Customer loyalty in e-commerce websites in China

¶ … Customer Loyalty in E-Commerce Outlets in China Today

E-commerce is examined in the context of the relationship between firms and their customers and the implications for customer loyalty within E-commerce website. While a large number of consumers in China begin to shop on the internet nowadays, the benefits and value of E-commerce determines what can be offered to customers, but only customers determine which of those will be accepted. Therefore, it is significant to develop a research to argue that providing the highest customer delivered value and satisfaction by E-commerce can be viewed as marketing real contribution to customer. Customer loyalty is one of critical importance when measuring perceived customer delivered value that is offered by E-commerce. Targeting on the main scales of how to create and maintain the customer loyalty within E-commerce business.

Chapter 1

Introduction

Introduction of study

Introduction of E-commerce in China

Statement of the problem

Background of the problem

Purpose of the study

Conceptual framework

Significance of the study

Chapter 2 - Review of the Literature

Introduction

Definition of customer e-loyalty

E-commerce's effect and advantage today

The link between web benefits and customer loyalty

Influencing e-satisfaction: customer need, customer value and customer cost

Barriers to E-commerce development

Chapter 3 - Methodology

Research Focus

Assumptions and rationales for the research design

Theoretical framework

Research approaches and strategies

Data collection methods

Data analysis procedures

Potential outcomes/problems of research

Timescale

Chapter 4: Data Analysis

Chapter 5: Summary, Conclusions and Recommendations

Bibliography and References

Chapter 1

Introduction

Introduction of study

In this study, the paper will carry out an investigation on developing loyalty customer within the specific E-business industry in China. In addition, it develops a research proposal fully recommending how the results of the investigation could be taken further and possibly be a question which needs to be solved. Furthermore, the paper will also state an aspect of the focus of the customer loyalty and then address the literature relevant to this issue. It is also conducted to summarise and justify this research topic.

In the last stage, the paper will discuss how and what data will be collected, and give an explanation of how the data will be interpreted. The report will depend on the primary research and various secondary researches including several case studies to address this specific question in order to summarise any potential difficulties anticipated within the research process.

Introduction of E-commerce in China

In this chapter, the history of Chinese E-business will be examined, starting from its inception 1999 to the present, which will give an insight how Chinese E-business was formed, re-structured, and its most recent developments. Song, the top Group Board Chairman and Chinese.com CEO (2001), points out that after 20 years of reform in China, the country's information industry has witnessed unprecedented rates of development unmatched elsewhere in the world. Indeed, China's telephone and network users and scale (as well as their gross national product) are now second in the world only to that of the United States. According to the 15th survey report publicised on 27 January 2005 by CNNIC, there are 94 million internet users in China (see further discussed in Chapter 3 below), which is above 6% of the total national population. In addition, the development speed and scale of e-commerce is not in direct proportion to the increase of internet users, and is affected and restricted by many factors including policy, goods flow, credit, and consumption habit. Further, e-shopping, online promotion and online sales cover 6.7%, 1.3% and 1.6%, respectively, of most commonly used internet services.

Chinese E-commerce has developed from initiation stage to implementation and developing stages. The most famous domestic E-commerce firms begin to extend their business. Some of them will come into the market abroad, more and more foreign E-commerce companies would like to invest or collaborate with domestic successful E-commerce websites. Facing by the drastic global E-commerce competition, Chinese E-commerce industry has to transform and make innovation to meet the challenges and opportunities.

Statement of the problem

In terms of the research topic area the problem to be addressed in this study is going to find out how customer loyalty will be developed in Chinese E-business industry and how it is important for development of E-business. In daily life, people have formed rooted consuming habits, and they tend to carefully select and try before they buy. But Song (2001) said that the virtual nature of internet causes low trust and loyalty to ecommerce. Many people use internet for information and communication but not purchase. Thus there is a clear need to address this question by evaluating the current situations and problems coming out with customer loyalty within Chinese E-commerce. Identify what and how the E-consumers think of the Chinese E-business industry now. Finally, the paper will demonstrate the impact on the further prospect of Chinese E-business.

Aims and Objective.

Aims:

The study aims to find out the ways in which Chinese E-business has been able to develop the customer loyalty.

To find out what the E-consumers think about E-business and E-shopping in China

Objective:

Focus on the existing e-consumer retention in China.

Identify what elements define on creating and maintaining the E-customer loyalty.

Determine the new methods to transform the Chinese E-commerce company's operation modes within the fast changing global E-business trend in order to gain loyalty customer.

