Doing Business in China (and East Asia and Greater China

1. Doing Business in China (and East Asia and Greater China https://www.youtube.com/watch?v=Iw7Q1LiNXig 7 minutes

2. Trade: Who matters to Russia? • In 2015, Russia exported $316B and imported US$184B • Resulting in a positive trade balance of US$132B, R9.6 trillion • In 2015 the GDP of Russia was $1.33T , R97T • GDP per capita was US$24.5k, R1,789K • 31 Dec 2015 exchange rate: Average: 1 USD = 72.8923 RUB 2

3. Trade: Who matters to Russia? The top exports of Russia are (in US$) • Crude Petroleum ($90.1B), • Refined Petroleum ($57.5B), • Petroleum Gas ($25.4B), • Coal Briquettes ($10.4B) • Raw Aluminium ($7.02B) Top imports are (in US$) • Cars ($7.73B) • Packaged Medicaments ($7.01B), • Vehicle Parts ($5.05B) • Computers ($4.05B) • Planes, Helicopters, and/or Spacecraft ($3.45B). 3

4. Trade: Who matters to Russia? The top export destinations of Russia are (US$) • The Netherlands ($32.2B) • China ($31.1B / R177 billion) • Germany ($18.5B) • Italy ($15.5B) • Belarus ($15.5B). The top import origins are • China ($34.5B / R196.4 billion) • Germany ($22.4B) • United States ($10.2B), • Belarus ($10.1B) • Italy ($7.71B). 4

5. Who matters to Russia? Russia borders : • Azerbaijan, China, Georgia, Kazakhstan, Mongolia, North Korea, Belarus, Estonia, Finland, Lithuania, Latvia, Norway, Poland and Ukraine by land • and Japan and the United States by sea. 5

6. Labels for Regions in World https://imgur.com/user/AndrewGloe, accessed 10 Feb 2018. 6

7. Asia: Geographic Asia: http://www.worldatlas.com/webimage/countrys/as.htm 7

8. Definitions: MENA: Middle East North Africa • MENA nations are bound together by language (Arabic), religion (Islam), and resources (oil). About two thirds of the world's known crude-oil reserves lie under the MENA region, with one quarter located in Saudi Arabia. • Wikipedia has a concise, useful article on MENA; see https://en.wikipedia.org/wiki/MENA. There is no standardized list of which countries are included in the MENA region, the term typically includes the area from Morocco in northwest Africa to Iran in southwest Asia and down to Sudan in Africa. • MENA is an English-languageacronym referring to the Middle East and North Africa region. The term covers an extensive region, extending from Morocco to Iran, including all Mashriq and Maghreb countries. This toponym is roughly synonymous with the term the Greater Middle East. 8

9. East Asia JAKOTA TRIANGLE–JApansouthKOrea & TAiwan Globalization & Diversity: Rowntree, Lewis, Price, Wyckoff

10. Past, Present, and Future of Economic Growth in Asia Reading assignment: OECD (2018), Economic Outlook for Southeast Asia, China and India 2018: Fostering Growth through Digitalisation, OECD Publishing, Paris.http://dx.doi.org/10.1787/9789264286184-en

11. Definition: Total Factor Productivity • total factor productivity (TFP): TFP is the portion of output not explained by the amount of inputs used in production. Hence, its level is determined by how efficiently and intensely the inputs are utilized in production. • From the conception of TFP for over 30 years, the conceptual difficulty when trying to endogenize (For over 30 years, the conceptual difficulty when trying to endogenize (derived or originating internally)

12. Definition: Total Factor Productivity: article • total factor productivity (TFP): TFP is the portion of output not explained by the amount of inputs used in production. Hence, its level is determined by how efficiently and intensely the inputs are utilized in production. • Further reading: http://www.people.hbs.edu/dcomin/def.pdf, Total Factor Productivity, Diego Comin, New York University and NBER, August 2006

13. Paying for Total Factor Productivity improvements • TFP growth was how to pay for the fixed costs of innovation in a perfectly competitive economy with constant returns to scale in capital and labor. In this context, all output is exhausted by paying capital and labor their marginal products, and therefore, no resources are left to pay for the innovation costs. • Patents: Romer (1990) and Aghion and Howitt (1992) solved this problem by granting the innovator monopolistic rights over his innovation, which are sustainable through the patent system.

