An Analysis of Business Relationships in China

This assignment involves a comprehensive analysis of business relationships in China. It requires an examination of various studies and research papers that have investigated the factors that contribute to successful business relationships in China. The assignment aims to provide an understanding of the complexities of doing business in China, including the role of guanxi, political connections, and institutional forces.

Running head: BUSINESS IN CHINA
BUSINESS IN CHINA
Name of the Student
Name of the University
Authors Note

1BUSINESS IN CHINA
Since the last few decades, China has risen from poor developing nation to a great
economic power. Till the year 1978, China was under the scrutiny of Chairman Mao Zedong and
directed a planned economy (Gan, Hernandez, and Shuang 2016). Majority of the country’s
share output was controlled and directed by the state. During the period of 1950s, all Chinese
individual household were taken together as large communes. Within the period 1960 and 70s,
the central government has undertaken large-scale investments both in human and physical
capital to support the increasing trend of industrialization. Foreign invested firms and private
enterprises were usually barred. The major of the government was to make the economy of the
country relatively self-sufficient. The foreign trade policy was only limited to such goods that
could not be generated or obtained in China. According to Liu et al. (2014) such kinds of policies
were the major cause of distortions in the economy. Most of the economical aspects were
managed by the central government and hence there was no mechanism in market to allocate the
resources.
China’s reform and urbanization was initiated after 1978 due to the practice of dual- track
price liberalization. According to Zhao (2016), the rise of village enterprises, township and
opening to various international trades was very major step taken by China. The dual track price
liberalization and rise of township enterprises made the state-owned enterprises to face major
competition. On the other hand, according to Hong and Jinfeng (2016) the development of
international trade made the domestic firms to face major competition. With the rise in
competition after the reform, the firm’s incentives for adopting modern technologies also
increased at a rapid pace. The political system of China is centralized in nature, which allows the
country for regional competition and experimentation. During the period of reformation, various
technologies were imported by China from the western countries rather than from Soviet Union.

2BUSINESS IN CHINA
As per the Chinese government statistics, the real GDP of China grew at an average
annual rate of 6.7% from the year 1953 to 1978 (Cho and Candy 2014). Earlier in the year 1979,
China started launching various economic reforms methods. The central government started
initiating ownership and price incentives for the farmers. These practices enabled the farmers to
sell their portion of crops in the free market. Moreover, the government also established four
major SEZ (special economic zones) for attracting investment from foreign countries, importing
high-tech products and boosting exports of China. The local middle income citizens were also
encouraged to initiate their own businesses. Various additional reforms were made in several
sectors with the main motive to decentralize the economic policy making. Economic controls
related to various enterprises were given to local and provincial governments. This was usually
allowed to compete and operate on free market principles instead of guidance and direction of
state planning. Moreover the state price controls on various products range were slowly
eliminated. According to Mitchell, Marie and Allen (2014) a country may be identified as
middle-income status for a prolonged period unable to transform itself to a high income status.
This phase is usually called the ‘middle income trap’.
A middle income country cannot easily be able to compete with a low income country as
the wage rate is too high in middle income country. On the other hand, according to Newell et al.
(2016) middle income country is unable to compete with high income countries as the
development and research capacity of a middle income country is too low. For a period of more
than 30 years of high growth China is currently considered to be upper middle income nation. As
per the World Bank, in the year 2016 China’s per capita GDP was ascertained to be 8,123.2
dollars. China’s growth process is a major process of integration involved into a greatest

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economy in the world. China has a population size of over 1.3 billion; therefore the level of
nation’s integration into the world is very unprecedented in history.
Feldman (2016) commented that nation’s with high income status usually avoids the
middle-income trap. Large countries are unable to rely on only service sector. Therefore it
becomes necessary to develop and adapt innovative technologies that are vital for the growth of
manufacturing sector. This would help the country to avoid the middle- income trap. As per Yen,
Dorothy Ai-wan and Abosag (2016), China avoids the middle-income trap by the development
of technological capacities and manufacturing sectors. The opposition of Industrialization by the
various land owners in China was quiet impossible due to land reforms in 1950. Before 1978,
huge capitals were accumulated due to the sacrifices made by the citizens. After 1978, due to
adequate development in the manufacturing sector resulted china in becoming a middle-income
country. In the recent times, China has huge income inequality. China will be able to avoid the
middle-income trap by providing free resources access, reducing income inequalities,
opportunities to its citizen and building crucial innovative capacities.
On the other hand, Macve (2015) has argued that by the development of interest group
can harm the economic growth in a stable society. Interest groups such as landowners can
deliberately harm the manufacturing sector development in various countries. The government of
the country if proved to be weak would be unable to implement significant policies related to
industrialization. The country’s manufacturing sector would therefore be easily captured by the
interest groups. Though the concept of middle income trap could be considered to be
controversial but there is a high rise in the theory of middle income trap (Wang, Rong and
Yanhong 2014).

