MN2155 Asian Pacific Business

Individual Assignment One

College Number: 100611707

College Number 100611707

Year: 2

Course Code MN2155 Individual Assignment 1

Course Tutor: Dr. Huaichuan Rui

Dr. Li Dong

Assignment No.: 1

Degree Title: Asian Pacific Business 09/10

Question No. & Title: What are the main characteristics of China’s
Business system? What challenges does China
face as China’s business system evolves?

ABSTRACT
The main characteristics of China’s business system and challenges faced China as
Chinese business system evolves.
 MN2155 Asian Pacific Business Individual Assignment One

College No: 100611707

Table of Contents

Introduction.....................................................................................................................3
Part A: Main characteristics of China’s Business system...................................................3
A. 1. Overview of China’s Economic Growth.....................................................................3
A. 2. Historical Influence on the Chinese Business System................................................4
A. 3. Role of State.............................................................................................................5
A. 4. China’s political environment....................................................................................5
A. 5. Market Reform..........................................................................................................6
A. 6. Chinese Culture.........................................................................................................6
A. 7. Institutional framework.............................................................................................8
A. 8. China’s Capitalist Business system............................................................................9
Part B: Challenges faced by China as China’s business system evolves.............................9
B. 1. China’s acquisitions face challenge: Lack of experience............................................9
B. 2. Management: Lack of innovation and HRM..............................................................9
B. 3. Corruption...............................................................................................................10
B. 4. Competing in overseas markets..............................................................................10
B. 5. Urbanisation and Inflations.....................................................................................10
B. 6. Censorship in China.................................................................................................11
B. 7. Change in ‘development mode’...............................................................................11
B. 8. Unsustainable growth? ‘Overheat’ Economy?........................................................12
Conclusion......................................................................................................................12
Bibliography..........................................................................................................13

Question: What are the main characteristics of China’s Business system? What challenges
does China face as China’s business system evolves?

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Introduction

The rapid growing economy, one of the largest populations in the world and ever increasing
economic demand made China a most attractive place for foreign investment. Almost every
company across all industries now have their operations and footprints in China. All of them
have experienced China’s existing business systems, called ‘doing business in a Chinese
way’, are facing continuous challenges in their operations. The systems when looked at
closely are deemed to be western capitalist systems laced with ‘Chinese characteristics’. This
paper discusses an overview of the existing Chinese business system and the main
challenges in its evolution. Studies suggest that China will probably retain its own unique form
of capitalism instead of adopting any currently existing model. Though the future shape of this
model is difficult to predict, the available theories and evidences suggest that the present
South Korean business system is probably the closest equivalent among the existing major
models of capitalism to what the Chinese business system may look like in the next ten or
twenty years. Cultures play a major factor in China’s business system characteristics and
continue to place an important influence on the success of many Chinese business
organisations.

Part A: Main characteristics of China’s Business system

A. 1. Overview of China’s Economic Growth
China has been shifting from the closed economic model to an open economy since 1979.
This followed Deng Xiao Ping’s economic reforms in the area of agriculture, industry, science
and technology followed by the “Open Door Policy”. China’s open door policy started from the
end of the Cultural Revolution (1966-1976) when the central committee of the communist
party met in the famous Third Plenum in December 1978 and the Right-Wing elements led by
Deng Xiaoping were able to establish effective control. Deng Xiaoping aimed to open the
Chinese market; make China a modern industrial nation; and improve the relationships
between China and the outside world.

