Benefits of doing business in China
Discuss about the Foreign Business Activities And Operations Of Phillips In Chinese Market.
The paper provides a brief outline about the foreign business activities and operations. It explains that how Phillips can enter in Chinese market to grow and expand the business. Philips is a Dutch technology organization which provides lighting products to the customers. It describes that how the firm uses fixed exchange rates regime in the market. Furthermore, here is the discussion about the costs, risks and benefits that are associated with business. A comparison and contrast Hofstede cultural dimensions between Netherlands and China has been explained in the paper. More detail of the task has been detailed below
Philips is a Dutch technology company with its headquarter is located in Amsterdam. The firm originates its operations into three main divisions such as Phillips consumer lifecycle, Philips lighting and Philips healthcare. The company is operating and managing factories in China also. The company attains various advantages while operating business activities and operations in such country (David, 2011). Some of the benefits that can be taken by the firm while doing in business China have been stated below.
- Every business plan focuses on profit margins within the organization. The company can get the chance to expand and explore the business activities in the China. Along with this, Chinese government focuses on the consumption and innovation that helps to beat the competitors in such market. In addition, the country uses innovative and advance technology to conduct the business activities (So & Walker, 2013).
- Along with this, China is the number 1 trading country and manufacturer by output. In addition, education is one of the significant factors behind the success of the country. In this way, Phillips can gain various benefits in the competitive market.
- In addition, the company can attract more and more consumers in the China. Phillips can invite more potential customers that would never have been able to visit the company operations and activities in the United States and some other countries.
- Moreover, the firm can find and identify a potential market size of the population of China. If the company produces innovative and attractive products, then it helps to provide growth opportunities to both existing and new customers in the country (Quanyu, Tong & Leonard, 2013).
- Salaries for management and technical personnel are significantly lower in this country and labor rates for hourly positions are generally negligible in the China. Additionally, the organization has an opportunity to avert material costs however it will depend on specific raw material needs and requirements.
- It shall be noted that the company can attain environmental advantages also while conducting business activities and operations in the China.
In this way, various benefits are taken by the company while initiating business operations in China. In today’s modern world, the country is growing and flourishing in the market. As a result, the company can stay in the competitive by maximizing the profitability and revenue in the China.
If a company conducts its business operation in foreign countries then huge investment is done by the company. In this process, various costs are incurred by the organization to attain long term goals and objectives in such country. As the same way, Philips bears enormous costs and expenses while initiating actions and activities in the China. The various types of expenses include market research cost, advertising cost, training and wages cost, and lawyer and accountant cost which could influence the progress of the organization in such country (Kawai & Wignaraja, 2011). Most of the costs and expenses are tax deductible up to $5,000 in the first year of starting business. The remaining costs are amortized over a period of 180 months. Capital costs in terms of property, vehicles, and inventory are also incurred by the firm while implementing new venture in the China. Apart from these costs, there are many costs the company needs to be aware while making business plan in China. It is seen that different types of businesses will have different costs whey are starting up. The company needs to think of all the different classes of expenses which incur in the workplace. The Philips needs to identify whether they are running costs of the operation or capital costs for purchasing assets. Fixed costs as well as variable costs also paid by the company before a starting a new business in China (Kaynak, Wong & Leung, 2013). The fixed costs include insurance fees, premises costs, professional fees, staffing and service, stock, sales, finance and marketing. On the other hand, packaging costs include the actual cost of the product, packaging expenses, shipping cost, direct wages, commissions and remuneration. The firm is responsible to pay all these costs while entering in the foreign market. If the company identifies these costs and expenses then Philips can grow its business activities in China also. Apart from this, a marketing plan will be made by the company to gain long term profit and revenue. Therefore, a huge investment is done by the company to make effective marketing plan within the organization.
Costs of doing business in China
On the other hand, if the firm initiates its business in Chinese market then it has to face various types of risks and challenges in new market that have been stated below.
