Risks:
Political and General Instability Risks
China is a communist state, with a one party system. There is no political opposition that has any real power. It is a totalitarian regime and a collectivist society. Even tough it has transformed its economy to a free market, there is little political change. The regime still maintains tight political control and restricts the personal freedom, e.g. ‘it limits the internet access for government and university employees’ (Hill, 2005, 69) and there ‘is no access to foreign newspapers’ (Country Profile, BBC). Other media is controlled, as well. The question is how a wider opening of its market and further economic development will be linked to sufficient political liberalization and reforms or to a stalemate of the authoritarian system. Will it be a gradually step by step transformation, or is it possible that a revolution will take place; because the government is not willing to give in. Can the authoritarian system survive a fully open market system?
Another issue is, if the huge central state is able to survive this or will the political development lead to a collapse.
China has disputes with India and Pakistan over Kashmir, as well as with North Korea, Tibet, Vietnam and Taiwan, but there is no immediate threat. Terrorism is not more of an issue than in other countries.
India developed to the biggest democracy in the world after it gained independence from Great Britain. It also proofed its stability over the last 50 years, even when it encountered crises. News and media are free and can work without any restrictions. Free elections are held regularly. There are several political parties and a real opposition exists. That the democracy is working became clear at the last elections when the government was voted out and the opposition came to power. The risk of a revolution is not given, because people can change the political environment with democratic means. External aggressions as the dispute with Pakistan and Chins over Kashmir are still in effect but seem to have softened. A crease fire is in effect and the relationship is slightly improving. Terrorism from Afghanistan is not higher than in any other country.
I think in political and general stability terms, India is not as risky as China. Even tough China would probably not take any actions that would scare off investors, there is still more risk potential. In India changes can be made only the democratic and legal way. Companies can best manage political risks if the pay close attention to the political evolution and assess how it might affect them. Then they should decide if it is worth to enter these markets.
Ownership and Control Risks
In India the risk of nationalisation, expropriation and forced sales is low, because the reforms of 1991 attracted a lot of foreign investors and that had positive effects on the economy. The government does not want to scare off investors and retract the successful process of opening up its market.
China may not enforce these measures either, for the same reasons as India. But there is a slightly bigger risk, because it is a communist system and the government does not have to its decisions.
My view is that neither in India or China is a significant risk that the government will take these actions, but in China it would be easier for them to do so. Companies could join with domestic companies, to prevent these actions. These risks are closely connected to the political risks and the best recommendation is to pay close attention to political events and trends.
Operations Risks
Setting up a business in China can include very long winded and exhausting negotiations with authorities. In the example of Qualcom, which offers technology for wireless phones, it took years until the final contract was signed. When the business is finally set up it has to deal with a difficult taxation system and other government policies. A confusing, complex accounting system, which is not based on profits, is also complicating the business. It is not comparable to western standards and the China will not adopt international standards. It is very complex to do business in the highly regulated environment of the communist system.
Political lobbying is seen as a part of the negotiation process and plays a vital part in it. Corruption slows the economy down and distorts competition. Bureaucracy is also very widespread and disturbing.
To rely on agents or partners in a Joint Venture for example is also very difficult, because you might not have enough control over them and no contact to the market. Conflicts can arise because there are differences of interest between partners and they might be violations of confidentiality.
China has many import tariffs and restrictions and FDI is still restricted and involves long negotiations with the government.
A poor infrastructure and a lack of sufficient distribution channels make it difficult to reach all parts of China. Hill gives the example of Coca Cola. It is in the poorer and rural areas even more expensive due to the transportation costs and transportation is its main restraint. 50% of its sales are in the major cities, where just 8% of the population lives.
In terms of labour supply and quality you have to take into account that there is a generation due to the Cultural Revolution that lacks education. The understanding and the willingness to accept the western way of doing business is not very widespread. As a result finding local managers is very difficult.
In India a huge problem is still the remaining tariffs and quotas that need to be further reduced. You also have to deal with delays and unprofessional practices. It is also hard to set up relationships with partners and agents. Joint Ventures and Strategic Alliances have the disadvantage that the Indian partners might exploit them to get access to the sophisticated technology of the partner company. Another problem is as well that FDI is still restricted.
