Risk Factors for Doing Business in China

This article discusses the risks of doing business in China, focusing on political and legal, economic and environmental, and socio-cultural and technological factors. It explores issues such as government interference, intellectual property protection, high operational costs, inflation, language barriers, labor shortages, and cultural differences. Understanding these risks is crucial for foreign companies planning to enter the Chinese market.

Risk factors for doing business in China
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Introduction
Market entry into foreign countries requires an organization to conduct a critical analysis
of the macro environment. Effective analysis of the Macro environment assists an organization to
identify the possible risks and opportunity that may affect business in the long term or short term
after penetrating into foreign markets. Furthermore, the analysis of the diverse markets helps a
company chooses a sustainable and profitable destination. Through the macro environment
analysis, a company opts to come up with a suitable strategy that will assist it to sustain
competitive markets and external forces. Some companies have opted to use strategies such as
exporting, acquisition, venturing, licensing, piggybacking, franchising and merging but finally
failed to penetrate to diverse competitive marketing as a result of high risks of doing business in
those markets. Therefore, the paper seeks to determine the risks of doing business in China.
The risk of doing business in China
The PESTLE tool will be the appropriate theoretical framework for analyzing the risks
factors that may influence an organization while doing business in China. Song, Sun and Jin,
(2017 p.276) defined PESTEL as a framework that is used to analyze external environment
including political, economic, social-cultural, technological, economic and legal factors of a
geographical location a business does or intends to do business. Therefore, the risks of
conducting business in China will be analyzed in terms of Political and legal, economic and
environmental and social-cultural and technological factors.
Political and legal risks of doing business in China
Political and legal risks of doing business in China refer to government interferences in
the affairs of businesses conducting business in the country. In China, the foreign firm operates
in political and legally investment influenced climate and uncertainty. The political risks that a
business can face while doing business in China include assets confiscation as a result of

nationalization and contract repudiation with respect to contacts with government entities,
expropriations, corruption, currency inconvertibility, rampant inflation, currency devaluation and
wreaking havoc on the adequacy of insurance limits. The possibility of nationalization in China
is high with the consideration that China has already faced a similar situation in 1949 (Sukosd
and Wang, 2013 p.83). In addition, there are stiff competitions from local Chinese competitors as
they are highly favored by the government and they are able to navigate the complex business
environment better.
Legal protections of foreign companies are poorly managed with intellectual property
laws such as copyrights being inconsistently protected. In addition, the financial system is poor
as it is designed in a way that it favors state-owned entities although the private-sector growth
makes up 40% of the economic activity of China (Tian, 2019 p.3). In addition, with the
consideration that Shanghai stock market has significantly declined (Zhou, Tan and Huang, 2018
p.1351) while China economy has significantly grown by 8% (Dieppe, Gilhooly, Han, Korhonen
and Lodge, 2018 p.2016), this is an indication that foreign companies are facing the risks of
retaliatory protectionist policies which favors local companies of China as compared to foreign
companies.
According to research conducted by Opie, Tian and Zhang (2019 p.95), over 76% of
China’s assets are owned and controlled by the government with individuals owning only 30%.
The high percentage of assets owned by government means foreign countries have to negotiate
frequently with states in terms of legal requirements which have significantly slowed down the
pace of business ventures. In addition, with the government highly involved, joint ventures are
hard to establish which indirectly exposes some business to risks of exiting the market.

China government has higher spending which in turns affects the stability of taxation. In
2018 alone, Chinese government fiscal spending arose by 8.7 percent to amount 22.1 trillion
Yuan which is equivalent to $3.3 trillion as compared to the revenue it gained of 6.2 percent
which is equivalent to 18.3 trillion Yuan (Cai, Feng and Shen, 2018 p.811). The spending has
been facilitated by increased in corruption in the country which has crushed with recent market
liberalization. Further research conducted by Chen, Hao, Li and Song, (2018 p.200-218) shows
that misspending, bribery, kickbacks and theft of public funds cost at least 3% of GDP each year.
In addition, with Chinese owning majority of assets they have been able to spend without
oversight into the budget process and wasted funds into government office buildings, low job
creation, high population, high resource consumption and high-profile infrastructure projects
which have significantly raised taxations and tariffs of foreign companies. The foreign
companies also encounter the risk of rigid bureaucracy at every level: city authorities, provincial
companies, up to national levels. The rigid bureaucracy creates complicated procedures on how
foreign companies get any local government approvals without breaking financial acts.
Other political risks affecting foreign countries include unsatisfactory foreign trade policy
such as unfavorable trade policies, loans, custom valuation, poor quotas, administrative delays
and restrictions on many services. In addition, unsatisfactory banking systems make foreign
companies experience a low return on investment (ROI) and high-interest rates.
Economic and environmental risks of doing business in China
The operational cost of doing business in China is very high with the consideration that
the Chinese government has mandated foreign companies to pay constriction taxes, urban
maintenance and education since 2010 (Sarwar, Xiao, Husnain and Naheed, 2018 p.1839).
Furthermore, the Social Insurance Law that was implemented in 2011 (Cheng, Nielsen and
Smyth, 2014 p.243) has added additional operational costs to foreign companies that already had

