Introduction to Asia as a business area

Business in China.

What to do and how to do it

Joan Perez Torres jp410403

Hui Wan hw410252
Yongyu Chen yc410251
Miguel Angel Díaz Fernández md410505
Index

Section Page

Index 2

General overview over the country's history and historical events that 3
play a major role in its economic development.

What are the reasons or factors that have affected positively or 10

negatively to the economic development of China?

The main characteristics of business cultures and business manners 16

Strengths and weaknesses of European companies operating in China 22

Bibliography 26

2
General overview over the country's history and historical events that
play a major role in its economic development.

The current economic situation of China

When it came to the world's economy, China came out smelling like a rose. China's economy during
the past 30 years has changed from a centrally planned system to international trade to a more
market-oriented economy and is playing an important role in the global economy.

According to Louis Kuijs’s article, economic developments have largely been favorable. Growth
has been strong, with some softening recently. Real estate construction has been an important driver
of growth while consumption has held up well, reflecting a healthy labor market. Export volumes
have recovered rapidly since the trough in early 2009. Indeed, they have grown faster than world
imports, resulting in further market gains, reflecting the strong fundamental competitiveness of
China’s manufacturing industry.

Growth has become less reliant on stimulus. Government-led investment has slowed substantially
and overall investment has also slowed. More recently, leading indicators and industrial production
data suggest that activity is decelerating somewhat. Inflation has picked up because of food prices
and housing related costs, but core inflation remains low.

The prosperity of Chinese economic history : Tang Dynasty (618-907)

As one of the most important dynasties in Chinese history, Tang Dynasty was established by
Emperor Gaozu - Li Yuan, with Chang'an (Xian today) as the capital. China had ever been the
strongest country in the world, enjoying a history of 289 years. Tang's brilliant culture, politics and
economy had great influence on the neighbor countries Silla, Bohai and Japan at that time. As a
result, nowadays Chinese people are also named 'Tang people', and in the western countries, the
residential places that Chinese people live in are given the name 'Tang Ren Jie'.

The social economy in the earlier period of the Tang Dynasty underwent a rising process of
recovery, development and prosperity. In particular, under the Zhen Guan Reign and the heyday of
Kaiyuan, the national economy reached an unprecedented advanced level.

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Handicraft Industry:
Because of the great progress in agriculture, surplus labor appeared which spurred the handicraft
industry. In all areas of technique, category, or industrial scale, the development of the handicraft
industry in Tang Dynasty surpassed that of the previous dynasties. In particular textile technology
reached a fairly advanced level. The technique of silk making became refined and delicate. The
ceramic industry also entered a new phase. Besides celadon porcelain, white porcelain and Tri-
colored Glazed Pottery were also invented. Some other kinds of manufacturing, including paper
making, tea-leaf processing, metallurgical industry and shipbuilding also thrived in that period.

Commerce:
Both the rapid development of agriculture and the handicraft industry provide impetus for the
prosperity of domestic business and foreign trade. The main commodities included foodstuffs, salt,
spirits, tea, medicine, textiles, gold or silver ware and some daily items. A large number of
commercial cites sprang up, such as Lanzhou, Chengdu, Guilin, Hangzhou as well as the capital
Chang'an (currently Xian) and the auxiliary capital Luoyang. Special markets were set up in those
cities, in which a strict market order ran very well. Meanwhile, due to the opening up of the Silk
Road in the Han Dynasty (206 BC - 220 AD), vast quantities of foreign merchants and envoys came
to trade in China. This also promoted the development of the marine trade. At that time, Tang ships
could traverse the Indian Ocean and reach the Persian Gulf. Merchant ships traded frequently
between China and countries in Asia and Africa.

Financial reforms after the An Lushan rebellion

The An Lushan rebellion had a deep impact on the financial situation of the central government. On
the one side, much of the economy in northern China had suffered heavy losses, peasants were
uprooted, owned no land and could pay no taxes, on the other side, what was left from the economy
in the north was controlled by mighty military governors who collected taxes for themselves and
not for the imperial court in Chang'an. For a long time, seventy percent of the tax revenue of the
Tang court came from the state monopoly on the production and merchandise of salt. The other part
should be provided from a tax poll payed by a free peasant and his household irrespectible of the
size and the income of the household. Many peasants therefore tried to escape taxes by working as
non-tax liable tenant farmers for a large land owner. This situation made a deep going tax reform

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inevitable.

