Entrepreneurial Venture – Introduction
This Challenges entrepreneurial venture assignment is aiming to develop a concise report which will reflect up on the challenges and business opportunities presented by a new country to an organization. Country which is selected for this assignment is China which is a recently opened country of Asian continent. In last 2 decades entire world witnessed a phenomenal growth in international business owing to globalization and liberalization of many economies which were previously closed for foreign business entities and investors. China is one of those countries which recently opened its economy for international business and they performed exceptionally well in gathering manufacturing business from entire world. Currently China is considered as work shop of world because of their ability to provide low cost manufacturing, low priced labour and availability of natural resources. This Challenges entrepreneurial venture assignment is a secondary research study which will use data and literature available from various reliable sources like online databases, books, previously done researches, peer reviewed articles, online publications etc. China is a culturally conservative country and population is china is slightly apprehensive about foreign organizations and its impact on their culture and business. This is the reason why Chinese government prefer foreign organizations that are entering in Chinese markets through joint venture modes. In such countries challenges are anticipated especially in context of cultural factors and regulatory norms (Chan, 2007).
Macro Environment theory
Macro environment is the external environment which impacts an organization and its operational process. Collectively macro environment and micro environment forms the overall scenario in which an organization conducts all transactions. It is important for any organization to assess macro environment of the country or region in which it is planning to enter. To assess the macro environment situation PESTLE analysis is primarily used by the organizational strategists (Ehrenfeld, 2004). PESTLE stands for political, economic, social, technical, legal and environmental status of a country and they collectively provide the broad picture of environment in which a organization would operate. PESTLE analysis of China is as follows
Political:- political environment of china is stable but strict in norms and regulations. Chinese government keeps a strict monitoring over the activities of an organization. This factor is specifically important for MNC because they are usually under strict surveillance of government. Political environment is not anti progress in china and they also liberalized their economy and opened it for foreign origin organizations. Political environment is getting better day by day and it provides good support to organizations that are willing to follow government regulations to the letter.
Economic:- Economically china is emerging as the next super power of world. Their growth rate is touching 10 percent annually and they are largest exporter in world. Economic environment of china is very lucrative for multinational corporations to enter. Companies can grow exponentially with growing economy and a huge market potential available with china (Walton, 2009).
Social:- China is a thickly populated state. Chinese government is struggling to provide sufficient infrastructure to its population. Previously china was under the control of communist parties and army which made some lasting impacts on Chinese population. In china organizations has to be socially responsible to avoid wasting resources and create good job opportunities for local population. Social environment of china is still in a improvement phase and gap between the poor and rich is to wide to be filled in near future. MNC are welcomes by Chinese society because it helps them to bridge the existing gap (Suisheng, 2000).
Technical:- technical environment of china is very conducive for a new organization to establish itself. China has a large work force which is technically educated and available at cheap prices. Chinese manufacturing unit are globally renowned for their ability to manufacture goods in a cost effective manner. MNC can take advantage of progressive technical environment of china. Initial establishment of manufacturing unit and infrastructure would also be easier for a organization in china because there majority of machinery, equipments and services they can get from Chinese market (Tang, 2010).
Legal:- legal environment of china is neutral and it does not favour any organization nor does it restricts any one. Laws and regulations are equal for all competitive organizations. There might be some difference in the level of monitoring of local and international organization. Regulatory framework of china is slightly tough and organizations need to seek much permission from government bureaucracy which might act as an obstacle for organizations. Government of China is progressively making changes in the policy to provide an easy and less time consuming licensing procedures.
Environmental:- environmental issues and changes are a matter of ongoing concern in china. Many experts and academicians are of the opinion that china is consuming its resources at a very fast rate. Mining and formation of large hydroelectric power stations are being opposed by local as well as international environmental groups. There is an increasing demand to find a balance between growth rate and consumption of natural resources in China. MNC would be more sustainable in china if they prove to be a benefit for the environment rather than only consuming resources (EIU, 2011).
All though there are many failed MNC organizations in China like closure of one of the ice cream factories of Nestle ( a Swiss dairy giant) in Shanghai or there may be some examples like Earlier this year, Best Buy Co., the world’s largest consumer electronics retailer, closed five of its Chinese stores. In March, US toy manufacturer Mattel closed its Barbie flagship store in Shanghai after only two years of operations. Following this trend, La Maison, a European building material distributor, closed its seven stores in Shanghai and announced intentions to withdraw completely from the Chinese mainland market.
However biggest empirical evidence which is presented here is regarding Google’s failure in Chinese market Research when it entered in the market as a sole player in internet search and competed head on with local player Baidu.
