Hedging political risk in China

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Table of Contents

Introduction
Literature review
Case Analysis and Discussion
Strategic Recommendations
References List

Introduction

Variations in communication styles and cultural differences have always hindered successful operations of businesses at international markets. As such, it becomes vital for multinational corporations to consider these two major aspects for better management of international business. Furthermore, the assessment of economic and political risks in the host country is also vital.

Culture has a great influence on consumer behaviour and revenues generated. Therefore, ignoring the influence culture has on business operations at international level, may lead to business implications. This is because past research indicates that ignoring the influence of culture especially when organisations centralise their marketing and business operations has always resulted to losses (de Mooij & Hofstede 2002).

To better understand business operations levels, Hofstede’s model of national culture is adopted to explore the main differences existing in different countries as a result of cultural differences.

The current report explores a UK based company that has a large chain of fish and chips restaurants and takeaways mainly in the UK but with presence in other countries as well. The company is looking to expand into China but is concerned about minimising its exposure to risks.

Therefore, the report to the board of directors provides evidence based analysis with recommendations on what strategies should be adopted. To realise this objective, the report revolves around political and economic risk as well as the implications for operating a business in a very different culture other than that of UK.

Literature review

The Hofstede model, a brain child of Geert Hofstede, came into inception in the 1980s. The model was developed with the objectives of evaluating and differentiating cultures as it pertains to organisational cultures. Research data was obtained from more than 116,000 surveys conducted in 40 nations with more than 88,000 employees to develop the model, (de Mooij & Hofstede, 2002).

The participants used were all employees of IBM, a multinational corporation (de Mooij & Hofstede, 2002). Hofstede study identified five dimensions which could be used to differentiate cultures and they are power distance, uncertainty avoidance, individualism vs. collectivism, masculinity-femininity and long-term vs. short-term orientation (Paul, 2011). Hofstede in his study conducted in 40 countries, concluded that these dimensions act as indicators where the countries could be placed based on cultural dimensions.

The primary focus of the power distance dimension’ is on the level to which society is able to reinforce interpersonal relationships, individual or collective achievement (Paul, 2011). The second dimension which is uncertainty avoidance according to Hofstede (2011) is “related to the level of stress in a society in the face of an unknown future” (p.8).

The third dimension which is individualism vs. collectivism focuses on individuals’ integration into primary societal groups found in the society (de Mooij & Hofstede, 2010). The fourth dimension is masculinity-femininity and is concerned with the division of emotional roles as played by women and men in the society (Hofstede, 2011). The emotional roles are either measured by the level of power, control, or achievement of different genders in the society.

Lastly, long-term vs. short-term orientation explains the level to which the society portrays “a pragmatic future oriented perspective rather than a conventional historic or short term point of view” (Paul 2009, 156). This is to say that the dimension is concerned with future oriented thinking and present and past oriented values such as hard work and social obligations respectively.

According to Fang (2010), Hofstede noted that cultural difference determine management skills adopted by leaders. In addition, different societies possess different histories and values, and one national culture cannot be duplicated in another (Fang 2010). Moreover, cultural collisions, cultural clashes, and cultural differences are viewed as a major problem.

Therefore, it is important for organisations investing in Asian markets especially China to embrace the host country culture and avoid problems associated with cultural collision or cultural shock. The way businesses are managed in China is totally different from how they are managed in UK and other parts of the world.

Hofstede major assumption is that management problems of the last century remain the same in the 21^st century but Ying Yang is keen to observe that were are no longer living as isolated and bipolarised creatures but were are bicultural identity (Fang 2010). This means that new technology and globalisation have changed people thinking. Subsequently, management is no longer an issue of culture but of people.

In other words, Chinese managers although from different cultures might share the same management skills and values with managers from UK or elsewhere. According to Fang (2010), “globalization has given rise to a paradoxical movement of cultures and management practices” (p.167). This means that culture is currently being shared as well as management practices across the globe.

The consumption of food in China is based on ideological, political, and historical context (Murray 2011). For instance, the way McDonald is viewed in Beijing is different from London and other areas in the Western world. For instance, in China, restaurants act as places of meeting and sharing a meal while in the West, it acts as a fast food store.

Therefore, cultural differences determine consumer behaviours. As a result, different strategic approaches are necessary while investing in a foreign country. A research carried by Ojiako, Maguire, and Guo (2009) found that the application of a business strategy that incorporates major cultural sensitivities compared to the general approach of standardisation applied by most franchises minimises political and economic risks.

