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Simple steps to improve literacy
Friday, January 20th, 2006

A new study indicates that more than 50% of students at four year colleges and 75% of students at community colleges lack the basic analytical, math, and reading skills needed for every day tasks. This skill gap does not bode well for business.

Experience indicates that a significant percentage of students at the community college level try not to read the materials that are assigned for each class. Instructors may not be able to force students to read outside of class, but they can incent students to do so. Instructors can force behavior to change by changing their behavior in class.

Here is my initial thinking on what instructors can do…

  1. Quiz students on the reading material.
  2. Require more research papers, article summaries, and think pieces of students.
  3. Refer to the textbook in their lectures and require students to read sections of the textbook in class.
  4. Provide articles to students during class, have students read the articles in class, and require students to discuss the articles in class.

It seems to me that these are steps that might be applied at all levels of the educational system. In addition, parents can help their children develop their reading skills by encouraging reading, being role models by reading themselves, discussing what their children have read, and insisting that homework is done before their children watch television. Just as children often have chores, maybe parents should require their children to write book reports that the parents read.

What other ideas do you have for improving reading skills?

Here is a resource for information about literacy.

Posted in Business Articles, Resources, Tips for Students | No Comments »



Using Metrics to Build Long-Term Relationships with Customers
Wednesday, January 11th, 2006

Click here to read an article that I recently wrote for CIMTech about the use of metrics to build strong customer relationships.

Is there anyone who wants to have weak customer relationships? That seems like a pretty silly idea. That said, a lot of firms are just now starting to get on the bandwagon for building customer relationships and measuring them. So what accounts for the delay? Perhaps, the delay is the result of fear, “if it isn’t broken don’t fix it,” and the cost issues.

Fear

There is a lot of fear of metrics. Metrics are a powerful tool, when used appropriately. Like any tool, when they are misused, metrics can spell disaster.  In selecting metrics, it is important to understand what matters to customers.  How can the relationships have value for customers?  How should suppliers and customers interact? 

A lot of jobs that have been eliminated or outsourced over the last few years based on metrics. Some have been instances where the metrics were used correctly. Other instances reflect metrics that were used incorrectly.

If it isn’t broken

It may be difficult to justify the use of metrics to manage customer relationships.  If everything seems to be going well, how can an investment be justified?

Even though things may be going well, are they going as well as they could be?   If the relationship is perfect with one customer, there might be steps that could be replicated in dealing with another.  By monitoring results and measuring the activities, there could be opportunities to stop issues earlier, before the parties are so frustrated with each other.

Many firms have been using customer feedback for many years.  In an era of globalization, few firms can afford to ignore customers.

Firms that are content with their current performance seldom seek feedback.  Firms that are unwilling to change often skip customer feedback as well. 

Cost

An issue often cited as justification for not measuring results is cost.  Depending on what factors are measured, cost may be a legitimate concern.  In deciding what to measure, it is helpful to find out what is already being tracked.

Measuring results can be negotiated.  Customers and suppliers can work out plans for working together to measure results.  In fact, it is in both parties’ interests to do so because that allows them to improve.

What systems already exist?  How can current processes support the measurement of results?  What resources can be used to help measure results?  What constitutes success?  

Cautionary Note

When suppliers ask for feedback, customers can be confused.  Is the request sincere, or a thinly disguised marketing ploy?  A firm that is starting to measure results can add more value and be more successful if the firm educates the other people being asked for feedback about the goals, processes, results, and vision.

If firms are engaging in thinly disguised marketing ploys, the parties providing feedback are unlikely to provide the feedback for very long before they realize what the firms are all about.

