參與中國之政策制訂 - 政大學術集成

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(1)國立政治大學商學院國際經營管理英語碩士學位學程 International MBA Program College of Commerce National Chengchi University. 碩士論文政治. 大. 立Master’s Thesis. sit. y. ‧. ‧ 國. 學. Nat. 參與中國之政策制訂 n. al. er. io. Managing Regulatory Involvement in China. Ch. engchi. i n U. v. Student: Grégoire Nallet Advisor: Professor Weichieh Su. 中華民國一〇五年七月 July 2016.

(2) 參與中國之政策制訂 Managing Regulatory Involvement in China. 研究生：葛瑞格. Student: Grégoire Nallet. 指導教授：蘇威傑. Advisor: Professor Weichieh Su. 立. 政治大. 國立政治大學. ‧ 國. 學. 商學院國際經營管理英語碩士學位學程碩士論文. ‧ y. Nat. A Thesis. io. a. er. National Chengchi University. sit. Submitted to International MBA Program. n. iv in partiall fulfilment of the Requirements. n U for e thendegree g c hofi. Ch. Master in Business Administration. 中華民國一〇五年七月 July 2016.

(3) Abstract Managing Regulatory Involvement in China By Grégoire Nallet. This research aims to contributes to the strategy building process in China, by integrating external regulatory actors in the equation. The major role of the People's Republic of China Government for international companies has to be taken into account during the strategy. 治政 formations process. Our research is divided into three大 steps. To begin, we evaluate if the 立 resource allocation – observable outcome of the strategy – is influenced by the government ‧ 國. 學. entities to then see how the companies manage this threat in term of internal alignment to. ‧. finally create a framework of best practice. We have three suggestions from the model. (1) The regulatory bodies affect strategy formation. The consistency between resource allocations and. y. Nat. er. io. sit. the official strategy decreases when regulatory involvement increases. (2) Positive involvement tends to create adjustment in corporate strategy through modification in the portfolio while. n. al. Ch. i n U. v. threats and dealt with internal changes such as management style and design. (3) To clearly. engchi. asses the operating risk in China, audits must be performed on every stakeholder. Nevertheless, the business culture must be understood as a cultural framework rather than legal.. Keywords: Strategy, Regulations, Management, China. i.

(4) TABLE OF CONTENTS 1. Introduction ............................................................................................................................ 1. 1.1. Purpose of the study ........................................................................................................ 1. 1.2. Research objective ........................................................................................................... 2. 政治大. 2. Literature review..................................................................................................................... 4. 立. 2.1. The six components of corporate strategy ....................................................................... 4. ‧ 國. 學. 2.2. The power school and the environmental school ............................................................ 7. ‧. sit. y. Nat. 2.3. The neo institutional theory ............................................................................................. 9. n. al. er. io. 2.4. Summary and discussion of the literature review .......................................................... 13. Ch. engchi. i n U. v. 3. Business environment in China ............................................................................................ 16. 3.1. Market overview ............................................................................................................ 16. 3.2. Business risk inherent to the Chinese market: between attractiveness and complexity 18 3.2.1. Importance of the network.................................................................................... 19 3.2.2. Law as a foreign concept ...................................................................................... 21 3.2.3. Stability of the country ......................................................................................... 22. ii.

(5) 3.3. Towards a more transparent market ............................................................................... 23. 4. Special considerations for conducting business in China ..................................................... 26. 4.1. A three steps impact ....................................................................................................... 26. 4.2. Framework for strategy formulation and implementation ............................................. 28. 政治大. 4.3. Recommendations ......................................................................................................... 32. 立. 5. Conclusion ............................................................................................................................ 35. ‧ 國. 學. 6. References ............................................................................................................................ 37. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. iii. i n U. v.

(6) TABLE OF FIGURES. Figure 1 - The strategy diamond framework .............................................................................. 2 Figure 2 – Components of corporate strategy ............................................................................ 4 Figure 3 – Hart’s 5 modes framework ........................................................................................ 8. 政治大. Figure 4 – Strategic focus in relation with degree of market regulation .................................. 14. 立. Figure 5 – GDP per capita in USD ........................................................................................... 17. ‧ 國. 學. Figure 6 – Economic overview of China .................................................................................. 18. ‧. Figure 7 – Business reforms in China to ease business ............................................................ 24. sit. y. Nat. Figure 9 – Rule of law in China ............................................................................................... 25. n. al. er. io. Figure 8 – Control of corruption in China ................................................................................ 25. Ch. engchi. iv. i n U. v.

(7) 1. Introduction 1.1. Purpose of the study. The environmental factors impact greatly the performance and success of a company; then will also impact its corporate strategy. Though, strategy formulation process has been more discussed in term of market strategies, while putting aside political activities or reducing it to. 政治大 between the external factors (political and legal) and the corporate behavior in the strategy 立 abstract notion of “risk” or “uncertainty”. We want to emphasize in this research the link. ‧ 國. 學. formation and execution processes. To support this study, the case of China will be particularly studied, as the political -national standards, local government laws and mechanisms of. ‧. executions- and regulatory factors -tax policy, labor law, trade restrictions, and political. er. io. sit. y. Nat. stability- need consideration more than anywhere else due to the relative power of institutions.. al. v i n C h allocation decisions we compare researches on resource e n g c h i U and their relation with regulatory n. In order to understand how the regulatory actors influence the strategy formation and execution,. environment to detect patterns in behaviors in different industries; to then formulate a framework including regulatory factors in the strategy formation process.. 1.

