DOING BUSINESS IN CHINA

Toye Samson Abiodun

 SOME FACTS ABOUT CHINA

• Full name: People’s Republic of China

• Capital: Beijing (Peking)

• Area: 9,596,960 sq km

• Population: nearly 1.37 billion (July 2016)

• GDP growth rate: 6.9% (2015)

• GDP per capita: $14,100 (2015)

• Official language: Mandarin

• Religion: Buddhism (18,2%), Christianity (5,1%), Muslim (1,8%), unaffiliated (52,2%).

• Currency: Renminbi (yuan)

The Greater China

• Mainland China • Taiwan • Hong Kong • Macau

Major religions in China: Confucianism

• Confucianism is more a social code for behavior, a general approach to life, than a religion. • It
is founded by the philosopher Confucius (551-497 BC), who was born in feudal China and spent
most of his life as a teacher. • The basic virtues of Confucianism are obedience to and respect for
superiors and parents, duty to family, loyalty, humility, sincerity, and courtesy. Confucianism,
moreover, inculcates servility, frugality, abstinence, and diligence. • It also recognizes hard
work, patriarchal leadership, entrepreneurial spirit, and familial devotion.
The virtues of Confucianism are reflected in the five principle relationships identified by
Confucius:

1. Ruler to people: The ruler commands absolute loyalty and obedience from his people. They
are never to question his motives. In return, the ruler is to be wise and work for the betterment of
his people.

2. Husband and wife: The wife is to be obedient and faithful, and she has a duty to bear her
husband sons. The husband has the duty of providing his wife with all the necessities of life.

3. Parent to child: Children must be loyal to their parents and obey their wishes without question.
While the parents must raise and educate their children, the children must care for their parents
in old age and always love and respect them.

4. Older to younger: Respect for age and obedience to all older family members is a key element
of the Confucian ethic. Grandparents receive deferential treatment from grandchildren as well as
from children.

5. Friend to friend: The relationship between two friends is the only equal relationship in
Confucianism. Friends have a duty to be loyal, trustworthy, and willing to work for each other’s
benefit. Dishonesty between friends is a social crime and demands punishment.

• In order to rule a state, Confucius preached, one first needed to have one’s house and family in
order. And in order to manage a household correctly, one needed to look continuously within
oneself in search of faults that could be improved, if not corrected, through learning.

• The Confucian philosophical approach to life is embodied in the principle of the Golden Mean,
or zhongyong zhidao, which dictates that one avoid extremes by taking the middle road, or
compromising.

Major religions in China: Buddhism

• Buddhism stresses tolerance and spiritual equality and focuses on wantlessness and
contemplation rather than upon consumption and work. The ultimate goal of Buddhism is
nirvana: the achievement of an ethical state marked by the absence of desire and suffering.

• For a Buddhist, human suffering is caused by the desire for possession and selfish enjoyment
of every kind. This suffering will not cease when desire ceases.

Buddhism’s five major commandments are: –

Do not take life – Do not steal – Do not commit adultery – Do not tell untruths – Refrain from
intoxicants
Buddhism also believes in reincarnation and the cyclical nature of life and teaches of the brevity
and impermanence of all things in life. • Since there is more than one chance at life there is less
pressure on business people to be ‘doing’ orientated. • It would therefore be difficult for
international business managers to motivate workers to increase their productivity and acquire
greater wealth. • Marketers might also face great difficulties in selling products because of the
lack of enthusiasm for new products and material possessions.

Social Harmony and the Avoidance of Conflict

• In China li (rite) guides the individual in his interactions with others by spelling out the proper
way to behave in various social situations, and towards various individuals with home he has
interpersonal relationships. Interpersonal Relationships, Reciprocity, and the Return of Favours •
In China guanxi (connections) is extremely important in the business world. Family Orientation,
Belongingness, and Group Dynamics • “Ideally the Chinese family acts as a refuge for the
individual against the indifference, the rigours, and the arbitrariness of life outside.” (Bond 2002)
• Among the Chinese, the kin group is the most important and long lasting of any membership
group

The concept of face is a cultural universal. In Anglo-Saxon it is ‘self-respect’, in Spanish it is

‘dignita’, in French it is ‘amour propre’. • The Chinese distinguish between two types of face,
lien and mien-tsu. Lien refers to the moral integrity of an individual’s character. Mien-tsu
represents a form of face involving prestige or reputation based on personal effort (Amtmann
2002). • The Chinese are careful not to cause others to lose face and expect the same regard in
return.

• In China, ‘Yes’ can mean either ‘Yes’ or ‘No’!

The Word “Yes” in Asia/China

There are four levels of meaning for the word ‘yes’ in Asian countries and they are:

1. Recognition: the first level acknowledges that you are talking to me but I don’t necessarily
understand what you are saying.

2. Understanding: the second level acknowledges that you are talking to me and adds that I
understand you perfectly, but I may have no intention of doing what you propose.

3. Responsibility: the next level of yes conveys that I understand your proposal, but I must
consult with others and secure their agreement before your proposal can be accepted.

4. Agreement: the final level of yes means that I understand, we are in total agreement and your
proposal is accepted. (Ruthstrom and Matejka 1990)

Hierarchy, Respect for Authority, Seniority, and Class Distinction

• A distinctive and common feature in Asia/China is the development of a strictly hierarchical
working environment. Belief in fate

• Among Asian cultures, there is a much stronger belief in fate, external forces, and
predetermined events compared with Western cultures.

• In China fate is yuan.

