US Firm Entering China as a Foreign Market

Nationalistic Orientation

China is one of the founding members of the United Nations (UN), and its membership is grounded on its signature on the UN charter. It is one of the largest developing countries and the world’s second economy. The country is one of the essential players of the G20. It is a member of the World Trade Organization (WTO), hence, has a service segment, which is significantly liberalized, thus allowing for foreign investments. Besides, the UN has established its offices in China, and as a result, a fruitful corporation has increased in such areas as poverty alleviation, healthcare, food security, and peace operations.

The country is renowned as major global economic and trade power. For instance, it is the second-largest economy in the world with a Gross Domestic Product (GDP) per capita of $8405.18 as of 2020 (Trading Economics, n.d.). According to Trading Economics (n.d.), the GDP per capita is expected to reach $8840.00 by the end of 2021, about 9020.00 by 2022, and at least 9090.00 by the end of 2023. China has a unique political system compared to other UN member states. For example, the country is officially under the People’s Republic of China (PRC), a one-party state founded on the leadership of the Chinese Communist Party (CCP).

Based on the PRC, China’s economic system is an emerging marketplace with a diversified economy controlled by state-owned enterprises. Consequently, its legal system is founded on CCP, which integrates economic development using trade laws and policies, hence, a socialist market economy.

Culture, Ethics, and Corporate Responsibility

China is comprised of a multicultural state, which is dynamic. According to Hofstede’s cultural dimensions, the country has a score of 87, indicating that it has a pragmatic culture (Hofstede Insight, n.d.). Based on Hofstede’s analysis, the nation has a power index of 80, an uncertainty avoidance score of 30, a collectivist score of 20, a masculine score of 66, with a long-term orientation (Hofstede Insight, n.d.).

With the above power index, the country believes that discriminations amongst people are an acceptable cultural norm. Moreover, at 30, the country has the lowest uncertainty avoidance score with obedience to laws and rules. As a collectivist culture, its people act in the interest of others. Furthermore, as a masculine society, the nation is more success-driven with a long-term orientation, hence a strong propensity to save and invest (Hofstede Insight, n.d.). It also holds the UN Convention Against Corruption as the main network of international anti-corruption cooperation.

Through social justice promotion, the country has promoted the growth of regulation on abuse of mineral resources in its land by working through inventing a just, rational, and balanced mining code. In promoting employment rights through its labor law, the country protects the rights of both its employees and employers through the provision of equal opportunity in terms of pay and job promotion. Through human rights data privacy, China has actively participated in the UN Intergovernmental Expert Group on Cybercrime. The country also promotes environmental sustainability standards. For example, it has enhanced the country’s transition toward clean and low-carbon energy. Moreover, China’s non-fossil energy is the main source of energy consumption, equivalent to the world’s average value.

Government Trade Policy

Concerning Porter’s demand of factor endowment, the country has a superior industrial infrastructure. Moreover, the nation has both strong offshore and domestic demand with both large and buoyant export and domestic market. For a factor of related and supporting industries, the country has a strong industrial agglomeration in Information Technology (IT) to support other production sectors. In strategy, structure, and rivalry, the nation has a strong growth strategy derived from a strong export market. However, the country faces strong rivalry from such players as India, which has similar strong export markets.

China has widened its trade surplus over the years with strong export market growth. As of October 2021, the nation had a balance of trade of $66.76 billion. Currently, China offers industrial subsidies to its offshore markets. The country has imposed through a proposal tariffs on $110 billion of U.S goods, accounting for most of its imports of U.S products (Meltzer & Shenai, 2019). However, China’s import quotas are limited to only a few industrial products and nations. China also has a local content requirement policy, thus only allowing domestic firms to be used for economic operations (Meltzer & Shenai, 2019).

According to Textor (2021a), by the end of 2020, the foreign direct investment (FDI) inflows were the second largest, with $149 billion against an FDI outflow of $153.71 billion in the same period. Moreover, there is a year-on-year increase in both FDI inflows and Outflows, thus, a change in FDI is expected in the next couple of years.

