Chinese Economics Essay Example

influence of landlords in rural areas. Over a span of more than 20 years, the party expanded its control over large agricultural regions through the implementation of an agrarian program focused on rent and usury control, as well as empowering peasant associations. On October 1, 1949, the Communist party successfully established a unified national government and economy on the mainland, marking the first time since the end of the imperial period in 1912.

From 1949 to 1952, the main focus was to put a stop to inflation, resolve the issue of food shortages and unemployment. The new government introduced a land reform program, which involved the redistribution of land to 300 million impoverished peasants, who then formed cooperative farms. In 1958, the rural people's communes were established and played a significant role in Chinese agriculture until the early 1980s. The communes operated on the principle of collective ownership of all land and major tools by its members. They primarily produced goods according to state planning targets and received rewards based on their individual work efforts. However, all commune members were guaranteed basic necessities.

State ownership of property and industrial and commercial enterprises was gradually expanded in the urban-industrial sector. Industry experienced steady growth following significant investment during the first five-year plan, resulting in the state-owned sector becoming overwhelmingly important. In 1958, the second five-year plan aimed to accelerate industrialization in China. This initiative involved substantial investments in heavy industry and the establishment of smaller versions of industries like steel refining. However, the program caused significant disruptions in economic management and rational economic growth, ultimately leading to its abandonment in 1960.

The Chinese economy underwent a period of

readjustment after which production in many fields reached levels similar to those of the late 1950s by 1965. However, the effects of the Cultural Revolution severely impacted both agricultural and industrial production during the third five-year plan, which began in 1966. In response, a fourth five-year plan was implemented in 1971 to initiate economic recovery. After removing the remnants of the Cultural Revolution in 1976, Chinese leaders decided to accelerate progress across all economic sectors to compensate for the previous decade's losses. Consequently, a fifth five-year program commenced in 1976 but was interrupted in 1978 with the launch of the Four-Modernization program.

The text discusses various aspects of China's modernization efforts, including agriculture, industry, national defense, and science and technology. From 1976 to 1985, a ten-year plan aimed to improve economic management and increase the involvement of privately and collectively owned enterprises. This plan was later replaced by a more modest ten-year plan from 1981 to 1990; however, efforts to attract Western technology and investment continued alongside incentives for enhancing agricultural production.

In October 1984, new policies were implemented to further decentralize economic planning and rely on market forces for determining consumer goods prices. With a population of 1.3 billion people, China has the potential to become the world's largest market.

Moreover, China has abundant untapped resources and is home to the largest and most cost-effective labor force in Asia. The sheer size of China and its underdeveloped state make it an attractive powerhouse that has garnered global attention for investment and development purposes. The Chinese economy provides expanding economic opportunities for all.

Cultural Aspects

The culture and society of China can be divided into two significant eras: Imperial China

and Communist China. Present-day Chinese society encompasses both long-standing values and accomplishments along with communist propaganda.

In imperial China, there was a prominent class system where the majority of the population faced poverty and had limited resources for their cultural, social, and personal development. Consequently, family connections became vital and influenced China's unique collectivist belief system. The primary objectives in society were to safeguard the welfare of both the family unit and the state. Any behaviors that did not contribute to the betterment of either the family or society at large were deemed inappropriate.

The Chinese Family plays a crucial role in the Chinese economy as the main economic unit in society. Within this framework, family members work together to produce and consume goods collectively. Additionally, it is the responsibility of the family to perform religious ceremonies for the welfare of the family. The harmonious combination of religion and family is imperative to guarantee social stability within the Chinese family.

These ideas sharply oppose the western belief in pursuing personal wealth. A prime illustration is the overseas Chinese, who run family-owned business empires that currently dominate many parts of Asia. They invest billions in China, contributing to their ancestral homeland's status as the world's fastest-growing economy. As a collective, China and its approximately 56 million offshore Chinese hold great significance as commercial and political forces, showcasing the family-based economic approach they adhere to.

