Report on Doing International Business Between 2 Countries in Given Industry

International Trade

China - United States Trade Analysis

Chinese Economic Development

China's Growing Resource Needs

China and Globalization

Protecting Intellectual Property

Working with Government Bureaucracy

International Management Considerations

Modes of Market Entry into China

Recommendations for International Expansions

China financial integration has significantly developed over the past three decades. The total of U.S.-China trade balances grew from $5 billion in 1980 to $409 billion in 2008. Both economies were significantly affected by the global financial crisis and the 2008 balance was reduced by a little over ten percent in 2009. However, the United States is still the world biggest importer of Chinese goods and the Chinese market as represent the third largest importer of U.S. exports. The total amount of trade between these two financial powerhouses is enormous. Furthermore, the Chinese population is already staggering and it is developing economically in historical rates. Thus China also represents a key strategic partnership for the U.S. indefinitely.

However, these trade routes do not come without a fair share of frustration. Since the U.S. imports far more than they export, there is rather large trade deficit that must be dealt with. Also, China's authoritarian government has intermittently chosen which World Trade Organization obligations it wishes to follow and seems to stall or ignore the rest. There have been numerous calls from nations across the global for China to let its exchange rate float as opposed to keeping it fixed. China also has a weak record on enforcing intellectual property rights (IPR), and its extensive use of protectionist policies to promote domestic Chinese firms over foreign companies. Many analysts predict that such trade conditions will continue to erode into the future; however given the extent of economic integration this may prove to be a slow and tedious process at worst.

This analysis will look at the potential for a U.S. company to incorporate Chinese manufactures into its supply chain to serve as a production base. The chosen U.S. industry will be that which consists of small handheld electronic devices i.e. cellular phones, personal organizers, global positioning system (GPS) devices, and other related goods. This strategy has worked well for many of the firm's competitors and the attractiveness of utilizing China's production capabilities seems to grow exponentially. However, at the same time, there is inherent risk associated with such a strategy and the risks identified will also be presented. The concluding recommendation asserts that, under the present circumstances, that such a strategy move should be deferred until economic conditions stabilize.

Chinese Economic Development

In the year 2001, China joined the World Trade Organization (WTO) and Americans gave way to the new "Asian powerhouse" (Rumbaugh and Blancher 2004). China has developed at roughly nine percent a year for more than a quarter decade and is sometimes referred to as the fastest growth rate for an economy in history. With exports rising from 38.8 billion to 196.7 billion (a 400% increase) from 1994 to 2004 to the U.S. alone, this growth curve represents one of the most remarkable financial developments ever. China is responsible for roughly two-thirds of the world's copiers, microwave ovens, DVD players and shoes which are manufactured in China.

With this powerful manufacturing advantage that China has, its promising future does not seem to contain any boundaries. Some have estimated that the size of the Chinese economy will overtake the U.S. economy within a decade. With its 4,000 skyscrapers in the financial capital alone, Shanghai, and the ever rapidly growing economy, China might just do more than simply overtake the United States' economy. They may undoubtedly dictate the direction of world markets. This is the course China seems to be headed for.

The unbeatable Chinese manufacturing industry is due not only to low labor costs but also, by some accounts, to unethical trade practice. According to one article in Newsweek World News a Morgan Stanley report showed that cheap imports from China has saved American consumers more than $600 billion in the past decade (Zakaria 2005). At the same time, this has in turn acted to devastate the domestic production capacities that the U.S. once held. Some view the world's fastest-growing economy and second largest holder of foreign-exchange reserves as a threat while are oblivious to its potential. Many in the U.S. are also realizing that this adds to the domestic unemployment rate (Mankiw 2003). This also adds to the risk of enhanced levels of tension through the political ramifications of millions of unemployed American manufacturing workers.

China's Growing Resource Needs

China has experienced economic growth in the last half century that can only be referred to as historical (Gallagher 2005). With its enormous population and track record of double digit growth, some analysts predict that China could emerge as the world's dominant economy within the next decade; some estimates as early as 2016 (Inocencio 2011). It already accounts for a massive percentage of the world's total manufacturing capabilities and its manufacturing dominance is unlikely to erode anytime in the foreseeable future. Although it would not be accurate to say that the Chinese population on a whole has benefited from this economic prosperity equally, these developments have brought millions of citizens out of extreme poverty and also have led to the development of a large and growing middle class. Some experts predict that the middle class will grow from twenty three percent of the population to forty eight percent within the next ten years (People's Daily 2010).