The shaming turning point of Chinese economy- Qing Dynasty

The Opium Wars and the Unequal Treaties

China as a country with a highly developed manufacturing industry had no need for imported cotton
fabrics or similar items produced in the West. The British merchants - especially the East India
Company - saw their chance in the import of opium. As the import of opium had been prohibited by
the Chinese government already during the 18th century, the only way to make profit by selling
Indian opium was the smuggling business. During the 1830’s, the British merchants systematically
built up their opium import system and thereby met the huge demand of Chinese opium consumers
and addicted people. Opium does not only mean a danger for health, but also has a deep impact on
public moral. Moreover, the export of tea, silk and chinaware was not able to cover the costs for
opium imports: the Chinese trade balance tended to become negative, the silver money left the
country and depreciated the copper coins - a fatal development for the lower classes of population
as well as for the rich merchants of the Yangtse area. The court in Beijing was divided between
ministers proposing a forced barter (opium against Chinese products); allowance of opium import
but imposing high taxes on the drug; or confrontation with the British merchants. A representative
of the last group was Lin Zexu who acted as commissioner in Guangzhou (Canton) in 1839, the
main import harbor of the south. He confiscated opium cases and tried to banish British merchants.
But under the protection of their government, the Britains under Captain Elliott attacked some small
harbors, occupied islands and threatened the port of Tianjin with canon boats: the begin of the so-
called Opium War. A British fleet, commanded by Henry Pottinger, proceeded until Nanjing, when
the Chinese government finally gave in and signed the Nanjing Treaty in 1842, the first of a long
line of shameful treaties for the Qing government, called "unequal treaties". For twenty centuries,
Chinese emperors had dealt in the same way with penetrating "barbarians": making concessions to
them by granting them material presents like Chinese silk or sending them princesses. In 1842,
nobody in China was aware that the danger coming from the West was much deeper than a few
nomad barbarians attacking the Chinese frontiers.
In the Nanjing Treaty, the Qing government granted the British free (opium) trade in the harbors of
Xiamen (Amoy), Shanghai, Ningbo, Fuzhou and Guangzhou (see map), abolishing the monopol of
the Chinese merchant guilds in these cities. British goods were imposed with a very low import tax,

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and British subjects were allowed to move freely inside China. As a trade base, the island of Hong
Kong (Xianggang) was handed over to Great Britain. The financial damages China had to pay for
the war counted 21 million silver dollars. Great Britain was officially recognized by the Qing
government as a foreign power with equal rights. In an additional treaty, the Humen Treaty, Great
Britain was allowed to establish concessional settlement territories where British subjects were
exempt of Chinese jurisdiction. But the most important item of this treaty was the Most Favorite
Clausula, allowing Great Britain to obtain every contractual concession any other country should
obtain. Following the British, France (Treaty of Whampoa or Huangpu 1844), the USA (Treaty of
Wangsha), and the minor European states forced treaties with the Chinese allowing them free trade
inside a handfull of harbor cities. France obtained the permission to dispatch missionaries to China.
Still unsatisfied with the Najing Treaty, the British merchants claimed residential rights in China.
When the Chinese police confiscated a Chinese ship under British flag named Arrow in 1856, and at
the same time a French missionary was killed, British and French saw their chance to revise the
Nanjing Treaty. Unifying their armies, British and French occupied Guangzhou and forced the Qing
government to sign the Tianjin Treaty in 1858 after their canon boats had bombarded the Dagu
Forts near Tianjin. But the French army invaded Beijing and burned down and plundered the Qing
emperors' summer residence in the Yuanmingyuan Garden; the court had fled to Jehol in
Manchuria. These military actions are called the Second Opium War. Signed in 1860, the Beijing
Treaty allowed British and French subjects free trade, travel and mission in all places of China,
basing on a couple of open harbors (see map). Damages of 16 million silver bars were added by the
cession of the Kowloon Peninsula opposite to Hong Kong to Great Britain. British and French were
subject only to their own jurisdiction, and the two countries were diplomatically recognized by the
Qing government and the first real foreign ministry. Until then, China had seen all other countries
as subject to the Qing empire. Additionally, many foreign goods were freed from import tax. The
maritime customs office was confiscated and run by the British official Robert Hart to ensure the
payment of damages China had to hand over to the Western Nations. China had lost her
sovereignity over the import taxes, a field that normally provided the state treasury with a large
income.
Meanwhile, Russia also claimed rights on Chinese territory. The treaties of Nerchinsk in 1689 and
Kyakhtain 1727 already had regulated frontier line and trade between Qing China and Russia. In
1858 Russia occupied the territory north of the River Amur and claimed this territory as Russian,
ensured in the Aigun Treaty.

