Business Attractiveness of China: A PESTEL Analysis

This report analyzes the business attractiveness of China using the PESTEL approach. It identifies both positive and negative factors and suggests joint venture and Greenfield investment as the ideal entry strategies for foreign organizations. The report also cites real-world examples of successful strategies.

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Executive summary
The aim of this report is to discuss about the business attractiveness of China in the current time.
In doing so, this report used the data from World Economic Forum and The Global Economy to
compared and analyze the current business factors relevant in China. It is identified that China is
mostly having favorable business environments, which are helping them in becoming a global
business hub. On the other hand, a number of negative factors also being identified, which may
prove challenging for the foreign business organizations. This report concluded that joint venture
and Greenfield investment will be the most ideal entry strategies for the business organizations in
doing business in China. Two real world success stories are also discussed that proved the
effectiveness of the stated strategies.

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Table of Contents
Introduction......................................................................................................................................3
Identification of the external factors................................................................................................4
Political factors............................................................................................................................4
Economical factors......................................................................................................................9
Social factors.............................................................................................................................12
Technological factors.................................................................................................................14
Environmental factors................................................................................................................16
Legal factors..............................................................................................................................18
Justification of the entry strategies................................................................................................20
Joint venture...............................................................................................................................20
Greenfield investment................................................................................................................21
Conclusion.....................................................................................................................................21
Reference.......................................................................................................................................23

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Introduction
In the current business scenario, it is becoming more important for the contemporary
business organizations to enter in the foreign markets in order to enhance their business
potentiality. This is also increasing the competition among the countries across the world to
attract more foreign investments. In addition, they are also increasing their competiveness over
the other countries to enhance their attractiveness to the potential business organizations (Lepori,
Seeber and Bonaccorsi 2015). Business organizations are determining the different aspects and
factors of doing business in a foreign market prior to entering. Determination of the business
attractiveness helps in identifying the important factors that will have influence and impact on
the long term business operation. In accordance to these factors, it can be concluded whether the
particular country is attractive for the business organizations or not (Docquier and Machado
2016). It is also important for the business organizations to identify the both the positive and
negative factors of doing business in a particular country. Accordingly, they will design their
organizational strategies and approaches to leverage the positive factors and avoid the negative
ones.
In the recent time, China is considered as one of the most promising economies in the
world and is attracting a major chunk of foreign investments over others. There are number of
reasons, which are helping them to stay ahead in the global business scenario (Hsueh et al.
2013). Some of these factors are huge population and marketing opportunities, positive economic
growth rate, stable governance and lower cost of resources. In addition, China is also rapidly
becoming a global hub for the major multinationals across the world due to their favorable
business environments in place. However, further detailed analysis of the business factors in
China is required to have the deeper picture.

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This report will discuss about the major business factors in having operation in China
using the PESTEL approach. Both the positive and negative factors will be identified and
discussed. In addition, the idea entry strategies in doing business in China will also be discussed
in this report citing some of prominent real world examples of multinationals.
Identification of the external factors
Political factors
Political factors refer to the governance and stability in the country and the extent to
which the business organizations are having stable operating environment and assistances from
the governments. One of the key elements is political stability. According to the global economy,
China scored -0.55 in terms of political stability (TheGlobalEconomy.com 2018). This denotes
that China is having moderate level of political stability in the country. Thus, business
organizations operating in the country will have favorable political environment along with
having the risk for future negative consequences. It is also identified that political stability of
China is improving if being compared in last few years. This is a positive factor for the business
organizations in doing business in China (Lee and Zhang 2013).

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Figure: 1
Political stability of China
Source: (TheGlobalEconomy.com 2018)
It is also identified that China is also having favorable score in terms of government
effectiveness with having the score of 0.41. This denotes that government is effective in the
country in regulating the business environment (TheGlobalEconomy.com 2018). Business
organizations operating in the country will have the provision of having effective governance in
place.

