Opportunity Advantage and main challenge for a foreign company that wishes to establish business in China sample essay
Economic growth of countries is largely contributed by the competitive advantage that it poses and which puts it ahead in terms of resources over the other economies. Michael Porter describes competitive advantage under factors such as the demand conditions, related industries, factors of production and corporate strategy under his famous competitive “diamond” model. In this model he establishes the strengths of nations basing on their industries. The factors of production are essential for an industry in the production processes and they include logistics, skilled labor among others.
These are the specialized factors of production which are created and not inherited. He also notes that other factors which can be termed as general factors include unskilled labor and raw materials and can easily be obtained by any company at any one time hence they do not lead to any competitive advantage of an economy whereas the specialized factors require sustained and heavy investment. These specialized factors lead to an economy’s competitive advantage because they can not be duplicated as they are valuable.
Demand conditions on the other hand apply to the nature and the extent of demand that exists within nations which is concerned with the services or products. The higher the demand of products in a nation, the higher the pressure that is exerted on them to produce more through innovative practices in order to enhance their competitiveness in the market by producing high quality products. Related industries apply to the extent, international, and the existence of the competitive strength of the other industries in an economy. These industries enable the exchange of information hence resulting in a continuous exchange of innovations and ideas.
Lastly corporate strategy, structure and rivalry refers to the conditions that exist in the domestic market which end up affecting the way corporations are created, grown and managed. Porter puts forward the idea that the home markets have to fight and work hard to increase the chances of surviving and succeeding in the international markets. This is because today’s markets are dynamic and firms have to work hard in order to increase its innovation and productivity and this can only be done through direct competition from these cor-operate organizations.
In this “diamond” model, Porter states that the main role of the government is to act as a catalyst and at the same time a challenger by encouraging as well as pushing companies to increase their performance, stimulating demand that should be made early enough especially for advanced product, pay attention to the creation of specialized factors and stimulating the existence of local rivalry through the limitation of direct cooperation and also enforcing regulations concerning anti-trust (Porter, 24-30).
In other words, Porter emphasizes on globalization by nations concerning their abilities to innovate and process a head of their competitors as the only means that nations can be able to increase their productivity gains hence gaining a competitive advantage.
He also argues that in order to be able to gain this, competitive advantage, countries need to have the technological know how in order to enable them to capture greater value in the world market place by establishing areas that they would like to compete and it is the companies which have posed the ability to continuously innovate and improve that have been able to remain competitive (Harrison & Hargrove, 2005, 14).
Porter also established five forces that are helpful in the analysis of competitive positions of nations. These forces are also helpful in the analysis of strategic plans as well as in the establishment of investment decisions that concerns organizations. The five forces include the existence of competitive rivalry between suppliers, threat of new market entrants, power of suppliers, bargaining power of buyers as well as the threat of substitute products that includes the technological change.
The new market entrants include ease and barriers on entry, geographical factors, new entrant strategy, and routes to market as well as the incumbents’ resistance. Supplier power applies to brand reputation, product/service level quality, and geographical coverage, bidding processes / capabilities and relationships with customers. Buyer power on the other hand refers to buyer choice, change cost or frequency, the buyer size, volumes and product/service importance.
In addition, product and technology development includes the alternative price/quality, fashion and trends, market distribution changes and the legislative effects. Lastly, the competitive rivalry refers to the number and size of firms, fixed variable costs bases, the industry size and trends, differentiation and strategy as well as product / service ranges (Harrison & Hargroves, 2005, 14). According to Montgomery and Porter, the creation of a competitive advantage only exists through the creation of a process that is highly localized.
They further argue that the factors that contribute to competitive success include the differences in culture, national values, institutions and histories and the economic structures (Porter & Montgomery, 135 – 136). This paper will focus on the opportunities, advantages and the main challenges for a foreign company that wishes to establish its business in China in some industry. China boasts of a good and stable economic growth which has mainly been linked to its domestic demand, foreign trade and investment that include foreign direct investment.