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Impacts on economy

Corruption and favoritism at the end of the 18th century helped to create hopless situations for
peasants in many areas. The White Lotus Sect was revived and helped to launch peasant uprisings
in territories where the mismanagement of local magnates and magistrates had neglected the
maintenance of dikes and waterways and had lead to flood disasters. Other peasant uprisings
followed a secret society named Triad Sect. The suffering of peasantry in many areas was worsened
by the demographic increase of population during the 18th century. The economical and technical
standards of the 18th China were quite high, but they did not fit the needs and demands of an
increasing population. Qing China did not make use of paper money but instead relied on copper
and silver coins. When the import of silver decreased - or rather the export of silver increased - at
the begin of 19th century, the small copper coin ("cash") suffered depreciation: a fatal situation for
the lower classes of society. Corruption, favoritism, and nepotism within the Chinese officialdom
has two sources. The first can be seen in the exaggerated centralism of Qing administration.
Governmental posts in the territorial administration were occupied by officials that came not from
actual province, but the magistrates had to rely on the help of local secretaries and the local gentry
and therewith had personal relations to these people. The second reason for the spoliation and
nepotism mentality is the fact that - after passing the difficult state examinations and obtaining a
post as local governor - the newly posted official had to reward his sponsors and his family as long
as he was sitting on his post. Additionally, the daily flood of paperwork in a centralized bureaucracy
lead to severe cautiousness and inflexibility of the officialdom. Paralyzed by administratorial
instructions and controled by censorate inspectors, local officials were unable to cope with new
challenges in a changing environment. The state itself run into financial crisis after decades of
prosperity, and the requirements for financial stability within an unstable economy were to high at
the begin of 19th century. While the small states of Europe could develop an industrial and
capitalist economy, the agronomical background and the loss of monetary investment could not help
China in her backwardness that became so obvious when the aggressive European merchants tried
to enter the Chinese market.

Overview on modern economy of China (1949-2010)

After almost 30 years of civil war and war against the Japanesse aggression the Communist Party of
China founded the People's Republic on Oct 1, 1949.

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The foundation of a new state prepared the chance to alter traditional rules and structures, and to
wipe away the shame from China that had been imposed on her by the unequal treaties in the 19th
century. But the construction of a new China was less than a smooth transgression into a new age.
Questions about the implementation of socialist ideas and the fear of a domination by a Russian-
style socialist bureaucracy lead to the split within China's leadership after the Great Leap Forward
and thus directly lead into the turmoil of the Cultural Revolution that was only ended with Mao
Zedong's dead in 1976. A new leadership under Deng Xiaoping stressed the need of reform and
opening to ameliorate the life conditions of the Chinese population and to restrengthen China's
economy. But reform was not a political reform towards democracy as was demonstrated by the
Chinese leadership in 1989. Since, China has made real great leaps in the economical sphere and in
international politics again becoming one of the leading powers of the world. The first astronaut of
China, Yang Liwei, has proved that China - at least in certain fields - was on the way of becoming a
technological challenger for other nations.

The Great Leap Forward

Under the impression of the rapid development of industry in the Soviet Union and China, both
states announced to surpass the USA and Great Britain in production of steel. The Sputnik satellite
launch in 1957 caused Mao to say "The eastwind (communism) prevails over the westwind
(capitalism)". China should make a Great Leap Forward to leave out some stages in direction to
communism. People were organized in vast people's communes (renmin gongshe 人民公社) and

had to "walk on two legs": building up a heavy industry had the consequence that even peasants had
to produce steel in backyard furnaces. Neglecting to work on the fields, the farmers were not able to
fulfill the given targets of production. Millions of people starved to death.
The Great Leap with the Three Red banners to hold high: the Great Leap, the people's communes,
and the general line to the erection of socialism was ended abruptly, and Mao had to face harsh
criticism even from inside the politburo, for example by Chen Yun 陈云. He had to give up his post

as state president in favour of Liu Shaoqi, a realistic person that is often called "softliner" of the
party. But Mao's main critic during the Lushan conference in late 1958, defense minister Peng
Dehuai, was dismissed and should be one of the first victims of the Cultural Revolution. Mao
Zedong himself decided to step back into the second row and to lay the daily politics into the hands
of the pragmatist bureaucrats around Liu Shaoqi, Deng Xiaoping and Zhou Enlai.

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A new start: Reform and Opening

The crucial point in China's contemporary history was the 3rd plenary session of the 11th Central
Committee of the CPC in December 1978. During this session, the guiding principle for the next
period was formulated, with practical experience as guideline instead of theoretization. A socialist
modernization should be started, with the renunciation of quick economical results in quanta and an
adjustment of the imbalance between the major sectors of the economy, but with a focus on
agricultural growth in order to rise the poor living standard of China's population ("a good
communist must not necessarily be poor"). The Politbureau rehablitated intellectuals, scientists and
technologicians that during the Cultural Revolution have been called sideliners with the eight
classes of conterrevolutionaries, or "Stinking Number Nine", and that had been sent to the
countryside to fulfill bodywork and to obtain political reeducation.

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What are the reasons or factors that have affected positively or
negatively to the economic development of China?

Strengths

Political and social stability.

The stability of social and political environment of China and rapid economic growth the country is
one of the most important factors to consider. Because this means that eventually the economy will
suffer no changes. Which other countries can not be assured due to political instability, such as
Israel. And for that reason international companies try to avoid risk.

