8 Forces Framework: Investing in China

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Table of Contents

Introduction
Eight Forces Framework
Conclusion
References

Introduction

The eight forces framework is an analysis tool that enables firms to evaluate the effect of the macro-environmental factors of the economy on their performance. It is thus used by entrepreneurs to analyze the suitability of the economies they intend to invest in.

This paper will focus on the application of this framework in the context of a firm that intends to invest in China. Thus the effects of the external factors associated with China will be illuminated.

Eight Forces Framework

Figure 1 illustrates the various components of the framework. These components denote the external factors that influence the performance of a business in a give economy. The interdependence among the factors or components of the framework illustrates their relationships. For example, political factors influence the development of the legal system. Their influence in a business setting can be explained as follows.

Socio-cultural

This relates to the norms, values and perspectives of the citizens and can be explained as follows. The dominant religious groups in China include Shensi-Taoism and Buddhism. However, majority of Chinese are not religious since over 60% of the population does not identify with any religion. Being a socialist country, collectivism is highly emphasized.

The achievement of a group is considered to be more valuable than the contribution of each member. In the context of a business, this is an advantage since it encourages teamwork. The citizens are beginning to embrace individualism due to the influence of globalization and the one-child-policy. Globalization and the introduction of private property is encouraging individualism in the country.

The Chinese are associated with a long-term time orientation. This means that they “value slow growth through perseverance”. They are also associated with formal work practices that are based on contracts. Long-term work relationships between employees and employers are highly valued in China.

The Chinese have a positive attitude towards work. The rapid growth of their economy is largely attributed to their ‘work to death’ attitude. This means that they are dedicated to work. Besides, the work ethics in the country promotes labor productivity and increased output.

Legal

Legal factors refer to the rules and regulations that guide the operation of the country and its economic activities. The Chinese legal framework is based on the civil system (codified legal system). This is reflected in six codes which include the “constitution, civil code, civil procedure, criminal code, code of criminal procedure and the administrative law”.

The common law is not very popular and is mainly used to settle disputes among individuals. According to the country’s labor laws, employments must be based on contracts. The contracts specify the rights and obligations of the employers and the employees. The contracts are informed by the labor laws that were introduced in 1994. The labor market is characterized by a large number of labor unions.

The unions have as high as 137 million members but are less effective in representing the employees. The government has responded to this situation be introducing “collective contracts and tripartite institutions to mediate in labor disputes”. In 2007, anti-monopoly laws were enacted to achieve three goals namely, promoting fair competition, protecting consumers and facilitating socialist market’s growth.

The laws are enforced by the Anti-monopoly Commission. The government is keen in fighting corruption through appropriate legislation that emphasizes tough penalties against the perpetrators of the offence.

Even though China’s constitution recognizes the international laws, the country has always been accused of failing to adhere to such laws. It has particularly failed to adhere to the World Trade Organization’s rules on several occasions.

Political

China is a communist state with its capital in Beijing and headed by President HU Jintao. The country is organized into “twenty three provinces, four municipalities and five regions that are autonomous”. The branches of the government include the “judiciary, the executive, the legislative and the political parties”.

It is one of the most stable governments in the world. Its stability is attributed to the Confucian philosophy that promotes peace and self control. Besides, the leaders are focused on maintaining stability in order to achieve high economic growth. The stability has enabled it to achieve rapid growth in the last three decades.

The national groupings in the country include 55 small ethnic groups and the dominant Han community. Other groups include the foreign that have been granted citizenship through legal procedures. The economic interventions associated with China’s government include the following.

First, the government regulates most industries in order to ensure stability. Second, subsidies are given to firms to boost their competitiveness. Finally, the government pursues policies that aim at protecting local industries from external competition. These strategies benefit local firms at the expense of foreign firms since they discourage fair competition at the international level.

Demographics

China is associated with the highest population in the world (Kaneda, 2011). This is beneficial due to the fact that it provides a large market for various goods and services. The total population is estimated at 1.3 billion people as at December 2009. Its composition is as follows. 19.8 percent of the population consists of children between the age of zero and fourteen years.

The citizens aged between fifteen and sixty four years account for 72.1 percent of the population. The males account for 51.53 percent of the population while the females account for 48.47% of the population. There is a fair distribution of the population between the urban and rural areas. 42.3% of the population lives in the urban areas while the remaining 57.7% resides in the rural areas.

China’s population is highly educated. Over 90% of the population is able to read and write. This promotes the development of human capital in the country. Internal migration in the country mainly involves movements between rural and urban areas.

There are also significant migrations to other countries. Currently, the country’s net migration rate is “-0.39 migrants per 1000 individuals”. The migrations are mainly attributed to push-pool conditions such as employment opportunities.

