Ib Case 2013 Srlim 805

7/23/2019 Ib Case 2013 Srlim 805

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Case Study

“CHINA - Legal Growing Pains in a Land of Opportunity”

Summary:

With leading economies of the world in dire shape, China now has become a crucial engine

of global growth — sooner than anyone had imagined. While developed countries remain in a

quagmire, China keeps roaring ahead.

But, China from here on is going to become more difficult. The post-crisis self-

confidence of the Chinese government, companies and people is soaring to the point where it

strikes many outsiders as hubristic. Today, some foreign companies in China wonder how long

they will be welcome. While smaller foreign consumer-goods makers, retailers and lower-tech

companies seem largely to fly below the radar, others feel they are being watched carefully.

China is making greater demands — especially on foreign companies with proprietary

knowhow and cutting-edge technologies. Competition is already brutal. To build a winning

business in China, foreign multinationals must now plan even more meticulously — as well as make

tangible contributions to the host country’s continued economic development.

A Land Of Opportunity:

Typically, they have been anxious to take advantage of new opportunities in one or more

of the following areas:

Market Potential: China has just over 1.3bn people, and economic growth has

lifted many millions of them into the middle class. Hundreds of millions more,

although desperately poor, appear to be looking at a better future.

Market Performance: Rapid economic growth has increased purchasing power,

which has translated into increased consumer spending.

Infrastructure: China is in a multiyear program to build its infrastructure; it will

invest trillions of dollars on highway, airports, seaports, dams, power plants, and

communication networks.

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Resources: China has a well educated population and immense pool of productive

labor while wage rates remain far below those in many other countries about 1/3 of

the Mexican and 1/25 of the U.S. rate.

Strategic Positioning: More and more companies consider investment and

operation in china as fundamental elements of their global strategies.

China attractiveness as a business destination continuous to suffer from an array of political

and legal complications that await any would be investor or entrepreneur. China have unique and

political and legal environments make local operations a complex and often frustrating process.’

China’s political and legal system foster time consuming busy work and tend to stake the odds

against foreigners who are bold enough to forge ahead in the face of an elaborate bureaucracy.

That this power struggle has a long tradition is evident in a sixteenth-century Chinese

saying “The mightiest dragon cannot crush the local snake.” What this means is that, even though

the central government in Beijing may appear to be all powerful, its practical reach is limited by

the politics of local bureaucracies.

Looking from the outside in, however, you can see that China has made great strides in

stabilizing its legal environment. Unfortunately, the willingness to modernize doesn’t ensure that

all problems immediately disappear. China still faces some fundamental challenges, including

legislative gaps, hazy interpretation, lax enforcement and philosophical disagreement.

Collectively, political biases, legal shortcomings, and philosophical legacies have

contributed to the weak or arbitrary enforcement of laws in China.

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1).What are the factors that support the phrase “China- The land of opportunity”?

With a GDP growing at more than 8 percent a year, China is world’s largest growing

economy, and it has joined US as one of the two locomotives powering the global economy.

The incentives to invest in china are compelling. More than 600,000 ventures are set up by

companies from around world, exceeding $800 billion. New opportunities are in many areas andfive key features are as below:

Market potential:

China has just over 1.3 billion people, and economic growth has lifted many millions into

middle class. Many Chinese market are still in the early- or mid – growth stage of product life

cycle.

Market performance:

Rapid growth has increased purchasing power. China has doubled real income per capita

in just 9 years which is substantially good compared to other developed countries.

Infrastructure:

China will invest trillions of dollars on highway, airports, seaports, dams, power plants,

and communication network.

Resources:

China has well-educated population and an immense pool of productive labour while wage

rates remains far low.

Strategic positioning:

More and more companies consider investment and operation in china as fundamental

elements of their global strategies.

2) COMPARING CHINESE ECONOMIC CONDITIONS WITH THAT OF

UNITED STATES:

Under the direct control of the Communist party from 1949 to 1979, China’s economy was

autarkic i.e. adhering the notion that contact with foreigners would corrupt the nation’s political

structure and pollute its cultural life, the government prohibited foreign investment and restricted

foreign trade. However, near 1970s Chinese leadership began to rethink its economic posture and

realized by 1978 that it was economically lagging behind much of the rest of the world, and hence

took first step towards economic modernization by enacting the Law on Joint Ventures using

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Chinese and Foreign Investment. Since then, Chinese economic policy has been characterized by

step-by-step liberalization and gradual entry into the world of foreign trade and investment, still

the Communist Party maintains and absolute monopoly on political power.

