Business Environment in China
The business has to assess whether the company has ability to incorporate most of the business needs and it should also be considered that whether the culture of the company can be integrated with the culture of that country.So the business operations will be different in different ways which have been discussed below: Import/export restrictions: There are certain types of goods and services which may be prohibited in the country where the business has plan to expand.
For example, in Islamic countries like Dubai, Saudi Arabia etc, it is prohibited to expert or import alcoholic products except in some situations.
Certain types of quality measurement might be imposed on the companies in order to import goods in the country. Another aspect of restrictions regarding export are the restrictions regarding the quantity which is being exported by the company. Governments can restrict the quantity of any specific product or service to be exported in order to avoid shortage in home country. China has imposed custom levy on the import as well as export of the goods. In addition to this levy, china has fixed a quote for imports of different types of products in the country.
These restrictions on imports allow the home countries to produce more for the residents of China and less amount will be spend on imports and hence improve trade surplus for China which will help China to increase foreign reserves and hence make the economy of China more strong. Recently, China has imposed different types of restrictions on the export of 17 metallic elements which are important for different types of manufacturing good which also includes inputs for automobiles as well as wind turbine. It has made a big issue in the world.
Other export restrictions include export duties which comprises of three types; regular, temporary and special, export quota for certain types of goods including mass consumption goods. Export license is required to be the exporter (Ambler, T. , Witzel, M. & Xi, C. , (2008). So if MNE has planned to come into the China for long-term investment, cost-benefit analysis should be carried out. However on the other hand, china support different types of exports and give reliefs for home productions which makes the business in china more attractive.
Labor relations: It can be described as the relations between employers and employees, which are either unionized or non-unionized. Under the umbrella of labor relations, employees protect their labor right. Different countries have given authority to employees for their rights to different extents and as a result in some countries, labor has more power. So it should be considered while moving to another country that what are the conditions of labor relations in that country and hence how much the employees are powerful and how they can exert their power.
It will help the companies to carry out stakeholder analysis as well as stakeholder mapping and hence can improve working conditions as well as can improve business operations. China has implemented labor relations law in 2008 (China Enacts Labor Relations Law, Effective in 2008, 2007). It has given more power to employees within the country. It has been made harder to lay off employees now. For the company like ACME or other MNE, it is very important to be noted that during last year, there was a strike by employees within factories in order to increase their wages.
It was said by the employees at that time that companies are making huge profits and they are the people who are working behind the success of companies so their share must be increased and aligned with the profits of the company. So companies should understand the risk that low production costs, which are due to low wages, will no longer be attractive in future. Companies should make strategy to deal with the employees in a way which provides them job security, human rights protection, motivation along with the level of work required by the company.
China’s manufacturing market is very feasible for labor intensive industries at the moment. Good relations between employers and employees can be made by providing good working conditions whether they will feel satisfied with their work. Supplier financing: It is the finance management in the situation where the products are being exported. All the credit terms are included in the contract between importer and exporter and credit agencies play their role in the process and reasonably insure that the contract terms will be fulfilled by importer and exporter will be able to receive payments.
At the same time it also ensures that importer will not be liable, to the agreed extent, to pay the risks which can be the political risk or economic risks. Companies while trying to operate in other countries must think how much it is sure that they will be able to meet the contract terms and if own company or other company will not honor the contract then what will be role of supplier financing in it how the laws and regulations of countries will support to force the either company to honor the contract. Tax rules: Tax rules and policies play an important role in order to make the strategy for the business.
Countries might have tax treaties with each other as a result company can have the benefit from it. Tax rules applied to foreign firms are sometimes stricter than for their home firm. Such type of tax rules decides that how the finance will be arranged and how the income distribution will be managed in order to increase the business for the company.Policy for deferred tax and tax policy for the export of products from china should also be considered. Many countries have higher tax rates which may also impact on the financial statements of the business.
Tax treaties play an important role in the implications of taxation policies. If home country and the country where company wants to invest have tax treaties then it would be beneficial for the company as it will not have to face double taxation. China has incentivized companies by in regards of taxation. Tax rules have to be followed but they are not very strict. There are many companies which are enjoys tax rates as low as 15%. Many other companies have also lower tax rates by increasing the exports from China (CCH Tax Editor, 2008).
Overall, China is an attractive market in regards of the incentivized tax rules. And hence it is feasible to invest in China. Depreciation Schedule: Depreciation has its impact on the financial statements of the business especially when the companies have high value for their fixed assets. Some countries allow capital allowance on depreciation and hence which becomes the source of tax savings. Straight line method and reducing balance methods etc are permitted methods in IFRS and IAS. China has flexibility in choosing the method of depreciation.
However whichever method company has chosen, it will not be able to change the method in future. Depreciation will become the source of tax savings so company can choose any method which will provide more tax savings to the business. However it should be noted that companies are required to assess the suitability of depreciation method before selecting it. At the same time, companies are also required to check if depreciation needs to be revalued. All the information, regarding revalued depreciation amount and if new asset has been purchased, should be submitted to tax authorities.
Minimum depreciation period in China is 20 years for land and buildings and for other types of fixed assets; it is 10 years (Yan, X. & Pitt, D. , 2002). Companies have to think the time period for which the company is going to work in China. Currency properties and restrictions: It is the control over the inflow and outflow of cash by imposing different rules which are set in monetary policy of the country. It is also the control of fluctuations in currency rates within country using different ways like interest rates and money printing etc.
These restrictions might impact on the business as they will not allow the company to export money from their country above some predefined level. It might affect the cashflow statement of parent company which is basically a foreign company. Currency properties restrictions might restrict the company to own properties in their country where the company is going to invest. Such types of consequences increases the risk of business as for a huge size factory, it might be required for the business to have its own premises as moving from one land to another land even within the same country is not an easy task (Riedel, J. , Jin, J. Gao, J. , 2007).
China’s policy to keep its currency undervalue is the point of concern for most the countries in the world. China keeps the currency undervalued in order to support exports. It helps exporters to export for more Yuan for the export of one dollar. On the other hand, it discourages imports in China. So companies have to consider this type of currency control and should make policy regarding the restrictions by china on currency. Sources of long-term and Short-term debt: Companies are required to arrange finance for the expansion of business and to run the activities of the business smoothly in the long run.
This finance can either be arranged either by raising equity of the company or it can also be arranged by debt as sometimes equity financing sometimes consume more time and shareholders’ WACC for the company is relatively high as compared to debt in most of the cases. Short term or long term debt includes loan from commercial banks or financial institutions and it will be measured that what is the interest rate for that short term finance and whether it is feasible for the company to arrange finance in foreign country or not. China is an attractive market because of easy sources of arranging debts.
However china is going to make more strict changes in its short term debt policy. Treasury bills have been proved to be one of the most effective short-term debt tools in china. China has been proved to one of the most efficient market for long term debt especially in aisa. It is relatively easy to obtain long term debt at a competitive rate. Government of China is still working for more efficiency in long term debt market. Bonds are one of the most powerful long term debt tools for the companies working in China. Ethics: There must be integrity in the information provided to CEO.
I will include the information about condition of human rights, labor welfare as well as all other information which belongs to the business. It is ethically necessary to provide the information because it will also help to protect the employees when company will start operating in China as company will already knew that what are the conditions are there and how these conditions can be improved (Norton, A. & Hughes J. , 2009). Although it might have a bad impact on CEO but for the purpose of integrity as well as honesty, I will include all the information. However I will also include the outline solutions to the problems.