Wuhan UniversityInternational Business and ManagementSeptember 81:30 – 4:45

China’s 12th Five-Year Plan

Are the five year plans made by the Chinese government important?

Five-year plans provide overall objectives and goals related to social and economic growth and industrial planning in key sectors and regions

Five-year plans represent a complex web of Chinese policy-making, containing previously implemented regional and long-term development plans and hundreds of targeted policy initiatives, all of which undergo constant review and revision over the course of the five-year cycle.

Effective implementation of five-year plan objectives remains difficult. Local government officials have been known to either slavishly follow plan targets or not follow them at all

The Chinese government often puts considerable resources behind achievement of the goals of a five-year plan

What incentives does China have to achieve the goals of the five-years plan?

The basic features of the 12th FYP are essential to rebalancing the Chinese economy and sustaining high rates of economic growth and achieving a better Chinese economy and society

the sharp decrease in Chinese exports during the financial crisis, leading to the layoff of millions of factory workers, underscored the importance for Chinese decision-makers of moving to a more balanced growth structure.

the perceived unsustainability of maintaining an exceptionally high growth rate, large global trade and foreign exchange imbalances that have led to tensions between China and its major trading partners,

the desire to spread the fruits of decades of growth to a wider proportion of the population

the inefficient use of resources that accompanies high levels of Fixed Asset Investment (FAI) by the government at all levels.

A lower growth rate assists in reducing a focus on FAI and give the Chinese government breathing space to set in train policies that will slowly increase consumption without having to unduly focus on ambitious growth targets.

Developing strategic emerging industries supports the effort to move beyond operating labor intensive factories and achieve industrial upgrading across the value chain

The seven industries are

o biotechnology, o new energy, o high- end equipment manufacturing, o energy conservation and environmental protection, o clean- energy vehicles, o new materials, o next-generation IT.

Spend more than RMB 4 trillion on these industries and to increase SEI’s contribution from today’s approximately 5 percent of GDP to 8 percent by 2015 and 15 percent by 2020.

By shifting to consumption-drivengrowth for several hoped foroutcomes:

o reducing incomedisparity, o moving away fromFAI because of overcapacityconcerns, o reducingChina’s dependency onexports and thus o reducing its current account surplus and need to maintain an

artificially weak currency. o While some Chinese experts are reportedly expecting consumption

to rise from the current 35.1 percent to around 50-55 percent of GDP by 2015, a State Council official recently predicted that it would only increase to 40 percent (by comparison, the United States is currently 71 percent, Brazil is 63 percent, and India is 54 percent).

In order to enable consumption to grow quickly, the government plans to increase household disposable income, most likely through raised minimum wages and increased social safety nets, such as health care and social welfare payments.

Preferential support for rural to urban migration will help to reduce the urban – rural income divide. Western regions linked by good roads to eastern cities will provide a base for movement of factories westward and educe of income gaps. Raising the minimum wage by 40% by 2015 will

also contribute. Environmental degradation threatens regime support and funding to

reduce CO2 emissions by 40% per nit of GDP by 2020 and creation of a carbon trading system will improve air quality

Sectors to benefit from 12 th FYP

Health Care –

greatly expanding access to basic medical coverage for citizens, modernizing the country’s health care infrastructure and improving

grassroots health care delivery, broader basic health care coverage, expanded infrastructure for grassroots medical networks, public awareness in disease prevention, improved health care administration, creation of national health care benchmarks and standards heavy investments in health care IT

Pharmaceutical Sector - consolidate and commercialize its pharmaceutical distribution industry throughout the 12th FYP period. The current structure of many of the 13,000 small distribution enterprises operating largely within the grey economy is a contributing factor to the high mark- up of drugs and risks for consumers buying fake or shoddy products.

establishing large national pharma champions, consolidate many of the smaller drug distribution companies in an effort to

bring pharmaceutical production and sales closer together, thereby reducing drug prices.

stringent regulations, integration will take place through preferential policies and financial

support to encourage larger companies to acquire smaller ones. consolidate the industry around one or two national-level companies, with

revenues reaching RMB 100 billion. At the regional level, the government plans to create 20 major companies,

with sales of nearly RMB 10 billion each.

