Part 1
1. Political Environment
According to the Chinese Constitution, The People’s Republic of China (PRC) has a socialist state democratic dictatorship that is based on the alliance of workers and peasants. China’s government falls under the country’s only party in power, the Communist Party of China (CPC). Due to its restrictive government, foreign investments are often seen as “high risked”. This is especially because China has a large possibility of nationalization, which would change the course of investments within the country. After the events at Tiananmen Square in 1989, the levels of foreign business fell, especially in terms of tourism. Since then, the United States has been involved in twelve rounds of dialogue in the hopes of improving China’s human rights. Although China is a top destination for direct foreign investment, many sectors of its economy are closed to foreign investors.
2. Economic System
The second largest economy in the world belongs to China; the rate of economic growth is one of the fastest in the world (“CIA World Factbook”, 2018). Starting in the 1980’s, the People’s Republic of China named itself a socialist market economy. The economy used to be centrally owned and planned, but it has moved towards a market-oriented system. The economy in the country of China has increased its global role greatly throughout the years. A traditional market-economy consists of all activities regarding production being privately owned, instead of being owned by the state. In China’s case, the state-owned companies still exist, but the country is in the process of transitioning towards a more individualized economy (“CIA World Factbook”, 2018). Some reforms that help to move China towards a market-oriented system include: the growth of the individual sector, a steady liberalization in prices, the creation of stock markets, and an involvement in foreign trade.
3. Legal System
China has a socialist legal system that falls under civil law, meaning they operate with legal codes (“People’s Republic of China Legal Research”, 2018). This is one of the more controlling legal methods, because legal codes are not up for interpretation like U.S. laws are. Strict guidelines inform the exact practices of businesses and people. However, because of the varying ideals of China over the years and the differing ethnicities geographically, there is a somewhat merged legal system. While China still falls under civil law, there is a combination of values in their system as well. Their practice is largely based off Marxist views, but also including traditional aspects such as Confucianism. Although China does have a fair amount of activity regarding business legality, they do not publish a majority of these amendments. This leaves other countries unaware of the Chinese legal practices.
4. Culture
China has the largest population in the world with 1.4 billion people. Of all these people, the Chinese government recognizes 56 ethnic groups, with the Han Chinese making up over 90% of the population (“Chinese Culture, Tradition, and Customs”, 2018). The major religion of China is Buddhism. There are many elements of Buddhism that are integrated in Chinese culture, such as phrases, beliefs, and values. Today, the Buddhist Temples and Sacred Mountains bring in revenue from tourists. Many people are still influenced by the ancient Confucius who emphasized manners, truthfulness, and strong family values. In fact, family is one of the most defining characteristics of the Chinese. In many families, the oldest son is expected to take care of his parents during old age (“Countries and their Cultures- China”, 2018). When babies are born, males are valued higher than females. Additionally, males are more likely to hold a higher political or business position, nonetheless, women are making progress.
5. Implications for doing business in China
Each country involved with business, whether it be domestic or international, has to overcome difficulties in order to reach the successful aspects. In particular, China is a very popular country for international businesses. One common challenge of doing business in China is the underdevelopment of intellectual-property laws. This creates strong competition between corporations with very similar ideas. It is not uncommon to see information technology being stolen, so this does pose a threat to doing business in China. On the other hand, there are various opportunities that will benefit business owners in China. A major convenience for American business owners in China is the high demand for American products in their markets. This presents vast opportunities for people working to advance their business internationally. Another advantage to doing business in China is the fast growth rate of the Chinese economy. Despite the fluctuation of global economics, China’s GDP has made its way to the number two spot (“CIA World Factbook”, 2018). This economic competition provides a prime arena for business owners from all over. All in all, the Chinese business sphere presents both advantages and disadvantages to international businesses looking to prosper there.
