joint exploration, and cooperative development” (Deng, 2001, p. 63). At the time, China was second behind only the U.S. as the largest target of foreign direct investment (FDI).
Indeed, contractual FDI in China at the start of the 21st century was well over half a trillion dollars from among 350,000 different investment ventures (Deng, 2001). This figure has only grown since: by 2013, China received foreign direct investment of approximately 1,085 billion USD—13% of the total FDI stock across the whole of the developing world (Chen, Yao & Malizard, 2017).

However, with the rise of nationalism in both the East and the West—from Russia to China to England to the U.S. (Suzuki, 2015; Gusterson, 2017)—there is more and more focus now on supporting domestic investment among fears that FDI “crowds out” the former (Chen et al., 2017). China is not unaware of this fear and the rise of trade war under the Trump Administration has only served as another reason for Chinese officials to promote more domestic investment. As Gao, Wang and Che (2017) show, historical relationships between countries have an impact on FDI location and performance. If the relationship between China and the U.S. continues to deteriorate under the strain of trade war, mounting tariffs and saber-rattling rhetoric, the entry mode that the company seeks to utilize will be crucial to the company’s success—especially if sentiment in China turns heavily against Western companies in general or as a rule, based on the interlinking nature of security and economic interests (He, 2017).

Recommended Entry Mode

The recommended option for entry mode into China for this company is, therefore, an equity joint venture (EJV) or contractual joint venture (CJV). Either would pose little threat to China’s domestic investment concerns and for that reason less risk to the Western investor. According to Chen et al. (2017), currently “the top-three entry modes chosen by foreign investors are equity joint venture (EJV), contractual joint venture (CJV), and wholly foreignfunded enterprise (WFFE)” (p. 410). While WFFE are popular modes of FDI, the risk with them is that China may begin to view wholly foreign-funded enterprises in light of the increasing trade war, nationalistic wave in the West, and isolation that it feels as bad for the Chinese economy. Already Chinese economy is at risk of rolling over with a debt crisis looming, its currency in free-fall, and its domestic infrastructure investment model at the heart of what could turn out to be a major problem not only for China but for the global economy as a whole (Ansar, Flyvbjerg, Budzier & Lunn, 2016).

The EJV or CJV options are recommended because both would be more beneficial for Chinese interests, especially in the tense economic stand-off occurring right now. Chen et al. (2017) state that “both EJV and CJV seem to crowd in domestic investment as they require their Chinese partners to also contribute capital in the newly established joint venture” (p. 411). This helps the Western company to mitigate the risk of investment in China while allowing the Chinese partner to absorb a share of the risk. It also promotes a more equitable distribution of benefits. This would increase the likelihood of Chinese authorities accepting the foreign investment, as it would not be seen as crowding out domestic investment. In today’s environment of suspicion and mistrust, developing and implementing a JV of this nature would be the best entry mode for the Western company looking to do business in China. The theory that supports the recommendation of this entry mode is that China is going to need as much money to stay in China as possible as its currency faces further devaluation and capital flight risk explodes (Gunter, 2017).

Dealing with Institutional and Cultural Differences

Institutional and cultural differences can be dealt with by observing Hofstede’s cultural dimensions model and using this as the theoretical basis of all interactions between the Western company and the Chinese JV partner and relevant authorities, as well as other stakeholders—such as consumers, community members and so on. The Hofstede model of cultural dimensions provides a basic understanding of the cultural differences between the West and the East and how these differences are infused into institutions, organizations and consumer behavior of both parties (Hur, Kang & Kim, 2015).

For example, the Chinese are far more forward-looking and focused on achieving long-term objectives than the West is likely to be; the people of the West, on the other hand—because of their culture at its rootedness in the classical/Christian tradition—are more likely to require more certainty and definition than the people of China who are, according to the Hofstede model of cultural dimensions, quite comfortable with uncertainty and ambiguity. Keeping these points in mind, as well as the other cultural dimensions of the model—such as masculinity, power distance, individualism, and indulgence—will help the company to engage more fruitfully and respectfully with the institutions of any foreign country but especially with China (Kassar, Rouhana &Lythreatis, 2015).

Opportunities

The opportunity for investment exists as both China and the West are open, in so far as….....

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References

Agnew, J., 2012. Looking back to look forward: Chinese geopolitical narratives and China\'s past. Eurasian Geography and Economics, 53(3), pp.301-314.

Altbach, P.G., 2004. Globalisation and the university: Myths and realities in an unequal world. Tertiary Education & Management, 10(1), pp.3-25.

Ansar, A., Flyvbjerg, B., Budzier, A. and Lunn, D., 2016. Does infrastructure investment lead to economic growth or economic fragility? Evidence from China. Oxford Review of Economic Policy, 32(3), pp.360-390.

Bolton, K., 2008. English in Asia, Asian Englishes, and the issue of proficiency. English Today, 24(2), pp.3-12.

Brouthers, K.D. and Hennart, J.F., 2007. Boundaries of the firm: Insights from international entry mode research. Journal of management, 33(3), pp.395-425.

Chen, G.S., Yao, Y. and Malizard, J., 2017. Does foreign direct investment crowd in or crowd out private domestic investment in China? The effect of entry mode. Economic Modelling, 61, pp.409-419.

Deng, P., 2001. WFOEs: The most popular entry mode into China. Business horizons, 44(4), pp.63-63.

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Gao, G.Y., Wang, D.T. and Che, Y., 2017. Impact of historical conflict on FDI location and performance: Japanese investment in China. Journal of International Business Studies, pp.1-21.

Gunter, F.R., 2017. Corruption, costs, and family: Chinese capital flight, 1984–2014. China Economic Review, 43, pp.105-117.

Gusterson, H., 2017. From Brexit to Trump: Anthropology and the rise of nationalist populism. American Ethnologist, 44(2), pp.209-214.

He, K., 2017. Explaining United States–China relations: neoclassical realism and the nexus of threat–interest perceptions. The Pacific Review, 30(2), pp.133-151.

Hur, W.M., Kang, S. and Kim, M., 2015. The moderating role of Hofstede’s cultural dimensions in the customer-brand relationship in China and India. Cross Cultural Management, 22(3), pp.487-508.

Kassar, A.N., Rouhana, A. and Lythreatis, S., 2015. Cross-cultural training: its effects on the satisfaction and turnover of expatriate employees. SAM Advanced Management Journal, 80(4), p.4.

Liu, Y. and Almor, T., 2016. How culture influences the way entrepreneurs deal with uncertainty in inter-organizational relationships: The case of returnee versus local entrepreneurs in China. International Business Review, 25(1), pp.4-14.

Lyles, M.A., 2008. Appreciating cultural differences in China: An interview with Robert A. Eckert, Chairperson of the Board and CEO of Mattel, Inc. Business Horizons, 51(6), pp.463-468.

Pan, L. and Block, D., 2011. English as a “global language” in China: An investigation into learners’ and teachers’ language beliefs. System, 39(3), pp.391-402.

Si, S., Yu, X., Wu, A., Chen, S., Chen, S. and Su, Y., 2015. Entrepreneurship and poverty reduction: A case study of Yiwu, China. Asia Pacific Journal of Management, 32(1), pp.119-143.

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Tung, R.L., 2016. Opportunities and challenges ahead of China\'s “New Normal”. Long Range Planning, 49(5), pp.632-640.

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