Regional Economic Integration and Foreign Direct Investment

There are several programs used for economic integrations, and of the greatest importance is the Belt and Road Initiative. The program focuses on the revitalization of China’s old trading blocs with a continental Silk Road Economic Belt. As such, the program promotes policy integration, trade, and person-to-person connectivity. The country is also a member of the Regional Comprehensive Economic Partnership (RCEP) trading bloc. According to Yongding (2021), China is currently in an expansionary fiscal and monetary policy. The country’s GDP grew by 6.5% in the fourth quarter of 2020, an indication that it had recovered from the post-COVID-19 pandemic (Yongding, 2021).

However, in 2020, the mean inflation rate was 2.4%, with projections indicating that the inflation rate will decline to about 1.82% in 2022 and slightly increase to 1.92% and 2% by 2023 and 2024, respectively (Textor, 2021b). The reason for fluctuation in inflation rates is because of the unprecedented consumer prices on such goods as gas and oil, and other goods and services.

Chinese yuan (CNY) has been known as a non-convertible currency. In part, the currency does not allow free trading in the forward currency markets. In this regard, the country pegs yuan to the U.S. dollar. It has another currency known as Renminbi, which currently trades at 6.3913 CNY per 1 U.S. dollar. However, according to the Economy Forecast Agency [EFA] (2021), the CNY/USD is projected to decline to 6.023, 5.861, and 6.054 in the years 2022, 2023, and 2024 respectively. Despite the projected decline, the currency is one of the major currencies in the world.

Monetary System and Capital Markets

From the above discussion, China does not have a floating exchange rate regime. Instead, it pegs its currency, the Yuan, to the U.S dollar. The renminbi is a modified version of an outdated fixed exchange rate. However, the strength of China’s yuan against the U.S. dollar has increased over the past three years to a record high of 6.4 yuan per dollar (Ping Koh, 2021). In terms of Capital markets, China provides ease of access to capital for both innovation and entrepreneurship. For instance, according to Reshetnikova (2020), almost $ 48.9 billion was disbursed for use in research and development (R&D), with China’s internal industrial construction exceeding $6 billion per annum. In this regard, China’s startups and commercial industries have developed internationally because of access to capital and free investments programs.

However, China’s capital investment has greater foreign exchange risks. For instance, the country has restrictive and complex foreign investment rules, making it challenging to establish a firm in the nation. This has been attributed to complex currency situations rising from currency risk. Even though the Chinese innovation market has rapidly increased over the years, there is a prospect of a “bubble,” which might burst to leave investors without a profit or their initial capital. Therefore, for a U.S.-based company to launch new products into such a market, directors should move towards internationalizing China’s currency (Vrondas, 2021). The effect is the creation of an onshore domestic yuan (CNY) and offshore yuan (CNH), hence the growth of an offshore market trading CNH.

Market Entry Strategy

China has a relatively high level of foreign product diversity and sales of foreign products within its market. Case in point, the country is driven by robust domestic consumption and the ever-growing international brands to meet the local’s demands. The best entry mode for U.S based products into the Chinese market is through a joint venture. In this case, a foreign firm can ship its products to China, with the second party in China helping in identifying appropriate end-users of the products. Despite China actively participating in imports, it has been reducing the inception for foreign goods entry into Chinese markets. However, with import tariffs cuts as directed by the WTO guidelines, foreign goods have significantly found better markets in China.

Since Joint ventures allow a foreign firm to avoid tariff and quota problems, the best timing is the waterfall strategy. According to Kaschny and Nolden (2018), the waterfall strategy allows firms to expand internationally using their available resources. Another advantage of the waterfall strategy is the reduced business risk and the ability to terminate a market entry in case of failure. Given the vastness of the Chinese foreign marketplace, U.S.-based companies should consider breaking down their market entries into small geographical segments or scales. In this case, a strategy that focuses on a niche entry or a specific region is regarded as the best initial scale of entry for startups and small and medium-sized firms. China’s consumer market is also divided according to income levels, hence, small-scale entry can be considered large in certain regions.