The Chinese market is one of the most attractive and misunderstood markets in the world from the perspective of developed countries. There have been attempts to break into this market by world class companies that have resulted in disaster because of the staunch cultural divide. One future necessity for the Chinese manufactures to maintain their growth curve will be the importation of key resources; including water (Asia Water Project 2009). China's land holdings are blessed with many natural resources however at the rate of current consumption and demand for various resources it is reasonable to suspect that vast amounts of importation will be necessary to fill its demand.

Since the growing need for raw materials is increasing exponentially, Chinese supply chain will grow increasingly outside of the domestic market. Consequently, this does carry some risk to the sustainability of supply chains that originate in China. If the Chinese rely solely on international firms as suppliers their supply chains will be under their control and thus subsequent to their demands. In order to exert more control over their raw material sources, Chinese firms will have to expand internationally resulting in the potential for increased tension and conflict (Pleven 2010).

Figure 1 - U.S. Stockpiling Race with China (Pleven 2010)

China and Globalization

With China's trajectory into the global markets appearing to be exponentially increasing, the country is often considered as the most vital nation today for both developing and developed countries alike. China manufacturing capabilities are ever increasing and not only can the produce high-quality, low-cost manufacturing but increasingly, high-quality, high-cost manufacturing. Organizations' such as Google and Microsoft have relocated research and development operations close to Tsinghua University in Beijing in hopes of recruiting top students from China's greatest science and technology institutions (Tsinghua University 2011). Despite considerable losses incurred thus far, Microsoft has remained steadfast in regards to funding operations in China, indirectly suggesting their predictions of the future of the Chinese economy.

China to this end has accepted a proactive position in regards to the flattening of the world by allowing competitors from other nations entry into its markets; although still clinging to many protectionist policies. The Chinese have also embraced many of the various types of products as well as the cultural lifestyles they represent. Examples of this are Wal-Mart, Kentucky Fried Chicken, McDonalds, and Domino's Pizza, just to name a few. The country finds itself more connect to more people than ever before through the implementation of cheap broadband and mobile services; though many of these services are still censored.

China has also made a significant investment in domestic infrastructure that also helps connect cultures such as roads, airports and other transportation systems. Education spending within China has received record levels of funding and is often internationally focused. For example, China has more English speaking citizens in its country than does many other countries in the Asian Pacific. They have recognized that education is vitally important for the continued growth of the nation and an international focus is only one method which they are pursuing.

Between China, India, Brazil, and Russia (BRIC), roughly 12% of their collective populations have broadband access, linking some 340 million people. These people have access to many of the same, if not better, resources, education and tools as people in developed countries. The repercussions of this trend are exceptional and it is predicted that in the coming years China will grow from simply a manufacturing base to more of an intellectual bases as well. However, in order to facilitate the economic, social and political transition to accommodate globalization, China must overcome some major obstacles which are specific to China; protecting intellectual property, working with government bureaucracy and increasing effective business relationships.

Protecting Intellectual Property

Intellectual Property (IP) is regarded as a major deterrent for foreign companies wishing to establish themselves in the Chinese market. It is projected that as much as 90% of business software sold in China is derived from pirated copies. This problem remains widespread despite recent changes to China's IP policy. It is uncertain if this problem will lessen in the future. Many of the roots causes for imitation goods arise from the dishonesty of local government officials and a large population living in poverty that use pirated goods as a means to sustenance.

The problem of IP rights serves as a major problem for U.S. investors looking to expand to international markets. It serves as a major deterrent for any organization to form a partnership with a Chinese firm in any market. If such a partnership did manifest, then the outside partner would always hoard any proprietary information. If they shared any proprietary practices then the Chinese firm may very well collect this information and send it back to China for its own personal use. Thus this would serve as a major obstacle for any firm to expand into a new market through the means of a partnership.