(8) 1.2. Research objective. Previous academic research developed models including environment on the strategy formation process. Though, these frameworks reduce the environment to a classification of outcomes into threats or opportunities: Andrews (1997)i and Porter (1980)ii defines strategy as a combination of Environmental conditions, opportunities and risks, Distinctive competence, and Corporate resources. Other studies put the environment in the middle of the formation such as strategy is. 治政 “an ongoing dialogue with key [external] stakeholders”大 (Hart, 1992), starting a shift towards 立 multi-level models (Pettigrew, 1992) . Middle management, top management, company iii. iv. ‧ 國. 學. culture and operations have been determined as key determinants of company success (Floyd. ‧. and Wooldridge, 2000)v but external actors have to be effectively assimilated in the models as mentioned by Burgerlman in the diamond frameworkvi.. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. Figure 1 - The strategy diamond framework Dynamic forces driving company evolution Source: Floyd and Wooldridge (2000). 2.

(9) We wish to understand the government and anti-trust agents’ impact on the behavior of companies in order to assess how to manage such outcomes. We will then be identifying the decision factors for running a business in China. At first, the allocation of scarce resources is an easily and accurately observable outcome of strategy formation and implementation (Bower and Gilbert, 2005)vii and research on these variables will help us giving recommendations on how to react to change. If regulatory pressures influence the combination of internal structure and external strategy, we need to develop a framework as a response.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 3. i n U. v.

(10) 2. Literature review 2.1.. The six components of corporate strategy. Management systems. Coordination. 立. 政治大. Leadership and style. ‧ 國. 學. Corporate strategy. Portfolio configuration. Nat. io. er. Concept. sit. y. ‧. Organizational design. al. n. v i n Figure 2C – Components of corporate strategy hengchi U. Source: Adapted from Chandler (1982). Our goal is the identify the changes is the six components of corporate strategy depicted in the graph, as well as the sequence in which changes occur following a disturbance in the environmentviii. By studying the literature on that topic, we can explicitly formulate how the environment impacts the execution on strategy, and then determine which characteristic of the strategy are needed to be the most flexible or rigid. As introduce by Chandlerix, we need to distinguish the content of the strategy from its execution in our model, to detect eventual. 4.

(11) discrepancies between the theory and implementation of the strategy and separate internal and external actions.. In the triangle of strategy, strategy is defined as a balance between concept, processes and technology; in other words, a balance between will, ability and environment. In our case, we will focus on the processes and concept as a result of regulations. A more explicit vision of corporate strategy includes 6 factors:. 立. Management systems: Delivering the strategy and implementing it through company. 學. ‧ 國. . 政治大. processes. The value creation process may be different when operating abroad as the target market, regulatory framework, or pricing strategy for instance differ from. ‧. country to country.. sit. y. Nat. n. al. er. Leadership and style: Delivering the concept of strategy top middle and low-levels and. io. . i n U. v. implementing it through company culture. In different markets, a strong leadership can. Ch. engchi. encourage entrepreneurship or dictatorship depending on cultural environment and company values or customs.. . Portfolio configuration: Observable components of strategy from the customers of the company; how the supply is influenced by the environment.. . Organizational design: Official composition of the hierarchy of the company and liability of the agents. The design is the framework in which each member evolves in order to achieve the business processes and deploy the core qualities of the company. It is the link between strategy (vision, governance and strengths), structure 5.

(12) (responsibilities, information flow), business processes (network), rewards system and human resources.. . Concept: Statement of strategy from top management and its compatibility with the environment. The concept of strategy is dynamic and is tailored to internal capabilities and the competitive environment.. . 政治大. Coordination: Synergy between and among business units, Vision – strategy – mission.. 立. This dimension is of particular interest when operating abroad as many multinational. ‧ 國. 學. companies (MNC) diversify risks by operating joint-ventures in China as we will discuss.. ‧ y. Nat. sit. Environment is a main component of strategy formation that has been extensively studied.. n. al. er. io. Ansoff and Porter for instance, considered the threats, opportunities of the environment, with. i n U. v. the strengths and weaknesses of the business to elaborate strategy. On another hand, Mintzberg. Ch. engchi. put the environment as the central piece of strategy building. As a basis for this study, we will focus on two of Mintzberg’s ten schools about strategy formation: the power school and the environmental school, both focusing on the environment as a dominant factor.. 6.

