Chapter 1

Introduction
1.1 Origin of the Report This report containing the title Business environment in China a case study for international business is a requirement as the part of Masters in Business Administration of the course of International Management, Course No-EM 556. I cordially thank the honorable teacher to provide me the topic for our report. The topic becomes as a part of study due to the diversified culture in China and its interesting political status as well as the government policy. 1.2 Objective of the report The aims and objectives of the report are as follows: To study of the Current cultural, Political and legal environment underlying in China. To identify the impacts of Chinese culture, politics and legal system on existing foreign firms as well as the new entrants.

1.3 Scope of the Report: With these report several businesspeople who are thinking to do business deal with Chinese or with China can get important information about Chinese culture, political system and legal environment of business. They can make themselves prepare for their behavioral pattern, negotiation system and communication skill. Also, the firm can assess their risk while doing business in china.

This report will provide some information regarding the views of Chinese Government about foreign firms in china and some recent policies taken by Chinese government. Moreover, in general, one can know about China in brief, Chinese culture, socioeconomic status and business views of government.

1.4 Limitation of the Study : Though I have tried to portray a clear scenery about the existing business environment in China I doubt whether it is clearly understandable to the reader and criticizer. The reasons behind this doubt are the limitation of this study. I can express the limitation as below: Time was limited and even too less to read and learn about a country, its culture, business environment. Lot of Information is collected from internet and I have tried to use the authenticated sites, however, it is very tough to identify the genuine sites and referee of these sites. More time has been passed to collecting information hence less time for report preparation which may decrease the standardized quality.

1.5 Historical Background of the Problem During 1980s, Chinas average annual real economic growth was about 10 percent. From 1990 to 1995 GDP maintained this spectacular ate of growth and by the turn of the century. Despite a severe economic downturn in the late nineties by its Asian neighbors, the awakened giant China reported an annual GDP growth of 8 percent. This continuing growth in tough times shows that its economy is healthy and growing stronger. At the same time, however, some international economists believe that China may overstate its growth rate and that it is really closer to 6 percent. Others contend that even if the country

has been growing at a healthy rate, China will be unable to maintain it and in fact, the Asian Development Bank recently forecasted the countys growth rate for the early years of the new century at 6 to 6.5 percent. The ruling communist government has set 8 percent as a target which is needed to handle the continual influx of workers from the countryside. Despite being caught up in the economic problems facing all of Asia, China continues to attract foreign investment. Among others, Motorola has put $120 million into facilities producing semiconductors and mobile phones, General Motors has a $100 million investment in a truck assembly plant, and proctor and Gamble has invested $10 million in a joint-venture factory to produce laundry and personal care products. Additionally, the countrys exports remain high with the U.S., Japan and the EU importing billions of dollars of goods from China every year. At the same time, however, China remains a major political risk for investors. The one country, two systems (communism and capitalism) is a delicate balance to maintain and foreign businesses are often caught in the middle. Most MNCs find it very difficult ot do business in and with China and have yet to make a profit. Many of them have also found that product pirating is till common, and while the government has promised to prosecute companies that engage in this illegal and unethical practice, much remains to be done about it. Perhaps even more disconcerting for MNCs is that contractual agreements often prove to be worthless. For example, McDonalds received a long-run lease on property in Beijing and built a large restaurant there; since then the government has told the company that it must move because the entire area is to be razed and turned into a huge office and retail complex. This is not an isolated incident. Outside chemical producers have found themselves facing $10,000-per-product registration fees, and U. S. law firms operating in Shanghai were forced to close until the government granted them new licenses. German and Japanese banks have found that collecting loans from the government can be extremely difficult as well. In addition, some securities firms have learned that Chinese clients sometimes refuse to pay for trades that turn out to be losers, and there is no government protection for such actions. Simply put, China remains a complicated and

high risk venture. Even so, MNCs know that China with its 1.3 billion people will be a major world market and they must a presence there.

1.6 Sources and Methods of Collecting Information Usually, now a days, the store house of information is interned so I have also go with the same stream and thus Internet is the main source of information of my report. Besides, I have adopted some valuable information form the book name International Management by Richard Hodgetts and Fred Luthans. Few people studied on China in different section like legal system or cultural system and I have taken some information from there as well. The information about recent issues in China has been taken from the UK based Business Magazine named The Confederation of British Industry (CBI).