In addition to the traditional imperial Chinese society, the Communist values have influenced and merged with modern Chinese philosophy. After gaining control in 1949, one of the initial actions taken by the Chinese Communist party was to officially remove organized religion. Confucianism, Taoism, and Buddhism had

previously dominated as religions in China. Many temples and schools associated with these four religions were repurposed for secular use. It was only with the enactment of the 1978 constitution that official support for formal religion in China was once again permitted.

The Chinese constitution guarantees the right to religious beliefs and China's rich cultural tradition places a strong emphasis on education. Education has played a crucial role in attaining positions of power and influence throughout Chinese history, dating back to the imperial era (221 BC-AD 1912). The first university was established in 124 BC with the specific goal of training future bureaucrats in Confucian teachings and traditional Chinese literature. However, access to education was limited for most of history due to the complexity of the language and associated literature. As recently as 1949, it is estimated that only 20% of China's population had literacy skills.

The Chinese Communists viewed illiteracy as a hindrance to their political agenda, leading them to merge political propaganda with educational advancement. Consequently, communism greatly influenced Chinese education, considering it was previously limited to the wealthy and privileged during the imperial era of China.

Under the Communist party, the establishment of universal public education for their large population has been one of the most ambitious programs. In the initial two years of the new government (1949-51), more than 60 million peasants enrolled in "winter schools" to make use of the slack season for agricultural workers. Mao emphasized the importance of education in bridging class distinctions, aiming to reduce the gaps between manual and mental labor, urban and rural residents, and factory workers and peasants.

After a series of interruptions and policy shifts, colleges reopened

in 1970-72. Many candidates were admitted based on their political affiliations, involvement in party activities, and support from their peer groups. However, this selection process came to an end in 1977, when the Chinese government initiated the Four Modernizations campaign. The government's objective was to rapidly modernize agriculture, industry, defense, and science and technology, which necessitated a focus on theoretical and formal skills rather than political attitudes and revolutionary spirit in educational programs.

Following the revolution, China underwent profound changes. The Chinese philosophy placed great importance on the stability of social values and structure, and these values, deeply ingrained in the country's culture, were further reinforced by communism and incorporated into China's development. As a result, Chinese society became a fusion of robust family and moral values alongside a strong drive for modernization and industrialization.

The notion that stability is the ultimate accomplishment has hindered China's progress in the past and continues to be problematic today. In contrast to Western society, where risk serves as the primary driver for development and investment, the Chinese culture is deeply disturbed by the mere idea of risks. The transformation from imperialism and significant class divisions to Mao Tse Tung's ideology of equality brought about the modern China. This shift from feudalism to communism resulted in a conservative China that made very few attempts to embrace capitalism. Although mercantilism and trade occurred during the imperial era, it never thrived in the same capitalistic manner as known in the Western world until China's re-opening to the West in the 1970s.

China has always possessed the necessary components for advancement, and it is possible that they could have undergone an industrial revolution even before

England. China had numerous essential elements, such as the compass, printing, and gunpowder, which played a crucial role in transforming Europe into a modern industrial economy. However, China's significance extends beyond industrial and economic development alone. When contemplating establishing a business in China, one must consider the cultural aspects that contribute to the country's powerful and unique society, setting it apart from western societies. Despite China's desire for growth, it will not necessarily adopt western models and philosophy; instead, it will develop its own models based on its culture.

The most problematic issue between Chinese and Western cultures is the point that must be acknowledged for success in developing a business relationship in China. Negotiating in China can be highly frustrating due to varying decision-making styles and negotiating tactics, leading to misunderstandings and tension. Chinese culture emphasizes the significance of rituals and ceremonies, which extends to Chinese business practices.

The significance of business meetings and receptions is illustrated through the example of Kentucky Fried Chicken's experience in China. This case involves the challenges and tactics involved in negotiating and establishing a foreign joint venture in China. However, comprehending the issues that arise and the current business landscape in China requires an understanding of its historical background and cultural revolutions. By examining the history of China, we gain insight into the obstacles faced by a KFC manager in their dealings with the Chinese.

