Investing in China

International Business Introduction As a Western manufacturing company of English Language products considering a major investment in one of the BRICS countries—preferably China—it is advisable that the company first possess an assessment of the feasibility of achieving the company’s aims in a country like China, which currently is in a trade war with the U.S. that shows no signs of letting up.

Moreover, an examination of the overall context of globalized society in the 21st century will help the company to determine whether this investment would be particularly strategic at this time or not. While the general business environment in China (in the widest sense) is positive, there are a number of obstacles that Western companies face when attempting to enter the Chinese market.

Cultural and institutional challenges make up the bulk of these obstacles, but, as other companies have overcome them in the past with the right approach, it is not impossible that this company should achieve the same.

This report will (a) give advice on the general business context internationally and nationally, (b) advise on entry mode and why this entry mode was selected, (c) advise on dealing with institutional and cultural differences as well as opportunities and challenges between the host and home countries, and (d) base all advice on theory supported by academic literature, evidence-based practices, relevant data, and statistics wherever applicable. Context Global Altbach (2004) points out that “English-language products of all kinds dominate the international academic marketplace” (p. 11).

Journals, books and other popular media formats in which English-language products are produced and disseminated can be found virtually everywhere in the world. Part of this expansive reach of English is the fact that approximately at any given time in today’s globalized world, there are 1.5 million students who are studying in some discipline outside of their native countries (Altbach, 2004).

80% of all international students, moreover, hail from developing countries—which means English is not their native language and yet it is more than likely the language in which they will pursue their education (Altbach, 2004). Bolton (2008) notes that the English language is particularly popular in Asia with more than 700 million English language learners from India to the Far East. This means means that there is certainly a market for English language products in the East. In China, specifically, it is estimated that some 500 million English language learning students (Bolton, 2008).

With a population of 1.3 billion, roughly one-third of the nation’s people are engaged in some form of English-language learning. National As Pan and Block (2011) note, English is a “global language” viewed as such in China, where this company’s English language products are intended to be sold. Thus, there is certainly a market and a demand for this type of item among Chinese consumers. The Chinese people are, moreover, very forward-looking (Agnew, 2012) while simultaneously holding on to its traditional aspects and cultural traditions.

This means that at one and the same time the Chinese are willing to spend a great deal of time and energy on learning while also keeping a safe distance between their culture and the culture of the West: in other words, the two are not the same—and the attempt by Mattel to sell its American Barbie products in China showed the extent to which the culture clash between China and the West exists (Lyles, 2008).

Nonetheless, because English is recognized as a “global language” the product itself which this company aims to produce and sell in China is not likely to be met with the kind of indifference or scorn that Mattel faced when it entered the country. China is, after all, one of the largest countries in the world in terms of sending students to the West (Altbach, 2004). In short, there is a great deal of national interest in China in having access to the English language.

Likewise, with China’s economy growing at an exponential rate in the 21st century—10% year over year in recent years (Bolton, 2008)—there is a great economic advantage to entering the Chinese market. This market, moreover, is fertile: “by 2020, it is estimated that 300 million, or 40 per cent of the Chinese population [will] be in the middle class” (Bolton, 2008, p. 8).

As part of the middle class, these 300 million Chinese consumers are also more than likely to be English-language learners—and indication that the market for English language products in China is ripe. Entry Mode Options Options for entry mode into China include: entering the market by way of establishing contracts with distributors, suppliers, licensees and/or franchisees (Brouthers & Hennart, 2007).

Other options include establishing the firm itself within the country, establishing subsidiaries for sales and/or manufacturing either via joint venture (JV) or through a WOS—wholly owned subsidiary. At the turn of the 21st centuries, foreign companies were “generally free to choose their mode of entry into the Chinese market from among such forms as equity joint ventures (EJVs), wholly foreign-owned enterprises (WFOEs), contractual (or cooperative) joint ventures (including licensing and technology transfer agreements), joint exploration, and cooperative development” (Deng, 2001, p. 63).

At the time, China was second behind only the U.S. as the largest target of foreign direct investment (FDI). Indeed, contractual FDI in China at the start of the 21st century was well over half a trillion dollars from among 350,000 different investment ventures (Deng, 2001). This figure has only grown since: by 2013, China received foreign direct investment of approximately 1,085 billion USD—13% of the total FDI stock across the whole of the developing world (Chen, Yao & Malizard, 2017).

