Q1. Analyze the external environment of the China.
Answer:

External environment also called macro environment consist of conditions, entities, events and factors surrounding an organization which influence its activities and choices, and determine its opportunities and risks.

External environment can be divided into three broad categories. These are:

➢ General environment

➢ Industry environment

➢ Competitors

Here we have to analyze the general environment of China. General environment is composed of several elements, which are discussed below in details.

A. Demographic:

1. Geographic Distribution: If we see the geographical location of china in map than it is surrounded by North Korea, Japan, Vietnam etc. o Natural Hazards: There are frequent typhoons, damaging floods, Tsunamis, earthquakes, droughts, land subsidence etc occurs. So there is a high risk of natural calamities over there. o Climate: If we talk about the climate of china than it is extremely diverse, hot in south to cold in north. o Mountains and hilly land take up 65 percent of the total area. so most of the area of china are covered by mountains. o Area = total: 9,596,960 sq km o Land: 9,326,410 sq km o Water: 270,550 sq km o Coastline:14500 Km o China is World’s fourth largest country after Russia, Canada, US

2. Population size: With just over 1.3 billion people (1,330,044,605 as of mid-2008), China is the world's most populous country. As the world's population is approximately 6.7 billion, China represents a full 20% of the world's population so one in every five people on the planet is a resident of China. China's population growth has been somewhat slowed by the one child policy, in effect since 1979.

3. Classes of Population: The People's Republic of China is a unified, multi-national country, comprising 56 nationalities. The Han people make up 91.02 percent of the total population, leaving 8.98 percent for the other 55 ethnic minorities. They are Mongolian, Hui, Tibetan, Uygur, Miao, Yi, Zhuang, Bouyei, Korean, Manchu, Dong, Yao, Bai, Tujia, Hani, Kazak, Dai, Li, Lisu, Va, She, Gaoshan, Lahu, Shui, Dongxiang, Naxi, Jingpo, Kirgiz, Tu, Daur, Mulam, Qiang, Blang, Salar, Maonan, Gelo, Xibe, Achang, Pumi, Tajik, Nu, Ozbek, Russian, Ewenki, Benglong, Bonan, Yugur, Jing, Tatar, Drung, Oroqen, Hezhen, Moinba, Lhoba and Gelo. All nationalities in China are equal according to the law. The State protects their lawful rights and interests and promotes equality, unity and mutual help among them.

4. The age structure of China: 0-14 years: 20.4% (male 143,527,634/female 126,607,344) 15-64 years: 71.7% (male 487,079,770/female 460,596,384) 65 years and over: 7.9% (male 49,683,856/female 54,356,900) (2007est) Looking to above it is very clear that in China the Older population is very less around 5 to 10 Per Cent, while the ratio of Generation X & Generation Y is high. So from above we can conclude that in China most of age of people are young and so it is very good market for the product targeting to the young age.

B. Economic:

Before few years company going to china faces lot of problem due to communist government, and there was a fear of confiscation that government may take over a control over your business and may ask you to leave the country and can have control your business and your investment. But after that there was a tremendous change in the political system of china and it open the market for the foreign companies to invest in their country and for that it gives many benefits to those foreign companies and due to that many foreign companies are attracted to invest in china and to take the benefit of cheaper source of production like labor, natural resources and lot of government support.

1. Market oriented economy: Due L.P.G in china it gives, it’s a tremendous benefit to those who are operating in china and or wants to operate in china because of its cheaper source of production and due to that many labor intensive companies had made china as a production hub. And even due to large population in china many companies established in china and they are earning by satisfying the local demand.

2. Inflation Rate: The inflation rate in China was last reported at 4.4 percent in October of 2010. From 1994 until 2010, the average inflation rate in China was 4.25 percent reaching an historical high of 27.70 percent in October of 1994 and a record low of -2.20 percent in March of 1999. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy.

China’s consumer prices increased at their fastest pace in two years in October, strengthening expectations the central bank might continue to tighten monetary policy to curb inflationary pressures. Fueled by a spike in food prices, the consumer price index jumped 4.4% in October, well above the 3.6% reading in September and beating economists’ expectations for a 4% rise. The nation’s producer price index accelerated 5% during the month, also beating estimates for a 4.6% rise and September’s 4.3% increase. Food prices soared more than 10% during the month, while non-food price increases, although relatively modest at 1.6%, were higher than the 1.4% increase recorded in September.

3. Interest Rate: The benchmark interest rate in China was last reported at 5.56 percent. In China, interest rates decisions are taken by The Peoples' Bank of China Monetary Policy Committee. The PBC administers two different benchmark interest rates the benchmark lending rate, which is the one year PBC lending rate and the benchmark rate of central bank lending that is the rediscount rate. From 1996 until 2010, China's average interest rate was 6.49 percent reaching an historical high of 10.98 percent in June of 1996 and a record low of 5.31 percent in February of 2002.

China ordered banks to set aside more deposits as reserves for the third time this year, seeking to counter the risk of property bubbles and the threat inflation will surge after a record expansion in credit. The reserve requirement will increase 50 basis points effective May 10, the People’s Bank of China said on its Web site today. The current level is 16.5 percent for the biggest banks and 14.5 percent for smaller ones. Today’s move adds to a government crackdown on property speculation that intensified after prices jumped by a record in March and economic growth surged in the first quarter. The central bank left benchmark interest rates unchanged as Europe’s debt crisis highlights policy makers’ concern that the global economic recovery may still be on fragile foundations. The world’s fastest-growing major economy expanded 11.9 percent in the first quarter from a year earlier, the most since the second quarter of 2007. Measures to cool the real-estate market have included a ban on loans for third-home purchases and raising mortgage rates and down-payment requirements for second- home purchases. Besides leaving interest rates at crisis levels, the central bank has yet to scrap the yuan’s peg to the dollar, in place since July 2008 to aid exporters. Inflows of speculative capital from investors betting on yuan gains may have driven today’s move, Chinese government faces numerous economic development challenges like:

• Sustaining adequate job growth for tens of millions of migrants: The main problem in china is that the rural market is not developing with the same pace as the urban areas of china and due to that migration level is very high in china, so the main problem for the government is to give support to those migrant and to give them employment and this is the main reason that labor is available at cheaper rate and due to that manufacturing companies are very much attracted to work in china and to make investment in china.