Business culture in China: business card

The correct ways of presenting or receiving business card:

•Always keep your business cards in an elegantlooking business card holder. The good shape and
clean business card will leave an good first impression.

•Shake hands upon meeting, and then do not need to wait to be asked to present your business
card. You can feel free to give it right after the greeting.

•If you are presenting your card to several individuals at once, make sure to present your card to
the highest ranked individual first and then follow rank protocol.

•Present your card with both hands, each hand should grasp at the opposite corners of the card.
Make sure that the printed side is facing the recipient.

•When you present the card, you should nod your head approvingly and say your name and
company. •As many Chinese still not familiar with most of the professional English words,
thereby having your business card printed both in English and Chinese are highly recommended.

•When receiving another’s card, accept it with both hands, bow and thank the person to express
gratitude for the opportunity of meeting them.

•It is considered rude to put the card away immediately after you receive it. Give due respect by
taking time to read it over immediately. Do not simply place it in your wallet or pocket and never
write on it unless so directed.

•If it is the first time you are meeting with the person, place his or her business card on the table
in front of you so that you can refer to it. Start to name the person with the title or position which
printed in the card, as Chinese are often addressed by the government or professional titles.

Business culture in China: Meeting

• Chinese national holidays: Spring festival, 1st May and 1st October. • It is recommended to
have your own interpreter if the Chinese hosts do not speak good English. • Prepare your
materials in both English and Chinese language. • Dress code at meetings is formal. • Always
good to learn some basic Chinese language. • Address the Chinese hosts with their title such as
Chairman or director. • Give your business card to the most senior person. Chinese use two
hands to give and receive business cards.

Business culture in China: Dining

• Start eating when the Chinese hosts start. • It is acceptable to refuse food if you have dietary
restrictions. • Do not finish all the food! This is a sign that you want more! • Drinking culture is
strong in China. If you cannot drink, say politely to the Chinese hosts in the beginning. • Chinese
hosts will start the banquet with a toast for your presence. • The conversation during a banquet is
informal. You should not negotiate business deals with your Chinese hosts. • Gifts are usually
exchanged at the end of the banquet.

Business culture in China: guanxi

Guanxi in China

• Guanxi is a bounded relationship between individuals, which aims to achieve mutual benefits
through exchange of favors and helps (Wong et al. 2007).

• Guanxi is primarily at personal level. • Whether guanxi exists between two people depends on
the existence of a guanxi base. − Blood bases (father/childen, husband/wife or elder/younger
brothers and sisters). − Social bases (studied in the same school, worked in the same company or
served in the same military unit).

Guanxi in China: Characteristics of Guanxi

• Guanxi is transferrable. − If A has guanxi with B and B is a friend of C, B can introduce A to

C. − Sustainable guanxi is a reciprocal obligation to respond to requests for assistance.

• Guanxi is intangible. − People who share a guanxi relationship are commited to others by
invisible and unwritten code of reciprocity. − Disregarding this commitment damages one’s
social reputation.

• Guanxi is a social capital. − Guanxi is an investment in a relationship and is different from

commercial-based, corporate-to-corporate relations.

Guanxi in China: why guanxi is important

• Personal relationship is more important in China because: – Laws and enforcements are
immature. – Lack of sound credit system. – Lack of trust in the market place. – Chinese tradition.

Guanxi in China: Establishing guanxi from western perspective

 • Ways to establish personal relationship – Various business associations – Buyer, vendors –
Personal connections – Parties & social activities – Embassy service – Consultants and
professional services

Face and Renqing

• Lien refers to the moral integrity of an individual’s character. A Chinese individual is socially
criticized if he has no Lien.

• Mien-tsu represents a form of face involving prestige or reputation based on personal effort
(Amtmann 2002). Normally a Chinese person who holds higher social status or is materially
richer has greater mien-tsu.

• Renqing means “human feelings” and favour. If one received a favour, it is expected to return
the favour to the other person. If not, you do not give face to that person and hurt his or her
feelings (El Kahal 2004).

Guanxi cannot be established and maintained by gift giving and wining-and-dining.

• Guanxi is not bribery or corruption.

Work and business relationships – Relationship with the government authority – Relationship
with Chinese partner – Relationship with suppliers – Relationship with customers – Relationship
with the local logistics network •

Personal relationships – Personal relationships between managerial staff – Personal

relationships between managerial and nonmanagerial employees – Personal relationships
between Chinese and expatriate managers – Personal relationships with external individuals –
Personal relationships with external organisations

Political and legal environment

• The People’s Republic of China was formed in 1949. • China is still under the communist party
leadership. • The state has reduced its control of economic activity and has been moving towards
a market economy. • Hong Kong has a laissez-faire policy. • Intellectual Property (IP) protection
is limited. • Corruption. • Enforcement of regulation and government effectiveness are low.

Economic environment in China

• World’s second largest economy. • China has the world’s largest market. • Fastest growing
cities are mostly located inland of China. • Relatively cheap labor and good infrastructure. • A
WTO member since 2001. • Government incentives for foreign investments. • China’s immense
diversity, variety, complexity pose a big challenge for foreign investors. • China has a so called
“socialist market economy”. • A big real estate bubble in China?

Saving rates are high due to the relatively weak social security system.

• Major industries are mining, iron, steel, aluminum, machinery, textiles, petroleum, consumer
products, electronics, automobiles, and telecommunications equipment.

• Increased availability of capital for small businesses to boost entrepreneurship within China.

• Continued economic growth leads to increased consumption of energy. Opportunities for

clean-tech companies

. • Institutional voids. • There is a big gap between “rich” and “poor”.

