The Political and Legal Environments Facing the Business

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To discuss the goals and functions of a politicalsystem

To profile trends in the emergence and diffusion

of contemporary political systems To explain the idea of political risk and describe

approaches to manage it

To understand how political and legal systemsaffect the conduct of business


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To describe trends in the evolution and diffusion ofcontemporary legal systems

To discuss the issue of the rule of law versus therule of man

To explain legal issues facing internationalcompanies

To explain the idea of intellectual property and todiscuss areas of concern and controversy


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Upto 1970s, prohibition on foreign investment andrestricted foreign trade.

This was due to the notion that contact with foreignerswould corrupt the political structure and cultural life.

By 1978, realizing it was economically lagging behindmuch of the world.

It took various measures like Law on Joint Ventures usingChinese and Foreign investment.


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The economy has since then witnessed step-by-stepliberalization & gradual entry into the world of foreign trade &investment.

Though the Communist Party maintains an absolute monopoly

on political power, the countrys economy is shaped by freemarket principles.

China is now the worlds 2nd largest economy, which alongwith US accounted for 60% of all global growth


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By the 1st quarter of 2007, the $12.5 trillion USeconomy was sputtering while the $2.5 trillionChinese economy was expanding at a rate of 11

% pa.

If this continues, China will replace the US asthe worlds largest economy, both in nominal &

real terms, within the next two decades.


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Total FDI in China, representing more than 600,000 ventures set upby companies from around the world, exceeded $800 billion.

Reasons :-

Market Potential Market Performance

Infrastructure

Resources

Strategic Positioning


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Market Potential-With a population of over 1.3

billion & economic growth lifting many into themiddle class, the scope is vast.

Market Performance-Rapid economic growth has

increased consumer spending.

Infrastructure-In a multiyear program to build its

infrastructure, it will invest trillions of dollars onhighways, airports, seaports, dams, power plants,

and communication networks.


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Resources-With a well-educated populationand an immense pool of productive labour with

lower wage rates-about 1/3rd of the Mexican

and 1/25th of the US rate.

Strategic Positioning- More and more

companies consider investment and operation in

China as fundamental elements of their globalstrategies.


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Chinas attractiveness as a business destinationcontinues to suffer due to many political and legalcomplications.

The western ideas does not automatically work inChina.

For e.g., in the West, you can form a corporation forany valid business purpose. This does not exist in

China.


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Incorporation in China requires providing

excruciating details such as who you are, what youwant to do, and of course how much you intend toinvest.

Next is official approval which is characterized bya tough political & legal systems foster time-consuming busy work, stacking odds againstforeigners who have to face elaborate bureaucracy,fledging legal system, and pervasive corruption.


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Chinas treacherous business terrain depending on abureaucratic system relying heavily on political agendasrather than legal statutes as a regulating business activity.

Westerners have become accustomed to the principle of the

rule of law, China has long relied on the rule of man

The legal rights derive from the will of the individual whohas the power to enforce them.


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In the 1940s, with the rise of Communist Party, anew centralized leadership took over an alreadycomplicated civil service system and proceeded toadd a further layer of bureaucratic authority bysuperimposing the hierarchy of the Communist

Party.

The result was a complicated and dauntingregulatory system.


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1) File an application- with multiple government

ministries-detailing your investment and

business plans & details.

2) You must seek approval of the Ministry of

Foreign Trade and Economic

Cooperation(MOFTEC), which prioritizes

those industries according to those it

encourages, restricts or prohibits.


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3) Finally, either MOFTEC or some provincial levelauthority reviews each foreign investmentapplication to determine whether its in the bestinterest of China.

Chinese officials typically subject each applicationto stringent criteria applied through a lengthyreview prevailing political goals and legalconditions.


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Typically, foreign investors endure long boutsof negotiation before their applications reach agovernment agency with the power to make adecision.

MOFTEC has quite narrow criteria fordetermining what offers sufficient benefits toChina.


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The vastness of the country means that localofficials are left to govern according to their ownpreferences.

The central govt. makes efforts to lower tradebarriers and increase competition by allowingforeign firms to control local operations, only to bethwarted by local officials who fear that such

initiatives will result in hometown employment andinstability.