Essentially because of its rapid economic growth since opening to foreign investment in 1978,
China is on a path to regain its traditional regional domination, and perhaps superpower
status. The impact that China is likely to make in global and regional terms can be understood
in terms of the following forecasts and facts (as per Guthrie, 2006):

 China has had the fastest growing economy in the world for past twenty-five years.
 China is now the world 3rd largest economy with its 2010 economic growth forecast to
9.5% from 9% according to the World Bank
 Chinese demand for grain will outstrip world capacity to supply by 2030, because of
the expected loss of land to industrialization and population growth.
 China is already the world's second largest consumer of oil.
 China will ultimately be the world's largest Internet and telecommunications market.
 Tension between US and China influenced by the political matters has been watched
closely

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A. 2. Historical Influence on the Chinese Business System

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A. 3. Role of State
In today’s China, the state has a significant if declining direct role in the economy as it
attempts to divest itself of State Owned Enterprises in all but strategically important sectors,
but maintains a significant role in the regulation and control of private business via various
arms of the state bureaucracy (Beeson, 2007). The Chinese government have always been in
control over the social, political and economic areas and set regulations of the media, press
and religion. The Government sets prices and tariffs and restrictions in some of major
industries, which many argue are still greatly influenced by central planning business models.
Some experts criticise this model as it lacks transparency and free market competition. Many
western companies spend a great deal of time and effort to lobby Chinese government in an
attempt to influence their pricing policies. However, many are facing major challenges in this
area.

Phases of Chinese industrial governance up to the reform:

1953-1956 Central planning was established along

Stalinist Soviet lines. China’s first ‘Fiver Year
Plan’ was launched in 1953
1957-1961 Decentralization and the Great Leap Forward
1962-1965 The period of readjustment: decline in
agricultural
1966-1976 The Cultural Revolution

A. 4. China’s political environment

Since 1949, the Communist Party of China has built the People’s Republic of China, and the
political and government structures have played a more active role in China’s economic
growth as well as in today’s global economic environment.

Whyte (1974) states that whereas primarily internal processes drive the western small groups,
internal and external political processes drive Chinese groups. The political environment of
the Chinese small group generates its authority structure, suggesting a pivotal position for the
leader, who informs the other members as to what is socially and politically appropriate.
(Confucian 1983, 12:19, 13:4; Hsiao 1979) Group members are expected to show deference
to the leader as to maintain the Confucian principles of harmony and hierarchy (Bong and
Wong 1983; Metzger 1977).

The control, the power to compel is a key value in the Chinese political system. The three
main forces in China are the Communist Party, the Government and the Army. The main
political conflict at present is the view of the developments in the People’s Republic as a two-
tiered contest between ‘socialist’ and ‘developmental’ values

After 1984, the “Decision of the Chinese Communist Party Central Committee on reform of
the economic system” was adopted, The government’s role has been redefined to provide

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guidance rather than mandatory planning, delegate more autonomy and decision making
power to the enterprise and its managers, gradually allow price reform based upon market
forces, establish a linkage between compensation and productivity, and further encourage
international economic cooperation, including foreign direct investment.

A. 5. Market Reform
Market reform is genuinely crucial to the transition of China’s industrial technology R&D
institutions, which were organized and developed by a substantially different regime. This
requires institutional restructuring, because the old institutions were developed to fit within the
old economic regime.

Changes in the economic environment since the end of the 1970s:

The present reform in China was initiated at the end of the 1970s. In 1978, the top leaders of
China decided to revise the objectives of economic development to give more attention to:

 The efficiency of economic growth at same time accelerating the speed of economic
development
 Improvement in the people’s living standards
 Two accompanying changes: first, the overwhelming priority of heavy industrial
development was replaced by a more balanced pattern, with consumer goods and
service sectors getting a greater share of this resource. This stimulated the
decentralization and diversity of the economy, and accelerated the development of
local and non-state owned industry. Second, it’s the open-door policy. (Shulin Gu.
1999: 8)

A. 6. Chinese Culture
Shenkar and Ronen (1987a) state the culture of traditional China encompasses diverse and
competing philosophies, including Taoism, Buddhism, Legalism and a host of local ‘little
traditions’. Nevertheless, Confucianism is most clearly defined as the foundation of China’s
great cultural traditions, and Confucian values still provide the basis for the norms of Chinese
interpersonal behaviour. (John Child. 1994: 266)

The Confucian tradition has a concern for the correct and well-mannered conduct of one’s
duties, based on a sound respect for the social conventions of a patrimonial system. It
stresses order, hierarchy, quality of relationships and obligation to social collectivities,
especially the family (Smith 1974; Waley 1938). Age is respected, particularly in the case of
male heads of family, while education is also valued as the means to achieving a better social
status, which reflects well on the family.

