China’s Terms for Global Companiesadmin / January 17, 2019
After the market reforms in 1978, China has become one of the world’s fastest growing economies, representing a very attractive market for the global companies and foreign investors.
For historical reasons, the Chinese leaders are unwilling to stress the influence of foreign capital on the economy of the country and develop restrictive policies for establishing the manufacturing operations in China, motivating the foreign companies to locate their production in the country and transfer their technologies.
Weighing all pros and cons, the Western companies should accept China’s terms instead of losing the opportunities to receive the financial profits.
Establishment of the manufacturing operations in China has its advantages and disadvantages. The main reasons for the attractiveness and popularity of the Chinese market for the foreign companies include the rapid economic growth of the country, opening up new opportunities for the development, the relative policy stability because the government does not change every four years, and the low wage rates for the Chinese employees, which allow foreign companies economizing on labour costs.
Still, each of these parameters has its reverse side and can be viewed from different perspectives as, for example, the rapid growth, which causes the lack of stability.
“In China, as in any high-growth economy, it is difficult to predict the long term” (Essential advice for doing business in China). One of the difficulties of planning the establishment of the foreign company in China is the short terms of the sales which can be predicted. Still, considering all the favourable conditions of the Chinese market, many reputable companies have established their manufacturing operations in China, and Volkswagen, Isuzu, and Boeing are among them.
At present, the foreign investments have a significant positive impact on the development of the Chinese economy. “Approaching 60% of the country’s exports are produced by foreign-invested enterprises” (Davies 2007). Despite the benefits of foreign companies for the economy of the country, the Chinese government is not satisfied with the existing state of affairs and aims at locating as many companies as possible and taking advantages of their technology transfers.
Though some observers believe that complying with China’s terms for establishing the manufacturing operations would mean bargaining away valuable industry knowledge, the companies should consider all the advantages of this choice before making the final decision.
The main restrictions of the Chinese terms for the foreign companies include limitations for the forms of ownership and a number of foreign employees in the company and inconsistencies in the legal system itself. Piggot (2002) noted that “Restrictions imposed on the share and forms of foreign ownership have a direct impact on foreign investor’s interest in transferring technologies to their operations in China” (p. 214).
Thus, the companies should decide whether they are ready to adapt their strategies and structure to the Chinese rules and whether the expenses which are required for the reorganization can be justified with the potential profits. Another restriction is the demand to involve the Chinese employees in the manufacturing operations instead of relying on the foreign staff.
Piggot (2002) noted that “Some policies limit the number of foreign employees in foreign companies in order to push for a speedy localization of foreign firms in China and to create more (well-paid) jobs in foreign companies for the Chinese labour force” (p. 214). Still, this restriction may cut both ends.
Though the jobs in foreign companies are regarded as well-paid for the Chinese labour market, the wages of Chinese employees would be usually lower than the wages of foreign workers, and it would allow economizing on the labour costs. Another important issue to consider is the weakness of the legal system. Shoushuang (2007) noted that “the low-quality of China’s legal system is causing it to act, to some extent, as a legal-risk-maker” (p. 5).
Weighing all pros and cons of penetrating the Chinese market, foreign companies should not risk losing their sales and take their chance to get a piece of the cake.
Davies, K. (January 2007). Ask the economists: Made in China. Is the game changing? Organization for Economic Co-operation and Development. Retrieved November 7, 2010 from http://www.oecd.org/document/21/0,3343,en_2649_201185_37892757_1_1_1_1,00.html
Essential advice for doing business in China. (n.d.) Retrieved November 7, 2010, from US Commercial Service website: http://www.buyusa.gov/pittsburgh/adviceforchina.html
Piggot, C. (2002). China in the world economy: The domestic policy challenges. Danvers. MA: OECD Centre for Co-Operation with Non-Members.
Shoushuang, L. (2007). The legal environment and risks for foreign investment in China. Berlin: Springer.