How does globalisation impact on the management of Chinese firms - Essay Example

How does globalisation impact on the management of Chinese firms? Introduction The Chinese society is generally considered to be guided by traditional norms and values. The Chinese business culture is unique, traditional and conservative by nature. Chinese business culture is large influenced by the ‘guanxi’ system. According to this system, ‘special relationships’ are given exceptional preference for establishing business connections. Therefore, very close relationships (such as family relationships) receive special attention in the business world, while the level of importance declines with distance in the relationship among networking individuals. However, the business environment is changing fast at the global level and the Chinese business culture is also changing fast along with the changing pattern of global business. Before the economic crisis of 2008, China’s economy grew at the rate of more than 11 percent (Keister, 2001). In this context, it is imperative to identify the key thrust that gears up the economy. In China, there are three types of firms; large private-owned firms, large state-owned firms and small family-run (private owned) firms operating inside and outside the Chinese border (Luo, 2002). The objective of this paper is to investigate into the effect of globalization on the Chinese economy, particularly with reference to small privately owned enterprises and family owned business. Effect of globalization Globalization has cast a significant effect on the economic activities of the Chinese economy. The biggest trend can be noticed in the form of international expansion of the small privately owned Chinese firms. Globalization is the intricate concept that covers a vast area including the economy, business, financial structure, culture and society and overall development of the small and large business corporations. It is the result of intensified of global networks that improve interconnectedness among the different economic agents and within the sectors. Since the effect of globalization is varied, it casts different effects on the different sectors of the economy (Brandel, 2006). Hence any singular aspect of globalization cannot describe this gigantic phenomenon. Through globalization, interaction takes place among diverse communities that leads to exchange of cultural and commercial attributes. Domestic cultures and businesses of the emerging economies evolve, adapt and modernize along with the incoming flow of foreign culture and practices. Six different aspects of globalization can be identified through in-depth study of the characteristics of the Chinese economy and business activities (Lawlor, 2007). These aspects are mentioned below: Faster rate of capital and information flow Improvement in modes of interaction and intensification of different connections Expansion and extension of cultural, social and political practices Greater level of interdependence between the global and local landscapes Greater effect of the western culture and practices on emerging economies of the developing countries Customisation of foreign ideas according to values embedded in domestic economies All these factors affect the small privately owned family businesses in China. The major benefits received by small firms as a result of globalization are increased technological knowledge, better ways of production and cheaper products. Rate of flow of capital and information, labour and goods has increased as a result of globalization. This is because, under globalization, channels of communication have increased and have become highly advanced. Modes of transportation have also improved and transportation has become faster, easier and safer. Small businesses have benefitted tremendously from this development since lack of proper information acted as a big hindrance to the development of these enterprises (Naughton, 2007). Due to lack of information these companies could not utilise modern methods of production and also received prices that did not represent the actual market price. Since small family owned firms do not own large infrastructural facilities, it takes them longer time than other organizations for transportation of raw materials and goods. Previously, it took a long period of the producers used to receive its raw materials due to which the production cycles were delayed. Simultaneously, the final products also reached the markets quite late. Faster transportation helps in shipping of the products quickly and this fastens up the process of production as well as marketing. Intense globalization leads to greater level of communication among various business partners. Modes of interaction have reached a higher level due to advanced methods of telecommunication. Development of the internet has enabled the small firms to connect with the rest of the world and keep regular contact with different agents situated at other parts of the globe. Networking has become cheaper, faster and easier through the internet. Entrepreneurs can also keep themselves updated with the news of the domestic and the international pertaining related to the industry in which the firm operates (Buckley, 2004). This higher level of interaction among people of different social and cultural backgrounds leads to the exchange of ideas beyond business purposes. There is exchange of cultural aspects, social feelings and values through the deeper interdependence between the global and local businesses. The cultural essence of one society gets transported to another society along with the exchange of goods and services between the societies. Due to