Open-door policy.
Since the open-door policy was introduced in the early 1980s, the Chinese economy gradually
opened to foreign trade and investment. This process encompassed allowing enterprises to
participate in foreign trade, replacing trade procurement targets by market based trade policy
instruments such as tariffs, quotas and duty exemption schemes, gradually reducing trade barriers,
and finally, increasingly using market mechanisms.
The great openness
– allowing imports of capital flows, technologies, and management competencies, along
with other major policy reforms
– greatly enhanced China’s market competition and efficiency.

High saving and investment rates

Consistent with its culture of strong propensity for saving, China’s domestic saving rate remains
high (around 35-45% from 1978-2003). Such a high rate of saving was able to withstand
remarkable institutional changes, and meet strong investment needs incurred from rapid economic
expansion. A marked increase in household savings offset the ending of artificially high state-
owned enterprise profits and consequently lowered savings in the combined accounts of the
government and SOEs. In the future, with the decrease of total fertility and an increase of per capita
income, the saving might continue to be strong.

Infraestructure and industry.

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At this time compared to many developing countries, China has a great quality infrastructure that
are at the same level as those of more advanced countries. And this must be added to the rapid
development of the country, and the high quality of its services.

High-quality, low-cost workers.

The relatively low cost of labor and the large base of skilled workers allow the outsourcing of many
services for international companies to China
− Proximity to Japan and South Korea may allow international expansion.
− The growing number of Chinese software companies.
Market share that reached the Chinese software companies in 2007 was 7.1% worldwide. This
means that their growth can be an international expansion and to provide other companies out to
international markets.

Weakness

Language and culture are two problems that prevent the full development and expansion of Chinese
companies
Although English is spoken, cultural differences are a problem that can cause inconsistencies in
communication between Chinese companies and European and American.

Failure to follow the laws of international trade.

Lack of regulatory oversight, are not effectively implemented laws and regulations, especially in
data protection and privacy, since she does not have formulated laws regarding these issues. The
intellectual property protection remains relatively weak, which is to reduce costs.

Weak financial system

A healthy financial system is the key to achieving higher productivity of investment and more
balanced growth in China. Though China has conducted major reforms in the banking sector in
recent years, some recent evidence shows that the financial sector is still not functioning efficiently.
One major weakness is that the financial market does not provide enough investment channels for
China’s huge savings, and capital has been persistently funneled to loss-making state-owned
enterprises, and the incremental capital output ratio is high. On the other hand, private firms with
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generally higher marginal productivity of capital have much difficulty getting access to external
credits. This reflects a lack of sound credit culture such as market-based lending and risk-based
pricing. Most state-owned lending institutions had limited incentives and ability to assess and
enforce rigorous credit standards while state backed borrowers were often able to avoid repaying
their debts. Limited financial outlets other than banks have contributed to burdensome debt loads of
businesses and make the payments system more vulnerable to credit risk than it would be in a more
diversified system.

Lack of a clear and efficient regulatory framework

In China, many government agencies are involved in the regulatory function, creating competition,
confusion and unnecessary complexity. The most obvious area of overlapping responsibilities is the
continued existence of both the Ministry of Information Industries (MII), China’s telecom regulator,
and the State Administration of Radio, Film and Television (SARFT), which regulates the cable TV
industry among other industries. Without regulatory convergence of the MII and SARFT, the entry
of cable TV operators into telecom remains clouded in uncertainty. In the online gaming industry,
many regulatory bodies claim control.

Limited application for e-commerce

Although China’s Internet users have surpassed 100 million, however, according to a survey by the
China Internet Network Information Center (CNNIC), in 2004, only about 7.3% of the internet
users saw online shopping as one of their major online activities. The major constraints are issues
with logistics (after-sale services), distribution, and payment system (lack of personal credit).

Opportunities

According to UNCTAD statistics, of the 1000 largest companies, 70% still have not outsourced
their business, indicating that the outsourcing industry, there is still a large market growth in the
future. In addition, many multinational companies in China, and large national companies have
been with complementary non-core business have been outsourced to local companies, creating a
wider market within the package. Outsourcing to service domestic demand and external demand
have expanded the possibilities of development outsourcing services.

Direct foreign investment is increasing every year.

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During the first half of 2007, the national service industry earned 13800000000 actual foreign
investment, an increase of 58.2% over 2005.
The United Nations response from 2002 to 2005 development of China's outsourcing services, a
survey shows that inflows of foreign direct investment projects in the 'Customer Support Center'.
According to Conill company the operational capacity of countries to attract offshore outsourcing a
comprehensive assessment of China ranks second only to India.

Threats

More intense international competition in outsourcing.

