Risks Companies Face Doing Business In China

Published Date: 02 Nov 2017

- describe main risks companies face doing business in China – all members

- identify the key employment issues in China - Ranjit

- outline the entry mode for our software design company and explain the principles of the HR strategy for this software development division

(ethnocentric, polycentric or geocentric approach – session 2 HRM + case study "The Tortuous Evolution of the MNC" – according to entry mode) – Jasmine

- consider other HR related issues, such as culture factors, with respect to the Chinese operation - Kate

- indicate the country in Europe for allocation of our software support facility, outline its main advantages and suggest a second alternative country – Saachi

Operational: Risks

Doing business in China companies face severe difficulties, problems and risks such as: political, economic, legal, tax, operational and security. Some companies succeed, some failed. Among software companies that have succeeded in China are Hewlett Packard and Microsoft.

The main risk in operation aligned with corruption, which pervades the party, and bureaucracy, which is massive and overarching with a lot of "red tapes". "Foreign companies encounter rigid bureaucracy at every level: from the national level, through provincial governments and down to city authorities" (Vestergaard and Lee 2007). Bribes among officials are common and even expected. It is almost impossible "to gain any local government approval without offering financial inducements" (Doole and Robin 2008, p.96).

Other difficulty is the language. Mandarin is spoken throughout China, but there are a lot of local dialects, for which local translator is needed. The main problem with this translator during business negotiations may be that he translates what the party wants to hear, thus leaving businessmen with "the wrong impression of what was actually said at a meeting" (Vestergaard and Lee 2007).

Another major problem for international company operating in China is piracy and insufficient protection of intellectual property rights, especially in such sectors as electronics, pharmaceuticals and software (about 98% of all software in China is pirated) (Doole and Robin 2008, p.98).

Regarding labor issues, China has a large workforce, both high and low-skilled. But in some booming regions there are shortages of skilled labor. Because of poor networks between universities and business many skilled graduates work for state sector.

All Chinese employees are represented by the All China Federation of Trade Unions and independent trade unions are illegal. The role of trade unions decreases nowadays. In modern China, while moving to free-market economy, workers "began to be able to choose whom they worked for, and managers whom they employed and how much they would be paid". (Lucas, Lupton and Mathieson 2007, pp. 344-345).

Cultural aspects

Human resource management is important factor for survival and performance of international organization. As our major American software design company is a multinational enterprise, the key to its success is HRM. HR managers, decided to operate internationally, should take at least 3 main points into consideration:

- strategy for becoming an international firm,

- the laws, labor market, institutions, dynamic business environment, industrial sector in hosting country,

- the impact of local cultural norms (national culture) on home-based (American in our situation) ways of working,

In this part of our assignment we are going to discuss the impact of cultural differences in managing people in China.

China itself is very specific country with unique language, distinctive culture and values which "affect the way people organize, conduct and manage work" (Brewster, Sparrow and Vernon 2007, p.6).

There are many definitions of national culture, given by different scholars, studying culture (Schein, Trompenaars, Hall, Kulckhohn and Strodtbeck, Hofstede and others) in different period of time. The most widely accepted is: "A culture is the configuration of learned behavior and results of behavior whose component elements are shared and transmitted by members of a particular society" (Linton 1945, cited in Doole and Robin 2008, pp. 72-73). There are no doubts that cultural differences affect organizational culture and each international company should establish and maintain its own corporate culture, based on knowledge of host-country’s culture.

One of fundamental studies in the field of culture is Hofstede’s Model of Culture (1980) with its 4th dimensions. China wasn’t included in Hofstede’s original study "Culture's Consequences" (1980), but later, in 2001, 5th dimension (specially designed for China) was added.

In this paper we try to analyze these dimensions regarding to China:

1) Power Distance. China is a country with wide power distance, high hierarchy and high level of respect to elder people. Chinese employees tolerate great differences in social power and wealth and Chinese managers spend a lot of the time looking up the pyramid (Brewster et al. 2007). All the decisions are made top-down. Planning is left to the superior (not to subordinates), who has greater trust and power.

2) Uncertainty Avoidance in China is quite high, thus more attention should be given to risk averse and cautious at workplace (Ogden and Cheng 2005). The need to invest in protecting employee against the possibilities of unemployment and sickness is also high.

3) Individualism vs. Collectivism. As it’s a collectivist country, family-organization prototype is used wide. "Managers spend nearly 25% of the time servicing a series of "father-and mother-in-law" relationships, party and ideological work takes up 1% of their time" (Brewster et al. 2007, p.40). Employees are not independent, make their decisions only in groups, don’t respect leadership and initiatives. Thus, all decisions are made by taking into account the interests of powerful member of the group. Sending staff to headquarters may be interpreted not as a promotion, but as a punishment and considered as a deprivation from a group.

