Challenges Faced By US Multinational Companies In The Chinese Market And Starbucks’ Market Entry Modes

Political Differences

Discuss about the Global Business Environment for Journal of Comparative Economics.

China and USA are vastly different from each other when it comes to their political, economic, cultural and legal environment. These differences inherently give rise to a lot of challenges and difficulties for the US multinational companies that have set up their business operations in the Chinese market. America is a democratic country where there is a stable government that has been chosen by the majority of the US population (Fogel, 2010). On the other hand, China is a communist nation where the concept of democratic government does not exist. China is being ruled by a dictatorial leadership that is a part of the Communist Party of China (CPC). The Chinese government exerts maximum power and authority in determining how business activities and operations are carried out in mainland China. Chinese leadership has often been criticised internationally for their human rights violations. Incidences such as the Tiananmen Square massacre have proved that the country has had an appalling record of ensuring human rights for their masses (Gilboy, 2016). The government determines the business guidelines and regulations which must be followed by all the business establishments in China and this allows the Chinese government to exert a greater control and authority on the way business establishments carry out their business in China.   

The corporate culture in China is also largely different from that of the US and this is the main reason why many American companies often encounter a cultural shock when they first try to set up their business operations in the Chinese market. People in China are not are not strict when it comes to detail and this can often lead to problematic business situations whenever instructions need to be followed meticulously (Morrison, 2011). In US, the companies like to push direct instructions to their vendors, whereas in China the Vendors enjoy a lot of freedom and liberty in the manner in which they operate their business and they definitely do not like to be pushed and instructed about how to conduct their day-to-day business activities. In the westernised countries, there is emphasis on following instructions as it helps in promoting greater discipline and order, thereby reducing the chances of mistakes and miscommunications (Du et al., 2008). However in the Chinese culture, people get offended whenever they are being instructed by another individual and they often consider it to be an infringement of their personal freedom and space.  Furthermore, the process of change is not so smooth in China as those in the other westernised countries like the US and Europe. Business establishments operating in China needs to provide notice to their staffs whenever sudden changes need to be undertaken within their business plans or daily functioning. Companies in US are much more dynamic in their business approach and they have adapted themselves to a rapidly evolving business environment. They are able to incorporate sudden changes within their business plans and strategies in order to offset the impacts of any developments taking place within their external business environment. This allows them to be better prepared to tackle any challenge or obstacle while ensuring the smooth continuity of the business operations (Ralston et al., 2008). However, the Chinese people are alien to this dynamic business approach and they are not habituated to a fast paced work environment. This is why it is essential to inform them before hand if the nature of the business is dynamic and subjected to sudden changes from time to time. Another important difference is the duration of the lunch break. Official lunch break in the US is 30 minutes whereas in China it is not restricted to just 30 minutes. Lunches in China are as elaborate as dinner and so it takes considerable amount of time. Typical lunch break during the noon can extend from 90 minutes to 120 minutes (Fogel, 2010).                  

Economic Differences

As far as the legal systems are concerned, the judiciary in the US functions in an independent manner and the US government does not have any control over its functioning. But the judiciary in China is controlled by the Chinese government and the judiciary in China acts as an instrument of the Chinese government to maintain law and order inside China. The Chinese government is more interested about controlling the growing opposition and dissent among the general population regarding the dictatorial leadership as they are least bothered about how business establishments carry out their daily activities within China (Chow, 2015). This is more so evident from the lack of any business guidelines and regulations that could help in encouraging fair business competition among the different Chinese business establishments. The concept of intellectual property rights does not exist in China and this is why there is a growing propensity among the Chinese companies to blatantly copy or imitate what is considered to be the intellectual property of the more repeated foreign business establishments (Shafer et al., 2007). These include names, patents, copyrights, trademarks and technology which are owned by an organisation. This promotes unethical business practices in China which the Chinese government is not eager to crack down on because they are eventually contributing towards the Chinese economic growth and success.

