Risk Factors for Doing Business in China

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