• New entrants to the work force: Now due to increase population, literate people are also increasing and due to that workforce also increase but due to control of government on population there is a one child policy and due to that slowly the young working population is also increasing.

• Workers lay off from state-owned enterprises: Now because of privatization in china and reduce in number of public corporation due to that laid off is increases in china and the labor laws are not that powerful and by this labor exploitation in china increases this one of the reason that why the labor is cheap in china and it is helpful to labor intensive industries are increases that manufacturing companies are more attracted.

• Reducing corruption and other economic crimes: The main problem the Chinese government is facing is the problem of high level of corruption is there and which is disturbing the economy and environment badly. And by these the high polluted companies are also given permission to set-up and which affect the environment badly which creates environmental damage and social strife related to the economy's rapid transformation.

C. Political/Legal System:

Political System: o China is communist country. o Chinese communist parties (CCP) and eight registered small parties in china hold that all resources should be owned and shared by all the people not by profit seeking enterprises for the benefit of the society. In china government controls all the productive resources and industries and as a result the government determine jobs, production, price, Education etc they emphasis on human welfare because profit making is not the government’s main objective. o Political pressure group and leaders o China democracy Party o No substantial political opposition group exists o Cabinet: State Council appointed by the National People's Congress (NPC) Elections: In China president and vice president elected by the National people. o People's Congress for five-year terms; elections last held 15-17 March 2008; premier nominated by the president, confirmed by the National People's Congress

Legal System: o China’s legal system is based on civil law system; derived from Soviet and continental civil code legal principles; legislature retains power to interpret statutes. In this system, the main rules are embodied in legislative codes. Every circumstance is clearly spelled out to indicate what is legal and what is not. There is also a strict and literal interpretation of the law under this system. o Judicial Branch: Supreme People's Court (judges appointed by the National People's Congress); Local People's Courts (comprise higher, intermediate, and basic courts); Special People's Courts (primarily military, maritime, railway transportation, and forestry courts)

Intellectual Property Rights:

The problem of getting patent granted is often difficult in many communist countries and less developed countries because patent law do not exist or are ignored.

o China did not enact its first patent laws until 1984

o Items like computer software, animal, plants, food, beverages, atomic energy related innovations, chemicals, and pharmaceuticals are not included in patent law

o Process of filing for patent – First to file system is adopted. Here patent is granted even if innovation was actually found by someone else. Patent publication is will be published eighteen month after filling.

Tax System:

VAT applies to enterprises engaged in importation, production, distribution or retailing activities. o The general VAT rate is 17% but necessities, such as agricultural and utility items, are taxed at 13%. o Custom duty of 25%.generally for all the product the custom duty is less as compare to India and so it even cheaper to import the products to china .. o Tariffs for ASEAN countries is 5.8% from 9.9%: Even special tariffs are there for the ASEAN countries in china and due to that many Indian companies have set up their plants and offices in china and it is also beneficial to other Asian countries. o And even the government gives special concession to the companies if they invest 40% of their earnings in china only, by this china will get good amount of investment as well as the companies will get several tax relieves.

D. Socio-Cultural Environment: Culture plays a significant role in influencing consumer’s perception, which in turn influences their preference and purchase. A marketing mix is effective as long as it is relevant to their culture. According to culture a company must modified their product. o Great wall, Grand Canal, Karez irrigation system is the symbol of rich culture which build 2000 years ago. o Culture is socially shared: In china culture is socially shared. o Women in work force: In Chinese business industries women are some times ahead of men. They are the President, Chairman or CEO of some powerful organizations o Girl children must have small feet: The preference of wanting their girl children to have small feet. Large feet viewed as lower class people. So that parents from upper class bound daughter’s feet tightly. o Lack of shared common culture common values: In china due to lack of shared common cultural values, standardized advertisement may have difficulty in communicating with customers. So due to that advertising and sales promotion require special attention. o Culture is enduring: In most Asian countries also in china culture is enduring. Culture is shared and passed along from generation to generation. Old habits are hard to break. People tend to maintain their own heritage. That’s why China is overcrowding. In past china views large family are blessing and assume that children will take care of parents when grown. Old but modern Chinese government make compulsory of one child per family. It’s result in numerous death of first born daughter. o Chinese do not consume beef at all: Influence of culture on consumption pattern. Living style and priority of needs are dictated by culture. Chinese do not consume beef at all. They believed that it is improper to eat caftan that work on ferns. Asian consumer prefer their chicken boiled rather than fried

E. TECHNOLOGICAL : In the span of less than three decades, China has evolved from a peripheral player to become the most potent engine in the global economy. Along with its rapid economic progress, and the many improvements in the quality of life for large numbers of the Chinese population, a variety of indicators suggest that China’s science and technology (S&T) capabilities also are on a sharply rising trajectory. Since the early 1990s, spending on S&T by the Chinese government has been increasing at a rate approximately twice that of overall economic growth. In 2007, China spent RMB (reminbi) 366 billion (US $50 billion) on research and development (R&D), or 1.49 percent of its increasing gross domestic product (GDP), highest among countries with similar economic development level, though the percentage is still lower than that of most of the major developed economies. Foreign investment, as well as imported technology and equipment, continues to pour into China, making it one of the largest recipients of foreign capital and know-how in the world. While most attention has been focused on the rapidly expanding export side of China’s foreign trade, it must also be remembered that China has become one of the world’s largest importers. And, most recently, many of the world’s technologically most innovative companies have decided to move beyond setting up manufacturing facilities in China to establishing advanced R&D centers to develop new products and services for global markets as well as the Chinese domestic market. By the end of 2007, there were well over 1000 foreign R&D centers operating in the People’s Republic of China. In early 2006, with a great deal of fanfare, China’s leadership issued a new “Medium- to Long-Term Plan for the Development of Science and Technology (2006–2020)” (MLP). In addition to setting ambitious national priorities and formalizing the leadership’s commitment to allocate substantial financial and people resources to meet the announced goals, the MLP specifically defines enhancing indigenous innovation capability, leapfrogging in key scientific disciplines, and utilizing S&T to support and lead future economic growth as the major objectives. In a word, once considered one of the more backward developing countries, China today stands as one of the world’s most robust and dynamic economic forces. These trends have led many observers to ask, in a similar vein, whether China also is poised to become a superpower in science and technology.