Supply Chain, Marketing, and Business Analytics

Chinese cities have a superior physical, technological, and financial infrastructure. For instance, the nation’s first-tier cities of Beijing, Shanghai, and Guangzhou have the best business opportunities because of the skilled and experienced labor force. According to Hedley (2021), the cities have the most experienced importers and exporters, with the nation’s second and third-tier cities being capable of holding pent-up market requirements for U.S.-based goods and services. Moreover, for human resources, the country is the most populated in the world, hence providing affordable labor demands and, at the same time, a source of end-user for U.S.-based products. As such, the cities provide the best choice of location as they offer natural resources, labor force, and tax advantages, hence efficient cost of operations.

China poses significant supply chain and logistics constraints. According to Chen et al. (2019), China has an advantage of low labor costs, which has attracted a large number of foreign investments, with increased new technologies and production of goods and services at competitive prices. As a result, Chinese business changed from a labor-intensive business to a tech-intensive industry. Consequently, the share of low-tech goods and services in its export volume has gradually weakened, resulting in unprecedented supply chain and logistic constraints. The nation also offers product mixes from global producers.

For instance, China depends on both the U.S and some European countries for bulk agricultural goods and services and raw materials (Chen, 2019). However, because of the increased expansion of its manufacturing industry resulting from foreign investments, the industry provides the most viable segment for economic growth in the country.

Human Resources and Finance

The recommended staffing policy to provide for the U.S.-owned firm in the Chinese market is the Polycentric staffing policy. In this case, top positions are assigned to home country labor forces to facilitate the foreign workers to learn the local markets facilitated by cultural and language integration. However, China’s Mandarin language is not universal, with more than 400 million Chinese people unable to speak it (Ju & Sandel, 2019). In this regard, expatriate cross-cultural training programs should be instituted to facilitate the understanding of both language and cultural diversity.

China’s economic growth is linked to increased labor relations issues. Moreover, the country’s labor relation is inconsistent with the trade requirements. For instance, in 2020, a law was introduced which banned the use of multiplayer video games because of their link to labor unions (Yang, 2020). Furthermore, China lacks independent trade unions, with only the All-China Federation of Trade Unions (ACFTU) as the only trade union, which abides with all the laws established by the CCP.

The Belt and Road Initiative has significantly improved China’s political and economic relations with the neighboring countries. For instance, through the initiative, the country aims to attain policy and infrastructure development through trading blocs and financial support. However, the country’s non-convertible currency imposes currency risk in the global foreign exchange market. The main driver for the currency risk was the devaluation of the yuan in 2015, making the market exchange fall to 4.4 (McCauley & Shu, 2019). As such, proper market strategy, U.S. based companies entering China’s market may experience a substantial fall in profits.

References

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Economy Forecast Agency. (2021). Chinese yuan forecast 2021, 2022-2025. Web.

Hedley, M. (2021). China market entry strategy: A guide to entering Chinese business-to-business markets. B2B International. Web.

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Ju, B., & Sandel, T. L. (2019). Adaptation of mainland Chinese labour migrants in Macao. Journal of Intercultural Communication Research, 48(3), 257-273. Web.

Kaschny, M., & Nolden, M. (2018). Strategy and Positioning. Springer.

McCauley, R. N., & Shu, C. (2019). Recent renminbi policy and currency co-movements. Journal of International Money and Finance, 95(1), 444-456. Web.

Meltzer, J.P., & Shenai, N. (2021). The US-China economic relationship: A comprehensive approach. American Enterprise Institute. Web.

Ping Koh, C. (2021). China’s yuan hits strongest level in nearly three years. The Wall Street Journal. Web.

Reshetnikova, M. (2020). Venture capital market in China: A new approach to innovation management, Utopía y Praxis Latinoamericana, 5(5), 1-13. Web.

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Textor, C. (2021b). Inflation rate in China from 2010 to 2020 with forecasts until 2026. Statista. Web.

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Vrondas, J. (2021). Doing business in China and managing foreign exchange risk. American Express. Web.

Yang, S. (2020). China to ban online gaming, chatting with foreigners outside Great Firewall: report. Taiwan News. Web.

Yongding, Y. (2021). China still needs expansionary economic policy. Project Syndicate. Web.