Edited April 13, 2007

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Contract law, the “rule of law” and Guanxi - doing business in Hong Kong and the People’s Republic of China - Part 5
Wednesday, December 28th, 2005

This is part 5 of the reprinting of an article written based on research and a trip to China in 2000. This part continues the discussion of contract laws in China and the United States. Please consult appropriate advisors. This is especially important when doing business in a foreign jurisdiction. Go here for part 1 of the article.
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Breach of contract

In the United States, if a party commits a substantial breach of contract, the non-breaching party generally has several options. Options include terminating the agreement, suspending performance of the agreement until the breach is corrected, waiving the breach with or without requiring further assurances of subsequent performance, invoking liquidated damage provisions, seeking specific performance of the agreement, or continuing to perform under the agreement while instituting legal action against the party who ahs breached the agreement. As discussed below, the Contract Law differs significantly from the typical provisions found in the United States.

Under the Contract Law, a party may suspend its performance if the other party is obligated to perform first and it appears that the other party will be unable to perform (Contract Law 1999 at Article 68). In the United States, it does not matter who has the obligation to perform first. If it reasonably appears that the other party will not be able to perform its obligations under a contract governed by one of the fifty states, the other party can suspend its performance. Under the Contract Law, the party with the obligation to perform first must do so despite knowledge that the other party will not be able to perform its obligations. As a practical matter, this suggests that individuals drafting agreements under the Contract Law need to pay close attention to the contract provisions regarding the parties’ obligations and the relative order of performance.

A party is entitled to terminate the contract if the other party fails to perform its major obligations within the agreed time and refuses to perform within a reasonable time after the other party urges the performance (Contract Law 1999 at Article 94). In the United States, parties insisting on performance according to the timeline may simply include provisions that define material breaches and specify that “time is of the essence.” These provisions allow contracts to be terminated immediately if the services or items are not provided by the due date (and time, if applicable) due to circumstances beyond the buyer’s control.

The Contract Law allows for punitive damages. (Id. at Article 114). Punitive damages generally are not legally available under US laws. Exceptions sometimes exist for bad faith or fraud by a party to the contract.

The Contract Law views specific performance as the major remedy for breach of contract (Jianhua, Khong and Yu Guanghua 1999 at 29). In contrast, specific performance is viewed in the United States as an extraordinary remedy and, as such, is only available if on other remedy would be able to make an innocent, but injured, party whole.

Conclusion

In the United States, we often assume that other countries have the same general standards for ethics, consumer protection, health, and other standards that one finds in the United States. In short, we assume that the results in other jurisdictions would be very similar to what we find in our home states. In many cases such assumptions are wrong. The biggest lesson to be learned from the tour of China and Hong Kong as well as the research for this paper is that such assumptions, at best provide an incomplete picture. At worst, such assumptions really do make “asses of you and me.” These assumptions can cause financial losses, criminal liability, or worse.

Contracts that are illegal in Montana may be illegal in Hong Kong. Agreements that are supported by public policy in California, may not pass muster in Chan An. Provisions that are lawful in New York, may not hold water in Beijing. The same is true for business activities as well. Business activities that are legal in the United States may be illegal in China. Judgments, settlements, and court orders may be unenforceable in China. Feedback suggests that local authorities may not enforce China’s national laws. Investors and firms in the United States should examine the situation carefully before investing and they should consult appropriate legal and business advisors.

If one had the option of investing in Hong Kong or investing in China, Hong Kong is likely to more closely resemble the United States’ standards for business conduct. That said, for businesses that rely on imports and exports, Hong Kong is a smaller marketplace. Still, Hong Kong’s infrastructure, laws, and transportation may be superior to what one would find in other parts of China.

It appeared that Hong Kong residents were financially better off than the residents in China. The majority of residents of Hong Kong did not appear to be well as well off as individuals living at the poverty line in the United States. The high cost of living in Hong Kong would affect individual’s ability to purchase goods and services. Extensive research is necessary before a company decides to enter the Hong Kong or Chinese market.

Bibliography

Black’s Law Dictionary (5th ed.). West Publishing Company (1979).

Chen, Min. Asian Management Systems. Routlege (1995).