Part 2
1. Key Trading Partners
Key trading partners are established through both the exporting and the importing of products. First, we will discuss the key trading partners of China in terms of export sales, which means that these countries are importing the most Chinese goods. The United States is the number one key trade partner in export sales. 19% of Chinese exports are directed towards the United States. Hong Kong, Japan, and South Korea follow the United States in export sales (“China’s Top Trading Partners”, 2018). When added together, these regions make up 22.9% of Chinese exports. In terms of importing products, the key trade partner is Korea. 10.01% of Chinese imports come from Korea. North America and Japan follow Korea as major importing partners making up 9.66 and 9.17% of Chinese imports. In the process of identifying key trading partners of China, it is extremely important to consider both importing partners and exporting partners.
2. Key Products and Services Imported and Exported
China plays a key role in world trade through both imports and exports. In 2016, China was the largest exporter and the second largest importer in the world. Total exports equaled $2.27 trillion; total imports equaled $1.23 trillion (“China Imports, Tariff by Country and Region 2016”, 2016). Electrical machinery and equipment accounted for 26.4% of China’s total exports. This includes the tools necessary for factory production and electrical devices, such as mobile phones. Alone, mobile phones and other phone devices created $219.4 billion for China. Computer machinery makes up 16.9% of China’s exports; this may include monitors, circuits, and electrical parts. In terms of imports, some key products and services include micro assemblies, crude oil, and iron ores. Micro assemblies and integrated circuits make up 24.7% of Chinese imports. Crude oil and iron ores make up 13.4% and 6.8% of Chinese imports.
3. Trade Barriers Imposed by Country on Imports
Since China’s admission into the WTO in 2001, they have significantly reduced some trade barriers. Before joining the WTO, their average tariff was 15.3%, but has now dropped to 9.3% (“Import Regulations in China, n.d.). This rate applies to most imported goods, packaging charges, freight, and insurance premiums. Some of these tariffs are due to their anti-dumping practices. Currently, China is involved in a trade war with the U.S. and raised tariffs to $60 billion on many American goods. Others trade barriers in China are the excessive amounts of subsidies, which make it harder for foreign companies to compete in the market (“2017 National Trade Estimate Report on Foreign Trade Barriers”, 2017). As for intellectual property rights, China is notorious for leaking trade secrets and not punishing the perpetrators (“The Most Important Chinese Trade Barriers”, 2012). They also have bad faith trademark, meaning people use a respected company’s logo to increase their own revenue. In the media industry online piracy and counterfeiting are large issues, so it is risky to bring products to Chinese markets. Additionally, it is difficult to obtain licenses and maintain operating requirements.
4. Incentives Provided by Country Government to Local Produces to Boost Exports
While China implements a lot of barriers on imports, the Chinese government provides a variety of incentives to motivate companies to produce products specifically for the foreign market. The most popular form of incentives are tax rebates, which are usually dependent on the firm exporting most of their products. In 2008, companies that exported over 70% of their productions enjoyed a large reduction in their income tax rate (“China’s Trading Success: The Role of Pure Exporter Subsidies”, 2013). Another benefit that exporting companies receive is a VAT rebate. The standard VAT (Value Added Tax) in China is about 17%. Companies that meet the criteria of exporting receive a full 17% rebate (“China’s Trading Success: The Role of Pure Exporter Subsidies”, 2013). The Chinese government also implements lower tariffs on certain imported goods for companies that export a fixed amount of goods. Other incentives include: direct cash subsidies, and discounted utility and land rental rates. Furthermore, due to these incentives, over a third of Chinese manufacturing exporters sell over 90% of their products. Economists predict that the total amount spent by China to fund these incentives is equal to about 1.5% of the GDP (“China’s Trading Success: The Role of Pure Exporter Subsidies”, 2013). There is a wide consensus among economists that export subsidies are not beneficial to a country’s economy. There have been positive and negative impacts of these incentives.