This economic growth that China experiences has also been as a result of its emphasis on education and the constant monitoring by the government in order to enhance success at the local level. The Peoples Republic of China can also be described as one of the rapidly growing economies in history. It is also the world’s largest recipient of Foreign Direct Investment (FDI) and China is currently focusing on the establishment of a free market economy. China’s Foreign Direct Investment is different compared with other economies.
Its Foreign Direct Investment falls under the category of labor-sourcing which is mostly greenfield and it is mainly accompanied or stimulated by the low costs in production through the availability of the local labor which is cheap (Chung-Tong Wu, 122). This type of Foreign Direct Investment mainly comes fro a high-income economy and is eventually invested in an economy with a low income and not to those countries that poses similar income models.
This is because during the process of development in an economy accompanied by high levels of economic development, the local currently of a country tends to generally appreciate and the production costs as well as labor costs also increase. The Foreign Direct Investment that exists in China which consists of the labor-sourcing is intended to effectively make use of the available cheap labor as well as performing some processes that are more labour-intensive or production activities.
The products from this type of investment are mostly exported to third world countries or are sold in the domestic market belonging to this Foreign Direct Investment. The inflow of FDI results in a demonstration effect that identifies suitable market conditions necessary for fixed assets investment and this therefore causes an impact on the location of industries. This has also affected the regional income and export growth in Central West and East China since the 1990s.
Moreover, the increases in the FDI – GDP ration has resulted in the increased industrial value added nationally in East China hence contributing to the positive growth in the regional income. However, this flow weakens the regional income. However, this flow weakens the regional income growth in central China (Chung-Tong Wu, 122). Domestic demand is also another factor that has contributed to China’s success in the global market, hence its future economic growth is highly dependent on this domestic demand and not the growth in its exports.
The rise in incomes means that people will spend more and the state-owned enterprises, joint ventures, town-village enterprises and private enterprises are in a positive to increase their sales hence growth in domestic demand. The growth in domestic demand in China has enabled the country to attract foreign direct investment and the virtuous cycle of demand growth has been as a result of foreign direct investment growth and the growth in capital spending that is practiced by most Chinese firms (Huijiong, 36-38).
The international trade that exists in China is also different from those that exist in other countries. 50% has been the share that involves the processing of export trade in China since 1995. In addition, the share of Foreign – Funded Enterprises has also been more than 50% since 2001. Moreover, the international trade in China can be linked to the inward Foreign Direct Investment. The labor-sourcing Foreign Direct Investment in China is export-oriented hence resulting in a direct and proportional relationship between the exports and Foreign Direct Investment.
The higher the level of Foreign Direct Investment, the higher the level of exports in China. Therefore, China’s economic growth has been as a result of inward Foreign Direct Investment. China has been able to develop as a global location option for production by many economies because of the combination of its heavy and large investment accompanied by the existing hand working; inexpensive easily trained labor that is literate (Huijiong, 36-38). China has a lot of opportunities that favor anyone or any foreign investors who would like to establish their businesses in China.
The country is also considered to be the third largest nation in the manufacturing industry specifically the semiconductor industry. Therefore China presents the best opportunity in the manufacturing sector and an integrated circuit market which is accelerating in which demand exceeds supply. China also has a market in PC that is the second largest in the world together with the largest market in handset. This therefore means that China has become one of the highest consumers of electronic products worldwide.
The electronic growth in China is staggering hence emerging to be among the top leading nations in computing. Communications as well as consumer electronics. As a result, China has been able to be forecasted to be having the second largest market in semiconductor worldwide by the year 2010 (Huijiong, 36-38). China also has technological advances which have been able to attract foreign investment. This is as a result of the development of strict technological standards which have competed well with the more open standards around the world.
The other opportunity and advantage is that China has been able to dominate mass manufacturing which has resulted into the provision of a low – cost base for manufacturing for foreign companies as well as for United States. The country is also considered to be a growing base for intellectual capital which is essential for scientific research work and development and provides a lot of opportunities in marketing for firm globally. China also boasts of having competitive advantage in areas of banking, insurance, retail and variety of services.