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Figure: 2
Government effectiveness index of China
Source: (TheGlobalEconomy.com 2018)
However, apart from these positive factors, there are number of negative political factors
also being identified. The global economy reported that China is having the score of 37 in terms
of global corruption perception index as of 2015. This denotes that corruption is having larger
influence in the country and the business organizations operating in the country will face it. In
addition, relevance of corruption may also cause lawsuits for the business organizations.

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Figure: 3
Corruption ranking of China
Source: (TheGlobalEconomy.com 2018)
On the other hand, world economic forum reported that inefficiency in government
bureaucracy is one of the most problematic factors in doing business in China. This denotes that
even though the governance in China is effective but the business organizations will face the
issue of high level of bureaucracy. This will slower up the business affairs for the organizations
and will also affect their relevancy of doing business in China.

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Figure: 4
Most problematic factors of doing business in China
Source: (weforum.org 2018)
Considering the different political factors of doing business in China, it is identified that
overall political environment for the business organizations is moderate and improving. In
addition, it should also be noted that corruption ranking of China is favorable if being compared
with the countries from South Asian regions (Khan, Alam and Alam 2015). The key example for
this is the presence of global multinationals such as Apple Inc. They are having only a few
manufacturing facilities across the world with one of them is in China. Thus, they are operating
in China due to having business friendly political factors.

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Economical factors
Economical factors refer to the external business elements that will have impact on the
economic viability and profitability of the firms. China is one of the leading countries in the
world in terms of economic growth. In addition, it is also reported that economic growth of
China is more compared to some of the developed countries. It is reported in the global economy
that as of 2015, the rate of economic growth is 6.9, which is one of the highest in the world
(TheGlobalEconomy.com 2018). Thus, the business organizations entering in the Chinese
market will have huge economic potentiality with the increasing economy and purchasing power
of the customers. However, it is also identified that China was having economic growth of 14.23
in 2007. This shows the decreasing trend of economic growth but still China is having leading
growth rate in the world.
Figure: 5

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Economic growth trend of China
Source: (TheGlobalEconomy.com 2018)
Another positive economical factor of doing business in China is lower rate of corporate
tax. According to the global economy, China scored 25 in terms of corporate tax and it much
lower compared to the tax rate of 33 in 2007. Thus, the business organizations entering in China
will have lower level of tax rates in their operations and this will further help them in having
lower cost of operation and more profitability.
Figure: 6
Corporate tax rate of China
Source: (TheGlobalEconomy.com 2018)

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It is identified that China is having moderate score in terms of overall economic freedom.
This refers to the extent to which the business organizations operating in a particular country will
have free economic elements. In this case, China is having the score of 52.7 as of 2015, which
denotes that they are having moderate sets of economic freedom in place
(TheGlobalEconomy.com 2018). It is also being identified that rate of economic freedom is
improving. Thus, in the following years, business organizations entering in the Chinese market
will have more economic freedom.
Figure: 7
Economic freedom index of China
Source: (TheGlobalEconomy.com 2018)
On the other hand, there are number of negative economical factors also being identified.
One of the major negative economical factors in doing business in China is trade tariffs. This is

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due to the reason that according to the world competitiveness index, China is having the ranking
of 118 in terms of trade tariffs (weforum.org 2018). This denotes that business organizations
operating in China will have the challenge of higher trade tariffs. This will cause more incursion
of cost in trading activities. This will have more impact on the international business and the
organizations involved in import and export activities. It is also reported in the global
competitiveness index that China is having the ranking of 33 in terms of the local market
competition. This denotes that the intensity of local competition is more in China and this may
have adverse impact on the profitability of the foreign organizations.
Social factors
Social factors refer to the taste and preference pattern of the target market customers
along with their cultural trend and influencing factors. These factors will also have influences on
the business potentiality of the organizations due to the reason that sales volume and revenue
will be determined by the preference pattern of the end customers. China is the largest country in
the world in terms of population and thus the market potentiality for the business organizations is
also the highest (Mak and Davis 2014). This can be termed as the one of the most promising
factors of doing business in China. Another major positive social factor of doing business in
China is high intensity of labor force. According to the global economy index, China is having
more 700 million eligible people for labor force and it is continuously increasing
(TheGlobalEconomy.com 2018). This denotes that the more will be the supply of the labor force;
the lower will be their cost for the organization. Thus, the cost of human resource will be less for
the business organizations. Companies such as IBM are outsourcing their services to China in
order to get the job done in lower cost. This is also one of the major reasons of China becoming
global business hubs for the leading multinationals.