Underlying the massive transitions taking place in the Chinese S&T system is the emergence of a very large, increasingly well-educated talent pool. The term “talent” is a concept that has gained increasing popularity and importance in China over the last few years; specifically, it denotes those Chinese with higher-caliber abilities and skills of strategic significance to the country’s modernization and national wealth creation. Leveraging the significant investments that heretofore have been made to modernize and upgrade the country’s higher education system and R&D infrastructure, China hopes to capture and harness the country’s most strategic resource – its talented people – to embark on a quest to close appreciably the prevailing technological gap between itself and the West in fields ranging from biotechnology to nanotechnology. The launch of the MLP reflects a commitment to rely more on “brains” rather than “brawn” to bring China into a strong, leadership position during the early part of the twenty-first century.
F. GLOBAL : The globalization speedily driven by the world economy has been shaping the world in a profound way. With this mega trend, China was able to break the bondage of the Cultural Revolution. It has taken a historical step to initiate a set of policies conducive to reform and liberalization, with modernization as its mission. Such a move has transformed China from a planned economy into a socialist market economy. It leads China in further opening up and integrating with the global economy, which will in turn speed up the progress of modernization in the country. Over the past 20 years, China achieved significant economic growth. If China failed to make such a decisive move, China would miss the golden opportunity to advance its economy. In absence of such a sound external environment created by economic globalization, the effectiveness of China's open door policy would have been lackluster. It explains what motivates China to play an active part in economic globalization.

Q2: Impacts of the factors of external environment on China’s overall business Industry.

Answer:

Impacts of the external environment on the overall Chinese business industries are as follows:

A. Impact of Demographic factors:

There are several demographic factors that affect china’s overall business industry. Each and every factor like geographic distribution, population size, age structure, ethnic mix etc. has individual impacts on different industry.

The first demographic factor is geographic distribution. Geographically China is very sensitive to natural calamities because frequently different types of natural calamities are striking there. This can have a adverse impact on the Chinese business industry. Many investors may think about not to invest here because of these natural hazards. China’s climate is extremely diverse.

The next factor is the population size. China’s population size is the biggest in the world. 20% of the world’s population exists in China. This is one of the most attractive markets for investing. Now the population growth rate is decreasing because of the government’s one child policy, but still it is an attractive market for investing. Every year foreign investments as well as local investments are increasing.

Age structure also plays an important role in the Chinese business industry. 71.7% of Chinese people’s age is ranging from 14 to 64 years. So a huge portion of a large population is productive. As a result labor cost is very cheap here. So every year a huge number of foreign investments are made in this market. Moreover, for varying age structure different new market segments are arising. So opportunities for investing in new product and service sectors are increasing.

Classes of population are an important demographic factor in the Chinese business industries. China’s population is consisting of 56 nationalities. Different market segments for different ethnic groups are arising. So the multinational companies that are offering diversified products in this market are having substantial profit margin than any other markets of the world.

B. Impact of Economic Factors:

Different economic factors are continuously affecting Chinese business industry.

1. Impact of Inflation:

Rising inflation has prompted concern Beijing might hike interest rates or take other steps to cool growth that hit 11.9% in the first quarter. That could affect the United States, Europe and others that look to China, the world's No. 3 economy, to help drive demand for their iron ore, factory machinery and other exports. A statistics bureau spokesman rejected suggestions China might face "stagflation" — a damaging mix of rising prices and slowing growth. He said inflation pressure was easing and the communist government can hit its target of holding full-year inflation to 3%. Actually there is no problem of stagnation. The economy's "three driving forces" — trade, investment and consumer spending — are still rising. Analysts expect China's rapid expansion to slow as the initial impact of its $586 billion stimulus wane. The World Bank's forecast for full-year growth is 9.5%. Slower growth could complicate efforts to control prices because the standard tool of rate hikes might further chill economic activity. "In the second half of the year, growth is going to be slightly disappointing, inflation is going to be slightly too high," said Tom Orlik, an analyst in Beijing for Stone & McCarthy Research Associates. "That clearly puts the Chinese government in a policy quandary." May exports surged by nearly 50% over a year earlier but analysts expect trade to weaken as Europe's debt crisis cuts demand in the 27-nation European Union, China's biggest trading partner. May growth in investment in factories and other fixed assets — seen as an indicator of future growth — slipped from April's 26.1% expansion to 25.9%, the statistics bureau reported. Growth in industrial output declined for a third month, falling to 16.5% from the previous month's 18.8% expansion. Investment growth has been dampened by government curbs aimed at cooling a credit boom and surging housing costs. Regulators also want to block overspending on industries such as steel in which production capacity already exceeds demand. Total lending by Chinese banks in May shrank by 17% from April's level to $93.6 billion, the central bank reported. Financial markets have been rattled by concerns the government might further tighten access to credit. China's main stock index has shed 4% since May 25. Two monthly surveys of industrial activity released earlier showed Chinese manufacturing growth slowing in May on sluggish new orders. In a positive sign, growth in retail sales accelerated slightly in May to 18.7% from April's 18.5% rate.