Political lobbying is as well important and India struggles with corruption and bureaucracy.
It has problems with distribution systems and a poor infrastructure in the rural parts. Envron for example was always closed on Mondays due to lacks of power supply.
Both countries have still huge problems with providing a good infrastructure in their rural areas, but ‘India's much-criticized infrastructure is still probably better than China's, particularly now that communications, power, electricity and airlines are being privatized’ (Dale 1994). Companies can manage the infrastructure problems when they try to set up their own infrastructure and distribution systems and built plant closer to the rural areas. Hill (2005) gives the example of Coca Cola in China and Unilever in India, they both found new ways of reaching people in rural areas. Unilever established a physical presence wherever people gather and Coca Cola build a plant closer to the rural area. It even has sales representatives that go by foot and bike to customers.
India and China need to reduce government intervention, restrictions and tariffs, to facilitate trade. A solution to bypass these restrictions is to set up a wholly owned subsidiary in the host country that would avoid as well problems with partners in Joint Ventures, Strategic Alliances or Licensing. You would gain access to the markets and to the resources but you are also able to protect your knowledge. The benefits of this measure also include tighter control, closeness to the market and reduced transportation costs. The downturn of this market entry is that you might have to negotiate extensively with the government, but I think it is worth it. You can also gain first mover advantages that would help you to be successful against competitors. Hill (2005) states that your product would set a norm; you would reach considerably economics of sale before your competitors and prevail in distribution and communication.
In general a good knowledge of the market and the characteristics help to overcome problems.
Legal risks
In China exists no legal system as we are used to it in western countries, because of the communists past of its economy. The legal system and contract law is based on a ‘complex amalgam of customs and statute’ (CIA). Personal power, connections and relationships replace the usual system that we are used to. This system is called ‘guanxi’; it is based on reciprocal obligations and royalty. In this legal environment, doing business can be very difficult for western companies that are used to have a fixed set of rules. Often there is a fine line between doing ‘guanxi’ and corruption, as westerners would see it. It is also hard to acquire positive ‘guanxi’ for foreign firms and understand how it is enforced. McDonald is an example of a company that had difficulties. Because it did not have the right ‘guanxi’, it lost a case against the government and had to move out of a profitable location.
China is a member of the WTO since December 11th 2001, but at the moment it does not enforce prosecution of infringements against intellectual property rights rigorous. That is the reason why piracy is very common in China. ‘It is one of the worst offenders against IPR and has a piracy rate of 92%’
(Hill, 2005, 55).
India has because of its colonial past, a legal system that is based on the British common law. It is able to settle ‘sophisticated and complex cases’ (Hill 2005). But due to many cases there can be delays.
India is member of the WTO since January 1st 1995 and Intellectual Property Rights are respected also enforceable at court. Its IPR are compatible to the TRIPS agreement. But for patens it is different, they are prohibited in areas that include the use of food, medicine and drugs. That allows western medicines and drugs to be reproduced.
There are still laws that make it difficult for doing business in India; Hill (2005) shows an example of a law that makes it difficult for companies with over a 100 employees to fire people at all.
Companies have to make sure that they understand the concept of law and enforcement in the country. Then they should adapt to these conditions and respect them.
For western businesses it might be easier to rely on a fixed set of laws, which they are used to. India offers this environment. You can rely on this, without being worried how they might be affected by connections. It gives foreign investors security and they do not need to worry about their attitude towards corruption. A big advantage is as well that Intellectual Property Rights are respected.
Economical risks
China is a mixed economy; it has a free market with private ownership but there are still state controlled enterprises that are under government control and planning.
The CIA states that China’s GDP per capita is $5,600 (2004 est.) and the real growth rate is 9.1% (official data) (2004 est.). The composition of the generating sectors is: agriculture 13.8%, industry and construction 52.9%, services 33.3% (2004 est.).