Regional Differences in China

Huaxi Village

•Every family has a house of between 400sqm and 600sqm, cars, healthcare support, free
education, each villager has minimum half to one million euro savings in bank.

•A 2.5 billion RMB (300 million euro) building “not a big deal” (382m high)

•Building a “New Village in Sky” • Many families start to purchase private helicopters and
village is purchasing 20 aircrafts to open its own airlines •Building world’s 15th tallest
skyscraper in China (118 floors, 538m tall)

• 23 provinces, 5 autonomous regions, 4 municipalities and 2 special administrative regions of

Hong Kong and Macau.

Eight regional cuisins of China

Yue Cuisin 粤菜 Chuan Cuisin 川菜 Hui Cuisin 徽菜 Lu Cuisin 卤菜 Min Cuisin 闽菜 Su

Cuisin 苏菜 Xiang Cuisin 湘菜 Zhe Cuisin 浙菜
Chinese eat Spicy, but not everywhere

Regional Differences of Chinese Market

•South China-includes Guangdong, Fujian, and Hainan Provinces. This regional economy was
the first to attract foreign investments with its four original Special Economic Zones (SEZs)
(Shenzhen, Zhuhai, and Shantou in Guangdong province and Xiamen in Fujian province). South
China has become the most outward-oriented regions in China.

•It has embarked on transforming itself from labor-intensive operations to high-tech

manufacturing.

• Guangdong has become more integrated with the economy of Hong Kong. Fujian has many
investors from Taiwan, and is renewing its ties with the island. • This region also represents the
culture of the South, i.e. Min-Yue Culture, with plenty of contacts with the outside world and
great emphasis on mercantile entrepreneurship.

•East China-around the mouth of the Yangtze River, consists of the municipality of Shanghai
and the provinces of Zhejiang and Jiangsu. This regional market is densely populated and highly
urbanized. •It is China's industrial powerhouse, boasting more than 35% of the country's
industrial outputs. • The delta area is also sprawling with medium-size cities such as Wuxi and
Suzhou that is the national center of textile and light industry manufacturing. •Known as the
“head of the dragon”, Shanghai is the industrial and financial center of Asia and the gateway to
the 300 million consumers in East China. • Consumers in this regional market are the most
innovative and cosmopolitan, setting trends in fashion and lifestyles.

• North China-including Beijing,Tianjin, and the provinces of Hebei and Shandong, historically
has been the geopolitical base of this country. This regional economy has been growing fast over
the last few decades and attracted FDIs from many countries. •With access to key government
agencies, this region is making tremendous investments in industries such as
telecommunications, computer technology, and pharmaceuticals. •Shandong is the biggest
agricultural province in China and has some of the best township enterprises in China. •
Consumers here are relatively conservative, yet are still open to new product ideas. •Beijing as
the nation's capital also represents the culture of North China-the “Jing-pai” culture, attaching
great value to the Confucian

• Central China-includes the provinces of Henan, Hubei, Hunan, Jiangxi and Anhui, is the
heartland of China with heavy emphasis on agriculture. • This region is relatively less developed
than East China due to its landlocked location. In recent years, these provinces have been trying
to energize their economies and catch up with coastal areas. • This region also has diverse local
cultures in dialects, cuisine, and operative styles, etc. •With limited purchasing power,
consumers in this region largely follow the trends in major metropolitan and coastal areas.

•Southwest China-including Yunan, Guizhou, Guangxi and the most populous province of
Sichuan (over 110 million people), has always been of interest to foreign companies. •Even
though its industrial output and huge population, most foreign firms find the consumer market
there sluggish. • Headed by the new municipality of Chongqing, this region is expanding its
economic base to develop various industries. •Known as the “Shangri-La”, attracting a huge
influx of tourists every year. •With rich natural resources and better transportation infrastructure,
this region has great potential as both a manufacturing base and a consumer market. • Relatively
isolated from other parts of China, consumers have a slow pace of life and are less exposed to
foreign goods.

• Northeast China-refers to the three provinces of Heilongjiang, Jilin and Liaoning, with the
port city of Dalian. This region emphasizes heavy industries such as mining, automobile, and
machinery manufacturing found in its old industrial cities. • This regional economy has been
slow in reforming its economy and state-owned enterprise. • Manchurian and Koreans are the
biggest ethnic minorities in the region and have great impact on local cultures. • Northwest
China-includes Shanxi, Shan'xi, Inner Mongolia, Gansu, Ningxia, Xinjiang, Qinghai and Tibet.
Among the high mountains and expanding desert, this region has the largest geographic area yet
limited arable land and industrial output. • To close the gap between the interior and the coastal
areas, central government has launched a “Fupin” campaign and encouraged more investments in
this region. Foreign investors have been given the same privileges previously.
 Entry modes and strategies in China

Major IB operation modes

Exporting Modes

•Domestic indirect exporting

•Foreign indirect exporting

•Direct exporting

Contractual modes

•Franchising •Licensing

•Management contracts

•Contract manufacturing

•Subcontracting

•Project operations

•Turnkey project

Investment modes
•Minority share investment

•50%/50%

•Majority share investment

•100% owned

Pros and cons of exporting

• Direct and indirect exporting.

• Direct exporting requires relatively little capital, personnel and resouces.

• Direct exporting provides the firms with the opportunity to test the foreign markets.

• In indirect exporting, exporting agents are useful when they possess knowledge of the local
market, culture and business ethics. Exporting agent may have established relationship with
customers and government in the host country.

• However, exporting agent may adopt selling methods that do not reflect the company’s image.
Agent may also be less committed because they usually have other products to sell.

