In general, marketing involves making decisions on the ‘five Ps’: people, product, price, promotion and place. In this chapter we discuss the challenges that transnational corporations face in marketing in China, and the strategies and approaches that they may adopt to deal with them. In the first section we review a debate triggered by Levitt on marketing in the context of the globalization of markets, and discuss the implications of the debate for TNCs operating in the Chinese market. The following sections discuss the major issues that TNCs need to take into consideration in making decisions on market segmentation, product, price, promotion and distribution in China, respectively. The final section summarizes.

The Levitt debate

In 1983 Theodore Levitt, professor in marketing at Harvard University Business School, published a paper entitled ‘The globalization of markets’ in the Harvard Business Review. In this article, Levitt argues that people in different parts of the world are increasingly connected to each other, and the world is moving towards a ‘converging commonality’. People tend to become similar to each other in terms of what they want and what they like, so ‘everywhere everything gets more and more like everything else as the world's preference structure is relentlessly homogenized’ (Levitt 1983: 93). Accustomed differences in national or regional preferences have disappeared, giving way to the need for standardized consumer products and marketing practices. The markets are, therefore, globalizing.

Underlying the globalization of markets is the advance of technology, which has made it increasingly easy and cheap for people in previously isolated parts of the world to move around and communicate with each other.

The infringement of intellectual property rights is a very serious problem in China. Although the government has made great efforts to comply with WTO regulations on intellectual property rights since accession in 2001, the enforcement of IPR laws and regulations remains ineffective in China even today. The protection of IPR is a daunting challenge to transnational corporations entering the Chinese market, particularly those with established brand names. In this chapter we first discuss the scale of the widespread IPR infringement in the country, and the reaction from the international community to the problem. Then we discuss China's IPR regime, with a focus on the laws and regulations regarding IPR and the enforcement of these laws and regulations. Following that, we analyse the shortcomings in the current Chinese IPR regime, before discussing some practical measures that TNCs can take to protect their IPR in the face of large-scale violation and ineffective IPR enforcement in the country.

Rampant infringement of IPR in China

Before China began its reform programme and its opening up there was little IPR violation in the country. China was isolated from other parts of the world, and foreign brands were virtually unknown to the Chinese. Chinese firms were under public ownership, and had little incentive to make a profit by violating IPR; in fact, they had no incentive to make a profit at all. With the launch of the reform programme, however, foreign brands moved into China, and private firms and township and village enterprises (TVEs) emerged. These private firms and TVEs had strong incentives to make quick profits, which they could achieve through counterfeiting internationally famous brand names that were well received by Chinese customers.

Since the publication of the first edition of the book in 2007, much has changed in the Chinese business environment, including the phase-out of government preferential policy on foreign direct investment, the astonishing rise of Chinese companies and their ‘go-global’ rush, and the intensified competition between Chinese companies and foreign companies in China, in the region, and in the world. One thing remains unchanged, however: China has managed to maintain its growth momentum and continue to be the most attractive place for investors from all over the world. The demand for practical knowledge about managing international business in the changing Chinese context has increased. Many scholars from top universities and executives from large transnational corporations approached me, asking whether I might update the book. I did not make up my mind until June 2014 when Paula Parish from Cambridge University Press wrote to me about possible publication of the second edition of the book.

I wrote a revision plan. Paula sent the revision plan, for comments, to a dozen professors who used the book as a textbook. The comments and suggestions from these professors were very helpful and encouraging. The second edition of the book is based on these comments and suggestions. I sincerely thank all the professors who made comments and suggestions on the revision plan. The second edition differs from the first edition in several aspects. First, a new chapter, ‘Think strategically’, has been added to discuss major theories of international business and management and their relevance to China. Second, the chapter ‘Look before you leap’ has been completely rewritten to examine Chinese history, geography, economy, enterprises and political and legal system. Third, a new chapter, ‘Corporate social responsibility considerations’, has been added to discuss CSR issues and the strategies transnational corporations take to address them in China. Fourth, the chapter ‘Managing guanxi strategically’ has been removed and part of it included in the chapter ‘Negotiating with Chinese partners’. Fifth, all figures, tables and cases are updated, and an updated closing case is added at the end of each chapter.

