Introduction
China, one of the largest developing countries, is the world leader in investment inflows. Reasons for China’s strong position on the global stage include a large consumer base, an integrated supply chain, and recent legislative improvements, including the Foreign Investment Law (“Investment Climate”). Investors entering this market are often faced with the plenitude of limitations and restrictions that impede their business dynamics. This paper aims to present a report assessing the investment climate of China.
For example, the Chinese government has imposed restrictions on foreign ownership of businesses and requires joint ventures. Another example is industrial policies that protect local producers or technology transfer requirements as a condition of market entry. In this way, the government protects public and private enterprises in China from competitive pressure from foreigners. An important factor in the investment climate is the policy of the Chinese Communist Party, which has ruled for over 70 years, as it actively intervenes in the country’s economic strategies. The party makes its adjustments to the free market, and these changes can be quite unpredictable. In general, China’s investment market is becoming increasingly clear-cut and robust despite many variables. This is probably due to the slowdown in economic growth and the factor of market stabilization.
Economic Environment
The currency exchange rate risk declined after the Chinese government launched a policy to achieve full yuan convertibility. This was stated by the Prime Minister of the State Li Keqiang in 2015, after which the promise was consistently fulfilled (“Doing Business in China”). At the same time, exporters were stressed by the subsequent devaluation of the yuan due to the possibility of falling profits. The convertibility of the yuan was subsequently achieved through the division of the currency into the domestic yuan – CNY and the offshore yuan – CNH, causing the growth of the offshore CNH market in Hong Kong (“Doing Business in China”). CNH has indeed become a fully convertible currency, and offshore companies are using it for trading settlements and hedging currency risks. Notably, experts advise using financial instruments such as foreign exchange options and forward contracts to manage foreign exchange risks.
Profit repatriation is an important element of doing business abroad because if problems arise at this stage, the company can lose very large amounts of money. In China, there are certain requirements for repatriation of profits, which must be strictly followed by all companies that do business in the Chinese market. These requirements include the settlement of tax liabilities, compensation for losses from previous years, the completion of an annual external audit, and a contribution of at least 10% to the company’s reserve fund (“Repatriating Profits from China”). Upon meeting the requirements and providing the banks with the appropriate documentation, companies can return dividends annually, although this process is quite lengthy and can take several months.
The purchasing power of Chinese consumers is one of the most attractive aspects of this market, which guarantees a constant influx of investors. Experts admit the projected growth of the middle class from 326 million people to 854 million in 2030 (Hedley par. 4). Equally important, analysts expect China’s GDP to triple by this time, which indicates an increase in the investment attractiveness of the market.
Political Risks
There are considerable political risks in the Chinese market that are associated with an unstable regulatory environment. Governments at all levels have theoretically equal rule-making powers, which can lead to conflicting legal requirements. Therefore, the Chinese courts can take advantage of the uncertainty to apply these rules as they see fit. Another unpleasant consequence is that it can be difficult for companies to determine whether their activities comply with the requirements of the laws (“The 3 Most Common”). At the same time, there are procedures for appealing against decisions of courts and other regulatory bodies, which is a good sign.
Intellectual property is another contradictive issue that should be considered a regulatory risk factor. The state has not developed laws that would imply sufficiently serious measures to combat piracy or infringement of intellectual property rights. Therefore, the market is filled with low-quality counterfeit goods, which account for up to 20% of all consumer goods (“A Guide to B2B Marketing”). China has formally amended the Intellectual Property Regulations to comply with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). However, these amendments are either insufficient, that is, they do not fully describe possible violations, or are not implemented in practice.
In general, the country creates opportunities for any type of business, especially for the sale of consumer goods and for the B2B sector. However, given the saturation of the market with small and medium-sized businesses, and rather complicated conditions for starting and running a business, the service sector in B2B may be the most promising. For example, companies that provide advice on starting and running a business in China and settle various legal and marketing issues are in great demand and many clients.
Market Entry Strategy
The market entry strategy for the B2B consulting services in China should largely be based on understanding the demand for such services and choosing a geographic region. B2C companies are predominantly concentrated in coastal cities due to the initial tendency to locate businesses in the most populous cities such as Beijing or Shanghai. Recently, however, China has been implementing a government policy of creating industrial clusters with integrated supply chains concentrated in these areas. B2B services need to follow the customer and, therefore, can be delivered right in these remote areas. The physical presence of employees may be necessary to demonstrate to clients that they are serious, more quickly resolve current issues that require direct consultant involvement, and better understand the realities of local markets.
Information on the distribution of industry sectors by province can help choose a narrower focus for consulting services. It is noteworthy that Shanghai is a region where pharmaceutical, chemical, petrochemical, automotive, financial, and electronic industries are developed. In Beijing, most of the companies operate in the IT, electronics, and communications sectors; in Guangzhou, the most developed areas are automobiles, textiles, electronic appliances, chemicals, petrochemicals, and toys. It is noteworthy that such a strict geographical division is not typical for other countries and is a unique feature of the Chinese market.
How B2B American Consulting Plans to Enter New Market
The company B2B American Consulting plans to enter a new market starting from the most populated cities and putting the headquarters office there. After immersion in the environment and understanding the basic informal laws of the local business, as well as after studying the formal requirements and other details necessary for the provision of consulting services, it is possible to expand the business to other regions. It is planned to create three more offices in the most actively developing industrial clusters. This seems to be a good decision, as remote regions are likely to have fewer companies that provide similar services, and therefore B2B American Consulting will be able to become a unique service provider.
Choosing Entry Mode
B2B American Consulting will choose the Wholly Foreign-Owned Enterprise (WFOE) entry mode, among other modes which are Joint Venture (JV) and the Representative Office (RO). Factors that influenced the choice include “legal status, liabilities of shareholders, registered capital, business scope, employment regulations, invoicing and contracting” (“The 3 Most Common”). Foreign investors tend to choose WFOEs as there are large liability limitations. WFOE is a Limited Liability Company (LLC), and its capital can be wholly foreign-owned, which frees the business from having to form a joint venture with a local company.
Growth Strategy and How It Will Be Achieved
The growth strategy over the next five years will be aimed at achieving a customer base of up to 200 clients and reaching the point of hiring up to 50 employees. These numbers imply that the company is planning to gradually evolve from a small to medium-sized enterprise. The more experience the WFOE B2B American Consulting will be getting, the more consulting it will provide without impeding the quality of the services. The company plans to start by establishing a business in Beijing, where there is a large IT sector that may need advice, given that young people and students often start effective start-ups.
The company will advise both foreigners and local entrepreneurs, as the legal system in China is difficult for all private entrepreneurs to understand. At the same time, success can be achieved by hiring local consultants for the company who is familiar with the specifics of the market or have good potential for its development. The American staff, in turn, will help to integrate Western schemes of work in those aspects that do not relate to legislation, thus achieving an effective exchange of experience between countries.
Works Cited
“A Guide to B2B Marketing in China.” Daxue Consulting, 2020, Web.
“Doing Business in China and Managing Foreign Exchange Risk.” American Express, 2019, Web.
Hedley, Mark. “China Market Entry Strategy: A Guide to Entering Chinese Business-to-Business Markets.” B2B International. Web.
“Investment Climate.” International Trade Administration, 2021, Web.
“Repatriating Profits from China as a Foreign Investor.” Global Expansion Simplified, 2018, Web.
“The 3 Most Common China Entry Modes for Foreign Investors.” Moore, 2018, Web.