Physical and Natural

The countries ecology can be described as follows. The land measures “approximately 3.7 square miles”. The terrain is diverse and includes plains, deltas and mountains. It is characterized by numerous ecosystems which are habitats of several species of plants and animals. Even though the government regulates pollution, the environment remains highly polluted by domestic and industrial wastes.

The man-made risks or disasters in the country include pollution and destruction of vegetation especially forests. This has led to droughts and famine in the past. China has experienced some of the most dangerous natural disasters. Such disasters include floods and earthquakes. The disasters occur regularly and affect over 200 million citizens every year in terms of destruction of property and loss of lives.

“The National Disaster Reduction Center” is the agency that is responsible for risk management in China. It provides information that helps in preventing and coping with the disasters. This is achieved by studying the trends of the disasters using modern technology.

The private sector also helps in risk management through research and financial aid. Terrorism cases are minimal in China. The few cases that exist are attributed to Muslim extremist in Xinjiang and a section of Tibetan clergy. In order to prevent terrorism in the country, the government has identified and banned the responsible organizations.

Competition

The government has taken a number of measures to reform the state-owned firms and this can be explained as follows. Most of the state-owned firms have been listed both locally and in foreign markets. This helps in modernizing them and improving their efficiency.

The managements of such firms have been given the authority to make decisions in regard to their operations. For example, they can hire the junior and middle level officers. Profit remittance has been substituted by profit taxes. Thus the firms are free to use their after tax profits for further development and investment.

The main barriers to trade and investment in the country include the following. First, the country’s procurement system is incomplete and is characterized by corruption. Second, companies are required to adhere to several compliance regulations. Besides, certification for compliance is cumbersome since it is done by third party agencies.

Third, the government’s trade policies aim at protecting local firms through import as well as export limits. This restricts sales and reduces the competitiveness of foreign firms. Finally, Investment in some sectors of the economy such as the energy industry is not open to foreign firms.

Besides, the government imposes “equity caps and limits the number of establishments” that can be owned by a firm. These factors undermine the efforts to facilitate capital flows. They also discourage international trade between China and its foreign partners.

Technology

The high production capacity of China is attributed to its massive investments in research and development in all sectors of the economy. In 2010, China was the third “largest spender in research and development” (Naik, 2011) at the international level. It intends to invest $153.7 billion in various research activities in the year 2011(Naik, 2011).

Thus it will be elevated to position two in regard to research and development expenditure. The country invests at least “1.4% of its GDP in research and development” (Naik, 2011) and this has led to innovation and cost reduction. The country is also focusing on the use of modern information technology.

This involves investing in both equipment and employee development in order to promote the use of modern technology. This has led to the development of sophisticated, efficient and cost effective production technologies.

In order to improve its productivity, the country relies on the use of modern communication technology such as the internet. It has invested in communication infrastructure such as fiber optic cables in order to reduce the cost of communication and data transmission. The government has also used its abundant labor and natural resources to invest in modern transportation infrastructure.

Thus the country has well maintained roads, railways networks as well as air and sea ports. These infrastructures are evenly distributed in the country. Due to the open-policy introduced by the government, the country has a high technology adoption rate. It adopts foreign technology by encouraging international companies to establish their research and development stations in the country.

The technology absorption capacity is high due to two reasons. First, teamwork and learning is high emphasized in the country and this promotes sharing of knowledge. Second, both public and private sectors invest in employee training and this enables them to use modern technology.

Economic and Financial

China is associated with a mixed economy with both socialist and capitalist elements. While the government recognizes and protects private property, it also plays an important role in the economic system. The government not only regulates economic activities but also own businesses either directly or indirectly. China’s economy is the second largest in the world.

Its economy experiences a rapid growth that has been maintained at 10% over the last three decades. The “country’s GDP in 2009 was $ 7,518 per capita”. Currently, China’s interest rate is 6.06%. The interest rate has been maintained at an average rate of 6.49% since 1996. The country’s inflation at the end of the third quarter of 2010 was 4.9%. The country’s inflation has been maintained at an average rate of 4.25% since 1994.

Renminbi is the country’s legal tender. China uses a ‘floating exchange rate system”. Currently, one US dollar is equivalent to 6.56 CNY. The country’s banking system is organized as follows. “The People’s Bank of China” acts as the country’s central bank.

It has the autonomy to formulate and execute monetary polices. Regulation of the banking industry is done by the “China Banking Regulating Committee”. The other institutions include commercial banks and deposit taking financial organizations.

Conclusion

The above analysis indicates that the eight forces framework provides the basis for analyzing the significance of the external factors in a business setting. China is a communist state with a politically stable government. The socio-cultural factors promote hard work among the citizens. The country is also associated with a rapidly growing economy. Its growth rate is attributed to a large domestic market and investment in research and development.

References

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