Unit 4 IP: Managing Multinational Operations 1 Deveye Hademeon American Intercontinental University Unit 4 Individual ProjectFIN630-1203A-05: Global Financial Management Project Type: Unit 1 Individual Project July 1, 2012
Unit 4 IP: Managing Multinational Operations 2 AbstractGlobal expansion has become a core business strategy for companies around the world in thenecessity to increase their operation fields and maximize their revenue. Over the last decade,essentially between 2000 and 2010, the number of corporation that expanded their businessacross their national borders is considerable. Although this business practice carries some risksand disadvantages, it’s necessary to mention that the list of companies trying to go global or atleast operate internationally is so long. For that reason the concept of global expansion as a formof business investment has become an object of study to promote its understanding and theknowledge of the factors associated.
Unit 4 IP: Managing Multinational Operations 3 Among factors that contribute to a particular country’s economic growth need to becounted foreign investments. In fact countries are interested in making it easier through policiesand regulations arrangements for multinational companies to make investments in theireconomies. Nevertheless, it is very important to acknowledge the fact that multinationals are alsointerested in investing in foreign countries to growth their own revenues and market shares. Overthe last decade one of the countries that have interested American and Europeans firms forforeign investment is China with its large market. In a brief description, the purpose of this essaywill consist in presenting the Chinese market with the attracting advantages it offers. That briefdescription will be followed by the factors that need to be understood and be taken intoconsideration when a firm is interested in starting long-term investment projects in China.Among others, those factors that will be exposed count import/export restrictions, labor relations,supplier financing, tax rules, depreciation schedules, currency properties and restrictions, andsources of short-term and long-term debt. It becomes evidence that no one can talk about the global economy without referring toChina. Actually known as the People’s Republic of China, that country is part of the East Asia,covering over 9.5 million kilometers squares with a population of over 1.3 billion people. Beingthe world’s most populous country, China serves as a large market, reason why it attracts manymultinational companies in term of business investment. After its adhesion to the World TradeOrganization in 2002, China opened a free trade area in the Asian market and became a “heaven”of international investments. Nevertheless, it’s necessary to have some knowledge of the countryas a market as well as of the factors that govern it. The first attribute of the Chinese market is the “disposition of China in encouragingforeign direct investment (FDI).” FDI consists of capital investment made by a multinational
Unit 4 IP: Managing Multinational Operations 4company in another country, an investment that gives that company a measure of control over itsoperations In the host country. According to Eun and Resnick (2009) that type of investment“…involves the establishment of new production facilities in foreign countries, to include themerger and the acquisitions of existing foreign businesses.” In fact, since its adhesion to theWorld Trade Organization, “China has remained a primary recipient of the world’s destination ofFDI in recent years, where FDI accounts for 27% of the value added production, 4.1% ofnational tax revenue, and 58% of foreign trade” (Fogel, 2010) for companies in differentcountries throughout the world to include the United States, the European Union; even Asiancountries invest in China by outsourcing part of their business productions. The motive is thatChina have developed a FDI management plan in 2006, instructing the Chinese Government togradually relax restrictions on foreign holding of domestic enterprises in the necessity tomotivate foreign investors in directing their capital towards high-tech industries, modern serviceindustries, high-end manufacturing, infrastructure development, and ecological or environmentalprotection, and to set up production, assembly, and training institution within the territory. The other attribute is the local currency and its exchange rate. The Chinese currency, theYuan has dominated trade transactions in China even in cross-border trades where that currencyis rivaling the U.S. dollar as Chinese officials are interested in seeing their currency play a biggerrole in cross-border investments. The Yuan is impacting foreign investment because it has beenmanipulated and continues to be manipulated by the local officials to be held at a lower level inthe exchange market. In fact, after its appreciation of 21 percent against the U.S. dollar at thebeginning of the third quarter in 2008, the Yuan went flat as desired by the country’s authoritiesin the necessity to encourage exports. A depreciated Yuan had and continues to have a bigimpact on the world economy, reason why President Obama and his administration urges
