Cambridge University Press
978 0 521 86188 5 - Managing International Business in China - by Xiaowen Tian
Frontmatter/Prelims

Managing International Business in China

With the rise of China in the world economy, investors from all over the world are moving to explore business opportunities in this market. Managing international business in a transition economy such as China is a daunting challenge. Tian presents a practical guide to major managerial issues faced by foreign investors in the Chinese market, including the strategic management of guanxi, entry mode selection, alliance management, negotiating with Chinese partners, productions operations management, human resource management, marketing management, the protection of intellectual property rights, and corporate financial management. These issues are analysed in the light of relevant theoretical models of international business, with reference to the current management practices of transnational corporations operating in China. With up-to-date case studies, questions for discussion and recommended reading lists at the end of each chapter, this book can be used as a textbook for postgraduate programmes in international business or other management disciplines, and as a textbook for executive training programmes.

XIAOWEN TIAN is Associate Professor in International Business and Chinese Management at Nottingham University, and Associate Professor in International Business at Bond University Business School, Queensland, Australia.

Managing International
Business in China

Xiaowen Tian

CAMBRIDGE UNIVERSITY PRESS
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo

Cambridge University Press
The Edinburgh Building, Cambridge CB2 8RU, UK

Published in the United States of America by Cambridge University Press, New York

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the written permission of Cambridge University Press.

First published 2007

Printed in the United Kingdom at the University Press, Cambridge

A catalogue record for this publication is available from the British Library

Library of Congress Cataloguing in Publication data
Tian, Xiaowen, 1956--
Managing international business in China / Xiaowen Tian. -- 1st ed.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978 0 521 86188 5 (hardback : alk. paper)
ISBN-13: 978 0 521 67993 0 (pbk. : alk. paper)
1. International business enterprises – China – Management – Case studies. 2. Investments, Foreign –
China – Case studies. 3. Joint ventures – China – Management – Case studies. I. Title.
HD62.4.T53 2007
658′.0490951 – dc22 2006036014

ISBN 978-0-521-86188-5 hardback
ISBN 978-0-521-67993-0 paperback

Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or
third-party internet websites referred to in this publication, and does not guarantee that any content on
such websites is, or will remain, accurate or appropriate.

	List of figures	page viii
	List of tables	ix
	List of boxes	x
	Preface	xiii

1	Introduction	1
1.1	The rise of China in the world economy	1
1.2	Development of international business in China	4
1.3	The challenge faced by transnational corporations in China	13
1.4	The structure of the book	17
1.5	Summary	20
	Further reading	20
	Questions for discussion	21

2	Look before you leap	22
2.1	China’s foreign trade regime	22
2.2	China’s foreign direct investment regime	29
2.3	China’s foreign exchange regime	42
2.4	A comment on gradualism	45
2.5	Summary	47
	Further reading	48
	Questions for discussion	49

3	*Manage guanxi* strategically**	50
3.1	Introduction	50
3.2	Environment scanning for guanxi	54
3.3	Formulation and implementation of guanxi-based strategies	61
3.4	Evaluation and control of guanxi-based strategies	65
3.5	Summary	69
	Further reading	70
	Questions for discussion	70

4	Select an entry mode	72
4.1	Introduction	72
4.2	Entry modes in China	77
4.3	Main considerations for entry mode selection	85
4.4	Combination of entry modes: a solution?	91
4.5	Summary	91
	Further reading	92
	Questions for discussion	93

5	Form an alliance	94
5.1	International business alliances in China	94
5.2	Partner selection	99
5.3	Control over alliances	105
5.4	Conflict management	111
5.5	Summary	117
	Further reading	118
	Questions for discussion	119

6	Negotiating with Chinese partners	120
6.1	Introduction	120
6.2	Cultural roots of the Chinese negotiation style	123
6.3	Characteristics of the Chinese negotiation style	132
6.4	Tips for negotiating with Chinese partners	140
6.5	Summary	149
	Further reading	150
	Questions for discussion	150

7	Production operations management	152
7.1	The siting of manufacturing facilities	152
7.2	The choice of location	157
7.3	The localization of sourcing	162
7.4	The localization of research and development	166
7.5	Summary	174
	Further reading	175
	Questions for discussion	176

8	Marketing management	177
8.1	The Levitt debate	177
8.2	Product	181
8.3	Price	186
8.4	Promotion	190
8.5	Distribution	196
8.6	Summary	199
	Further reading	200
	Questions for discussion	200