2. Impact of Interest Rates: The standard assumption is that a hike in interest rates is a tightening measure, because when the price of borrowing money rises, demand for it should fall, reining in economic activity. However, as it is seen, in the prevailing interest rate range, both supply and demand for lending in China is relatively inelastic — that is, a modest 0.25% increase won’t have much effect on people’s willingness to borrow, or banks' willingness to lend. Given the boom environment in China today, most borrowers either think they’re going to double their money, or (in the case of mortgage borrowers) are desperate to keep up with skyrocketing asset prices. There are many borrowers who shop around aggressively for the cheapest interest rate, but at the end of the day, regardless of what interest rate they’ll get, they’re going to take the money. Maybe that might change if the rate increases by 5 or 10%, but 0.25% barely registers. Chinese borrowers who either don’t have access or can’t borrow any more from banks are regularly willing to pay rates near 20% in the informal lending market. On the other side of the equation, banks have a guaranteed spread of nearly 4% between the regulated deposit rate (just above 2%) and the minimum lending rate (6%). To the extent they can, they try to direct loans toward state-owned enterprises (SOEs) that they see as virtually risk-free. From their point of view, its arbitrage, and they are going to lend every yuan they can, constrained only by their lending quota and reserve requirement. If the deposit rate increases by 25 basis points, and banks can’t raise their lending rates, their spread will narrow and so will their profits, but they still have every incentive to keep lending. But since borrower demand is also inelastic, they probably can raise their rates without seeing any fall-off in lending. The main constraint on bank lending in China – and the effective tool China’s central bank has for tightening — is the reserve requirement ratio (RRR). Last year, Chinese banks drew down on their actual reserves from 21% to around 17%. At the same time, China’s central bank has been raising the RRR to just over 17% for large banks, a bit lower for smaller ones. For the first time the banking system as a whole has run out of excess reserves and is bumping up against its reserve requirement. The Chinese inter-bank lending rate has shot up, and banks have been scrambling for deposits that would allow them to keep lending. When the regulated deposit rate is lower than CPI — as it has been for several months now — people with their money in bank accounts are losing buying power. They start withdrawing money from banks and either spending it or (more likely) stashing it in non-fixed return forms of savings like real estate or gold. By squeezing deposits out of the banking system, ultra-low interest rates in China have reinforced the reserve constraint on bank lending — acting, in effect, as a tightening measure. Viewed in this light, China’s interest rate hike isn’t really a policy to actively head off inflation, it’s an involuntary response to inflation. As CPI rises, the gap between CPI and the regulated deposit rate widens, squeezing more deposits out of the banking system, putting more pressure on banks to rein in lending. At some point, in order for the banks to continue lending, you need to raise the deposit rate, otherwise their reserve constraints will force them to stop. (Of course, Chinese officials could also lower the RRR, but such an overt loosening measure would be a much harder sell in the face of rising inflation). The point is that inflation is driving interest rates, not the other way around. So besides relieving pressure on banks, and keeping the money flowing, some other effects will the interest rate hike have. One thing is that it will increase interest expenses, and reduce profits, across a wide swath of the Chinese economy. Even when Chinese companies have fixed-rate loans, they’re effectively floating-rate, because the terms are short (usually a year), and the interest rate hike will kick in when they roll over. This bottom-line impact, particularly on SOEs, is probably why Chinese officials were so reluctant to raise interest rates for so long, and why they’ll probably take a lot of heat for it now. Even if higher rates are (perversely) a loosening measure, to most Chinese companies it will still feel like a tightening measure, even as they keep borrowing. As it is mentioned earlier that Chinese borrowers regularly are being willing to pay 20% rates in the informal credit market, people are paying such rates to fund business expansion was during the Dot-Com Bubble, when people were financing start-ups on their credit cards. It’s a good illustration of the boom mentality prevalent in China right now.

C. Impact of Political/Legal system:

China is a communist country and due to communism foreign businesses operating this country are facing some problems. They are exposed to some political risks:

• Confiscation Risk: It is a process of Government taking ownership without giving any kind of compensation like in case of coke. Chinese government takes the American property after the Chinese communists take place in 1949. As a result foreign investors are not willing to invest here. • Operational Risk: here Chinese government constrains the company’s business operation in all areas including operation, marketing and finance. For example direct marketing is not allowed in china. Due to this investors are incurring some losses. • Political instability: Due to political instability investors are discouraged to invest in china because when the political situation is unstable in a country; economic situation will also become volatile. As a result investments in different industries are reducing. • Social unrest: China is modernizing its economy. It does not fully embrace open economy which is liable to encourage disseminations among the various groups for the sake of its own survival. Co operative society may have to obstruct the dissemination of new idea and neutralize an external group that forces a threat. • Policies of host government: In china production of illegal compact disk has greater increased. The factories making counterfeit products are able to operate freely because of their political contacts. As a result the companies which are producing legal disks are losing their motivation to invest in china. • Attitude of nations: The product of a multinational company is accepted or not is depend on the attitude of the nation towards the multinational companies.

Impact of Tax system:

Tax system of china has a great impact on its business industries. As the vat for necessity or utility items is less than the general items, it is facilitating the companies which are generally producing agriculture related products and the daily necessary products.

As the custom duty for all products is low in china, it gives benefit to companies to earn good profit, and the companies who are export oriented units the government provides special tax exemption and also provide s.e.z area for the exporting from china which is more attracting the multi- national companies and due that the cost of production is very less in china

In China tariffs for ASEAN countries are very low, which facilitates the MNCs from these countries to invest in china. As a result Chinese business industries as well as economy are becoming more and more wealthy and strong.

Intellectual property rights:

In china intellectual property right does not exist. In 1984 the Patent Law was enacted but it did not include some important products. As a result, one company’s product can be easily copied by other companies. In china 95% of the computer softwares are pirated. Every year software companies both inside and outside china losing $400 million.

D. Impact of Socio-Cultural Environment:

Chinese culture is a mix of different subcultures. So people from different subcultures are getting involved in the work force which is increasing the work force diversity. As a result businesses are getting opportunities to introduce new products and equipments for these groups of people. So firms are engaged in continuous innovation.

Now a day in Chinese business industries women participation is increasing. So businesses are getting some talented works from these women which were absent previously. Moreover, increased women workforce is increasing the demand of office accessories, equipments, dresses. As a result firms producing these products are making more profits than previously.

In China lack of common cultural value is more. As a result firms have to promote their products in different cultures in different ways. They can not use the standardized advertisement in all the cultures which eventually increases their promotion cost and reduces their profit margin.

China is a country of huge population and it’s because of its culture. In Chinese culture there is a tradition to keep large families because people think that children will take care of there old parents. As a result population was increasing. Though the rate of population growth decreased, still china has the biggest population of the world. As a result labor cost is very low in this region, which is attracting the foreign investors to invest in china. Eventually it is having a positive impact on the Chinese business industries.

E. Impact of Technological factors:

Production in the industrial development in the Chinese economy grew very rapidly due to technological factors. Technological developments have been considered the keys to continue the research and development in the Chinese economy. This also created new competitive industries and products to join but it also improved the Chinese economy’s infrastructure. The Chinese economy was well aware of the technological developments that needed to be taken up in the earlier years to make their economy more advanced. This new technology that has been coming about to help the Chinese economy replace obsolete technology within the industrial sector has been considered to hold the Chinese economy back some in some areas. Some of the new technology has been imported and was said to help the Chinese economy jump over many generations of technology and move into what we call the more high-tech industry of production.