International licensing

▪ Licensing is an industrial contractual arrangement whereby a licensor grants the rights to use its
proprietary knowledge (i.e. intellectual property) to another firm (the licensee) for a specified
period of time, and in return the licensor receives an agreed upon remuneration (e.g. royalty)
from the licensee

▪ Intellectual property includes patents, trademarks, designs, copyrights, trade secrets, and
know-how.

Why licensing?

Licensor:

▪ Circumvention of import barriers & investment restrictions

▪ Low transportation costs

▪ Low political risk ▪ Low resource requirements

▪ Lower financial risk

▪ Provide funds for domestic expansion

▪ Rapid market entry

▪ Testing the market

Licensee:

▪ Obtaining technology already developed

▪ low cost and risk

▪ expansion to new product area & range

Why not licensing?

Licensor:

▪ Potential competitor

▪ Lack of control

▪ Income disadvantage

▪ High opportunity cost

▪ quality risks

▪ payment risks

▪ contract enforcement risk

▪ renewal of agreement

Licensee:

▪ Restrictions by licensor

▪ Effects on internal R&D

▪ Technology may be mature and less competitive

Classification and definition of international franchising

▪ Franchising used to describe many different forms, not easily defined.

▪ Classification according to IFA (International Franchising Association)

1. Product distribution franchising “In product distribution franchising, the franchisor

licenses its trademark and logo to the franchisee but typically does not provide them with
an entire system for running their business. Franchisee simply sells the franchisor’s
products and are supplierdealer relationships” (common in petrol stations, car
dealerships, and soft drink bottlers)
2. Business format franchising “On going relationship between franchisor and franchisee
that includes not only the product, service and trademark, but the entire business format –
a marketing strategy and plan, operation manuals and standards, quality control and
continuing 2-way communication” (Welch et al. 2007:52) (common in fast food
restaurants)

Why franchising?

Franchisor:

▪ High profile international image of franchising

▪ Prior experience ▪ Foreign inquiry

▪ Lower capital requirements and risk

▪ Franchisees’ interests and local knowledge

▪ Local knowledge ▪ Rapid market penetration

▪ Distribution network

Franchisee:

▪ Strong brand

▪ Training

▪ Independent operation yet scale benefits

▪ Low failure rate

▪ Continuing technology transfer

▪ Financial support

▪ International network

Why franchising?

Franchisor:

▪ High profile international image of franchising

▪ Prior experience ▪ Foreign inquiry

▪ Lower capital requirements and risk

▪ Franchisees’ interests and local knowledge

▪ Local knowledge

▪ Rapid market penetration

▪ Distribution network

Franchisee:

▪ Strong brand

▪ Training ▪ Independent operation yet scale benefits

▪ Low failure rate

▪ Continuing technology transfer

▪ Financial support

▪ International network

Why not franchising

Franchisor:

▪ Lack of trust / potential competitor

▪ Dependence on franchisee

▪ Control ▪ Cultural and market differences

 ▪ Site availability ▪ Intellectual property ▪ Government regulations and legal restrictions ▪ Lack
of international profile ▪ Training demands ▪ Local knowledge issues ▪ Disaffected franchisees

Franchisee:

▪ Weak brand name ▪ Exaggeration of benefits ▪ Undelivered promises ▪ Negotiation

disadvantages ▪ High initial investment ▪ Restriction of operating freedom ▪ Unsuitable know

Foreign direct investments Definition of FDIs:

Foreign direct investments are investments in an already existing company or in a company to

be established abroad, in whose management and control the investor is participating on the basis
of the investment made (equity share >10%)

Generic motives for foreign direct investments ▪ Resource seeking ▪ The procurement of raw and
natural resources and access to low-cost inputs ▪ Market seeking ▪ Following customers and
market expansion ▪ Efficiency seeking ▪ Quality of HR, infrastructure and suppliers, regional
integration ▪ Strategic asset seeking ▪ know-how and technology, research and development

Foreign direct investments

Advantages:

▪ Increased control ▪ Closer contact with markets & customers ▪ May overcome some difficulties
related to other entry modes (high transportation costs and trade barriers, restrictions on royalty
payments) ▪ Local-company image ▪ …

Disadvantages: ▪ Greater resource commitment ▪ Higher exposure to risks ▪ New management

problems ▪ Inflexible

International joint ventures

▪ Definition: A joint venture arises whenever two or more sponsors bring given assets to an
independent legal entity (i.e. greenfield strategy) and are paid for some or all of their
contribution from the profits earned by the entity, or when a firm acquires partial ownership of
another firm (i.e. acquisition strategy). A joint venture is considered international when the
nationality of one or more parents of joint venture is other than the country of residence of joint
venture (Brouthers & Hennart 2007: 398).
▪ Ownership alternatives 1) A majority joint venture 2) An equal joint venture 3) A minority
joint venture

Pros and Cons of Having a JV Local Partner

• Market knowledge and understanding the needs of the clients. • Existing industry and
government relationships. • Less expensive compared with setting up a whollyowned foreign
enterprise in the host country and usually provides faster market access. • For high-tech firms
working with a partner in China would entail a fully developed intellectual property (IP) strategy
to be in place prior to market entry. • Create a local competitor. • Conflicting goals and
objectives between JV partners. • National and organizational cultural differences

IJVs in China –

Which Partner? • Connections with the Chinese governments. • Sales & marketing force. •
Market knowledge and market share. • Complementary assets. • Compatible business and
management cultures. • Commitment and trust.

