Doing Business in China

Doing Business in China

Getting Ready for the
Asian Century
Jane Menzies
Mona Chung
Stuart Orr
Doing Business in China: Getting Ready for the Asian Century
Copyright Business Expert Press, 2012.
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any
meanselectronic, mechanical, photocopy, recording, or any other
except for brief quotations, not to exceed 400 words, without the prior
permission of the publisher.
First published in 2012 by
Business Expert Press, LLC
222 East 46th Street, New York, NY 10017
www.businessexpertpress.com
ISBN-13: 978-1-60649-344-1 (paperback)
ISBN-13: 978-1-60649-345-8 (e-book)
DOI 10.4128/9781606493458
Business Expert Press International Business collection
Collection ISSN: 1948-2752 (print)
Collection ISSN: 1948-2760 (electronic)
Cover design by Jonathan Pennell
Interior design by Exeter Premedia Services Private Ltd.,
Chennai, India
First edition: 2012
10 9 8 7 6 5 4 3 2 1
Printed in the United States of America.
From Jane Menzies: To John
From Mona Chung: To Holly
From Stuart Orr: To Rose
Abstract
Te Asian Century will bring many changes to world trade and to the
global economy. It is predicted that China will be the largest single
economy in this new economic era; understanding how business operates
in China will hence be central to success in the Asian Century. Tis
book will be of particular interest to researchers, managers, and anyone
interested in international business in China. It examines the experiences
of a wide range of Australian businesses that have internationalized to
China, including planning for, establishing and operating a business
in China, staf selection and management, the trade and investment
environment, legal practices and regulations, politics, corruption and
intellectual property protection. Australian businesses were selected
for this project because of Australias strong economic connection with
China and the stability of the Chinese economy over the last 20 years,
including during the GFC. China has been Australias top trading partner
since 2007. Te consistency of the Chinese economy and the long-term
commitment of Australian businesses to operations in China provided a
valuable perspective from which to examine foreign business operations
in China. Over the last 20 years, the Chinese economy grew tenfold, to
become the second largest in the world. Te longitudinal perspective of
many of the participants over this period of change enabled them to ofer
insightful observations regarding the fundamental drivers of business
practices in China. Te fndings presented in this book are based on
interviews collected from 40 organizations, ranging from global mining
and banking organizations to small manufacturing or service companies,
covering a range of industries, and entry modes.
Tis book examines the process of preparing for successful operations
in China, the opportunities ofered by the Chinese market, and the
obstacles to establishing and maintaining business operations in China.
Te research utilizes a number of frameworks to consider business in
China, including foreign direct investment and trade, cultural, political
and legal, intellectual property, strategy, market entry, and human resource
management frameworks. Te fndings presented in this book are based
on a rich and well-considered collection of observations provided by
senior executives with long-term experience of operating businesses in
China. Tis book provides generalized fndings that can be transferred
to other developed country contexts and evaluates the appropriateness
of international business and trade frameworks for the Chinese context.
Keywords
Australian business internationalization, China, doing business in China
Contents
Acknowledgments .........................................................................................xi
Foreword ...................................................................................................xiii
List of Abbreviations .................................................................................... xv
Chapter 1 Introduction ............................................................................1
Chapter 2 Exploring the Trade and Investment Environment
in China ............................................................................... 15
Chapter 3 Understanding the Cultural Gap Between Australia
and China ............................................................................ 37
Chapter 4 Using the Political Structure in China: Can We Ever
Make Sense of It? .................................................................. 61
Chapter 5 Te Legal System: How Can You Use It
to Your Beneft? .................................................................... 81
Chapter 6 Intellectual Property in ChinaAre the Issues All
Tey Are Cracked Up to Be? ................................................ 97
Chapter 7 Motivations, Planning, and Strategies for China ................ 115
Chapter 8 Entry Mode and Location Choices in China ..................... 135
Chapter 9 Human Resource Management in China: Can You
Find Skilled Staf and Retain Tem? .................................. 157
Chapter 10 Conclusions ........................................................................ 175
Notes ....................................................................................................... 191
References ................................................................................................. 207
Index ....................................................................................................... 223
Acknowledgments
Te authors would like to acknowledge the assistance provided by the
Australia China Business Council (ACBC)Victoria Branch for their
active support in completing the project. Tey would like to thank
the members and other individuals who gave us their time and talked
with us about their business activities in China. Tey would also like to
acknowledge the fnancial assistance provided by the Faculty of Business
and Law, Deakin University, to complete the project. Te authors would
like to acknowledge the copy editor, Lynn Spray. Dr. Menzies would like
to acknowledge the support provided by Dr. Ilan Alon and Te China
Center, at Rollins College, Winter Park, Florida, who hosted Dr. Menzies
as part of her sabbatical, which enabled her to devote considerable time
to writing this publication to book.
