Cross-cultural Management

Business in China

Group members:
Ramanan Krish
Nguyen Van Hoang

Nguyen Thi Thanh Nhan

Nikolett Madarasz
Barnabas Pasztor
Bence Irmes
Hoang Ngoc Thien

2020
PART I:
It has been already submitted by our team member, Hoang Ngoc Thien.

PART II: Culture

Chinese culture is one of the world’s oldest existing culture, originating 1000 years ago. Due
to the large geographical region, Chinese culture and traditions can be highly diverse
through regions, provinces and cities. There were many religion and teachings which
influenced Chinese culture in the past, from these teaching the biggest three are Chinese
Buddhism, Taoism, Confucianism.

Norms and values – based on Confucianism

Confucianism had a big impact on Chinese culture, it is a teaching developed by Master Kong
in 551-479 BC. Based on Confucianism, all individual should be able to practice 5 things
under all circumstances, these 5 practices called The Five Virtues:
− Ren (Humanity): The virtue of benevolence, charity, and humanity;
− Yi: (Righteousness): Honesty and uprightness;
− Li: (Civility or Proper rites): Doing one’s best, conscientiousness, loyalty &
consideration for others
− Zhi: (Wisdom): Knowledge, awareness
− Xin (Integrity and Faithfulness)

Family
In the Chinese culture family is one of the most important cultural values. Confucianism
teaching says family contains the most important relationships for individuals and forms the
foundations of all social organization. Interest of the family is more important than interest
of the individual and all the individuals have to respect the hierarchical structure of the
family. Also, individual behavior highly effects the reputation of the family, so individuals
need to behave respectfully and properly.
Hierarchical structure of life
Based on Confucianism every situation can be described by the five-way relations. These
relations should be respected and used in the society. Due to this teaching China has a strict
hierarchical structure which cause high power distance between individuals. This means
individuals have to obey to the person with higher social status. This also influence business
culture.

THE FIVE RELATIONSHIPS

1. Ruler to citizen,
2. Father to son,
3. Husband to wife,
4. Elder brother to younger brother,
5. Friend to Friend

The emphasis of hard work and achievements

Confucianism teaching says, individuals must have a goal, purpose in their life and they need
to work hard to achieve that. As individual purposes are not that important than the group
purposes, individuals should have a goal which benefits family or society. In this case that
purpose is more valued.

Basic assumptions and beliefs

Based on Taoism and Chinese Buddhism, spirituality takes a big part from the culture of
China. Connection between life and the after-life is important aspect of the culture such as
reincarnation and other rebirth concepts.

Hofstede’s 6 dimensions in China

100 87
80
80
66
60
40 30
20 24
20
0

Based on Hofstede’s analysis China has a big power distance and a low value of indulgence.
These values are highly impacted by Confucianism the five relations. Power distance is high
because the strict social hierarchy system, indulgence is low because youngsters do not have
the freedom to make their own decision because respect of the family dictates, they need to
obey to parents will.