In 1986, Tony Wang, Vice President of KFC's Southeast Asia division, recognized the opportunity to introduce the world's largest chicken restaurant company to China. With his extensive experience at KFC and entrepreneurial skills, Wang took the initiative despite a lack of market evaluation or competition in

the People's Republic during that period.

Despite the challenges of doing business in China, such as managerial resource requirements and restrictions on repatriating hard currency, Wang encountered a dilemma when choosing the location for the inaugural KFC restaurant. The variations between cities made it arduous to accurately evaluate these discrepancies. Nonetheless, despite past disappointments faced by other companies, Wang (also referred to as Ta-Tung or Tony) recognized immense opportunities within the Chinese market. Born in 1944 in Sichuan province of the People's Republic of China, Wang resolved to undertake this venture.

Having moved to Taiwan as a young person, he graduated from Chong-Yuan University with an engineering degree. Later on, he relocated to the United States and earned a masters degree in management science from Steven's Institute of Technology in New Jersey in 1973. In 1975, after completing a post-master's certificate in international business management at New York University, Wang began his career at KFC's headquarters in Louisville.

Wang, after attending a lecture by the mayor of Tianjin regarding investment opportunities in the city, recognized the potential for American-style fast food in China. Impressed by Wang's insights, the mayor invited him to join a council aimed at improving the fast food industry in Tianjin. Notably, R.J. Reynolds, who currently owns KFC, expressed strong interest in entering the Chinese market with their cigarette products.

Wang, who had the support of top management, was proficient in both Mandarin and English languages. He was equally at ease working in New York or Beijing and had prior experience in negotiating with the Chinese. Additionally, American cigarettes were highly sought-after in China.

As Tony Wang delved deeper into the necessary prerequisites, his concerns grew. He

recognized that Chinese workers would face challenges in adhering to KFC guidelines, necessitating time-consuming and costly training programs. Moreover, substantial capital investments would be required for finding and negotiating partnerships, securing leases, and obtaining operating permits. Wang devoted himself to comprehensive research on the Chinese market, starting with a focus on location. This aspect held significant importance due to its potential impact on profitability, future expansion throughout China, and resource allocation for management.

Four cities were chosen as potential sites for the first store: Tianjin, Shanghai, Guangzhou, and Beijing. Among the advantages of Tianjin, one was the existing contacts that Wang had there. Additionally, Tianjin was one of the three municipal governments in China that were not under the control of the Central Government in Beijing. However, a major issue with Tianjin was the absence of a readily available supply of grain-fed chickens.

Local chickens were fed using fish meal, which was a problem for the Chinese who value freshness and taste. Additionally, Tianjin was not a popular tourist destination. Despite this, Wang expected most profits to be in Renminbi. However, some foreign currency was necessary for profit repatriation and purchasing supplies that could only be obtained outside of China.

Shanghai

Shanghai is considered China's most prosperous business center with a population of over 11 million people. It is home to various Western hotels, business facilities, and attracts tourists. However, it is not a popular tourist destination due to pollution and noise.

The investment is only justifiable if it provides enough foreign currency. Shanghai has several feed mills and is the largest poultry supplier in China.

Gangzhou

Gangzhou, located in Southeast China near Hong Kong, is known for its favorable treatment

of foreign investment. It has more control in approving foreign investment projects, lower tax rates, and promotes technological development.

Many tourists visit Guangzhou because it is close to Hong Kong and operations can be directly managed from there. Additionally, Wang expects no trouble finding a chicken supplier.

Beijing

Beijing is China's second largest city and serves as both the political and cultural center. Its residents enjoy high levels of affluence and education.

Being the tourist center of China, Beijing is also home to many attractions. A Beijing location can provide a higher profile, which has both advantages and disadvantages. On the positive side, obtaining approval from the central government would allow them to easily enter the rest of the Chinese market. On the other hand, due to the increased visibility, the government may decide that they do not align with the Chinese landscape, leading to their failure. Additionally, outside of Beijing, there are numerous poultry farms.