Foreword
Chinas popularity as a research topic for both inward and outward trade
and investment has increased steadily in the past two decades. Understand-
ing the interactions of diferent countries with China is a vitally important
dimension of internationalization, as diferent contexts can result in a dif-
ferent interplay between home and host country variables, such as politics,
culture, economics, resource base, legal factors, among many others.
Australia is similar, on many levels, to other Western Anglo-Saxon
countries such as the United States or the United Kingdom, though it has
a much smaller population (22.6 million people) and its organizations
tend to be smaller, have fewer resources, and are less international than
their American or European counterparts. Despite the reduced access to
resources, Australian organizations have been successful in the Chinese
market across many sectors, including natural resources, automotive,
education, engineering, building and construction, heavy industries and
banking to name a few, all of which are discussed in this book.
Tis book presents research describing the abilities, choices, and
mind-sets of managers from Australian organizations when they interna-
tionalize to China, from a number of theoretical perspectives. In particular,
this book focuses on the motivations, strategies, and entry mode choices
that organizations select. Tis book also presents a variety of managers
perceptions on the frameworks pertaining to trade and investment, cul-
ture, politics, law, and intellectual property rights. Te human resource
management issues that these organizations face are also explored.
Tis book makes a unique contribution to a small, but growing,

literature on Australian companies in China. Te authors should be
commended on an enjoyable, informative, and absorbing read on entry
into the worlds second largest economyChina, the Middle Kingdom.
Dr. Ilan Alon
1
Department of International Business
Rollins College
Winter Park, Florida
List of Abbreviations
ACBC Australia China Business Council
BSA Business Software Alliance
CCOIC Arbitration Court of the China Chamber of International
Commerce
CIETAC China International Economic Trade Arbitration
Commission
CIT Corporate Income Tax
CJV Cooperative Joint Venture
CPC Chinese Communist Party
DFAT Department of Foreign Afairs and Trade
EJV Equity Joint Venture
FDI Foreign Direct Investment
FESCO Foreign Enterprise Service Company
FIEs Foreign Invested Enterprises
FIRB Foreign Investment Review Board
FTA Free Trade Agreement
GATS General Agreement on Trade in Services
GATT General Agreement on Tarifs and Trade
GDP Gross Domestic Product
GDP PPP Gross Domestic Product Purchasing Power Parity
GFC Global Financial Crisis
HCNs Host Country Nationals
HR Human Resources
HRM Human Resource Management
IP Intellectual Property
JV Joint Venture
M&A Merger and Acquisition
MNE Multinational Enterprise
NPC National Peoples Congress
OECD Organization for Economic Cooperation and Development
PBSC Politburo Standing Committee
xvi LIST OF ABBREVIATIONS
PCNs Parent Country Nationals
PCT Patent Cooperation Treaty
PRC Peoples Republic of China
R&D Research and Development
RMB Renminbi
RBV Resource-based View
SEZs Special Economic Zones
SIPO State Intellectual Property Of ce
SME Small to Medium Enterprise
SOE State-owned Enterprise
T&D Training and Development
TCNs Tird Country Nationals
TM Talent Management
TRIMS Trade-related Investment Measures
TRIPS Trade-related Aspects of Intellectual Property Rights
WIPO World Intellectual Property Organization
WOFE Wholly-owned Foreign Entity
WTO World Trade Organization
CHAPTER 1
Introduction
China, also known as the Middle Kingdom or Zhnggu, has been an
attractive emerging market for international businesses that can be
expected to ofer new opportunities, well into the future. It is predicted
that China will grow and fourish until it is the worlds largest economy
in 2016. Along with its own rapid growth, China ofers many foreign
companies great potential for their future growth. Despite the attractive-
ness of this country, it is dif cult to understand how it operates, and
there are many minefelds waiting for the unwary. An understanding of
the context, the drawbacks, and issues associated with internationaliza-
tion to China, will assist with understanding how entry decisions should
be made for this unique market. Te purpose of this book is to provide
an overview of the Chinese business environment, and present the fnd-
ings from research, conducted with Australian managers who either are
involved in their organizations international activities in China or have
had the experience of internationalizing their business to China. Tese
viewpoints are invaluable in understanding the dynamics of this market
for researchers, would-be investors, and those interested in exporting or
participating in international trade.
