Pros and Cons of Doing Business in China - A Macro-Economic Analysis

This report consists of analyzing the advantages and disadvantages of entering into the China market for future business layout. Along with analyzing the local labour export and employability, government policies, and entrepreneurial environment with the theme of entry and development business in China market.

Macroeconomics

Contents
INTRODUCTION...................................................................................................3
MAIN BODY.........................................................................................................3
Pros and Cons of doing business in China...................................................................3
REFERENCES.....................................................................................................12

INTRODUCTION
The expansion of the business requires setting effective policies and owing to the
saturated local business, the company needs to develop a broader market to lay the
groundwork for the future business development of the company. As per the long-
term high rate of economic growth, China has been a leader in economic gain in
comparison with developed countries and developing countries, which is rare in the
development history of each nation. China is the second-largest economy in the
world, in terms of GDP and currently is ranked second, so a growing number of
multinational companies are willing to establish new companies and promote their
business in China. This report consists of analyzing the advantages and disadvantages
of entering into the China market for future business layout. Along with analyzing the
local labour export and employability, government policies, and entrepreneurial
environment with the theme of entry and development business in China market.
MAIN BODY
Pros and Cons of doing business in China
Pros: There are mentioned different benefits to a company that get after entering
into China market that are mentioned below:
Business cluster: In a certain field, a business cluster is a geographic
concentrations of related enterprises, distributors, and related companies. Clusters are
thought to boost productivity levels, allowing them to operate on a world - wide scale
(JANUŠKA, M.2011). India and China have the biggest labour supply and the most
manufacturing in the globe. By examining their regional educational standards,
money supply, accessible manpower, transport, and equipment, the reasons why firms
want to expand business in the country may be validated.

Source ： UNESCO Institute for Statistics (2020)
As shown in the graph, China's regional standard of training has always been
higher than India's, and it continues to rise, demonstrating that the quantity and
educational level of employees in the labor industry in China is likewise higher than
in India. Furthermore, during the last few years, China has popularized the bilingual
system, with the government enacting a slew of training materials aimed at
encouraging English acquisition beginning in primary school. In China, millions of
high school graduates with a rudimentary understanding of The language and a great
willingness to learn enter the workforce to fill the earnings gap. All of these benefits
are significant for organizations trying to hire local workers in the upcoming.
Labor Productivity
While compared production in India to other nations, we are often drawn to the lower
labor costs, but businesses often neglect one important piece: performance.
Despite having a large labour market and facilities, India's producers are further
behind the rest of the country in respect of production line design, operations
management, cleanliness, and repair, which is a primary reason for their low growth.
In addition, the efficiency of Indian manufacturing employees is approximately twice
less than that of Chinese workers (McKinsey & Company 2012).
By analyzing the GDP of 2 nations, one can have a better grasp of personal
production per capita. Calculated for purchasing power parity (PPP), per capital GDP
provides a hierarchical system of measurement to monitor each worker's impact on

national household consumption output. China's per capita GDP was $12,609 in 2014,
as per the statistics, when corrected for purchasing power parity. This amount has
been more than almost double equivalent in India, which is $5,565. Nevertheless, as
of 2014, India's manufacturing industry accounted for around 17% of the country's
GDP, whereas China's manufacturing industry contributed for roughly 31% of the
national GDP (From the World Bank's website). The fact that India's labor market is
regulated more strictly compare than China's is the fundamental explanation for the
performance disparity between the two countries. As per missing values,
approximately 80% of India's labor force is unregistered and unsupervised by
government agencies.
Other cause of low efficiency is the fact that its unions are distinctive, limiting
factory output. In China, there is just one central organization, which oversees
affiliates in all other regions. However, in India, unions are spread separately in each
factory, exerting an even greater effect than the firms. In this way, when conflicts
occur, it is easy to cause strikes, which will affect the normal production of the
factories. China is on the winning side without doubt by comparing the productivity
of the two countries.
Availability of Labor: The available labor in China and India are the largest in the
world with the great majority of the population, respectively, and India's labor force
share in 2014 was 502 million, while China's was 802 million. The proportion of 15 to
64-year-old in the labor force within this range is 66% in India and 73% in China.
China is also ahead of India in this regard (Mello, 2020).
Logistic and infrastructure