(13) 2.2. The power school and the environmental school. The power school is based on political science within the organization and with the stakeholders. The model is then and the macro and micro scale. The power school is a negotiation process of influence, emphasizing the use of power and politics to negotiate strategies favorable to particular interests. The role of alliances is emphasized by Mintzberg. This theory will be especially relevant for China, as the regulatory framework is more. 政治大. influenced by shared beliefs and practices rather than laws. Besides, this school is useful for. 立. understanding the strategic alliances that are common in Asia and to conduct shareholder. ‧ 國. 學. analysis. A limitation of this rather realistic vision of strategy is the huge costs it implies and the focus on manipulative strategies rather than operating ones. Nevertheless, the cultural. ‧. environment in China is suitable for such a framework.. sit. y. Nat. n. al. er. io. The environmental school, similarly, sees strategy as a response to the challenges imposed by. i n U. v. the external environment. It considers the environment as an actor, whereas the other schools. Ch. engchi. consider it as a factor. In this extend, the environment manoeuvers the company. This model is relevant in our study as the Chinese communist system allows a high monitoring of local and international companies. Nevertheless, we will discuss that companies, local or international, can take actions to change the environment; for instance, by involving international regulatory entities such as the World Trade Organization, or by taking defensive strategy to compensate the environmental change.. 7.

(14) Figure 3 – Hart’s 5 modes framework Source: Hart (1992). 立. 政治大. ‧ 國. 學. Hartx extends the framework with five modes (command, symbolic, rational, transactive, and. ‧. generative) integrating the roles of top managers and organizational members. It illustrates the interaction between the stakeholders of strategy building and picture it as an organization-wide. y. Nat. io. sit. phenomenon. In each of the mode, the role of management and members in different, ranging. n. al. er. from an entrepreneur member to soldier, and a commanding management to sponsor. We notice. Ch. i n U. v. that a more directive management style stifle entrepreneurship for Hart, as a commanding style. engchi. will lead employees to act as soldiers and not participants that “learn and improve”.. China seems to fits more the rational style, with a labor force committed to the boss directions. The important part of the cultural aspect of management is of particular importance in Asia and the associated benefits and flaws must be considered in our recommendations. Indeed, following the model, the formal structures and planning systems leads to two drawbacks that are a relative lack of reactiveness or capability to change in reaction to changes, and a higher risk of fraud and mistake due to the concentrated executive power.. 8.

(15) 2.3. The neo institutional theory. The neo institutional theory is an appropriate framework to direct our study as it “allows a balance between deterministic and strategic elements, an explicit integration of external actors, and the precise conceptualization of the environment and its influencing mechanisms.”xi This theory is focused on seeing the interaction between institutions as sociological links, rather than economic links. In this way it is midway between the power school and the environment school.. 政治大. It emphasizes the link between the company and its environment and vice versa. As detected by. 立. DiMaggio and Powel (1983), the isomorphism between companies evolving in the same. ‧ 國. 學. environment, meaning that all agents influence the behavior of each other, will allow us to generalize our recommendations (expectancy theory and neo- institutionalism).. ‧ y. Nat. sit. This theory is intended to establish a balance between the Fit and the Alignment, which is the. n. al. er. io. relation between the company’s environment and its internal context; while the consistency is. i n U. v. the coherence between the execution of the strategy (resource allocation) and strategy statement.. Ch. engchi. We assume that consistency shows the link between intent and action and then is an indicator of change in the environment. For this reason, it is the consistency that needs to be isolated. The consistency remains unchanged in a stable external environment (regulations, ethics, competition, economy…) and internal environment (processes, culture). It case of change in the environment, resisting forces will create a discrepancy between the concept and execution of strategy. Building on this reasoning, consistency will be our indicator of the starting point of an alignment process and ending point of its effective implementation. 9.

(16) The literature review showed that quantitative studies have been conducted in relation to strategy content but less on strategy process. Indeed, the impact of regulations are mostly studied individually about their impact on a dimension of the strategy such as: impact of taxation on innovativeness, economic situation and management style, quotas and production. Thus, the model we tend to develop will have to include external factors and internal alignments, focusing on processes.. 立. 政治大. Past research identified that inconsistencies arise when a shift in the environment triggers a. ‧ 國. 學. change in resource allocation that will no longer be consistent with the initial strategy but will be fitted to react to the new environment. The company will pursue one of the five generic. ‧. strategies presented, or reorient if needed to control for business risk.. sit. y. Nat. n. al. er. Avoidance: avoiding the conflict by postponing or cancelling a market entry.. io. . . Ch. engchi. i n U. v. Control: diversifying risk by implementing different unilateral strategies according to a panel of likely political and economic outcomes. These hands-on market research are costly but they are the only way to obtain reliable data on a rapidly growing market. The customers’ tastes are constantly evolving and require monitoring in the establishment of this strategy. this strategy makes sense in China as fraud in privately held company may not receive a satisfying attention for foreign or local companies. Since multinationals cannot well evaluate the risk of the new environment, controlling the outcomes by drafting contract and conducting audits for due diligence would transform the subjective risk into objective risk. 10.