As far as economic is concerned, China is the second largest global economy after the US and it is expected to surpass the US economy by the year 2050 to become the largest global economy. Chain has been able to successfully transform itself as the manufacturing hub of the world mainly because of its cheap labour and raw material costs. This is compelled the global business establishments to flock to China and set up their manufacturing base to capitalise on the unbelievably low labour and raw material costs (Fogel, 2010). This has enabled the global business to maximise their cost savings and as a result they have been able to generate greater profits and revenues from their business. Exploitation of the working class population is rampant in China as the country does not have any policy or stringent laws in place that helps in protecting the interest of the workers and ensures their safety and well being at the workplace. This is the major difference between the economic condition in China and that in the US. In the US the laws are much more stringent and they emphasise on the aspect of worker’s health and safety (Morrison, 2011). The concept of minimum hourly wages is also absent is China and this is why the global corporate seeks to take unfair advantage of the absence of any proper employment legislations in order to maximise their profits. This is not possible in US as there are stringent laws which help to ensure that employees are getting paid at the minimum hourly wage rate of $7.25 per hour (Ralston et al., 2008).

Cultural Differences

There are different market entry modes followed by Starbucks in different countries. The organisation utilises majority ownership, complete ownership, licensing (franchising) and joint venture as their choice of market entry methods whenever they seek to establish their business operations in the different nations (Musteen et al., 2009). The organisation has majority owned businesses only in Thailand and Australia.  The joint venture approach is being utilised by Starbucks in Austria, China (Shanghai), France, India, Greece, Germany, Hong Kong, Japan, Israel, Mexico, Puerto Rico, South Korea, Spain, Taiwan and Switzerland. The market entry mode of licensing is being adopted and utilised by Starbucks in China (Beijing), Indonesia, Philippines, Malaysia, Middle East, New Zealand and Singapore. The organistion utilises the complete ownership

Country	Entry – Mode	Partner	Starbucks
			Partnership
Australia	Majority owned		90%
Austria	Joint Venture	Bon appetit Group	19,5%
China (Beijiing)	License	Mel Da Coffee Co	N/A
India	Joint Venture	Tata Global Beverages	50
China (Shanghai)	Joint Venture	5han.gai President Coffee Co	5%
France	Joint Venture	Group VIPS	50%
Germany	Joint Venture	Karstadt Quelle AG.	19.5%
Greece	Joint Venture	Marinopoulos Brothers Ste_	18%
Hong Kong	Joint Venture	Maxim’s Caterers Limited	5%
Indonesia	License	131-Mitra Ad i pe rkasa	N/A
Israel	Joint Venture	Delek Development	19,5%
Japan	Joint Venture	Sazaby Inc.	40%
Malaysia	License	Berjaya Coffee Co.	N/A
Mexico	Joint Venture	S.C. de Meico: SA_ de C_V_	18%
Middle East	License	M.H. Alshaya Co. W.L.L.	N/A
New Zeeland	License	Restaurant Brands Ltd.	N/A
Philippines	License	Ruyan Coffee Corp.	N/A
Puerto Rico	Joint Venture	MacNau.ghton Group	5%
Singapore	License	Bonvests Holdings Ltd.	N/A
South Korea	Joint Venture	Shinse.gae Department   are	50%
Spain	Joint Venture	Group Vips & Europastry. 5.A.	18%
Switzerland	Joint Venture	Bon app6tit Group	19.5%
Taiwan	Joint Venture	President Coffee Co.	5%
Thailand	Majority owned		97%
United Kingdom	Owned		100%

In the majority ownership model, the organisation enters into strategic collaboration with business partner who are local to the host country and are operating on a much smaller scale as compared to them. Starbucks has a greater ownership stake within the newly created business entity and it enables them to capitalise on the local market knowledge of their business partners in order to expand their business operations in the host country (Ball et al., 2008).