Chapter 2
Overview of China and Its Business Environment
2.1 Introduce with China: 1.2.2 Profile of CHINA : People's Republic of China : China : Zhonghua Renmin Gongheguo : Zhongguo : PRC : Communist state : Beijing : 1,338,612,968

Conventional country name (long form) Conventional country name (short form) Local long form Local short form Abbreviation Government type Capital name Population 2.1.2 Location

China is located in Eastern Asia, bordering the East China Sea, Korea Bay, Yellow Sea, and South China Sea, between North Korea and Vietnam. The geographic coordinates 35 00 N, 105 00 E. China is the world's fourth largest country (after Russia, Canada, and US); having Mount Everest, the world's tallest peak, on the border with Nepal.

2.1.3

Area and Land boundaries:

Total area of China is 9,596,961 sq km with a land area 9,569,901 sq km and water area of 27,060 sq km. Land boundaries of China is 22,117km and the border countries are Afghanistan 76 km, Bhutan 470 km, Burma 2,185 km, India 3,380 km, Kazakhstan 1,533 km, North Korea 1,416 km, Kyrgyzstan 858 km, Laos 423 km, Mongolia 4,677 km, Nepal 1,236 km, Pakistan 523 km, Russia (northeast) 3,605 km, Russia (northwest) 40 km, Tajikistan 414 km, Vietnam 1,281 km. Along with this China is having two regional borders and they are Hong Kong 30 km, Macau 0.34 km. 9

2.1.4

Government

The 73.1 million member CCP, authoritarian in structure and ideology, continues to dominate government. Nevertheless, China's population, geographical vastness, and social diversity frustrate attempts to rule by fiat from Beijing. Central leaders must increasingly build consensus for new policies among party members, local and regional leaders, influential non-party members, and the population at large.

In periods of greater openness, the influence of people and organizations outside the formal party structure has tended to increase, particularly in the economic realm. This phenomenon is most apparent today in the rapidly developing coastal region. Nevertheless, in all important government, economic and cultural institutions in China, party committees work to see that party and state policy guidance is followed and that non-party members do not create autonomous organizations that could challenge party rule. Party control is tightest in government offices and in urban economic, industrial, and cultural settings; it is considerably looser in the rural areas, where the majority of the people live. Theoretically, the party's highest body is the Party Congress, which traditionally meets at least once every 5 years. The 17th Party Congress took place in fall 2007. The primary organs of power in the Communist Party include: The Politburo Standing Committee, which currently consists of nine members; The Politburo, consisting of 25 full members, including the members of the Politburo Standing Committee; The Secretariat, the principal administrative mechanism of the CCP, headed by Politburo Standing Committee member and executive secretary Xi Jinping; The Central Military Commission;

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The Discipline Inspection Commission, which is charged with rooting out corruption and malfeasance among party cadres. State Structure

2.1.5

The Chinese Government has always been subordinate to the Chinese Communist Party (CCP); its role is to implement party policies. The primary organs of state power are the National People's Congress (NPC), the President (the head of state), and the State Council. Members of the State Council include Premier Wen Jiabao (the head of government), a variable number of vice premiers (now four), five state councilors (protocol equivalents of vice premiers but with narrower portfolios), and 25 ministers, the central bank governor, and the auditor-general. Under the Chinese constitution, the NPC is the highest organ of state power in China. It meets annually for about two weeks to review and approve major new policy directions, laws, the budget, and major personnel changes. These initiatives are presented to the NPC for consideration by the State Council after previous endorsement by the Communist Party's Central Committee. Although the NPC generally approves State Council policy and personnel recommendations, various NPC committees hold active debate in closed sessions, and changes may be made to accommodate alternate views. When the NPC is not in session, its permanent organ, the Standing Committee, exercises state power. Principal Government and Party Officials President--Hu Jintao Vice President--Xi Jinping Premier, State Council--Wen Jiabao State Councilors--Liu Yandong, Liang Guanglie, Ma Kai, Meng Jianzhu, Dai Bingguo Secretary General--Ma Kai NPC Chair--Wu Bangguo

