Multinational enterprises (MNE’s)
Multinational enterprises (MNE’s) face various challenges in their pursuit to form establishments in foreign economies. Such challenges include poor infrastructures especially in the developing countries, poor transportation and communication and banking systems leading to increase costs of production. Intensive market research is important as it will establish if a company can make profits which are the major aim of being in operation. Market research will offer needed data for analysis before the final decision making process takes place.
(Hill L, 2007). The analysis offers the best approach towards which approach to enter the market with as well as the people’s culture and hence not go against it. The research also offers details regarding the government’s requirements or rules and regulations to be adhered to before the establishment of the business. It is vital to establish if the country or economy in question allows business freedom through various tax as well as trade policies to know if the business in question will be profitable.
Other aspects to consider here are fiscal as well as monetary policies, intellectual property rights and the entire regulatory climate as well as the price and wage control. Introduction Countries across the globe have shown their interests of enjoying with China the benefits of tremendous economic growth through foreign direct investment (FDI). Foreign direct investment has rose from $109 million in 1979 to $72 billion in 25 years making it the 3rd largest FDI destination. (Elwell C and Labonte M, 2007).
The Chinese population is estimated to be over 13 billion and it raises concerns that if not controlled it might have a negative effect on the country’s natural resources. MNE’s can exploit the high population as a source of labor and market for their products and services. To succeed in China there are various issues that must be checked or addressed. History China an Eastern Asia country is endowed with natural resources which compliments her abundant human capital making it attractive for foreign investors.
In the past decade her economy has registered a positive economic growth rate raising concerns that she might replace or overtake the USA as a world superpower. Since the 1978 economic reforms foreign direct investment was embraced. Trade liberalization was vital in seeing China’s economy become what it is today. After the reforms forces of demand and supply would determine the production, set prices as well as play a significant role in the allocation of resources. (CIA, 2008). Culture
Culture is the term used to define a people’s way of life and it includes their language, their attitudes, values, beliefs, interests as well as their understanding of time. All these factors are important in the carrying out of business transactions and should consequently be taken seriously. Understanding culture of the host country is vital and it also entails understanding who the key players are in as far as making important decisions in the business is concerned. In china the role of politicians cannot be underscored as it is of a vital significance.
(Sebenius K, 2002). Proper understanding of people’s culture paves way for long-term friendship which is vital for the success of MNE’s. A deeper understanding of the host behavior and mannerism is also essential especially during business negotiations. When communicating with the Chinese people it is important to use formal introductions and titles, arrive at the designated places in time. Prior appointments must have been made to discuss business. The decision making process is a bit slow thus seeking for patience on the part of the MNE.
(InternationalBusinessCenter. org, 2008). Proper eating habits must be ensured for instance tasting all the food that one has been served with and not eating all of it. Chopsticks should also be handled appropriately. Pointing especially using the fingers is also deemed inappropriate and should be avoided. Gift offering is now gaining popularity but one must be aware of the dos and don’ts. The Chinese people are a bit conservative and will opt for a similar mode of dressing. (InternationalBusinessCenter. org, 2008).
Being a communist country the Chinese people tend to embrace socialistic tendencies or attitudes. The literacy levels according to the CIA world fact book are very high indicating that the human capital can be exploited optimally. Religion also has a role to play in determining or rather influencing a people’s way of life and it is of much importance while engaging in business. The Chinese government tolerates only the formally recognized religious organizations though the highest proportion of the population is Buddhist. (CIA, 2008). Import/export restrictions.
Since her membership in World Trade Organization in 2004 China removed the import quotas that had initially been placed on goods like refined oil products, natural rubber, vehicle tires as well as motor vehicles. Restrictions on some exports for instance textiles have also been uplifted. (Hong Kong Trade Development Council, 2009). Various reforms related to agricultural goods were also introduced like on wheat. The import goods that are faced with quantitative restrictions are controlled through quotas and licensing approaches while those with qualitative restrictions or regulated depending on technologies used are regulated using licensing.
Goods termed as free imports do not face any restrictions. Prior approval ought to be done with the relevant departments before business transactions are done. There are export restrictions on the export of goods like natural resources which are likely to be depleted. Goods that are in short supply are conserved. Those goods facing export restriction are subjected to quotas and licensing approaches. To cater for quality product through the application of proper technology licensing is applied.
To export goods that are regulated through quotas and licensing approval is sought with the Ministry of commerce after which licenses are acquired from the relevant departments. (Hong Kong Trade Development Council, 2009). Labor relations MNE’s in China have the power to sell or adopt an appropriate manner of recruiting their staff members as stipulated by the labor laws. A firm may use the media, fairs, the office premise or corporate websites to seek for employees. Labor contracts must be given after working for one month failure to which the employee is paid a monthly wage twice a month’s pay if the duration does not exceed one year.
Upon hiring employees must be informed of their duties, responsibility of their positions. The employer also has the right to know details regarding the employee. Probations period depends on the duration of the labor contract in question. (Hong Kong Trade Development Council, 2009). The labor contract can be terminated if the employee fails to meet the requirement while on probation or goes against the set rules or regulations, is corrupt, fails to change upon warning or is convicted of a crime. Staff layoff is permissible due to economic reasons. An explanation 30 days earlier should be offered if more than 20 employees are to be laid off.
Contracts made are to be authenticated by the local labor administrative departments within 30 days after a labor contracts has been made. Approval and registration with the labor bureau is important for the foreigners working in china. Such foreigners must have no criminal record, over 18 years of age and of good health, have a confirmed employer, possess a valid passport or genuine travel documents and ought to have the appropriate skills. MNEs must register with the local social insurance institutions which are mandatory in China. (Hong Kong Trade Development Council, 2009).