In a separate study conducted by Okoro (2012), the findings indicated that while some MNCs fared well in international markets, majority failed because of inadequate acculturation of organisational managers or as a result of cultural imperialism. As a result, Okoro (2012) concluded that cross-cultural etiquette and effective cross-cultural communication is the key to success.

Different countries have different economic and cultural risks. Bremmer and Zakaria (2006) observe that China is the best example that can adopted in understanding business investment and political/economic risks. For example, foreign firms operating in China “operate in an uncertain, politically influenced investment climate” (Bremmer & Zakaria 2006, p. 22) which may not sustain business growth.

In addition, foreign businesses operating in China are exposed to external shocks, like protectionist sentiment observed by the Western community, political unrests in the region, epidemics, and spikes in energy prices. The Chinese government largely favours state owned business. Also, China is characterised by retaliatory protectionist policies that favour home-based companies compared to foreign companies.

Foreign firms operating in China are faced with reputational risks as it has been the case of Yahoo Inc., Microsoft Corporation, and Google Inc (Bremmer & Zakaria 2006). Therefore, by expanding a business in China should be ready to be criticised. Lastly, China is faced with domestic political unrests and social insatiability which may hinder successful business operations in China.

Case Analysis and Discussion

In the context of the case study, some of the major culture dimensions discussed by Hofstede emerge. For instance, individualism vs. collectivism and the short term and long term orientation are clearly exhibited. Compared to UK, China is highly ranked in terms of collectivism rather than individualism. Therefore, the organisation has to consider the cultural dimensions and incorporate Chinese culture as part of the expansion strategy.

In recruiting its employees the organisation ought to put into consideration the effects of cultural differences which can be minimized through workforce diversity. The way in which the organisation integrates itself in Chinese market should borrow from collectivism dimension rather than the individualism aspect.

Given that the Chinese have a high cultural context; it implies that they also enjoy a long-term orientation compared to the British nationals who are majorly influenced by short term orientation (de Mooij 2010). Chang (2006) add that Chinese business focus is concentrated on long-term investment compared to British nationals who focus on short-term investment.

Therefore, the organisation should be prepared to invest in long-term basis and this could be achieved through long-term relationships at personal levels. This would ensure that trust is developed for ensuring long-term relationship. Long-term orientation and individualism are some of the major teachings of Confucian philosophy applied by Chinese (Akgunes & Culpepper, 2012; de Mooij, 2010).

Therefore, maximum understanding and consideration should be enhanced. Pheng and Yuquan (2002) opine that social behaviour of people is pegged on cultural beliefs and values of one society and vary from one society to another. This has been supported by Fang (2010) who suggest that different societies maintain their culture and subsequently, their beliefs and values cannot be applied in another society.

Therefore, the organisation is faced with the challenge of not adopting the general approach of standardization applicable to other franchises. Instead, the organisation is expected to adapt a business strategy that incorporates major cultural insensitivities so as to minimise cultural implications (Ojiako et al. 2009).

The organisation is more likely to face economic and political risks. For instance, China which operates a transitional economy does not follow the World Trade Organization’s rules, and as result, most business aspects remain unfair, not legal, and non-transparent (Bremmer & Zakaria 2006). In addition, it may be faced with reputational risks such as those levelled against U.S based corporations like Yahoo and Google.

Therefore, there is need to develop and follow the set corporate responsibility standards with the objective of minimising reputational risks. Other political risks associated with investing in China include favour for state owned firms by the government, copyrights issues, and financial favour of state owned corporations.

Bremmer and Zakaria (2006) add that “the threat of retaliatory protectionist policies that would favour Chinese companies at the expense of foreign ones” (p.23) is common in China and other Asian nations and any firm should be aware of this political risk.

Despite the fact that China is an emerging economy with a high population that would support business in hospitality industry, the organisation should not seduced by the large population and ignore the mentioned challenges (Bremmer & Zakaria 2006).

Economic shocks supported by political uncertainty threaten successful expansion of the organisation. Poor legal enforcement on protection rights, murky financial market, and high economic and political volatility threaten the welfare of firms operating in the mainland.

Therefore, the organisation needs to develop strategies which address these issues. Food industry in China is influenced by political, cultural, ideological, and historical perspectives (Murray 2011). Therefore, operating without the consideration of these perspectives undermine the profitability of the organisation.