Resource from : Word Bank
In the graph, China is developing stronger than India in areas such as
infrastructure. Economic progress is inextricably linked to the frequency of
commerce, and the regularity of effective technology and commerce are similarly
linked, but none of this can happen without facilities being built. To reach clients,
products must be carried via road, rail, air, and sea, resulting in real income benefits.
Because the government spent 4 trillion yuan in 2008, China's network has grown
rapidly, with a total route length of 5.0125 million kilometers, railroad service of
139,000 kilometers, 2,520 port berths, and 238 airports. (Resource from :
www.mot.gov.cn.) With both the suggested comprehensive strategy of the "Belt and
Road Initiative," China's rail transport reportage will be able to cover all of Europe
starting in 2011, with a flip train between China and Eu nations able to operate 3
times a week, assisting countries in exporting to China and also China's goods
importation to various lands, having a major impact to econometric growth.
Growth of the consumer group: China's whole consumer base has been significantly
expanding over the last century, with 92 percent of urban dwellers having a

discretionary family income of 140,000 yuan in 2011. 50% of Chinese households
now belong to the wealthy, with discretionary income ranging from 140,000 to
300,000 yuan. After satisfying the requirements of ordinary food and shelter spending,
consumers begin to seek decent quality expenditure, including such travelling,
hanging out to events, and purchasing foreign imports, as their money rises (as shown
in the figure). Almost all of consumption growth in China comes from urban
consumers, who account for 60% of GDP, but there is still considerable market
potential in some second-tier cities and rural areas.
（resource from McKinsey&Company（
Stability: In the last 30 years, China's culture, economics, and government have
been steady. The financial crises of 1997 and 2008 resulted in a global economic
downturn, inflation, and significant unemployment levels. Nevertheless, thanks to its
unique administration and response system, China was able to mitigate the effects of
economic disaster and achieve successful urbanization growth and development in a
short amount of time, ensuring the sustainability of China's economy. Economic
growth is a key indicator of a nation's stage of technology, and enterprise development

necessitates a pleasant and stable financial and market climate. As a result, it assists
businesses in making accurate corporate budgeting and forecasting judgments, as well
as guiding businesses in the proper direction of development, which itself is
represented in employment generation (Atmiati and Iradianty, 2021).
Policy support: The Chinese government encourages international companies to
build up manufacturing plants, and taxation is the most favorable regulation for
foreign companies in China. Commonly Prescribed companies have to pay business
taxes of 33%, but international companies should pay business taxes of between 15%
and 24%. (There will be different ranges because of different industries and regions).
Furthermore, international companies can request for a three-year reduction of
corporate tax, and different communities can seek for five-year full exemptions of
taxation in the second year after turning a profit (Schenck and Liard, 2020).
Taxation: In comparison to other countries' levies on foreign firms, China's tariff
reduction is unprecedented. Interior areas offer substantially cheaper tariffs than
coastal areas for foreign corporations setting up factories in China, which is vital for
foreign trade businesses to generate profit, as following. Simultaneously, the regional
government will offer the business with ideal essential amenities and surroundings,
including such infrastructure and geographical accessibility.：1： Tariff rate: The Chinese government has reduced the import tariff rate for 8
times since 1991. The VAT of general trade import link now is 17%, 13% or
0%.(Resource from KPMG.)：2： Duty free for imported equipment: The imported equipment for foreign
investment and domestic investment projects encouraged and supported by
China is exempted from tariff and import VAT.
Cons: There are mentioned various cons that face by the company to enter into the
China market for the business such as:
Challenging market access: Although it has a good investment environment for
foreign investors, the premise is that the company must be legally registered and put
on record in China's regulatory authorities, pass the examination and approval, and