In the complete ownership model, the entire business is owned by Starbucks in the host nation. This type of business model is usually undertaken in those nations where Starbucks has a detailed understanding of the market and they have invested their own business capital in order to set up their business operations in those nations.

The joint venture model is undertaken in those nations where there is competition among the local players and the organisation does not have an adequate knowledge about the market in the host country. This compels them to utilise the joint venture model which acts as a safe bet and helps Starbucks to minimise their risks in the unfamiliar markets. They are able to capitalise on the market knowledge and expertise of their partners and this helps them to ensure their growth and success in the unfamiliar markets (Musteen et al., 2009).

The licensing (franchising) model is the most secure business model as it does not involve any investment on the part of Starbucks. In this business model, Starbucks sell the rights to utilise their brand name, image and logo to third party business establishments for a yearly fee. Their business franchises are able to capitalize on their brand name and identity to expand their business in a rapid manner. The profits from the franchisee have to be shared equally with Starbucks (Morschett et al., 2010).

Legal Differences

The regional economic integration is playing a crucial role in facilitating the process of international trade between different nations. This is helping to ensure the economic growth and prosperity of different nations all over the world and enabling them to sustain their economy. Global institution such as the World Trade Organization (WTO) and the International Monetary Fund (IMF) has been playing a proactive role in reducing the trade barriers that exists between different nations. They are encouraging and promoting free trade between nations which is essentially helping to cater to the global demand for products and services (Sunley & Martin, 2017). This is eventually creating a win-win situation for the global consumers as they are able to get access to quality products at affordable prices. The process of regional economic integration has lead to the concept of one regional economy (evident in case of the EU nations and ASEAN countries) and this has helped in creating a level playing field for the developing countries through which they are able to challenge the market dominance of the modern industrialised nations (Dunning & Lundan, 2008). 

References

Fogel, G. K. (2010). Business environment in China: Economic, political, and cultural factors. Lawrence Technological University.

Du, J., Lu, Y., & Tao, Z. (2008). Economic institutions and FDI location choice: Evidence from US multinationals in China. Journal of comparative Economics, 36(3), 412-429.

Morrison, W. M. (2011). China-US trade issues. Current Politics and Economics of Northern and Western Asia, 20(3), 409.

Ralston, D. A., Holt, D. H., Terpstra, R. H., & Kai-Cheng, Y. (2008). The impact of national culture and economic ideology on managerial work values: A study of the United States, Russia, Japan, and China. Journal of International Business Studies, 39(1), 8-26.

Shafer, W. E., Fukukawa, K., & Lee, G. M. (2007). Values and the perceived importance of ethics and social responsibility: The US versus China. Journal of Business Ethics, 70(3), 265-284.

Gilboy, G. J. (2016). The myth behind China’s miracle. In SEEKING CHANGES: The Economic Development in Contemporary China (pp. 1-16).

Morschett, D., Schramm-Klein, H., & Swoboda, B. (2010). Decades of research on market entry modes: What do we really know about external antecedents of entry mode choice?. Journal of International Management, 16(1), 60-77.

Ball, D. A., Lindsay, V. J., & Rose, E. L. (2008). Rethinking the paradigm of service internationalisation: Less resource-intensive market entry modes for information-intensive soft services. Management international review, 48(4), 413-431.

Musteen, M., Datta, D. K., & Herrmann, P. (2009). Ownership structure and CEO compensation: Implications for the choice of foreign market entry modes. Journal of International Business Studies, 40(2), 321-338. 

Dunning, J. H., & Lundan, S. M. (2008). Multinational enterprises and the global economy. Edward Elgar Publishing.

Sunley, P., & Martin, R. (2017). Paul Krugman’s geographical economics and its implications for regional development theory: a critical assessment. In Economy (pp. 25-58). Routledge.

Chow, D. (2015). The Legal System of the People’s Republic of China in a Nutshell, 3d. West Academic.