globalization the geographical frontiers have diminished in importance (Peng and Zhou, 2000). Hence the small firms can also expand beyond their domestic territories and start operating in the international frontier. The family owned Chinese firms, therefore, can utilise this opportunity to in order to expand their bushiness further and operate in other locations outside China. Another impact of globalization is the effect of western culture and practices on the domestic practices. Along with globalization development of the economy takes place. Hence, this process of development affects the economic activities of the economy, the tastes of the mass and the overall preferences of the consumers. Hence, the producers have to update themselves according to the preferences of the customers and adapt their products according to the demand faced in the market (Carlise and Flynn, 2005). Since the domestic market of China is highly affected by the western cultures, small producers also try to modify product designs and other attributes in line with the western culture and fashion. This also facilitates them to expand their business to the international platform. Empirical evidence shows that a number of small family owned businesses based in china have expanded internationally and are currently operating in foreign countries. Globalization thus, acts as a drive for the domestic businesses to expand into the international front. Foreign cultures and values are often imbibed into the local cultures. This rate has increased after the phenomenon of globalization has taken place. Greater interaction among the members of different communities leads to exchange of cultural values. However, this exchange does not take place in the form of superimposition of some values of the western society over the developing economies. In China, values of western societies are customised by the domestic population according to their own faiths and beliefs (Rowley and Benson, 2003). Hence, this gives rise to certain new avenues of business which have the attributes of both the societies, but, are characteristically different from both origins. Since small businesses are not equipped enough to compete in the industries in which giant corporations already exist, new channels of business provide them with the opportunity to develop and expand without facing the threat of competition from bigger organizations (Gordon, 2002). Globalisation is the modern trend that every business organization is trying to adapt to in the most gainful manner. With globalization, both large and small firms receive several benefits. However, this phenomenon also implies that competition in the international platform rises. While most firms benefit from globalization, all firms do not receive the same level of gain. The level of benefit depends on the level of performance of the firm and the amount of resource endowment of the firm (Carney, 2008). It has been found through research that the positive effects of globalization are enjoyed more by the larger organizations than the smaller firms. This increases competitiveness among firms. Large firms gain more in this competitive environment, since they can make maximum utilization of the various facilities arising from advancement of technology, reduction of transportation cost and speeding up of the process of transportation as well as communication (Khanna and Yafeh, 2007). However, smaller organization operates at a lower scale, due to which they do not often enjoy the economies of scale enjoyed by larger counterparts. In many cases firms do not face cost advantage occurring out of bulk production. Faster transportation of the goods to the market implies that they have to speed up their production process or produce in larger amounts, in order to meet market demands. Small firms fail to meet market demand adequately and therefore, face loss of market share to larger firms (Tang and Ward, 2003). Besides, the advancement of technology leads to better methods of production, which can be implemented by the larger organizations easily due to their financial support and the big infrastructural framework. It allows them to produce at lower cost and sell the good at a lower price in the market. Smaller businesses are unable to compete with this price. This also reduces their total market share. Therefore, steep competitiveness, arising as a result of globalization, casts significant adverse effects on the smaller firms. Human resource management In China, since the 1990s, small enterprises including family owned businesses have been in the limelight. Estimates of some experts claim that the total number of small businesses and medium sized enterprises is more than 8 million, which accounts for nearly 99 per cent of all enterprises operating within the country (Xinhua, 2002). This shows that the privately owned small organizations attract the majority of the labour force in the country. They are therefore, recognised in the country as one of the most important source of employment. According to reports of some sources, the small enterprises contribute 40 per cent of tax the revenue earned by the government and 60 per cent of the national industrial output as well as the total exports (Morck and Nakamura, 2007). It has been claimed by researchers that the industrial sector has undergone a structural reform and the sectoral importance has undergone a major change. While previously, most of the jobs were offered by the state, in the past few years large number of jobs is being created by the small and medium sized privately owned enterprises. The local human resources are utilized to the maximum efficiency level and this leads