4) Masculinity vs. Femininity. China is a masculine country and the ideology of male superiority in China prevails even these days as it is a country of traditional values. According to Confucian philosophy women are "subservient and undervalued and had no place in public life" (Lucas et al. 2007, pp.344-345). Despite Socialist China placed gender equality at the centre of its political and ideological project, however, in reality there is a discrimination against women in employment. Thus, ‘the reduction in government involvement in the labor market meant that managers had more freedom to engage in discriminatory practices’. (Lucas et al. 2007, pp.344-345).

5) Long Term vs. Short Term Orientation ("Confucian work dynamism"). Confucian dimension is quite high. Thus, stability of society, quality of life, focus on future, savings and persistence make sense for Chinese employees. Doing business in China MNE needs to take longer-term view of investment.

Apart from Hofstede’s dimensions such specific factors as guanxi is very important in understanding Chinese culture. According to Davies (1995, cited in Mead and Andrews 2010, p.172) Guanxi can be defined as:

the set of personal connections which an individual can draw upon to secure resources or advantages when doing business or in course of social life.

It’s a kind of "social capital owned by a business person and associated with his/her organization" (Chen 2001, cited in Mead and Andrews 2010, p.172). Guanxi relationships are necessary for getting business, political or personal advantages. The Chinese rely heavily on personal relationships in business and all mutual trust is built around guanxi. On one hand, guanxi may take the malignant forms, as well as patronage, that harm the organization and, on other hand, it may take benign forms that only help organization to build strong positive corporate culture. For international company it is very important to understand the dynamics of guanxi.

According to Hall (2000) China is a "high-context" country, that’s why while managing people the main stress should be given on integration within group, because the great deal of information is internalized there (Brewster et al. 2007, p.19). The words don’t have significant meaning and to understand the communication body language and silence are used. A great role is given to age, family and social status. "High-context cultures are often more traditional and unchanging" and "because of the importance of relationships, they tend to be deep and longer-lasting" (Brewster et al. 2007, p.19). Traditional cultural courtesies are expected, discussions are long and repetitive. In this case written agreements have a higher priority, despite employees prefer verbal ones.

In our situation the best way for HRM is to use cultural (relationship-based) control over Chinese subsidiary and develop high level of loyalty and moral commitment to our international company. It can be done by different socialization programs, social events, seminars, visits between the subsidiary and headquarter. As loyalty, trust and commitment are the main characteristics, some problems, concern managing people, may appear. Chinese culture, even in business environment, is family-based, that’s why it’s hard to fire or dismiss someone. Fired employee can be a relative of other employee at the firm, thus sometimes the whole family may be against person, who made a decision about dismissal.

As in a collectivist culture, it’s hard to hire fired employee back, because the community is against this employee. Also when the boss is gone, most probably the team, loyal to him, is gone too. It happened very often because close relatives are usually hold general management positions.

Overall, managing people in China all these factors need to be taken into consideration. Thus, human resource managers need to practice:

- small group discussions and presentations, participative approaches, prevailing of group rewards in compensation and benefits (as China is a collectivist country);

- as a preference in China is for Group Orientation, our HR manager should appeal to the common interest. All changes need to be considered on how they are good for the group. Tasks formulation and asking questions are also on groups. Need to allowing groups to consult with each other is also very high and HR manager should spend a lot of his/her time working out their responses, questions, and concerns;

- as other preferences for Chinese employees are High Power Distance and Hierarchical Orientation, for making announcements and communicating changes it is perfect to use senior staff, who has a great respect from subordinates. For exercising authority only legitimate power need to be used. Also there is necessary to tell the employees what and how to do differently, don’t leave this decision on them. As a main education method lectures and group work are preferred;

- as Quality of Life Orientation ("Work to live") has a great meaning for Chinese employees, the main stress should be given to interdependence, solidarity, improving quality of life. International manager should always remember that these employees have a family life, which is very important for them.

To sum up, on one hand, "Best practices" HRM for our subsidiary in China are:

Teamworking, worker "voice" (employee involvement and participation) and increasing emphasis on work-life balance. Good HR manager should be intuitive, with emphasizing humility and modesty in his approach and resolving conflicts by compromise and negotiation. On other hand, as innovation and quality enhancement are main features in software industry, an extensive training, learning and development can be added to practices above.