Wang's understanding of KFC's success relied heavily on selecting the right location. This decision was crucial as it would determine the fate of the business. At that moment, there were no other competitors in the Chinese market, creating a favorable opportunity for Wang to make a bold move. However, he was fully aware of the associated risks and had to carefully assess them in order to figure out if the expenses would result in substantial gains or significant losses. Making a bold move, Wang ultimately chose to commence operations in Beijing in early February 1987.

This decision was made due to the large number of tourists in Beijing and its separate local government. However, his concerns about the business were growing. KFC entered into a

partnership through a joint venture. Wang's worries were based on his struggle to accomplish tasks in a city governed by a complicated bureaucracy that appeared to be incomprehensible and uncooperative. He believed that finding a suitable location and obtaining government approval for everything would be impossible.

Wang's concerns about whether Chinese workers could meet KFC's standards of cleanliness, quality, and service were also a reason for considering the establishment of a joint venture. Wang believed that the Chinese were "completely impossible for us to understand" and trying to understand them would be a waste of time. Dealing with investment regulations, obtaining operating licenses, leases, and employment contracts could potentially hinder their progress. Although Chinese law did not require a local partner, Wang believed it would be beneficial for setting up operations and ensuring long-term sustainability. The partnership between KFC and the Beijing Corporation of Animal Production, a producer of chickens controlled by the Beijing city government, was formed through the connections that R.J. Reynolds had with the Ministry of Light.

After conducting a thorough examination, KFC determined that Animal Production had already been breeding three of the chicken breeds that meet the company's requirements. Negotiations began with Mr. Jue Xia, a senior manager at the Beijing corporation, who expressed concerns about meeting KFC's high demand due to insufficient grain reserves. Xia also had reservations about KFC's quality standards.

However, the notion of collaborating with a Western company appealed to them because it would provide them with valuable international exposure. Xia believed that Tony Wang, unlike other American managers, was someone he could easily communicate with. The Beijing Corporation assisted Wang in locating a chicken supplier, but they lacked

the necessary connections with government agencies required for establishing operations. Thus, an additional partner was necessary. Both partners concurred that the Beijing Tourist Bureau would fulfill their needs.

The Tourist Bureau oversaw the building and running of hotels and restaurants in Beijing and had expertise in expedited construction of Western hotels. They frequently collaborated on joint ventures. It was during this period that KFC was acquired by Pepsico. At the time, KFC was the world's second-largest fast-food chain.

Initially, it was believed that Animal Production joined due to pressure from the Ministry of Light Industry in order to gain favor with Reynolds. Therefore, the acquisition occurred during an unfavorable period. However, it was discovered that Pepsico had stronger connections with the Beijing government than Reynolds did. Consequently, negotiations progressed with a renewed enthusiasm. To persuade the partners to join the venture, Wang promised a five percent return on equity, which was significantly superior to what they could obtain domestically. This ultimately convinced the partners to agree to the deal.

The breakdown of ownership in the arrangement consisted of KFC retaining 60%, the Tourist Bureau receiving 27%, and Beijing Animal Production taking 13%. Each partner contributed their respective assets to this agreement. The partnership received pre-approval from the Foreign Economic Development and City Planning Commissions. Approval required the sharing of the corporation, with one-half coming from KFC and the other half split between the other two partners. Additionally, the deal stipulated that the chairman would be appointed by Animal Production and the vice-chairman would be appointed by the Tourist Bureau.

This worried Wang as it meant losing control over operations. To address this, Wang decided to open the new store

as a franchisee under KFC's head office in Singapore. As part of the franchise agreement, the store would be required to make 3% royalty payments to the head office and purchase its seasoning mixes from them, both using hard currency. Additionally, Wang hired a day-to-day general manager in Beijing who was appointed by KFC and had authority over operations.

Despite appearing to have overcome all major challenges, KFC faced another obstacle in the form of not obtaining operating authority in the city even after the partnership was approved. They had to acquire a "Licence to Execute a Business Activity," which necessitated the signatures of multiple government departments including the District government, Commerce Department, Taxation Department, Health Department, and Food Supply and Logistics Department. Since these agencies lacked coordination, separate approval from each one was mandatory, potentially resulting in a lengthy waiting period of months or even years. Tony Wang acknowledged that while KFC and the Chinese were both pioneers in China, whether the Chinese were willing to learn was uncertain.