14. Paying for Total Factor Productivity improvements • Patents: Romer (1990) and Aghion and Howitt (1992) solved this problem by granting the innovator monopolistic rights over his innovation, which are sustainable through the patent system. • In this way, innovators can recoup the initial fixed costs of innovation through the profit margin they make from commercializing their patent. • By linking the TFP growth rate to innovation, endogenous growth models shed light on the determinants of TFP growth. R&D subsidies and an abundance of skilled labor reduce the marginal cost of conducting R&D and increase the rate of innovation development and therefore, the TFP growth rate. Increases in the size of markets increase the innovators’ revenues, leading to more innovation and higher TFP growth.

15. Total Factor Productivity • Increases in TFP result usually from technological innovations or improvements.Read more: http://www.businessdictionary.com/definition/total-factor-productivity-FTP.html

16. TFP • TFP growth is how to pay for the fixed costs of innovation in a perfectly competitive economy with constant returns to scale in capital and labor. • If all output is exhausted by paying capital and labor their marginal products, no resources are left to pay for the innovation costs. • Hence, by granting the innovator monopolistic rights over his innovation are sustainable through the patent system. In this way, innovators can recoup the initial fixed costs of innovation through the profit margin they make from commercializing their patent.

17. TFP • By linking the TFP growth rate to innovation, endogenous growth models shed light on the determinants of TFP growth. • R&D subsidies and an abundance of skilled labor reduce the marginal cost of conducting R&D and increase the rate of innovation development and therefore, the TFP growth rate. • Increases in the size of markets increase the innovators’ revenues, leading to more innovation and higher TFP growth.

18. The History of China’s Economic Development: China’s Economy Prior to 1979 Reforms • Prior to 1979, China, under the leadership of Chairman Mao Zedong, maintained a centrally planned, or command, economy. • A large share of the country’s economic output was directed and controlled by the state, which set production goals, controlled prices, and allocated resources throughout most of the economy. • During the 1950s, all of China’s individual household farms were collectivized into large communes.).

19. The History of China’s Economic Development: China’s Economy Prior to 1979 Reforms • To support rapid industrialization, the central government undertook large-scale investments in physical and human capital during the 1960s and 1970s. • As a result, by 1978 nearly three-fourths of industrial production was produced by centrally controlled, state-owned enterprises (SOEs), according to centrally planned output targets. • Private enterprises and foreign-invested firms were generally barred.

20. The History of China’s Economic Development: China’s Economy Prior to 1979 Reforms • A central goal of the Chinese government was to make China’s economy relatively self-sufficient. • Foreign trade was generally limited to obtaining those goods that could not be made or obtained in China. • Such policies created distortions in the economy. Since most aspects of the economy were managed and run by the central government, there were no market mechanisms to efficiently allocate resources, and thus there were few incentives for firms, workers, and farmers to become more productive or be concerned with the quality of what they produced (since they were mainly focused on production goals set by the government).

21. Chinese & Japanese Per Capita GDP: 1950-1978 ($ billions, PPP basis) https://fas.org/sgp/crs/row/RL33534.pdf https://www.weforum.org/agenda/2015/07/brief-history-of-china-economic-growth/

22. The “opening”-Deng Xiao Ping, 1978-1979 • A market economy with Chinese characteristics. • The “opening” referred to allowing foreign enterprises to invest in China to produce goods for export, goods for local consumption, and to provide learning models to improve China’s business operations and manufacturing quality.

23. The Economist, 1 March ‘18 • Our cover this week looks at a bet that failed. The West hoped that opening up to China would turn a communist giant into a market economy and, eventually, a democracy. It has not happened. Chinese business acts increasingly as an arm of the state, China is challenging America across Asia as the dominant power and last weekend Xi Jinping set himself up as president for life. What should the West do now? 

24. East Asia, Greater China, Southeast Asia/ASEAN, South Asia

25. Review: Influence of Cultural Values Dimensions on Behavior at Work: Hofstede’s (1994) descriptions of expected behaviors in particular environments as functions of cultural value scores Hofstede, Geert. (1994). The Business of International Business Is Culture. International Business Review, 3(1):1-14. Hofstede, Geert. (2004). The Business of International Business is …… IMD Newsletter, 17 September, p. 1.