to more productive allocation and distribution of resources at the national level (Siu, 2005). Along with globalization, there have been wide developments in the technological sphere. The firms also possess much advanced knowledge base regarding managing the human resource so as to ensure that the interests of both the employer and the employees are satisfied (Nolan, 2002). Government policy China’s economy is highly regulated by the government. Fiscal policies adopted by the government plays a major role in the Chinese business environment (Taylor, 2002). However, foreign investment by Chinese firms is highly regulated by government policies. However, with globalization, pattern of government intervention into the business environment is changing fast. China is gradually following the path of other Asian countries and expanding its businesses to other countries. Although the level of Chinese foreign direct investment (FDI) is rising, from the perspective of the international market it is still considered as small scale investment. Average capitalization of Chinese FDI accounts to approximately $3 million (Smyth, 2000). This occurrence also shows that there is scope for further rise in FDI by the Chinese ventures. The service sector is the most probable sector in which the small firms can operate effectively and grab a desirable share of the market. With opening up of the Chinese economy, the service sector offers huge opportunity to the smaller firms. In this sector, the knowledge based firms can offer various types of service to the target customers. Since such firms in China are mostly run by their family and do not possess much capital or infrastructure, they can operate in the service sector on the basis of human resource, knowledge base and networking capabilities (Yu and Stough, 2006). During the period of globalization, these firms are facilitated largely on all these three aspects. Hence, they can expand their business domestically. There is also scope for international expansion (Chen, 2001). While some of the family owned firms are establishing their physical presence in other countries in Asia, some firms might also operate in international locations with the help of networking through the internet. Within the span of last few decades, few small family-owned businesses based in China have expanded and became recognised as large corporations. Another factor that acts as a hindrance in the path of making FDI by the Chinese investors is the lack of experience in the international frontier. Since the small firms lack exposure and experience in the process of making investments globally or even domestically, they suffer from political as well as commercial risk (Luo, 2003). This is a major setback for the small firms since they do not receive sufficient government consultation with regard to commercial investment (Wu, 2000). Foreign direct investment (FDI) Globalization has acted as a drive towards bringing the business firms in Northeast Asia to a new phase of life. The Chinese firms are currently facing potentially profitable prospects in domestic as well as international markets. This is boosted up by the increase in investment by foreign investors into the Chinese economy. Since small enterprises that operate with little capital, which is mostly family owned, they are not directly affected by the direct investments made by the foreign investors. Besides, the ‘guanxi’ pattern of business implies that the business owners attach maximum importance with the individuals that are within the innermost rings of relationship networks. Hence, most of the capital is owned by the domestic entrepreneurs and investors (Park and Luo, 2001). However, the direct investment made by foreign entrepreneurs casts indirect effect on the small enterprises in China. With investment made by foreign investors, foreign capital inflow takes place, which in turn helps in development of various aspects of the economy. For instance, as foreign capital inflow takes place, it leads to transfer of knowledge from foreign companies and this knowledge is dissipated in the labour force of the host country. This enhances the knowledge base of the host country. Infrastructural development also takes place in the host economy due to foreign investment. The benefits of such developments do not accrue to the particular companies that are directly related to these developmental activities. These benefits include development of transport facilities, improvement in living standard of workers, flow of knowledge regarding advanced technology and better and more economic allocation of resources (Peng and Luo, 2000). Thus, it increases efficiency of the domestic workers, improves productivity and quality of the goods and services offered by the firm for sale (Tan, 2002). Since, Chinese economy has a vast reserve of skilled and unskilled labour, the wage rate in this economy is low, but the firms in this country can produce quality goods at par with the industrialised nations. With the benefits of globalization, the small family run firms get the opportunity to develop its knowledge base and improve its productivity so as to reflect competence on the basis of knowledge and less production cost in the international market. Thus, globalization offers these firms the opportunity to expand. They can now enhance their capital endowment on the basis of increased revenue. Conclusion The Chinese business environment is largely influenced by the government policies and regulations. It is seen as a traditional society and its business culture and relationships are highly affected by the closeness of personal relationships among the individuals. With