Background of the problem

The choice for this topic comes after the current rapid and drastic development of Chinese E-business situation. Recently there are lots of controversy and speculation coming up about the most popular prospect of E-business in China. More and more people begin to argue and pay attention on the Chinese E-business evolution. There have been many exposures about the problems existing in Chinese E-commerce, they are industry structure, credit system and systematic distribution. The other reason why E-business was chosen was in terms of the 8th survey report by CNNIC, within 22.5% internet users, only 0.86% use internet mostly for purchase of goods. There is a huge potential opportunities of E-business development in the next five years in China.

On the other hand, E-business development is getting more and more flexible and popular in China. According to the fast change of customer's buying behaviours and attitudes to online shopping, people would like to pay more attention on the online shop because of its convenience and low price; however, in terms of some traditional factors such as security problems, credit level and reputation degree, companies are quite hard to keep people as long-term or return customers. That is the reason to hypotheses this topic (Analysis Report on the 13th Survey, CNNIC, 2004).

Purpose of the study

In this purpose, the study will demonstrate the relationship between customer retention and E-business. Try to find out how E-business could gain customer loyalty and satisfy them in China. In other words, the study is helping E-companies to develop their own competitive advantage to improve the understanding and prospect of customer's need and increase their online sale profit.

Conceptual framework

Base on the topic of study, the paper will provide comprehensive theories and opinions to support the question. Basically, the E-business can also be seen as E-retailing, therefore, it should be the same or quite similar to develop the relevant marketing strategies to keep customer loyalty and satisfy customer's need. In that case, the study may be supported by the Phillips's theory (2003) and Hansen and Hennig-Thurau (2000) theories, and also be accepted by other authors' opinions through electronic journals. Most of the theories and opinions are focused on the consumer buying behaviours and attitudes, customer loyalty, customer relationship management and customer retention.

On the other hand, the research project should be conducted by the research methods and theories. Some relevant ideas come from Saunders, et al. (2000) providing comprehensive knowledge to support the research process.

Significance of the study

The study will indicate how E-business can develop and gain customer loyalty in order to improve the online sale and reputation. According to the well developing prospect of E-business in China, organisations especially small online companies have to think about how to accommodate the fast changing competitive environment of online shopping and how to compete with each rival depending on its own competitive advantages. The result of this study may benefit to those organisations which want to start or extend their E-business in the future.

Chapter 2

Literature Review

Introduction

In this chapter, the research carrying out is focused on how to develop customer loyalty, with the main focus being on Chinese E-commerce industry. Today, customer loyalty is considered an increasingly important component of a business's international marketing efforts because of its positive effect on long-term profitability. Studies have shown time and again that it is much more profitable to retain an existing customer than it is to actively recruit new ones. According to Reichheld, et al. (2000), the high costs of acquiring new e-customers can lead to unprofitable customer relationships for up to three years. Lin (2003) also indicated that E-commerce have emphasised on a better understanding of customers' needs and wants and then translated them into the capability to give customers what they really want for the purpose of making them loyalty. Much marketing research has been done on analysing customer behaviour and retention. As a consequence, it is crucial for online companies to create a loyal customer base, as well as to monitor the profitability of each segment (Reinartz and Kumar, 2002)

Definition of customer e-loyalty

Customer loyalty has been defined as "a deeply held commitment to re-buy or re-patronize a preferred product/service consistently in the future, thereby causing repetitive same-brand or same brand-set purchasing, despite situational influences and marketing efforts having the potential to cause switching behaviour" (Oliver, 1999). This general definition appears to apply to e-loyalty as well. Another briefer and more specific definition is provided by Anderson and Srinivasan (2003), who define e-loyalty as "the customer's favourable attitude toward an electronic business, resulting in repeat purchasing behaviour" (p. ____).

Since it is considered difficult to gain loyal customers on the internet without directly contact (Gommans et al., 2001), satisfaction with the merchant and their services may be even more important online than offline. Therefore, Shankar et al., (2003) and Van Riel et al., (2001) stated that E-satisfaction directly and positively affects e-loyalty.

In China, trust is proposed as the most important factor of influencing loyalty. The rust concept has been studied in a number of disciplines, and various definitions have been proposed (Lewicki et al., 1998). Trust is consistently related to the vulnerability of the trustor (Bigley and Pearce, 1998; Singh and Sirdeshmukh, 2000). In terms of increased spending (Gefen, 2000), and intentions to purchase (Pavlou, 2003) or repurchase (Pan et al., 2002). Lack of trust is frequently cited as a reason for not purchasing from online merchants (Lee and Turban, 2001).

E-commerce's effect and advantage today.