Many Westerners have the misconception that they can easily pay to get their work done quickly in China. However, this belief is not applicable in China. The Chinese people are not driven by the motivation to do things correctly just for the sake of it. They are not interested in expediting the process with your assistance, but rather their main goal is to avoid any issues. Therefore, if we cannot convince them otherwise, we ourselves become the major obstacle for them. Wang was concerned about not being able to find a suitable location, as a license was required prior to signing a lease.

Beijing is fully occupied in

terms of buildings and available space. Additionally, Chinese regulations require new tenants to guarantee employment for any workers who become jobless when a new tenant assumes control. Wang was concerned about this requirement as he would need to hire unskilled Chinese workers. Wang desired to open a large and eye-catching store as it would determine KFC's future success in China. This was a strategic move, but it contradicted the Chinese culture which historically exhibited hostility towards Western culture. Finally, in February 1987, KFC received a license from the city to operate in Beijing.

The Tourist Bureau played a crucial role in expediting the application process. Alongside this, KFC was granted a two-year tax remission under their license. Profits made in years three, four, and five would be subject to a 16.5% tax rate, followed by a 33% tax rate for profits thereafter. The next step for Wang was to choose a suitable location for the first KFC outlet. However, regardless of the chosen location, the company would still need to obtain a building permit and arrange connections for electricity, water, gas, and heating before commencing operations. Wang soon discovered that obtaining these services was challenging, often resulting in delays of several months for application processing. Additionally, another issue arose regarding the import licenses required to bring essential equipment into the country. This included pressure frying machines, cash registers, and various kitchen equipment for blending and cutting purposes.

Tony Wang discovered during the permit acquisition process for each item that it could be time-consuming and could even take months. He realized that amidst these negotiations, there had been no consideration given to test marketing the area. It was

understood that the Chinese population had a fondness for chicken, with KFC's success in Hong Kong serving as a basis for assumption. However, there was no definitive confirmation due to a lack of time and they had to resort to hoping for the best. Moreover, a challenge lay in securing a trustworthy supplier of high-quality potatoes. If they failed in this endeavor, they would have to opt for mashed potatoes instead and Wang was unsure of how the Chinese customers would react.

Tony Wang was primarily worried about whether the Chinese employees could adhere to the quality, service, and cleanliness standards set by KFC. There was a lack of understanding among the Chinese employees regarding KFC's international standards of cleanliness and product quality. Additionally, domestic organizations did not have any incentive programs in place, and work was generally considered undesirable. Moreover, the concept of providing excellent service was unfamiliar to them. It was crucial for the store to meet these requirements in order for KFC to authorize its opening.

The irony was that Chinese consumers were willing to accept less than the necessary amount, which caused conflicts with the partners. Tony Wang also pondered the fate of the soft currency that the venture would generate and questioned if there would be any profits at all. Wang had three options to consider: 1.

To mitigate company losses and prevent negative publicity in case of venture failure, KFC could consider two options. Firstly, they could opt to pull out completely, allowing for further research and potential re-entry in the future when more comprehensive information is available. Alternatively, they could proceed cautiously by taking more time to evaluate the situation and

ensure the partnerships are secure and the market is receptive to KFC. However, this approach might invite competitor response.

Go ahead full - the market had high potential for success for KFC, and, with 1.1 billion people, large potential for profits. Wang decided to go full ahead. The location was finally found. The central government approved the lease because Wang sold them on the idea that the restaurant would represent a symbol and statement of the People's Republic open policy with the West. The lease was finally approved in April of 1987, however they did not have the building permit, which would allow them to make necessary renovations.

Hookups for gas, water, and heating were also requested. However, the applications for these hookups were frequently lost or left unanswered. Once KFC announced job openings, the number of applications received was overwhelming. In response, management made the decision to treat all applicants with fairness and impartiality.

Referrals were not accepted, which was a novel decision in China where family contacts are typically utilized to secure highly desirable positions. This decision caused tension with the partners.

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