Some technological improvements in the Chinese economy have proven to indicate empirical evidence in the increase in productivity for them. A few of the technological improvements do include the state enterprises, which have shown increase in the pace of R&D efforts and new product development and process innovations. China has continued to benefit from technology transfer and it also has been able to provide their economy with growing technology industries and even a good outlook for more technology development and innovation in the near future for more production. One of the major roles of the Chinese economy industrial production is the use of imported technology. In order for the Chinese economy to close the technology gap and the production levels with the rest of the countries and to develop a high-tech economy, after reform they must consider technology imports vital for the Chinese economy. The Chinese economy’s government continues to increase their investment in industries in order to increase their productivity and product quality. It also continues to improve many other production areas such as the production of raw materials and improving their transportation. The technology developments of the Chinese economy and productive capacity have been enhanced by the benefits of importing large scale technology.

There have been a number of industries that have become more competitive because of the improvements in the Chinese economy’s industrial production sector. Most of the improvements have resulted from the imported technology and technology transfer that have led to new emerging industries in China. Actually, the increased amount of imported technology seems to have a greater affect on industry than China’s overall economy. The new technological advancements have led to growth in the export of manufacturing products and this caused more competitive industries and lower production costs. This result of a stronger market export also increases the economic growth of the Chinese economy. The economic growth of the industrial development of the Chinese economy is also a very important element.

The economic growth of the Chinese economy has tremendously improved over the years, mainly due to the technological changes. Not all of the economic growth is due to technology factors; there is a large amount that is due to strong international demand for its products and heavy government spending.

The export manufacturing products has been growing and this is because of the technological advancements in the Chinese economy and industry. This has been shown through the increase of productivity, lower production costs, and other competitive industries. Imported technology is a direct result of the technology advance that was achieved in the Chinese business industries and also the technology promotion efforts was also achieved. The Chinese economy has a relatively small share of technology development of overall economic growth but this new technology has transferred to China and made their industrial development better. It also created new industries and increased the competition for them. Technology in the Chinese businesses has also played a role in the future developments. Some of the new technology that is coming about that will affect the businesses in the Chinese economy are, the pervasive next generation of the Internet, the emergence of smart environments, the post-genomic health space and the emergence of the real-time enterprise. Another huge development that will take place soon for the Chinese economy is the 3G standard that has been developed in China. The Chinese government is welled prepared to have up to four 3G licenses be awarded in the coming year. They are mostly likely to be China Mobile Communications Corp., China Netcom Corp, Ltd., and China Telecommunications Corp. Right now there is no set timetable for the award of the 3G spectrum and the authorities are waiting for next-generation technology to become more mature.

F. Impact of Global factors:

The impact of globalization on China's economic growth is far-reaching. During the past 20 years, China's international trade expanded 16 times, with its ranking in the world bounced to seventh from the original 32"nd. Trade dependence rate lifted from 10 to 36%. The amount of FDI is now the largest amongst developing countries. According to a modular study on the synergy of FDI conducted by the Development Research Centre of the State Council, China's GDP recorded an average annual growth rate of 9.7% over the past 20 years, of which 2.7% was attributed to FDI Apart from using such statistics to show the impact of globalization on the Chinese economy, we recognize that integration with the world economy is instrumental to improving the Chinese economic structure, speeding up the establishment of the market economy, raising the level of corporate governance and technological capability, as well as optimizing its human resources. The impact of globalization on China's economic growth is momentous. Globalization presents to everyone a world which is increasingly liberalized and market-oriented. It also brings us intensified competition and a greater degree of interdependence. Everyone must learn to adapt to the increasingly competitive environment, and coordinate and cooperate with others in line with the new rules. Hence, the practices of different governments would inevitably be challenged. Whichever government comes to proceed with strategies or policy assessment and planning, economic globalization is definitely an important factor to be taken into account. The Chinese government has adopted a series of strategically significant policies so as to address the challenge of economic globalization. These include readjustment of the economic structure by speeding up the development of the high technology sector and the western region; transformation of the pattern of economic growth by strengthening IT education and sustainable development as well as further development of the outward-oriented economy by implementing ''come in" and "go out" strategies. Besides, the government is consolidating reform in SOEs and government administration with a view to establish a governing mechanism in compliance with international rules and practices. These policies obviously facilitate China's further integration into the global economy. Economic globalization creates cross-boundary impact on the economy and administration of a country/region. A ruling regime, if accountable, should uphold the principle of maintaining the stability and growth of the world economy. It is evident that the Chinese government is an accountable government. Its economic policies not only serve to meet the needs of China's economic progress, but also take into account the possible impact on the world. Its response to the Asian financial turmoil is a typical example. The success of the open door policy has boosted Chinese people's self-confidence, and has also established a liberal thinking in the country. Chinese people acknowledge that today's success is a result of liberalization, which has long been our primary target. Though like other nations, China may have a different interpretation of globalization and some specific ideas to cope with the challenges arisen from it, a few Chinese people would advocate going back to "isolationism" and hardly any would call for shutting the door of the country. The newly-promulgated Tenth Five Year Plan clearly demonstrates China's attitude towards economic globalization. The theme of the plan is nullified as that "'In the 21s1 century, with growing globalization, the IT wave, rapid economic restructuring, intensifying global competition and radical changes in the world economy, particularly its imminent accession into the WTO, China is no doubt facing enormous opportunities and hefty challenges." Such an idea, by and large, will guide the future course. Some scholars even remarked that the Tenth Five Year Plan is in fact a plan to address the challenges of China's accession to the WTO and globalization. China is marching towards the WTO and embarking on a new phase of liberalization. The new phase will mark the paradigm shift on liberalization from the previous confines of commodity trade to all-directional opening. It will phase-in the liberalization of such services as banking, insurance, telecommunications, external trade, internal trade and tourism as well as the national treatment for foreign enterprises. The commitment to wider opening the service industry not only aligns with the requirements set during the WTO talks for bilateral market access, but also due to the fact that the rapid development of the service sector becomes indispensable under the evolution of modem China. If China strives to boost the quality and quantity of the economy, attain balanced economic development, cope with the growing domestic demand, raise employment, speed up the integration of systems and so on, the only way is to propel the development of the service sector. It is an important measure to maintain the high speed of China's sustainable economic growth. As such, liberalization of services can bring about a win-win case. China is a developing country. Its service sector is relatively small in scale and weak in strength compared with other sectors in the country and its counterparts in the foreign countries. The industry is pre-dominated by traditional services and has yet to be diversified sector-wise. When it opens up, it will definitely feel the pressure from other countries, which have preemptive advantages in business ideas, strength and scale. However, the open door reform over the past 20 years witnessed the successful transformation from a traditional planned economy to a market economy and from seclusion to openness. The impact of such a change has gone beyond expectation and been overwhelming. And it is also true that no single country can stay away from globalization. Participation is the only-way to identify and grasp the opportunities. Participation is also the only way to keep abreast with the mainstream of the world economy.