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Vice Premiers--Li Keqiang, Hui Liangyu, Zhang Dejiang, Wang Qishan

2.1.6

Economy - Overview

China's economy during the past 30 years has changed from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy. Reforms started in the late 1970s with the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, the foundation of a diversified banking system, the development of stock markets, the rapid growth of the non-state sector, and the opening to foreign trade and investment. Annual inflows of foreign direct investment rose to nearly $108 billion in 2008. China has generally implemented reforms in a gradualist or piecemeal fashion. In recent years, China has re-invigorated its support for leading state-owned enterprises in sectors it considers important to "economic security," explicitly looking to foster globally competitive national champions. After keeping its currency tightly linked to the US dollar for years, China in July 2005 revalued its currency by 2.1% against the US dollar and moved to an exchange rate system that references a basket of currencies. Cumulative appreciation of the renminbi against the US dollar since the end of the dollar peg was more than 20% by late 2008, but the exchange rate has remained virtually pegged since the onset of the global financial crisis. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2009 stood as the second-largest economy in the world after the US, although in per capita terms the country is still lower middle-income. The Chinese government faces numerous economic development challenges, including: (a) reducing its high domestic savings rate and correspondingly low domestic demand through increased corporate transfers and a strengthened social safety net; (b) sustaining adequate job growth for tens of millions of migrants and new entrants to the work force; (c) reducing corruption and

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other economic crimes; and (d) containing environmental damage and social strife related to the economy's rapid transformation. Economic development has been more rapid in coastal provinces than in the interior, and approximately 200 million rural laborers and their dependents have relocated to urban areas to find work. One demographic consequence of the "one child" policy is that China is now one of the most rapidly aging countries in the world. Deterioration in the environment - notably air pollution, soil erosion, and the steady fall of the water table, especially in the north - is another longterm problem. China continues to lose arable land because of erosion and economic development. In 2006, China announced that by 2010 it would decrease energy intensity 20% from 2005 levels. In 2009, China announced that by 2020 it would reduce carbon intensity 40% from 2005 levels. The Chinese government seeks to add energy production capacity from sources other than coal and oil, and is focusing on nuclear and other alternative energy development. In 2009, the global economic downturn reduced foreign demand for Chinese exports for the first time in many years. The government vowed to continue reforming the economy and emphasized the need to increase domestic consumption in order to make China less dependent on foreign exports for GDP growth in the future. The GDP (purchasing power parity) of China as follows: $8.791 trillion (2009 est.) $8.088 trillion (2008 est.) $7.42 trillion (2007 est.)

The real growth rate of GDP is: 2.2 8.7% (2009 est.) 9% (2008 est.) 13% (2007 est.) Political Environment and governments recent Policies in China

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The Chinese political environment is very complex and risky because of the governments desire to balance national immediate needs with the challenge of a free market economy and globalization. At the present time Chinese government is trying to sustain its economic growth within 7 percent and if the growth is slower 7 percent the economy will likely not be able to generate enough jobs to take in the 9 million Chinese that enter the workforce each year, as well as the millions being laid off by restructured state enterprises. Chinese government has taken some recent decision as follows: 2.2.1 Market Access Issues - Indigenous Innovation Policy Recent efforts of the Chinese government are to foster domestic innovation through government procurement incentives. In November 2009, Chinas State Council issued a Notice that laid out the details of an accreditation process for companies seeking to offer indigenous innovation products. Companies are required to own relevant Chinese intellectual property (IP) in China. Deep concerns among foreign companies that requirements excluded foreign IP and proprietary brands On 29 April 2010, Premier Wen Jiabao tried to reassure foreign companies that China was not attempting to push them out of its markets. It is very rate for a senior Chinese leader to respond to complaints by foreign companies On 9 April 2010, Beijing issued a clarification document and sought responses to legislation from business community. The Confederation of British Industry (CBI), a UK based business magazine with a slogan of The Voice of Business, Comments regarding this decision as Loosening of restrictions is a welcome change although concerns remain, specifically over how the rules will be implemented and applied in practice. Amendments to earlier Notice fail to clarify the use of the qualified product list or its link to government procurement preferences. Problematic issue concerning possible divergences between application at the national and local level. 14