China has experienced stunning double-digit growth rates in gross
domestic product (GDP) for over two decades and, as of 2010, it is
the second largest economy in the world.
1
It is predicted that Chinas
economy will surpass that of the United States by 2016 in GDP pur-
chasing power parity (PPP).
2
Tis is just one dimension of Chinas eco-
nomic success; however, it is predicted that it may take another 30years
or so for China to catch up and become the largest economy in real
terms. Tis prediction, however, has changed dramatically since the
Global Financial Crisis (GFC). China will have to develop and maintain
a range of economic fundamentals in order to reach this goal. However,
2 DOING BUSINESS IN CHINA
serious Black Swan events,
3
such as the recent GFC and European Debt
Crises, may impede Chinas future growth.
The Context of China
Chinas entry onto the world economic stage occurred in 1978, with the
implementation of Deng Xiaopings this Open Door Policy.
4
Since then
China has opened its borders and economy to commercialism, indus-
trialization, foreign direct investment (FDI) (now both inwards and
outwards), and international trade. Chinas economic growth has been
astonishing in the past 30 years; and its move from a closed-door, com-
munist, centrally planned economy to a socialist market economy, or
what has been termed by others as the worlds largest capitalist economy
with such success, has been even more astounding. Along with these
economic developments, numerous changes have been made on a social,
cultural, political, and legal front. As a result, the Chinese people have
seen a positive efect on the economy, country, standard of living, quality
of life, and security in China.
5

Culture is a pervasive issue for foreign business in China and is not
well understood by foreign managers. For this reason, the theme of
Chinese business culture runs throughout this book. Understanding the
deeper cultural values is often the key to creating a successful business in
China.
In the past, China has been perceived as the factory of the world due
to its low-cost, endless supply of hardworking labor. Chinas comparative
advantage as a low-cost manufacturing nation is currently being eroded
by increasing wage levels (wage infation has ranged between 7% and
25% per annum in recent years)
6
and greater worker protection, which
increase business costs. In response to this, the government is working
to develop the innovation-based segment of the economy, investing in
education, a strong patent system/patent portfolios, and an emphasis on
research and development. In fact, the focus of Chinas 12th fve-year
plan is the development of an innovation economy.
7
Only time will tell
whether China will be successful in this respect. Considering its past
success in developing other parts of its economy and the power of the
INTRODUCTION 3
government, China is likely to be successful in this endeavor as well. A
common saying in the Chinese business community is, things get done in
China, but it is not always easy.
8
The Context of AustraliaChina
Business Relations
Chinas growth has been the single largest contributor to global growth
over the past 5 years, and this is expected to continue until, at least,
2016.
9
In 2011, China accounted for 45.1% of the worlds crude steel
output
10
and 58.6% of the worlds pig iron output.
11
As a major global
minerals supplier located close to Asia, Australia has taken advantage of
the economic development in China. Today, Australia enjoys a mineral
boom because of its supplier relationship with China.
12
In 2010, Aus-
tralia represented Chinas 6th principal import source, with 4.1% of trade
imported from Australia.
13

China is not only a resources market for Australia; other Australian
companies have been pursuing the Chinese market since the introduc-
tion of the Open Door Policy in 1978.
14
Overall, however, the results of
this pursuit have been somewhat inconsistent. Some Australian compa-
nies have unquestionably had success in China. For example, the ANZ
Bank has one of the most developed Chinese operations of the Australian
banks operating in China. It has managed to open a number of branches
throughout China and has progressed successfully through the stages, as
specifed by government regulations, to become an incorporated bank in
China in 2010.
15
Other Australian organizations have not been so suc-
cessful and have had to withdraw from China. For example, the large
Australian beer manufacturer, the Fosters Group, was unable to make a
proft from their Chinese operations and pulled out of China in 2006.
16

China is now Australias largest trading partner,
17
and its importance
to the Australian economy has grown alongside Chinas increasing eco-
nomic, political, and strategic infuence in the Asia-Pacifc region and in
the global economy.
18
In 2011, Australian investment in China amounted
to A$16.9 billion,
19
making it Australias 11th largest investment
destination.
20

4 DOING BUSINESS IN CHINA
In terms of trade, 3,245 Australian companies were exporting to
China in 2006.