The research on the effect of e-commerce is based on the main e-commerce channel-internet. Worzala et al. (2002) suggests that in 2010, 50% of the retail stores in America would be closed because half of all purchasing will occur online. For marketers, e-commerce then provides a new market space through which to provide customers with product purchase opportunities and delivery processes in addition to their traditional brick-and-mortar marketplaces.

The research views about e-commerce benefits and advantages were expressed by Kotler (2000) and Skyrme (2001):

24-hour, 365-day opening

Lower costs

Efficiency gains

Extended market reach

Quick adjustment to market conditions

Convenience and information

Streamlined process

The increased use of the internet has suggested that there may be many advantages to both suppliers and customers in using e-commerce in a web-based environment.

Influencing e-satisfaction: customer need, customer value and customer cost

People are driven by the desire to satisfy their needs. Satisfaction can be viewed as the end-point in the motivational process (Maslow, 1943). Customer will emphasise the objective or tangible attributes of products. They might rely on a product or service to meet their needs for excitement, fantasy or self-fulfillment according to Solomon (1999). Another way of achieving customer satisfaction is through understanding customer value, as perceived value is considered an important contributor to customer satisfaction (woodruff, 1997). Customer value is the bundle of benefits customers expect from a given product or service.

Oliver (1980) indicated that customer satisfaction or dissatisfaction results from experiencing a service quality encounter and comparing that encounter with what was expected. What must be taken into account is the customer's need for quality improvements and his willingness to pay for it. According to Best's customer analysis (1997), customer cost can be understood as a rather essential aspect in the discussion of customers' evaluation of services as well as values and needs.

Barriers to E-commerce development

The main ones barriers are concerns about security and confidentiality of transactions, the authenticity of suppliers, trust in their ability to deliver and the legal enforceability of contracts (Skyrme, 2001). Andersen/Rosen (2000) point out that some of the cause of problems such as conservatism in shopping habits, buying confidence, limitations in bandwidth technology, distribution problems, and lack of profitability of e-retailers are also important to influence the development of e-commerce. Other barriers for e-commerce include poorly organised sites, slow downloads speeds, and difficulties in finding information, according to McQuitty and Peterson (2000); however, occasionally consumers would be happy to align their interests with those of the product and service providers if they can receive the level of service they desire.

Chapter 3

Methodology

Research Focus

In this chapter, the methodology of the research project will be examined and have an explicit objective which succinctly states why the research is being implemented. The objective focuses on the marketing decision which needs a solution ways, the research plan and the data analysis procedure. The research will keep focusing on "Aims and Objectives" and base the ways of gaining answers through the two approaches (secondary and primary) of data collection so as to answer the question of why the research is carried out.

There will be both the quantitative and qualitative methods available for looking at the research, as well as the theories behind it. Following that, the paper will be choice of the research methods and different ways of analyzing them. Finally, the study will bring out the outcome of this research.

Aims and Objective.

Aims: The study aims to find out the ways in which Chinese E-business has been able to develop the customer loyalty.

To find out what the E-consumers think about E-business and E-shopping in China.

Objective:

Focus on the existing e-consumer retention in China.

Identify what elements define on creating and maintaining the E-customer loyalty.

Determine the new methods to transform the Chinese E-commerce company's operation modes within the fast changing global E-business trend in order to gain loyalty customer.

Assumptions and rationales for the research design

Saunders, et al. (2000) state that defining research questions, rather like generating research ideas, is not a straightforward matter. It is important that the question is sufficiently involved to generate the sort of research project that is consistent with the standards expected of researcher; however, depending on the nature of the Chinese E-commerce market there are differences in the approach and techniques required on the part of the researcher. It is often a useful starting point in the writing of research questions to begin with one general focus research question which flows from research idea. Designing research will in most cases be researcher's individual concern, but it is useful to get other people to help you (Saunders, et al., 2000).

In this research plan, the respondents will be targeted as the potential future E-consumers depending on their different income level, degree of knowledge of using internet, the understanding of E-shopping and so on. The E-commerce marketplace has revolutionized the way in which businesses and consumers interact, by providing a medium through which they can search, order, pay and even receive the service or product, this pattern is changing fast, internet access in China is also growing very rapidly, Gladding (2000) pointed out. Winning customer loyalty in E-commerce industry is not merely a modern challenge facing retailers and suppliers today. In many respects the same challenge must have to some extended been a preoccupation of anybody supplying products or services online.

Saunders, et al. (2000) indicated that the choice of topic will be governed by ethical considerations. Researcher may be particularly interested to study the consumer loyalty to online company. Although this may provide some interesting data collection challenges (what type of customer and why) there are not the same ethical difficulties as will be involved in studying - the online purchasing decision. In terms of what Saunders, et al. (2000) analysed before, research design in the latter case may have to concentrate on data collection from the undertaker and, research design will be based on a flow of logic and a number of assumptions, all of which must stand up to the closest scrutiny.

