1 Factors Affecting Foreign Companies Forming Joint Ventures with Chinese Companies in China.

Implications of these factors on the Success or Failure of such Joint Ventures. Abstract China is the country which has an emerging economy, which allows the state to offer numerous opportunities for foreign investment and thus, creation and development of joint venture companies. Despite the fact that China possesses big potential for the growth of its economy, it provides foreign countries with access, thus making significant savings in costs of labor. However, political and cultural environment are the main issues which are expected to increase risks and bring some amount of uncertainty in business for the investors who come from abroad. Introduction Nowadays economy of China is the second largest in the world after the United States of America. The country had a long way to achieve such results and the greatest efforts were made within the period of last 25 years (World Bank, 2009). Moreover, it is planned by the government of China to double the GDP by 2020 using improved economy mechanisms and reduction of the role of the government in the economic affairs of the country. Looking back at the period of establishment of economy, it is impossible not to remember elimination of peoples communes and introduction of the township-collectivehousehold production system to the sector of agriculture. Nowadays private ownership of production is legal; however, some facilities which are non agricultural and industrial are still owned by the state and they are planned centrally.

2 The government has made a decision to foster a dual economic structure and now the country has market economy, which at the same time has some socialist characteristics. It is important to pay attention to the fact that increasing technological advancements have played a significant role in the process of development of various industries in China. Today China has related foreign trade restraints due to the acceptance to the World Trade Organization in 2001. This fact significantly contributes to promotion of joint venture companies, especially to those which are situated in the special economic zones of the coast, as well as in open coastal cities. The reformed economy is beneficial for the development of joint venture companies and this fact is supported by statistics that the number of rich citizens has increased significantly. As it is stated by the officials of China, currently there are two main trends which influence economy of the country and future development of the joint venture companies. These are regional integration and multi polarization of the world (Balfour, 2004). This issue is closely tied to the joint venture companies and their countries of origin. There are many companies of this type which have managed to reach success. However, despite this fact, leaders of China face various challenges which address the issues of future development of the economy of the country. Some of the challenges are: Maintenance of high growth rates; Effective dealing with the workforce which comes from rural regions; Improvement of financial system of the country; Continuous reformation of the enterprises which are owned by the state; Fostering of the productive private sector; Establishment of an effective system of social security; Improvement of technological, educational, and scientific development;

3 Promotion of better cooperation with foreign countries; Introduction of changes into the role of the government in the system of

economy of the country (World Bank 2009). Political environment of China Constitution of China states that The Peoples Republic of China is a socialist state under the peoples democratic dictatorship led by the working class and based on the alliance of workers and peasants. Government of the country is composed to peoples congresses; it involves a political party system which supports cooperation with other parties, and provides consultation in terms of politics. The primary level of the whole society and the framework of the political system of the country are composed to regional ethnic autonomy, peoples congresses and multi party cooperation, which have been already mentioned above. Since multi party cooperation system is one of the essential elements of the whole political system of the country, it identifies functions and the status of the country, as well as directs work of the other eight political parties in terms of their political life and inter party relations (Background Note: China, 2009). Government of the country involves the system of multi party cooperation and political consultation under the leadership of the Communist Party of China. This party is the only party which exercises power in China. Leadership of the party is accepted by all people and organizations, including joint venture companies, as well as other eight political parties which have right to participate political affairs and cooperate with the Communist Party of China. Under the leadership of the Communist Party of China all organizations, including joint venture companies management teams, have right to participate in consultations on the