21
Currently, major areas of opportunity include min-
ing and energy; agribusiness; manufacturing; construction; technology;
management; consultancy; regional development; and fnancial, legal,
education, engineering, and architectural services.
22
Major exports from
Australia to China include iron ore, wool, copper ores, and coal.
23
In
the area of services, Australias major exports to China are education and
education-related travel and personal travel (e.g., Chinese visitors to Aus-
tralia). Tere are approximately 1,000 Australian exporters entering the
Chinese market each year,
24
with about 400 Australian businesses operat-
ing in China; most of them engaged in manufacturing, property, business
services, fnance, insurance, education, mineral exploration, and informa-
tion services.
25
Recognizing the signifcance of these business relation-
ships, Australia and China began negotiations for a Free Trade Agreement
(FTA) in 2005.
26
Te FTA aims to facilitate Australian exporters and
businesses in gaining greater and smoother access to the Chinese market.
Australian-Chinese business relationships are important to Australia,
mainly due to Chinas demand for resources. However, many other sec-
tors of Australian industry have been successful in China, such as the
food and beverage, education, and manufacturing industries. Australian
organizations have actively participated in China-related activities, but
little is known about how these organizations internationalize to China.
Hence, it is important to develop our understanding of how they do busi-
ness in China.
Tis book presents the fndings of this research into Australian organi-
zations entry strategies into China. It provides an explanation of and
insights into how Australian organizations make decisions when entering
the Chinese market place and the factors infuencing those decisions. Forty
Australian organizations with business activities in China participated in
the research. Senior executives, directors, managers, and consultants famil-
iar with their international business activities in China were interviewed
to collect the data. In order to illustrate the predominant factors and their
impact, a business strategy model was developed for entering the Chinese
market. Tis model incorporates all the factors, which were identifed as
having an impact on an organizations decision-making process (Figure 1.1).
Each aspect of this model will be considered in detail in Chapters 29.
INTRODUCTION 5
The Study
To conduct the study, initially support from the Australia China Busi-
ness Council (ACBC) was gained by approaching Te Honorable Jim
Short, who then approached ACBCs board for their support of the pro-
ject. Te board gave the researchers approval to contact ACBC members
to participate in the studyinvitations were e-mailed to all members of
the Victoria branch. Nonrespondents were followed up with telephone
calls to encourage participation. In addition, the research team members
personal contacts were used to select companies who were not members
of ACBC. Te snowballing method
27
of participant recruitment was also
used to increase participant numbers. Tis involved asking the interview-
ees to identify potential interviewees from other companies they thought
would be suitable and available to participate in the study.
Once the participants had agreed to be involved in the research, the
aims and background of the study were explained, and confdentiality
and anonymity were assured. An appointment was then made to con-
duct the interview. Te interviews mainly took place at the participants
of ces. Most interviews lasted approximately an hour, and the interviews
were recorded and transcribed by a professional transcriber. One partici-
pant did not want a recording to be made at the interview and notes were
taken instead. Te interview transcripts were then analyzed using a the-
matic methodology, which identifed the major themes representing the
viewpoints of the participants. A total of 43 interviews were conducted
Figure 1.1. Business strategy model for entering the Chinese market.
Trade and investment
framework
Cultural factors
Political factors
Legal and regulatory
environment
Intellectual property
framework
Motivations,
strategy, and planning
Entry mode
and location
Human resource
management issues
6 DOING BUSINESS IN CHINA
for the 40 Australian organizations (in some cases, more than one partici-
pant was interviewed from the organization). To conduct this research,
a grant worth $12,000 was provided by Deakin University. Te ACBC,
Victoria branch, supported the research in kind.
The Organizations Involved in the Study
Te descriptive features of the organizations represented by the partici-
pants, including industry, entry mode(s), business activity in China, year
started in China, and location(s), are presented in Table 1.1. Te partici-
pants are represented by pseudonyms, which highlight their key features.
Te largest sector in the sample consisted of organizations in the
manufacturing industry (10 out of 40). Other industries investigated in
the study were business and property services (5); building, construction,
and engineering (3); education (4); agriculture, forestry, and fshing (4);
and fnance and insurance (3). Tere were a small selection of organiza-
tions that were scattered across various industries, such as accommoda-
tion, restaurants and cafs, mining, publishing, information technology,
government, administration and defense, and health and community
services.