In writing up the second edition of the book, I benefited immensely from a course that I taught for the executive MBA programme at Bond University Business School from 2008 to 2013. The course was titled Global Business Including China Study Tour.

In international business, explicitly or implicitly, strategic decisions are made based on international business theory. In essence, international business theory explains why and how business activities are carried out across national borders over time. This is a daunting task as it requires a systematic, connected and evolutionary view on the business world around us in different locations and time periods, and an open-minded stance towards the value of each individual perspective in explaining a particular phenomenon in a particular context. Scholars in the field of international business have made great efforts to move in this direction. In this chapter, we discuss major theories of international business and management with reference to their relevance to managing international business in China. We first introduce theories of international trade that help executives think strategically about how to engage in trade with China, then theories of foreign direct investment that help executives think strategically about how to invest in China, and finally the transactional strategy framework that helps executives think strategically about how to manage transnational operations in China.

Trading with China

The growth of international trade has been an important feature of accelerated globalization in the past few decades. In particular, emerging economies, including China, have been vigorously promoting foreign trade since the 1980s, and have become significant contributors to international trade. In 2014, China surpassed the United States to become the largest foreign-trading nation in the world. The growth of international trade in China indicates that goods produced by firms in China are exported to foreign countries, and goods produced by firms in foreign countries are imported to China. Transnational corporations are major players in these export and import activities. For managers of TNCs doing business in China, it is essential to know the theoretical explanations for international trade in order to understand the driving forces behind international trade in China and thereby make sound strategic decisions on exporting and importing.

In a competitive global market environment, companies are accustomed to take profit maximization as the sole goal in order to outperform rivals. This is often achieved at social and environmental cost. Along with accelerated globalization in recent decades, the adverse social and ecological consequences of this practice have loomed large. In the early 1990s, Shell sank an obsolete oil rig, Brent Spar, in the North Sea, and Nike allegedly profited from the abusive labour practices of its Asian suppliers. These events triggered protests from green campaigners and social activists. Ecological and social problems, such as gas emissions, global warming, community destruction, corruption and human rights violations, caught attention worldwide. Corporate social responsibility (CSR) became a hot topic of discussion in social media, academic publications and corporate boardrooms, particularly the boardrooms of transnational corporations operating in an emerging economy such as China where legal regulations against pollution, violation of human rights, corruption and other wrongdoing are weak. In this chapter we first highlight the major CSR issues TNCs face in China. We then introduce theoretical perspectives on CSR. Finally, we provide some recommendations on how to address CSR with reference to some positive examples of TNCs operating in China.

Major CSR issues in China

Transnational corporations face particularly challenging CSR issues in China primarily because of the weak regulatory framework against unethical business behaviour and the consequent lack of socially responsible business practice in China's economy as compared to advanced economies. Starting from the late 1990s, due to protests around the world about sweatshops and environmental pollution, some large TNCs applied social and environmental standards to their China operations, especially their local suppliers, and shared their understanding and experience in CSR with Chinese partners. As Chinese companies had not yet engaged CSR as a working concept, TNCs were generally regarded positively by the public in respect to CSR performance.

To do business in China, transnational corporations have to negotiate with local Chinese partners. Many TNCs have now come to the realization that the Chinese have their own negotiation style, and that they are, though less advanced in other areas, rather good at negotiation. Without adequate understanding of the characteristics and skills that the Chinese demonstrate at the negotiation table, TNCs are unlikely to succeed in striking a desirable deal with Chinese partners and in developing business in China. The aim of this chapter is to set out how to understand the Chinese negotiation style and how to negotiate with Chinese business partners.

First, a theoretical debate on negotiation is briefly introduced, with a focus on cross-cultural theory, which can serve as an analytical framework for the Chinese negotiation style. Then we discuss the cultural roots of the negotiation style, which helps us understand why Chinese negotiators behave the way they do. Next we illustrate the main characteristics of the Chinese negotiation style, and finally we highlight some general rules that may serve as broad guidelines for TNCs in their negotiations with Chinese business partners.

