Introduction

Recently, a businesswoman in Houston failed to take culture into consideration in dealings in Bahrain. US firms considering business in China may wish to review this article that I wrote as part of my MBA program in May 2000. Please confirm the accuracy and currency of the information. You should consult an attorney who specializes in international transactions with expertise in China if you are considering undertaking operations in China. It is always a good idea to consult appropriate advisors in connection with any business undertaking. This is especially important when doing business in a foreign jurisdiction.

This article is being shared to emphasize the importance of understanding the situation before making business decisions and to highlight the differences one may encounter between one’s own culture, and the culture in other countries. To a lesser extent, one may find significant differences in culture even within a country. Within the United States, there are significant differences between how one does business in California, Texas, Illinois, and New York, for example.

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Contract law, the “rule of law” and Guanxi - doing business in Hong Kong and the People’s Republic of China

The People’s Republic of China represents a tremendous potential market for many US companies. Relatively few US companies have entered the Chinese market. For some, such as telecommunication providers or US defense contractors, regulatory restrictions by either the Chinese government or the US government may explain the absence. In other cases, US companies have made a conscious decision not to expand into China.

Many companies that could do business in China have chosen not to expand into China, at least at this point. One must wonder why companies would decide not to expand into China, especially since it represents such a large potential market. In domino fashion, this question leads to many other questions. How do commercial activities in China compare with those in the United States? How do contract laws in the two countries compare? What relative importance are the laws and regulations regarding contracts given in the two countries? Finally, the paper will look at how these factors affect business transactions. Through both research and personal observations, the author was able to draw some conclusions on each of these questions. This paper will briefly discuss each of these question in an effort to provide a deeper understanding of the opportunities and obstacles that US companies face relating to business activities and transactions in China.

Why would companies decide not to do business in Hong Kong or China?

A company may decide not to do business in Hong Kong or China for many reasons. These reasons include lack of a market for the products or services, little disposable income, corporate resources, growth potential in current markets, as well as the firm’s internal and external environment.

Absence of a market

While Hong Kong and China are home to a large percentage of the world’s population, this does not guarantee the existence of a market. Some US companies are very successful in selling pet food and treats, pet beds and grooming items, and pet beds as well as other pet furniture.

Many dogs were seen during the trip to Hong Kong and China. This does not mean that there is a viable market for pet items. Most of the dogs were emaciated and seemed feral as they ran around and away from people and scrounged for scraps. Of all the dogs observed, only three appeared to be pampered pets. Two were seen on an apartment balcony in a wealthy part of Hong Kong. The third was seen at Digital Lighting’s villa in Chan An.

Based on these observations, there did not appear to be a significant market for pet food, treats, beds, toys, or shampoos. According to information gathered by the Foreign Commercial Service, there are 100,000 registered pets in Beijing (Foreign Commercial Service - American Embassy, March 24, 2000). By US standards, this is a low number of pets for a city of ten million inhabitants. Consequently, the market may be too small to attract a company like PetsMart.

Little disposable income

Although the population of China is very large, according to US government estimates, two-thirds to three-fourths of the population is too poor to be able to afford anything but the most basic consumer products (U.S. & Foreign Commercial Section 1999 at 10). This absence of disposable income would prevent the majority of Chinese people from purchasing many goods that are produced by US companies. Consequently, China may not represent a viable market for US companies that market foreign luxury cars, gourmet restaurants, art, jewelry, and similar products and services. To the extent that such companies do enter China’s markets, they may need to market products differently and use different operating models than they use for their US operations.

Corporate resources

The resources required to do business in China may exceed the assets of many small US companies or may not be available in China. Small companies may not be able to afford the cost of transporting raw materials that cannot be produced in China from the United States. Conversely, the companies may be unable to afford the cost of exporting goods made in China back to the United States or other overseas markets. In some arras, the labor pool may lack the skills, background, training, or credentials. Many parts of China are isolated. In those areas infrastructure required for many of today’s businesses may not be present.

Entering foreign markets can require considerable expense to develop relationships, establish distribution channels, obtain qualified workers, and overcome cultural hurdles. If the companies are able to expand within current markets, deciding not to expand into Hong Kong or China may be a smart business decision. Businesses considering entering the Chinese markets may decide not to do so because of language and cultural barriers, the effort and expense required to create and maintain relationships, prejudice against foreigners, and difficulty locating suitable workers. When faced with these requirements, many companies that have adequate expansion potential in their current markets are unlikely to expand into the new markets.

Legal and regulatory factors

Each of the preceding factors should be considered by US companies when they consider doing business in China. The factor that prevents the greatest number of US companies from entering China is the regulatory and legal environment in China. Legal and regulatory factors will be discussed in the sections that follow.

Part 2 of this article will compare the commercial activities in China and the United States.

Filed by Coleen Davis at 7:54 pm under Business Articles, Cultural Issues