- One of the significant that is faced by Philips is political challenge which could influence the targets of the company adversely. The country follows the communist party rule since past decades. The communist party uses absolute power over the regulations and financial and cultural institutions. The rules and legislation are not transparent in China. As a result, it could influence the business activities negatively. Along with this, building relationship is not important for the country due to the strict rules and regulations as it also affect the operations of Philips.
- The cultural challenges also faced by the company while initiating new business in China. The culture of Chinese is quite different from culture of the west. As a result culture aspects of the country are reflected in the trade world. Sometimes, it is difficult for the companies to understand the culture of foreign countries as it arise issues and conflict within the organization.
- Negotiating with people is one of the vital challenges in the China. The Chinese are very formal. Along with this, social status also plays a critical role when it addresses to the people. The people are very indirect in China when it comes to refusing a foreign deal, it is impossible to expect a straight no or yes answer from the Chinese as it also increases negotiating issues and challenges (Cavusgil, Ghauri & Akcal, 2012).
- Along with this, China is not familiar with key concepts of internal control over the financial reporting as it arises various barriers in the firm. Due to lack of training and development coaching, Philips is unable to recruit potential and capable employees in the country. Effective and unique supply chain is also missing in China due to a reliance on existing relationships. Furthermore, raw material issues have also surged over the past decades (Tate, Ellram, Schoenherr & Petersen, 2014).
There are enormous entry modes can be used by Philips to enter in the international market. The entry modes include exporting, joint venture, outsourcing, franchising, foreign direct investment, turn key projects, licensing and merger and acquisition. Joint venture is used by the company to enter in the Chinese market (Claeys & Hainz, 2014). Joint venture is a strategy initiated by the companies to enter a foreign market by joining hands and sharing ownership and management with other companies. It is used when two or more companies want to attain some common goals, objectives and explore the international operations. The common objectives include foreign direct entry, joint product development, reward sharing, confronting to government regulations and technology sharing. This strategy is useful to meet the scarcity of financial resources, managerial or physical resources (Chen & Messner, 2011). This strategy can be implemented by Philips to stay in the competitive market. Along with this, partners are able to learn from each other by using joint venture entry mode. In addition, optimum utilization of resources can be possible by initiating this entry mode within the organization. On the other hand, if the company adopts wholly owned subsidiary entry modes then various risks and challenges can be faced by the company in the foreign market. Setting up a wholly owned operations and activities in a foreign market renders less of the quick benefits than other market entry modes. Along with this, it also takes some time and effort to develop and build new market presence. Under wholly owned subsidiary mode, the firm needs to work under a parent company. In addition, the parent company supervises and monitors the activities and operations of subsidiary company. Therefore, it can influence the profitability and returns of the subsidiary firm whereas joint venture mode can provide enormous benefits to Philips in Chinese market. The joint venture mode also includes shared ownership and various macro environmental factors such as social, technological, economic, legal and political factors encourage and improve the structure of joint ventures. It also provides required capital that is needed while conducting business activities at international level. Along with this, the firm can gain various advantages with the help of innovative and latest technologies within the organization. Additionally, advanced and innovative technology is used by the company to share and reduce the risk and challenges in the international market. In this way, Phillips can analyze and evaluate the competitors in China as it also improves the image of the firm in the Chinese market. Apart from this, it helps in satisfying the governmental joint venture (Sun, Peng, Ren & Yan, 2012).
Risks and challenges of doing business in China
On the other hand, it is noted that wholly owned subsidiary is not fit for the company to enter in the Chinese market because a subsidiary is controlled and managed by a more powerful and bigger entity in the global market. In addition, wholly owned subsidiary is time taking and expensive process (López-Duarte & Vidal-Suárez, 2013). It is shall be noted that the subsidiary company is unable to find skilled and potential worker to perform tasks and duties in the international market. Sometimes, it is difficult for the parent company to handle and manage the operations and actions of subsidiary because it is costly process. Furthermore, the parent firm has to bear all the risks and issues of its subsidiaries. As a result, if affects the operation and profit of the subsidiary firm. In the contrast, joint venture helps to spread risks and challenges among the partners as it helps to avert and eliminate the barriers and hurdles of the international market. Moreover, Philips can easily stand out against the competitors in China. It is observed that joint venture helps to provide large funds to the company for investing in the other country. Various skills such as technology, human, technical, and marketing skills are developed by using joint venture entry mode. In this way, joint venture offers several advantages to the firm to reach its top level of the market (Holtbrügge & Baron, 2013).