Theoretical framework

Sekaran (2000) mentioned that a theoretical framework is a conceptual model of how one theorizes or makes logical sense of the relationships among the several factors that have been identified as important to the problem. The existing phenomena can be developed to examine whether the theory formulated is valid or not, which can be tested through appropriate statistical analyses. Sekaran (2000) continued state that the theoretical framework is the foundation on which the entire research project is based. It is a logically developed, described, and elaborated network of associations among the variables deemed relevant to the phenomena problems and which have been identified through several of methods such as questionnaires, case study, interviews and observations.

Easterby-Smith et al. (1994) provide a useful summary description of phenomenological paradigm below:

According to Datamonitor Analysis (2000), by 2005, Asia will have the largest online population due to rapid growth in both China and India. Internet has achieved a self-enforcing momentum, continuing to transform business strategies and consumer purchasing behaviour. So as it is essential to develop a research to investigate the potential phenomenon in China. Bernice and Hurst (2001) also indicated that consumer reluctance to shop online is attributed to a number of reason including security fears, problems with fulfillment and poor and impersonal customer service. (p. ____).

Research approaches and strategies

This is a plan of how the researcher will set out to answer the research question; it will detail the sources from which the researcher intends to collect the data and consider the constraints which the research may face. As noted above, this dissertation employs the phenomenological approach to research; this technique is so called because it is based on the way people experience social phenomena in the world in which they live. Phenomenology is an attempt by the researcher to understand what is happening and why it is happening (Saunders, et al. 2000). The most appropriate choice in this research method is the inductive approach according to the theory suggested by Sekaran (2000). Induction is a process where researcher observes certain phenomena and on this basis arrives at conclusions. Researcher logically establishes a general proposition based on observed facts. This type of approach help researcher to understand, explain, or predict business phenomena.

In addition, the research strategy will be a general plan of how researcher will go about answering the research question which has been set. In this regard, Robson (1993) lists the three traditional research strategies as: experiment, survey and case study. At this point, the paper will take the survey strategy which belongs to quantitative methods such as questionnaires approach to collect the data primarily. Saunders, et al. (2000) mentioned that the survey method is a popular and common strategy in business and management research. It allows the collection of a large amount of data from a sizeable population-based most often on a questionnaire, these data are standardised, allowing easy comparison. This means the time you spend planning precisely what data you need to collect, how you intend to analyse them and designing your questionnaires to meet these requirements is crucial. Decisions about tactics will involve researcher being clear about the different data collection methods (e.g. questionnaires, interviews, focus groups, and published data). Furthermore, the survey approach should give researcher more control over the research process. It will concentrate on measuring phenomena involves collecting and analysing numerical data and applying statistical tests.

Data collection methods

Secondary Data - Secondary data refers to information gathered by someone other than the researcher conducting the current study. It includes both quantitative and qualitative data and can be used in both descriptive and explanatory research. To analyze the E-commerce industry and achieve the previously defined objectives, secondary research was used as it provided sufficient data to carry out the purpose of the survey. Saunders, et al. (2000) mentioned that secondary sources such as internet, journals and books are the subsequent publication of primary literature. Data can also be culled from case studies and any of the many sources of secondary data for analysis and application to solve specific problems (Sekaran, 2000).

In this case, the paper will conduct the existing Chinese official surveys (in English) published by CNNIC or other internet journals in relevant domains in order to support the research to be finished. The advantage of secondary data is saving in time and cost of acquiring information. Sekaran (2000) continued to analyze that published data can provide a lot of information for research and problem solving. Such data are mostly qualitative in nature. Secondary data can provide a useful source from which to answer, or begin to answer, the research question (Saunders, et al., 2000).

The information sources and published data about E-commerce industry will be gathered from journals, database, books and internet. These offer the researcher with the main and comprehensive facts and figures that are needed to carry out an analysis on the key objective of the project. Stewart and Kamins (1993) argue that the secondary data already exist researcher can evaluate them prior to use. The time spent evaluating any potential secondary data source is time well spent.

Primary Data - Primary data is information that is collected for the first time by either one or a blend of observation, experimentation and questionnaires. Saunders, et al. (2000) discussed that the greatest use of questionnaires is made by the survey strategy. In this dissertation, a comprehensive and accurate questionnaire will be taken account of solving the particular problem. Questionnaires are a preformulated written set of questions to which respondents record their answers, usually within rather closely defined alternatives. Sekaran (2000) talk about that questionnaire is an efficient data collection mechanism when the researcher knows exactly what is required and how to measure the variables of interest. Questionnaires can be administered personally or mailed to the respondents, or electronically distributed.

