TITLE:INTERNATIONAL BUSINESS IN CHINA

1.Introduction

In this era of globalization, organizations are continuously striving for expansion at the global level. Indeed, with the removal of trade barriers it has become easier for organizations to expand in any country of the world. However, before moving to any country, it is important to evaluate the environment of the selected destination. Businesses work in an open environment where there are various environmental factors that influence the operations of the business. The most common environmental factors are political, economic and cultural. The present report is about evaluating one country i.e. China for expanding a business. The selected business is of a small fast food restaurant that sells a wide range of burgers and cold drinks. Along with its physical restaurant, it is also based on online selling where customers order through their website and then products are delivered to the destination. This is a fictional business. The next section of this report analyzes the environment of China for this fast food restaurant. It considers political, legal and cultural factors and it analyzes in terms of risk, benefits and costs for the business.

2.Environmental Analysis of China

According to Ambler et al., (2008), one of the most attractive locations of this world is China as it is known as the strongest power of the world. This has increased the international business in China. This location has become attractive for international investors due to the large size of the market, China’s growth potential and the low cost of labor. With the free trade concept, it has opened up its borders for other countries for economic activities. On the one hand, there are various benefits that are associated with expansion of the business in China. At the same time, on the other hand, there are numerous costs and risks associated with the expanding of restaurant business in China. The below section has analyzed the environmental factors of China which are important for restaurant business if they move to this country.

2.1.Political Factors

Firstly, the political factors involve the governmental regulations, which involves both the informal and formal rules and regulations which must have to be abided by the companies. As it is said by Czinkota et al., (2009), the most unsettled force is political force, therefore, it must be considered for evaluation of the country.

Like governmental regulations, the legal issues are also important. Though government has started to invest in legal framework for e-commerce but this is still its legal framework is still in its initial stages. Related to e-commerce, there are very little legislation in China. For example, there are no intellectual property rights protection and taxes in China. Moreover, for recognition of digital signatures, support of privacy, validation of electronic contracts and consumer rights for e-commerce, there is no proper regulatory framework. On one side, it is beneficial for this business as the company will not have to pay such taxes. But it will become difficult to continue selling its fast food through its website (Makos, 2015).

With the improved international trade, this business will have the opportunity to expand the business such that its global supply chains are enhanced. Likewise, the business can reform the strategies and practices for reducing the taxation influence on the business. One important political factor for this business is related to public health policies of China. These policies discourage the Chinese citizens to use the fast food, hence, only few of such policies are not in favor of this business. However, this business can utilize these policies in a favorable manner by introducing healthy food items (Dublin, 2015).

Another aspect in legal environment is related with the minimum capital requirement for the businesses. In china, the minimum capital requirement is quite stricter, hence this will be a cost for the business. The registration of small business in China is done through provincial and local authorities, hence, this business will have to register with such authorities instead of the Ministry of Commerce.  VAT in China is around 13-17%, while local tax is around 30% and general national income tax is 30%. These all taxes will be a cost for the business (Blackman, 2000).

With the entry of China in WTO, there is good marketing opportunity as fast food industry is going to flourish further in China. With the agreement among China and America, it is expected that raw material cost is going to decline while quality will improve. It has started to import high-quality grain at lower prices and at good quality and this is going to reduce the cost of fast food businesses in China. Hence, this is an important opportunity for this business to expand in China. In China, foreign investors are also given the same treatment like national investors, this is beneficial for this restaurant to expand in China. There is high transparency in legal policies of China, therefore there is better chances to predict market risk and profit conditions, hence risk is reduced. There is also a good political stability in China. The environment for investors is good. There is huge market for tourism businesses hence businesses like fast food restaurants can expand (Pearson, 2005).

2.2.Economic factors

In the last five years, a significant growth rate of GDP has been observed in China. If it will continue growing with this rate, it will surpass US economy in a very short period of time. The flourishing economy is characterized by abundant and skilled labor, potential urban growth, sight rate of savings and more export business. All of the economic developments have a significant influence on small and medium enterprises and their processes (Dublin, 2015). The improved GDP of China tells that every citizen is contributing more in China’s economy. This shows that purchasing power of every citizen is high, hence they have enough money to spend on food items which is beneficial for the business. Moreover, this country has quite low labor cost, so it will be beneficial for the business as it’s a service business and relies on human resource. So this low labor cost will decrease its overall business cost (Knight and Song, 2005).

Currently the growth rate is quite impressive, but it can slow down hence that will become risk for this business. Moreover, currently China has high property rates. Hence, while moving to China, this business must has to consider the high cost of property which is mandatory for restaurants. Furthermore, it has high inflation rate and recently interest rates has also been increased by The People’s Bank of China (Makos, 2015). Similarly, the reserve requirement for banks as also increased. Banks are required to give less loans and there are also limits on property purchasing. These are few risks which must be considered by this business, before expanding to China (Keen Pang, Roberts and Sutton, 1998).