China’s society is a collective, masculine society. Individual goals are not as important as
group, family and social goals. But also, individuals are highly competitive and achievement
oriented. Chinese people based on the Hofstede diagram usually wants to avoid risk and
rather focus on the long term, stabile plans.
Business Culture
China has a great impact on the market, their businesses and market constantly growing and
highly influence the whole world. First of all, to do a business in a different country, in our
case in China, after we understood the culture and history, we have to go deeper, we have
to see the business culture.
There are some main element of social culture that also appear in business culture.
As we mentioned above Chinese business culture is largely influenced by Confucianism.
Thus, the Confucian concept of Guanxi means that a relationship network is crucial and
based on the values of solidarity, loyalty and modesty.
As well as in social life the hierarchy has a main role in business culture in China, it is
vertical and highly respected. For example, the first person of your team to enter in the
room must be the highest-ranked and will seat at the place of honour directly in front of
the host. This person will negotiate.
Chinese people really take care about other’s opinion, so for them it is very important to
protect their individual reputation as it can influence their future and dignity.
Long-term orientation
According to Hoftstede’s 6 dimensions in Chinese culture people more risk taker, but in
some cases they show risk averse attitude, which can come from their long-term oriented
attitude. For example, they are really deliberate in the decision-making process, they make
decisions through a long and slow process to be sure that their decision is correct and it is
the best. This is the same in creating relations as well.
In China, people often distrust with strangers, thus to create a relationship can be a long
process. They try to make long-term relationships, so establishing it can last from several
days to several months through meetings, dinners etc., until they can really trust in a person.
Business meals are an important part of business relations and people must sit down and eat
in order of importance.
Business “rules”
To create good relations with Chinese business partners and to adopt to business culture
there are some main norms or “rules” that we should follow.
● Punctuality- arrive on time for meetings.
● Respectful behavior- for example, in greetings (handshake initiated by Chinese
partner, look down etc.), through the meeting.
● Give gifts-
o it symbolizes the beginning of a relationship;
o given or received by both hands;
o don’t accept for the first time;
o should not be very expensive.
● Reliability- to reach that Chinese partners trust us, we have to be reliable.
● Business cards-
o Chinese and English version as well;
o Given and received by both hands;
o Chinese part is given to the partner.
● Bargaining- it is an important part of the culture, without bargaining it can be a
weakness.

Part III: Setting up a business in China

Identifying The Market

With the territory of China larger than America and nearly 1.4 billion people, China has an
enormous market size and is distributed by geography. Therefore, search for business
partners, agents, or distributors related to geographic segments. Despite the great
opportunities that the Chinese market can bring to foreign goods and services, from the
large multinational company to the first-time market entrant, they found the disadvantage
of lack of provincial knowledge. Each province has its geographical, demographic, income,
natural resources, and labor, lifestyle disparities. This leads to the difference in the
advantages and disadvantages of industries in different geographical areas. Moreover,
China's economy tends to develop concentrated in a certain area or one end-user. For
example, an agent representing a product or service in Beijing may find the difficulties to
establish in Hangzhou. 

Province Industry

Shanghai Petrochemicals, chemicals, pharmaceutical, automobile, electronic

apparatus, financial

Beijing IT, communications, electronics

 Guangzho Automobiles, electronic appliances, textiles, apparel, toys,
u petrochemicals, chemicals

Jiangsu Chemicals, textiles, communications, petrochemicals, steel, foods, auto

parts, biomedicine

Shenzhen IT, semiconductors, biomedicine, communications, electronics

information

Zhejiang Light industry, plastics, textiles, apparel, toys, metallurgy, household

electrical, furniture, kitchenware

Shandong Agricultural, oil & foodstuffs, pharmaceutical

With a fragmented geography consumer market like China, focusing on a niche or specific
entrant strategy is the best initial approach for forging companies. It supports the companies
to know where its target customers are, which cities to focus on, and even where to base its
operations. Even niche markets (older customers in second and third-tier cities) can be
profitable. 

Choosing a location 
In 2017, 339 Chinese cities were decentralized into six levels based on their commercial
appeal by a financial magazine, Yicai Global: tier 1 ( Beijing, Shanghai, Guangzhou,
Shenzhen), new tier 1 (Chengdu, Hangzhou, Wuhan,..), tier 2 ( Xiamen, Fuzhou, Wuxi,
Hefei,...), tier 3 ( Weifang, Baoding, Zhenjiang,...). Even Though Beijing, Shanghai,
Guangzhou, Shenzhen have certain market saturation, many entrepreneurs have knowledge
and experience to cooperate with foreign companies. Therefore Tier 1, densely populated
areas and income levels higher than the national average, is normally the best start for
foreign companies. but not so that tier 1 becomes the only option of businesses. In recent
years, tier 2 has become an attractive forest town because of low operating and
establishment costs and a significant increase in people's spending. In the long term, the
market potential of tier 2 and 3 will bring long-term and sustainable development to foreign
companies.