Contract Law of the People’s Republic of China. Adopted and promulgated by the Second Session of the Ninth National People’s Congress (March 15, 1999). Translated by John Jiang and Henry Lui at http://www.cclaw.net/laws%20Regulations/Chinese Contract_Law.txt.

Folsom, Ralph and W. David Folsom (ed.). International Business Agreements in the People’s Republic of China. Kluwer Law International Ltd. (1996).

Foreign Commercial Service - American Embassy Beijing. China Commercial Brief Vol. 2, No. 29 at 2 (March 20, 2000).

General Principles of the Civil Law of the People’s Republic of China at http://www.quis.net/chinalaw/prclaw27.html (January 1, 1987).

Howson, Nicholas C. “When the Center Doesn’t Hold” The China Business Review 8-12 (Jan.-Feb. 1995).

Jianhua, Zhong and Yu Guanghou. “China’s Uniform Contract Law: Progress and Problems” 17 UCLA PAC. L.J. 1 (Summer, 1999).

Johnson, Vincent. “America’s Preoccupation with Ethics in Government” 30 ST. MARY’S L.J. 717 (1999).

Mo, John S. “The Code of Contract Law of the People’s Republic of China and the Vienna Sales Convention,” 15 AM. U. INT’L L. REV 209 (1999).

Rosen, Daniel H. Behind the Open Door: Foreign Enterprises in the Chinese marketplace Institute for International Economics (1999).

U.S. & Foreign Commercial Service. Contact China (1999).

U.S. Department of State. FY 2000 Country Commercial Guide: Hong Kong (1999).

U.S. Embassy - China: Economic Section. Part I: China 1999 Investment Climate. http://www.usembassy-china.org.cn/english/economics/991014a.html (1999).

U.S. Embassy - China: Economic Section. China Economic Indicators at http://www.usembassy-china.org.cn/english/economics/991020.html (July 23, 1999).

Xuanjung, Wang. “Features of the new Contract Law of the People’s Republic of Chin.” httpL//www.eaglelink.com/law-review/w99/wang2.htm.

Zhang, Z. Alex, partner, Dorsey & Whitney LLP (seminar conducted on April 14, 2000 for Our Lady of the Lake University students).

Posted in Business Articles, Cultural Issues | 1 Comment »



Contract law, the “rule of law” and Guanxi - doing business in Hong Kong and the People’s Republic of China - Part 4
Wednesday, December 28th, 2005

This is part 4 of the reprinting of an article written based on research in 2000 and a trip to China. This part continues the discussion of contract laws in China and the United States. Please consult appropriate advisors. This is especially important when doing business in a foreign jurisdiction. Go here for part 1 of the article.
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Hong Kong’s standards

In Hong Kong, the local court system “provides effective enforcement of contracts, dispute settlements and protection of rights…” (U.S. Department of State - Hong Kong 2000 at 61). Hong Kong’s legal system is considered to be “based on the rule of law and the independence of the judiciary” (Id. at 62). Hong Kong has a reputation for combating corruption and, for the last thirty years, there have not been any reports that corruption was an obstacle to foreign direct investment (Id. at 68-69).

China’s Standards

Although China has engaged in a high profile effort to deal with official corruption and has harsh penalties for individuals convicted of corruption, corruption is widespread in China (U.S. Department of State - China at 78). According to surveys of US firms, corruption was viewed as a hindrance to doing business in China. (Id. at 78).

“Although more than 150 major laws and regulations apply to foreign investment, China’s legal and regulatory system remains characterized by a general lack of transparency and inconsistent enforcement” (U.S. Department of State - China 2000 at 75). Guanxi is prevalent in most judicial proceedings (Johnson 1999 at 723). “[T]he party who has the strongest guanxi with the most individuals will have an edge regardless of the strength of his case” (Id. at 723). Part of the reason for guanxi’s power may relate to the individuals serving as judges in China. In 1999, only 66% of China’s judges had completed college and many did not have any legal background (Rosen, Daniel H. 1999 at 208). In addition, China has spotty or absent enforcement of laws and regulations (Rosen 1999 at 222).