Since the establishment of the People’s Republic of China (PRC) 1949, many of the social
institutions, such as its educational system and its system of industrial governance, have
been given a strong political character both to reflect the new political ideology and with the
intention of using institutions as instruments for bringing their member’s value into line with
the accepted ideology. This could identify as part of culture.

Lockett (1988) identifies four culture values which he argues have particular relevance for
management in China:

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Culture aspects
- Respect for age and hierarchy which is the -
Confucian concept of li (rite, propriety)
- Orientation towards groups’ collective
contribution instead of individual
accountability
- The preservation of “face”
- The importance of relationships “guan xi”
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Implication of Chinese culture
- Respect for age can inhibit an acceptance
of the younger, qualified managers whom the
exponents of economic reform wish to see
appointed to lead the re-invigoration and
modernization of Chinese industry. Despite a
major investment in training, there remains a
shortage of professional and technical skills
among managers, many of who have stayed
in their positions for a long time.
- Chinese firms face major problem of
collaboration and communication. The
problem is further exacerbated by group
orientation, which is the workplace equivalent
of the family of vertical loyalties. It tends to
unite with the preference for egalitarianism
and present difficulties for the development of
individual responsibility. Unwillingness
among Chinese managers to assume
personal responsibility/accountabilities are
frequently expressed concerns to foreign
partners in joint ventures.
- Individual initiative and the evaluation of
personal performance are been discouraged
by the significance attached to face which
conflict usually ends with a loss of face for
one party and sometimes both.
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(Source: John Child. 1994)

A. 7. Institutional framework
Table 2: China’s Institutional Frameworks

Capital From 1978 China was closed or in a state of

chaos and foreign domination.

Post 1978 FDI dominated investment.

Property rights lack legal definition.

Social Capital In the deficiency of legal protections, Chinese

family and ‘guanxi’ relationships underpinned
domestic business relationships.

Human Capital Human resources and management systems

greatly underdeveloped in 1978, and
shortages and systemic issues still caused
concern, despite efforts at modernization.

(Source: Milston, 1978; Child and Pleister.2003; Beeson. 2007)

A. 8. China’s Capitalist Business system

Table 3: China’s Business Systems

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Ownership Current system mixture of SOEs, POEs, and
FIEs, legacy of the communist era and the
economic opening. Export industries are
dominated by foreign capital, and SMEs by
CFBs.

Unless specifically mandated, ownership

rights lack consistent legal protection.

Networks & Alliances China is a networked society. CFBs and

‘guanxi’ connected companies dominate the
domestic sector of the economy. The export
sector is dominated by foreign companies,
which operate in a web of formal and informal
connections.

Management Under “One-man management system”,

directors were responsible primarily to
subordinate state bureaucracies and were
able to ignore the views of party secretaries
with relative impunity. (Chamberlain 1987)

Decision process in Chinese enterprises

primarily revolved around interlocking
relationship between directors and party
committee.

Chinese trade unions been subordinated to

party authority.

(Source: Chamberlain 1987; John Child 1994)

Part B: Challenges faced by China as China’s business system evolves

B. 1. China’s acquisitions face challenge: Lack of experience
China’s robust growth has fuelled a number of merges and acquisitions, which in themselves
have led to new challenges and opportunities. China’s legal environment has become more
transparent and the regulatory framework is relatively robust and thus able to provide a better
environment for foreign investment.

Acquisition market and the stable regulatory environments in US, Europe and international
arenas have provided opportunities for Chinese companies’ to purse overseas investment.
However, China’s lack of experience in international deals in terms of transparent legal and
commercial awareness will be some of the major challenges. Establishing international
business operations within the existing Chinese business system requires understanding of
international regulatory and legal systems where they intend to invest.

B. 2. Management: Lack of innovation and HRM

China’s growing importance means that functional areas of management, such as marketing,
innovation, finances, HRM or strategy, need to be supplemented by knowledge gained from
different countries, business systems and local production system.