Strategic Recommendations

Based on the case analysis and literature review, it is recommendable for the organisation to consider the effects of cultural shocks and communication barrier. This is because effective communication in a foreign language is part of leadership qualities necessary in managing a workforce that is culturally diverse.

Borrowing from the sentiments of Asparuhova (20112), on communication, communication skills that are “sensitive to the power of symbols and recognizing how people perceive words and actions, are essential skills of the competent leader” (p. 18) are is applicable to the case study. In this case, the organisation can recruit a consultant to train UK-based employees and managers before expanding business to China.

In addition, the organisation should put into place intercultural training programs for its employees to improve their level of communication. This would ensure that the managers are ready for any issues arising from cultural shock, cultural collision, or barriers in language communication. The organisation can organise for exchange programs and seminars as well as trips to equip the employees with proper intercultural communication skills and knowledge competence

Given the political and economic risks in China, the organisation is not supposed to be seduced by the sheer size of the market, assume the risks, and rely on employees’ assessments. This is because these employees may have less experience on how business are operated and run in China. The organization also needs to embrace hedging strategies that involves adherence to and the establishment of corporate responsibility standards with a view to minimize politically induced reputational risks.

As advised by Bremmer and Zakaria (2006), the organisation should not let the Chinese government to manipulate the way it operates in the host country. For the organisation to avoid the political and economic risks mentioned earlier, it should have an external business consultant who understands the business and economic climate in China and Asian markets in general. As a result, the organisation would be in a better position to secure long term profits.

Despite the fact that china is an emerging economy with a large population that may be targeted; the organisation should have a proper exit strategy put into place. This is because according to Bremmer and Zakaria (2006), China’s long-term outlook remains uncertain compared to other states because it lacks political institutions that can minimise political and economic risks.

It is recommendable for the organisation to avoid duplicating its general franchise strategies in China. Instead, the organisation is advised to adapt a business strategy that incorporates key cultural sensitivities because different countries have different cultural values and beliefs.

Although, Ying Yang argues that management skills across the globe are the same as a result of globalisation and technological change, it is advisable to remember Hofstede major assumption that management problems of the last century remain the same because of cultural differences. Therefore, the organisation can develop strategies for recruiting and training talented managers and employees.

This can be achieved through the use of exchange programs for both Chinese managers and UK managers. Consumption of food in China is based on ideological, political, and historical context and as a result, the organisation needs to understand the ideological, political, and historical perspectives of China.

The recommendations given would give the organisation a competitive edge over its competitors and be in a position to minimise the risks originating from the political, socio-cultural, and economic perspectives.

References List

Asparuhova, V 2011, Leadership, Culture and Management Practices – A Comparative Study between Denmark and Japan, Aarhus School Of Business And Social Sciences, University Of Aarhus.

Bremmer, I., & Zakaria, F 2006, “Hedging political risk in China”, Harvard Business Review, pp. 22-25.

de Mooij, M & Hofstede, G 2002, “Convergence and divergence in consumer behavior: implications for international retailing,” Journal of Retailing, vol.78, pp.61–69.

de Mooij, M & Hofstede, G 2010, The Hofstede model: Applications to global branding and advertising strategy and research, International Journal of Advertising, vol. 29, no. 1, pp. 85–110.

Fang, T 2010, “Asian management research needs more self-confidence: Reflection on Hofstede (2007) and beyond”, Asia Pacific Journal of Management, vol. 27, no.1, pp. 155–170

Hofstede, G 2011, “Dimensionalizing cultures: The Hofstede model in context”, International Association for Cross-Cultural Psychology, vol. 2, no.1, pp.1-26.

Murray, N 2011, “Cultural Discontinuity In Post-Mao China: An Itinerant Ethnography Of McDonald’s Beijing”, International Business And Economics Research Journal , vol.2, no.10,pp. 15-26.

Ojiako, U, Maguire, S. & Guo, S 2009, Global operations management during major change: An exploration of industrial practice, Business Process Management Journal, vol. 15, no. 5, pp. 816-839.

Okoro, E 2012, “Cross-cultural etiquette and communication in global business: toward a strategic framework for managing corporate expansion”, International Journal of Business and Management, vol. 7, no.16, pp. 133-137.

Paul, J 2009, International business. New Delhi: PHI Learning Private Ltd

Pheng, S L, & Yuquan 2002, “An exploratory study of Hofstede’s cross-cultural dimensions in construction projects”, Management Decision, vol. 40, no.1, pp. 1-16.

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