obtain the commercial operation certificate before it can officially operate legally in
China. This is a difficult challenge for foreign enterprises that do not know China's
national conditions because that some government departments only have Chinese
materials, so applicants must be able to read Chinese.
Local Marketing competition: China is a huge market with the largest population
density in the world, which is also a very competitive one. Such competition happens
every day in the market, especially in China's first-tier cities such as Beijing,
Shanghai and Guangzhou, where the competition is particularly fierce. Both local
enterprises and foreign enterprises seek for greater market share in their respective
fields, so as to earn more profits.
The enterprise type of China is divided into private enterprise and state-owned
enterprise. State - owned enterprises often have a unique value of existence in its
industry, which seems unchallenged, but with the development of the economy, such
characteristics are gradually fading. As China opens the market more, we hope that
more foreign companies will enter China and compete with each other to bring better
services and products to consumers, increasing consumers' interest in purchasing, and
driving economic growth through consumption (Zakat, 2021).
Policy and Culture: The relationship between the Chinese government and
Chinese companies is not the same as that in Western countries. Companies can
challenge wrong government decisions in western countries; however, the
government plays a more active role in China and has an absolute right to speak in
economic development. They directly formulate and control economic development
strategies and is very strict with the rules, which is difficult for companies coming to
China for the first time and takes time to accept.
The future consumer of the company will mainly be the Chinese market, and the
differences between Chinese and Western cultures will be unavoidable, including
business habits, thinking and values:
1. Business Habits: The difference between China and the West is that Western
businessmen usually distinguish interpersonal relationship from business relationship.

They always talk about how to cooperate with their business partners no matter in
formal or informal occasions, whereas Chinese businessmen make friends first, and
by getting to know each other, they develop into business partners (Banerji, 2020).
2. Business thinking: In business negotiations, Chinese people generally place more
weight on sincerity and strength of the other side, and the negotiation process
emphasizes adaptation rather than thorough arrangement. Western businessmen, on
the other hand, focus on the negotiation process and requirements with clear goals,
data collection, plan determination, etc.
3. Business values: The difference between the two sides lies in the fact that Western
businessmen mainly consider shareholders and maximize the profit of the company.
Chinese businessmen, however, focus on corporate efficiency and social
responsibility (Mubarok, Hamid and Al Arif, 2020).
Environment: The economy grew quickly, and pollution became a problem.
Excess manufacturing degradation, road building, and other factors are contributing to
China's severe water destruction. Since of pollutants, a natural site windstorm
occurred in Beijing and Inner Mongolia. Furthermore, the PM2.5 index in China's
industrial development hubs, such as Beijing, Shanghai, as well as first towns, far
surpasses the threshold, and long-term exposure to quite an atmosphere may harm
human lives and produce labor losses. In the last five years, the Chinese government
has noted the significance of ecological concerns and has implemented a number of
initiatives to combat pollutants that are presently prevailing views. China announced
recently a "carbon neutral" policy framework, stating that perhaps the government
will require businesses to increase technical innovation and cut carbon emission, as
well as encourage the use of reduced running instruments like electrical vehicles and
public transportation. At the same time, the investment will be made in infrastructure
like hydro energy, wind energy and solar energy to replace traditional thermal power
generation. Thus, while the environment is still a risk to China, it will be steadily
reduced in the future.
Lobal cost increase: Many foreign companies choose China as a location for their

factories because of its inexpensive labour force. However, even as market and
scientific and technological grow, more work opportunities open up for the public,
and the median earnings improves. As a consequence, there is a scarcity of low-wage
people, and employees are no more ready to do fundamental tasks. Furthermore,
manufactures have rapidly evolved from foundry operations in industrial sectors
including such clothing and shoes to autonomous research, industrial output, and
manufacturing capability, implying that fundamental labor costs would continue to
keep going up. Some businesses are considering relocating their manufacturing
operations to neighboring countries such as Myanmar, Thailand, and Laos, where
labor costs are lower than in China. Although rising labor costs is a danger to
contemplate, these low-wage countries lack China's infrastructures and logistical
systems, which would have a significant impact on the effectiveness of their
commerce, and their per person investment and expenditure capability cannot
compete with China's (Plassard, 2021).
.
CONCLUSION
To summaries, China offers a high-quality labour force, cheap costs, high
productivity, a favorable foreign investment development climate, and a number of
challenging guidelines for the growth of small ventures. Furthermore, when the
average income per capita in China's mass market rises, demand will rise as well.
However, in a stable social context, person's consumer spending potential will expand
even more. The local government's favorable tax and tariff regulations will provide
significant assistance in the establishment of the new enterprise in the neighborhood.
For the time being, the greatest risk of increasing sales in China is figuring out how to
fit into the local supermarket culture while also meeting legal standards. This can be
mitigated by hiring existing workers and having more fun learning about Chinese
culture, but it is not difficult to eliminate. Threats and possibilities cohabit for the
organization. It would be a wise option to take advantage of the increase in person's
disposable income driven on by Economic development and investigate the Chinese

market, therefore enhancing the firm’s competitiveness over the following five years.

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