5. Regional Agreements of China
Following China’s entry into the WTO came a large amount of regional trade agreements. China currently has 14 regional trade agreements (RTAs), and they have several still in the stages of negotiation (“China-Trade Agreements”, 2017). The most influential of the 14 are ASEAN and Hong Kong. The compromise with ASEAN removed trade barriers and lowered costs of trade significantly; this agreement also mentioned an anti-dumping policy due to the rise of the issue in recent years (Jiangyu Wang, 2014). It has over 1.7 billion consumers present in the operation, making it the most sizable internal market in world. China’s attempt at an expansive economy doesn’t stop there. By starting trade agreements with Hong Kong, Macao, and Taiwan, China wishes to create what is known as a “Greater China Economic Circle”. By doing so, they plan to maintain their position as a major economic superpower by pooling resources and economic support in their exporting field. This is where economists start to understand China’s sudden impulse in recent years to create RTAs. In addition to these resource benefits, China, establishes RTAs for the purpose of maintaining partnerships with countries that may look to do business elsewhere (John Whalley, 2014). In conclusion, with increasing production and need for factors of production, China locks in on regional trade agreements to support their expanding exporter economy.
Part 3
1. Brief History
The founder of Alibaba, Jack Ma, was from Hangzhou, China. Mister Ma and 18 other individuals came together with the confidence that the internet would level the playing field and give small businesses their time to shine (Alibaba Group, 2018). This would allow them to have a more competitive stance in the global marketplace through a technological breakthrough. The vision of the company is to last at least 102 years, because this would signify that they were able to span 3 centuries. This is not a common accomplishment by most firms. The vision of Alibaba states, “We aim to build the future infrastructure of commerce,” (Alibaba Group, 2018). During the creation of this successful business, 6 values were established; these values are customer first, teamwork, embracing change, integrity, passion, and commitment (Alibaba Group, 2018). Throughout the years, Alibaba has stayed true to their values. The company has conveyed its values through charitable and successful launching efforts, most occurring in the past few years.
2. Industry Alibaba Operates In
According to Forbes Magazine, Alibaba operates in the internet and catalog retail industry. This is an up and coming industry with technology at the forefront of the movement. Alibaba provides internet-based markets in retail and trade, along with other things. The major businesses of Alibaba include: Alipay, Taobao Marketplace, and Tmall.com.
3. Number of Countries Alibaba Has Operations In
The Alibaba Group Corporate Campus is located in Hangzhou, China. Other offices and campuses are located in California, United States; London, United Kingdom; Milan, Italy; Taiwan; Paris, France; Munich, Germany; Amsterdam, Netherlands; Hong Kong; Tokyo, Japan; Mumbai, India; and Victoria, Australia (Alibaba Group, 2018). This consists of 10 countries with Alibaba centers and Taiwan and Hong Kong, 2 of the administrative regions of China.
4. Strategy it has Adopted
Businesses have to choose between four strategic methods when competing internationally. These can be described as localization strategy, international strategy, global standardization strategy and transnational strategy. The two pressures that impact which strategic method a business chooses are pressures for cost reductions and pressures for local responsiveness. The Alibaba Group has low pressure for local responsiveness, but it has high pressure for cost reductions (“Alibaba Globalization Strategy”, n.d.). This combination of high pressures for cost reduction and low pressures for local responsiveness means that Alibaba has a global standardization strategy. Since Alibaba sells universal products, there is a low pressure to conform to local wants and needs. Products sold through Alibaba are desirable from people in all places, so conforming to local wants is not necessary. Alibaba faces high pressures for cost reduction because it has a major competitor, Amazon. Although Amazon and Alibaba claim to reach for different markets, there is an underlying level of competition between the two businesses. Firms that use a global standardization strategy aim to “pursue a low-cost strategy on a global scale” (Hill & Holt, 2019, p. 383). The internet and catalog retail industry is becoming extremely competitive with Amazon gaining an upper hand on the market; this forces the Alibaba Group to have low pressures for local responsiveness and high pressures for cost reductions.