(17) . Cooperation: multilateral strategies to reduce the riskiness of the environment through partnerships, contracts with suppliers and customers or mergers. This solution was preferred by American companies from the 1980 to 2000s as it seems to offer a protection of knowledge and limited liability to the foreign company. However, the intangible assets were not sufficiently protected as experience by Procter & Gambles through copyright violation. In fine, the partnerships revealed to be costly for. 政治大. companies and were not worth the additional uncertainty of cooperation. As Haley. 立. notice, the wholly owned enterprises are now the preferred mode of entry as local. ‧ 國. 學. partners are unpredictable. Nevertheless, ventures such as Dongfeng Renault Automobile Company1 shows an improvement in the recent year of government backed. ‧. companies.. er. io. sit. y. Nat. al. v i n C h in China and implemented Motors relied on quick reaction this strategy which turns out engchi U. Imitation: benchmarking and implementing best practices (follow the leader). General. n. . to be hard to implement in an international context. As a result, they established in 2010 the GM SAIC venture.2. . Flexibility: implementing various multilateral strategies to respond to business risk by expanding the product scope, line and market. Philips when entering China in 1980 planned on selling to a billion customers but ended up exporting most of its production. 1. http://asia.nikkei.com/Business/Companies/Joint-venture-with-Renault-opens-Chinese-SUV-factory. 2. http://www.reuters.com/article/us-china-auto-idUSBRE90P04W20130127. 11.

(18) from China. Flexibility allows a fast shift in strategic focus to change easily in uncertain market.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 12. i n U. v.

(19) 2.4. Summary and discussion of the literature review. It his study of the German energy sector, Frankenberger (2006) identifies the changes following the shift from protected market to an open one after governmental decision. This decision implies a threat to the fixed and safe profits as the market shifts from a monopolistic to competitive market while the rise of new opportunities in terms of market and freedom of action. It was identified from secondary publicly available data from public companies in China. 政治大. that shift in behavior was triggered by a political incentive.. 立. ‧ 國. 學. Analysis of resource allocation confirm our hypothesis that a change in regulations triggers a change in resource allocation as the strategy is reoriented. First, a stronger shift in policy,. ‧. perceived as a higher pressure creates a stronger shift in resources allocation. The company will. y. Nat. sit. be more likely to reorient their portfolio and corporate strategy, while the organizational design. al. n. shift in regulations:. er. io. and management are secondary. We then notice that the sequence of events is dependent of the. Ch. engchi. i n U. v. Market openings for companies are positive signals that trigger a reaction from concept, then portfolio design and management as dominant factors whereas a threat is managed through management systems, design and concept in that order. In other words, it means that opportunities will be treated mostly by top management with change in the strategic concept whereas threats will impact first the middle management with a change in objectives and design. In a hierarchical business environment as China, this is a problem to keep in mind, as threat avoidance can be encountered since management is relatively directive. Besides, strategic reorientation implies flexibility in term of processes and capabilities, which has to be 13.

(20) compatible with the hierarchy and established processes of the company.. The study of the externally directed actions reveals that opportunities such as market openings triggered mostly external actions rather than change in internal structure. Similarly, a change in management systems and leadership style are prominent in a threatening situation. A threat will be dealt through buffering strategies while opportunities are seized with offensive strategies.. 政治大. Besides, differentiation threats and opportunities revealed that consensus-oriented strategy and. 立. negotiation dominate for positive regulations while the manipulation, and prevention are. ‧ 國. 學. reactions triggers by threats. This is consistent with our assumption that the company can retro actively impact the legal and political environment they evolve in.. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. Figure 4 – Strategic focus in relation with degree of market regulation Source: Frankenberger (2006). 14.

(21) As showed in the matrix, in a transitive environment, non-market strategies need to be implemented. We define non-market oriented strategy as leveraging social and political leverage to achieve business goals. We will see that this advice is especially relevant in the Chinese market. Indeed, the major cultural importance of influence in Asia is a source of competitive advantage. Such strategies require a long term commitment and imply a careful monitoring of reputation, values and social impact. Since influence can be used (or created through the creation of institutions supporting the business goals), a risk arises in a way that the. 政治大. game-theory makes the outcomes uncertain. As a results, establishing a business in China may. 立. be a long process because of conflicting interests; leading to many MNC to choose the safer. ‧ 國. 學. choice of joint venture or complete proprietorship.. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. 15. i n U. v.

(22) 3. Business environment in China 3.1. Market overview. Starting from reforms in 1978, the centrally planned economy slowly mutated into a market-based economy that grew at an unprecedented rate of about 10% a year, lifting 800 million out of poverty3. Having reached the Millennium Development Goals drafted by the United Nations last year, the 1.3 billion citizens’ country is now the second economic player in. 治政 the world, even though still 70 million still remain in rural 大areas. 立 ‧ 國. 學. The directions given by the Five-Year Plans from 2011 to 2020 tackle the issue of services. ‧. development to address social imbalance, environmental concerns, education and social protection. Such objectives come at a cost, since the goal of achieving a “quality growth”. y. Nat. er. io. sit. reflects in the expectation of an expected GDP growth of “only” 7%. The directive Communist party is then answering international and internal critics on growth at every-costs by. n. al. Ch. i n U. v. implementing laws benefiting social goods rather than economic.. engchi. The globalized world sees China as a rising force pushing for deflation in the global production (Leggett and Wonacott, 2002) xii , while the growing purchasing power of the population combined with incentives to increase consumers spending are signs of the transition from a manufacturing superpower to a consuming one. Even though the middle class is growing fast, the Chinese are still the most important money savers, in opposition to the United States with a culture that promotes spending. As the poverty rate fell from 88% in 1981 to 6.5% in 2012,. 3. http://www.worldbank.org/en/country/china/overview. 16.