9	Human resource management	202
9.1	Staffing	202
9.2	Retaining Chinese employees	210
9.3	Managing expatriates	218
9.4	Summary	227
	Further reading	227
	Questions for discussion	228

10	The protection of intellectual property rights	229
10.1	Widespread infringement of IPR in China	229
10.2	China’s IPR regime	233
10.3	Shortcomings in China’s IPR regime	238
10.4	Tips for IPR protection in China	244
10.5	Summary	250
	Further reading	251
	Questions for discussion	251

11	Corporate finance considerations	253
11.1	Taxation	253
11.2	Banking services	260
11.3	The securities market	264
11.4	Accounting	269
11.5	Summary	275
	Further reading	276
	Questions for discussion	276

	References	278
	Index	285

Figures

		1.1 Share of China in world GDP (1820–2001)	Page 2
		1.2 GDP growth in China (1952–2004)	4
		1.3 Foreign trade with China (1950–2004)	5
		1.4 Composition of foreign trade with China (1980–2004)	5
		1.5 Foreign trading partners of China (2004)	6
		1.6 Foreign direct investment in China (1979–2004)	8
		1.7 Country of origin of FDI in China (1979–2004)	8
		1.8 Change in entry modes of FDI in China (1992–2004)	10
		1.9 The four-choice model	16
		2.1 Official exchange rate between yuan and US dollar (1981–2004)	43
		4.1 Hierarchical classification of entry modes	75
		4.2 Growth of foreign investment and exporting in China (1983–2004)	78
		4.3 Hierarchical classification of entry modes in China	80
		4.4 Foreign direct and indirect investment in China (1979–2004)	80
		4.5 Composition of foreign direct investment in China (1992–2004)	81
		4.6 Joint ventures in China (1992–2004)	81
		4.7 Composition of foreign indirect investment in China (1992–2004)	83
		5.1 International alliances by nationality of participating companies (1995–2000)	96
		6.1 Taoist yin-yang principle	127
		6.2 Chinese pictographic language	129
		7.1 R&D centres established by TNCs in China (1987–2003)	169
		8.1 Transnational corporations’ distribution channels	197
		10.1 Judicial enforcement step by step	236

Tables

		1.1 Industry distribution of FDI in China (1979–2004)	Page 10
		1.2 Regional distribution of pledged and realized FDI in China (1979–2004)	12
		2.1 Reduction in average tariff rate level (2000–2008)	25
		2.2 Non-tariff barriers subject to phased elimination	26
		2.3 Products subject to tariff rate quotas	27
		4.1 Official Chinese classification of foreign investment	79
		7.1 Factors influencing the decision on the siting of manufacturing facilities	156
		10.1 Legislation on IPR in China	234
		10.2 Administrative IPR enforcement authorities and their responsibilities	237

Boxes

		1.1 Definitions of transnational corporations and foreign direct investment	Page 6
		1.2 Cost reduction through experience curve economies and location economies	14
		2.1 China’s accession to the World Trade Organization	23
		2.2 Excerpts from the Guidance Catalog of Industries with Foreign Investment	34
		2.3 China’s foreign exchange rate reform of 2005	44
		3.1 The debate on the ethics of guanxi	52
		3.2 Diagnostic Products Corporation in China	60
		3.3 Sino-Singaporean Suzhou Industrial Park	67
		4.1 Cooperative joint ventures in the Chinese telecommunications industry	82
		4.2 Super 8 Hotels (China)	84
		5.1 The alliance between Kodak and Lucky Film	98
		5.2 Control arrangements in Shanghai Foxboro Co. Ltd	110
		5.3 Two approaches to conflict resolution: BorgWarner and Volkswagen	114
		6.1 Examples of Chinese stratagems	135
		6.2 General Motors and Ford in China	144
		6.3 The experience of a Canadian negotiator	147
		7.1 The location choice of Seagram	161
		7.2 Volkswagen’s localization of sourcing	164
		7.3 The R&D centre of Proctor and Gamble in China	171
		8.1 Economies of scale and economies of scope	179
		8.2 Coca-Cola’s product strategy	184
		8.3 Direct selling in China	191
		9.1 The Story of Wilson Wang	207
		9.2 In-house training at McKinsey (China)	214
		9.3 The story of an American expatriate	221
		10.1 The Agreement on Trade-Related Aspects of Intellectual Property Rights	232
		10.2 Toyota’s lawsuit	239
		10.3 Silk Alley in Beijing	243
		10.4 Anti-counterfeiting at Proctor and Gamble	248
		11.1 The reformed Chinese taxation system	254
		11.2 The tax cost of merger and acquisition	259
		11.3 The repatriation of profits from China	263
		11.4 The acquisition of listed companies in China	266
		11.5 The Lucent Technologies bribery case	274