Joint venture is an effective tool and mode to make feasible and possible the turn key projects in the market whereas flexibility risk is involved in wholly own subsidiary mode. Furthermore, Philips can share their costs and participate in the profits by using joint venture mode. By using this mode, Philips is able to maintain long lasting relationship with other companies The Company can also save money and costs by sharing marketing and advertising cost in the host country. Along with this, the firm can increase and improve the credibility and productivity in China by initiating the joint venture mode (Killing, 2013). This mode is only temporary between Philips and other country. In this way, the organization is able to cope up the rivalries in the Chinese market. Moreover, this mode also permits companies to enter in a new market very easily whereas this opportunity is not provided by the subsidiary. With the formation of the joint venture, Philips is able to expand and explore their product portfolio globally. In addition, critical intellectual property, resources and technology are often complex to build and develop in house for the firm (Wilson & Brennan, 2010). The businesses then enter into joint venture with businesses which posses these resources and technology in order to gain success and growth in the foreign market. These benefits cannot be provided by wholly owned subsidiary mode. One of the significant reasons to form a joint venture is reduced and avoided competition and price pressures. It helps in maintaining collaboration and cooperation with neighbor countries. Philips enjoys the economies of scale by using joint venture mode in China (Beamish, 2013). If talks about wholly owned subsidiary mode, it creates issues and barriers at the workplace. In addition, all the liabilities are beard by the parent company which is the major issues for the firm. Furthermore, acquisition is also much expensive in wholly owned subsidiary mode (Quanyu, Tong & Leonard, 2013). Now it is assumed that Philips can choose joint venture mode to stand out against the competitors and meet the long term mission and vision.
Modes of entry into China: Joint Venture vs Wholly Owned Subsidiary
Culture plays a significant role in each and every country to gain long term competitive advantages in the global market. Culture refers to a program of human minds which distinguishes two different human groups one from others (Ardichvili, Jondle & Kowske, 2010). Hofstede cultural dimension model is developed by Hostede to analyze and identify the culture of different countries (Lee, Trimi & Kim, 2013). The model encompasses six dimensions such as power distance, individualism, Masculinity/femininity, uncertainty avoidance and long term orientation. The compare and contrast between China and Netherlands in terms of Hofstede cultural dimensions model has been stated below.
Power distance (PDI): Power distance refers to the extent in which less powerful employee in the organization will expect and accept power in order to distribute other people. This dimension measures people’s attitudes and beliefs towards distribution of power. Let talks about the China, the country is ranked 80 on PDI dimension which is very high. It means there is a lot of power distance between employer and employee; however it is normal and accepted (Fang, Zhang, Bao, & Zhu, 2013). In the contrast, Netherlands rank 44 on PDI which shows that there is a good understanding between the employees and employers yet may be some issues and conflicts arise in some specific situations. Phillips needs to understand and evaluate the place in Chinese society before entering in the marketplace (Chhokar, Brodbeck & House, 2013).
Individualism/collectivism: Individualism refers to level of sovereignty in a organization or society, there are two types of individualism like high individualism and low individualism. High individualism indicates that people are highly involved in the organization work where as low involvement shows that people are not involved in the tasks and duties of the company. High individualism shows that employees are more respected and dedicated towards their roles and duties (Taras, Steel & Kirkman, 2012). If talk about two countries, China maintains rank 91 on IDV, that means people are high collectivistic in China. Collective relationship is important to Chinese people to attain desired goals and objectives (Rinne, Steel & Fairweather, 2012). The people of the country think about the welfare of whole society whereas individualism is highly existed in the Netherlands market. Furthermore, people are think about their own work in the workplace. They generally take care of themselves and highly close with their family members (Ferraro & Briody, 2013).