(23) China still acknowledges that moving from a low-class to middle-class is a hard task and the recent policies are intended to correct it.. 學 Figure 5 – GDP per capita in USD. ‧. ‧ 國. 立. 政治大. Source: The World Bank Group. n. er. io. sit. y. Nat. al. Ch. engchi. 17. i n U. v.

(24) 3.2. Business risk inherent to the Chinese market: between attractiveness and complexity. Even though China in 1990 accounted for less than 3% of worldwide output by value, the share of the country is now estimated to be 25%.4 But at the same time, the country is ranked 84 out of 189 by the World Bank Group in 2016 about the “Ease of doing business”5. Indeed, local competitors and governments maintain the information asymmetry as a competitive asset that. 政治大. increases business risks when operating in China. Recently, the ban on foreign investment on. 立. Tobacco6 to decrease the numbers of smokers in China is an example of the unpredictability of. ‧ 國. 學. the regulative market mostly intended to protect the economy. In a nutshell, the enormous Chinese market comes in pair with uncertainties related to the market size, copyrights,. ‧. regulatory risk and corruptions.. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. Figure 6 – Economic overview of China Source: The World Bank Group. 4. http://www.economist.com/news/leaders/21646204-asias-dominance-manufacturing-will-endure-will-make-dev. elopment-harder-others-made 5. http://www.doingbusiness.org/data/exploreeconomies/china. 6. http://www.chinabusinessreview.com/up-in-smoke-why-china-has-banned-foreign-investment-in-tobacco/. 18.

(25) 3.2.1. Importance of the network. The communist party has great influence on both cultural and economic institutions, as well as laws. The cultural on emphasis on relationship to doing business creates an uncertain environment that is not as constrained as the occidental one. The major importance of developing and maintaining a network of influence ( 關係網 ) creates uncertainty for international and local business. The legal framework in China is getting more transparent. 治政 following the country’s adhesion to the World Trade Organization 大 in 2011, but efforts are still 立 necessary. China is receiving incentive to follow international business law but the ‧ 國. 學. implementation of these may still be hazardous. Then, to develop strong links with institutions. ‧. and business partners in mandatory in executing the strategy. Recruiting and retaining local talents with extensive networks is of prime importance in the Chinese market as a driver of. n. al. er. io. sit. y. Nat. success.. Ch. i n U. v. On the same idea, Mianzi and Junzi (面子, 君子) is an important in doing business in Asia.. engchi. The sociological concept of Mianzi is the importance of the “Face” in the meaning of pride and honor that has to be carefully taken into account in China, whereas it remains of minor importance in the West. Similarly, Junzi represents the expectation of being a gentleman with temper while conducting business, focusing on integrity. Social standards must be taken into account in the strategy implementation.. PWC relates the need to strong relationships network with a culture of corruption. This major problem was fiercely tackled by the government for the last decades by anti-corruption laws. 19.

(26) and the creation of governmental auditing units. Nevertheless, law and culture are colliding in a way that the GuanXi has to be considered as part of the environment culture and not a grey area to avoid. McKinsey Asia actually suggests business units permanently attached to the management of relationships within partners. The importance of relationships in conducting business in China is a threat and an opportunity for international businesses. Relying on networks for partnerships and disputes is a common and necessary step to succeed in this environment.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 20. i n U. v.

(27) 3.2.2. Law as a foreign concept. The Confucian tradition in China that promotes sharing of knowledge to achieve the society harmony is an issue in international business. Many forged products (山寨) developed in China represent a risk for business development in the country. As of today, China is the number one producer in terms of counterfeits goods which causes a major impact on market confidence:. 政治大. 立. “Chinese counterfeiting now costs foreign firms an estimated $20 billion a year in lost profits.. ‧ 國. 學. In the case of one consumer goods manufacturer, as much as 70 percent of the goods on the. ‧. market are counterfeits," said Scholz.7. y. Nat. io. sit. Besides, existing laws are often ambiguous and manipulated to exploit loopholes. The. n. al. er. common saying “商場如戰場” illustrates that “business is a battlefield”. In such terms, the. Ch. i n U. v. competition is aggressive, with an emphasis on the rule of man before the rule of law. A long. engchi. focus on relationship laws puts international laws as a foreign concept that is not necessarily taken into account by foreign firms.. The importance of the hierarchy in China is as well a major difference with occidental countries, where the CEO is not a consensus builder with stakeholders, but a sole decider of strategies of execution. This shows the strict hierarchy in the business world that is independent from the legal framework.. 7. http://abcnews.go.com/WNT/story?id=130381&page=1. 21.

