Doing business in China : how Australian companies make their decisions when entering the Chinese market
Menzies, Jane, Chung, Mona and Orr, Stuart 2008, Doing business in China : how Australian companies make their decisions when entering the Chinese market Deakin Business School, Deakin University, Melbourne, Vic..
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This report describes and analyses the experiences of Australian businesses which have established operations or conduct business in China, both successfully and unsuccessfully. The information was collected over the period from August to November in 2007. It involved interviews with 43 respondents from 40 different Australian businesses across both manufacturing and service industries. The project was motivated by the increasing significance of China to Australia’s economy (such as the demand for Australian iron and coal exports and the transfer of much of Australia’s manufacturing operations there) and its extraordinary growth and development over the past 10 years. Using the contemporary modes of international expansion as a framework, the research considered companies which had entered China through Wholly Owned Foreign Enterprises (WOFEs), Joint Ventures, exporting and other forms such as licensing and agents. Most of the participants had located their operations in China in the eastern region, including Shanghai, Beijing, Guanzhou, Shenzhen and Tianjin.
One of the major findings of this project was that the key motivations for internationalisation into China were growth and market development opportunities. Secondary motivations included cutting costs, following the industry into China or following suppliers, customers or clients. One surprising discovery was that only a minority of the participants entered China based on a strategic plan, as most reacted to opportunities presented through associates, networks or customers. There did not appear to be any relationship between the use of strategy and success (although many of the organisations which did not use a strategic plan for their entry to China, did not monitor the success of the operations carefully), however, it is suggested that such ventures should be planned using appropriate strategic management planning processes and taking into account the resources and organisational design needed.
Location choices were driven by proximity to major cities which were seen as providing large local markets, strong regional economies and more flexible administration. Alternatively, location choices were also driven by proximity to other companies in the industry, such as customers or suppliers.
One important finding is the frequency that cultural gaps have been identified by participants. They emphasised the impact of the differences in cultural norms between their organisations and the local staff that they employed. This suggests that a greater understanding of Chinese cultural norms, particularly those relating to language, communication and relationship building, would reduce the lead times and costs associated with establishing local Chinese operations.
The respondents indicated that their entry modes were frequently affected by the local policies and regulations that they experienced, as well as by the support they received from the Australian and Chinese Government. The Chinese legal system was identified as a (small) barrier to conducting business in China, particularly in relation to understanding law, pursuing legal cases and intellectual property protection (which was weak compared to developed countries). Archaic and complex finance/banking rules and regulations were considered to be small operational issues, which were still worthy of consideration when planning the establishment of a business in China. These regulations principally impacted upon the ease of banking procedures and repatriating funds from China. Possibly because the perceived risk made it difficult for companies with inadequate internal resources to gain internationalisation capital externally, most of the participants had used internal equity resources to fund their Chinese subsidiary establishment.
The publicly listed participants generally utilised transparent business proposals for their international business subsidiary plans, whilst the other participants generally did not anticipate all the costs associated establishing business in China. In particular, participants noted the importance of using due diligence for both acquisition targets or joint venture partners as some Chinese organisations carried surprising financial burdens.
The impact of the currently negotiated Australia–China Free Trade Agreement was perceived by the participants as being neutral or negative, although the impact of China’s accession to the World Trade Organisation was considered to have created an improved business environment. In particular, improvements to profit repatriation, improvements in legal conditions, relaxation in FDI investment regulations and the reduction of tariffs were positive features. The current operational issues identified by the participants related to human resource management, such as appropriate recruitment and selection of skilled local staff and the difficulty in retaining them. Most of the participants attempted to limit their use of expatriate staff, preferring Chinese nationals with Western experience or knowledge.
The key implications for business, government and future research identified in this project were: • Businesses need to create strategic plans considering both the macro environment of China and then micro-environmental conditions in the region under consideration. Factors to be noted include the importance of infrastructure to the business, the role of local suppliers, networks and local customers and cash flow projections. Businesses need to develop contingency and exit plans to ensure a successful market entry.
• Australian Federal government support and encouragement is important for Australian businesses investing in China and should be continued. Government funding and incentives could be provided to help businesses improve their strategic planning for China. It is suggested that the portfolio of services provided by the various international trade support organisations be reviewed to reduce overlap and avoid confusion about their roles.
Many further benefits could be derived from an extension of this research. One of the most fruitful areas for future research in this area would be observing and developing strategic planning process for internationalising into China with particular attention to local environmental conditions, partner matching and subsidiary performance assessment. A second important research project would examine the current operations management issues in Chinese subsidiaries in China, with particular emphasis on human resource issues, technology management, leadership and communication. This project would identify frameworks for subsidiary management under various entry modes and environmental conditions.
Scope exists for an improved understanding of the key drivers of successful Australian businesses in China, which will improve the performance and success rate of Australian company investment in China in the future. Some of this knowledge exists in isolation, however, it must be developed and operationalised so that it can be utilised by all Australian companies considering business opportunities in China.
Field of Research
150308 International Business
Socio Economic Objective
970115 Expanding Knowledge in Commerce, Management, Tourism and Services
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