According to the American Chamber of Commerce in Chinas 2010 Business Climate Survey, 28% of US companies said they are currently losing out on business in China as a result of the countrys indigenous innovation policies

2.2.2

Transparency and Implementation of Regulations

Foreign companies in China have expressed rising concerns about the lack of transparency in the rule-making process, as well as the arbitrary enforcement of laws and regulations. In Amchams 2010 Business Climate Survey, respondents marked inconsistent regulatory interpretation as their top challenge for the first time in the surveys history. US business firms usually faced several challenges while intended to do business in China. The major obstacles from the Chinese government are as follows: Inconsistent regulatory interpretation Obtaining required licenses National protectionism Bureaucracy Unclear regulations Lack of transparency IPR infringements

2.2.3 Offensive and Protectionism Mentality from Government: In case of environmental issue, foreign companies often feel they receive offensive attention from the Chinese government for breaking pollution laws, but real violations committed by major multinationals certainly exist. In addition, many multinationals operate joint ventures across China and are often unaware that their local partners are not in compliance with environmental regulations.

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According to the 2009/2010 European Business in China Position Paper, insufficient time is provided for public consultation on new laws and regulations. In 2008, time for public consultation averaged 24 days, an improvement from 21 days in 2007, however, still falls far short of international best practices whereas the requirement from WTO and European Commission is average about 60 days. Chinese government often does not provide enough explanation and justification for important decisions and key cases. Two mentionable cases are as below: Example One: Rejection of Coca-Colas $2.4 billion bid for Chinese beverage giant Huiyuan by Chinese regulatory authorities in 2009, citing anti-monopoly concerns, however, many foreign companies say the Chinese government failed to provide sufficient explanation for the rejection, fueling suspicions of protectionism Example Two: Rejection of foreign firms in the bidding process for 25 state wind power projects resulting from Chinas economic stimulus package in mid-2009 and $7 billion in contracts awarded to Chinese companies. Four of the worlds top five wind turbine companiesVestas Wind Systems (Denmark), GE Energy (US), Gamesa (Spain), and Suzlon Energy (India)all excluded despite having made substantial investments in China and met stringent localization rules requiring they source 70% of their equipment within China.

2.2.4

Protection of Intellectual Property Rights (IPR)

Poor protection of IPR remains a continuing problem in China, standing as a key impediment to innovation and foreign investment. Vast majority (86%) of respondents to EU Chamber Survey cited enforcement of IPR laws/regulations as either inadequate or very inadequate. European Business in China Position Paper issued on 2009/2010 by the EU Chamber cited leakage of confidential information during business development

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during project approvals, product certifications, patent filings, etc. as a top IPR concern, however, China has taken positive steps towards strengthening the overall IPR environment.

2.3 The Impact of Cultural Differences Culture can be defined as the collective programming of the mind which distinguishes the members of one human group from another. Culture, in this sense, includes values; and systems of values are a core element of culture (Hofstede 1984, p. 21). Furthermore, culture comprises values and attitudes, social structure, religion, language and communication (Fisher, Hughes, Griffin & Pustay 2006). Understanding culture is an important issue for any firm in China because of the pervasive impact that it has on business operations and success. Cultural difference is a major issue for any countries businesses doing business with Chinese. The issue takes everybody by surprise. A major cultural difference between the PRC and many western countries is the issue of time. The Chinese tend to be punctual, so it is important that those who do business with them arrive in time. During meeting, such as those held when negotiating a contract, the Chinese may ask many questions and nod their assent at the answers. This nodding usually nears that they understand or are being polite; it seldom means that they like what are hearing and want to enter into a contract. For this reason, when dealing with the Chinese, one must keep in mind that patience is critically important. The Chinese will make a decision in their own good time, and it is common for outside businesspeople to make several trips to china before a deal is finally concluded. Moreover, not only are there numerous meetings, sometimes these are unilaterally canceled at the last minute and rescheduled. This often tries the patience of outsiders and is inconvenient in terms of rearranging travel plans and other problem. Another important dimension of Chinese culture is guanxi, which means good connections. In turn, these connections can result in such things as lower costs for doing