(28) 3.2.3. Stability of the country. The economic, fiscal, monetary and trade stability of China are major factors influencing the success of an international business. As the economy relies mostly in manufacturing and tries to boost the national demand and increase customers spending, the yuan is still undervalued by almost 40% according to foreign economists. Trying to maintain a stable rate between the yuan and the USD is part of the country’s attractiveness for exports but is a business risk if it. 治政 comes to change. Indeed, international pressures push the 大country to reevaluate its money and 立 officials have to follow the international demands little by little. Then, the increasing wages of ‧ 國. 學. workers going in pair with the generalization of higher education pulls up the costs for. Nat. y. ‧. companies. As a result, the labor costs is inconsistent in China.. er. io. sit. The political party in power is a strong authoritarian and united political party that does not represents a major threat in term of political stability. Even though concerns about labor, land. n. al. Ch. i n U. v. and environment are rising, they remain of minor concern for the very legitimacy of the. engchi. directive organs. As Andrew Gilhom (security risk analyst for Control Risks Group Holding) puts it: “Widespread civil unrest in China is not likely in the short to medium term, because there are no signs of divisions in the ruling Communist party or the downturn in the economy becoming really destabilizing, two key ingredients for political upheaval”8.. 8. http://www.businessinsurance.com/article/99999999/NEWS03/120309887/political-stability-in-china-comes-wi. th-little-transparency. 22.

(29) 3.3. Towards a more transparent market. The regulatory risk in China arise from the powerful influence groups in the party and the major important of the GuanXiWang( 關係網 ), creating an uncertain environment relying on relationship and interests. The People’s Republic of China government is conscious of the impact of this opacity on FDI as the degree of transparency and predictability of the environment shapes the favorable or detrimental interests of local and foreign companies. On. 政治大. the other hand, this opacity helps official protecting nationalist interest.. 立. ‧ 國. 學. Being aware of this negative impact and reacting to international pressures, the PRC made efforts towards a more transparent and regulated market over the past decades. The government. ‧. decision making processes are more opened as the price index and market information became. y. Nat. sit. public. As an example of this initiatives, in 2008 for the Strategic Economic Dialogue, the PRC. n. al. er. io. pledge to publish a draft of its regulations and laws, which was concluded in Washington in. i n U. v. 2011 with the issue of the transparency commitments and domestic regulations. However, the. Ch. engchi. implementation of policies is still lacking.. Additionally, incentives to promote business are noticed by the World Bank as another proof of the willingness to direct China’s policies towards a clearer structure, categorizing them as “making business easier” or “more difficult”. We notice that on the last 5 years, policies are clearly oriented to easing business operations for international and local companies.. Through reducing the taxes levels, lowering requirements for operation and creation of business and improving the taxes collection, the government encourages business while 23.

(30) developing its Shanghai and Beijing hubs. At the same time, the will to speed up legal procedure and to have mandatory audits shows a shift to fraud prevention and reliability of information. These steps contribute to the strategic plan of the country to evolve from a manufacturing country to a business hub.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. i n U. v. Figure 7 – Business reforms in China to ease business Source: The World Bank Group. engchi. 24.

(31) 政治大. Figure 9 – Control of corruption in China. 立. ‧. ‧ 國. 學. n. al. er. io. sit. y. Nat. Figure 8 – Rule of law in China. Source: The World Bank Group. Ch. engchi. i n U. v. Efforts to meet international standards are effective even though they collide with the local culture. It appears that the corruption diminishes efficiently in the recent years while at the same time the rule of law is gaining importance. Nevertheless, putting things in perspective, it is still important to notice that even though China is the second world economy, the rule of law ranking puts it only at the 42nd percentile in the world.. 25.

(32) 4. Special considerations for conducting business in China 4.1. A three steps impact. Risk assessment models do not necessarily apply in volatile emerging markets with a strong information asymmetry as Studwell (2002) explains in the perils of General Motors, General Electric, and Daimler-Benz in China.xiii The importance of rules of men apart from rules of law impact the formulation and implementation of strategy.. 政治大. 立. Regulations and institutions influence all kind of companies on their resource allocation. But at. ‧ 國. 學. the same time, economic agents can and should direct external response to take advantage of. y. strategy: study of resource allocation. For instance, a. n. al. sit. io. Institutions. – 1 Direct Influence of regulations and customs on Resource allocation. er. Nat. Regulatory and political environment. ‧. the environment’s opacity.. Ch. Concept. i n U. v. change in barriers to entry, intellectual property. engchi. regulations will impact the efficiency/profitability of. Regulative Culture. stakeholders and thus, their behavior. Over time, the Systems Actors and initiative. strategy represented by the allocation of scarce. Normative Design. resources, is impacted by the regulatory powers. Coordination Cognitive Configuration. 26.

(33) – 2 Internal alignments in strategy and management: sequence and content of changes following regulations. management systems, leadership and style, portfolio configuration, concept, organizational design and coordination mutate to fit the environment.. – 3 Responses directed externally: influence from the company to account for regulatory pressure. Actions intended to change the environment in an active way, in opposition to react passively to the environment.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 27. i n U. v.