4 issues of basic policies of the country, as well as important issues of cultural, social, political, economic affairs before any decision is made and implemented into life. Joint venture companies, similarly to other organizations, participate in the political consultation at the Chinese Peoples Political Consultative Conference. The consultation is the most impotent form of organizational and political management of the whole political system of the country. It is necessary to pay attention to the fact that the principle long-term coexistence and mutual supervision, treating each other with full sincerity and sharing weal or woe is the basic principle which is used by the country and joint venture companies when it comes to making decisions (Background Note: China, 2009). Dealing with the issues of creation and development of joint venture companies in China, it is necessary to pay attention to the fact of human rights violation. According to the state department of Human Rights Practices and International Religious Freedom Reports, China has numerous and continuous abuses of human rights and international norms violation. The situation was caused by dissent intolerance of the authorities, inadequate legal safeguards for peoples basic freedoms. It is also necessary to pay attention to the fact that abuses are constantly reported about and they describe such actions as confessions which were made because of enforcement, lengthy and arbitrary incommunicado detention, tortures, prisoners mistreatment, and also significant restrictions in terms of usage of free press, speech, association, assembly, religion, rights of employees, privacy, and birth limitation. Moreover, in the year 2006 many people such as defense lawyers, journalists, internet writers, religious activists, and political dissidents were monitored, harassed, intimidated and arrested by the Chinese authorities.

5 The government also restricts activities of some organizations, especially of those which deal with the law rules and judicial review expansion. (Background Note: China, 2009). Before a joint venture company is established in China, it is necessary to pay attention to the fact that the country is hazardous if viewed from the political risk perspective. It is especially important to pay attention to the fact that the government tends to nationalize industries. In fact, the nationalization took place in 1949. However, still there is treating of expropriation, confiscation, contract reputation, and currency inconvertibility in the country. Management teams of joint venture companies should also pay attention to the problem of currency devaluation and inflation, which not only harm business, but also change insurance limits. Dealing with the issue of personnel, human resource department of the joint venture companies should remember that China does not guarantee effective protection of the employees from personal harm or kidnapping, or from extortion attempts. Moreover, the country has a unique form of political risk, which occurs and represents a constant disagreement between the central government of the country and local and provincial authorizes over applicable low, as well as over its non observance and observance. Because of this problem it is very difficult for joint venture companies to operate in China and know for sure that the rules of the country (China Political Risk Management, 2009). For some time joint venture companies were actively established in China. However, after the Tiananmen Square massacre the level of activity of foreign business companies has fallen significantly. This reduction of establishment and development of joint venture companies was observed in many spheres of business, including tourism.

6 The reason is that companies had some investments in China, and the countries are involved into activities of investments, so they are waiting for a stable period of economic progress. It is believed that the country is not going to expel its investors which come from abroad. It is not likely that joint venture companies and foreign plants are going to be closed because of the current regime of the country. However, the issue of political stability remains to be questioned by foreign investors. It is also necessary to pay attention to the fact that level of life of people was significantly improved. People of China received an opportunity to travel, have more changes to get good education and alter good job, develop socially and culturally, make better housing choices and be provided with information of various types. Recently new civil and criminal laws were passed by the government of China, providing the citizens with safety of better quality. Foreign policy of China is important for the development of joint venture companies. Thus, it is necessary to remind that the United States of America had human rights dialogue with the government of China after Tiananmen. However, the country did not make any changes in order to improve the situation, so the dialogue was resumed in several years in order to promote understanding of the discussion and of constructive measures which should be taken. Officials of many countries which have joint venture companies in China raise human rights concerns with the government of China at various levels of authority (Foreign Business in China responds to Political Instability, 1990). Economic situation of china China remains the main recipient of FDI worlds destination. FDI accounts 58 per cent of the foreign trade, more than 4 per cent of national tax revenue, and 27 per cent of

7 VAP. Approximately 200 countries from all over the world invest into China, including 450 of 500 Worlds Fortune companies. According to the Member Priorities Survey, many joint venture companies which are developed by the United States of America serve the domestic market of China and do not bring significant income to America. As it is estimated by UBS AG, 11 per cent of the total share belongs to joint venture companies (Library of Congress, 2009). Moreover, the greatest impact is made by Hong Kong, Taiwan, and South Korea companies. However, foreign companies are losing their interest in establishment of joint venture companies in China, so the main sources of FDI for the country remain the same for several years. Hong Kong goes the first one in the list of the companies which invest into China; it is followed by the British Virgin Islands, Japan, Korea, and America. According to the estimation of Member Priorities Survey, which has been already mentioned above, approximately 81 per cent of all the joint venture companies which are based in China are profitable (Foreign Investment in China, 2009). An important change for the development of joint venture companies occurred in the environment of the country in 2006, when the Chinese National Development and Reform Commission decided to establish a new plan to promote better management of FDI investment in the economy of China. According to the plan, the relationship between foreign investment and national security was the issue of the primary concern. The plan tends to relax restrictions on joint venture companies and domestic enterprises holding. As for the foreign capital, it was expected to be directed towards high technological industries, manufacturing, industries of modern service, development of infrastructure of the country, and protection of ecology and economy of the country.

