China: Big Opportunities, Complicated Risks

Q 3-1: Recommend a perspective an MNE could use to make sense of the political situation in
China

A 3-1 : Over the past thirty years, it is China which has well and truly taken advantage of the
idea of globalization. Plenty of China’s own local businesses have thrived, attaining the status of
world-renowned multinationals. During the same phase in time, various international MNEs
have taken a keen interest in China and have invested within the nation. However, over times,
these MNEs have experienced hardships when conducting business. They have had to endure
many barriers in the form of ‘State Capitalism,’ among other obstacles. So, how may an MNE
make sense of the political situation in China?

MNEs must consider that China does not provide the same business freedom as the USA does.
When a new business is set up, MNEs are obligated to inform the Chinese government exactly
what their intentions are. What can the MNE offer the Chinese economy? Will it create jobs?
Who are its business partners? MNEs have to also consider that China is in the midst of boosting
its own economy. Initiatives such as Belt and Road and Made in China 2025, even though they
may be seen as opportunities, should actually worry international MNEs operating within China.
The nation is looking within to upgrade its own sectors such as AI and technology as well.
Chinese entities do not anymore want the tag of providers of only low-cost labor, evident from
local administrations supporting the advancement of the intelligent manufacturing industry. Such
changes require MNEs to move on from any traditional views they might have had about China’s
corporate world.

MNEs must be prepared to face numerous legal and political complexities if they are looking to
establish themselves as leading enterprises within the country. With the Communist Party of
China holding an overwhelming majority in the National People’s Congress, the political party
has a stronghold on how legal proceedings are conducted. There exist over a 130 cities with
populations exceeding half a million people. Even the biggest MNEs would find challenges
when dealing with a country with such geographical features. The Chinese system is organized
in a way in which businesses are regulated under the control of the state. MNEs have to
understand the political structure as well, where they take into account how they must deal with
the central or provincial government. Many believe the Chinese legal structure to be outdated
and it may well take time to change that. Chinese officials have also been accused of promoting
their counterfeit market, which has caused billions of dollars’ worth of loss. Thus, international
MNEs are required to take all such matters into perspective if they truly want to reach successful
levels of business in China.

In spite of the obvious challenges, MNEs must know that there are pivotal to China’s economy.
Business structures will evolve over the next ten years, as China looks to overtake the Western
side of the world in terms of commerce and data solutions. Commercially, China is set to grow
and MNEs need to engage with the Chinese government in a manner which will keep them in
China’s future plans. MNEs must also be ready to face challenges from local entities. Chinese
companies have been fast in adapting to the changes in the technological world, making it clear
that they are prepared to take on MNEs head on. It should also be mentioned that local
companies have the backing of their state, something which MNEs do not necessarily possess.
Thus, MNEs need to link their own ethos to the needs of the Chinese economy, and make this
link in the most efficient way possible (which profits all parties involved).

Q 3-2: How would you advise an MNE to manage the intricacies of China’s legal environment?

A 3-2: MNEs face a tricky situation when dealing with China’s legal environment. They must be
sure whether they are in China to indulge the local market or gain a platform to serve the global
markets. If it is the former, MNEs have to compete with Chinese entities in addition to knowing
what may work in their favor in the process. The Chinese business community would attest to
the fact that knowledge of the local markets is a requirement if an MNE is to find success in
China.

MNEs need to stray from core policies of their headquarters and instead embrace the idea of
localizing their products and services. Just because a product has worked in overseas markets
does not automatically render it fit for the Chinese market. For the advancement of their
economy, China has adopted a centralized method in terms of their legal environment.
Government and state control is prevalent in present-day China, and MNEs must abide by these
rules in order to stay relevant. Another geographical issue is that national laws may not count for
much in provincial matters, a factor which MNEs should be aware of before setting up shop.
This does not come as much of a surprise as China is still going through issues such as
enforcement of law and loopholes within their legal setup. MNEs must accept that the Chinese
Communist Party (who are currently in power) will have their own mandate in terms of how the
advancement of the Chinese economy occurs.

Chinese government regulations are constantly changing, and MNEs need to appoint trusted
executives within the nation to understand how the market works. Regions of the nation vary in
regards to consumers’ tastes and rule of law. MNEs must keep up with the technological
advances and understand what is demanded. That is indeed a challenge as MNEs need to
consider that present-day China is not represented by just one national market, but many regional
markets. The latter would receive much legal support (something which MNEs may not) from
the state and MNEs need to understand that. In this context, MNEs must also compete with
China’s private companies and state-owned enterprises. MNEs may also have to deal with
matters such as performance standards and also test methods. By buying goods and services
locally, MNEs have the ability to help the Chinese economy. In such a way, MNEs may help
their own case for doing business within the Far East nation.