27. Hofstede: East Asia Dimension Chart

28. Cultural value dimensions: “Asian” countries tend to: • High Power Distance • High Collectivism (Japan tends to be more individualistic at work and more collectivistic at home and in social life.) • Low Uncertainty Avoidance (Japan has a high UA average.) • High Masculinity (Japan has highest average.)

29. Small Power Distance Societies Large Power Distance Societies In the family: 1. Children encouraged to have a will of their own 2. Parents treated as equals 1. Children educated towards obedience to parents 2. Parents treated as superiors At school: 1. Student-centered education (student initiative) 2. Learning represents impersonal “truth” 1. Teacher-centered education (order) 2. Learning represents personal “wisdom” from teacher (expert, guru) At work place: 1. Hierarchy means an inequality of roles, established for convenience 2. Subordinates expect to be consulted 3. Ideal boss is resourceful democrat • Hierarchy means existential • inequality • 2. Subordinates expect to be told • what to do • 3. Ideal boss is benevolent autocrat • (good father)

30. Collectivist Societies Individualist Societies In the family: • Education towards “we” consciousness • Opinions pre-determined by group • Obligations to family or in-group: • Harmony • Respect • Shame • Education towards “I” • consciousness • Private, personal opinions • expected • Obligations to self: • Self-interest • Self actualization • Guilt At school: • Formal learning is for the young only • Learn how to do • Education can be lifelong • Learn how to learn At work place: • Value standards different for in-group and out-groups: particularism • Other people are seen as members of their group • Relationship prevails over task • Moral model of employer-employee relationship • Same value standards apply to • all: universalism • Other people seen as potential • resources • Task prevails over relationship • Calculative model of • employer-employee relationship

31. Feminine Societies Masculine Societies In the family: 1. Stress on relationships 2. Solidarity 3. Resolution of conflicts by compromise and negotiation 1. Stress on achievement 2. Competition 3. Resolution of conflicts by fighting them out At school: 1. Average student is norm 2. System rewards student’s social adaptation 3. Student’s failure at school is relatively minor accident 1. Best students are norm 2. System rewards student’s academic performance 3. Student’s failure at school is disaster, may lead to suicide At work place: 1. Assertiveness ridiculed 2. Undersell yourself 3. Stress on life quality 4. Intuition 1. Assertiveness appreciated 2. Oversell yourself 3. Stress on careers 4. Decisiveness

32. Weak Uncertainty Avoidance Societies Strong Uncertainty Avoidance Societies In the family: 1. What is different is ridiculous or curious 2. Ease, indolence, low stress 3. Aggression and emotions not shown 1. What is different is dangerous 2. Higher anxiety and stress 3. Showing of aggression and emotions accepted At school: 1. Students comfortable with: 2. Unstructured learning situations 3. Vague objectives 4. Broad assignments 5. No time tables 6. Teachers may say “I don’t know” 1. Students comfortable with: 2. Structured learning situations 3. Precise objectives 4. Detailed assignments 5. Strict time tables 6. Teachers should have all the answers At work place: 1. Dislike of rules, written or unwritten 2. Less formalization and standardization 1. Emotional need for rules, written or unwritten 2. More formalization and standardization

33. Geert Hofstede’s 7-Dimension theory in 2008 • Indulgence vs. Restraint: Indulgence defines a society that allows relatively free gratification of some desires and feelings, especially those that have to do with leisure, merrymaking with friends, spending, consumption, and sex. Its opposite pole, • Restraint,defines a society which restricts such gratification, and where people feel less free and able to enjoy their lives.

34. Indulgence vs. Restraint. Minkov (2007: 114) specifies that at the societal level, happiness is associated with a perception of life control, with life control being a source of freedom and of leisure. • Societies with high means for Indulgence tend to co-mingle work and social activities, and generally have a less “serious” attitude toward work than societies with high means for Restraint.