Masculinity/femininity: Hofstede said that men’s ambitions and objectives are different from female ambitions and objectives. These can be differentiated as feminine and masculine as well. In the femininity, people work together to accomplish common goals and objectives. In the contrast, China rank 66 for this dimension, that means they are very driven by the achievements, competition and successful. The Chinese people leave their families to go work at factories and companies for 11 months out of year. This will help the employees to achieve promotions and transfers in the organization. In addition, they get high salaries and wages. Along with this, masculinity is high in China that means there is discrimination between male and female at the workplace. The Chinese people do best in order to accomplish the goals and objectives whereas Netherlands has the lowest rank in this dimension. Netherland come on14th rank under this dimension. It means there is very low level of discrimination between the female and male workers as they are treated equal at the workplace. Low masculinity shows that people are opened in the society (García-Sánchez, IRodríguez-Ariza & Frías-Aceituno, 2013).
Comparison and contrast of Hofstede cultural dimensions between Netherlands and China
Uncertainty avoidance: This dimension refers to the level of uncertainty among the employees. There are two types of uncertainties such as low uncertainty and high uncertainty. High uncertainty indicates that people are avoided uncertain situations whereas low uncertainty shows that people feel very less threatened by the unknown situations. China ranks 40 in this dimension that means people accept ambiguous and uncertain situations. The people do not like taking risks and challenges at the workplace whereas Netherlands ranked is 53 in this dimension. It means people face challenges and risks to avoid and reduce unknown situation.
Long term orientation: It is an effective hofstede cross cultural dimension model which was developed in 1990. It refers to long term as well as short term values, ritual and standards. Long term orientation is a time consuming process because time is required to build and develop trust and loyalty among the employees. The rank of China is high in this dimension. China has ranked 118 on LTO that means focus and analyze the urgency and persistence and the employees are dedicated towards their long term goals and objectives. They focus and measure the long term outcomes versus short term goals. It shall be noted that China is a strong and unique long term oriented society. On the other hand, Netherlands have ranked 44 in term of long term orientation. It indicates that the country have great level of stability, social obligation, tradition and reputations (Zhang, van Doorn & Leeflang, 2014).
Indulgence: Lastly indulgence dimension, this dimension defines as a extent to which people try to control and manage their desires and needs. Netherlands have ranked 68 in indulgence. The employee’s posses favorable and positive attitudes in order to enjoy life. They can easily control their feelings and desires. On the other hand, Chinese in the societies are classified by a low score in indulgence because they are unable to control their impulses and desires (Beugelsdijk, Maseland & Hoorn, 2015).
In this way, it can be said that culture differences are highly influences the business practices of Philips Company in China. The Hofstede cultural dimension model plays an empirical role to study and measure the culture of foreign country. This model shows the culture differences among the different countries. It shall be noted that Philips should focus on culture and environment of the China to stand out against the competitors across the world.
A fixed exchange rate is also known as a pegged exchange rate; it is a type of exchange rate system where a currency’s value is set against the value of another single currency. The fixed exchange system controls the behavior of a currency such as limiting the rates of inflation. On the other hand, a floating rate exchange rate is a regime where the exchange price is fixed by the forex market based on demand and supply compared with other nations where as fixed exchange rate is determined by the government (Klein & Shambaugh, 2012). In floating exchange rate, prices are usually fluctuated in terms of foreign exchange market mechanisms. A currency that uses a floating exchange rate is called floating currency. In today’s modern world, most of the currencies are floating in the world (Persson & Tabellini, 2012). The merits of fixed exchange rate and floating exchange rate regimes have been stated below.
Avoid currency fluctuations: If the value of the currency is fluctuated, mainly it will arise the issue and problem for the company to engage in trade and business. For example, if Philips is exporting a rapid appreciation in real would make its exports activities hostile and they might go out of trade and business. On the other hand, it the company is importing the raw materials, a reduction would maximize the costs of imports and it will reduce profitability and revenue. In this way, if the company adopts fixed exchange rates then it can take several benefits in the global market (Nguyen, Ali & Angert, 2016).