Why / why not joint ventures Advantages:

▪ Capital saved ▪ Risks smaller ▪ National image ▪ Local knowledge and experience ▪ Local
legislation 36

Disadvantages: ▪ Objectives differ ▪ Profits smaller ▪ Problems in purchasing strategy ▪ Problems

in personnel policy ▪ Political problems ▪ Financing problems ▪ “Dead-end street” problems of a
50-50 venture ▪ Legal protection of minority shareholders

Pros and Cons of Wholly Owned Foreign Enterprises (WOFE)

• No need to invest time in managing a partnership arrangement. • If planning to trade and

invoice in-market, will require cost of setting up a WOFE. • Market access issues. Selling
directly to government or state-owned enterprises may be restricted. • Takes time to develop
market awareness, networks, influencers. Slower route to market. • In China, incentives (mostly
tax-based) are provided to companies by national Government or by municipal governments
(varied according to local preferential policies).
Factors influencing the change of JVs to WOS in China

Equity JV problems • Shared control • Divergent goals • Problematic partners • Leakage of

proprietary technology

Advantages of WOS • Highest level of control • Strategic & operational flexibility • Low
dissemination risk

Changed external environment • Environment for WOS • Reduced government restriction on

WOS • More open business environment & deregulated industries • Decreased country risk

Greenfield vs acquisition strategy

▪ Acquisition: an existing company acquired ▪ rapidity ▪ personnel ▪ distribution channels ▪

customers, market share ▪ lead-time & pay-back period ▪ difficulties in integration

▪ Greenfield investment: building a unit from scratch ▪ product adaptation / lack of available
firms ▪ high product / process technology firms ▪ incentives limited to specific geographical area
▪ location close to some production factors

Acquisition problems ▪ High failure rate ▪ Integration difficulties ▪ Pressure to move quickly on
acquisition prospects ▪ Over-confidence and acquisition surprises ▪ Lack of preceding market
experience ▪ Difficulties in retaining key staff ▪ Divestments that have basic problems – difficult
to turn around ▪ Lack of appropriate firms to acquire

Other Strategies for Market Entry into China • Through the help of commercial section of
your embassy in China. • Through industrial fairs (such as Canton fair) in China. • Through
government and non-government organizations dedicated to help foreign firms.

FDI – Where to Invest in China? • Incentive policy. • Economic development. • Infrastructure

availability. • Quality of marketing infrastructure. • Resource: Land, labour, raw materials. •
Local customs, historical and traditional connections. • Physical location of the Chinese partner.
• Vicinity & level of the Chinese government to deal with.

Investment Costs in China

• Costs vary from region to region, city to city. • Land Cost: if you need to build your own office
building or factory. • Rental Cost (monthly): $ 15-30/m2 (Beijing), $ 20-40/m2 (Shanghai) •
Utility Cost: Low. • Logistic Cost: Low. • Labour Cost: –

Tier I Cities: RMB 5,000/10,000/15,000 – comparable to Indian companies

– Tier II Cities: RMB 3,000/8,000/12,000 – better arbitrage

– Company social insurance contribution: 20-30%

Chinese Market Entry Practical Info

IPR Contractual Protection

Non-disclosure agreements Any foreign company entering the Chinese market should have a
written contract with its Chinese counterpart that addresses IP protection. The most familiar
example of such a contract is the non-disclosure agreement (NDA) that many companies require
prospective suppliers, designers or employees to sign before sharing sensitive or secret
information. However, the typical “off the shelf” NDA used by many foreign companies is
insufficient and often completely ineffective in China. Foreign companies should instead insist
that their Chinese partners sign non-disclosure/non- use/noncircumvent agreements (often called
NNNs) specially crafted for use in China, along the following lines:

•Non-disclosure

•Non-use

•Non-circumvention

Practical Info IPR Contractual Protection

• Non-disclosure Non-disclosure to an unrelated third party in China is fairly uncommon. The

bigger risk is disclosure to a related third party. Many Chinese businesses have multiple
subsidiaries, and manufacturing is often done through a large network of subcontractors. Chinese
companies are quite relaxed about passing around information within this network. A good non-
disclosure agreement must therefore focus on control of information within a network that the
Chinese manufacturer itself may not consider as falling within the scope of a nondisclosure
requirement.

• Non-use Often, a foreign company’s biggest concern is that a Chinese manufacturer will use
the foreign company’s IP to compete with the foreign company. For this purpose a non-use
agreement is required. A good non-use agreement focuses on two issues. First, the agreement
identifies the applicable IP of the foreign company and then authorizes the Chinese manufacturer
to use that IP solely to manufacture the product for the foreign company. Second, the agreement
requires the manufacturer to agree not to manufacture the product or any similar product under
any circumstances, other than for the foreign company. This second provision is the most
important as it prevents the Chinese manufacturer from manufacturing a similar product under its
own trademark. Many companies have products that are only protectable as trade secrets because
there is nothing to patent or copyright, and the only way to prevent copycat manufacturing is
with such a non-use provision.
• Non-circumvention A foreign company also does not want the Chinese manufacturer to go
around the foreign company by selling the product directly to the foreign company’s existing or
future customers. This is called circumvention and it is extremely common in China. To avoid
getting “cut out” in this way, a non- circumvention agreement is required.

Marketing & Consumer Behavior in China Social Media Marketing

& E-Commerce in China
Marketing principles and practices: Western style
• Marketing in the West firstly appeared in the nineteenth century, when Vyrus H. McCormick
made the distinction between marketing as hard selling and advertising and marketing as ”the
unique and central function of the business enterprise.