Local officials encourage people to circumvent Chinese law. According to Nicholas Howson, “[i]n every province and major municipality of China, foreign investors are being asked by their Chinese partners or local officials to circumvent China’s published laws and regulations” (Howson, Nicholas 1999 at 8 ). At the meeting with Deloitte Touche Tohmatsu on April 20, 2000, tour participants learned that China’s local government officials are promising foreign investors more than the law allows them to provide in order to attract foreign investment. In speaking with the mayor of a zone in Chan An on April 17, 2000, the tour participants were assured that, if their companies wanted to invest, the mayor would take care of everything. In retrospect, it seems as if the mayor was indicating that they had ways to deal with any “problems” that foreign investors might encounter.

China places strong emphasis on resolving disputes through conciliation and consultation, rather than litigation (U.S. Department of State - China 2000 at 69). When it is necessary to use a formal dispute resolution mechanism, the authorities prefer arbitration through Chinese agencies. Some foreign investors have experienced asset striping by Chinese joint venture partners during the course of dispute resolution and China was unwilling or unable to prevent this (Id. at 69). Even when foreign companies won arbitration or a favorable court decision, the local courts where the venture is situated may choose not to enforce the decision.

The contract laws of China and the United States

There are certain basic standards for contracts in the United States and most of the world. These standards include definitions of who can contract and what is required to have a valid contract. This paper will consider the parties’ capacity to contract, the required elements of a contract, warranty provisions, and breach of contract provisions.

Capacity

Individuals must have sufficient maturity, mental capacity, and authority in the United States or the agreements they sign will be invalid. Individuals signing agreements in the United States on behalf of companies must have actual or apparent authority to do so. How do these requirements compare with the corresponding provisions under Chinese law? China generally defines an adult as someone who is at least 18 years old, although this limit can be lowered to 16 or even 10 years old in some cases. (General Principles 1986, Chapter II, Articles 11-12). Under Article 10 of the Contract Law, the parties must have “appropriate capacity” for civil conduct in order to execute an agreements. Some agreements by individuals with “limited civil capacity” are binding (Contract Law 1999 at Article 12-13). Depending on the situation, an individual may be able to contract if the individual is as young as 16 or even 10 years old. In the United States, any child (regardless of age) as well as mentally incompetent individuals can contract for items required for basic survival. To be enforceable, such agreements normally must relate to food, clothing, or shelter. Consequently, the Chinese law and laws in the United States are very similar regarding the capacity to contract.

In the United States, issues relating to capacity normally relate to whether the individual executing the contract has authority to do so on behalf of a third party or an organization. There are two types of authority, actual authority and apparent authority. The concept of actual authority relates to situations in which the third party or organization has specifically granted the individual authority to speak for the third party or organization. Most of the time, questions relate to apparent authority. Unless the party trying to enforce the agreement knows the person does not have actual authority to enter into the agreement, if a reasonable person would have felt that the person signing the agreement was authorized to do so on behalf of the organization or third party, the organization or third party is bound by the agreement in most cases.(The organization or third party may have a cause of action against the person found to have apparent authority, but this will not eliminate the requirement that it fulfill the agreement.) China appears to have similar concepts (Id. at 48-49).

The difference between Chinese law and the norm in the United States regarding capacity is found in the context of companies and other “legal persons.” A “legal person” is an entity that has capacity for civil rights and civil conduct (General Principles at Article 36). To qualify as a legal person, the organization must be established in accordance with the law; possess the required assets; have its own name, organization, and premises; and be civilly liable independent from any other organization or individual (General Principles at Article 37). According to Z. Alex Zhang, corporations in China must specify the scope of their business and obtain approval for the scope from relevant authorities. In the United States, corporations generally do not have to limit the scope of their businesses to any area. While corporations must file certain documents with government in order to be created, this is primarily an administrative requirement. In the United States, if the paperwork is in the appropriate format and contains the prescribed information, the document must be accepted and filed.