 Additional Q: One of the best known model in explaining the relations between MNEs and
host governments is "Obsolescing Bargain Model". What is it? How can MNEs retain relative
bargaining power and prevent opportunistic behavior by the Chinese government?

 Answer: The Obsolescing Bargain Model is a concept which involves the nature of the changing
equation between an investor and a host nation (Vernon, 1971). It explains that as the investing
entity gains a stronger foothold in the aftermath of the initial investment, the host government
gains the upper hand in bargaining power. This may imply an increase in taxes or a stricter
government control over the assets of an MNE. In relation to China, it is deducible that the
nation has, overtime, given prevalence to advancing its local economy and businesses and that
the state has applied this model in the form of rules, legal obstacles and even the counterfeit
market. However, MNEs still have ways in which they may retain their relative bargaining
power and thus avoid falling prey to opportunistic behaviours.

MNEs have to figure out a way in which they can hold on to their local employees, a factor
which may help them in continuing business in the country. Chinese workers today have the
option of working for well-established Chinese corporations, and this is where MNEs must try to
tip the balance in their favor. MNEs have to try and break through the cultural barriers and create
a work environment where Chinese employees feel welcome and where they are content to
contribute. Attributes such as discipline are pivotal to running a successful business in China.
Thus, MNEs must adapt to the working cultures of the different regions within China and bring
on board the work ethics which will be respected by their Chinese employees.

It is true that MNEs might have to endure political issues and legal matters which are
complicated, but the fact remains that foreign investors are constantly attracted to the Chinese
market. Companies in China are competing in matters such as product innovation and how
quickly they can reach the market. This requires MNEs to apply efficient and effective business
models. MNEs may utilize the option of working in cohesion with Chinese merchants while also
offering them training in various fields. Where MNEs face challenges of regulations of different
provinces, they must try and work with the administration to deal with the problems. MNEs may
also consider where the Chinese economy needs assistance and work accordingly. For example,
China’s urban population is on the rise and this in itself is a commercial opportunity; local
administrations will try to update their respective service sectors. In this regard, an MNE may
begin an initiative where it provides for the education of the children of its employees until they
graduate high school.

MNEs need to build strong relationships with the corresponding local governments, in regards to
where they are based. There should be specific plans when targeting a certain market or region.
While the major cities of China might be on the same economic levels as some of the most
developed regions of the world, the same cannot be said for emerging markets. China’s
regulations do pose challenges to MNEs, with them facing tighter enforcement than local
enterprises. However, with the right mindset MNEs can establish themselves in the Chinese
market. Through the development of technology and research and development functions MNEs
have the opportunity of availing favorable tax regimes. How MNEs are governed and whether
they comply with the regulations are of essence. MNEs must ask themselves why they are based
in China; are they there to minimize their overall costs or is China part of their future plans.
State-owned enterprises within China have already been looking for ways to surpass methods
utilized by MNEs. These very SOEs are playing a fundamental part in China’s urbanization.
Therefore, MNEs have to work towards a plan where China is included in their future endeavors,
and look for possibilities of working together with SOEs where possible.

MNEs must be poised to face challenges such as the following: corruption, license issues,
administrative obstacles, irregular regulatory behavior and unfavorable legislations. Therefore,
they must comply with Chinese laws and truly make sure of this aspect. MNEs must find a space
where they are also able to follow the laws of their respective home nations. It is not uncommon
to find regulators going public, where open investigations are made of companies within China.
Thus, it is imperative that MNEs are governed in a manner where policies are followed and any
type of fraud is not tolerated. MNEs themselves may try and take part in regulation-making
processes so that they are involved and engaged with Chinese regulators.

Even though China has adopted seemingly strict procedures when it comes to MNEs, it is
important for the latter to comprehend that it is still possible retain bargaining power. MNEs
must play by the rules and consider the requirements of present-day China. It is correct that
MNEs must endure legal and political difficulties, but with the right business models and
governance, it is still possible for MNEs to prevent opportunistic behavior.
Footnotes:

(1) MNCs in China: Making the Right Moves , KPMG Report , KPMG, Sept 2014

https://assets.kpmg/content/dam/kpmg/pdf/2015/08/MNCs-in-China-201409.pdf

(2) James Gathercole, Steacy Sun, Colin Wong. The Challenge for Multinationals in China,

Odgers Berndtson Report

https://www.odgersberndtson.com/media/6835/odgers-berndtson-challenge-for-multinationals-
china-whitepaper.pdf