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Figure: 8
Labor force in China
Source: (TheGlobalEconomy.com 2018)
On the other hand, it is also identified in the global competitiveness index that China is
having the ranking of 24 in terms of hiring and firing practices. This denotes that the level of
employee attrition in the county is high and this will cause added cost for the organizations due
to the reason that more attrition of the employees will cause increased cost in selecting new
employees and training them (TheGlobalEconomy.com 2018). In addition, the global
competitiveness index also reported that poor work ethic is another major problematic factor in
doing business in China (weforum.org 2018). This will affect the productive working
environment of the organizations in their Chinese operation. Thus, it is concluded that
organizations with having the need of extensive physical labor and employees such as

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manufacturing sector will be benefited from the larger supply of labor in the country. On the
other hand, the vast availability of the skilled and trained labor and employees is also attracting
the services companies such as IBM to invest in China (Lai et al. 2013).
Technological factors
In the recent time, it is important to determine the technological factor due to the reason
that technological advancements determine the competitiveness of the companies in the market.
Countries are also enhancing their technological infrastructure in order to attract larger foreign
investments. One of the major technological factors is innovation index. According to the global
economy, China scored 47.5 in the innovation index, which denotes that they are having
moderate intensity of innovation in the country (TheGlobalEconomy.com 2018). However, it is
also identified that China is rapidly improving in the innovation index due to their extensive
development in the technological sector. Thus, organizations entering in China will have the
access to growing innovation opportunities.

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Figure: 9
Innovation index ranking of China
Source: (TheGlobalEconomy.com 2018)
China is also known for their high rate of exports of information technologies in both
form of hardware and software. According to the global economy, China is having the score of
26.56 in term information technology exports. This denotes that this sector is improving much
faster compared to the global average (TheGlobalEconomy.com 2018). The growth rate is also
denoting the companies in the information technology sector will have huge opportunities in
doing business in China. This is the reason behind having operations of global technological
giants such as IBM and Accenture in China.
Figure: 10

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Export of information technology from China
Source: (TheGlobalEconomy.com 2018)
On the other hand, it is reported by the global competitiveness index that China is having
the ranking of 81 in terms of availability of latest technologies. This denotes a lower ranking and
will pose challenge for the foreign business to have the access of latest technologies in doing
business in China. In addition, it is also being reported that China is having the ranking of 80 in
terms of internet users (weforum.org 2018). Thus, the business organizations will have lower
advantage of using the internet facilities in the country.
Environmental factors
In the recent time, environmental factors are gaining importance due to the increased
degradation of natural resources. It is becoming mandatory for the organizations to adhere to the
regulations and standards for environment protection. One of the major factors is the access to
electricity. According to the global economy, China is having score of 100 that denotes that they
have 100 percent access to electricity (TheGlobalEconomy.com 2018). Thus, the business
organizations operating in China will have the access to cleaner energy. This will reduce their
carbon emission.

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Figure: 11
Access to electricity in China
Source: (TheGlobalEconomy.com 2018)
However, on the other hand, it should also be noted that China is the one of the topmost
countries in the world in terms of carbon emission and thus, the regulations for controlling the
pollution is more. It is reported that China emitted more than 10000 tonnes of carbon dioxide as
of 2015. Thus, the business organizations entering in the Chinese market should have the
adherence with the environmental standards and regulations. In addition, business organizations
operating in China will also face the challenges of environmental impact. This is due to the
reason that China is having some of the most polluted regions in the world.