35. Geert Hofstede’s 7-Dimension theory in 2008 • Monumentalism vs. Flexumility(a created word, with the dimension name changed to Self Effacement by the theorists): • Monumentalism is related to pride in self, national pride, making parents proud, and believing religion to be important, similar to McClelland’s (1961) concept of need for achievement 35

36. Geert Hofstede’s 7-Dimension theory in 2008 • Monumentalism vs. Flexumility(a created word, with the dimension name changed to Self Effacementby the theorists): • The Flexumility pole identifies societies valuing humility, with members seeing themselves as not having a stable, invariant self-concept, and a flexible attitude toward Truth.

37. Other cultural issues in Asia: FACE

38. Face and Social Interaction • There are two basic categories of face in Chinese culture: lian and mianzi • A person’s lian face can be preserved by faithful compliance with ritual and social norms • One gains lian by demonstrating moral character. When one loses lian, one cannot function properly in the community. 38

39. Face and Social Interaction • Mianzi represents a more Western conception of “face”, a reputation achieved through success in life and frequently through ostentatious display of wealth (automobile brands, conspicuous consumption, wanton waste) or some other desirable trait (education, position)

40. Similar Differences: The Greek word filotimo • A sense of “honour” • The word is difficult to translate into English • It contains a sense of honour, obligation, self-respect, and teamwork • Literally, it means “love of honour” • To defend their country is the highest achievement for any Greek citizen. Actions of selflessness for the defence of one's country are the essence of filotimo.

41. Some details on Face in Asia https://www.youtube.com/watch?v=IOd_wAXwNAo Video: 5 minutes • https://www.tripsavvy.com/saving-face-and-losing-face-1458303

42. Hofstede Related to Business Practice

43. Hofstede - Individualism High • emphasis on person • creative person valued • initiative valued Low • emphasis on group • creative person is disruptive • conformity valued

44. Blat, Guanxi, Quan Tri, Kwankye, Kankei

45. Collectivism • Members of Collectivist, Embedded, Particularist societies favour members of close in-groups above others, sometimes to the exclusion of others • Through members of their close in-groups they make connections with other in-groups

46. China: Guanxi and Renqing • While all cultures put some sort of a premium on networking, information, and institutions, the Chinese place a premium on individuals' social capital within their group of friends, relatives, and close associates. Guanxi (kuan hsi in Wade-Giles spelling) are increasingly complex relationships that expand, day by day, throughout the lives of ethnic Chinese. • One is born into a social network of family members, and as one grows up, group memberships involving education, occupation, and residential neighbours provide additional opportunities for expanding the network.

47. China: Guanxi and Renqing • Renqing (favours) has many implications in Chinese cultures (Hwang, 1987; Chu, 1991). The direct translation of the Chinese characters for renqing is “human feelings”. • The dictates of renqing are that the human element should not be removed from human affairs, and a sympathetic give-and-take compromise should govern the relationships of men.

48. China: Guanxi and Renqing • The Chinese form lifelong, rich, networks of mutual relations, usually involving reciprocal obligations similar to the Confucian rules, but with the obligations and reciprocity running much deeper. • The relative permanence of such social networks contributes to the importance and enforceability of the Chinese conception of reciprocity in the form of renqing and bao, that is, morality (bao ying) based upon obligatory reciprocity of favours. See Yum (1988) for a comparison of reciprocity in Western and Chinese societies. • The guanxi relationships are useful and used. Hwang (1987) thoroughly analyses the implications of this long-term reciprocity.

49. China: Guanxi and Renqing • Ideally, renqing is an informal and unselfish give-and-take among people. In reality, accounts are kept carefully and strictly, and favours and obligations are weighed carefully, and the balances owed between people are known as well as if they were recorded in a ledger. • The debts of renqing are not often written down or discharged rigidly and exactly, but they are remembered in minute detail and enforced by deeply rooted feelings of guilt and shame in those who fail in the fulfilment of their obligations. • In China, almost always, when a friend or relation telephones, early in the conversation he or she will be asked, “What do you want?”, with the expectation that some sort of exchange of renqing debts and credits is in the offing.

50. China: Guanxi and Renqing • Renqing is often the basis of manipulation of adversaries in business negotiations. An obligation is created through a gesture that might cost little, and the debt is called due when the adversary can only repay it with a more valuable concession. • This aspect of renqing is worth remembering when engaged in business negotiations. • Chu (1991), in The Asian Mind Game, presents an informative and entertaining treatment of renqing and Chinese, Korean and Japanese cultures in general.