MANAGEMENT SUMMARY PREFACE
1.1 Motivation for Research
1.3 Problem Statement and Research Questions
1.4 Research Method
1.5 Structure of the Report
2 Economic Climate & Forecast
2.1 Economic Climate
2.2 The Chinese Economy
2.3 Forecast of the Chinese Economic Development
3 Role & Importance of Transnational Organizations
3.1 Definition and Characteristics of a TNO
3.2 Transnational Organizations in China
4 An Efficient Strategy for the Chinese Market
4.1 Approaches for a Market Entry
4.2 Relevance for the Chinese Market
4.3 Innovation Strategy
4.4 Relevance for the Chinese Market
4.5 Realization of a Winning Innovation Strategy
5 Threats of Doing Business in China
5.1 General Risks & Threats
5.2 Business Risks & Threats in China
List of Figures
List of Tables
Appendix 1: 360 Degree Analysis
Appendix 2: Economic Overview China
1.1 MOTIVATION FOR RESEARCH
Nowadays, emerging markets attract the attention of nearly every transnational operating organization (TNO) and especially China has become one of the most important markets in terms of sales, R&D operations and low cost manufacturing. The enormous economic growth rates of the Chinese market will increase the importance of this market in the near future dramatically. In contrast, today’s advanced economies will lose significance in the world’s economy and the accompanying shifts in spending could provide substantial opportunities for all global companies.
However, many TNOs fail to enter the Chinese market, despite the huge economic opportunities that China possesses. A TNO needs to identify the right strategy and has to be aware of various challenges that the Chinese market poses, such as government interventions, underdeveloped infrastructures or copyright violations. Therefore, an efficient strategy is needed in order to sustain successful in the Chinese market.
The purpose of this report is to conclude why China is attractive for TNOs, what the specific risks and challenges are when operating in the Chinese market and on which aspects a TNO should focus, when entering the China. The crucial factors for a successful implementation of an efficient strategy are presented.
Of course, this report is restricted by factors like time, scope and accessibility of research sources. Aspects, like the cultural background of China, the exact implications of the financial crisis or the availability of financial resources have either been neglected or are only discussed briefly. Furthermore, this report will only provide a general recommendation for TNOs, how to enter the Chinese market successful. Factors like the marketing mix, trade barriers and several other important decisions are crucial for the success of a company. However, due to limitations this report will focus only on innovation strategy and the four most important approaches of an international market entry strategy.
1.3 PROBLEM STATEMENT AND RESEARCH QUESTIONS The problem statement of this report is:
“What are the crucial success factors for transnational organizations, when operating in the Chinese market environment?”
Hence, this report will take a look on the aspects on which a TNO should focus in order to build an efficient strategy for the Chinese market. To solve the problem statement (main research question) the following specific research questions will be answered successively within this report.
- What is/will be the economic relevance of the Chinese market?
- Which cultural/economical aspects influence the performance of TNOs in China? § How does the Chinese market differ from domestic markets of TNOs?
- What are the challenges and risks within the Chinese market?
- What are the key success factors in the Chinese market environment?
1.4 RESEARCH METHOD
For answering the questions posed in this report, qualitative research sources (literature review, internet sources) and quantitative research sources (databases e g. Bloomberg, Factiva, Forrester, Destatis) are consulted. The answer to the main research question focuses on an analysis of practical experiences by TNOs combined with theoretical models (Entry modes), which build the backbone of this study.
1.5 STRUCTURE OF THE REPORT
The report starts with a research proposal in the first chapter which builds the introduction of the topic and clarifies the content and scope. After this introduction, the second chapter will give a description of the current economic situation on a global perspective and will further focus on China’s situation. An outlook of the future economic developments will demonstrate the relevance of China for the world economy. In the following, chapter three will explain the characteristics of TNOs and analyses the current state of transnational organization’s in the Chinese market. An efficient strategy for the Chinese Market is presented in chapter four. The important aspects of entry modes and innovation strategy are clarified and the implementation for China will be analysed. Threats and risks of the Chinese market environment are explored in the fifths chapter. The report will conclude with a recommendation for crucial success factors which TNOs should consider in order to become successful in the Chinese market.
2 ECONOMIC CLIMATE & FORECAST
This chapter will describe the current global economic climate with the impacts of the financial crisis and will further focus on China ’ s economic situation. An outlook of the future economic developments will demonstrate the relevance of China for the world economy.
2.1 ECONOMIC CLIMATE
The global economy has increased its size by nearly 4 % per annum since 2004. Countries like the United States, the member of the European Union, emerging markets like Russia, India and China have been the major reason for this development.
However, the world economy is mired in the severest financial crisis since the Great Depression. The world gross product is expected to decrease by 0.4 per cent in 2009, a sharp deceleration from the rate of 2.4 per cent estimated for 2008 and well below the more robust pace in previous years. While most developed economies are expected to be in a deep recession, a vast majority of developing countries is experiencing a sharp reversal in the robust growth registered in the period of 2002 2007, indicating a significant setback in the progress made in poverty reduction for many developing countries over the past few years. The prospects for the Least Developed Countries, which did so well on average over the past years, are also deteriorating rapidly. Income per capita for the world as whole is expected to decline in 2009.
In 2007 the total global GDP increased to nearly $ 50 trillion with a growth rate of 3.9 %. The United States had the largest stake with above 20 per cent of the worldwide economy. Japan and Germany were on the second and third place. However, China and other emerging markets improved their significance enormously in the global economy due to their rapidly increasing economic growths rates.1 Hence, the economic climate of China, the largest emerging market, will be explored in the following chapter.
2.2 THE CHINESE ECONOMY
China has the largest population in the world (approx. 1,3 billion) and in 2007 its nominal GDP was $ 3,280 trillion.2 The GDP growth rate was 11.9 per cent.3 Since mid 2008 China is, according to the World Bank, the worldwide third largest economy, subsequent to Japan and the US with nearly $ 14 trillion.4
Nevertheless, analysts agree that China will become the largest economy within the next 15 to 20 years and will leave the United States behind in terms of GDP.5 Since 1979 as China opened its markets and reforms its economy, the average GDP growth rate was remarkable 10 per cent per annum. In particular the World Trade Organization (WTO) membership in 2001 facilitates China’s capability to continue the growth rates. Since the entry to the WTO nearly all quotas and other barriers have been removed. Industries like Banking, Manufacturing or Tourism are now available for foreign investments. Nowadays, China is a market based economy which gets highest amounts of foreign direct investment in the world.
More than 350,000 foreign invested enterprises do business in China. These companies are responsible for approximately 40 per cent the Chinese national exports.6 The improvement of the economy since 1970 resulted in a tremendous growth of the Chinese middle class.
Consequentially, the private consumption increased enormously what is regarded as utmost important factor of the Chinese economic growth.7 However, an average Chinese worker (ca. $ 4,000) still earns only 10 per cent of what an average US workers (ca. $ 41,000) would earn. Despite the recent challenges through the economic crisis, China’s economy seems relatively stable. In response to the global crisis, China launched a 460 bn. stimulus package to contribute to global stability by boosting investments and consumer spending. Experts support this action, but China’s economic growth seems to decline and similar growth figures as in the last 10 years are not realistic.8
Table 1: Global Economic Outlook
illustration not visible in this excerpt
Source: Economist Intelligence Unit
1 (www.un.org, 2008)
2 See Appendix 2
3 (www.state.gov, 2008)
4 (www.globaltradeventures.com, 2008)
5 (Fischer, 2006)
6 (www.imf.org, 2008)
7 (Hodgson, 2007)
8 (www.spiegel.de, 2008)