Elements of a contract

Normally, a valid contract in the United States requires offer, acceptance, and consideration. The Contract Law requires that offers be specific, definite, and result in a binding obligation upon acceptance (Contract Law 1999 at Article 14). Chinese law allows offers to be withdrawn or revoked in most cases. It also allows the acceptance requirement to be satisfied by notification or behavior (Id. at Article 22). Each of these provisions is, on its face, similar to the provisions commonly found in the United States. The differences between the laws one generally finds in the United States and the Contract Law relate to the depth with which issues are addressed. Since China uses a code system instead of a common law system like the United States, the Contract Law includes considerable detail relating to each element of a contract.

In the United States, most agreements can be oral. A written agreement is generally required if the contract cannot be performed within one year or the transaction fits into certain categories (such as real estate sales or consumer credit). Likewise, the Contract Law allows oral agreements in most situations (Id. at 10). In both countries, it is generally best to have a written agreement so that there is no question regarding the scope of the agreement and in order to prevent misunderstandings.

Warranties

In the United States, there are two important warranties that courts imply in commercial transactions, unless the parties have waived the warranties. The first warranty is called the “warranty of fitness for particular purpose.” This warranty arises when the seller knows at the time of the contract what the buyer intends to do with an item and that they buyer is relying on the seller’s skill or special knowledge regarding the suitability of the item. The explicit or implied warranty given by the seller in such a situation is that the items are suitable for the uses that the buyer intends. The second warranty is called the “warranty of merchantability.” This warranty means that the items meet the contract specifications, are suitable for the ordinary purpose of such items, are adequately contained, packaged, and labeled, and conform to the information published by the seller (Black’s 1979 at 1423).

China did not explicitly adopt either a warranty of fitness for particular purpose or merchantability. The closest statement in the Contract Law to these warranty provisions is found in Article 62. Article 62 uses industry standards to measure performance when quality provisions are unclear. However, there are at least two risks associated with this approach. First, it provides little guidance to the parties on what is required or acceptable. One of the reasons that contracts rely on the laws of particular states or countries is that laws have been tested so parties know what is required. In specifying jurisdictional law that applies to a particular contract, the parties are able to avoid certain procedural burdens (in case litigation arises) and to obtain certainty about the standards that will be used to judge their performance. However, there is insufficient history for the parties to know what “industry standards” will be applied by Chinese courts. It might be an international industry standard, Chinese industry standards, or even the industry standards of another country. Consequently, the term “industry standards” does not provide the parties with sufficient guidance to identify the source of the standards that will be applied.

Part 5 discusses breach of contract, and contains the conclusion and bibliography for the article.

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Contract law, the “rule of law” and Guanxi - doing business in Hong Kong and the People’s Republic of China - Part 3
Tuesday, December 27th, 2005

This is part 3 of the reprinting of an article written based on research in 2000 and a trip to China. This part discusses contract laws in China and the United States. Please consult appropriate advisors. This is especially important when doing business in a foreign jurisdiction. Go here for part 1 of the article.
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How do the contract laws of China compare with the contract laws of the United States?

In 1999, the National People’s Congress of China passed a unified contract law, “Contract Law of the People’s Republic of China” (the “Contract Law”). Contract Law replaced three prior statutes, “Law of PRC on Economic Contracts,” “Law of PRC on Economic Contacts Involving Foreign Interest,” and “Law of PRC on Technology Contracts” (Xuanjun, Wang). The new law was intended to provide parties with more freedom to contract and to make the form more flexible. To accomplish these objectives, the Contract Law was more detailed and more comprehensive than prior laws (U.S. Embassy - China 1999). It also recognized certain forms of agreements that had not been recognized previously.