With the increasing of international competition in manufacturing upgrades, global markets become
saturated, many developing countries will undertake service outsourcing as a major strategy for the
country's economic rise and take a number of measures to the development of service outsourcing
industry, to create favorable conditions for, and actively seize the international outsourcing market.

Brain drain.
At present, China is closely related to outsourcing and professional services is still a huge gap
between supply and demand. Meanwhile, multinational corporations entering the Chinese market
for outsourcing services offering high salaries to attract highly qualified personnel. Causing a
weakening of the development of the country, due to the shortage of highly qualified personnel.

Service outsourcing market in Japan and South Korea limitations.

Japan and South Korea is currently China's service outsourcing market is the main international
markets. However, in comparison with the European and American markets, Japan and Korea
outsourcing market, there are many limitations. If Japanese companies are generally used to carry
directly to the domestic outsourcing companies contracted by these enterprises in the upper design
work, and then sub-contract to the underlying overseas to reduce costs. This will enable China's
service outsourcing industry, the most significant in the value chain, the bottom of a very low value.

Increasingly competitive and complicated global environment

With the knowledge revolution, the global competitiveness mainly hinges on a country’s ability to
create, disseminate and use of knowledge and technology. China is very successful in processing
technology, but lacks strong indigenous innovation capacity where even India appears stronger. In
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order to fundamentally enhance China’s global competitiveness, China needs major breakthroughs
in this area.
Meanwhile, as China rises and increasingly becomes an important global player, the existing world
economic and political structures are poised to change accordingly. This will inevitably bring more
challenges to China in the areas of trade, exchange rate, diplomacy, technology development, and
energy, etc.

Education inequality
In line with the income disparity, the education inequality is almost at the same magnitude. The
adult illiteracy rate ranges from below 10% for most of the East region to above 20% in many West
provinces. The level of education attained by the labor force also varies widely across regions. The
education spending per student is also very unequal from province to province. For example, the per
student spending in primary schools across provinces ranged from almost RMB 5,429 yuan in
Shanghai to just RMB 520 yuan in Henan Province in 2003. The rural-urban gap is even worse.
According to the fifth census, rural laborers in 2002 had 7.3 years of schooling on average, 2.9
years fewer than urban laborers. In the rural areas, only 8.5% were educated beyond high school, 35
percentage points lower than in the urban areas. Rural areas have also been slow to achieve the 9-
year compulsory education: by 2002, 15% of counties had failed to reach this national goal. This
affected 108 million people in poor and remote rural areas, roughly 9% of total population.

Imbalance between growth and the environment

China has made serious efforts to improve the environmental protection for at least a decade, with
some success – including air quality improvement is major cities and reforestation to prevent
flooding and desertification. But the environmental degradation is still a serious concern. The major
environmental issues include: water stress and pollution; air pollution and acid rain; congestion;
land degradation and desertification.
In China, almost 70% of its energy comes from coal, and much of it is burned for home heating and
small industrial boilers. This has caused continuously high sulphur content in air. Nitrogen dioxide
is another source of air pollution as the stock of private cars is increasing rapidly. Both levels of
sulfur dioxide and nitrogen dioxide in many Chinese cities show a downward trend between the
1980s and the 1990s, but since 2003, concentrations of both have increased. Pollution in the
expanding towns and townships is a major challenge because their environmental management is
not well monitored and their development plans contain only limited provisions to address it. Many

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Chinese cities still rank among the most polluted in the world.
Water pollution is also very serious. According to an OECD study, almost one-third of major water
basins are classified as highly polluted and 75% of the water flowing in urban areas is unsuitable for
drinking or fishing. In addition to the quality issue, the shortage of water has also become a
problem, particularly in North and East China, which account for one-third of national GDP, but has
only 7.7% of the national water resources. The situation is likely to deteriorate over the next decade,
especially in the rivers north of the Yangtze. In addition, there are also the problems of land
degradation and declining forestry cover, etc. To solve these problems, there is a need for both
technical progress and improvements in institutional, administrative and regulatory arrangements.

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The main characteristics of business cultures and business manners

There are three main philosophies that shape most Chinese in their life: Confucianism, Taoism and
Buddhism. Each philosophy help its believers deal with dilemmas in certain aspects. Confucianism
sets a framework for being an ideal man, preparing oneself to enter the world. While Taoism
focuses on how to get out of the world as to be invisible. Buddhism helps people to deal with
adversity personally. As business is concerned, Confucianism explains what Chinese want as well
as how Chinese act during a busi

Foundations of Confucianism

Three principles:
 The king is the master of the minister
 The husband is the master of the wife
 The father is the master of the son

Five norms:
goodness 仁, rightness义, ritual礼, wisdom智, credibility信

Goodness仁, literally, means “love of people”. The Chinese character 仁 consists of two

morphemes, one亻standing for “person”， and the other二 for two, hence” two persons”.