Unit 4 IP: Managing Multinational Operations 5continually China to reconsider the value of its currency and to make every effort to have theYuan appreciated for as mentioned by the U.S. Treasury Secretary, “the appreciation of the Yuancould be a win-win situation for the world’s economy.” (Fogel, 2010) Nevertheless, adepreciated Yuan will advantage foreign companies investing in China when it comes to converttheir capital assets into their own currencies. Trade also needs to be considered as a factor impacting foreign investment in China. Theexchange of goods and services in the Chinese market is made in form of import and exportthrough cross-border trades based on various trade agreements existing between the country andits economic partners that include the U.S., the E.U., Japan, countries of East Asia, and countriesin Africa that become an open market for products manufactured in China. Political implications need to be considered as well due to the fact that China has in placepolicies and regulations that might lead to the naturalization of industries operating on itsterritory. This situation forces many multinational companies to operate in the Chinese marketthrough mergers with local companies, fostering its business policies that can lead and in facthad led in the past to the risks of confiscation, expropriation, currency inconvertibility andcontract repudiation. It’s necessary to consider also the constant battle between the centralgovernment and the provincial and local governments over applicable laws, whether they need tobe observed or not, making it difficult for companies operating in China to know exactly whatthe business rules are (Chang, 2009). Employment in China is another picture to look at when expecting to invest in business inthat country. In 2008, the Chinese federal government had adopted a new labor to protectemployees from being abused by their employers. Before then, the employment law in China
Unit 4 IP: Managing Multinational Operations 6was liberal, giving companies the opportunity to abuse their employees, to discriminate againstthem based on some social factors such as sex (situation that was preventing women workers tobe treated equally to their men coworkers). China’s tendency to “…shift toward capitalism andto promote its economic growth had attracted the world attention toward labor laws andregulations in that country, forcing the government to trig the new labor laws that are strictlyenforces in its business environment today.” (Villa da Costa, 2009) The new provision requiresthat job offerings be done on contracts that should not be signed by anyone under age of 18 (thisto suppress minor employment that was going on decades ago); “the contract must includedetails such as job description, working hours, and compensation, and it must be created duringthe first month of employment, to adopt more transparent principles in support of positiveemployer-worker relations.” (Villa da Costa, 2009). Employees are required to be insured, andthe insurance of employee injury specially is reserved to the country’s institutions, and shouldnot, in any case, be provided by private insurers like it’s in the United States. Thus, in case ithappens, injury to employees where there is a lack of insurance can lead to criminal prosecutionagainst the employer. Cultural values and social behaviors also play an important role in the Chinese businessenvironment as factors contributing to business emancipation in China. The main attribute is that“the Chinese culture and society are defined as collectivist in that the most important valuesinclude the importance of the family, the hierarchical structure of social life, the cultivation ofmorality and self-restraint, and the emphasis on hard work and achievement to contribute to asocial development.” (Fogel, 2010) In other term, the Chinese society values family and socialunit over individual expectations. Indications of social and cultural factors in China show high“power distance” ranking, sign of high level of inequality of power and wealth within the
Unit 4 IP: Managing Multinational Operations 7society, a high “long-term orientation” as Chinese like willingly to overcome obstacles with timeand strength, a low “individualism” ranking due to the existence and predominance ofcommunist rules to foster a collectivist society where everyone takes responsibility for fellowmembers of their group based on loyalty and strong social relationship. These indicationsdetermine Chinese’s attitude in seeing foreigners as representing their company rather thanthemselves. Rank is thus very important and one thing to keep in mind during businessinteractions is rank differences and hierarchy, although the preference of face-to-face meetingspredominates over writing and telephone communication. Also, it is important to see and takeinto account the demarcation between social and business relations; intertwining the two cancause drastic failure in business process in China.Conclusion The different attributes that govern a long-term investment in China are regrouped inthree categories. There are thus economic implications, political implications, and socio-culturalimplications. For Acme considering making a long-term investment in a country like China, it’snecessary to take into account each of these implications to determine in which way they willadvantage or alienate the company’s investments. These factors enumerated here are just fewamong others, and a thorough market research might require sending a representative on theground to experiment the way the business life is ruled in China. Business benchmarking is alsoa good suggestion, as it will help in learning about the way these factors have in one or other wayhelp other companies during their business expansion into the Chinese market.
Unit 4 IP: Managing Multinational Operations 8 ReferencesChang, G. g. (2009). China Political Risk Management. Retrieved June 29, 2012 from http://www.chinariskmanagement.com/Political.htmlEun, C. S. & Resnick, B. G. (2009). International Financial management (5th Ed.). McGraw- Hill Company, Inc., New York, NY.Fogel, G. K. (2010). Business Environment in China: Economic, Political, and Cultural Factors. Retrieved on June 28, 2012 from the EBSCOhost Database.Villa da Costa, M. (2009). Employment laws in China. Retrieved on June 30, 2012 from http://www.internationalhrforum.com/2009/05/04/employment-laws-in-china/