Q3. In which industry this country has more opportunity and why?

Ans: China has enormous opportunities in many industries but its most of the opportunities lie in the Electronic and Information Technology industry. No country in history has burst onto the world's economic stage as dramatically as China. With its accession to the World Trade Organization in 2001, China has not only become the world's third largest trading nation, following the United States and Japan, but also the world's top destination for foreign direct investment (FDI), and one of the world's major manufacturing bases. With China's rapid economic growth, Electronics and IT has now become one of the most important industries in the nation. China has become the world's largest maker of many electronic appliances, such as color TVs, DVDs, & cell phones and the IT products such as computer hardwares and Softwares. China also now has a leading-edge semiconductor industry. This is great for China, since the Asian-Pacific market is projected to grow significantly over the next decade. China registered sales totaling 2.65 trillion yuan (420.4 billion US dollars) in the electronics and information sector last year, a year on year rise of 40 percent. China exported 200 billion US dollars of electronics and information industrial products last year. The competitiveness of China's IT industry depends on whether it has self-independent core technologies and whether it can set new industrial standard based on its independent core technologies. China has made breakthroughs in CPU designing, third generation mobile telecommunications technology and interlinkage between information products and household electric appliances over the past decade. BPO , namely business process outsourcing, is also known as ITES (Information Technology Enabled Services), including customer management outsourcing, human resources outsourcing, financial process outsourcing, claim management business outsourcing, financial business outsourcing, loan process outsourcing, and the government’s non-core business process outsourcing, etc. is also a part of the Electronics and information Technology industry. Despite suffered the impact of the global financial crisis in 2008, backed by its strong domestic market; the whole economy of China still maintains a relatively stable growth. And China's electronic and It industry is still growing at a high speed. Since the open-door policy began in 1979, China has boasted one of the fastest growth economies in the world. Electronics has been a Chinese pillar of success and is now the largest industry in China with growth of nearly 20 percent annually, and there is no end in sight. China is now the world's number one producer of TVs, recorders, VCD players, telephones, calculators, refrigerators, and air conditioners. China also has the number one cellular phone market, is number one in IC consumption, has a leading-edge semiconductor industry, and is the largest PC producer. Entry into the World Trade Organization is leading to economic liberalization, simplification of the licensing and foreign investment policies, and targeted government funding in electronics and IT R&D. China’s Electronic and IT industry has enormous growth potential and advantages, a growing number of global large-scale Electronic and IT companies have targeted China's market, and take entering China market as an important step of their global business development strategy. China’s main advantages in this industry development are as follows: 1. Low Labor Costs: It is well-known that for both providers and buyers, cost is the first element they need to consider, and that is just China’s advantage. Related statistics shows that the average wage of China's software engineers in first-line cities is only around half of the Indian programmers, and less than a quarter of the programmers in the US; and the wage is even lower in other cities like Tianjin. For the companies producing electronic appliances the cost advantage is even more evident. 2. Adequate Human Resources Supply: As the most populous country in the world, after years of education accumulation, China has formed a relatively rich HR storage. According to relevant statistics, from 2001 to 2006, the college graduates number has increased from 1.14 million to 4.13 million and the number would reach at least 6 million in 2009. At the same time, there are some schools and institutions cultivated a large number of personnel urgently needed for the service industry. Take Neusoft Software Park for example, it set up the Neusoft Institute of Information in order to promote the development of BPO business, which focuses on training students in computer and foreign language ability, and the graduates have a very strong practical capability in the BPO business. The above channels have provided sufficient human resources for the BPO industry. 3. Comprehensive IT Infrastructure: The development of Electronic and IT industry is highly dependent on the urban infrastructure, particularly the IT infrastructure construction, which is an important advantage for China. To resist the adverse effects caused by international financial crisis and avoid the economic fluctuations, the China government determined to invest 4000 billion yuan within two years to boost the economy, and most of the investment will be used for infrastructure construction: including 34 billion for the livelihood project and infrastructure construction in rural areas, 25 billion for railways, highways, airports and other major infrastructure construction, 100 billion for indemnificatory housing projects. At present, 20% of Chinese government’s investment is used for the continuous improving of infrastructure construction like transportation and communication etc. The 2008 World Economic Forum (World Economic Forum) released a report which made an integrated evaluation on the internet infrastructure construction of 127 countries and regions, China ranks 57 (last year, China is 62). 4. Powerful Domestic Market: Domestic market is the unique advantage for China's Electronic and IT industry. China owns huge domestic market and a strong manufacturing base, which forms its biggest core advantage. Modern service industry, especially the modern manufacturing service industry, is derived from manufacturing and based on the manufacturing industry. If there is no powerful manufacturing, there would be no powerful service industry. Thus, along with the unceasing expansion of China's advanced manufacturing industry, the high-end service industries originally located in developed countries also moves to Chinese cities looking for the customer needs. Today, the trend of MNCs setting corporate headquarter in first-line cities of China is a live verification for that. China's advanced manufacturing basis is bound to promote the huge demands of modern service industry. Therefore, the foreign demand plus domestic demand led by the rapid development of China’s economy composed the unique and unparalleled advantage for China’s Electronics and IT industry. 5. Government Support: The Chinese central government is encouraging foreign investment and providing massive incentives in the so-called "pillar industries," which include the electronics and IT industry, to serve as a multiplier for science, technology, and national economic development. As a result, companies are rapidly transferring science and technology into China. For example, Intel, which already operates three major electronic facilities in Shanghai, is further expanding into Chengdu with two new plants and more than 2,000 employees. Intel is also training engineers and has introduced new textbooks and added courses on semiconductor physics and factory processes to the undergraduate curriculum of the local universities. This book documents the technologies, manufacturing, capabilities, and infrastructure that have made China a major player in the electronics industry. It covers semiconductors, electronic packages, printed circuit boards, connectors and contacts, computer hardware and software, telecommunications, and various electronic systems. Other topics include the role of government, research organizations, educational institutions, science and technology information networks, and major companies in establishing an infrastructure where the Electronics and IT industry can flourish.