Goodness therefore includes everything that is good when people get along with each other and
includes such connotations as tolerance, forgiveness, deference, filial obedience( to parents),
faithfulness( to the master), wisdom, honesty, and so on. It is the core of the five norms of
Confucianism.

Rightness 义 means friendship and fraternity. Rightness overlaps with goodness, but fraternity is
above all other relationships. Confucius said that a gentleman takes as much trouble to discover
what is right as lesser men take to discover what will pay. An often used compliment when praising
a man who is willing to give up his own interests to help a friend is considered personal loyalty.
Friendship to some degree is a blind obligation. MENG ZI, another great teach after the example of
Confucius, said that the ruler of a country should not advocate profit seeking as his administrative
objective. Once he does so, “ the whole country will fight for profits thus causing instability in the
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society and consequently endangering the regime of the ruler. Why should the ruler mention profit
making? Goodness and rightness are sufficient.”

Ritual 礼 means ethical norms. In the Analects, Confucius said that one should regulate by ritual.

Govern the people by political force, keep order among them by chastisements, and they willnot do
wrong things, but they will lose all self-respect. Govern them by moral force, keep order among
them by ritual, and they will keep their self-respect and understand. He also said that he who rules
by moral force is like the pole star, which remains in its place while all the lesser stars do homage to
it. In the use of ritual, harmony is prized. A harmonious relationship is the most important element
of governance and therefore should be retained at any cost.

Wisdom 智 equals to knowledge and cleverness. When you have knowledge, you have wisdom.

Confucius said in the analects that the good are not worried, the wise are not confused, and the
brave are not afraid.

Credibility 信 involves what you say you will do. Undoubtedly, Confucianism is one of the most

important cultural heritages of the nation in that it played a key role in the formation of Chinese
culture for about 2000 years, up till the Qing Dynasty( 1644---1911). It has been referred to as one
of the three “religions” in China, but it was in fact a philosophy of administration and was used as
such from the Han Dynasty(206BC—220AD) up until the Qing Dynasty. Therefore, Confucianism
took on political functions aside from its ethical functions and was used to build the feudal
hierarchy. In a self-sufficient and paternal agricultural economy, Confucianism played its role of
keeping the social order. Used as a guide for personal cultivation and the coordination of
interpersonal relationships, Confucianism has overwhelmingly positive connotations. However, as
an administrative device, Confucianism had a vital limitation: its principle of governing by moral
force. This administrative philosophy still exerts influence over today’s China in its transition from
the planned economy to the market economy.

Confucianism in Business

People throughout the world know that China is a country that has been strongly influenced by
Confucianism. However, many of these same people believe that to speak of Chinese Confucianism

17
is to speak of the phenomenon in the past tense. They assume that because the philosophy was
condemned in China during the Cultural Revolution, it no longer receives attention. A related
assumption is that the influence of the West can be felt in every aspect of life; however the reality is
that the Western influence is reflected only in material and behaviors, which is merely skin-deep,
while Confucianism is found in people’s mentality and behaviors, which is bone-deep. A few
examples will suffice to illustrate the point.

In a research survey of young people in joint ventures in Shanghai, a young woman is quoted as
saying “my foreign colleagues never care about what others do but concentrate on their own work,
while Chinese staff will take into account many background factors and will look at an issue as a
result of many relationships. We like to find out the cause and effect and what place in a network a
certain issue is located. We spend a lot of time on others and on the community we belong to.
“Individualism in Chinese culture is still equal to egoism.

The leader at any level has to perform not only an administrative function, but he or she also plays a
moral role. “To set a model for the masses is something leaders often say and even those most
corrupted ones will not fail to say it, because the common people, when they are asked to choose,
would prefer to choose a leader who is morally “good” to a leader who is administratively efficient.
If a leader is both, they will refer to him as “parent leader” or “blue sky” --- a high official of
integrity, justice, wisdom, and so on. Then, they are willing to trust him in every sense.

Even today, people engaged in trade are sometimes referred to as “evil merchandisers”. When a
person buys something that is not worth its price or a fake, instead of asking what kind of rules
should be set up, he is likely to attribute it to the evil nature of businessman. When people is
successful in their business, they like to refer themselves as “ Confucian businessman”.

In many parts of the country, even in a big city like Shanghai, loans are sometimes made without
written receipts, because written confirmation is thought to suggest a “lack of friendship”. Being
called “businesslike” in such situation is not flattering. It is considered an abridgement of the
personal relationship not to lend money to a friend who asks to borrow it or to ask for it when it is
time to repay the loan. In such cases the lender runs the risk of “losing face” or “doing harm to the
friendship”.