Furthermore, Chinese government is continuously putting efforts to improve the safety and quality standards. There are strict control and regulation on edible and processed goods, in China. Similarly, there is existence of tight health regulations along with the worker regulations. These tight and strict regulations will increase the cost of doing business in China (Ambler et al., 2008). However, one benefit for expanding in China is about the huge investment by the government which is done for social welfare and domestic infrastructure. Moreover, it is expected that sales of branded food will increased from US $150 to US $650 billion in next year i.e. 2017. Therefore, this can be said that there is a huge potential for this brand of fast food (Kearney, 2010). Moreover, recently Hong Kong is ranked as the second best country which has ease of doing business.

2.3.Cultural Factors

Demographics continuously change, therefore, it is important to analyze the social and cultural aspects of the country before expanding there. Due to change in demographics, the trends and values of potential customers can change, hence these are important. Likewise, the education, religion, lifestyle and emigration has also important influence.  There is high education rate in China. Majority of population i.e. more than ninety percent are educated. Internet is used by a significant number of people (Makos, 2015). There is also a trend of online shopping, and it is expected that use of e-commerce will further increase in China. This is beneficial for this business as this restaurant also sells through its website. On the other hand, there are still many people in China who believe that perceived risk associated with online shopping is high, therefore they do avoid it. The people who do not trust e-commerce are difficult to attract on internet (Kearney, 2010).

The most significant socio-cultural environmental factors are its widening wealth gap, healthy lifestyle trend and increased cultural diversity in China. The widening wealth gap is an opportunity for this fast food business, as it is easier to grow because it is targeting customers from low and middle income households (Dublin, 2015). With this opportunity of cultural diversity, the business is in position to introduce more products and improve its product mix to target customers from diverse market. The healthy lifestyle trend is a risk for this business (Anderson, and He 1999). As it is a fast food business, there are numerous adverse health effects of junk food. The customers might not be willing to eat more due to this trend (Zhang, van der Lans, and Dagevos, 2012). At the same time, this can be an opportunity for this fast food restaurant as it can introduce such products which are healthier for customers. The young Chinese are still inclined towards western style fast food. Indeed, adults do nor prefer such western food, but there is good opportunity of fast food restaurant for targeting the young generation of China (Lee and Ulgado, 1997). So as long, this restaurant continues to offer quality food, there is good opportunity for this business in China.

3.Conclusion

From the above discussion, it can be concluded that China is a feasible choice for this fast food restaurant. No matter, there are certain risks and cost that the business will have to bear up. There are more benefits for the business. From political environment, to economic and cultural factors, there are more opportunities for such business than risks and cost. Therefore, on the basis of this analysis, it is recommended to select China for expansion. 

 

 

References

Ambler, T., Witzel, M., Xi, C. and Zou, D., 2008. Doing business in China. Routledge.

Anderson, P.M. and He, X., 1999. Culture and the fast-food marketing mix in the People's Republic of China and the USA: implications for research and marketing. Journal of International Consumer Marketing11(1), pp.77-95.

Blackman, C., 2000. China Business: The Rules of The Game. Allen & Unwin

Czinkota, M.R., Ronkainen, I.A., Moffett, M.H., Marinova, S. and Marinov, M., 2009. International business (Vol. 4). Dryden Press.

Dublin, 2015. Food Processing Industry in China PEST Framework Analysis Report Out Now, [Online], Available at: http://www.businesswire.com/news/home/20071004005805/en/Food-Processing-Industry-China-PEST-Framework-Analysis [Accessed on: 8th March, 2016]

Kearney, J., 2010. Food consumption trends and drivers. Philosophical Transactions of the Royal Society of London B: Biological Sciences, 365(1554), pp.2793-2807.

Keen Pang, C., Roberts, D. and Sutton, J., 1998. Doing business in China-the art of war?. International Journal of Contemporary Hospitality Management, 10(7), pp.272-282.

Knight, J.B. and Song, L., 2005. Towards a labour market in China. Oxford: Oxford University Press.

Lee, M. and Ulgado, F.M., 1997. Consumer evaluations of fast-food services: a cross-national comparison. Journal of Services Marketing11(1), pp.39-52.

Makos, J.,2015. PEST Analysis of China, [Online], Available at: http://pestleanalysis.com/pest-analysis-of-china/ [Accessed on: 8th March, 2016]

Pearson, M.M., 2005. The business of governing business in China: institutions and norms of the emerging regulatory state. World Politics, 57(02), pp.296-322.

Zhang, X., van der Lans, I. and Dagevos, H., 2012. Impacts of fast food and the food retail environment on overweight and obesity in China: a multilevel latent class cluster approach. Public Health Nutrition, 15(01), pp.88-96

 

 

 


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