Case Study 1
Google entered Chinese market in year 2005 and became a instant hit and grabbed the position of number one search engine in Chinese market. They were generating huge amount of business plan from Chinese searches and grabbed almost 80 percent of total market share. During that time they were subject to be answerable to Chinese government and all searches in China has to undergo a censorship removing any content which is considered as illicit, illegal or against government in any manner. Google initially followed all the laws and regulations imposed by Chinese government and followed a strict code of censorship. Till that time they were getting all the praise and priority by Chinese population and government. They also developed a Chinese language interface to make researches easier for Chinese people. From 2005-09 everything was going good for Google china but in the end of 2009 Google china’s head who was a Chinese origin technocrat decided to depart from the company and start his own venture fund. This was the first time Google china started losing market share to its local rival baidu (Drummond, 2010).
Further the make the matter worse in year 2010 Google abolished the policy of following censorship needed Chinese government. This move was said to be made against the increasing number of Chinese hacker attacks on Google and US tech companies. To negotiate with the existing land laws and Chinese regulations all searches were routed through a Hong Kong based server thus they were not subject to censorship. Chinese law of censorship and regulations regarding control of internet information flow is not applicable on Hong Kong and Google took advantage of this arrangement. In next two years Google saw a tremendous loss in its Chinese market share and now they moved from top notch position in internet search by a local player ‘Baidu” which is a preferred search engine by Chinese people. Google’s current market share just slipped below 20 percent and now every strategist, international business expert is contemplating that Google is down on the same road as e bay went in Chinese market. Many critics argue that Google made two basic mistakes in there china operation. First was going against the government regulations and circumventing government’s will and second was removing Chinese language interface which was perceived as a disrespect by Chinese people (MacKinnon, 2012).
Interpretation, discussion and analysis
On analyzing the entire case study it can be stated that Google failed to understand the basic psychology of Chinese population and Chinese government. Google might have won the small battle by moving its base to Hong Kong but lost the war because it created a negative image of self in Chinese market. Google followed the strategy of one size fits all and made business decision like they are made in western culture. However in China what laws say is not as important as what is perceived about you. Another mistake made by them is regarding a insult to Chinese language and culture (Suisheng, 2000). There might be other ways to retaliate but Google choose the way of retaliation by removing Chinese language search and this hurt the sentiments of Chinese population. This move was directly conflicting with the likes and preferences of their primary consumer base. On basis of further discussions and analysis it can be said that there are following challenges and opportunities in business conduction in China by a foreign organization.
Challenges and opportunities in china
Challenges associated with conducting business in China especially by a foreign organization are as follows
- Strong role of government:- traditionally china was ruled by a very strong hold government centrally and a majority part of it was under military control. Government has a more than average interference in each and every activity of a individual and a organization in China. It becomes very difficult for any organization to full estimate how much interference government can do in their operations If needed government can order immediate ceasing of business without any explanation from their side. An international organization has to always ensure that they comply with demands of government in China fully and take care that they do not contradict them in any manner possible. This is a difficult challenge and every organization might not be ready to meet this challenge (Henley, et al. 1999).
- Development of Relationships:- China as a society and culture is more oriented towards relationships rather than regulations. Many people call Chinese society is a relationship society. Here decisions are taken on the basis of relationship rather than logic. Because of this organizations are required to have a long term relationship with governments and local people. Since this option in not available for a new entrant in market so they would need a long time in Chinese market to prove their mettle.
- Cultural sense of superiority:- owing to their long period of civilization and historical facts about innovation and discovery of many important chemical products and weaponry in China Chinese people have a superior sense of civilization, culture and technological advance. China and Chinese people does not think that they are a newly erupting economy and they believe that they are and they were the centre of world and in future they would be. They also strongly believe that western civilization has a just a momentary edge in technology and soon they would be a thing of past. They consider western civilization as inferior and do not accept them or their products in their market easily (Mente, 2000). An organization has to work very hard and prove they are superior in every aspect to gain respect and acceptance in Chinese market.
- Lack of Infrastructure:- China is growing very rapidly but they still lack sufficient infrastructure in terms of roads, power, connectivity, supply of raw materials etc. China is not able to cope with the growth rate of business in terms of infrastructure and this is also emerging as a big challenge for foreign companies entering in Chinese market. Chinese government is trying to develop infrastructure in a very fast manner but geographical size of country and population are two major issues which reduces the developed infrastructure into inadequate (Firzli, 2011).
- Corruption:- corruption is another problem rampant in Chinese bureaucracy and government systems. As china is a strategic relationship based society soon relationship based favouritism and biased treatment give rise to corruption. Corruption is a big deterrent for many international organizations (Alon, ed. 2003).