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Business culture

 Business banquets
Chinese has a habit emphasizing feeling over reason. Since a banquet is a friendly and merry
occasion, westerners would be able to handle business affairs more easily there. If one wants to cut
the deal in China, he’d better solve it in banquets. The key of such banquets is to invite all the
concerning partners. Generally speaking, when business associates accept the invitation, it implies
that one has a good opportunity to cut the deal. During the cordial and friendly atmosphere of a
banquet, one may either formally or informally mention the problem or dilemma while the key
individuals are caught up in the spirit of the banquet. At this time, they will usually promise to help,
a promise that in many cases is as good as a legal contract. Many thorny problems are easily solved
in the banquet atmosphere.

Why so? It stems from the spirit of Chinese values. Many Chinese believe that, “ To eat one’s food,
your mouth will be soft.” In general, people do not rushly refuse an invitation to a banquet, because
it may mean that the inviter will lose face, and you may lose friends, too.

Giving an invitation to a banquet is a very delicate and skillful matter. Some people hide the real
purposes and may look for an ingenious excuse to put on a banquet, such as a birthday party.
During the banquet, they may reveal their real purpose, or they may wait until a third party friend
does this for them after the banquet.

The characteristics of banquets

 Special or famous restaurant
 “Complete” choice of dishes: A Chinese banquet emphasis on linking up the parts to form a
whole. For instance, there must be chicken, duck, fish, and pork or beef at a common banquet
and there must be delicacies from land and sea at a special banquet, the contents must also be
integrated and balanced. If a host serves an incomplete banquet to his or her guests, it could be
viewed as not very polite.
 Toasting: drink to be polite but not to get drunk

 Gifits
Chinese give or accept gifts for three reasons:
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 To express one’s respect and friendship
To reciprocate
To ask for a favor: when people do this, they should be careful in their selection of a gift,
because people are often hesitant to explain their purpose clearly and directly. Generally,
people try their best to make gifts for favors look very normal and natural, otherwise it may
make others feel uncomfortable or they may simply not help you.

Business negotiation
Chinese definition of victory in negotiation
Negotiation is a type of human association that includes two possible types: (1) Both sides have a
common interest in communicating in a friendly manner in order to support each other,(2) both
sides do not have common interests, and therefore argue, bargain, and compete with each other. No
matter which type of negotiation is used, in western society, the signing of a contract could be seen
as a victory. However, for the Chinese, in some cases, neither type of negotiation nor the signing of
a contract with legal effect are very acceptable. They might consider negotiations that try to
mutually bargain and seize benefits for one side to be cold and harmful to the feelings between the
two groups. In China, negotiations and contracts should affirm the associations between people by
confirming the strong human bond. Traditional Chinese culture advocates that benevolence should
be the loftiest principle of association among people based upon the Confucian idea of “kindness to
people”. Even though this cultural concept of association, particularly for negotiation, has had its
own alienations, it still traditionally influences Chinese people.

Share benefits
In many cases, Chinese do not think that maintaining one’s benefits is more important than
damaging another’s feelings. They do not believe that a successful negotiation depends on one
absolutely gaining and the other absolutely losing. On the contrary, they prefer that a successful
negotiation be decided considering the interests of both sides to achieve a win-win goal. Therefore,
a one sided negotiation in which the “winner takes all” is considered immoral by the Chinese.

Do not force the negotiations by using your powerful position.

Chinese pay great attention to human feelings. The Chinese particularly dislike people who use
their strengh to pressure others. They will not conduct business with who uses pressure in a

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negative way. These individuals will be discounted as friends with whom the Chinese are willing to
share common interests, and more likely they would consider these people to be outside their circles
of interest or even ae their enemies. Not surprisingly, negotiations with a friend would be very
different from negotiations with an enemy.

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Strengths and weaknesses of European companies operating in China

European firms operating in China have to confront to a totally different business culture and
negotiation behaviors that makes it really difficult for them. Even the market, that force foreign
companies to take a business associate for make products or sell them can create a complicate
situation making really difficult to them surviving in China.
But there are some opportunities for European firms too. All the differences between European
companies and the chinese ones can represent a way to take an advantage in some market sectors
that chinese firms don´t know how to exploit.
In this part we will analyze which advantages and disadvantages our firms can have when they
operate in China, as a seller or as a producer. After that we will conclude if the balance is in general
positive or negative for them and we will comment some differences between sector.

Strengths

When a company start to operate in another country there are always some strengths behind that.
All these strengths are valid in the case of China. They usually are:

Financial capacity.

Some firms that have a big amount of money to invest decide to internationalize because they can
afford projects that the native companies cannot. In the case of European firms operating in China
there is always an advantage to have a big financial capacity, but is not so big in the case you have a
good partner there because China is a country where is easy to get access to money.

Know how.

Some european firms have know how in lots of fields of knowledge can help a lot when some firms
try to introduce in the chinese market. They can use different ways to take a competitive advantage
against companies that don´t have that. This strength can be located in all the activities of the firm.
This isn´t typical strength of european firms, but can be in firms all around the world.