In such case, respondents will be questioned by numbers of questions regarding the reasons of shopping online, attitude towards using internet services, customer retention and loyalty for a product/service and expected type of online companies. In terms of what Sekaran (2000) analyses, this research will despatch the questionnaires in doc format (it is easy for self-administer) through many channels such as website publishers, mail lists, forum discussion groups as covering the population's characteristics, attitude, attributes and behaviour either at a fixed time or at a series of time to enable comparisons.

The purpose of research direction is focusing on the Chinese E-commerce, so it is the most efficient way to target on the Chinese respondents through internet in the purpose of making the results representative and accurate as possible (Saunders, et al., 2000). The online survey will be spread its links for downloading by targeted respondents or contents via major domestic information platforms and websites in obvious place. The questionnaire formats are including open questions and closed questions. It is flexible and easier to answer as respondents can control independently.

Data analysis procedures

Getting data ready for analysis - Once the data are ready for analysis, the researcher is ready to identify the phenomena already developed in the previous study. When a researcher intend to undertake quantitative analysis, it is essential to consider the following factors as this is equally important for both primary and secondary data (Saunders, et al., 2000):

The type of data (level of numerical measurement)

The format in which data will be input to the analytical software

The impact of data coding on subsequent analyses

The methods which are intended to use to check data for errors

Data analysis - Tukey's (1977) exploratory data analysis approach is useful in the initial stages. It is important to keep research question and objective in mind when exploring data. The reliability and validity of the measures can now be tested. Descriptive statistics here enable you to describe and compare variables numerically. However, the exploratory data analysis approach also formalises the common practice of looking for other relationships in data which research was not initially designed to test. In this research, computer makes this relatively easy and quick. All the elements of quantitative data have been incorporated into relatively analytical software such as Excel and SAS (Saunders, et al., 2000).

After data collection, the paper is going to examine the reliability and validity of the measuring results. For instance, when the researcher carries out a set of questions, how can researcher be reasonably sure that they are measuring the concept they set out to measure and not something else? This can be determined by applying certain validity tests. The sample needs to be as representative and accurate as possible as it will be used to generalise about the total population. According to the coming research questionnaire, the paper will confirm how well the dimensions and elements of a results have been presented in table and chart format. In addition, the answers will be testified to how well the results obtained from the use of the measure fit the theories around which the questions is designed.

Potential outcomes/problems of research

According to the purpose of research, some extra significant outcome will emerge beyond the original expectations. For example, the paper will find out other great potential developing small or medium E-commerce companies in China according to some specific respondents working in relevant companies even. On the other hand, some problems difficulties will also come out in the following results. For instance, Saunders, et al. (2000) said the respondents will not give the exactly key answers the researcher wants, and it may not be as wide ranging as those collected by qualitative research methods. Saunders, et al. (2000) continue to argue that there is also a limitation to the number of questions, which any questionnaire can contain if the goodwill of the respondent it not to be presumed on too much. Because the questionnaires only one chance to collect the data, as it is often difficult to identify respondents or return to collect additional information. Either some of respondents can not touch the soul of the research. They also give the negative solution probably either. In addition, secondary data in this research project will have been collected for a specific purpose which may not match the needs of research question or objective (Stewart and Kamins, 1993). Finally, data from published data or journals may be out of date or it may not accurately represent the fact in the research period.

Timescale

The following activities were identified during dissertation period:

Activities

Date Completed

Introduction 13th Apr 2005 Yes

Consideration 5th May 2005 Yes

Research proposal and finally chosen 20th May 2005 Yes

Issue/problem introduction (Chapter 1) 30th May 2005 Yes

Literature review (Chapter 2) 15th June 2005 Yes

Research methods drafted (Chapter 3) 5th July 2005 Yes

Finding and present the data (Chapter 4) 3rd August 2005 Pending

Conclusion and recommendations (Chapter 5) 23rd August 2005 Pending

First draft 3rd September 2005 No

Submission of Dissertation 9th September 2005 No

Chapter 4: Data Analysis

Primary Data Analysis

Survey No. 1: e-Loyalty Factors among Chinese Consumers (posted online with Zoomerang.com)

Please list the primary reason you shop online.

Convenience

Prices

Selections

Other, please specify

What is your attitude about using Internet services?

I feel very secure using online services for shopping feel somewhat secure using online services for shopping do not feel either secure or insecure using online services for shopping feel somewhat insecure using online services for shopping feel very insecure using online services for shopping

What factors would influence you to shop at an online outset more than once?