• Marketing was further developed in 1905 when W.E. Kreusi taught the first course ”The
Marketing of Products” at the University of Pennsylvania and in 1910 when R. Butler delivered a
course ”Marketing Methods” at the University of Wisconsin.

Marketing principles and practices: Western style

• T. Levitt (1983) made the distinction between selling and marketing. Selling focuses on the
seller, whereas marketing emphasizes the need of customers.

• E. Jerome McCarthy developed the famous four Ps: Product (product features, packaging,
branding and servicing policies), Price (wholesale price, retail price and allowance), Place
(wholesalers, retailers and distributors) and promotion (advertising and sales promotions).

Product policy in China

• Standardization strategy −A standardization strategy is used when a firm decides to produce

one product and sell it in the same way everywhere in the world with the same specification and
characteristics.

• Differentiation strategy −It increases the profits by being capable of quickly responding to the
changes in consumer trends, needs, and tastes in Asia. −KFC menu in China

Product positioning in China

• Consumer behavior in Asia is directed towards to social than individual needs. Egocentric
positioning is not appropriate in Asia.

• Luxury brands have relied on country of origin to position their products in Asia

. • “Wind and water” or Feng Shui is especially important in China. It refers to as the ancient art
of geomancy. A company’s image and reputation as well as success of its brand depend on
whether or not the company takes Fengshui seriously.

Pricing policy in China

• Consumers in Asian countries such as China, Hong Kong, and Singapore are more canny and
discriminating shoppers than the average person in the West.
• Since Chinese customers are price-conscious, many multinationals have used price-cutting
strategy. Examples are Carrefour and WalMart in China. Price-conscious of customers does not
apply to the luxury goods that are bought by elite group.

• Pricing your products / services so that they can bring luck in China. - The number 6 and 8 are
lucky numbers in China. See example at: http://www.apple.com/cn/shop/buy-iphone/iphone-7. -

The number 4 is an unlucky number because its Chinese pronunciation is similar to “death”.

Promotion strategies in China

• Concern for aesthetics such as an attractive look, touch and feel, and attention to details is
widespread in China. −Chinese value complexity, decoration, harmony and naturalism. −Chinese
love the display of multiple forms , shapes, and colours. −In China, symbols and display of
natural objects such as mountains, rivers and phoenixes are common in packaging and
advertising.

• Creating a prestigious image.

• Enhancing quality perceptions.

• Providing the appropriate level of service.

Most Chinese prioritize happiness over wealth and feel an increasing in saving money

Documentary Crocodile in the Yangtze: Alibaba and Jack Ma

• https://www.youtube.com/watch?v=RkVJNOQ7B74

Companies from China Chinese multinational enterprises

State-owned Enterprises (SOEs)

• Before 1979, the enterprises in China were used by Communist party for economic
management.

• Enterprises were pure production unit. They did not responsible for distribution or R&D.

• All profits were given to various branches of the government, and all deficits were subsidized
in return. The level of product/service quality and firm productivity were low.

• Since 1979, China started to transit from a centrally planned economy to a market economy
with socialist characteristics.

• Decentralization of government authority to lower levels of governments has been a key tool to
implement economic reforms in enterprises.

• SOEs had poor technology, obsolete equipment, low-quality products and management skills
that were inappropriate for market economy.

• Chinese government began to encougre SOEs to invest in R&D and partner with foreign
multinationals. • Diversification of the ownership was encouraged.

• Chinese government forced mergers amongst well-run and troubled SOEs in several core
industries.

The policy of ”seizing the large, letting go of the small and medium SOEs” led the restructuring
small and medium sized SOEs.

• Bankruptcy was allowed but still rare. Huge lendings from state-owned banks.

• Non-performing loads were huge.

• Nowadays biggest SOEs are China Petroleum & Chemical Corporation (SINOPEC), China
National Petroleum Corporation (CNPC), State Grid Corporation of China (SGCC), Industrial &
Commercial Bank (ICBC), China Construction Bank (CCB), Agricultrual Bank of China (ABC),
China Mobile Limited, Bank of China, etc.

Reasons for China Investing Overseers

Increasing market shares 25.4%

Learning or introducing advance foreign tech 11.2%

Acquiring information 10.8%

Acquiring advance foreign tech 10.3%

Diversifying operating risks 8.9%

Purchase local raw material and export to china 7.8%

Local R&D 6.9%

Lowering cost of raw materials 6.9%

China’s foreign reserve is more than 3.5 trillion USD by the end of 2015 which is No.1 in the
world

Environmental Issues Push China to High-tech, Green-tech and Sustainable Energy Sector

E.g: Shoes Factory in East/South China

•Standard worker 300-500 euro/month Skilled worker 500-1200 euro/month

•No income tax for Chinese who earns less than 420 euro/month
 International Business Negotiations in China

Definition of international business negotiations

 A voluntary process of give and take where both parties modify their offers and expectations
in order to come closer to each other (Ghauri 2003: 3).

 Negotiation is a decision-making or problem solving process (i.e., identifying problem, putting

ideas for resolution, andreaching an agreement), accomplised jointly by two or more business
parties (Luo 1999: 141).

 International business negotiations: when the business negotiations take place between the
parties from different countries (Luo 1999: 141).

Characteristics common to all negotiations

 There are two or more parties.

 Parties negotiate because they think that they can get a better deal than by taking what the
other side will give them.

 C1: Common (or compatible) interests between parties.

 C2: Conflicting (divergent) interests between parties  C3: Compromise (parties expect give
and take on conflicting interests).

 C4: Criteria for success (parties should understand each other’s true motivation/purpose of
negotiations).

 C5: Contingency planning.