Preface

China is the most populous country in the world. Following rapid economic growth and impressive improvement in people’s living standards in recent years, China is now widely accepted as a market with enormous potential. The Chinese market is still limited in per capita terms, but it is precisely this low income per capita that enables China to enjoy a pronounced advantage in cheap labour. Attracted by the huge market potential and the low-cost labour force, investors from all over the world are currently pouring into China to do business.

Doing business in China is not an easy task, however. For some years China has been in the process of transitioning gradually from a command economy to a market economy. This gradual transition has resulted in a complicated and uncertain business regime, which puzzles even the most knowledgeable experts on China. In addition, Chinese culture is different from those in other parts of the world, which can often frustrate foreign investors. For foreign investors, therefore, the main challenge is to learn how to manage business in the uncertain, unfamiliar and complicated Chinese environment. Unfortunately, there is no textbook that comprehensively addresses the managerial issues faced by foreign investors in the Chinese business environment. The aim of this book is to fill this vacuum.

The idea of writing the book occurred to me when I was a research fellow at the Centre for International Business at the University of Leeds in 2003, working on a project on transnational corporations in China. Several months later I took up a position as a lecturer at Nottingham University Business School. I decided to design a module on managing transnational corporations in China for postgraduate students in the management sciences. In preparing the module I went through numerous books, journals, newspapers and online sources, and identified a number of key managerial issues faced by almost all transnational corporations doing business in China. These issues involve a wide range of business activities, including entry mode selection, international business alliances, negotiation, production operations management, marketing management, human resource management, the protection of intellectual property rights, corporate finance management and cross-cultural management. I addressed these issues in eleven lectures, which form the framework of this book.

In delivering the lectures, my thinking was that these managerial issues needed to be discussed in the light of the relevant theoretical frameworks and models of international business and management, with reference to the current business and management practices of transnational corporations operating in China. It was also my belief that these issues should, moreover, be discussed in the context of China’s general business environment and specific international business regimes. In consideration of the fact that international business theories and models have already been investigated in detail in many international business textbooks, I deliberately paid great attention to the experiences of transnational corporations in managing business in the business environment as it actually exists in China. As a result, I used a large number of real-world cases to illustrate the points I wanted to make throughout the lectures. I found it very rewarding to move along this line of thinking: the number of students registered in the module increased from forty-one in 2003 to 124 in 2006! I would like to take this opportunity to thank all the students who participated in the lectures and seminar discussions and made helpful comments and suggestions.

Encouraged by positive feedback from the students, I decided to draft book chapters and contact publishers. The responses from several publishers were very encouraging, in particular from Cambridge University Press, where editors Chris Harrison, Katy Plowright, Lynn Dunlop and Paula Parish showed great interest in the book, and sent three sample chapters to experts in the field for review. The review reports were very helpful; without the encouragement from the Cambridge University Press editors and the constructive comments from the anonymous referees the book would not exist in its current form. I would like to take this opportunity to thank Chris Harrison, Katy Plowright, Lynn Dunlop and Paula Parish for their excellent editorial guidance, and the three anonymous referees for their helpful comments. I would also like to thank Mike Richardson, Phyllis van Reenen and Alison Powell for their brilliant work in copy-editing, indexing and producing the book. Finally, I would like to express my gratitude to Michael Barbalas, president of the American Chamber of Commerce in China, who kindly read through the manuscript and made valuable comments and helpful suggestions.

This book can be used as a textbook for postgraduate students in international business or any management disciplines with an area focus on Asia-Pacific business, and as a textbook for the short training programmes that are offered to executives who are assigned to China operations. In addition, this book can serve as a major reference book for any foreigners doing business in China, or any university academics doing research into transnational corporations there. I will feel greatly rewarded if this book is of assistance to its readers.

Xiaowen Tian