Page 49 - DMGT547_INTERNATIONAL_MARKETING

International Marketing

Notes
Getting permission to operate in China required companies to follow a long and winding
road that started with an expression of interest and ended with an extensive review by
MOFTEC or provincial authorities. A foreign firm began by finding a Chinese organization
to sponsor its application to establish a representative office. The foreign company might
then be assigned a Chinese company with which it negotiated. This same Chinese company
could negotiate with more than one foreign company to develop the best offer. The same
steps applied to a wholly-owned investment; however, the foreign company could deal
directly with all authorities rather than have a proposed partner handle the arrangements.

Determining the proper authority depended on the priority of the particular type of
investment. For example, provincial officials could approve those business operations
that planned to export all output. Further, MOFTEC prioritized industries—those that it
encouraged, restricted, or prohibited involvement by foreign companies. The higher the
priority, the more likely that approval would be granted at the provincial level. The list of
industries was quite detailed and specific. For example, the list applied in 1995 included
industries within 18 categories.
Until the mid-1990s, China required most foreign firms to agree to an equity joint venture
with a local partner as a precondition to market access. The Chinese government believed
that equity joint ventures versus other types of FDI transferred capital, technology and
management skills yet did not dilute its own control. Theoretically, a foreign firm could
establish a wholly foreign-owned venture in select industries. Such proposals, however,
received greater scrutiny from Chinese authorities.

China has steadily increased its dependence on international business. Its trade (imports
plus exports) as a percentage of GDP has risen, so too has the number of SEZs. It has
gradually permitted wholly foreign-owned ventures. In 1997, such ventures surpassed
equity joint ventures for the first time. By 1999, more than half of all foreign investments
in China were in the form of wholly foreign-owned ventures. Further, Chinese companies
could seek foreign joint venture partners on their own.

China joined the WTO in November 2001. Accession to the WTO required the Chinese
government to agree to trade and investment liberalization. China’s gradual integration
into the WTO will change its economy by opening it to foreign products and firms. China
must begin to accept a system of global trading rules—everything from lower tariffs to
anti-dumping regulations to removal of rules restricting distribution and retailing as
well as penalties for violating trademarks, patents and copyrights.
There are benefits and costs to joining the WTO. Regarding the former, some forecast that
China could double its exports by 2005, gain an extra percentage point of economic growth
for the next decade, and double its FDI stock within the next five years. Regarding
drawbacks, WTO membership requires the Chinese government to reform many business
institutions and market practices. Some Chinese oppose such changes. For example, five
independent bombings hit the operations of Western multinationals that were patronized
by affluent Chinese, such as McDonald’s, right after China joined the WTO.

Foreign firms welcome the changes required by the WTO. Foreign-invested enterprises
make nearly half of all China’s exports and three-quarters of its manufactured goods.
A boost in exports directly benefits these firms. Operationally, WTO regulations give
foreign firms the option to set up wholesale, retail, distribution, and after-sale networks
in China. Similarly, foreign firms no longer must comply with local content requirements,
deal with the previously high tariffs on imports, or submit investment proposals that
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