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In the concrete case of European companies there are different types of know how that can be
specially useful. European market is very developed in logistics for example. Our market has more
experience in logistics than the chinese one, because it growth decades or centuries ago and in all
these time the logistics were being improved in some aspects.
Another aspect is the technology. The most of the inventions are created in Europe and north
america. Our firms are usually the first ones who have access to new technologies for processes and
products.

Culture

Even if the firm is internationalizing on China, some parts of the productive process can be made in
another country. And because of this the European firms can have the advantage of being more
close to international markets and business styles.

Negotiation power against suppliers and costumers

Big international firms can have more power when they are negotiation with suppliers and
costumers. That is because of the relative size, that means that for big firms one supplier is easy to
change for other, meanwhile for a small producer is really difficult to change if a really big
costumer or supplier decide that the deal is not good.
In our case this means that the international european firms don´t depend a lot of the chinese
partners. They always have the possibility to produce or sell in Europe if other firms try to change
the contracts a lot. Translating to diary negotiations this force chinese firms to give them better
conditions and represent an advantage specially on the sector that have small difference between
return rates.

Incentives

There are European countries that gives incentives to the firms to operate in China, trying to make
their economies more competitive. This incentives can be less taxes, better conditions in the local
market or some quotas in their own market if they accomplish some conditions. Lots of that
practices are illegal but there are countries that continues making them, specially during the bad
economic periods if that practices generate employment.

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Weaknesses

We were discussing about the strengths of European firms operating in China. There are some
benefits that helps a lot the european firms and make them easier to operate in China as producers
or sellers. But on the other hand there are some disadvantages that European companies have to
deal with if they want to enter in the chinese market. These disadvantages are really important in
sectors where is necessary to negotiate with lots of companies or sectors where companies are close
to the final costumers or final retailers. That because they expect the firms behave in the normal
way of their country.

Law

This is the first disadvantage foreign firms have to deal with. Chinese law is sometimes different for
natives and foreigners and can force firms to have a chinese partner if they want to produce in
China, forbidding them to produce directly.
This is a big disadvantage against native companies who do not need to negotiate with anyone to
produce or expand their business. This lack of openness has been criticized for lots of governments
all around the world and for many multinational firms, but today still continue.

Know who

Firms who operate in China have to know the correct people and this is difficult for foreigners.
When a new firm enters in the chinese market know the laws is just not enough to operate there.
Chinese laws are quite flexible to make easy or hard depending on who you talk. For this reason is
very important to get information about who are the important characters in the sector you want
operate and negotiate with them.
For native firms this is the normal way to behave, but for foreigners can represent the difference
between success and failure.

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Guanxi

Guanxi, as we discussed before, is the name of the chinese business negotiation behavior, that
consists on give and receive favors to reinforce the relations with partner, costumers and suppliers.
This represent a disadvantage for european firms due to their lack of experience dealing with it.
When a firm enters in the country, they are out of this system, so their native competitors can ask
for favors they cannot. And it is difficult to enter in the “circle of favors” because is needed to know
who are the key persons, what they need or want and how to give them in a way they consider
good.

Intellectual and industrial property.

In China the copyright laws are not as respected as in the occidental countries. For their culture
copying is a tribute to the creator of the idea instead a theft. That makes really difficult to acquired a
competitive advantage and keep it for a long time. That makes it the counterpart of the advantage
“know how” because depending on the type of knowledge is really difficult to preserve the
competitive advantage.

External risks

A big change of exchange rate or something that makes more difficult communication can affect a
lot the foreign firms who are operating in China. That kind of external shocks can happens
everywhere and is always a disadvantage for foreign companies against the native ones.

Conclusions

There are lots of advantages and disadvantages for occidental firms when they start operating in
China. The advantages are more focused on internal capacities that big enterprises have and the
disadvantages are located on de difference between cultures and the generic risks the
internationalization have.
However, weighing strengths and weaknesses we can conclude that the firms have a positive
balance. This conclusion is just based on experience, because all of them know their good and bad
points and almost of them decide operate in China when they have the chance.
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The economic development of China <中国经济发展史>

http://www.hudong.com/

China profile
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Economic history of Qing Dynasty

http://www.hudong.com/

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ILAN ALON, 2003. Chinese Culture, Organizational Behavior, and International Business
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THOMAS MENKHOFF, 2002. Chinese Entrepreneurship and Asian Business Networks.

London:Routledge Curzon

The analects

ZHEN, D. WANG, S. 2007, London "China and the knowlede economy: challenges and
opportunities"

TUNG, R. 1982, USA "Chinese industrial society after Mao"

WELFORD, RICHARD AND PRESCOTT, KATE, 1994 “European business”. Pitman Publishing,
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