Another opportunity is that the government of China has offered on-going government regulations which have lifted several restrictions on trade and this has made it easier for foreign companies and businesses to succeed. Moreover, several companies are now moving to China to establish their production processes since the country offers generous tax incentives, cheap labor as well as high productivity taxes. China also agrees to greater investment levels from multinational companies. Therefore, China offers both irresistible attractions to foreign investors and challenges as regards its cultural, legal and social differences (Huijiong, 36-38).
In addition, the recent announcement made concerning local incorporation has led to the growth of foreign banks in markets in China. The factors that have led to the growth in investments in banks include a strong economy and a growing middle class, and the China’s terms on the World Trade Organization accession which has resulted in the opening up of China’s banking sector. The business climate in China is favourable hence providing the opportunities to open up markets and foreign investment. The country has also adopted a status position in the world Trade Organization.
China is also increasingly developing to become a major supplier of various industrial products namely power transmission, machinery, telcom equipment, pipelines, distribution equipment, oil and gas industry equipment and automotive products. The existence of a favourable geographic location is also another opportunity that China presents. The country has unique geographic features including a climate that as favourable in the establishment of businesses, China also has a favourable cultural advantage since its culture forms the major source of Japanese and Asian cultures hence connecting East Asia and South economies.
The majority of overseas Chinese worldwide have been able to control huge resources in the world hence aggressively investing in China. The local market available in China is attractive consistency of a large population of Chinese hence increasing the purchasing power of the Chinese. Therefore in terms of opportunities, China presents the opportunity for technology, investment, import, export, manufacturing among others which could be classified under social, economic, political and religious opportunities that are friendly to any one person or company that wishes to establish itself in China and succeeding in business (Huijiong, 36-38).
China however has its challenges that affect the establishment of foreign companies. It is important to note that challenges are a part and parcel of the daily life that we undertake. These challenges also affect the way businesses are run and confronting them will require perseverance, knowledge and commitment. The challenges that are commonly experienced by today’s managers include risk management, changes that could be on-going in the business environment, management of the needs of the business people as well as fighting fraud.
These challenges can be classified as under convergence, corporate reporting, fraud, corporate governance, intellectual property, managing change, improving business performance, managers and acquisitions, risk management, managing people, operating globally, sustainability, security and privacy. Shareholder value as well as job creation. These categories of challenges affect business operations as well as the opportunities for foreign investment in an economy.
One of the main challenges that China poses to foreign investors is the cultural challenge as well as the political differences. This takes the form of language barriers and bureaucracy. People in China are not used to signing contracts which also includes the details concerning the joint venture and this takes a lot of time for them to be able to sign any contract for any business whatsoever. The business leaders in China are the ones who mostly study the behaviour of these people.
They regard the written contract as secondary to the existing verbal agreement made. The challenge in Chinese culture can be best described by using coca-cola company as an example. This company came across this challenge in 1984 when it had tried to establish its business in China. Having signed a contract with the central government trading company in 1978, coke believed that it was in a better position and all the exclusive rights in the selling of their beverages in China (Harris and Robert, 120).
Coke company encountered a rude shock since the government of China informed them that their exclusive rights were limited and not for the entire of China and they should sell their products in those places that they were initially allocated. In addition, since China is rapidly under the transformation from an agricultural economy to that of an urban society and also from a commanding economy to the more elaborate market economy, the government plays a huge role in the country’s planning activities and the entire economy more than any other western countries. This has resulted into the way the Chinese think which is bureaucratic.
Therefore establishing a new business in China requires the knowledge of regulatory, monetary and legal issues that exist in China hence the need for respecting and understanding the culture of the Chinese people. The development of human resources and staffing a local team into management in China is also a challenge especially when it involves finding the right group of people to be in corpoorated into the business (Kirpalani, 1990, 186 – 188) As a challenge, there is lack of predictability in China’s business environment because of inexistence of a body of regulations and laws.
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