Q4. Identify some strategic issues adopted by the government of that country to enhance the business performance.

Ans.

to enhance the Electronics and Information technology Industry, Chinese government has taken a strong policy which is called ‘Indigenous Innovation policy’. To develop and implement this industry Chinese government has taken further steps. The following part will describe about this policy and the steps taken to implement this policy.

Indigenous Innovation Background

Indigenous innovation is a policy concept developed by the PRC government to boost the creation and commercialization of proprietary ideas and technologies by Chinese companies. It has been a core component of China’s economic development policy for several years. Central-government planners have often expressed their concern that the country’s economy and production capacity are heavily reliant on foreign technology. In their view, it is developmentally risky to have foreign-owned patents underlie much of China’s economic growth and to allow foreign brands to dominate the marketplace. As the country has advanced economically, some government planners have argued that Chinese-owned patents and trademarks should be the foundation of the country’s development. In 2006, the central government more formally introduced a policy of promoting indigenous innovation (or self-innovation), whereby government agencies would work cooperatively to develop measures that would favor products that use Chinese-developed ideas and technology. Since then, several government agencies at the central and local level have implemented preferential policies, product catalogues, financing schemes, and other tools to ensure that the indigenous innovation policy results in the development of Chinese-owned technology and intellectual property (IP).

Indigenous Innovation Policy Development and Implementation

Several PRC government agencies are responsible for developing and implementing indigenous innovation.

The State Council Leading Group on Science, Technology, and Education is comprised of representatives of major ministries and government offices, such as the Ministry of Finance (MOF), National Development and Reform Commission (NDRC), Ministry of Science and Technology (MOST), Ministry of Industry and Information Technology (MIIT), Ministry of Commerce, and the Chinese Academy of Social Sciences, among others. Led by Premier Wen Jiabao, this group under the State Council is responsible for discussing, reviewing, and approving major policies and strategies on science and technology (S&T) and coordinates relevant departments and localities to implement key tasks and projects. The group has been involved in formulating indigenous innovation policy since 2005 and is the principal venue for integrating indigenous innovation policy among the various agencies involved.

1. MOST is responsible for leading the reform of China’s S&T system and formulating S&T strategies, policies, and laws and regulations. Responsible for China’s overall innovation strategy, MOST is tasked with accrediting indigenous innovation products and formulating and developing indigenous innovation product catalogues.

2. NDRC is the PRC government’s chief ministry-level macroeconomic planning body. NDRC sets China’s long-term national economic development agenda, from which ministries devise and implement their own policies. Importantly, S&T and innovation are outgrowths of these long-term economic development policies.

3. MOF oversees government procurement and sets procurement criteria for indigenous innovation products the government uses. Procurement is the lifeline of China’s indigenous innovation strategy, because government purchases are a major source of funding for companies engaged in the research and development (R&D) of innovative products.

4. MIIT is built around the core functions of the old Ministry of Information Industry, including regulation of electronics and information product manufacturing. It is also responsible for crafting and implementing China’s industrial policies, of which innovation is an essential component.

Implementation of indigenous innovation

As with all major economic development plans, the central government first crafts broad policy documents that outline the principles for implementing the specific policy. Then, the relevant ministries and commissions—at both the central and local levels—create specific measures that implement the policy based on the principles in the broader documents.

At the center of China’s indigenous innovation drive is the Medium- and Long-Term National Plan for Science and Technology Development (2006-20) and a follow-up document on its supporting policies both released in 2006 by the State Council. The plan and its supporting policies formally introduced the concept of indigenous innovation into China’s national industrial policy and laid out several goals, including

5. Developing a system to evaluate and qualify indigenous innovation products;
6. Establishing a system to use government funds to buy indigenous innovation products; and
7. Giving preferential treatment in the government procurement process to indigenous innovation products.

Preference in Government Procurement

The primary and most explicit benefit conferred upon products that receive indigenous innovation recognition is preference in government procurement. The size of China’s government procurement market is difficult to calculate because schools, hospitals, museums, think tanks, state-owned enterprises, and other public entities are subject to varying degrees of influence from central and local governments. Even excluding these entities from the government procurement system, however, China’s vast government bureaucracy at the central and local level presents substantial commercial opportunities across a wide range of industry sectors.

In addition to granting priority in government procurement, Selected Supporting Policies for the 2006-20 Medium and Long-Term Science and Technology Development Plan (2006) also favor indigenous innovation products in price-based bidding. Article 23 states that during the price-based bidding process, if the price of an indigenous innovation product is higher than others, the company making the product may reduce the price in its bid; if the price is not higher than other products, the government agency must procure the indigenous product. In addition, several articles of the 2007 Evaluation Measures on Indigenous Innovation Products for Government Procurement award indigenous innovation:

8. Article 13 provides that indigenous innovation products shall be given preference at a margin of 5–10 percent in the event that price is the sole determining factor.
9. Article 14 states that indigenous innovation products may enjoy an additional 4 to 8 percent boost in their technical and price evaluations if comprehensive evaluation methods are used. When provincial authorities use comprehensive methods, they weigh technical merit and other technology-related factors alongside the product price to create an overall score, which is used to select the most competitive products.
10. Article 24 calls for establishing a government system for initial purchasing and ordering that will encourage the commercialization of products with indigenous innovation accreditation. The government should purchase the first set of innovative products created by domestic enterprises, universities, and research institutes if the products are thought to have future wide-market potential. The article aims to give such products a stronger foothold in the market.

November 2009 circulars lay out rules for new central-level indigenous innovation catalogue

NDRC, MOST, and MOF released two circulars in November 2009: application procedures and a notice that lays out provincial responsibilities for the new central-level indigenous innovation catalogue. The documents included a December 10, 2009 deadline for companies to submit applications for indigenous innovation status and a December 30, 2009 deadline for provinces to make recommendations to the central government for the scope of the catalogue.

Four of the six areas identified for inclusion in the indigenous innovation catalogue are information- technology related: computers; communication (believed to include mobile phones); office equipment (such as scanners); and software. The remaining two are related to new-energy equipment and energy-efficient products. Foreign company concerns center on Section IV of the application procedures, which reiterates seven conditions, including the patent and trademark restrictions that will likely exclude foreign companies from qualifying their product. The November 15 notice does not appear to include any new requirements, but as the first national catalogue, its impact will likely exceed that of the local catalogues.