Convenience

Prices

Availability

Quality

What is your gender?

Male

Female

What year were you born?

How many children do you have under 18?

Which of the following best describes you?

Employed (full or part time)

Homemaker

Retired

Volunteer

Not employed

Please indicate your highest level of education completed?

Some high school

High school graduate

Some post graduate

Post graduate

What was your annual combined household income before taxes in 2004?

Under $30,000

30,000 to $39,999

40,000 to $49,999

50,000 to $74,999

75,000 to $99,999

100,000 to $149,999

150,000 and up

Please provide any additional insights, observations or thoughts you might have concerning the online shopping experience and what factors influence you to shop at one Web site over another.

Please type your answers here:

Online Survey No. 2: EnglishClub.com Polls and Voting Forum

Please list the primary reason you shop online.

Convenience

Prices

Selections

Total Votes: 1

What is your attitude about using Internet services?

I feel very secure using online services for shopping feel somewhat secure using online services for shopping do not feel either secure or insecure using online services for shopping feel somewhat insecure using online services for shopping

Total Votes: 1

What factors would influence you to shop at an online outset more than once?

Convenience

Prices

Availability

Quality

Total Votes: 1

Secondary Data Review and Analysis

The review of secondary data was conducted using a variety of online sources, including the World Bank, the CIA's World Factbook, premium services including Questia and Britannica.com, as well as governmental and nongovernmental Web sites.

In their essay, "Thriving in the Regulatory Environment of E-Commerce in China: A Guanxi Strategy," Lo and Everett (2001) report that E-commerce can be defined as any commercial transactions conducted over the Internet (Shah & Sterrett, 1998). In many Western countries, the Internet has become an important channel through which international business activities take place; however, in China e-commerce is still in its infancy. During the past two decades, though, China's economy has grown rapidly and developing international e-commerce has been a key initiative of the Chinese Communist Party's (CCP) economic liberalization project (Lo & Everett, 2001).

The authors point out that Internet connections were first allowed in China in 1994; by the end of October of that year, the number of Internet users had already reached 620,000; since that time, growth has been exponential and at the end of June 2000, there were 16.9 million Internet subscribers and 27,289 websites in China (Lo & Everett, 2001). This number was expected to grow to around 40 million by 2003. In order to maintain this level of growth in the future, the Chinese government has been encouraging a number of local businesses (most notably state enterprises) to continue to promote e-commerce development. Early on, in fact, the government invested.$714 million (in 1993) in laying fiber optic cable networks under all major cities, a clear reflection of the Chinese government's commitment to support future e-commerce initiatives (Lo & Everett, 2001).

Despite the Internet's growth, the government is also attempting to devise laws and regulations to oversee its burgeoning development. The goal of these initiatives is to constrain access to politically harmful information and to safeguard national security. According to Everett and Lo, this fact emphasizes the fundamental contradiction of e-commerce development in socialist China today: "The CCP wants to enjoy the economic growth brought about by Internet technology while restraining it by maintaining control over the free flow of information" (p. 16). This level of contradiction could result in China taking a course of action in its promotion of e-commerce that does not follow that taken by a number of other industrialized countries in their development of e-commerce (Everett & Lo, 2001).

At present, both public and private access to the Internet in China is restricted to four state-controlled Internet service providers (ISPs) (Kennedy, 2000). These include ChinaNet (China Network), China GBNet (China Golden Bridge Network), CERNET (China Education and Research NETwork), and CSTNet (China Science and Technology Network), all of which are governed by the Ministry of Information Industry (MII), the supreme agency responsible for administering Internet-related regulations and licensing for online companies (Kennedy, 2000 cited in Lo & Everett, 2001). Those local private and foreign-invested ISPs (with up to 49% equity share from the date of WTO accession) are able to provide their services to their Chinese customers through these four state-controlled ISPs only, the avenue through which business permits are also issued (Kennedy, 2000). In addition, individual customers can only obtain Internet access either indirectly from private providers or directly from one of the four government ISPs (Kennedy, 2000). Once customers are actually connected to the Internet, they must "register with the local public securities authorities within 30 days" (Lo & Everett, 2001 p. 17).

With the uncertainties and risks involved, prospective foreign investors must develop distinct business strategies for competing in the fledging Chinese e-commerce industry (Coughlin & Segev, 2000). As in other emerging economies, equity joint ventures are the most common form of strategic alliance. In fact, it is the only type of FDI that will be allowed in the industry after China's WTO accession; however, foreigners considering investing in Chinese e-commerce are likely to prefer this type of FDI for the following reasons.