However, at the same time, many companies choose to do just that. Apple's supply chains originate in China where entire cities are built around Apple's supplier's production facilities consisting of hundreds of thousands of people working on iPhones, iPads, and iPods. However, to maintain control over IP in this instance, Chinese partners use brute force. Suppliers have come under criticism for using child labor, having unsafe working conditions, and being guilty of other human rights abuses (Moore 2010). There have also been many complaints about Apple's suppliers breeching environmental regulations (Meyer 2011). One case even highlighted the harsh conditions that these employees must endure by telling the story of an employee who worked at Foxconn, one of Apple's largest suppliers, who committed suicide while undergoing a beating for being accused of stealing an iPad.

Working with Government Bureaucracy

China has been called one of the world's most corrupt regions of the world in which to do business. Today's problem stems from a new cultural development which leads many people to pursue personal gain before any other consideration, a significant move away from socialist ideal. Additionally, the government also maintains the control over the access to resources Corruption can take the form of any one of the following forms; demands for payments of unauthorized fees, payment for services that should be provided as part of a bureaucrat's job, or a payment or kickback for awarding a business contract or preferential treatment.

The Economic Co-operation and Development (OECD) and five other countries have recently signed the OECD Convention on Combating Bribery. All countries struggle to ensure that corruption be eliminated by establishing legislation in all contributing nations. In addition, some research suggests that international agents may improve communications between their stakeholders and the foreign entity thereby increasing cooperation. Communication has been show to significantly increase the sense of group effectiveness, cohesion, mutual obligation and interdependence all of which may act to deter corruption in international business deals.

International Management Considerations

Measuring a potential business endeavor has many facets which the international manager must be conscious of in order to deliver the correct information back to the decision makers. Being unaware to any of the aspects can lead to an incorrect representation of the project, and hence an uninformed decision being permitted. In order for a business to survive it must grow and in China's case this requires massive amounts of resources. For growth to be ideal, management must first be able to identify the most attractive prospective leads. The country as a whole, specifically geography, government, and financial aspects must be considered in order to produce the most accurate analysis of the market that a company may wish to enter. Awareness of various issues should be based on than gathering reliable facts that are backed up by more than one source.

The success of the multinational corporation lies on the shoulders of its management. International management has three essential duties: direct supervision, development of the organization's strategy, and management of the organization's internal boundaries. Top management's obligation at and beyond the organization's precincts is largely a communication requirement. Within even some of the largest world class organizations, the process used is disorganized and unpredictable; especially in the light of language and cultural barriers. Furthermore, the Chinese language and culture are vastly different from that of the traditionally recognized developed countries. Thus this translates as a significant barrier for Chinese entrepreneurs.

Modes of Market Entry into China

There are four mechanisms that represent foreign market entry modes. These modes are exporting, licensing, joint venture, and also direct investment. Generally organizations choose a joint venture motive entry to achieve one of five objectives. The first is market entry as in our case with China. However organizations may also choose a joint venture to share risks and rewards or to engage in joint product development. The other two objectives are technology sharing and also a joint venture to be chosen to conform to a foreign government's rules and regulations.

Many other advantages can be acquired through a joint venture such as access to key product distribution channels or knowledge of the local customs and intricacies within the international marketplace. Although many of the same benefits can be gained through acquisition, a joint venture often has an advantage by ensuring both organizations work towards their common strategic goals. Also sharing resources they provide access to quantities of scale in different arenas that he could not access individually.

There are also many potential problems associated with a joint venture. One potential problem is a constant struggle over proprietary information. This occurs when one company refuses to share where hordes if knowledge management or acquired best practices. Disconnects create mistrust between the two organizations. Cultural clashes can also produce barriers to collaboration. This is definitely a problem Chinese firms will have to work to overcome since the conditions surrounding the state of intellectual property rights is so volatile in domestic China.

Recommendations for International Expansions

It is recommended that U.S. firms explore the joint venture avenue first and foremost. This will help them overcome the cultural divide that they might otherwise struggle with if they tried to enter a market by themselves. It would also serve to help them navigate the governance restrictions and local regulations that would otherwise require a rather sharp learning curve since they are so different than that of the U.S. regulatory environment. This is true especially in light of the IP voids in China and any over exposure to IP risk could be catastrophic for U.S. firms. It is not recommended to be as brutish as Apple is in regards to human rights, however some measure would have to be taken.