8 Such change caused setting up of production, training and assembly institutions in the country in order to enhance the innovation independence for the companies of China. The change enhanced growth of economy of the country and by the end of 2006, its direct investment was more than $ 73 billion. Nearly 81 per cent of the investment was received by Hong Kong, Cayman, and the British Virgin Islands (Foreign Investment in China, 2009). The table below shows the main origins of FDI in the country for the period of 2005 and 2006:

Since China joined the World Trade Organization in 2001, it started experiencing a rapid import growth; the country increased its exports and inflows of FDI. In five years, the reserves of foreign exchange exceeded $ 1 trillion and in two years more the figure reached % 1.9 trillion. The figure remained the same till the end of the year, when the rates of the trade growth started their decline (China Foreign Exchange Reserves, 2009). Inflation is one of the most important factors to be taken into account when it comes to establishment of joint venture companies.

9 Legislation and government regulations of joint venture companies. Rate of inflation can be defined as the general rise of the prices which is measured against some standard level of power of purchasing. Spring of 2009 became the time of drop of the prices. Since the prices fell, the consumers were encouraged to make more purchases and to spend more money. This strategy helped the government of the country to solve the main problems of the diminishing exports. Currently the Chinese Central Bank takes caution to the risk and it expects that the prices are going to decrease in the nearest future, so purchases are delayed in order to lower the demand and make the economic growth stifled. The government also takes risks to raise the price which are controlled by the state, and particularly the prices of products and resources of purchasing farmers. The risk is taken in order to make the price stable. After the investment of $ 586 billion into the economy of the country it is less probably that its pricing would be protracted. However, inflation might be fueled because the economy of China turns around (China Inflation rate, 2009). The table below demonstrates how Consumer Price Index changed annually from spring 2008 to spring 2009 (National Bureau of Statistics, China Report, 2009).

Social cultural differences China is a country with rich culture and history and these together with ethics and values should be taken into account before any cooperation is started. Successful creation and

10 development of joint venture companies in China requires accepting original Chinese system of culture values, and ethnic traditions of people. It is necessary to pay attention to the fact that Chinese people are very sensitive towards social minorities. These people represent a small number of citizens of the country. However, they are very important because a range of theories addresses benefits of cultural diversity. Minorities are under protection of the law in China it is stated by the Constitution and the Administrative System of the country that the government of China guarantees protection to all the representatives of the minorities which reside on the territory of the state. People of China possess a wide range of culture values which together form a complex which is necessary to be taken into account when creating joint venture companies. Most of the values are based on Confucian philosophy and at the same time they represent the basis for the identity of people of China. However, some of the values are considered to be of the greatest importance. These are: Family Support of hierarchy in social life Self restraint Morality cultivation; Hard work; Achievement.

In other words, the whole society is collective and there are many ways in which families take precedence over their separate members. However, values are not the only issue which requires urgent addressing, but religion also takes an important part in life of Chinese people.

11 There are five religions which are recognized by the government of the country. These are Islam, Buddhism, Catholicism, Taoism, and Protestantism. A range of cultural issues, including cultural dimensions should be taken into account. According to Geert Hofstede, cultural factors can be measured on the basis of such dimension: 1) 2) 3) 4) 5) Power distance index; Collectivism versus individualism; Masculinity versus feminity; Avoidance of uncertainty; Long term oriented cooperation.