Government policy and regulation

Government officials play an oversized role in the economy.  Although, socially and
economic picture is much more disparate and fragmented, China is unified in the geopolitical
sense. Firms should seek to understand how their product or service is regulated and by
which agency. Despite China’s entry to the WTO in 2001 helped to liberalize China’s trade
environment to some extent, There are still a lot of industries that remain off-limits to
foreign companies. For example, In the field of petrochemicals, energy, the participation of
foreign companies is strictly limited. 
The wise choice of market access is the most important in establishing a presence in China.
Foreign Investment Vehicle including Representative Office (RO), Wholly Foreign-Owned
Enterprise (WFOE), Joint Venture/Licensing (JV)- represented in two forms ( EJV and CJV),
which have positive aspects, drawbacks, and risks for each vehicle. Working with qualified,
experienced legal advisors may reduce the risk that it can bring for a first- time market
entrant. 

Advantages Disadvantages

RO ● Quick to set up ● Unable to trade

● Low cost (low overheads) ● Staff employed via third party
● No registered capital ● Limits on number of staff
requirement
● Good for marketing, partner
auditing and admin

WFOE ● High level of managerial control ● Initial set-up costs high

● Can employ own people
without restrictions
● Greater flexibility
● Can convert RMB profits into
US dollars
● Greater level of IPR protection
● Long incubation period
● No access to JV partner resources
● Higher start-up and operating
costs (registered capital)
● Some industry limitations
● Minimum number of staff
requirement
● Tax and repatriation of profits
challenging

JV ● Mandatory for some industries ● Less managerial control

● Opportunity to utilize existing ● Finding a trustworthy partner is
sales networks and customer critical
base ● Challenging to agree terms of the
● Access to partner’s existing partnership
 resources ● May be a long negotiation period
● Production facility ● Potential risk to IPR
● Lower cost base (local ● Success may depend on having
management) staff on-the-ground to oversee
operations
● Partner likely to negotiate terms
in their favor

Along with the development of the Chinese economy, the government has issued separate
regulations and circulars for specific industries that require the compliance of enterprises.
These regulations may affect the outcome, finance, and timeline of the market participants. 
Therefore, understanding and complying with Chinese legal mechanisms help businesses
have an effective strategy and way to enter the market.

Furthermore, China is a "first-to-file" registration process, which means if the IP assets are
not registered in China, Chinese competitors can, and often will, register those rights in
China first. This may lead to the possibility of needing to buy back one’s trademark or facing
legal action. Bad trademark registration, stealing trade secrets, online piracy, and
counterfeiting, requiring the transfer of unfavorable technology are issues that are easily
encountered by foreign businesses when they enter the market. Although China joined the
World Trade Organization in 200, it strengthened its legal policy and amended its intellectual
property laws. Preventative registration is essential to any IPR strategy and strongly
recommended before entering the China market.
policy and amended its intellectual property laws. Before entering the China market,
Preventive registration is strongly recommended in any IPR strategy

Hiring staff
At the end of the day, the human element is always the key to the success of a company. To
find a staff not only in terms of quality but also in terms of quantity, there are many factors
that affect this issue. First, with the WFOE enterprise form, managers can use their own
employers without restriction, which JV does not. The second question is should Chinese
people be used for important positions in the company? Foreign employers can manage
operations effectively but increase the costs incurred such as relocation costs, insurance,
visas, and more. Local management, meanwhile, (guanxi) brings profound local and business
knowledge in China. In addition, Chinese managers not only have lower staff maintenance
costs but also have significant connections with contractors, investors and agents. 
The population of China is nearly 1.4 billion, which has become one of the countries having
abundant human resources, which solve the problem of labor shortage in manufactories.
However, the required salary for employees in China increased to 12%  a year. This leads to
high costs for hiring and training of employees (even local ones)

Due diligence 
Although the Chinese market has great potential for foreign companies including violating
contractual payment obligations, irregularities in accounting practices, wrong financial
management, undisclosed debts and fights. contend for control in the joint venture. These
costly local disputes can be avoided by due diligence. The main objective of due diligence is
to verify the credibility and financial position of partners, domestic investors and employees.
Fortunately, China's development environment has created due diligence advantages. Based
on Article 253 of the Criminal Law PRC stipulates the criminal responsibility for the accuracy
of information about employees provided by government agencies and organizations in the
fields of finance, telecommunications, transportation. transportation, education or health.