Introduction

The word ‘negotiation’ refers to an interaction process in which two or more parties communicate with each other in order to reach a mutually acceptable agreement to resolve their opposing interests. It is well acknowledged that the negotiation process normally involves two key elements at the same time: common interests and conflicting interests. As Fred Iklé (1968) puts it, ‘Without common interests there is nothing to negotiate for; without conflicting issues nothing to negotiate about.’ There is controversy, however, as to how negotiators should proceed in a negotiation process in order to reach a mutually acceptable agreement. This issue has been debated by scholars from different disciplines, including organization science, social psychology, political science, cross-cultural management and communications.

China is the most populous country in the world. Following rapid economic growth and impressive improvement in people's living standards in recent years, China is now widely accepted as a market with enormous potential. The Chinese market is still limited in per capita terms, but it is precisely this low income per capita that enables China to enjoy a pronounced advantage in cheap labour. Attracted by the huge market potential and the low-cost labour force, investors from all over the world are currently pouring into China to do business.

Doing business in China is not an easy task, however. For some years China has been in the process of transitioning gradually from a command economy to a market economy. This gradual transition has resulted in a complicated and uncertain business regime, which puzzles even the most knowledgeable experts on China. In addition, Chinese culture is different from cultures in other parts of the world, which can often frustrate foreign investors. For foreign investors, therefore, the main challenge is to learn how to manage business in the uncertain, unfamiliar and complicated Chinese environment. Unfortunately, there is no textbook that comprehensively addresses the managerial issues faced by foreign investors in the Chinese business environment. The aim of this book is to fill this vacuum.

The idea of writing the book occurred to me when I was a research fellow at the Centre for International Business at the University of Leeds in 2003, working on a project on transnational corporations in China. Several months later I took up a position as a lecturer at Nottingham University Business School. I decided to design a module on managing transnational corporations in China for postgraduate students in the management sciences. In preparing the module I went through numerous books, journals, newspapers and online sources, and identified a number of key managerial issues faced by almost all transnational corporations doing business in China. These issues involve a wide range of business activities, including entry mode selection, international business alliances, negotiation, production operations management, marketing management, human resource management, the protection of intellectual property rights, corporate finance management and cross-cultural management. I addressed these issues in eleven lectures, which form the framework of this book.

In the previous chapter we looked at different entry modes. In some of these entry modes, such as joint ventures, transnational corporations need to form an alliance with a local Chinese partner. In the contemporary world, of course, business alliances cover a wide range of forms and areas, and have now become ‘the normal way of doing business’ (Lasserre 2003: 97). Given the difficulties of going it alone in China, in particular, it is often in the interests of TNCs to form business alliances with local Chinese partners. In this chapter we first introduce the typology of international business alliances in China, and then discuss the three most important issues of forming and managing an international business alliance in China: partner selection, control over the alliance and conflict management.

International business alliances in China

Business alliances can be defined in different ways. They may be defined, for instance, as ‘cooperative agreements between potential or actual competitors’ (Hill 2003: 346), or as ‘the sharing of capabilities between two or more firms with the view of enhancing their competitive advantages and/or creating new business without losing their respective strategic autonomy’ (Lasserre 2003: 97). These definitions indicate that a business alliance involves co-operation between companies, that these companies may be potential or actual competitors, that the co-operation is conditional, and that the purpose of the alliance is to enhance the competitive advantage of the participating companies. To put it simply, we may define a business alliance as a co-operative and capacity-sharing arrangement between companies to help them achieve their respective strategic objectives. An international business alliance refers to the aforementioned arrangement between companies from different countries; in this context, between a TNC based outside China and a local company in China.

All business activities, no matter whether negotiation, production or marketing, have to be carried out by people in a business organization. People are, therefore, valuable assets or human resources, and should be properly managed. Human resource management (HRM) is about how to use human resources effectively and efficiently in an organization. As people are different from machines or products, in the sense that they can think and feel, managing people is probably the most difficult task that a company undertakes. HRM has to deal with many complex issues, such as how to recruit employees, how to retain them and how to motivate them. The complexity of these issues is exacerbated in an international setting, where a company has to manage human resources in an environment different from that at home. A transnational corporation needs to learn how to manage its human resources efficiently and effectively in the different countries in which it operates. The aim of this chapter is to analyse the main challenges faced by TNCs in managing human resources in China, and the various approaches to dealing with these challenges. In so doing, we focus on three of the most outstanding challenges: staffing, retaining Chinese employees and managing expatriates.