In order to compare contract laws of China and the United States, four areas will be discussed. The first area is the jurisdictional type (common law or code). Next, the relative certainty business can have about legal interpretations will be considered. The third issue is the rule of law and enforcement of court decisions. Finally, the contract law of China will be compared with those typically found in the United States.

Jurisdiction type

China’s legal system is based on a code of laws (Mo, John S. 1999 at 2). While France and Germany base their laws on codes, most of the United States still recognizes the common law. (Louisiana is the exception.) As is characteristic of common law jurisdictions, courts in the United States can look at prior court decisions and long-standing societal expectations to resolve unanswered questions and define terms in agreements. In code jurisdictions, this option is not available.

To the extent that China adheres to the code approach, its courts will not look beyond the agreements and applicable laws and regulations in interpreting agreements. Consequently, the Contract Law is more detailed than similar laws in the United States. One manifestation of this is found in the explicit categorization of the kinds of agreements that are recognized in China (Contract Law 1999 at 9-27). If a type of agreement is not included in the Contract Law’s list, in theory, it is not recognized.

Certainty

Contract laws have existed in the United States since its inception. Contract law is one of the oldest types of law. Many branches of law in the United States, including family law and criminal law, originated in medieval England using contract and property law principles.

In contrast, when modern contract laws were developed in China in the 1970s and 1980s, they were not developed based on a systematic scheme (Mo 1999 at 3). After all, there is little need for laws regulating contract between private companies and governments in an economy where the government decides the items and the quantities to be produced (Jianhua, Kong and Yu Guanghua 1999 at 3).

Courts in the United States will enforce any agreement that is not contrary to public policy. Since contract laws in general and the Contract Law in particular are extremely new, it is unclear how undefined or ambiguous terms in the law will be interpreted. In addition, in many cases, the Contract Law may not apply because other laws control if they are not consistent with the Contract Law (Contract Law 1999 at Article 10).

One risk associated with contract in China is that companies do not know if courts will recognize agreements that may not fit into the categories listed in the Contract Law. Another risk is that commercial terms may not be applied, or may be applied differently, by Chinese courts than they would be applied in most other countries. Finally, China’s legal system places relatively little emphasis on precedent, which makes it difficult to ascertain how issues will be resolved in subsequent cases (U.S. Department of State - China 2000 at 70).

The Rule of Law and enforcement of court decisions

In the United States, there is a strong belief in the “rule of law.” The “rule of law” refers to the idea that judges are to treat litigants fairly, all litigants receive justice, and that laws should be interpreted and administered in the same manner, regardless of the parties and judges involved. Many US companies expect similar standards in other countries. In the case of Hong Kong, it may exist. However, it does not yet exist in the case of China.

United States’ standard

While it does not necessarily occur in practice, legal systems in the United States are based on the idea that the court should reach the same decision in the same jurisdiction, regardless of the judge hearing the case. To help ensure this, judges and juries cannot hear cases if they have a relationship with a party or a witness that may influence their impartiality. Judges cannot preside over a case if their relationship with any participant (attorney, witness, or party) in the case creates even the appearance that the judges may not be impartial.

If a company wins a court case, the next step is enforcing the decision. In the United States, courts are the final arbiter of statutes and agreements. If Congress or a state legislature disagrees with a court decision, there are only five options. First, the legislative body can reverse some decisions by enacting statutes or pursuing constitutional amendments. Second, the legislative body may be able to remove or limit the court’s ability to hear further cases involving the situation in question. Third, in some cases, a government entity may appeal the court’s decision even if the government entity was not a party to the original litigation. Fourth, the government may be able to file a separate lawsuit seeking to prevent implementation of the decision. The final option is for the government to enforce the decision.