Energy Sector –

Coal will decline but remain very large and important; nuclear power and hydro power will increase; China’s 11 nuclear power reactors currently account for 1 percent of the

nation’s total power capacity, but by 2015 will double, with 25 nuclear power plants in operation.

Hydropower’s capacity will increase by 50 percent by 2015. The electricity grid will be expanded and improved with connections

developed for both wind power and solar power; large expansion of a smart grid (how is this related to ubiquitous computing or to an internet of things?)

Next Generation Information Technology –

accelerating the creation of next-generation information networks, mobile communication and the Internet.

invest in R&D of the "Internet of things" and cloud computing, and develop digital and virtual technologies.

How will foreign invested enterprises react to the 12th Five-Year Plan?

Many foreign firms will see this plan as a threat to their business and to their opportunities in China.

Investment and procurement will be biased toward Chinese firms and will discriminate against foreign firms.

Foreign firms will need to develop closer government ties and closer JV partners in China to help grow their business.

Costs for wages will continue to increase substantially, helping to drive firms to invest in higher value production and shift away from production that is efficient only for low wage labor.

Other firms may decide to remain in China and shift operations inland to places such as Wuhan.

Government decision-makers will seek information and guidance from foreign firms for implementation of policies.

The most advanced domestic firms should also expect to participate in this process.

Business and Culture

Basic Terms and Questions

National culture –

broadly defined as values, beliefs, norms, and behavioral patterns of a national group – has become increasingly important in the last two decades,

Are cultures becoming more similar – converging - under the force of globalization?

Are national cultures being rearranged by the ideas, beliefs, preferences and values of Western societies into one basic type of culture?

Has this process of convergence taken place in certain areas – such as fashion, movies, youth culture, sports – but not in areas such as identity?

Does China’s emerging middle class emulate the middle classes of western societies in buying patterns and in personal aspirations?

How do we think about and understand culture”

1) viewing culture as a multi-level construct that consists of various levels nested within each other from the most macro-level of a global culture, through national cultures, organizational cultures, group cultures, and cultural values that are represented in the self at the individual level.

2) viewing culture as a multi-layer construct consisting of the most external layer of observed artifacts and behaviors, the deeper level of values, which is testable by social consensus, and the deepest level of basic assumption, which is invisible and taken for granted.

Global layer values are dominated by those in the western societies and are transmitted by global firms, tourism, education and media:

free market economy, democracy, acceptance and tolerance of diversity, respect of freedom of choice, individual rights, and openness to change

But their are important differences in organizational culture and group culture:

Based on different industries: autos versus social media

Based on different functions within an organization: accounting versus R&D

Based on national cultural patterns –

attention to detail,

orientation toward time,

conformity to rules and standards,

openness to new ideas and innovation,

acceptance of failure and risk

willingness to take initiative

approach to hierarchy

importance of informal networks of communication

ideas of fairness and merit

working as a team versus working alone

importance of consensus

short-term versus long-term orientation

3) Culture is dynamic and complex: contradiction is common, mixing of ideas and beliefs is not consistent, change is non-linear

Rules-based culture versus relationship-based culture

What institutions do people use to govern their economic interactions to protect their property rights and insure economic exchange?

Are these institutions created by public systems such as governments? Or by more informal arrangements that emerge from interactions at the micro level?

Rules-Based Systems

Shaomin Li (2009-10-01). Managing International Business in Relation-Based versus Rule-Based Countries Business Expert Press. Kindle Edition.

the public rules governing economic exchanges (such as laws, state policies, and regulations) are fairly made;

the rule-making, rule-adjudication, and rule-enforcement are separate; rule-enforcement is fair and efficient;

public information infrastructure (such as accounting, auditing, and financial rating) is highly reliable and accurate.

the public information must be of high quality and trustworthy is vital for a rule-based economy to function smoothly and efficiently.