Before 1980s Life-long employment

High job security, employment rate and
welfare, low wage and productivity.

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After 1980s to 1990s Changes in Chinese HRM policies

Challenges of human resource management in Chinese business firms:

1. Regional government interface with companies existing management systems, particarly

in recruitment and award systems
2. Local interfaces, such as culture and relationships (guanxi) influence the firms where they
are operating
 People holding guanxi get recruited as a priority especially at senior management
level despite their lack of experience and education
 Lack of opportunities exists for young and well trained managers in order to follow the
‘culture’ that elder people get first pick
 Little experience in the competitive market environment
 Staff turnover is high as skilled individuals are in great demand and as such
employers are not able to retain their services
 Local management methods often overshadow those that the companies are try to
introduce

B. 3. Corruption
In the Chinese business world, the Chinese place great importance on personal relationships;
trust between “old friends”, much flexibility may be possible on obtaining contracts and the
conditions of contracts may change. The relationship with people who are in reality above the
law in China might affect the way of doing business. This leads to corruption i.e. bribery,
abuse personal relationship with communist party members (use ‘back-door’, 走后门).

B. 4. Competing in overseas markets

Domestic factories have built most buses in China, especially in Suzhou. Higer as one of the
top 10 bus companies in the world sells into Middle East, Russia, South Asia as well as
domestic markets. Although companies like Higer have suffered through the recession in
2008 but China’s economic recovery is earlier and stronger than any other countries. Some
analyst like Dr J Therese Tong fear the country’s growth model is not robust enough. The
export-driven economy is not sustainable and will only work in a short-term basis.

Many managers believe that Chinese staff need learn to pay more attention to detail, quality
of products like the Japanese who are able to compete in the international level of
manufacturing.

Chinese companies are facing challenges when try to enter international markets as it’s
difficult to establish sales channels. Senior managers in international markets suggest that
Chinese companies need to adapt a more international culture when doing business
internationally by identifying the right market place, networking and identifying the right
channels as they face different governmental systems and regulatory schemes.

B. 5. Urbanisation and Inflations

China is described as world’s “biggest urbanisation experiment” and concerns over the
inflation of property prices and prediction of Chinese “bubble economic” has been addressed
during recent congress meetings.

Chinese urban property prices increased 7.8 per cent in December from a year earlier, versus
a rise of 5.7 per cent in November, the National Development and Reform Commission stated
early this year. Beijing renewed its pledge to curb excessively fast real estate price rises in
some cities, on concerns that a asset bubble was forming.

Property price inflation dramatically in most developed cities like Shanghai and Beijing.
Chinese government planning put measurements in place to try to stop the ‘bubble busting’
and ‘doing it in a way so as not to bring about social disorder’. Many consumers suffer from
this problem as the proportion of average income is lower than consumption.

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B. 6. Censorship in China
The Internet has always been subject to restriction in China. Government have set so called
‘Great Fire-wall’ including three layers of restrictions to monitor the Internet activities in China.
Firstly, the technical layer- government invest funds to build routers and other infrastructure to
filter, monitor and block websites, look how people communicate with each other. Second
layer is in a social context by developing and training people to monitor and track other
people’s activities. Third layer is psychological, after affect of first 2 layers taken place among
internet users in China, people slowly developed self-censor when browsing on sites. The
‘Great Fire-wall’ could restrict Internet users searching any topic relate to political sensitive
terms such as Tiananmen Square incident etc.

Major International enterprises like Microsoft, Yahoo and Google have had to agree on
censorship before entering and conducting business in China. Those multinational enterprises
and a myriad of companies have always said this is the price they have to pay for doing
business in China with the prospect of accessing tens of millions of potential customers. In
spite of this, the social and political situation in China has become potentially unstable.
Political tensions between US and China have become more intensive as the meeting
between Chinese government and Google taken place this month on issues of censorship
serves to illustrate.