Several types of entry modes were represented in the data, with some
frms utilizing multiple entry modes. For example, one frm engaged in both
acquisition and greenfeld modes. Te modes identifed in the research data
included the following: fy-in-fy-out mode (8); using representative of ces
(2) or a registered of ce (1); joint ventures (6); using agents and partner-
ships to source customers, or, in the case of education institutions, sourcing
students (5); wholly-owned foreign entities (WOFE) (13); licensing (1);
supplier relationships (1); exporting (6); and exporting assistance (1).
Te popular internationalization locations in China amongst the par-
ticipants included Shanghai (24), Beijing (15), Guangzhou (9), Shenzhen
(4), and Tianjin (6). Various other locations are shown in Table 1.1. Te
organizations represented in the data had participated in China over very
diferent periods of time. One organization established its business rela-
tionships in China in the late 1890s, whilst another organization had
established its operations there in 2007. Te majority of companies in the
study had internationalized to China in the early 1990s.
INTRODUCTION 7
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INTRODUCTION 13
Intended Audiences for This Book
Tis book presents the fndings and analysis of a research study investi-
gating the internationalization of Australian businesses into China. Tis
book will be of considerable value to those researching AustraliaChina
business relationships, as there has been little research conducted in this
area, and little is known about the internationalization of Australian
frms to China. Tis book thus makes a signifcant academic contribu-
tion to this important area of research. A better understanding of this
phenomenon is especially important as the Australian government is cur-
rently attempting to develop its relationship with China, responding to
the anticipated emergence of the Asian Century.
29
Tis research also has
practical signifcance for businesses that are new to or are considering
entry into the Chinese market and provides observations that would be of
interest to practitioners. Tis research is also important for managers who
are planning to have careers in China in the future. Tis book provides a
thorough background of the Chinese business environment, based on a
number of theoretical perspectives, and draws conclusions regarding the
key issues identifed in the research for organizations internationalizing
into China.
Structure of This Book
Tis book frst explores the trade and investment climate in China
(Chapter 2), and analyzes the perceptions of the participants towards
Australias negotiations with China on a FTA, and Chinas accession to
the World Trade Organization (WTO). Chapter 3 is devoted to under-
standing the deeper cultural values associated with doing business in
China, identifed by the participants. Tis chapter examines the Chinese
business culture and utilizes the research fndings to identify a number
of approaches, which could be used to address the cultural diferences
that foreign businesses will experience in China. Chapter 4 describes
and analyzes the political system in China and specifcally identifes how
politics in China should be managed. Tis chapter utilizes the fndings
to identify a number of approaches for dealing with the political condi-
tions in China. Chapters 5 and 6 provide an understanding of the legal
14 DOING BUSINESS IN CHINA
and intellectual property (IP) regulatory framework in China. Chapter
5 focuses on the legal system, and the perceptions that managers had of
the system, whilst Chapter 6 focuses on an analysis of the IP issues that
the participants experienced. Tis chapter utilizes the fndings to identify
a range of approaches, which organizations could utilize to protect their
IP-related assets in China. Chapters 5 and 6 also provide a critical assess-
ment of the challenges associated with dealing with the Chinese legal
system and IP laws. Chapter 7 focuses on the motivations, planning, and
strategies that the participants used to enter China. Transaction cost, OLI
(ownership, location, and internalization), internationalization, and the
resource-based view theories were utilized in Chapter 8 to examine the
entry modes that participants adopted when internationalizing to China
and their locational choices. Te international human resource manage-
ment literature was utilized in Chapter 9 to evaluate the human resource
management issues that the participants identifed as relevant in the Chi-
nese environment. Tis chapter focused on staf ng preferences, dealing
with skills shortages, and attracting and retaining staf. Chapter 10 con-
cludes this book with a summary of the key fndings and analysis of the
data. Practitioners will fnd this chapter of interest as the fndings ofer
suggestions for decision-making processes, which will increase the likeli-
hood of success in establishing Chinese foreign business operations.
Conclusion
Deng Xiaoping, the mastermind behind the economic reforms in China,
is famous in China for the saying Search for stones to cross the river.
30

Deng Xiaoping used this statement to indicate that the people of China
needed to search for stepping-stones to make the transition from a cen-
trally planned economy to a modern day market economy, which is inte-
grated with the world. Foreign businesses planning to enter the Chinese
market, whether by exporting, FDI, or joint ventures, should also heed
this advice and search for stones to cross the river. Tis book presents
and evaluates some of those stones. It is hoped that this book will
provide guidance for achieving success and prosperity in the Middle
Kingdom, Zhnggu.