However, with the rise of nationalism in both the East and the West—from Russia to China to England to the U.S. (Suzuki, 2015; Gusterson, 2017)—there is more and more focus now on supporting domestic investment among fears that FDI “crowds out” the former (Chen et al., 2017). China is not unaware of this fear and the rise of trade war under the Trump Administration has only served as another reason for Chinese officials to promote more domestic investment.

As Gao, Wang and Che (2017) show, historical relationships between countries have an impact on FDI location and performance. If the relationship between China and the U.S. continues to deteriorate under the strain of trade war, mounting tariffs and saber-rattling rhetoric, the entry mode that the company seeks to utilize will be crucial to the company’s success—especially if sentiment in China turns heavily against Western companies in general or as a rule, based on the interlinking nature of security and economic interests (He, 2017).

Recommended Entry Mode The recommended option for entry mode into China for this company is, therefore, an equity joint venture (EJV) or contractual joint venture (CJV). Either would pose little threat to China’s domestic investment concerns and for that reason less risk to the Western investor. According to Chen et al. (2017), currently “the top-three entry modes chosen by foreign investors are equity joint venture (EJV), contractual joint venture (CJV), and wholly foreignfunded enterprise (WFFE)” (p. 410).

While WFFE are popular modes of FDI, the risk with them is that China may begin to view wholly foreign-funded enterprises in light of the increasing trade war, nationalistic wave in the West, and isolation that it feels as bad for the Chinese economy.

Already Chinese economy is at risk of rolling over with a debt crisis looming, its currency in free-fall, and its domestic infrastructure investment model at the heart of what could turn out to be a major problem not only for China but for the global economy as a whole (Ansar, Flyvbjerg, Budzier & Lunn, 2016). The EJV or CJV options are recommended because both would be more beneficial for Chinese interests, especially in the tense economic stand-off occurring right now. Chen et al.

(2017) state that “both EJV and CJV seem to crowd in domestic investment as they require their Chinese partners to also contribute capital in the newly established joint venture” (p. 411). This helps the Western company to mitigate the risk of investment in China while allowing the Chinese partner to absorb a share of the risk. It also promotes a more equitable distribution of benefits. This would increase the likelihood of Chinese authorities accepting the foreign investment, as it would not be seen as crowding out domestic investment.

In today’s environment of suspicion and mistrust, developing and implementing a JV of this nature would be the best entry mode for the Western company looking to do business in China. The theory that supports the recommendation of this entry mode is that China is going to need as much money to stay in China as possible as its currency faces further devaluation and capital flight risk explodes (Gunter, 2017).

Dealing with Institutional and Cultural Differences Institutional and cultural differences can be dealt with by observing Hofstede’s cultural dimensions model and using this as the theoretical basis of all interactions between the Western company and the Chinese JV partner and relevant authorities, as well as other stakeholders—such as consumers, community members and so on.

The Hofstede model of cultural dimensions provides a basic understanding of the cultural differences between the West and the East and how these differences are infused into institutions, organizations and consumer behavior of both parties (Hur, Kang & Kim, 2015).

For example, the Chinese are far more forward-looking and focused on achieving long-term objectives than the West is likely to be; the people of the West, on the other hand—because of their culture at its rootedness in the classical/Christian tradition—are more likely to require more certainty and definition than the people of China who are, according to the Hofstede model of cultural dimensions, quite comfortable with uncertainty and ambiguity.

Keeping these points in mind, as well as the other cultural dimensions of the model—such as masculinity, power distance, individualism, and indulgence—will help the company to engage more fruitfully and respectfully with the institutions of any foreign country but especially with China (Kassar, Rouhana &Lythreatis, 2015). Opportunities The opportunity for investment exists as both China and the West are open, in so far as business dealings are concerned, to engaging in joint ventures.

China’s population of over 1 billion people, a third of whom are engaged in some degree of learning or using the English language, means that there is a great deal of opportunity in so far as the practical application of the business model is concerned. In terms of opportunities between the host country’s cultural and institutional aims and attitudes and those of the West, opportunities exist in many forms.