Marketing research
Market research should precede every final decision to know: how, when to enter the
market, or which market entry model will be suitable (international or expansion). effective
market research which helps find the largest markets for your product, the fastest-growing
markets, market trends and prospects, conditions, business practices, and opportunities for
your products on the market. Allow to narrow the vision and effort effectively into a certain
field or scope. From there, foreign companies can set priorities for a specific target market
and plan for future markets on a longer-term. More and more companies are now assisting
foreign businesses in researching the domestic market. That shows more and more the
openness of the central government in promoting foreign investment

Especially after COVID 19, China's economy has undergone a huge change. For instance,
before COVID 19, the “hawker” economy was considered a Shameful image, reminiscent of
the previous poverty period and a step backward for the younger generation. However,
Chinese Premier Li Keqiang recently encouraged unemployed people to turn to street
vendors to bring the economy back on track before the pandemic. According to Analyst Cary
Huang of SCMP newspaper (Hong Kong) said that China will pay a high price after the COVID-
19 epidemic and lose part of its influence globally or Controversy over China's 'hawker
economy'. Therewith, Because of the tense dispute between the US and China in recent
years, China has made moves that are difficult for US businesses. As of June 1, 2019, China
has raised retaliatory duties from 5% to 25% of a total of 110 billion goods for US
imports.
Resources (for this part):
https://en.wikipedia.org/wiki/Chinese_city_tier_system
https://www.trade.gov/knowledge-product/china-market-entry-strategy
https://www.trade.gov/knowledge-product/china-market-challenges
https://www.trade.gov/knowledge-product/china-establishing-office
http://www.opportunityguide.cn/blog/pros-and-cons-of-joint-ventures-in-china-reasons-for-
and-against
https://www.ic.gc.ca/eic/site/cipointernet-internetopic.nsf/eng/wr04329.html
https://www.ecovis.com/focus-china/six-considerations-business-locations-china/ 
https://www.b2binternational.com/publications/china-market-entry/

Part IV: Future

What springs to mind when you see the label “Made in China”?

Most of us would think inferior quality and low production costs. But that will soon be over.

China is looking to boost its image abroad. Beijing does not want to be known for cheap
products and mass production anymore.

They want China to stand for quality, innovation, and new technology.

We will tell you how they are pulling this off… And of course, how to invest in China 2.0.

Moving up the value chain

All over the world, countries that are undergoing industrialization have the tendency to
move from low-cost into high-quality manufacturing. It happened in both 19 th century
Europe and early 20th century America.

What kicks off a country’s economic growth are usually small-scale industries and low-tech
factories. As efficiency goes up, so will labor and production costs.

Nowadays, China is going through the same transition of low-tech to high-tech

manufacturing.

The time of lower quality products and cheap production is coming to an end for China. The
country’s new policies are aimed at enhancing innovation and production efficiency. The
image below shows which ten key sectors are targeted to drive the economy.
The image above shows there are specific deadlines for reaching these goals too.

China would like to be competitive with developed manufacturing economies in 2035. And
Chinese leaders want to give the country a nice 100 th birthday present by becoming the
world’s top manufacturer in the year 2049.

The ultimate target is to change China from a mass-producer to a quality-master.

Though these are their well-defined goals, they do have many hidden goals which are not
being discussed publicly like re-creating the ancient trade routes which can be very effective
for their trade. And this is being done through a huge funding for different countries running
along these routes.

But goals are always the future and while determining the goals of a country it is very
uncertain, just like the corona virus situation the world is struggling right now, which was not
even in someone's wildest dreams. This has topled the world economy and trust towards
China, which is very significant for mass productive countries like China because they need
to export their products.

Conclusion
This is our analysis of China based on their culture, business, politics, and policy. Though we
try to understand more about China, there are still many hidden information about then
which is not easy to understand or receive.

Having a very strong economy and workforce they are in their race to be the best of the
world and we never knew the future.