(34) 4.2. Framework for strategy formulation and implementation. As PWC puts it in its guide to conduct business in China, “While analyzing financial and operational data is key to any cost rationalization strategy, it is especially vital in China to consider the risks that lie beyond numbers. When performing due diligence or reviewing any other financial, it is important to consider the business infrastructure of the target Chinese company, including the corporate culture and internal control environment, business processes,. 治政 information management systems, management style 大 and relationship network with both 立 internal and external stakeholders.” ‧ 國. 學. An extensive evaluation of the environment and its stakeholders is mandatory. An example of. ‧. it is the backlash of the Foxconn violation on employment law for Apple. As a result, the. y. Nat. sit. American company involved the non for profit organization Fair Labor Association to audit. n. al. er. io. the manufacturing sites and revealed that 43% of the workers experienced work-related. i n U. v. accidents, unfair wages or unpaid overtime. As Apple did not monitor the compliance. Ch. engchi. practices of its supplier, it impacted the reputation and finance of the brand.. The central part of the framework selected to assess the environment is the industry playing field, consisting of all the institutionsxiv impacting the environment through delivering threats or opportunities. Indeed, they create the guidelines for behavior such as norms, values and laws. As depicted in the model, two different strategy arise from the field: market strategy and non-market strategy.. 28.

(35) 政治大 Figure立 10 – Neo-institutional study of a business ‧. ‧ 國. 學. Source: Frankenberger (2006). At first, the first arrow represents the regulatory pressure that impact the environment of the. Nat. sit. y. company and will determine its strategy. The third and second arrow is the response from. n. al. er. io. companies to leverage public opinion, or normative institution to balance the regulative. i n U. v. environment and restore the lost profitability. This model is especially useful to consider the. Ch. engchi. importance of relationships in China. The second arrow uses strategies to reduce the threats of new regulation or maintain and lock the new opportunity. At the same time, established institutions are challenged to fit the new regulatory environment on arrow 4.. Following the neo-intuitional thinking, we support that the strategic choices are limited and supported by the existing institution in the field. In other word, regulative, cognitive and normative institutions will dictate the strategy of the company that will direct its effort toward market strategy (arrow 5) such as management style. New standards are created and the industry is auto-normed.. 29.

(36) The sixth arrow represents the corrupted thinking of strategy which leverages the power of influence, corruption through strategies such as dumping, cross subsidizing, and skimming. It is important to notice that these strategies are aimed to fight the new regulations, but this is indirectly. Indeed, companies doing such will expect to damage the beneficiaries of the new regulation in order to intensify the number of actors reclaiming the status quo. As an example, deregulations on quotas agreed by the World Trade Organization on agriculture led in the past. 政治大. to protective strategy that created a national demand (pull strategy). Another way to settle. 立. disputes is as well to file a complaint directly to international institutions such as the WTO.. ‧ 國. 學. Defensive and aggressive strategies are often preferred for a simple reason: this is a costly process that requires disclosure of information. Thus, initiatives are often government backed. ‧. such as the recent case of USB flash drive from Taiwan and the (unfair) anti-dumping policies. n. al. er. io. sit. y. Nat. in India9.. i n U. v. Political (non-market) strategies influence the environment and can be self-harming. They are. Ch. engchi. signaling effect directed towards the government bodies. On the other hand, market strategy such as cost reduction, brand building, and diversification, can be preferred to bear with the new environment.. As top management will have to screen initiatives to be considered as a threat or an opportunity for their own company, they react by designing strategies to evolve in the new competitive landscape. According to research, pattern exist in such reactions were institutions will adjust 9. DISPUTE DS498 India — Anti-Dumping Duties on USB Flash Drives from the Separate Customs Territory of. Taiwan, Penghu, Kinmen and Matsu. 30.

(37) the structural context in case of threat or pursue autonomous strategy and promote innovativeness to benefit from an opportunity.. The degree of regulation influences the design of strategy were stability and transitive situation will result in different formation. Regulated industries react to change through non market strategies and creation whereas market strategies are preferred by unregulated market.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 31. i n U. v.

(38) 4.3. Recommendations. Uncertainty of regulations in China impact the viability of information on four different axes: growth, infrastructure, costs and compliance. As a result of this study, we will summarize best practices in these four categories.. Growth risks. 立. Adapt the value proposition to the fragmented Chinese market and their customer. 學. ‧ 國. . 政治大. behavior that may change according to governmental policies as demonstrated in the. ‧. past. BestBuy explained its China’s failure by failing to adapt to local preferences of small, many and conveniently located stores.. sit. y. Nat. n. al. er. Acknowledge the impact of the five-year plan with a focus on consumption and green. io. . i n U. v. economy. Monitor new political development and tailor the strategy to fit the new legal implication.. . Ch. engchi. Assess the financial and ethical liability of all stakeholders through in depth audits. This is a capital part of expanding to china to avoid issues such as the ones face by Nike and child labor, or McDonald’s and expired meat10. Even though the relationship can be formal with contracts, there is still a need for a commitment for consistency, that comes with building a relationship with the operaor.. 10. http://fortune.com/2014/09/02/why-mcdonalds-supplier-failed-in-china/. 32.