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business. Yet guanxi goes beyond just lower costs. Outsiders doing business in china must be aware that Chinese people will typically argue that they have the guanxi to get a job done, when in reality they may or may not have the necessary connections. In practice, guanxi resembles nepotism where individuals in authority make decisions on the basis of family ties or social connections rather than objective indices. In China, it is important to be a good listener. This may mean having to listen to the situation in the United States and other Western countries, where individualism is highly prized. For this reason, one must never single out a Chinese and praise him or her for a particular quality, such as intelligence or kindness, because this may well embarrass the individual in the presence of this or her peers. Chinese also are less animated than Westerners. They avoid open displays of affection, do not slap each other on the back, and are more reticent, retiring, and reserved than North or South Americans. They do not appreciate loud, boisterous behaviors, and where speaking to each other, they maintain a greater physical distance than is typical in the west. 2.4 Legal Reform

The weakness of the rule of law in contemporary China is a major source of concern. In particular, the judicial systems submission to political influence, especially that of local government officials, its vulnerability to corruption33 and its weak expertise34 exacerbate the lack of legal remedies,35 the inadequacy of the available sanctions36 and the randomness of their enforceability.37 2.4.1 The Rule of Law

While still a work in progress, the Chinese legal system has been among the most breathtaking achievements of the reform movement launched in 1978. Even the fact that the early reforms were adopted by the use of recognized legal sources represented a

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variance with respect to prior politicized processes. In 1997, the 15th National Congress of the Communist Party adopted the rule of law as a basic strategy and an important goal for socialist modernization and it committed itself to the task of building a socialist legal system with Chinese characteristics. In 1999, the Constitution was amended to include protection for the rule of law. At its 17th National Congress in 2007, the Communist Party renewed its call for comprehensive implementation of the rule of law. In its February 2008 report on Chinas Efforts and Achievements in Promoting the Rule of Law, the State Council reaffirmed the countrys commitment to the rule of law as a fundamental principle. The intertwining of legal reform with economic reform is illustrated by the adoption as early as in 1980 of the Provisional Regulations with respect to Lawyers. At first, lawyers were State workers expected to give priority to their duty to protect socialism and the Chinese State over their duties toward their clients. But in the manner typical of the reform movement, the State has fostered a gradual transformation toward independence of the legal profession. After seven years of preparation, a national Law with respect to lawyers was adopted on May 15, 1996 and it entered into effect on January 1, 1997.38 It was amended on December 29, 200139 and again on October 28, 2007 with effect as of June 1, 2008.40 A main issue of contention as regards the independence of the legal profession arises because of the exposure of lawyers under the laws article 37 to administrative and criminal sanctions for their defense of causes that touch upon national security, for their use in court of arguments that constitute slander and for their conduct that causes courtroom disruptions. Since 1985, the Standing Committee of the NPC has adopted five decisions and four fiveyears plans to promote the dissemination of knowledge of law among the people. More than 300 television stations carry programs on the law.

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As of the end of 2006, 603 institutions of higher learning offered bachelors degrees in law to some 300,000 students majoring in the subject. Some 333 institutions awarded masters degrees in law and 29 doctorate degrees. Within three decades of the launching of the reform movement, Chinas accomplishments in the building of legal institutions enabled it, in 2001, to join the World Trade Organization (WTO) with the intentions not only of submitting to its rules because of their demonstrated effectiveness in promoting international trade and development, but also to use it as a forum in which to press its own claims for equal treatment in accordance with international law. In the process of building a modern legal system compatible with the constraints in the WTOs substantive agreements, China adopted, amended or repealed within a few years some 3,150 laws and regulations. Chinas reform of the regulatory frameworks of its trade and financial sectors have won the praise of the WTO and of the International Monetary Fund (IMF). 2.4.2 A Modern Legal System with Chinese Characteristics

The implementation of legal reform since 1978 has entailed a deliberate effort to draw inspiration from the best results achieved by other countries in regulating economic activities. Delegations of Chinese officials, experts and scholars have sought encounters with their correspondents in foreign countries to discuss their solutions to all aspects of social engineering within the purview of the law. Large numbers of the countrys youth have enrolled in the finest foreign law schools, business schools and universities. As China has joined all the major international economic conventions, Chinese-origin personnel within international organizations have worked with their peers from other countries and are assuming ever more important responsibilities. By way of just one illustration, the World Bank has appointed a scholar from China as its chief economist, Justin Yifu Lin, founder and director of the China Center for Economic Research at

