Implementing a business in another country is an adventurous trip for any company.
By entering a new market, a company must often conduct Business Risk Management. China, the fast-growing second economy of the world, generates the interest of many companies from all around the globe. Those firms want to benefit from a developing economy and get access to a new market.
Have a look at our article regarding Business Risk Assessment: A Guide for Managers
In addition to the classic risks faced by any investor entering a new market, China brings a wide range of challenges and potential threats. Therefore, companies’ management must take every kind of business menace into consideration.
Types of Chinese Business Risks
Political and legal risks
The main risk when starting a business in China is the complex legal and political environment. In China, the rules often change unexpectedly and create unclear regulations, obligations, or prohibitions for companies. These changes can sometimes drastically impact the course of their activities. Moreover, the state’s interventionism on the interest rate, currency, and prices creates what can be seen as an unpredictable business environment for companies.
Foreign companies must also keep in mind that the Chinese government often promotes the development of local companies that can compete fiercely against them.
Corruption and dishonesty
China is the second most powerful country in the world. However, it still knows the issues that can be found all around the developing world. China knows a lack of transparency, conflicts of interest, and corruption. Also, Guanxi, the set of social networks of influence and relationships through which Chinese people do business can have excesses. It can create an unethical work environment.
Read on the Chinese Business Culture: What You Need to Know
Companies who are entering China often deal with Intellectual Property issues. Intellectual Property must be duly registered in China, which means giving precious technology information to the authorities. Moreover, joint-venture partners might also show signs of dishonesty and scam their foreign associate.
Lack of skills in the job market
The Chinese professional environment is not as performing as it should be, mainly in areas such as internal control, financial and management accounting. The structural lack of skilled employees can generate issues in the way the company is managed. Thus, it can impact the decision-making process and the business overall.
How to manage risk when doing business in China?
The risks can be controlled through extensive preparation before arrival and serious job after the start. To get the most successful results and capture the opportunities offered by the Chinese economy, any company willing to invest in the country must:
- Prepare thoroughly its business plan and assess the risks of the activities supported by the company and the sector’s Chinese regulation.
- Conduct thoughtful and extensive investigation before investing in a Chinese company, buying property, or creating a joint venture with another enterprise. If this is the path that you are willing to take, you can read our article on How to make your Joint Venture successful.
- Hire qualified and trustworthy managers and employees. Organize regular meetings in order to improve communication between employees and departments.
- Implement internal control procedures and insist on the strict following of the legal and internal rules by the employees. Moreover, it must avoid the excess of Guanxi that could create conflicts of interest within the company.
Conclusion
Any company setting up in China faces significant business risks that threaten its activity and intellectual property. Those risks might also limit its profitability and overall economic success.
However, any businessman should never forget that it’s only by taking reasonable risks that rewards can be obtained. Chinese business risks are preventable provided that the threats were properly reviewed and control tools were introduced.
Contact us
S.J. Grand’s offers financial advisory related to risk management, due diligence, and forensic accounting that will guide you through the present challenges of China’s business environment and succeed in overcoming them. Contact us for consultation and assistance.
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