With growth rates in the last years of 13% or more they are fears that the economy is overheating. The high growth rates and the big investments could collide with the poor infrastructure.
‘China's current growth has exceeded its potential given the many structural problems it faces. Also, because the market economy in China remains at an immature stage, government influence remains strong, and not only public investment but also investment by state-owned enterprises lacks rationality. Coupled with overly optimistic demand forecasts, a decline in investment efficiency is feared.’
(Kwan 2003)
‘Almost everybody now agrees that the economy is growing too fast. The key question is: will China's economy slow gently or will it crash? The hotter the economy gets, the greater the risk of a hard landing … leaving a hangover of excess capacity and deflation that lasted for several years. As a result, the biggest risk to the economy is not inflation, but overinvestment.’
(Economist, The Great Fall of China, 2004)
That would be dangerous for the whole economy.
The inflation rate is 4.1% (2004 est.).
The unemployment rate is 9.8% in urban areas, but in rural areas it can reach up to 20%. That is a result of the uneven development of the economy. The costal areas are much more favoured than the vast interior of China. But also a result of the privatisation of state owned businesses that made many employees redundant.
The population that lives below the poverty line is 10% (2001 est.). The market for western style consumer goods is weak, because the people cannot afford to buy them. There is a huge wealth disparity. An example is Phillips that had established a plant in China and also hoped to market its product in China. But soon it discovered that even its employees could not afford it to buy the products.
Not only is the state bank in dept but also the government. The external dept is $233.3 billion (3rd quarter 2004 est.), the public dept is 31.4% of GDP (2004 est.).
The exchange rate of the Yuan is fixed to the US$. ‘Indeed, the undervalued Yuan is one important cause of China's credit boom and rising inflation.’
(Economist, The Great Fall of China, 2004)
China is also very vulnerable to energy shocks.
It also has restricted the number of joint ventures that MNC can enter with Chinese enterprises.
Another huge problem that is paralyzing the economy is corruption and .
(All figures from the CIA)
India is as well a mixed economy with characteristics of a free market system but there are still some sectors under government control.
The CIA states that the GDP is $3.319 trillion (2004 est.). The GDP per capita is $3,100 (2004 est.), and the annual growth rate is 6.2% (2004 est.). The composition of the GDP is agriculture: 23.6%, industry: 28.4% and services: 48% (2002 est.).
The unemployment rate is 9.2% (2004 est.) and inflation is 4.2% (2004 est.).
The public dept is 59.7% of GDP (federal debt only; state debt not included) (2004 est.) and the external one is $117.2 billion (2004 est.). ‘India has far worse financial problems, both in terms of foreign debt and internal deficits’ (Dale 1994). These debts are a serious concern of foreign investors.
The size and income of the middle class is often overestimated and the standard of living is for many people low. Poverty is still a major problem in India. The population that lives below the poverty line is 25% (2002 est.). This fact is covered by the large income of a few and has to be recognised. Local rivals are tough and often underestimated in the competition for customers. It is also very difficult to satisfy the demanding customers, because the needs are too different and hard to target.
India needs to take its reforms further; otherwise a stalemate could be the result.
(All figures from the CIA)
China is in economical terms better off than India. There are still risks involved but China managed it to have better growth rates and better debt situation. That is partly because it started to open up its markets long before India did. But due to the positive economic situation, there is the risk of overheating. But you should also consider the long term perspectives and potential first mover advantages in India.
Cultural and social risks
Religion does not play a major role in China because it is officially an atheist state. But Buddhism, Taoism, Muslimism and Christianity are next to the Confucian way of live the most practised religions in China.
Hofstede states that China is more group orientated than individualist and that might be an effect of the collectivist society. That is reflected in the high value of family and relationships and the commitment and loyalty to these groups. The Chinese also have a high power distance feeling, which shows that there is a huge gap regarding wealth and power in the society. It is also very preservative. That is probably the reason why Chinese have also difficulties to adapt foreign ideas.