As Liu and Almor (2016) note, both China and the West have unique expectations about consumer behavior and organizational behavior. However, as a result of globalization, a lot of the expectations of the West have been imbibed by Chinese entrepreneurs who are more than likely going to be the ones to form a JV with the company.

In other words, the ground floor of expectations is already going to be set by the fact that the Chinese partners have been exposed to Western ideas and concepts and have brought them home to China where they have implemented them in their own start-ups and thus prepared the Chinese consumer to be more accepting of them as well. The Western company, assisted by this, will find it less difficult to penetrate the market or to be upset by cultural miscues. Si et al.

(2015) point out that China is dedicated to poverty reduction and for that reason wants to assist in domestic investment. The rise of local entrepreneurs is happening in China, with support from institutional players among Chinese authorities. Western players, like this company, can benefit from this opportunity to work with these domestic entrepreneurs in China. It would be a demonstration of good will to establish a JV with them as well as a better strategy in terms of mitigating the overall risk of the venture.

Challenges As Tung (2016) states, the challenges that are faced deal with the “aging of China’s population; institutional weakness, corruption/weak corporate governance and growing income inequality; and China’s newfound confidence on the world stage” (p. 632). China’s population is aging as a result of its one child policy, which as effectively curbed the number of children throughout the nation.

This means that it will be harder and harder for China to maintain its current economic status as the years go by unless the population begins to regenerate more quickly. Already the economy of China is showing signs of slowing in what Xi has described as a “new normal” for China (Tung, 2016). Another challenge is the overall weakness of Chinese institutions and governance. Corruption in China is nothing new but it can be problematic if tensions rise between the West and the Chinese.

Military disputes could set off a hot war, especially if the West presses its point on the South China Seas. However, should the trade war de-escalate and no hot war commence, the heavy hand of the Chinese government might be of no concern to the Western investor—especially if the Western company is engaged in a JV that allows domestic investment to flourish.

China’s confidence on the world stage is bolstered by its alliance with Russia of late as well as its friendships with Iran and Syria, which aim to assist with and benefit from China’s New Silk Road. With so many partners eager to help, China’s entrepreneurs at home may have many more options today in terms of investment than they did previously. This could limit the extent to which a Western company has access to the market.

Recommendation Because the Chinese market represents such a substantial size of the global marketplace, and because English is a global language (meaning that there is a suitable market for English language products, particularly in China where approximately half a billion or roughly one third of the population is considered an English language learner), the recommendation of this report is that the company proceed with the investment opportunity in China.

The entry mode used should be either an equity joint venture or a contract joint venture, as the JV mode alleviates the risk of Chinese backlash against foreign companies in the country—particularly those that who are wholly foreign funded investments—should the trade war take a considerably uglier turn in the coming months and years. China’s economy, moreover, is potentially on the ropes, with what could be a mounting debt crisis and a death-spiraling currency increasing the problem of capital risk.

Domestic investment and trust are going to be crucial to China’s success in the long-term and Chinese leadership understands as much, especially as it seeks to build relationships with long-term partners like Russia, Iran, Syria, Saudi Arabia and other countries that may end up playing a major role in China’s One Belt, One Road Initiative (Ferdinand, 2016).

Entering into the country via JV and developing a trusting, respectful relationship with Chinese partners, consumers and authorities by applying the Hofstede model of cultural dimensions, the company will do well.

The market for its products exists, and in terms of consumers responding to the English language products that the company wishes to sell there can be no doubt that so long as the quality is there and the relationships between the host country and the home country are fostered with respect displayed by the company’s leaders towards all Chinese stakeholders, there is little risk that the JV will end with the same dismal fate as that seen by Mattel when it attempted to sell a distinctly American product in to people of a culture that had no taste for it or desire to purchase it for their children.

The English language products of this company, on the other hand, are well-regarded throughout the world because of the fact that English is a global language. Throughout Asia there are more than 700 million English language learners, with the vast bulk of them found in China. China is a country dedicated to learning and therefore the market is ripe for a company that sells English language products.

So long as the company does not attempt to go it alone and enter into the country as a wholly foreign funded investment entity but rather as a JV with Chinese partners who bear a portion of the investment and risk of the venture, the company stands to profit and should be well-situated even if the current trade war escalates into hot.