In preparation for departure

In preparation for my study trip to China, I did a lot of reading and research on how to do business in this emerging country.  Here is a glimpse of the things I learned before I step in one of the fastest growing economies of the world.  Throughout my trip, I will keep an account of what I'm learning that is different from what I believed going in.

GUANXI: Guanxi means connections, or relationships.  It is probably the most critical resource to have to be able to do business in China.  Because of the country's tight regulations and bureaucracy, business people need Guanxi to help them "get around" those regulations.  I had learned about Guanxi even before starting my studies on China in my International Business class.  It's a very important part of successfully doing business in China and everyone will reiterate it.

FACE: The Chinese are very concerned with face.  They will do almost anything or not do something to get face or give face to someone.  When I first read about face, I wasn't sure exactly what it meant, maybe because English is not my first language and I'm not familiar with this expression, or maybe it's just something that's not commonly used in western culture?  After a quick Google search, I learned that face is in fact of Chinese origin.  It is a sociological concept meaning dignity or respectability also synonymous to prestige, honor, respect, and status in other cultures.  So going back to face and the Chinese, putting it simply, they place appearance over substance.

CHINA BOOM: In 1978, the Chinese government created policies to open China's door to the world economy and went through a series of economic and political reforms leading for the China Boom of the last 30 years.  The boom came about following the new policies primarily because of the privatization of enterprises allowing business to make their own choices of prices and production quotas, which in turn created competition and increased productivity in China.  Individuals were also able to make their own choices for the first time.  China's economy now relies heavily on foreign direct investments and exports.  However, this model is not sustainable in the long run and China will have to keep moving forward towards a more consumption driven economy.

PROPERTY RIGHTS: Doing my research on China, so many things became more clear in my head.  We all know about the immense counterfeiting problem in China, but I never really questioned why.  The Chinese people do not benefit from intellectual property rights like we do in western cultures.  Companies do not want to innovate and invest in research and development because their intellectual property investments will not be protected by the government, so instead they copy.

STATE OWNED ENTERPRISES SOE: Up until 1978, 90% of China's output was produced by SOE.  These SOE had the monopoly in their industry and the government controlled the pricing and production quotas leaving the SOE inefficient at using their resources.  Privatization of industries came about after the open door policies of 1978; today the private sector represents about 50% of China's GDP.

LOW PRICES: Again we all know that the cheapest prices a business can get will come out of China, but other than their low wages, which a lot of other countries also have, why?  One of the reasons lies in the Chinese culture.  The Chinese are curious, eager to learn and very ambitious.  "The Chinese companies are flexible and make decisions very quickly.  By the time a multinational firms are ready to make a decision, the Chinese companies have already made a cycle of decisions and learned from each of them.  The Chinese companies leverage this model to grow very fast" and be able to offer the lowest prices. (Edward Tse, for the Asia Society China Boom Project)

CHINESE CONSUMPTION: The Chinese population is very frugal.  The consumption level in China, around 36% of GDP, is much much lower than the developed nations of the world standing at around 50% of their GDP.  In fact, "China had the lowest consumption-to-GDP ratio of any major world economy except Saudi Arabia, where oil exports contribute the bulk of economic output." (see chart below)  The main reasons for this phenomenon are because the Chinese government doesn't offer its citizens any social safety net - there are no social security, no pension plans - and the other reason is simply behavioral.  "The country's households have an extraordinarily high ability to save: the average Chinese family squirrels away an astonishing 25% of its discretionary income, about six times the savings rate for the US households." (A consumer paradigm for China, McKinsey Quarterly, August 2009) But when they do spend, they make sure it's on something that will give them face!

Along with these main important facts about doing business in China, I also learned some Chinese cultural etiquette, like the way to accept and give a business card, the way to greet and be greeted, and more, which I will report on when I actually experience it.

Now on to my super long flight half way around the world.