(39) . Protect proprietary knowledge from business partners and competitors, while understanding that the risk of imitation is important. Build on the unique selling points of the product to differentiate from competition.. Infrastructure risks. . Monitor management and protection of the intellectual property to account for the. 政治大. cultural environment while controlling it.. 立. Leverage the power of local institutions, in order to promote transparency. 學. ‧ 國. . implementation, Shelly Zhao of China Business Reviews advise to provide relevant. ‧. comment and feedback to international authorities to report improvements or roadblocks in the business environment. Additionally, she suggests to leverage the. y. Nat. er. io. sit. influence of industry associations that are already established and often well connected with the government to help communicating regulatory suggestions.. n. al. . Ch. engchi. i n U. v. Develop management systems that relies on information sharing and does not lies in the hand of few executives and install robust governance.. Costs assumption risks. . Account for the risk associated with informal arrangements.. . Insure consistency in reporting by implementing a strong leadership that knows the local economy and systems that support a free flow of information.. 33.

(40) Compliance risks. . Evaluate the implication of business regulations, ethics and customs and leverage them to the advantage of the company. In China, some areas are more tax friendly whereas customs are inconsistent with the west law dictated customs.. quickly to change.. 立. ‧ 國. 學. Increase awareness on conflicting practices with international standards. Even though it. ‧. may be assumed to be ineffective, it is a main driver or Chinese legal evolution.. y. Nat. io. sit. . 政治大. Commit resources to deal with the day-to-day environment to react effectively and. n. al. er. . Ch. engchi. 34. i n U. v.

(41) 5. Conclusion. Legal and political risks are a major concern in conducting a business, especially abroad. To mitigate this risk, we determined that success relies on the creation and implementation of both market and non-market strategies. In markets such as China where the political and legal risks are important, the business operations are directly impacted. As the government policies were intended to protect and develop the national economy, they now tend to transform into a more. 治政 international complying framework of laws. Even though, 大uncertainty still remains important 立 and cannot be treated as an in Western countries. ‧ 國. 學 ‧. Effective market strategies are costly in the Chinese market that is rapidly evolving and needs a tailored offer, and major businesses failed to meet the target by lack of understanding of the. y. Nat. er. io. sit. needs. To manage governmental and customs induced risk, these strategies can be used to leveraged public opinion and manage the environment, but it appears that non-market strategies. n. al. Ch. i n U. v. are more efficient in China. Indeed, customs as a cultural barrier and legal issues need to be. engchi. assessed to conduct business in China since relationship building in business is a way to deploy defensive and offensive strategies in the environment. Similarly, international and local institutions to support business should be used in order to modify the regulatory framework.. Business in China is a balance between regulations and customs, that creates a need for in depth market knowledge and assessment of stakeholders. Agreeing on committing resource to understand and leverage the local culture is an essential driver for success. Even though new steps from the Chinese government show a will to comply with international standards, the. 35.

(42) small improvement in the implementation of the rule of law these past years still implies the need to do business in a more documented way.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 36. i n U. v.

(43) 6. References. i. Andrews, K. R. (1991). The concept of corporate strategy, Richard D. Irwin, Homewood. ii. Porter, M. E. (1980). Techniques for analyzing industries and competitors, New York: Free Press iii. Hart, S. L. (1992). An integrative framework for strategy-making processes. Academy of Management Review, 17(2), 327-351.. 政治大 Pettigrew, A. M. (1992). The character and significance of strategy process research. 立 Strategic Management Journal, Special Issue Volume 13, pages 5–16. iv. ‧ 國. 學. v. ‧. Floyd, S. W., & Wooldridge, B. (2000). Building strategy from the middle: Reconceptualizing strategy process. Sage. Burgelman, R.A., (March 1994). “Fading Memories: A Process Theory of Strategic Business Exit in Dynamic Environments,” Administrative Sciences Quarterly, p. 31.. sit. al. er. io. vii. y. Nat. vi. v. n. Bower, J. L., & Gilbert, C. G. (2005). A revised model of the resource allocation process. From resource allocation to strategy, Oxford University Press, 439-455.. Ch. engchi. i n U. The McKinsey Quarterly – 2004, No. 3, Balancing growth and regulation, McKinsey and Company, New York, 2004. viii. ix. Chandler, A. D. (1962). Strategy and Structure. Cambridge (Mass.). x. Hart, S. L. (1992). An integrative framework for strategy-making processes. Academy of. Management Review, 17(2), 327-351. xi. Frankenberger, S. (2006). Management of regulatory influences on corporate strategy and structure. Deutscher Universitäts-Verlag/GWV Fachverlage GmbH, Wiesbaden.. xii. Leggett, K., & Wonacott, P. (2002). Burying the competition. Far Eastern Economic Review, 37.

(44) 17, 30-5. xiii. Studwell, J. (2002). The China dream: The quest for the last great untapped market on earth. Grove Press.. xiv. Scott, W. R. (2005). Institutional theory: Contributing to a theoretical research program. Great minds in management: The process of theory development, 460-485.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 38. i n U. v.

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