These are the dimensions which would be taken into account before joint venture companies are established in China. Moreover, cultural dimensions of the nations who are going to participate in the work of the companies should be compared on the basis of the classification of Hofstede. Issues with technology or knowledge transfer Conducting business in China might bring challenges because of many differences, uncertainties and issues with technology and knowledge transfer, as well as with political, economical, and cultural issues. It is necessary to pay attention to the fact that technology and knowledge transfer operations are more successful in the cases when the Chinese work with the companies they already know and this means that development of joint venture companies requires working through intermediaries. All business relationships are built formally in China and it is very important to be patient with the issues of technology and knowledge transfer because these, as well as many

12 other aspects which participate in the process of development of joint venture companies require dealing with incredible government bureaucracy (Shanker, 2003). Time of entry Time of entry is defined by a range of conditions for each separate joint venture company. As it has been already mentioned above, it matters whether Chinese market has already cooperated with the representatives of the newly established company or whether the establishment of the new business relationship occurs through an intermediary. It obvious that in the cases when nothing is known about the founders of a new joint venture company, it takes more time to enter the market. Most companies use special techniques and strategies which allow them, taking into account specific features of the Chinese market and of their own company, shorten the time of entry (China Market Entry investment). Danone Company is one of the best examples of success in the market of China. At the moment of entry the company was a welcomed partner. Its management team developed a strategy of actions to cover all the vital areas of cooperation, including economy of the country, its political, cultural, social conditions, etc. These were addressed intensively and today the company experiences smooth growth, it is working on the clearing of the plans, development of alternative strategies, and receive an opportunity to promote its production at a greater amount of Chinese regions (The lessons from Danone and HSBCs troubled partnerships in China). Conclusion China is one of the countries which have the most developed economy. Its market is opened for cooperation with foreign companies, which usually choose the form of joint venture Company to enter the market. It is necessary to pay attention to the fact that newly established joint venture companies might have some difficulties with following the political

13 regime of the country. However, there are strategies to contribute to rapid development. Political conditions are not the only issues to be taken into account, and economy, social atmosphere and culture of people who live in the country and of those who come there to work at the joint venture companies are important to be remembered about during the whole process of establishment and development of the company. Culture is one of the most important aspects to be paid attention to as it is the core of any society and it might promote greatly or undermine completely any attempts to establish a joint venture company. Despite the fact that there are many favorable conditions for entering the market, technology and knowledge transfer are the key to the successful entry and cooperation with Chinese companies. In order to be promoted, these require an intermediary and application of innovative approaches.

14 References Background Notes: China, US Department of State, viewed 27 September, 2012, <http://www.state.gov/r/pa/ei/bgn/18902.htm>. Balfour, F 2004, Chinese reform pick up speed, Business Week, March 8, 46. China Foreign exchange Reserves, US State Administration, viewed 27 September, 2012, <http://www.chinability.com/Reserves.htm>. China Inflation Rate, Trading Economics, viewed 27 September, 2012, <http://www.tradingeconomics.com/>. China Market Entry investment, viewed 27 September, 2012, <http://www.starmass.com/en/investment_in_china.htm>. China Political Risk Management, China Monitor, viewed 27 September, 2012, <http://www.chinariskmanagement.com/Political.html>. Foreign business in China responds to political instability, 1990, viewed 27 September, 2012, <http://www.readabstracts.com/Business-international/Foreign-business-in-China-respondsto-political-instability.html#b Foreign Investment in China, USCBC, viewed 27 September, 2012, <https://www.uschina.org/info/forecast/2007/foreign-investment.html>. National Bureau of Statistics, China Report, 2009, viewed 27 September, 2012, <http://www.stats.gov.cn/english/statisticaldata/yearlydata/>. Shanker, D 2003, Developing countries, China and economic institutions, Social science Research Network. The lessons from Danone and HSBCs troubled partnerships in China, viewed 27 September, 2012, <http://www.economist.com/node/9040416>. World Bank Report (2008). GDP and economic indicators of China, viewed 27 September, 2012, <http://www.worldbank.org/>.