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Peking University41. While some foreign jurists attach considerable importance to the classification of the Chinese legal system as belonging either to the common law legal tradition or to that of the civil law, the State Council has clearly described the countrys pragmatic approach to the integration of foreign rules of law: China pays attention to making reference to and learning from other countries' experience in legislation. In the field of civil and commercial legislation, the basic systems of both common law countries and continental law countries have influenced the general principles of civil law, as well as the contract and the property laws, and inspiration has been drawn from the spirit of the principles of private law and legislation applicable throughout the world. China has adopted the principle of legal certainty and the principle of proportionality applicable in modern administrative law. The Criminal Law and the Criminal Procedure Law have adopted the basic principles and spirit of the law applicable in other countries. Regarding legislation for the protection of intellectual property rights and environmental protection, China has also learned much from foreign experience.

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Chapter 3 Findings and Conclusions

3.1 Major Findings: In Beijing, on October 1, 1949, Mao Zedong proclaimed the founding of the People's Republic of China (P.R.C.). The new government assumed control of a people exhausted by two generations of war and social conflict, and an economy ravaged by high inflation and disrupted transportation links. A new political and economic order modeled on the Soviet example was quickly installed. In the early 1950s, China undertook a massive economic and social reconstruction program. The new leaders gained popular support by curbing inflation, restoring the economy, and rebuilding many war-damaged industrial plants. The CCP's authority reached into almost every aspect of Chinese life. Party control was assured by large, politically loyal security and military forces; a government apparatus responsive to party direction; and the placement of party members into leadership positions in labor, women's, and other mass organizations. Now Chinese government is trying to keep GDP growth within 7 % and if it is less than 7% the 9 million of new job seekers from this large population will face the unemployment problem. Sometimes it may seem that Chinese are taking some daring decision against the foreign firms or western owned firm. This is because of their safety. Thus the major findings can be summarize as below: China wants to be self dependence in technology and production. The government of China very conscious and analytical while foreign firms doing business in China or wants to do business with China. Government allows the privilege for local organization and very strict for foreign firms against which the western speaking a lot.

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In culture, The Chinese place values and principles above money and expediency. Chinese are very punctual and do not want express emotion openly. China has become a headache for western world due to its large manpower, advancement of technology, robust economy.

3.2 Conclusion: In the year of 2007, Germany lost its champion export crown to China which was predicted by several economists of Germany from 2005. This was possible because of contemporary business policy of Chinese Government. The Government at a time has given opportunity to local firms and restricted the invasion of Foreign Multi-National companies. This is because of keeping economy dynamic with self sufficient. China is having almost one third of the worlds population so it is great challenge for Chinese government to keep people employed under a better economy.

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Appendix

Explanation of Abbreviations used in the study:

CBI: Confederation of British Industry CCP: Chinese Communist Party EU: European Union GDP: Gross Domestic Product IMF: International Monetary Fund IP: Intellectual Property IPR: Intellectual Property Rights MNC: Multi-National Corporation NPC: National Peoples Congress PPP: Purchasing Power Parity PRC: People Republic of China sq km: Square Kilometer US: United States WTO: World Trade Organization

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Bibliography
Books:
1. Hodgetts, Richard M & Luthans Fred, 2003, International Management: Culture, Strategy and Behavior Tata McGrawhill, New Delhi, 5th edition, pgs 21, 34, 154-156.

Reports:
1. Drury, Guy Dru, May 2010, Chinas Investment Environment Still good for Business? CBI in China, pgs 6-10.

Articles:
1. Laprs, Daniel Arthur & Youjiao, Zhang, Business Law in China, Internet, pgs 910.

Websites:
1. 2. 3. 4. http://www.indexmundi.com/china/geography_profile.html http://www.indexmundi.com/china/government_profile.html http://www.indexmundi.com/china/economy_profile.html http://www.wikipedia.com/china.html

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