Google has threatened to pull out of doing business in China after a recent cyber attack by
Chinese hackers on 13th Jan 2010. The search giant says it may well pull out of China after
discovering what it called a "highly sophisticated and targeted attack" on its corporate
infrastructure. And while that attack originated from China, Google did not actually accuse the
government of orchestrating it. On 8th Feb 2010, China closed down the country’s biggest
training website for hackers after Google threatened to pull out of China unless government
relented on censorship. At the moment, Google is planning to convince Chinese government
that it should let it operate an unfiltered search engine during their meetings. US government
lead by Barack Obama has put pressure on Chinese government on this censorship matter.

In a different view, some say China is blocking these sites in order to cement domestic
businesses in the market. China has the ability and has used it in the past to block specific
sites based on content, and it has blocked specific YouTube and Facebook sites since they
went online. Nonetheless, only recently have they blocked such sites in a wholesale manner.
The reason being they were gaining market share against local competitors like Youku, Baidu
as government is more prompt to protect the domestic businesses.

B. 7. Change in ‘development mode’

Recent news reported China has made decision to adjust its economic structure and
transform its development mode in ‘a very timely manner’. As “Chinese leaders attach great
importance to the transformation of economic development mode and structure, and some
concrete guidelines and policies have already been put forward, which are is essence very
timely” says Hong Pingfan, chief of the global economic monitoring centre of UN department
of DESA.

China’s development mode can be characterized by the growth of GDP which driven by
investment and exports. It helped sustain an average GDP growth of 10% in past thirty years
of reform and opening up and lifted hundreds of millions people out of poverty. Such mode
was in line with the preliminary development is China’s distinctive advantage over other
economics i.e. cheaper labour cost.

Cheaper labour force has supported the rapid development of China’s export-oriented
processing and manufacturing industry. The bottleneck caused by poor infrastructure and
limited industrial capacity could effectively be solved by increasing investment each year.

China needs such intensive development mode to push its economy to next level. However,
challenges lie ahead as issues of climate change has became a rising problems for the
country. The only solution is to change its energy resource structure, a mode from high
emission and high growth to low emissions and high growth development.

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B. 8. Unsustainable growth? ‘Overheat’ Economy?
China’s economy surged 10.9% in 2009’s fourth quarter. China’s economy grew at 8.7% in
2009, some worry this growth is not sustainable like a bubble waiting to burst. Despite the
global recession, China’s economy has grown faster than predicted. The danger now is its
economy is overheating. Many observers worry China’s growth rate is unsustainable, as it
has largely been underpinned by government spending and its economy. The World Bank
warned Beijing that it needed to cool inflation and cut risk of a bubble in property sector. It
also argued that China should let its currency appreciate to contain prices and to stop the
economy overheating. The Bank believes “strengthening the exchange rate can help reduce
inflationary presses and rebalance the economy”. Wen Jiabao, Chinese Premier accepted
inflation would be a major challenge but rejected criticism of China keeping its currency
undervalued in order to boost exports. He said a stable ‘Yuan’ was ‘an important contribution’
to global recovery after the recent downturn.

Conclusion

The Chinese business system has been established based on it’s control, centrally mandatory
planning structures. The state and its political environment have control over major industries’
pricing and tariffs. It’s long historic culture hugely influences the way of doing business in
China. Relationships and networking rather than well-established legal and management
system is also seen as a main characteristic in it’s business system. Despite it’s economic
reform and ‘Open door’ policy in later 70’s, China’s economic growth is seen as one of the
fastest in the world, China’s lack of international commercial experience and different route to
market approaches continues to challenge Chinese companies entry into the international
market. Foreign companies operating in China face great challenges over the State
interference on their pricing and operations in China. China’s dogged persistence that all
agreed international norms are subject to alteration to include for ‘Chinese characteristics’
renders the products or services being provided to international markets as non-compliant,
and as such open to criticism and ultimate rejection on contractual quality accounts. Culture
barriers, corruption and slow adoption of agreed international standards, legal frameworks
and international law inevitably are all holding back China’s progress on their future economic
growth.

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