However, the country’s economy is shaped by free market principles, it has been growingat more than 8% GDP a year, China is now the world’s second largest economy and it has

joined the United States as one of the two locomotives powering the global economy;

between 2001 and 2006., the two nations accounted for 60% of global growth.

By the first quarter of 2007, the $12.5 trillion US economy was sputtering while the $2.5

trillion Chinese economy was expanding at a rate of 11.1%. If the same pace continues,

China will replace the United States as the world’s largest economy, both in nominal and

real terms within next two decades.

Some economists note that as America and Britain industrialized in the nineteenth century,

they took 50 years to double real income per capita; essentially, China has achieved the

same increase in just 9 years.

China has a well – educated population and an immense pool of productive labour while

wage rates remain far below those in many countries about 1/3 of the Mexican and 1/25 of

the US rate.

Some observers argue that, when it comes to doing business in China, the number one rule

is to throw away the rule book. In particular, foreign investors are advised to abandon the

notion that Western ideas will automatically work in China.

In the West, for instance, a basic principle hold that’s you can form a corporation “for any

valid business purpose”. This principles does not exist in China. If you want to incorporate

in China, the government wants to know – in excruciating details – such basics as who you

are, what you want to do, and, of course, how much you intend to invest.

“Chinese legislation is chock-full of ambiguities,” says one Beijing based lawyer, who

thinks it will take 10 to 15 years to iron out most of the wrinkles. Others are a little more

pessimistic about the time frame, comparing the state of the present Chinese legal system

with that of the United States in the 1920s – an antiquated composite of statues and legal

precursors that took over 80 years to modernize.

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The United States has been the world’s biggest economy since 1871, but that top ranking is

now under threat from China. The Asian giant has achieved economic growth averaging 10% since

it initiated market reforms in 1978 and, in the process, lifting almost half of its 1.3 billion

population out of poverty and becoming the undisputed second-largest economy. China’s gross

domestic product (GDP) – in terms of current prices and market exchange rates – was estimated

by the IMF at approximately $8.25 trillion in 2012, which is just over 50% of US GDP of

approximately $16 trillion for the same year. While that is a significant gap that may take China

many years to close, using another measure known as Purchasing Power Parity (PPP), China is

forecast to race past the U.S. in just a few more years.

While the Chinese economy may be poised to surpass the U.S. on a PPP basis in less than five

years, the U.S. will continue to be well ahead on most indicators related to living standards and

quality of life. However, China’s surging economic clout may result in the country increasingly

challenging the U.S. on a number of fronts, including diplomacy and military.

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3) How are market realities affecting China adversely? Comment on each

criteria in brief.

A market reality refers to the current economic as well non-economic situations prevailing in the

Chinese market; it also includes systems, traditions and rules & regulation followed in the China.

China’s attractiveness as a business destination continues to suffer from an array of political and

legal complications. China’s unique political and legal environments make local operations a

complex and often frustrating process.

There are some factors or we can say tradition of china which can be considered as market realities.

These are as follows:s

Politics and bureaucracy

The mighty dragon and the local snake

The legal system

The matter of intellectual property

Corruption

POLITICS AND BUREAUCRACY:

China is following bureaucratic system. According t o many foreign investors china’s treacherous

business terrain is due to this bureaucratic system that relies on political agendas rather than legal

statutes as a means of regulating business activity. Politics also includes “rule of man” in china,

which means a centralised leadership which is making already complicated system more

bureaucratic. Foreign investors have to suffer due to the complex procedure to be followed in

starting up a business. Another factor that acts as a hindrance is politics. There is a very lengthy

process to be followed in getting business approval. The Chinese government approves only those

firms which offer sufficient benefits to China.

THE MIGHTY DRAGON AND THE LOCAL SNAKE

The mighty dragon refers to the central government and the local snake refers to the local

officials. Both the parties are affecting china adversely because there is a continuous conflict going

n between these parties. Local officials are in favour of protecting the local firms and factory.

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Therefore, when central government tries to investigate any unfair practices local government

party usually do not support this, which ultimately results into the slow grow of China.