insurance covers for their employees. The industrial overcapacity, the trend in growing turnover
(third and second-tier cities), increasing in salaries and trend that the government is planning to
impose new “minimum per hour rate”; the operations costs are likely to be high.
The high inflation rates in China and trends that the rate is expected to increase in the
near future also affects how businesses do business. According to research conducted by
Klingelhöfer and Sun (2019 p.19) on “Macroprudential policy, central banks and financial
stability”, the inflation rate of China has grown from 2.0 in 2018 to 2.5 in 2019 and it is
projected to reach 2.7 by 2022. The trend shows that foreign business experiences inflation
struggles year by years and in the future, they are likely to struggle more which indicates the
future investment in China by foreign companies remain an uncertainty. With high inflation
rates, the spending rates of customers have significantly declined with the purchasing power of
customers declining significantly. With low consumptions of products and consumers
prioritizing commodities from local firms, the majority of the foreign companies have incurred
significant losses with others opting to exit the markets.
Socio-cultural and technological risks of doing business in China
Intercultural communication issues such as Language remains a social challenge facing
diverse companies in China. Most of Chinese spoke in Mandarin (Liu and Pell, 2012 p.1042).
When the Chinese speak English there are full of local dialects which need translators. This
makes the negotiation process long and misunderstandings which slows down how the business
makes decisions in China. In addition, the translators may influence the negotiations and
business decisions as it may omit some important information that is required for doing business.
Labor risks also affect how businesses do business in China. With China having a high
population of 1.4 billion (Kim, Zhao, Zhang, Huang, Cui, Xiao, Downs and Wang, 2016.
P.9600), the number of unskilled labor is still high and therefore foreign companies face risks of

skilled labor shortages. In addition, with the poor network between foreign companies and
universities, most skilled university graduates prefer to work for the state sector.
Chinese cultures impacts how foreign companies do business in the country. The cultural
risks of doing business in China are examining using Geer Hofstede’s cultural factors that are
measured on five dimensions: long-term orientation, uncertainty avoidance, masculinity vs
feminism, individualism and power distance (Minkov, and Hofstede, 2012 p.3). Power Distance
index explores risks that are associated with the way people are influenced by leaders and power.
Individualism vs. collectivism explores into which people are integrated into groups. Masculinity
and feminism refer to preference in society for material rewards, assertiveness, heroism and
achievement. Uncertainty avoidance refers to the way people feel uncomfortable with ambiguity
and uncertainty and long-term orientation explores how people are linked with the past while
dealing with future and current challenges. China has power distance of 80, the individualism of
20, the masculinity of 60, uncertainty avoidance of 30 and long term orientation of 87 (Minkov,
and Hofstede, 2012 p.6).
(Image source Minkov, and Hofstede, 2012)

Analysis of risks associated with China's cultural dimensions
China has a high power distance as an indication that the country has strong hierarchies
and powerful leaders that pass laws which are favorable to local companies. In addition, with
leaders owning shares in local markets, they tend to influence their followers to purchase goods
and services from the local manufactures as compared to foreign countries. For example, despite
Amazon having a large market share in the e-commerce industry, it has failed to be successful in
China because they prefer Alibaba which is believed to be owned by a political figure in the
country.
The collectivism culture of Chinese significantly affects the purchase patterns between
local companies and international companies. The collectivisms cultures enable Chinese
population to have a higher respect for customs and traditions and therefore they are likely to
reject products from foreign companies. In this collective culture, it is hard for foreign
companies to fire underperforming employees because of entire community standing firmly
against local employees. Furthermore, whenever the key stakeholders of the company resign, the
employees who are loyal to them follow hence it becomes hard for a company to retain
employees.
In addition, with China having high masculinity, Chinese people tend to have a high
sense of belonging and pride and therefore families influence how community switches products.
This means Chinese having a low switching power to foreign countries which significantly
affects business long term profits and exposes it to closure risks. The uncertainty avoidance of
china is very low which indicates that Chinese people are not risk takers and therefore they end
up rejecting foreign products and services. His is what happened to amazon, Chinese people

were unable to take risks of shopping online despite Amazons products being low in terms of
prices as compared to their competitor Alibaba.
Conclusion
Generally, learning the risks of doing business in Chinese is essential as it enables an
organization to strategize on how to improve its profitability. The summary risks that impact the
way foreign countries do business in China include high crime and theft, trends of government
instability in near future, corruption, foreign currency regulations (foreign inconvertibility)
inflation, poor work ethic in labor forces, tax regulation complexities, high tax rates, policy
instability and ineffective government bureaucracy.
High taxation and inflation risks have the most impact as compared to all other risks
faced by the foreign as it has been associated with the closure of big companies in the region.
Furthermore, the risks are associated with failure of Amazon and Wal-Mart failing to make an
impact in the country.

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