A comparison between the Chinese and US political regimes. The difficulties of doing business in China
The following is an essay submitted at the University of Newcastle Australia 2012 by Ryan Lee for POLI3001. The mark received was 17/20 and is a credible source of information. If you are using this paper for research, I would encourage you to use the sources provided in the reference list directly, assuming you can gain access to them. Most can be found on public search engines or in the university business databases.
The aim of the paper is to discern the differences between the Chinese and United States political regimes, followed by an analysis of which would provide a more stable political environment for business expansion. The conclusion is in favour of the USA, but provides more information on the Chinese environment; which in turn is the basis of the decision to support the USA, whom have a strong framework for business law and focus on privatisation.
The following essay compares the political regimes of China and the USA to determine which provides the most preferable business environment. It begins with an overview of the different regimes and their ideologies, followed by an analysis of the resulting environmental effects. Findings show the USA is preferable from a general perspective, not because it provides special benefits, but because of the political minefield China presents for business professionals.
Five interrelated, specific areas of the Chinese environment have been chosen for discussion. They are: political structure and law, finance, supply chain management, corruption and intellectual property rights. These categories have been chosen because of the stark challenges they present for businesses expanding in China, and because they seem to be affected by interrelating political issues.
The USA and China sit on opposite ends of the political spectrum; the USA is a capitalist country based on a Liberal ideology (Phatak, n.d.), whereas China is a socialist country based on a strong Marxist background (Svenson, 2002. p. 47). They have differences in their view of individual freedom, economic control and structure.
The core difference between Capitalism and Socialism is their concept of individual freedom (Phatak, n.d.). According to Phatak ( n.d.), liberal ideology focuses more on the inherent rights of an individual, whereas Socialism believes rights are relative and held by society as a whole (Cho, 2011. p. 5) and the group is given preference over the individual (Lampton, 2002. P. 132). As a result, individual rights may be circumscribed for the sake of economic development in China (Cho, 2011. p. 6). Conversely, the USA has a bill of rights supported by a strong legal backbone (A brief history of human rights, c. 2008-2012).
The countries are also different in regards to their control over the economy. The Chinese Communist Party (CCP) owns all the ‘means of production’ which includes land and resources (Phatak, n.d.). The USA however, takes a lassie faire approach known as a market economy (US market economy, 2010). According to Phatak (n.d.) this is based on the rational of individual freedom and the right to own the risks and rewards associated with investment.
Another obvious difference is the political structure. Lawrence and Martin (2012), state that there is an emphasis on long-term planning and political stability in China. They are a one-party system, whose leaders are elected for a maximum of two five year terms (Country report, 2011); lead by a collective of nine ranked leaders (Lawrence & Martin, 2012). The USA is a two party system with a maximum of two four year terms; led by a president (Two Party System, 2012). Furthermore, Chinese politicians are chosen on merit (Lawrence & Martin 2012), whereas US politicians are elected based on popularity. It is important to mention however, that China is in a liberal-economic transitional phase, creating a turbulent business environment (Sheng et al. 2011).
Sheng et al. (2011 p. 1) emphasises that China has not developed a stable legal institution for enforcing contract law nationwide, whereas the USA has a very specific framework and a structured court system. “Both forms of ties rely on personal interactions and social networks, instead of formal contracts and arms-length transactions, to obtain resources and facilitate cooperation” (Sheng et al. p. 2). Lawrence and martin (2012, p. 14) state that there is an inability or unwillingness to enforce the law amongst officials. As a result of this, firms often need to exploit political connections to enforce contracts when legal enforcement fails (Ambler & Witzel 2004). The obvious problem here is an absolute reliance on political ties. Foreign business expanding into China will likely be disadvantaged from a legal perspective.
This political dependency seems to be connected to problems regarding corruption and logistics as well. Many ventures in China which rely on political connections get caught up in criminal investigations and scandals (the economist, cited in Sheng et al. 2011). According to Lawrence and Martin (2012, pp. 4-5) China’s provincial leaders are powerful political figures, and provinces have the right to extend upon national laws and regulations. It’s not unreasonable to assume legal differences across provinces make supply chains difficult to manage.
According to Mehring (2004), China has been imposing restrictions on lending and foreign investment in an attempt to slow down growth. This presents two concerns for prospective business expansion into China. Firstly, if growth is not slowed to a sustainable rate then the investment bubble could spark another global financial crisis. Firms would do well to avoid close ties to this. Secondly, this restriction on lending could make it difficult to attain the investment required to expand. Mehring (2004, p. 1) supports this with the statement “If Beijing picks up the pace of tightening solely via reductions in liquidity and rate hikes; it risks a seizing-up of China’s fragile financial market.”
Hsu (2012, p. 33) states that constraints in the banking sector have encouraged the growth of informal finance. This is not surprising considering that political ties are often required to obtain key regulatory and financial resources (Sheng et al. 2011 p. 3). Due to tight government control of a significant portion of financial resources (Faccio, 2006), many firms may be forced to acquire informal finance instead, particularly if they lack the political ties to gain shortcuts to these resources. Therefore, foreign firms may struggle to gain formal bank loans due to a lack of political connections. They may also lack the social connections to gain informal finance, making growth difficult, or expensive due to the higher interest rates.
Supply Chain Management
The lack of coherent business laws and strong government control over limited resources has been known to cause problems for supply chains in China (Cia et al, cited in Collins, Sun & Li, 2012). Findings from Collins, Sun and Li (2012, p. 401) find the political environment to be the leading factor in supply chain management issues. However, poor relationships between members of the supply chain are also to blame (Collins, Sun & Li, 2012, p. 401).