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For China, technological improvement is highly essential to avoid the middle income trap
as mentioned by Feng, Johansson, and Zhang (2015). Building of infrastructures, financial
development and industrial upgrading are highly important for China to avoid the middle income
trap. Industrial upgrading mostly depends on the country’s technological progress. As mentioned
by Wang et al. (2016), developing infrastructure and technological capabilities are generally
complementary in nature. Moreover, financial development will help in reducing the
technological cost related to the manufacturing firms. Though the development of technological
capabilities is necessary for the growth of middle-income country, it is not necessary for the low-
income country.
Technological improvement is highly essential to avoid the middle-income trap. As
mentioned by Ahlstrom and Zhujun (2014) prominent amount of per capita income is usually
related with the high level of labor productivity that can only be achieved through effective and
improved technologies. Development of Chinese technological capabilities is also greatly
influenced by the policies of the government. During the early 1990’s, China’s investment and
trade reforms as well as incentives led to a major surge in the foreign direct investments (FDI).
This resulted in major productivity gain of the country and rapid trade and economic growth. As
per Shou et al. (2014), China has currently become a major recipient of FDI in the global level.
Moreover also provides great FDI outflow globally. In 2016, The FDI outflows of China were
resulted to be $183 billion, which makes it the second- largest FDI provider in the world.
As per Barnes et al. (2015) the sharp rise in China’s FDI outflow globally in the recent
few years was driven by various numbers of factors. These included the government policies of
China and their significant initiatives to motivate and support firms to ‘go-global’. The Chinese
government uses FDI to gain major access to various technology, know-how, IPR and famous

5BUSINESS IN CHINA
brands. This strategy was used to move the value of Chinese firms in services and manufacturing
sectors. This resulted in boosting the country’s domestic innovation and Chinese brands
development, which further helped the firms in becoming global competitors. Moreover, the
rising labor costs and slow economical condition of China has led major Chinese overseas FDI.
This was done in order to help the business firm in expanding the business opportunities as well
as diversifying risks beyond the Chinese market. In few cases, it is done to relocate the lower
competitive firms from the country to other low-cost countries.
As per the reports of China’s Ministry of Foreign Trade (MOFCOM) for the year 2016,
the non-financial FDI of China in BRI countries were totaled to $14.5 billion and were signed
with such countries. On the other hand as suggested by Macve (2015) the increased outflows of
FDI may also be the result of the government of China making an attempt to diversify its
reserves holdings in foreign exchange. Moreover, recently it has been ascertained that the large
share of China’s reserves had been moved to portfolio investments, such as in U.S. treasury
securities. These securities are comparatively safe and liquid in nature though small returns are
availed.
As per the government data on non- financial FDI of China, the greatest sources of FDI
in China for the period 1979-2016 were Macau and Hong Kong. They were followed by British
Virgin Island (BVI), Japan, Singapore and the United States. The new ‘go-global’ strategy
encouraged the Chinese business entities especially SOEs to make major investment in overseas.
The key element responsible for the huge investments was China’s great accumulation of the
various foreign exchange reserves. In the year 2007, the government of China officially launched
China Investment Corporation (CIC) to gain more profitable returns from its foreign exchange
reserves. Moreover, this will help in diversifying it away from its U.S. dollar holdings. As per

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Newell et al. (2016) another major relevant factor related to the government’s drive for
encouraging more outward flow of FDI was to obtain maximum natural resources like, minerals
and oils. Ultimately, the government of China has indicated its major goal of generating its own
globally competitive business entities with their very own brands.
According to Feldman (2016), acquiring the foreign entities or investing in them is
currently ascertained to be the biggest techniques of Chinese firms to obtain management skills,
technology and also international recognized brands. This helps China to become more
competitive in the global business environment. In the year 2005, a Chinese computer company
better known as Lenovo Group Limited purchased the computer division of IBM Corporation for
more than $1.75 billion. In the same manner, as per Wang et al. (2016) overseas FDI in new
businesses and plants that is viewed as growing international Chinese entities with major
research and development operations and production facilities all around the world.
In the current scenario, China is now regarded as an upper middle- income nation. As per
Newell et al. (2016), due to the rise in wage rates, the comparative advantage related to the labor
intensive goods has diminished. It is important for China to switch from the factor based to
innovation or efficiency based growth. The Chinese government and business needs to properly
rationalize their behavior for being more effective and efficient. Moreover, as mentioned by Liu
et al. (2014) better technologies will also lead to reducing the demands for all the natural
resources. Advent of better technological advances as well as creating fair and equal
opportunities enables development of the society. The economic growth of China would not only
be proved to be beneficial for the Chinese but even for the rest of the world.

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The manufacturing sector faces major challenges related to diversion of resources and
rising costs. The medium and small-sized manufacturing entities help in lowering the
concentration of unequal distribution while playing a major emphasis in innovations. The State
Owned Enterprises (SOE) is occupied in various infrastructures, resources and financial sectors
in China have generally high monopoly power. According to Macve (2015) the manufacturing
sector of Chinese business is big but not strong. The automobile industry of China is still
dominated by foreign entities and monopolizing technologies.
The technological capabilities needed to be improved for the Chinese firms to become
strong in the global business environment. The ultimate development of all the technological
capabilities is completely dependent on the domestic firms that unbundles the foreign
technologies as well as developing indigenous technologies. Therefore it can be concluded that
maintaining equal-access society and through proper development of innovative and
technological capabilities, China would be able to avoid the middle-income trap. Furthermore,
there are positive signs related to China’s sustained growth as the exports of the country has
become highly sophisticated driven by technological and skill improvements. In the current
times, the Chinese Government also has high interest to encourage innovation for the future
growth of China through its ‘go-global’ strategy.

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