Risk of Doing Business in China

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Risks in Doing Business in China

E &Y China

Key Points

For multinational companies, China’s market has started to come of age. Despite the opportunities along with China’s WTO entry and opening up, doing business in China remains very challenging at the operational level for MNCs.

Regulatory Risks
Managing the regulatory environment remains a real issue for foreign firms operating in China. They have to learn how to deal with red tape, “guanxi (relationship)” and make breakthrough in the thicket of regulations and restrictions.

Entry Modes
Different entry modes bring different risks and returns. Foreign enterprises should weigh and balance those risk factors.

Mergers and Acquisitions
With newly issued M&A regulations and laws, foreign enterprises have more alternatives to acquire domestic corporations. They are starting to use mergers and acquisitions in the same way that they do elsewhere. However, many factors exist to discourage foreign firms from fully utilizing the advantages, such as poor standards of corporate governance, inadequate due diligence process and evaluation matters.

Tax Arrangement
In different phases and regions, FIEs enjoy different preferential tax rates. How to fully utilize the tax holiday and other concessional arrangements to maximize profit is a crucial question facing foreign corporations.

Human Capital Constraints
Finding and retaining human resources remains one of the most taxing day-to-day issues facing foreign companies in China. On the demand side, foreign firms are no longer the automatic choice for ambitious people. At the same time, the supply of skilled workers is very limited. Foreign firms face spiralling wage costs for skilled employees.

Environmental Protection
The government has more than on one occasion stressed economic growth while protecting environment. Those that could maintain clean production or adopt energy saving technologies will more and more enjoy a premium in negotiations with the government. While it becomes pretty difficult, if not totally impossible for those that are labeled as pollution generating or technologically backward to enter into China.

Intellectual Property Protection
Counterfeiting and piracy are clearly major problems for MNCs operating in China. Among others, inadequate IPR protection and immature market mechanism are the most important factors contributing to the rife violation of intellectual property rights (IPR).

Summary

For multinational companies, China’s market has started to come of age. The growth of the “middle class” is creating strong consumer demand, and there is also a burgeoning business- to-business market. Improvements in infrastructure and a relaxation of regulations have made these markets much more accessible than was the case just a few years ago. A broadening and upgrading of the activities of multinational firms has accompanied these changes. For many big companies China has become a major global market and, in some cases, a large profit centre.

China’s importance is currently not evident in all industries, but these sectoral differences are likely to ease over the next few years.

Accompanying the rise in demand in China has been an intensification of competition. While this represents a new strategic challenge for multinationals, the development of China’s economy has also opened up new ways in which they can respond. Foreign firms have more opportunity to bring their sophisticated brand building and marketing capabilities to play in the China market, and to localise production, markets and sourcing to lower costs. The emergence of a local market for mergers and acquisitions is allowing big foreign firms to buy up local competitors.

At an operational level, doing business in China remains very challenging. Infrastructure has improved during the last few years, but remains deficient...
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