This paper examines the key considerations for a UK higher education institution seeking to establish learning centers in Beijing, Guangzhou, and Shenzhen. It evaluates direct investment structures — wholly foreign-owned enterprises, equity joint ventures, and cooperative joint ventures — against indirect options such as licensing and representative offices. The paper then assesses the political, legal, and economic environment in China, including intellectual property risks and the tension between state planning and free-market reform. Finally, it applies Hofstede's five cultural dimensions to compare Chinese and British sociocultural norms, highlighting concepts such as Guanxi, Mianzi, and Zhongjian Ren as essential factors in formulating an effective market entry strategy.
2010 saw a remarkable occurrence in global economics: China, a rising yet still developing economy, catapulted past long-time economic powerhouse Japan to reach number two status behind the United States. While still only a third of the size of the U.S. economy, the Chinese gross domestic product stood at $5.879 trillion (Monahan, 2011). The China growth story, however, is one that shows no signs of fading. "In an analysis published that January, John Hawksworth, an economist at PricewaterhouseCoopers, projected that China will surpass the US by 2020" (Scherer, 2010). Given China's remarkable growth trends — "from 1989 until 2010, average quarterly GDP growth was 9.31 percent, reaching an historical high of 14.20 percent in December of 1992" (Trading Economics, N.D.) — and the potential for similar growth in the coming decade, businesses around the globe are clamoring to enter the Chinese market to not only sell but produce.
Of particular interest in the context of global expansion is the case of a UK-based university that desires to develop a market entry strategy to establish learning centers in several key Chinese cities: Beijing, Guangzhou, and Shenzhen. Understanding the intricacies of Chinese business acumen as well as specific sociocultural attitudes is critical for the institution to gain a foothold in the competitive Chinese business climate.
When discussing investment in China, there are fundamentally two broad strategies for market entry: direct and indirect. The direct method of investment involves a company registering as an official "legal person, giving it, among other things, the right to sue other entities or persons in a Chinese court" (PricewaterhouseCoopers, N.D.). In proceeding this way, the foreign entity pursues a strategy in which the company is "entitled to the rights and protections accorded to Chinese legal entities" (PricewaterhouseCoopers, N.D.). Direct investment typically involves one of three methods: a wholly foreign-owned enterprise (WFOE), an equity joint venture, or a cooperative joint venture.
Of the three, the wholly foreign-owned enterprise is the most common direct approach, in which the "WFOE is funded entirely with foreign investment and has sole responsibility for profits and losses" (PricewaterhouseCoopers, N.D.). The equity joint venture involves shared ownership collaboration between foreign and domestic entities: "Both the foreign and the Chinese investors contribute capital, obtaining equity and subsequently receiving redistributed profits accordingly. The minimum share that a foreign investor can hold is 25%" (PricewaterhouseCoopers, N.D.). In a cooperative joint venture, typically the "foreign investor provides funding and technology, and the Chinese partner provides land, labor, natural resources, and power and water facilities" (PricewaterhouseCoopers, N.D.).
The indirect investment option offers two avenues: licensing agreements or branch and representative offices. "Foreign companies with patents, trademarks, or other intellectual property are free to enter into licensing agreements with local companies. Licensing has the advantage of limiting a foreign company's exposure, since the company need not set up an office or a joint venture" (PricewaterhouseCoopers, N.D.). The branch or representative office "remains part of the parent company and is therefore not entitled to the rights and protections accorded to Chinese legal entities; however, it also must appoint a Chinese legal representative" (PricewaterhouseCoopers, N.D.).
Each option carries its own advantages and disadvantages. The direct investment option allows the foreign entity to immerse itself in the political, regulatory, and business framework of China's economy. Importantly, direct investment allows the foreign investor to build and develop their business with control over final profit decisions. By contrast, the indirect investment licensor "has less control over how its product is priced, marketed, and distributed" (PricewaterhouseCoopers, N.D.). The branch or representative office "allows a foreign investor to enter the Chinese market with little initial investment, but the investor is prohibited from direct profit" (PricewaterhouseCoopers, N.D.).
For the institution in question, the choice hinges on capital availability, time horizons, and long-term goals for Chinese operations. As a higher education institution, its mission is to provide students with a broad curriculum that fosters a global perspective on cooperative engagement. Because the profit motive is not its primary driver, the indirect option may initially appear sufficient. Yet in analyzing the political, economic, and cultural environment, the direct investment option provides a more effective analytical and operational framework.
When assessing the relevant aspects of China's environment, the primary consideration is how they present obstacles and opportunities for the institution. Government and political forces are perhaps the strongest obstacles to entering the Chinese market. "Local government officials can be critical to the success of a foreign-invested enterprise (FIE)" (PricewaterhouseCoopers, N.D.). In China, government is a ubiquitous presence at the foundation of all business relationships. While government can be intrusive in its regulatory oversight, "the best way to maintain good relations with Chinese government officials is to work with them. Although some Chinese laws can be burdensome and compliance expensive, a company that diligently follows all the rules will be in better standing with the government" (PricewaterhouseCoopers, N.D.).
"Probably the most widely publicized obstacle to setting up operations in China is the difference in attitudes toward intellectual property. The Chinese government has signed treaties, passed legislation, and created special courts to safeguard IP rights. Nevertheless, reverse engineering, counterfeiting, theft, and other forms of IP misappropriation remain widespread" (PricewaterhouseCoopers, N.D.). Because intellectual property rights are not as robustly protected as in fully developed economies, considerable pressure can be placed on firms caught in IP disputes. Over time, China's economic growth will require stronger legal protections, since "it is not just foreign investors who need protection from capricious legal interpretations; Chinese companies, too, will benefit from the relative certainty of a consistent, rule-based order throughout the country" (PricewaterhouseCoopers, N.D.).
The economics of China presents both the greatest opportunity and a considerable difficulty for an organization such as a UK university. Specifically, two economic systems exist in China today, each competing for supremacy: the old-style command-and-control bureaucracy of state planning, and the free-market-oriented business model responsible for so much of the country's growth. Nowhere is this more visible than in the contrasting systems of Hong Kong and Mainland China.
According to Chinese officials, "we are pursuing a policy of 'one country, two systems.' More specifically, this means that within the People's Republic of China, the mainland with its one billion people will maintain the socialist system, while Hong Kong and Taiwan continue under the capitalist system" (China.org, N.D.). A company entering the Chinese market must understand that while market reforms in Mainland China are being adopted rapidly, they remain at odds with the government's state-control policy objectives. Businesses must be alert to opportunities while exercising caution in industries subject to significant state authority.
"Hofstede's five dimensions applied to China–UK contrast"
"Guanxi, Mianzi, and Zhongjian Ren explained"
The decision to invest abroad in China and develop new learning centers is not one that follows the normal path of domestic expansion. For the institution in question, the emphasis must first be placed on determining whether a direct or indirect investment strategy is most appropriate, followed by a thorough analysis of the governmental, legal, and economic environment — including both the obstacles it presents and the opportunities it offers — and finally, a deep understanding of the unique sociocultural dynamics that differentiate the UK and China.
You’re 54% through this paper. Sign up to read the remaining 2 sections.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.