Stability encourages investment: The fixed exchange rates help to increase and encourage the investment in China. The uncertainty of exchange rates can decrease the incentives and benefits for the company to invest in export capacity. In this way, the fixed exchange rate provides wider certainty in the marketplace.
Keep inflation low: The fixed exchange rates regime help to keep inflation low in the market. The government who permits their exchange rate to reduce may become the cause of inflation. Reduction of a currency may cause inflation because AD maximizes import prices. In this way, the fixed exchange rate reduces inflation in the foreign market.
Currency stability: Currency stability is possible through fixed exchange rate regime. By using fixed exchange rate, the investors are able to know the worth of currency. It makes country businesses and trade attractive and unique to foreign direct investors. They do not need to protect themselves from wild swings in the currency value. In this way, they are able to hedge their currency risk (Fagan & McNelis, 2014).
Automatic stabilization: Any disequilibrium in the balance of payment system will be automatically rectified by a change in the exchange rate. For example, if a nation is suffering from a shortage in the balance of payment system then other thing is equivalent and the country currency is also depreciated. It will help to make the exports cheaper in the country and increases the demand of the products. On the other hand, it makes imports expensive and decreases in the demand. In this way, floating exchange rate helps to stable the balance of payment system (Tsangarides, 2012).
No need for elaborate capital flow restrictions: In a floating exchange rate regime, the external fundamentals of the country may influence the exchange rate in the international market as it also affects the portfolio flows between the countries. Hence, the floating exchange rate regime enhances the market efficiency (Rajan, 2012).
No need for frequent central bank intervention: Under the fixed exchange rate, central banks interfere in the foreign exchange markets to protect the gold parity but it is not in floating exchange rate regime. Under floating exchange rate, the central banks are not interfered in the foreign exchange markets. Therefore, the company can gain enormous benefits in the China.
Management: Under floating exchange rate, the government is free to manipulate the external value of their money. Along with this, the country averts and avoids inflation in floating exchange rate regime.
No need for international management for exchange rates: The floating exchange rates are not required an international manager like the international monetary fund to look after the current account imbalances.
Absence of crisis: The emergency and crisis are not presented in the floating exchange rates regime. It will to gain rivalries benefits in the foreign market.
Freeing internal policy: The floating exchange rates regime permit a government to pursue internal policy goals and objectives such as full employment growth in the lack of demand pull inflation without external constraints.
Lower reserves: The reserves are lower in floating exchange rates rather than fixed exchange rate. These reserves can be used to import capital goods and other items in order to encourage rapid economic growth in the foreign market (Cleaver, 2013).
In this way, there are various advantages of fixed exchange and floating exchange rates regime. Philips can choose fixed exchange rates regime in China to conduct business activities smoothly because it helps to set the currency rates in the foreign market. Inflation can be reduced in Chinese market by using fixed exchange rates regime. In this way, the firm can be benefited by using fixed exchange rate regime. Moreover, Philips can set the appropriate prices of the products in this market to gain long term benefits. Setting up the suitable prices lead to cope up with rivalries in the international market. This system also helps to reduce unemployment rate in host country. As a result, the organization appoints skilled and capable workers for performing tasks and duties effectively and smoothly. Under floating exchange rates regime, the firm is unable to get these benefits. It is assumed that fixed exchange rate regime is better than floating exchange rate regime. By using fixed exchange rate regime, Philips has been able to carry its business actions and operations in Chinese market.
Conclusion
On the above mentioned study, it can be concluded that Phillips is a Dutch consumer electronics company which is operating and managing business in China. The firm can take enormous risks by using unique and effective strategies in the country. Along with this, various risks, costs and benefits are associated with foreign business. The company uses joint venture mode to enter in the Chinese market. Hofstede cross cultural dimension model is used by the firm know and understand the culture of China. Additionally, fixed exchange rates regime is chosen by the company to explore and flourish business in such country.
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