January 2010 draft implementing regulations for PRC Government Procurement Law

The State Council’s Legislative Affairs Office (SCLAO) released on January 11 long-awaited draft Implementing Regulations on the Government Procurement Law, rules that outline the scope, responsibility, conditions, format, procedures, and requirements for government procurement in China. Notably, the draft defines domestic products, projects, and services in a way that appears to include FIEs.

Specifically, Article 10 of the draft implementing regulations defines what constitutes a “domestic product” under the 2002 PRC Government Procurement Law, such that a “domestic product” is one “made within China’s borders and for which domestic manufacturing costs exceed a certain percentage of the final prices.” This definition should allow FIE products that pass a local content threshold—which apparently will be equally applied to Chinese-owned companies—to qualify as domestic for the purposes of government procurement, given that FIEs produce in China. Though the draft is silent on the percentage of domestic content required to qualify as domestic, temporary measures released by the Ministry of Finance in 1999 stated that products with less than 50 percent of their value produced domestically were classified as imports. It is unclear whether these measures are still in effect.

Article 10 also states that government procurement for projects and services will apply to Chinese nationals, Chinese legal persons, or other Chinese organizations. Because FIEs have legal person status under existing PRC laws, this definition indicates that projects and services provided by these FIEs should be treated as “domestic” for government procurement.

In addition, these regulations provide a threshold for the price preference to be given to domestic products and services. Many countries allow or require government entities to preferentially procure domestically produced items unless they are “unreasonably” expensive compared to a competing import. The draft regulations define “unreasonable commercial terms” to mean that the price of domestic goods, projects, or services is at least 20 percent higher than those of non-domestic competition. If a domestic offering meets this definition, it should not receive preference in procurement. For reference, the US Buy American Provision in the American Recovery and Reinvestment Act has a threshold of 25 percent for manufactured goods, iron, or steel purchased under the act, and the United States has a 6 percent threshold for procured goods in general.

Indigenous innovation is mentioned repeatedly throughout the draft regulations, reinforcing the notion that indigenous innovation is an increasingly important concept in the minds of Chinese policymakers. Article 9 of the implementing regulations gives preference in government procurement to energy-saving and environmental-protection products, indigenous innovation products, products made by small and medium-sized enterprises, and products made in minority ethnic areas (such as Xinjiang). The article is significant because it states that qualifying products should either be given priority or mandatory purchase preferences, without further clarification. This article echoes current concerns from foreign companies about recent criteria issued by the PRC government for qualification of indigenous innovation products that effectively exclude FIE participation.

Policy and Regulatory Framework Surrounding Indigenous Innovation:

The central government has released various policies and regulatory measures to implement its indigenous innovation policy. Below is a list of some of these regulatory measures.

PRC Government Procurement Law (2002)

This law establishes the foundation for government procurement, noting that PRC government agencies should purchase domestic goods and services unless the required items cannot be obtained within China or under “reasonable commercial circumstances.” The law applies to all purchases made by central-, provincial-, and local-government agencies.

Medium- and Long-term National Plan for Science and Technology Development (2006-20)

This plan introduces the concept of indigenous innovation into China’s national industrial policy and lays out key principles that government agencies should follow when implementing indigenous innovation.

Selected Supporting Policies for the 2006-20 Medium and Long Term Science and Technology Development Plan (2006)

These policies further detail how the principles of indigenous innovation should be implemented and entrusts MOF and other agencies with setting the standards for what will be considered a domestic product.

Trial Measures for the Administration of the Accreditation of National Indigenous Innovation Products (2006)

These measures set up the specific certification criteria for evaluating and certifying indigenous innovation products, including ownership of core intellectual property and trademarks by the applying China-based company.

Evaluation Measures on Indigenous Innovative Products for Government Procurement (2007)

These measures lay out the advantages that accredited products enjoy in the government procurement process, including price deduction and extra consideration in technology and quality evaluations.

Administrative Measures for the Government to Initially and Selectively Purchase Indigenous Innovation Products (2007)

These measures require government agencies to make initial purchases of newly developed products by domestic companies that are not currently competitive in the marketplace. Products are designated in the Catalogue of Indigenous Innovation Products, and government agencies are required to purchase those products, which will eventually be used in government-funded investment projects.

Notification Regarding the Launch of National Indigenous Innovation Product Accreditation Work for 2009

This notification details to relevant authorities the application and review process for products applying for indigenous innovation status.

Q5. Top five countries on which China has greatest impact.

We can rank the top five countries on which china has greatest impact on the basis of its export to and import from those countries. Export and import is mean through which a country can influence other country’s economy. The following tables list the name of the five countries where China exports mostly, from where China imports mostly and its top five trade partners.

China's Top Import Suppliers 2009 ($ billion)

|Country / region |Volume |% change over 2008 |
|Japan |130.9 |-13.1 |
|South Korea |102.6 |-8.5 |
|Taiwan |85.7 |-17.0 |
|United States |77.4 |-4.8 |
|Germany |55.8 |0.0 |

China's Top Export Destinations 2009 ($ billion)

|Country/region |Volume |% change over 2008 |
|United States |220.8 |-12.5 |
|Hong Kong |166.2 |-12.8 |
|Japan |97.9 |-15.7 |
|South Korea |53.7 |-27.4 |
|Germany |49.9 |-15.7 |

China's Top Trade Partners 2009 ($ billion)

|Country/region |Volume |Export |Import |
|United States |298.3 |220.8 |77.5 |
|Japan |228.9 |97.9 |131 |
|Hong Kong |174.9 |166.2 |8.7 |
|South Korea |156.2 |53.7 |102.5 |
|Taiwan |106.2 |20.5 |85.7 |

From the above tables it is clear that china mostly imports from Japan, South Korea, Taiwan, United States and Germany, and exports to United States, Japan, Hong Kong, South Korea and Germany.

If we want rank the countries to which china is mostly influential we have to consider the exports and imports cumulatively. In that case China’s top five trading partners are United States, Japan, Hong Kong, South Korea and Taiwan.

If China stops or reduces it’s trading with any one of these countries, that country will be economically hampered. If china stops importing from that country, it will lose its one of the biggest market of the world and if China stops exporting to that country, there will be a lack of supply of that product. So all the five countries’ economy will be tremendously affected, if China stops trading with these countries.