1. Like many emerging economies, China has weak market-supporting institutions, such as Internet-related regulatory institutions and property rights; combined with its rapidly changing economic environment, such weak institutions often increase ambiguity and create obstacles to understanding unfamiliar, ill-defined regulations. Joint ventures allow inexperienced foreign investors to minimize such uncertainty by relying on their local partners' inside knowledge about the regulatory environment (Arregle, Borza, Dacin, Hitt, & Levitas, 2000).

2. Access to local market information and an established customer base are also the deciding factors in forming strategic alliances in China (Arregle et al., 2000). Particularly in the e-commerce industry, local businesses can benefit by being the pioneers in the market, seeking competitive advantage by capturing market share. Furthermore, local business will be more likely to have intimate knowledge about the market and the customer. Finally, joint ventures also provide opportunities for potential foreign investors to capitalize on such intangible assets already possessed by their local partners.

3. Because institutional constraints (i.e., laws and regulations) remain weak in China, informal constraints are likely to play an important role in facilitating foreign investment (Ramamurti, 2000). The recognition of informal constraints, such as customs, norms, and values, is crucial for business success in many emerging economies (Arregle et al., 2000; Ramamurti, 2000). In China, these informal constraints include the distinct practice of doing business among firms and individuals, called guanxi networking, which is a salient aspect of all Chinese businesses (Luo & Peng, 2000). Joint ventures allow foreign investors to gain a competitive advantage by exploiting guanxi networks of their local partners.

Clearly, facilitating foreign investment in China's e-commerce will require recognizing and overcoming legal uncertainties, and minimizing these uncertainties improves all aspects of e-commerce in China today. While Sino-foreign joint venture strategy represents a fundamental step toward addressing those uncertainties, in isolation from other reforms it will be inadequate to resolve all of the problems foreign investors can likely expect if they are not capable of developing and maintaining good relationships with local alliance partners, corporate executives of local firms, and government officials (Everett & Lo, 2001); these issues are discussed further below.

While a joint venture can provide the opportunity for knowledge sharing among the parties, trust must be established before any exchange activity can take place (Arregle et al., 2000). Trust is an important component of guanxi and a key component of any successful partnership (Tsang, 1998). According to Everett and Lo, environments in which formal constraints are underdeveloped can mean that individuals will be less likely to depend on formal rules and procedures for doing business; they cite as an example conflicts over contractual obligations that can occur if foreigners choose to strictly enforce alliance agreements signed by their Chinese partners. "Business standards used in developed countries may sometimes be unworkable in countries with great structural and legal uncertainties," they advise (Everett & Lo, 2001 p. 17). Consequently, guanxi should be cultivated and maintained in a way that secures collaborative relationships and governs appropriate codes of practice for successful partnership. We are not suggesting that formal rules and procedures are unimportant, rather that they should be implemented in conjunction with guanxi-building in the case of a Sino-foreign partnership. Guanxi-building enhances mutual trust (Tsang, 1998) and facilitates the transfer of local market knowledge that foreign partners lack (Arregle et al., 2000).

Fostering managerial connections with those at other local firms is another important aspect of guanxi networking (Luo & Peng, 2000). These connections are usually developed with executives at other local firms, including customers, supplies, and competitors. Informal contacts between executives are often the prerequisite for developing good business connections (Luo & Peng, 2000). Foreign executives who have developed close ties with leaders at other local firms are likely to obtain preferential treatment. For example, an e-business with a close relationship with its local supplier may receive timely deliveries of goods and services. Because transportation and institutional infrastructures are not present in China, formal business contracts and agreements would likely give the supplier extra incentive to make on-time delivery to the firm with which it has good guanxi. Thus, cultivating close managerial relationships among firms can help minimize the risks and uncertainties engendered by the embryonic legal environment in China. For foreigners, Chinese culture and language are barriers to the building of sophisticated managerial networks. However, a joint venture strategy may help remove such barriers.

In socialist China, government officials have enormous authority in their ability to allocate critical resources and influence legislative decisions (Luo & Peng, 2000). Rules and regulations governing e-business in particular change at lightening speed, as Internet technology increasingly jeopardizes national security. As such, despite the past 20 years of the Open Door reforms, arbitrary government intervention remains a threat to many foreign investors.