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China had no formal system whatsoever in 1978,

when it launched, when it launched one of the

greatest campaigns of legal reform in history.

China still faces some fundamental challenges,

including legislative gaps, hazy interpretation, lax

enforcement, and philosophical disagreement.


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For e.g., No comprehensive bankruptcy law protectsbusinesses; recent draft legislation favors closing downdebt-ridden enterprises rather than protecting creditors.

There are no effective way of resolving contractdisputes.

For e.g., If you challenge your local partner, youll endup ruining local business relationships.


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Chinese legislation is a clock-full of ambiguities says aBeijing based lawyer, who says it will take 10-15 years to

eradicate all the problems.

Other major problem is a fundamental difference in theconception of legality in the society.

In China the system equates the decision of one man withthe law. The authority are ceded with powers to makedecisions without being subject to transparent system of

checks and balances.


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Intellectual Property-general term for intangible

property rights resulting from intellectual

efforts and assets such as patents, trademarks,and copyrights.

Western companies complain that Chinasindustrial surge is powered by the sophisticated

theft of their Intellectual Property.


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For the past 40 years, one observer explains

All patents are owned by the government andcould be shared by any company that was

willing to use them.

The Chinese govt. actually encouraged this,

effecting concerned companies.

Aggressive estimates claim that nearly a thirdof the Chinese economy is pegged to traffic in

counterfeit goods.


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To quote Tim Clissold, who had a long businesscareer, I was dealing with a society with no

rules, or with plenty of rules, which were

seldom enforced. China appeared to be run by

masterful showmen: appearances that mattered

more than substance , rules were there to be

distorted, and success came through outfacing

an opponent.


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Govt. role at all levels of business,

underdeveloped legal system with the habit of

lax enforcement and the material temptations of

an emerging capitalist society, you get therecipe for corruption.

China still faces many questions concerningproperty and procedures for which the Chinese

govt. has furnished few solutions.


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Many foreign companies routinely battle bribes

and attempts to steal property while strugglingto establish clear titles to land and physical

equipment.

In addition, embezzlement flourishes,

Tunneling, a scheme in which relatives or

friends of managers of state owned enterprise

do business with the firms or their subsidiarieshas spilled into JVs with foreigners.


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Prudent investors heed the failures of others;

for example, the Director of Subway

Restaurants China operations noted his Chinese

JV partner had cheated the company of

$200,000 by various chicanery andmisrepresentations.

He warns that the lure of Chinese market led

people to leave their heads at home when they

come here, forgetting about due diligence.


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Opportunities in China continue to attract

foreign firms.

Entrants believe the influence of external

institutions will spur Chinese officials to make

the countrys business environment moreconsistent, transparent, and fair.


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Chinas membership in WTO requires it to

accept a system of global trade rules - from

tariffs & antidumping regulations to procedures

for protecting trademarks & copyrights.

It has responded to many WTO regulations, for

e.g., state owned enterprises no longer officially

discriminate against foreigners by giving

preferential treatment.


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It has amended its legal code to conform to

WTO stipulations on issues ranging from trade

and investment to Intellectual property

protection.

In 2007, US filed complaints with the WTO for

inadequate enforcement. arguing its failure to

curb piracy not only cost billions of dollars of

loss in lost sales but also make it unfairly hardfor legitimate firms to operate in the Chinese

market.


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Dont Leave Common Sense at the Border Develop Guanxi.

Understand the Role Government Plays inDay-to-Day Business

Learn to Thrive in the Local Business

EnvironmentKnow The Market and Your Customers

Internalize Chinese Cultural Values and Ways

of Thinking


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Select the Right Partners, Suppliers and

Resellers

Understand The Role of Contracts in Business

Relationships

Develop a Comprehensive China Strategy


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Collectively, political biases, legal

shortcomings, and philosophical legacies have

contributed to the weak or arbitraryenforcement of laws in China.

But slowly, market forces and WTO regulations

would make it a better business destination inthe true sense of the term.


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Although tremendous opportunity exits,

companies must be open to continuous learningand adaptability in order to manage the

complex environment and the rapid pace of

change.


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The Political and Legal Environments Facing the Business