- Large Population:- This aspect act both as a opportunity as well as challenge for the organization entering in China. A large population means there is a lack of abundance of resources and there is a high probability that government can control the consumption of natural resources as well as consumer based consumption. If organization is entering the country then they might face problems in sourcing the resources needed for public infrastructure development, and if control is executed by government when organization is established in market then control might impact the sales and growth of company negatively.
- One dilemma which is faced by MNC in china is to achieve solid foundations and respect in china at the same time maintaining a fast speed of growth. In china one has to build brand equity and brand reputation in market and this take time because people would be slightly apprehensive about MNC in their market and after some time they would start dealing with organization and when they are satisfied with working then only they will trust the company. On the other hand local companies are rapidly filling the gap which MNC wants to fill in china. In such situation MNC’S are facing the challenge that what should be their priority, the brand building or gaining market share (EIU, 2011).
- HIGH GROWTH RATE:- china is world’s fastest growing economy with a growth rate of approximately 10 percent and they are consuming products and services (specially raw materials) in huge quantity generating business opportunities for many supplier countries and companies (Lipman, 2011).
- LARGE AND EDUCATED WORK FORCE:- Chinese education system produces maximum number of engineering graduates in world. Availability of a cheap and talented workforce is china’s biggest competitive advantage and they are using this asset to grow themselves into a global manufacturing hub. A foreign organization can use this availability for their benefit and compete with other companies on a global level.
- LARGE POPULATION:- China is world’s largest population which means it has the maximum consumption potential. In future china would be the biggest consumer of products and services rather than USA. Disposable income, luxury life style and a high consumption rate are growing trends in China.
- OPEN ECONOMY AND CAPITAL INTENSIVE AMRKET:- Chinese capital market is exploding with capital investment. This is creating a perfect ground for international companies to come and explore the market. Government is making liberal laws for investment and giving immense opportunities to companies who are interested in establishing themselves in China (Hutchings, 2003).
- LARGE GEOGRAPHY AND EMERGING ECONOMY:- Not only growth rate but Chinese economy in its sheer volume is a huge economy and every year it is contributed by the productivity of a population of more than 1 billion. China has the second biggest army in world and they are also one of the largest spenders on Defence of their country. China is a huge country geographically and provides a large population which can be a potential market. Presently China has all the features of a huge market like large population, strong and growing economy, large geography, opening and liberalizing market regulations thus making it one of the attractive destinations for foreign investments.
In conclusion it can be stated that for entering in China market Joint venture is the most suitable strategy for a multinational organization. A joint venture should be made with a reputed Chinese organization even if it means fewer profits in initial stages because this will ensure a firm entry of organization in Chinese market and also provide a great support during initial phases when organization would be scrutinized with scepticism by government as well as general population. A joint venture will also help the newly entering organization to better understand the intricacies of local market and provide them a readymade distribution and sales network which is a very difficult task to achieve in China. Another benefit associated with joint venture is having a self made controlling and checking mechanism (Homburg, et al. 2009). A local Chinese company as a partner would never take any decision which might be against Chinese government or it would contradict any cultural norms of China. A joint venture would give a slow but a very solid and specific start to the newly entering multinational organization in Chinese market.
- Drummond, D. (2010). “A new approach to China: an update”. The Official Google Blog [ONLINE] available on http://googleblog.blogspot.in/2010/03/new-approach-to-china-update.html Retrieved October 22nd 2012
- MacKinnon, R. (2012). Consent of the Networked: The Worldwide Struggle For Internet Freedom. Basic Books. pp. 37–38. ISBN 978-0-465-02442-1.
- Chan, K. (2007). “Misconceptions and Complexities in the Study of China’s Cities: Definitions, Statistics, and Implications”. Eurasian Geography and Economics 48 (4): 383–412. doi:10.2747/1538-722.214.171.1243.
- Walton, G. (2009) International Centre for Human Rights and Democratic Development “Executive Summary”. China’s golden shield: Corporations and the development of surveillance technology in the People’s Republic of China. Rights & Democracy. p. 5
- Tang, X. (2010) Guo, Sujian; Guo, Baogang. ed. Greater China in an era of globalization. Lanham, MD: Rowman & Littlefield Publishers. pp. 52–53. ISBN 978-0-7391-3534-1.
- Lewis, E. (2007). The Early Chinese Empires: Qin and Han. London: Belknap Press. ISBN 978-0-674-02477-9.
- Mente, B. (2000). The Chinese Have a Word for it: The Complete Guide to Chinese thought and Culture. McGraw-Hill Professional. ISBN 0-658-01078-6
- Alon, I. ed. (2003), Chinese Culture, Organizational Behavior, and International Business Management, Westport, Connecticut: Praeger Publishers.
- Suisheng, Z. (2000). China and Democracy: Reconsidering the Prospects for a Democratic China. Routledge, ISBN 0415926947. p.43.