globalization, remarkable changes can be noticed within the social as well as economic spheres of the country (Rong, 2004). Globalization has affected the commercial activities in China, which in turn affects the country’s economic activities. Several researchers claim that the growth of Chinese economy can be largely attributed to the independent entrepreneurial activity (Wong and Tam, 2000). New entrepreneurial activity and small business enterprises cast significant impact on the economic development of the country (Busenitz and Lau, 2001). This discussion shows the effect of globalization on the small privately owned business enterprises operating in China. It has been found that the small enterprises create the largest share of employment opportunity in the economy. These companies therefore, are considered one of the most important employment generators in the Chinese economy (Williamson, 2001). Globalization benefits these enterprises directly as well as indirectly. New avenues of growth are revealed under the process of globalization, which allows the firm to expand within the nation as well as internationally. However, the small firms also face the negative impacts which hinders or lengthens there process of development. Reference List Brandel, M., 2006. The World Gets Smaller Still. Computerworld, 40 (29), pp. 28-31. Buckley, P. J., 2004. Asian network firms: An analytical framework. Asia Pacific Business Review, 10 (3-4), pp. 254-71. Busenitz, L. W. and Lau, C. M., 2001. Growth intentions of entrepreneurs in a transitional economy: The People’s Republic of China. Entrepreneurship: Theory and Practice, 26 (1), pp. 5-20. Carlise, E. and Flynn, D., 2005. Small business survival in China: Guanxi, legitimacy, and social capital. Journal of Developmental Entrepreneurship, 10 (1), pp. 79-96. Carney, M., 2008. Asian business groups: Context governance and performance. London: Chandos Publishing. Chen, M-J., 2001. Chinese business: A guide for managers worldwide. Boston: Harvard University Press. Gordon, M., 2002. How to Succeed in Strategic Planning. [online] Available at: [Accessed 6 November 2013]. Keister, L. A., 2001. Exchange structures in transition: Lending and trade relations in Chinese business groups. American Sociological Review, 66 (June), pp. 336-60. Khanna, T. and Yafeh, Y., 2007. Business groups in emerging markets: Paragons or parasites? Journal of Economic Literature, 45 (2), pp. 331- 372. Lawlor, B. R., 2007. The Age of Globalization: Impact of Information Technology on Global Business Strategies. [pdf] n.p. Available at: < http://digitalcommons.bryant.edu/cgi/viewcontent.cgi?article=1000&context=honors_cis > [Accessed 6 November 2013]. Luo, Y. 2002. Partnering with foreign firms: How do Chinese managers view the governance and importance of contracts? Asia Pacific Journal of Management, 19 (1), 127 – 151. Luo, Y., 2003. Industrial dynamics and managerial networking in an emerging market: The case of China. Strategic Management Journal, 24, pp. 1315-1327. Morck, R. and Nakamura, M., 2007. Business groups and the big push: Meiji Japan’s mass privatization and subsequent growth. Enterprise & Society, 8 (3), pp. 543-601. Naughton, B., 2007. The Chinese economy: Transitions and growth. Cambridge: MIT Press. Nolan, P., 2002. China and the global business revolution. Cambridge Journal of Economics, 26 (1), pp. 119-137. Park, S. H. and Luo, Y., 2001. Guanxi and organizational dynamics: Organization networking in Chinese firms. Strategic Management Journal, 22, pp. 455-477. Peng, M. W. and Luo, Y., 2000. Managerial ties and firm performance in a transitional economy: The nature of the micro-macro link. Academy of Management Journal, 43 (3), pp. 486-501. Peng, M. W. and Zhou, Y. D., 2000. Managerial ties and firm performance in a transition economy: The nature of the micro-macro link. Academy of Management Journal, 43 (3), pp. 486-501. Rong, X., 2004. Research on China’s small and medium-sized enterprises cluster development model. Chinese Economy, 37 (5), pp. 7-19. Rowley, C. and Benson, J., 2003. Introduction: changes and continuities in Asian HRM. Asia Pacific Business Review, 9 (4), pp. 1-14. Siu, W., 2005. An institutional analysis of marketing practices of small and medium-sized enterprises (SMEs in China, Hong Kong and Taiwan). Entrepreneurship & Regional Development, 17 (1), pp. 65-89. Smyth, R., 2000. Should China be promoting large-scale enterprises and enterprise groups? World Development, 28 (4), pp. 721-737. Tan, J., 2002. Culture, nation, and entrepreneurial strategic orientations: Implications for an emerging economy. Entrepreneurship Theory and Practice, 26 (4), pp. 95-111. Tang, J. and Ward, A., 2003. Taking the Capitalist road: The changing face of Chinese management. London: Routledge. Taylor, R., 2002. Globalization strategies of Chinese companies: Current developments and future prospects. Asian Business & Management, 1, pp. 209-225. Williamson, I. O., 2001. Employer legitimacy and recruitment success in small businesses. Entrepreneurship, Theory and Practice, 24 (1), pp. 27-28. Wong, Y. and Tam, J. L. M., 2000. Mapping relationships in China: Guanxi dynamic approach. Journal of Business and Industrial Marketing, 15 (1), pp. 57-70. Wu, X. P., 2000. Establishing an insurance system for our country’s outward investment. Guoji Maoji Wenti, 3, pp. 63–65. Xinhua, 2002. SMEs Vital for Sustained Growth of China’s Economy. [online] Available at: < http://www.xinhua.com.cn > [Accessed 6 November 2013]. Yu, J. and Stough, R. R., 2006. The determinants of entrepreneurship development in China. International Journal of Management and Enterprise Development, 3 (1-2), pp. 30-52. Read More