Staffing

Staffing is concerned with selecting and recruiting employees. Entering a new market, a TNC has to think about what kinds of people it should select and employ for the management positions of its affiliates in the host country. Should it select parent-country nationals and bring them to the host country? Should it recruit locals in the host country? Should it select and recruit the best people regardless of their nationality? Clearly, the answers to these questions will have a major influence on business operations in China. In this section we first look, from a theoretical perspective, at the staffing strategies that TNCs may adopt, and then discuss the shift towards localization in the staffing strategy of TNCs operating in China and the key issues involved.

As indicated in the previous chapter, application of international business and management theories to the particular Chinese context is a challenge faced by managers of transnational corporations in China. To counter this challenge, they have to familiarize themselves with the Chinese business environment. Evidence suggests that failures experienced by some transnational corporations in China were largely due to their lack of knowledge about China and their inability to adapt their business strategy to the China environment. In this context, ‘search for stones to cross the river’, famously posited by Deng Xiaoping, is a key not only to understanding China's political and economic reform, but also to learning about doing business in China. The chances of business success increase with managers’ increasing experience in China and knowledge about the business environment in the country. In this chapter we provide an overview of the China business environment. We first introduce China's history, geographic features, administrative units and ethnic groups. We then discuss China's economic reform and outcomes, Chinese enterprises and their recent ‘go-global’ moves, and government policy towards foreign enterprises. Finally, we discuss the political and legal structure, the prolonged battle against system corruption, and the political constraints to future economic growth and business development in China.

History and geography

Ancient China was located in the Yellow River and the Yangzi River areas, and was one of the four earliest river valley cultures in the world, in about 2000 BC. The other three were Egypt along the Nile, Mesopotamia along the Tigris and Euphrates, and India along the Indus and Ganges. Ancient China was divided into several kingdoms. Nevertheless, ancient Chinese created their own languages and arts, and produced such great thinkers as Confucius and Sun Tzu. Gradually, the Chinese managed to build up a unified country, and developed it into a great cultural, economic and political centre in Asia and the world. After the painful experience of foreign invasion and civil wars from the mid-nineteenth century to the mid-twentieth, China regained its strength and prosperity in recent decades. China has many different ethnic groups, complex administrative systems and diversified geographical features.

‘Production operations’ refers to the processes in which goods and services are produced or inputs are transformed into products and services. As such, they play a crucial role in the value creation of a firm, and need to be managed carefully. Production operations management in an international setting differs from production operations management at home in many ways. In managing production operations in China, transnational corporations need to take into account the Chinese business environment and the challenges that environment poses for them. In this chapter we discuss some key issues that TNCs need to address in managing production operations in China, including the siting of their manufacturing facilities, the choice of location, localization of supply chains, and localization of research and development.

The siting of manufacturing facilities

In establishing manufacturing facilities in China, transnational corporations need to think about the way in which the manufacturing facilities are arranged – that is, the siting of the facilities. China is a huge country with a vast territory. Investing in manufacturing facilities in China is different from investing in a small country such as Singapore, where all the facilities can be concentrated in a single place. In a large country such as China, TNCs have to make a decision on whether they should establish all their manufacturing facilities in one place or establish them in a number of sites across the country – that is, whether they should centralize or decentralize their manufacturing facilities in the country. Some TNCs have adopted the centralization approach to the siting of their manufacturing facilities in China, while others have adopted the decentralization approach.

Each approach has its advantages and disadvantages. If a TNC sets up all its production facilities in one place, for example, it is better placed to exploit economies of scale and reduce the unit cost and price of its output. The TNC may suffer, however, from poor responsiveness to possible differences in consumer preference in different localities, and from high transport costs.