THE LEGAL SYSTEM

Till 1978 China had no formal legal system, after also when it introduced a legal system

that was not much effective. China still faces some fundamental challenges, including legislative

gaps, hazy interpretation, lax enforcement, and philosophical disagreement. Currently for example

no comprehensive bankruptcy law protects business; recent draft legislation favours closing down

debt ridden enterprises than protecting creditors. Nor there is any effective way of resolving

contract disputes. Another point that is affecting China adversely in terms of legality is the

fundamental difference in the conception of legality in society. western counties follow “rule of

law” whereas china follows “rule of man” and thus to a system that equates the decision of oneman , whether emperor party, local bureaucrat , with the law. Both bureaucrats’ ad agencies are

ceded the authority to make the decision without being subject o a transparent system of checks

and balances.

THE MATTER OF INTELLECTUAL PROPERTY

One area of controversy in China is about intellectual property- the general term for

intangible property rights resulting from intellectual effort and including such asset as patents,

trademarks, and copyrights. Western companies often complaint that China’s industrial surge or

growth is being powered by the sophisticated theft of the intellectual property. Another reason

related to this matter is that all patents were owned by the government before China begun to put

intellectual-property laws in place, and any company willing to share could share it, thus the

dominance of government and easy sharing of patent act as hindrance in growth of China.

CORRUPTION

Government role is pervasive in China. It takes part into all level of business affairs, mix

n an underdeveloped legal system with a habit of lax enforcement and the martial temptations of

an emerging capitalist society, and you have a prescription for corruption. As it stand, many

investors would be in China face many question concerning property and procedures for which

Chinese government has furnished few solution. Many foreign companies routinely bribe and

attempts to steak property while struggling to establish clear titles to land and physical equipment.

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4) Will China continue to attract foreign firms in future?

Multinationals’ future in China varies greatly depending on industry, company size

and indeed on the individual company concerned. But some general observations

can be made. First, companies are counting on China to deliver more. But not all are planning to

plough in more investment in the name of higher returns. Almost half (49%) of all the survey

respondents said that the fallout from the global rest, companies are investing into china with the

hope of “China will deliver more global revenue.”

While smaller foreign consumer-goods makers, retailers and lower-tech companies seem

largely to fly below the radar, others feel they are being watched carefully. China is making

greater demands — especially on foreign companies with proprietary knowhow and cutting-edge

technologies. Competition is already brutal. To build a winning business in China, foreign

multinationals must now plan even more meticulously — as well as make tangible contributions to

the host country’s continued economic development.

Image of China that emerges from this case study is an outsized potential, Boundless

ambition and increasing complexity. The relentless rise of the China market remains one of the

most important global business stories today. But how this story ends will not be the same for all

MNCs. That will depend on how well each company writes its own subplot.

5) Suggest ways of improving Chinese economic and political conditions and

there by constructive changes in International business environment changes

at large.

China’s unique political and legal environments mak e local operations a complex and often

frustrating process. Layers of bureaucratic authority should be reduced in order to make it

smoother and more effective.

Lengthy review process and narrow criteria for determining sufficient benefits to china

should be broadened.

Western companies in china often complain that china’s industrial surge is being theft by

the sophisticated theft of their intellectual- property. Concrete steps must be taken in order to

rectify this distrust amongst the in investors.

Many foreign companies routinely battle bribes and attempts to steal property while

struggling to establish clear titles to land and physical equipment. A transparent and just system

should be established to fight corruption.

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Bibliography:

1) Daniels John D., Radebaugh Lee H., Sillivan Daniel P., Salwan Prashant, “International

Business- Environment & Operations”, 12th edition, Pearson Publicstions, New-Delhi,

India

Weblinks

1) http://www.investopedia.com/articles/investing/032013/us-vs-china-battle-be-largest-

economy-world.asp

2) http://www.theguardian.com/news/datablog/2013/jun/07/china-us-how-superpowers-

compare-datablog

3) http://www.heritage.org/research/reports/2011/04/the-united-states-vs-china-which-

economy-is-bigger-which-is-better

http://www.investopedia.com/articles/investing/032013/us-vs-china-battle-be-largest-economy-world.asp





http://www.theguardian.com/news/datablog/2013/jun/07/china-us-how-superpowers-compare-datablog





http://www.heritage.org/research/reports/2011/04/the-united-states-vs-china-which-economy-is-bigger-which-is-better











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Ib Case 2013 Srlim 805