The main language is Standard Chinese/ Mandarin, but there are a lot of different languages and dialects. So it is very difficult to address people in China in their mother tongue. It makes it difficult to make standardisation for the entire market and you have to be careful not to offend somebody. You also have to take into account that gestures and mimic have sometimes different meanings from what we are used to in the western world. Personal space is another mater that can arouse misunderstandings in business negotiations.
Mores, values and norms are as well very different from western cultures. For example it is common and also essential to exchange gifts. We would probably see that as bribery.
Certain products do not fit to the customer demand. You should also take care that certain unlucky numbers or colours should be avoided.
Relationships play a major role in the business environment of China. It takes a long time until they built up trust. There is also a strong tie between business and family. They are more reserved and formal in doing business than western business men.
The demographic trend is, because of the one-child–policy of the government, towards an aging population. The growth rate is 0.58% and the structure is: 0-14: 21.4%, 15-64: 71% and 65 and over: 7.6%.’ This will have impacts on the health and pension policy and the economy.
(All figures CIA)
Education is compulsory in China and the ‘literacy rate is 85.2 %’ (Anon November 20th 2005).
The education also favours the collectivist spirit, therefore individual aspects are neglected.
In India the most practised religions are Hinduism, Muslimism, Sikh and Christianity. From this complexity also arise conflicts. For example violence erupted between Hindus and Muslims.
Hofstede states that India has a high level of power distance as well but is slightly lower than Chinas. Masculinity is also very high which indicates that it is very competitive. It has also a very low ranking is uncertainty avoidance, which means that is open to new ideas and situations. The family is the centre of life; therefore relationships play a major role.
The main languages are English and Hindi, but there are 14 other official languages and hundreds of other languages and dialects are spoken. This can lead to problems in communications. Gestures mimic and personal space are as well interpreted differently.
Norms, values and mores vary from the western ones. For example the cow is regarded as holly and also everything from it. Therefore Indian people do not eat beef or something derived from a cow. You have to take that serious. For example McDonalds did not adhere to this and it was therefore sued. There is also a definite taste for all other food in India. Another example for a company that underestimated this unique taste is Kellogg’s; they did not anticipate that the majority of the Indian population is nor used to eat cold breakfast in the morning. So it only able to offer its product to a small niche.
Despite the abolishment of the cast system after the independence of India, it has still influence on the social structure. The influence is declining but did not vanish yet. Therefore the Indian society is less mobility. It is difficult to have different cast members to work together. But for example modern professions are not linked anymore a specific cast.
‘India’s literacy rate is at 64.8%’ (The Economic Times). The education is free and compulsory until the age of 14.
The demographic trend in India is that it will be the most populated country in the future. ‘Its growth rate is at the moment 1.4%’ (CIA).
Hill (2005) states that international companies can mange these cultural and social risks best by being sensitive and cross-cultural literate. That means to employ host country nationals as well as cosmopolitan staff that have experience in the country or have lived somewhere else and are adaptable to new situations. Misunderstandings and worse can be avoided through prior information. This can include internet research, speaking to people that have experience, ask trade organizations for advice and much more. You should make sure that you do not regard the host country’s culture, norms and attitudes as inferior. Kentucky fried Chicken for example is a company that had success in being sensitive to cultural differences to the Indian market.
Ethical risks
Companies that enter the Chinese market often see themselves confronted with various ethical challenges.
Should they enter a country with an oppressive regime that does not respect human rights? A government that sends people that criticize them into labour camps; tortures them and even executes political prisoners.
What environmental standards should it apply? The ones that are required by the local government? These are less demanding than in its home country but are you allowed exploiting the environment, in a country that has already the majority of the most polluted cities in the world?
Employment practices are as well a hot topic. Just the required minimum wage or that they can afford a life without misery. Is child labour acceptable just because it is not illegal in the host country? How are the health and security requirements enforced?
Is bribery and corruption seen as acceptable, because it belongs to the daily business routine? What about donations and commissions to facilitate business?
Does the company have social responsibilities to the staff and host country that need to be considered?
In India companies face the same dilemmas about employment practices, environmental issues, product safety, the facilitation of businesses and social responsibilities. But they do not have to worry about an oppressive regime or the violation of human rights. Bribery and corruption are as well widespread. Child labour is official illegal, but hard to control.