Why negotiate? Parties negotiate for two complementary reasons:

 To achieve something of value from each other that neither party could attain on their own
(i.e. common interests)

 To resolve a problem or conflict between the parties (i.e. conflicting interests)

What is conflict?

Conflict is defined as “the perceived divergence of interest, or a belief that the parties’ current
aspirations cannot be achieved simultaneously.” (Pruitt & Rubin 1986: 4) 6 Levels of conflict

 Intrapersonal conflict (within an individual).

 Interpersonal conflict (between individuals- e.g. husband-wife).

 Intragroup conflict (within a group- e.g. within teams, within families).

 Intergroup conflict (between groups- e.g. between organizations). 6 Different views of conflict
There are two opposing views of conflict:

 Conflict is bad and creates negative outcomes.

 Conflict is healthy and beneficial and creates positive outcomes. (Source: White et al. 2007:
379) 6 Negative view of conflict Often considered bad and escalates as under:

 Misperception and bias

 Emotionality

 Decreased communication

 Magnified differences

 Escalation of conflict

 Competitive processes 6 Positive view of conflict Conflict is also considered healthy and
beneficial because of followings:

 Awareness of self and others

 Awareness of problems

 Strengthens relationships (intra-group)

 Encourages psychological development (realistic self-appraisal)

 Can be stimulating and fun

Competition I win, you lose (i.e., zero-sumgame) Plus:

 Demonstrating negotiators’ strength, stamina, or authority. Minus:

 Winner ignores the other party interests.

 There is no constructive solution to the joint problem.

 If both parties resort to competitive strategy, the inevitable result is confrontation, a battle of
wills.

 Sacrificing the long-term relationships.

Collaboration I win, you win Plus:

 Both parties “win”.

 Creates good feelings as both parties’ wishes are satisfied.

 Strategy creates mutual trust and has great merit of farsightedness. Minus:

 It requires a readiness to collaborate from both parties.

 Sometimes difficult to achieve.

Compromise Parties achieve a solution that is tolerably acceptable to them. Plus:

 If neither side is able or willing to make further concessions, it is often the only option. Minus:

 No one gets what they want.

 May feel like a dead end.

Avoidance No-win situation. Plus:

 Prevent damaging an otherwise good relationship with the other party. Minus:

 The other party may perceive that you do not care enough to engage.

 It allows the conflict to heat up unnecessarily, resulting in anger or negative outburst. 6

Accommodation I lose, you win. Plus:

 Curtails an escalating conflict or simply establishes a friendly atmosphere. Minus:

 May be interpreted as weakness.

 May be an invitation of more demands.

Relative power “An actor… has power in a given situation (situational power) to the degree that
he can satisfy the purposes (goals, desires or wants) that he is attempting to fulfill in that
situation. Power is a relational concept; it does not reside in the individual but rather in the
relationship between persons to his/her environment” Ghauri and Usunier (2003: 208) Sources of
power:

 Information power (on the other party, situation)

 Expertise power (superior technology and know-how)

 Legitimate power (authority, performance)

 Location in structure (centrality, criticality)

 Personal power (attractiveness and friendliness, integrity) 6 6 Theoretical background of

international business negotiations

 Social exchange theory: “It views negotiation essentially as a social exchange process, a
human interaction of ideas of both parties that influence each other in a problem-solving manner
to reach a win-win agreement”

 Game theory: “The process of negotiation is essentially viewed as a game, that is, there is a
winner and a loser in the game of negotiation. It is bounded by assumptions of rationality, taking
logical solutions to dilemmas at every stage, viewing the relationship between parties as
competitive in nature, and ultimately having a zero-sum gain” (Khakhar & Rammal 2013: 579)
 Example: Prisoner’s dilemma game

Types of negotiations According to Ghauri (2003: 3), there are two types of negotiations:

 Distributive negotiation (Roots in game theory)

 Integrative negotiation (Roots in social exchange theory)

Remarks on case 1: Distributive

 Focus on a single issue (often, money).

 The objective of parties is to maximize their own benefit, quite often at the expense of the
other party.
 Possible outcomes: win-lose, no agreement

Case 2 Two men were quarrelling in a library.

One wants the window open and other wants it closed. They argue back and forth about how
much to leave it opens: a crack, halfway, three quarters of the way. No solution satisfies them
both.

The librarian enters. She asks why he wants the window open: “To get some fresh air”. She asks
the other why he wants it closed: “To avoid the draft”. After thinking a minute, she opens wide a
window in the next room, bringing in fresh air without a draft.

Integrative negotiation

A’s goals and strategies

B’s goals and strategies

Remarks on case 2:

Integrative

 Win-win negotiations: everyone can win.

 Problem solving approach, where both parties involved perceive the process of negotiation as
a process to find a solution to a common problem.

 One party’s gain is not at the expense of the other party.

 Focus on the interests of the parties (e.g. to get some fresh air to avoid the draft) instead of
positions (e.g. a crack, halfway, three quarters of the way).

What is culture?

The collective programming of the mind which distinguishes the members of one human group
from another (Hofstede 1980)

Are different cultures a problem?

Problem is ethnocentrism: “To believe that one’s own values, norms, way of doing things and
culture is superior than others”

The impact of culture on international business negotiations

According to Usunier (2003:104-135), culture impacts the:

 Behavioural dispositions of the parties

 Negotiation strategies

 Negotiation process elements

 Negotiation outcome orientation

Culture and behavioural predispositions of the parties Credibility

 A credible person can be considered as with low self-concept profile (modest, patiently
listening to others, speaking little and cautiously) or high self-concept profile (showing self-
confidence, speaking arrogantly, not paying attention to what the other is saying).