Ignoring or refusing to follow a court decision is seldom a viable option for a government official in the United States. Unless the government official is authorized by a court or a statute not to enforce a court decision or the court clearly lacked jurisdiction to hear the case or make a decision, government officials almost always enforce and follow the court decision. Severe penalties can be imposed against officials or governments that refuse or fail to follow a court order. For example, government officials who ignore or refuse to follow court decisions can face criminal prosecution in some situations. A second penalty is that the government officials can be removed from office for failure to follow the law, including applicable court decisions. Finally, financial penalties can be available when a government acts illegally. In some cases, the individual officials can be personally obligated to pay the penalties and the legal fees of the individuals who were harmed. When judgments are entered against officials in their individual capacities, government entities generally cannot reimburse the officials for the money they were required to pay.

Part 4 of the article continues the discussion of contract law.

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Contract law, the “rule of law” and Guanxi - doing business in Hong Kong and the People’s Republic of China - Part 2
Tuesday, December 27th, 2005

This is part 2 of an article written based on research in 2000 and a trip to China. This part discusses how commercial activities in China compare with those in the United States. Please consult appropriate advisors. This is especially important when doing business in a foreign jurisdiction. Go here for part 1 of the article.
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How do commercial activities in China compare with those in the United States?

Beginning in the early 1980s, China began to move towards a market-driven economy (Folsom 1996 at 4). This has increased the similarities between commercial activities in China and those in the United States. However, there remain surprising similarities and striking differences between the commercial activities in China and the United States. Three areas will be considered. First, the approach to guanxi will be discussed. Second, the role of attorneys handling business transactions will be considered. Finally, the paper will review the availability of information relating to the economy and the companies in China and the United States.

In both China and the United States, establishing relationships with other companies is very important. “Guanxi” is a Chinese term that refers to the use of special connection and relationships to gain an advantage or accomplish a desired result (Johnson, Vincent 1999 at 720). Guanxi obligates people, who may or may not be friends, through the exchange of favors (Chen 1995 at 53). Logically, businesses would try to limit their reliance on guanxi while increasing the other party’s reliance on it.

Chinese companies may grant favors in order to obtain the right to a favor in the future. US companies tend to focus explicitly on the exchange nature of relationships. Typically, US companies discuss the benefits and expectations associated with relationships. This prevents misunderstandings about the nature of the parties’ obligations to each other. According to one US businessman based in China, businesses in the United States identify business opportunities that are legal, develop plans for pursuing the opportunities, and establish any required relationships. He said that, in China, the process was reversed and the first requirement is to establish the relationships, then one develops the plans, and finally, one determines if the opportunities contemplated are legal. (Rosen 1999 at 45).

Companies in both China and the United States rely on attorneys’ assistance in the area of commercial transactions. In the United States, attorneys expect their clients to consult with them from the beginning of the transaction. When the clients can afford it, they often rely on attorneys or professional negotiators to handle the negotiations. In contrast, the advice given to people trying to enter China’s market through joint ventures is to try to develop a personal relationships with the joint venture partner and to consult attorneys only at the end of the negotiations (Laws Contracts & Arbitration 1). Including attorneys at earlier stages would be seen as an expression of distrust of the other company. This advice may be equally applicable to wholly foreign-owned enterprises and other entities.

In the United States, it is relatively easy to gather market information and information about competitors. Commercial services, including Dun & Bradstreet, collect and compile information about many companies. In addition, the US government collects data on markets, regions, trends, and industries that, normally, can be obtained at little or no cost. While economic indicators are available for China, the information relating to Chinese markets and trends is more limited and less accurate than what US firms usually deal with (U.S. Embassy-China, 1999). Until recently, private reporting of economic information has been discouraged by the Chinese government (Rosen 1999 at 30).

Part 3 of the article deals with contract law in China and the United States.

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Contract law, the “rule of law” and Guanxi - doing business in Hong Kong and the People’s Republic of China - Part 1
Tuesday, December 27th, 2005

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.

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