Responses to these issues can be different. Companies can either adhere to the laws and requirements of the host country. Whatever is not illegal there is not unethical for the company. Or it can apply the standards of their home country. Both ways include risks, because one the one hand you may be seen as you just want to exploit the current conditions. On the other hand you do not respect the way how business is done in the host country and this may be perceived as the western culture is superior to the company. The solution might be a mixture of both. To make sure that respect for core human values are always respected. For example human rights and child labour. This should be the always adhered. If these have been assured companies should respect local traditions and the context in which it is operating.
Hill (2005) states that a solution might be to hire staff that have a good sense of what is ethical acceptable and what is not. That a company should set up high value on ethics that is applicable by everybody within the organisation. Everybody should act consistently and also be aware of ethical issues in business decisions. In addition it should encourage it employees to act morally courageous.
Conclusion:
My recommendation for setting up a business either in China or India is to look first at the product that the company want to produce and market in these markets. For manufacturing and processing China would be the better choice, because that are their competitive advantages. On the other hand if you have services to offer or software development, India should be your choice, because here you have the best educated engineers at low cost. For example IBM and Microsoft have their software parts developed in India and their computer parts produced and assembled in China.
In general I would recommend India to set up a business and market the products. India may not have the economical success of China yet, but I think the risks are lower and in the long term India has the better prospects for investors. ‘India is the coming China’
The long term perspective:
‘By 2030 it will probably have overtaken China as the most populous country’ (Mandelson 2005). That means it offers a bigger and more interesting market. The middle class is bigger; more developed, earns more money and is more likely to spend it. Its population will be younger and therefore more likely to have modern views and demand western products.
India also has a ‘sophisticated financial system and a better developed private sector as China’ (Dale 1994) and has an ‘entrepreneurial spirit’ (Presek 2004). This will enable India to be better placed in the future than China. Another factor for choosing India is that China is ‘growing too fast for comfort’ (The Economist, The Great Fall of China, 2004) investors. India is emphasizing high tech industries and services. Its people are highly educated and able to handle the latest technology. They are also eager to succeed and willing to adapt new ways of thinking. This will be a valuable asset in the future as well as now. Multinational companies can rely that people are familiarized with these technologies and the future also lays in these high tech industries. The biggest growth can be expected there. It just does not concentrate on low cost but also on high value and quality and tries to develop more value added services to stay competitive. China may sometime be replaced by a country that offers even lower cost for manufacturing, if it does not further develop its offer. ‘India has created world class companies that can often compete with the best in the West, often on the cutting edge of software, pharmaceuticals and biotechnology’ (Power2004) and these are the technologies of the future. That means India will be competitive in the future and the growth will be stable then. It shows that India is future orientated. Therefore is ‘India better placed than China for further growth’ (Power2004). ‘If China will be the world’s workshop, India will be its laboratory’ (Bennhold 2004). Omen for success are also good bond markets and ‘better institutions and corporate governance’ (FAZ)
The reduced risks:
A major advantage for India is that is a democracy. There are no risks of revolutions and insurrections. That IPR are protected is also a good way to attract and ensure high tech investment in the future. An advantage is also that India is respecting the human rights. This is getting more and more important for multinational companies, because their image will be affected and consumers all over the world are getting more and more sensible for this topic.
But that does not mean that companies should not be careful in entering the Indian market. There are many pitfalls. Companies should conduct a careful market research and be sensible to special circumstances in the market. They should not overestimate the opportunities and the potential market and respect the local tastes, social and cultural differences. To choose the right entry strategy is also a major factor of success. I would recommend if the company has enough resources to set up a wholly owned subsidiary. This will ensure that you will have control and no unwanted technology transfer. Quality standards will be ensured, tariffs and trouble with uncommitted partners avoided. Anyway it should be ensured that there are enough locals under acceptable conditions employed, also in the management level. This will help the company to respond to the specialties of the market and shows that it is aware of its social responsibilities.
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