Establishing guanxi with government officials is necessary for coping with legal uncertainties in Chinese e-commerce. However, not many foreigners are able to make contact with top officials because such guanxi networks often take years to establish before they become advantageous. Culture and language are, again, the main bafflers for foreigners. Despite the difficulties, some foreign companies in other industries have already set up representative offices in China and, for example, hired the children of senior Chinese officials as employees (Tsang, 1998). Other foreign companies have started to look for alliance partners with Communist Party connections. Recently, Motorola signed a U.S. $258 million contract with China Unicorn, one of the few state companies with licenses to provide cellular services, to expand GSM networks in five provinces. China Unicorn provides Motorola with strong support in many respects, such as earning official approval for its proposed inves tments in China. The contract gives Motorola more confidence in its future investments and helps strengthen its market position in China. "Developing guanxi with government officials by seeking alliances, by employing their children, or other means, gives foreign firms an edge over their competitors. Prospective foreign investors may rely on such a network strategy to reduce the investment and legal uncertainties of conducting e-business in China" (Everett & Lo, 2001 p. 17).

According to U.S. government analysts, in 2004, China was the second-largest economy in the world after the U.S. when measured on a purchasing power parity (PPP) basis; however, these analysts also report that the country remains poor. Foreign investment and accession to the World Trade Organization have been responsible for much of the gains realized recently, with agriculture and industry enjoying major increases, particularly in coastal regions near Hong Kong and opposite Taiwan and in Shanghai.

Although the Long March veterans have been replaced by more forward-looking leaders, tight social controls continue to characterize the administration of the country and in some cases they have taken two steps back for every "leap forward." In response to the fundamental challenges facing China as it struggles to assume a dominant position in the international community, the political leadership has sought to:

1. Provide for adequate jobs growth for tens of millions of workers who have been laid off from state-owned enterprises, migrants, and new entrants to the workforce;

2. Reduce corruption and other economic crimes; and, 3. Maintain support for the large state-owned enterprises; a number of these enterprises had been subsidized in the past.

Other challenges involve the enormous number of rural workers who remain under- or unemployed in China (the CIA estimates between 100-150 million!); a growing resistance to the one-child per couple policy that has helped China keep its population under control in recent years; and environmental issues all threaten to way-lay all current and future efforts to facilitate e-commercial enterprises in China. Despite the fundamental constraints and challenges, though, China appears well-poised otherwise to achieve its goal of capturing additional market share from the globalized market through its past heavy investment in a telecommunications infrastructure. For example, Internet use stood at 94 million users at the end of 2004. Finally, the analysts at the CIA report that, "In its rivalry with India as an economic power, China has a lead in the absorption of technology, the rising prominence in world trade, and the alleviation of poverty; India has one important advantage in its relative mastery of the English language, but the number of competent Chinese English-speakers is growing rapidly" (p. 4).

Telephones - main lines in use:

263 million (2003)

Telephones - mobile cellular:

269 million (2003)

Telephone system:

general assessment: domestic and international services are increasingly available for private use; unevenly distributed domestic system serves principal cities, industrial centers, and many towns domestic: interprovincial fiber-optic trunk lines and cellular telephone systems have been installed; a domestic satellite system with 55 earth stations is in place international: country code - 86; satellite earth stations - 5 Intelsat (4 Pacific Ocean and 1 Indian Ocean), 1 Intersputnik (Indian Ocean region) and 1 Inmarsat (Pacific and Indian Ocean regions); several international fiber-optic links to Japan, South Korea, Hong Kong, Russia, and Germany (2000)

Television broadcast stations:

3,240 (of which 209 are operated by China Central Television, 31 are provincial TV stations and nearly 3,000 are local city stations) (1997)

Internet hosts:

Internet users:

94 million (2004)

Although precise estimates from past years are not available, the following estimates reflect the clear trends in Internet usage in China today:

Source: CIA World Factbook, 2005; Lo & Everett, 2001.

The World Bank's Knowledge Economy Index (KEI) is the average of the performance scores of a region or country in all four of the Knowledge Economy components; these are: 1) Economic Incentive Regime, 2) Education, 3) Innovation and 4) Information Communications & Technology. The World Bank's KI (Knowledge Index) is derived from the simple average of the performance of a region or country in three KE pillars (Education, Innovation and Information Communications & Technology) (World Bank, 2005).

The following tables and figures are all based on data from the World Bank's online Knowledge Assessment tool; economic incentive indicators are provided in tabular, descriptive and graphic form below.

Country KEI Econ. Incentive Regime Innovation Education Information Infrastructure Taiwan

Korea

Hong Kong

East Asia

China

Country KEI Econ. Incentive Regime Innovation Education Information Infrastructure East Asia

World

China

Source: World Bank Interactive Knowledge Assessment Methodology, 2005.

Chapter 5: Summary, Conclusions and Recommendations

Summary.

Conclusions.

Recommendations.

Bibliography and Reference

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Textbooks

Easterby-Smith, M., Thorpe, R. And Lowe, A. (1991), Management Research: An Introduction, London, Sage, 1991.