Firms and people must be able to rely on publicly available information such as financial analyses and auditing reports in order to conduct business and make decisions, saving the cost of privately collecting information and investigating its quality for every potential business transaction.

the information must be explicit and verifiable by a third party; otherwise, it cannot be admitted in court if disputes arise.

The court can only enforce the agreements between the parties that are publicly (third-party) verifiable; any implicit agreements privately made between them that cannot be verified by the court are not admissible to the court and thus cannot be enforced.

business agreements in a rule-based society are usually formal and clearly written in explicit language.

rule-based societies tend to be mature democracies, because for the laws and rules to be fair, a society must ensure fair participation of all interest groups in law making, which requires a representative democracy. For legal interpretation to be impartial, judges must be independent of political influence, which implies checks and balances between different branches of the government, and for the enforcement to be impartial and efficient, the executive branch has to be answerable to the constituents and be checked by the legislative and judiciary branches.

Relationship-based systems

have a governance environment based on private enforcement that can effectively and efficiently regulate markets and resolve disputes.

public rules (laws, government policies, and government regulations) are less fair because they are usually biased in favor of certain privileged groups (due to the lack of checks and balances);

the executive branch of the government usually overshadows the legislative and judiciary branches and is likely to be controlled by a dictatorial ruling elite;

courts and judges are controlled by the ruler(s);

government operations are secretive and public information and press are controlled and censored by the government;

industries and markets tend to be controlled by a small number of insiders (e.g., people who have connections with the ruler) and are closed to outsiders;

officials and business insiders are usually locked in a corruption-bribery relationship;

the informal network among the insiders in an industry is so closely knit and powerful that if one of the insiders is said to have broken the (unwritten) norms of the trade, the word of mouth by other insiders will effectively put him out of business.

public information in a relation-based society is usually untrustworthy, because the government controls public information and the media in order to support its rule and agenda.

So people and firms rely on private information to govern their transactions.

When the scale of the economy is small and business people predominately deal with people they know, they rely on private information between the transacting parties and they do not want to make their information available to a third party because the private business relationship is their most important asset.

Because the agreements made in a relationship system cannot be verified by third parties (such as a court), business people must rely on private means to protect their transactions.

firms in a relation-based society rely on three private monitoring mechanisms to govern their rights in transactions: These mechanisms are ex ante monitoring capability, interim (also called ex nunc) monitoring capability, and ex post monitoring capability.

o Ex ante - a firm must privately investigate its prospective transaction partner in terms of his or her track record and reputation.

o Interim – constant monitoring of events and transactions related to a firm

o Ex post is the most important and refers to the ability to remedy or deter cheating or other opportunistic behaviors by the other party, in the absence of resorting to public regulators such as the courts (which tend to be corrupt, unfair, and inefficient in relation-based societies). In a relation-based society it is not uncommon for a promisee to resort to kidnapping in order to force a promisor to fulfill a promissory obligation (which may be an implicit, oral promise). For relation-based governance to work efficiently, private ex post monitoring must be effective

and efficient. Under certain conditions, relation-based governance can be quite

effective and efficient due to its differing cost structure. in a relation-based society, business can thrive with minimal social

order. As long as crimes such as robberies are not out of control, business can be conducted and governed by well-functioning social-industrial networks maintained by private players (individuals or firms).

In Thailand, where the public protection of business is not very effective or efficient and the formal channel of financing (through banks) is expensive because of stringent rules, the Chinese Thai business community has resorted to informal financing among themselves.

Such a system may have low transaction costs though it imposes significant scale limitations on markets

Chinese heavily rely on guanxi (Chinese for connection and relation) in business activities not only because of their cultural heritage but also and more importantly, because the public rules are not effective and efficient in providing fair protection for their property rights and interests.

Relying on the relationship-based way to conduct business activities is not merely a cultural phenomenon, it is fundamentally determined by the stage of political and economic development in a society.