Collins, Sun & Li (2012) found that there was a high level of uncertainty and a lack of trust between supply chain members. China comprises of provincial factions based on factors such as birthplace, parents, education or work history (Lawrence and Martin, 2012, p.15). Competition among these factions can extend to the deployment of law enforcement and other methods to support the local businesses of their province while creating barriers to players from other jurisdictions (Lawrence & martin, 2012, p. 5). This means that foreign firms should be conservative and keep a short supply chain, removing intermediaries where possible (Collins, Sun & Li p. 402). Given the fragmentation of political and social networks, it would be wise to choose suppliers who will have a chance to build strong relationships due to close faction ties.
According to Hall (2012), a recent study from Shanghai showed that corruption in China hinders over sixty per cent of the respondents. Because of the tight Government control, there is an increased risk of officials asking for bribes to get business approvals (Hall, 2012, p. 2). Sheng et al. (2011, p. 1) states: “building relationships with various government officials is imperative for firm survival”. The problem with this is emphasised by Hall (2012, p. 3), who points out political relationships are often the only way to negotiate grey areas of legislation, with officials who have a lot of legal freedom.
Businesses operating in China should be cautious when using political ties (Sheng et al. 2011, p.12). As previously mentioned, a dependency on networking often pulls firms into dangerous territory, finding themselves caught up in serious legal affairs. This is in part due to the threat of existing corruption. Those who have a negative relationship with powerful officials may find themselves being investigated or punished for minor infractions, whereas those who play the bribery card avoid unwanted attention (Lawrence & Martin, 2012).
The political structure of China clearly presents an environment which exacerbates and facilitates widespread corruption. Lawrence and Martin (2012, pp. 10-11) point out that multiple officials compete with each other for resources and attempt to assert their jurisdiction, but clash when they share the same bureaucratic rank. It is quite likely that this structure creates a need for officials to acquire resources illegally through bribery.
Intellectual Property Rights
China is the world’s largest source of counterfeit goods and intellectual property infringement in the world (Zimmerman & Chaudhry, 2009). A survey of 19% of foreign firms operating in China listed IPR as one of the top business issues (American Chamber of Commerce, cited in Chou & Ratner, 2011). Modern IPR policies can erect barriers that contradict Chinese values (Chou & Ratner, 2011, p. 12) and as a result, IRP law in China is incomplete and poorly enforced. When this is combined with corruption, it creates a serious problem.
This essay has taken a brief look at some of the areas which make China a difficult political environment for foreign business. The USA is a safer choice for expansion if given the choice, due to a strong set of business and intellectual property laws, based upon an ideology which promotes the growth of private business. Any firm wishing to expand into China, should do so with caution and prior research.
A brief History of Human rights by United for Human Rights 2008-2012, consulted 14 August 2012, http://www.humanrights.com/what-are-human-rights/brief- history/declaration-of-independence.html
Cho, J. 2011, ‘Ideological competition between the United States and China in the field of Human Rights: Consequences for Chinese diplomacy’. ERAS, Edition 12, Issue 2.
Chou, JA, Ratner, M. 2011, ‘The influence of Confucius on intellectual property rights in China’, Journal of Emerging Markets, Vol. 15, no. 3, pp. 8-16, Business Source Complete, EBSCOhost.
Collins, R, Sun, X, Li, CG. 2012, ‘Are supply -chain relationships more influenced by buyer- supplier relationships or the business environment of the country itself? Evidence from the ‘China-Australia’ trading relationship’, Vol. 18, no. 3, pp. 391-405, Business Source Complete, EBSCOhost.
Country report, 2011, The Economist Intelligence Unit Limited.
Faccio, M. 2006, ‘Politically connected firms’, American Economic review, Vol. 96 no.1, pp. 369-386.
Hall, C. 2012, ‘Corruption in China hinders foreign biz’, WWD: Women’s Wear Daily, Vol. 204, no. 12, p. 1, Business Source Complete, EBSCOhost.
Hsu, S. 2012, ‘Role of informal finance in China’s continuing economic development’, The Chinese Economy, Vol. 45, no.1, pp. 28-45, Business Source Complete, EBSCOhost.
Lampton, D. 2002, ‘Same bed different dreams – managing US-China Relations 1989-2000, University of California Press, London, England 2002.
Lawrence, SV, Martin, MF. 2012, ‘Understanding China’s political system’, Congressional Research Service.
Mehring, J. 2004, ‘Tentative tightening’, Businessweek 3889, p. 36, Business Source Complete, EBSCOhost.
Phatak, O. Communism Vs Capitalism, consulted 14 August 2012, http://www.buzzle.com/articles/communism-vs-capitalism.html
Sheng, S, Zhou, KZ, Li, JJ 2011, ‘The effects of business and political ties on performance: evidence from china’, Journal of Marketing, Vol. 75, no.1, pp. 1-15.
Svensson, M. 2002, ‘Debating Human Rights in China’, Rowman & Littlefield Publishers Inc.
US Market Economy by EconomyWatch 14 October 2010, Consulted 14 August 2012, http://www.economywatch.com/market-economy/us-market-economy.html
Two Party System by Smoop: we speak student 2012, Consulted 14 August 2012, http://www.shmoop.com/political-parties/two-party-system.html
Zimmerman, A, Chaudry, PE. 2009, ‘Protecting intellectual property rights: the special case of China’, Journal of Asia-Pacific Business, Vol. 10, no. 4, pp. 308-325, Business Source Complete, EBSCOhost.
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