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Figure: 12
Carbon dioxide emission of China
Source: (TheGlobalEconomy.com 2018)
Legal factors
Legal factors refer to the laws, rules and regulations prevalent in a particular country and
which should be followed by the business organizations operating there. According to the global
economy, China scored -0.41 in terms of rule of law in the country. This denotes that China is
having moderate intensity of law. Thus, the business regulations will also not be complex for
operating in the country. If compared to the previous years, it is seen that intensity of the rule of
law is increasing in China and it will be positive factor for the foreign multinationals. In addition,
the global competitiveness index reported that China is having the ranking of 45 in terms of
settling disputes. This ranking is moderate and denotes that laws and regulations of China are

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favorable for the business organizations in dealing with their disputes. The global
competitiveness index also reported that China is having the ranking of 53 in terms of property
rights (weforum.org 2018). This denotes the moderate ranking and will have majorly favorable
impact. Thus, the foreign business organizations will have safer legal environment and protection
to safeguard their property.
Figure: 13
Rule of law index of China
Source: (TheGlobalEconomy.com 2018)
On the other hand, global competitiveness index also reported that China is having the
ranking of 104 in terms of number of procedures to start a new business (weforum.org 2018).
This lower ranking is denoting that business organizations willing to start their operation in

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China will face more complexities. This may de-motivate the foreign investors in entering in the
country. In addition, it is also identified that China is having lower ranking of 102 in terms of
strength of investor protection. Thus, the investment is not protected legally in China and it will
act as one of the major risk factors for the foreign multinationals.
Justification of the entry strategies
Joint venture
One of the most effective and popular ways of doing business in China is joint venture.
This refers to the process where the foreign organizations come in partnership to form a separate
entity in the market. This entry strategy will be ideal for the Chinese market due to the reason
that Chinese market is huge and in order to cater the entire market, it is important for the foreign
investors to have their facilities in the country (Sun and Lee 2013). However, on the other hand,
investing in China will increase risk factor for the companies. Hence, initiation of the joint
venture will help to have the partnership with a local firm, which is having more experiences in
the Chinese market (Lin, Jiang and Lam 2013). The foreign investor can have the access to the
information of their partnered firm and this will enhance the future business potentiality.
For instance, Toyota is one of the prominent automakers doing business in China.
However, Toyota was not having any Greenfield investments in the country; rather they are
having joint venture with a leading Chinese car brand, GAC (Pan et al. 2014). This brand is
having more knowledge about the local experience and trends and helping Toyota in offering the
products accordingly.

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Greenfield investment
Greenfield investment or direct investment is one of the major entry strategies for the
foreign business organizations. It is recommended for the Chinese market due to the reason that
initiation of this entry strategy will ensure the foreign brand to have their physical presence in
China (Ashraf and Herzer 2014). This will help them to have more influence on the customer
recall value. In addition, another advantage of Greenfield investment is offering products
accordingly. This will help the business organizations in gaining competitive advantages in the
market.
Apple is having their fully owned facility in China. This strategy is helping Apple in
reducing the cost of resources in their manufacturing process. In addition, it is also making
possible for Apple to offer the products according to the local and taste and preference pattern
(Kowalewski and Radio 2014). One of the major competitiveness of Apple is their distinctness.
Thus, in case of the joint venture, they should have to transfer their competitiveness to the
partnered firm. Thus, Apple is having Greenfield investment in China in order to cater to the
local preference pattern and protecting their technological competitiveness (Stepanok 2015).
Conclusion
This report concludes that China can be considered as one of most potential and
promising countries in the world for the business organizations. In this report, the external
business factors relevant in China are being discussed and compared. This showed that China is
having a number of positive as well as negative factors to be faced by the foreign investors.
However, in majority of the elements, China is having favorable business environments. In
addition, this report also identified joint venture and Greenfield investment as the two most ideal

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entry strategies for the business organizations in entering in the Chinese market. Real world
examples are also discussed to prove the relevancy of the identified entry strategies.

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