Upon registration they should pay monthly premiums for their employees. Reports must be submitted before the 5th of each month of how deductions are to be made from the employees and paid for the social insurance within 3 days. The basic old age insurance varies across varying regions or places but should not exceed 20% of the employees pay. The employee contributes up to 8% of his pay. MNE’s are liable to pay up to 6% of the employees pay while the employee pays only 2% . Unemployment insurance paid is 2% of one’s salary by the employer while the employee pays 1%.
Work related injury insurance paid depends on how risk averse an establishment is while the child bearing insurance depends on ones income. (Hong Kong Trade Development Council, 2009). Supplier financing. Since the 1994 Banking Reforms and the taking to effect of the Commercial Banking Law in July 1995 there has been tremendous positive effect in this sector. More private banks were established and this was vital in as far as the flow of credit was and is concerned. Rural financing empowers people living away from the urban centers or regions precipitating equal distribution in as far as wealth is concerned.
After gaining membership with World Trade Organization, China allowed some foreign banks to offer their services and up to 150 foreign branches are in operation. (Library of Congress- Federal research division), Tax rules In China goods obtained through the general trade attract import tariff as well as import related value added tax. Consumption tax is also applicable to some goods. There are no export levies except for a few raw materials and certain important resources. A zero tariff rate is imposed on exports except those that have been restricted because of qualitative as well as quantitative reasons.
This implies that there is no consumption tax or value added tax for exports that have not been restricted. Goods exported by MNE’s since 1st July 2004 are eligible to rebates or exemptions if they have export production capacity. Those exported without this capacity are also eligible to rebates as per the stipulated regulations on foreign trade enterprises. (Hong Kong Trade Development Council, 2009). VAT is paid for the processes that add value to the commodities at various stages. Commercial enterprises are supposed to pay a 4% of the sales made value.
VAT paid on imported goods depends on the composite assessable value which includes the customs dutiable value plus custom duty. Some commodities like food, water, fuel, fertilizers, pesticides newspapers and magazines as well as agricultural machinery have a lower VAT rate at 13% while other goods have a basic rate at 17%. There is a zero tax rate on exports and partial or full refunds are made in instances where they are paid. General taxpayers can purchases special VAT invoices which they present to the buyer or to claim deduction if they are according to the set regulations.
The tax authorities determine when the taxes are to be paid. A consumption tax is paid depending on the sales volume of those consumer goods eligible for taxation. In case of commodities like addictive substances for instances cigarettes, alcohol, watches, motor vehicles and some of their parts the consumption tax is added to the VAT. (Hong Kong Trade Development Council, 2009). At the end of the day it is felt on the consumers rather than the producers. It is paid by those engaged in production, processing as well as the imposing of consumer goods that are taxable.
Consumption tax is payable after the payment of taxable consumer goods have been made and the date of payment depends on the tax authorities. Custom duty is paid for commodities entering or departing from China, personal luggage and gifts. Countries that have formal trade agreement with China pay a preferential tariff rate while those without pay a general tariff rate. Those businesses dealing with taxable services have to pay business tax which ranges from as low as 3% to 20%. There is also the enterprise income tax which is payable by all firms that receive incomes with China’s jurisdiction.
This tax is at a rate of 25% to those firms with establishments in china and is paid progressively from as low as 5% to 45%. Incomes could be on savings deposited, transfer of property, royalties and property leasing, authors’ remuneration as well as on labor services. Various tax concessions have however been introduced to encourage foreign investment. Targeted enterprises include those dealing with research and development. (Hong Kong Trade Development Council, 2009). Recommendations China is a great opportunity for the company to invest heavily.
The tax rates are fair and with the accessibility to finances by the masses there is a wide market. There is also the abundant source of labor which can be exploited maximally. The rich Chinese culture must also be respected as it will have a great impact in the success of the company. Adherence to the set rules and regulations will lead to reduced conflicts with the authorities and thus the success of the company. Ethical dilemma Most of the findings established from the market research as to how one would best enter the Chinese market were in contrast to the beliefs and values of the company’s CEO.
The ethical dilemma in question here is whether I should indicate this in my report or not. Market research is very important and the findings should not be compromised regardless the perceived outcomes as it may cost the company a fortune and yet gain no profits in the long run. Conclusion China has undergone so many changes within the last two and a half decades. There have been positive changes in as far as her economy is concerned and this has attracted many foreign investors. The political and social climate is also conducive to make it attractive for those willing to share the prosperity of the Asian country.
Multinational enterprises must however be very cautious if they are to register success in their operations. Understanding the people’s culture must be blended with understanding the economic aspects such as labor relations, tax and trade policies, supplier financing as well as the countries history. References: CIA world fact book. China. Retrieved on 20th February 2009 from https://www. cia. gov/library/publications/the-world-factbook/geos/ch. htm Craig Elwell and Marc Labonte. 2007. Is China a Threat to the U. S. Economy? Retrieved on 20th February 2009 from http://www. fas. org/sgp/crs/row/RL33604.
pdf. InternationalBusinessCenter. org. 2008. Retrieved on 20th February 2009 from http://www. cyborlink. com/besite/china. htm Hong Kong Trade Development Council. 2009. Extract from Guide to Doing Business in China. Retrieved on 20th February 2009 from http://info. hktdc. com/chinaguide/ Hill, C, W, L. , 2007. International Business; Competing in the Global Marketplace, 6th Edition, McGraw-Hill/Irwin, New York. Library of Congress- Federal research division. Country profile: China. August 2006. Sebenius, J K. 2002 “The Hidden Challenge of Cross-Border Negotiations” in Harvard Business Review