5. Organizational Structure
Alibaba’s organizational structure is known as a partnership governance structure. The company has 27 partners, each having the right to nominate board members and hold a minority of risk within the company (Yue Wang, 2017). Ma chose this structure because he wanted to create a collegial leadership group that has the ability to make long-term decisions. Another factor the company considered in deciding organizational structure was the corporate culture. Jack Ma believes that corporate culture is an integral part of Alibaba’s success, and is included in its vision statement: “Aiming to build the future infrastructure of commerce and allowing customers to meet, work and live at Alibaba, at least for 102 years” (Alibaba Group, 2018). Ma has attempted to ingrain this sense of dedication in each employee in order to build a strong working environment. Alibaba has attempted to remain transparent in its “flattened” hierarchy and reduce the sense of structure by having the employees use nicknames for each other, even for those at the top of the chain. This creates a sense of familial connection between all of the employees as well as the company’s executives. The company’s corporate culture has allowed for Ma and all of the top management to establish control over the board members. As Alibaba continued to grow, the company’s beliefs did not change in order to meet the requirements of the IPO’s. Alibaba continues to put their employees and their customers ahead of their shareholders. However, this sparked trouble for their plans for stock in the Hong Kong listings. This forced the company to turn to the United States stock market in order to maintain their corporate values. Because the United states stock regulation was less intense than Hong Kong, shareholders receive less of a voice, which in turn kept them from interfering with Alibaba’s partnership needs.
6. Preferred Mode of Internalization
Going into the next couple years, Jack Ma has demanding goals for his company. He wishes to reach 1 trillion dollars in gross merchandise (Adam Lashinsky, 2017). With this goal in mind, he is pushing for globalization. Recently, joint ventures have been largely used to vastly expand their market and increase profit. For example, they have created a joint venture with Marriott. To capitalize on the considerable amount of travel their customers do, a combination of advanced technology and hospitality promotes a luxurious travel experience that people want. Another mode of internationalization is exporting. It is a way to largely produce and sell goods to other people, especially in bulk to consumers. However, recently Ma is also looking to reach out directly to small businesses in the U.S. to grow his company. Doing so, he appeases the economy by encouraging new jobs to be made. He even promised Donald Trump that with the help of Alibaba, the U.S. would create one million new jobs (Adam Lashinsky, 2017). The expansion of business that Ma is speaking of with small businesses sounds beneficial for the U.S. economy, but it comes with its risks. Alibaba, while trying to expand, is running into issues with counterfeit products. One area of the company, Taobao, is struggling and dropping in business, whereas another is thriving and trustworthy. However, this is a worry for those companies wanting to do business with Alibaba, especially small business, in need of a strong reputation and customer base. While internationalization increases, it’s important for the U.S. to be wary of the validity of the products and business we are getting into.
7.Suggestions for Future Strategies in Terms of
1. Cost and localization pressures
Currently, Alibaba is not specializing their products for certain markets, they are only mass producing. In order to increase their sales, they need to strategically market and strategically place their ads. All countries and cultures are different, so they cannot be treated as the same. Different values and lifestyles affect buying behavior. For example, advertising an Indian woman wearing a dress when trying to sell that dress to an Indian market would be more effective than an African woman in the same dress. This is because when people see someone similar to them doing something, they can see themselves doing the same. Additionally, Alibaba must be culturally sensitive and aware. Advertising that they sell steak knives to Hindus could come off as offensive since some Hindus are vegetarian. Alibaba must also be aware of different income levels across countries. There is no point in advertising expensive items to low income countries because they cannot afford it.
2. Internationalization in Different Countries
In order to sustain the company’s approximate 40 percent continuous growth, Alibaba needs to expand their market on a larger scale (Yue Wang, 2017). Over the past two years, Alibaba’s founder, Jack Ma, has busied himself with trying to do just that. Ma’s vision is to get small companies from all around the world to trade securely through the platform established by Alibaba. However, one obstacle he faces, is getting his establishing his company in countries, like the United States, where there is competition such as Amazon. One strategy the company could use would be to emphasize the possibilities that expanding Alibaba into a given country would have on job creation. For many leaders like Donald Trump, this would be seen as a good investment on their part. Another strategy Alibaba could use would be to invest in outside markets that would provide growth opportunities. For instance, in 2016 Alibaba invested in the Southeast Asian company, Lazada, who has platforms in Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam (Yue Wang, 2017). This provides several different markets in one investment, as the company is able to network through another company. Location is an important part of a business’ success. In Alibaba’s case, if they want to expand their company internationally, they should focus on emerging markets. According to a recent study, e-commerce would be more successful in emerging markets versus already developed countries. It’s important for Alibaba to strategically invest and expand its company on an international level in order for them to continue with their high revenue growths, especially as the Chinese economy continues to develop and mature.