Interpersonal orientation: How negotiating parties relate to each other:

 Avoiding open conflict and maintaining formal harmony during negotiations or acting more in
self-interest and being overtly competitive and confrontational.

 Collectivist cultures (avoiding conflict and maintaining harmony) vs individualistic cultures

(self-interested and overtly competitive)

Power orientation 

It means who has power to conduct the negotiations: Top authority or members with task related
capabilities.

 High power distance cultures (by top authority) vs. low power distance (by members who
have task related capabilities).

Willingness to take risk

 Lower tendency for negotiators to take risk or higher tendency for negotiators to take risk.

 High uncertainty avoidance (lower tendency to take risk) vs low uncertainty avoidance (higher
tendency to take risk).

Culture and negotiation strategies

National orientation towards integrative vs. distributive strategy

 Negotiators from some countries adopt more integrative strategy than others (reasons:
showing trust willingly, explicit communication style, finding a solution acceptable to both
sides).

 Example: Negotiators from Finland, Mexico, and US adopt integrative strategy, while
negotiators from India and Turkey adopt distributive strategy (Metcalf et al. 2006).

Ignorance of other party’s culture as an obstacle to the implementation of integrative

strategy in international business negotiations.

 Example: Japanese try to learn a lot more than French and Americans about the other party’s
culture (Usunier 2003: 119).

Culture and the negotiation process elements Processing information

 Ideologists (focusing on broad issues that are to be solved at once) or Pragmatist (focusing on
detailed issues that are to be solved one by one).

 Example: Southern and Eastern Europe has ideologist orientation, while North Europe and
United States have pragmatist orientation.

Argumentations

 Based on hard facts and proofs (e.g. Saxonic style of English and Americans) or based on
theory (Gallic style of the French, and Teutonic style of the Germans)

The role of time in negotiations Cross-cultural differences in patterns of time.

Different time orientations:

 Economic value of time (scarce resource vs plenty).

 How to schedule tasks (monochronic vs polychronic).

 Linear vs cyclicity of time.

 Temporal orientation: past, present, future.

Using time efficiently

 Take time for preliminaries.

 Control your time.

 Never reveal your time frame.

 Allow plenty of time to yourself and the other party.

 Set realistic dates and deadlines.

 Learn about temporal differences between you and the other party.

 Wait for negotiation process to end -beyond signing of the contract.

Culture and outcome orientation Oral versus written agreement

 “My word is my bond” (trust is a personal matter) or “Get-it-in-writing” (trust is impersonal).

 Western cultures prefer written agreements. Asymmetry in perceived degree of agreement

 Parties may have quite different interpretations of a written clause or some kind of non written
agreement.

 Best way to solve this problem is to confirm that both sides thoroughly understand what they
have agreed upon before leaving the negotiation table. Written documents and mutual trust

 Trust is constructed by the negotiation process (i.e. trust is high when parties sign a written
agreement) or trust is prerequisite to the negotiation process (developing high trust before getting
to the negotiation process).

 Asian cultures consider trust as prerequisite to the negotiation process

Direct vs. indirect communication

 Direct communication (communication that comes to the point and lacks ambiguity).

 Indirect (communication that does not come to the point and has ambiguity).

Formal vs. informal communication

 Formal communication (communication that acknowledges rank, titles, and ceremony in

prescribed social interaction).

 Informal communication (that does not acknowledge rank, titles, and ceremony in social
interaction).
Nonverbal communication 49 Salacuse (1998: 229) Communication through body
movements

 Examples: leaning forward, crossing arms, crossing legs, bowing.

 Most Asian cultures use bowing to show respect.

 No universal code for what body movements mean.

Use of space to communicate Salacuse (1998: 229)

 Use of space to communicate

Each culture has appropriate distances for communication. The personal bubble of space may
range from 9 inches to over 20 inches.

Stages of negotiations

• The process of negotiations can be divided into the following stages: 1) Lobbying 2) Offer 3)
Formal negotiations 4) Implementation

Negotiation strategies in China –

Lobbying •Understand the objectives of Chinese negotiators.

• The western firms should find out who the competitors are and convince the Chinese side of the
firm’s advantages over its competitors.

• Presentation materials should be available in both English and Chinese language.

• Building trust both in the products that are subject of trade and in the individuals who are
negotiating.

Negotiation strategies in China - Offer

•Western firms should make an offer outlining its general principles, technology, equipment and
price, and the terms and conditions of the deal.

•It is very useful for a western firm to invite the Chinese team to their home country to show
them their manufacturing plant and technical capabilities.

• This invitation helps the western companies gain an edge over its competitors and build trust.
Negotiation strategies in China –

Formal negotiations and implementation

• Chinese negotiators would like to use different tactics such as flattery, embarrassment, and the
use of historical facts.

• Chinese would like to create a competitive environment by revealing selective information on

competing offers.

• Chinese want the best and latest technology. Therefore, western firms should be specific about
patents and copyrights.

• In negotiating a joint venture, the contributions of each partner should be very clearly
specified.

• The Chinese normally like to agree on principles and broad terms in formal negotiations and
leave the details for the implementation stage.

• Chinese view communications as a way to achieve long-term relationship.

• Yes could mean no.

• Building guanxi and trust.

•Intermediaries can be very helpful in interpreting the Chinese negotiators’ approach.

• Foreigners may find focusing on long-term benefits, their commitment, and the intention of
cooperation very beneficial.

• Bureaucracy can prolong the negotiation process.