China -- A Country Analysis

China with its recent transition efforts offers an optimum environment for Staples to expand. There is a huge labor pool supplied by the world's largest population. There is a high-level of capital input energized by sufficient household savings and foreign direct investment. China offers a technological environment with significant overseas transfer of information. In addition, significant structural and legal reform efforts are well under way and although the future is unknown, overwhelmingly a positive future is predicted for China if it can successfully balance the Golden Straightjacket with its cultural roots. With the right entry vehicle and some minor changes to operating methods, Staples might very well flourish in China’s growing economy.

(1) Time. The research of this paper took place over the entire semester from 10.27.02 – 02.01.03 and the writing took place during the one-week period from 01.27 – 02.02, 2003.

(2) Resources. Research was limited to information accessible online and in English. Many of the resources regarding China were in Chinese.

Staples first opened its doors less than 20 years ago and has since grown to b

e an $11M company with over 1400 stores located in the US, England, Germany, Canada, the Netherlands and Portugal as well as an online presence. (Staples Corporate Information, 2003) In true entrepreneurial spirit and western culture, Staples was the first superstore or category killer to offer office supplies at discount prices. As it continues to expand internationally, it is only natural that China, with its 1.2 billion population, recent a

dmission to the World Trade Organization and the burgeoning small- and mid-size business environment, would be considered as a potential target.

China could offer Staples an opportunity to increase the target market reach while maintaining the core product of low price office supplies. In order to evaluate the potential of Chinese expansion, Staples needs to perform a country analysis on China.

According to Sullivan (2002) when a company begins to consider international expansion, it is important to conduct a country and a market analysis as well as an internal SWOT analysis. However, the country analysis should be performed first, “since countries with hig

h risk and poor infrastructure are poor candidates for business activities regardless of market potential” (p. 364). A country analysis encompasses three primary categories:

Economic, Political, and Legal Conditions – this includes the business climate, economic conditions, currency issues, government laws and policies as well as the ethics environment. In assessing these conditions for China, we examined the political and regulatory system, anti-competitive practices, product and service standards, intellectual property rights, financial markets, and monetary policy.

Infrastructure Analysis – the focus is “on the factors which support the economic and business climate and allow it to function” (Sullivan, 2002, p. 522). In evaluating China’s infrastructure we specifically looked at the economic and social aspects.

Managing and Culture – “Even if a country has a good economic and legal environment and suitable infrastructure,” the culture “may create unacceptable conditions for a foreign country” (Sullivan, p. 522).

A thorough examination of these three categories will help us and Staples determine if China offers a plausible expansion route or if it is too high of a risk.

During the past decade, the Chinese government has opened their markets to world investors creating laws and regulations more in line with th

e World Trade Organization (WTO) guidelines. This change in philosophy has encouraged foreign investment in China. However, there are still many risks to consider before expanding to China.

One risk is that the Chinese communist, socialist philosophy continues to be core to the Chinese culture and may impact the political/legal environment and therefore foreign investments in the future. Another risk is that the stability of the current Chinese regime may be negatively impacted by demonstrations protesting cultural changes, low growth, and inequities of wealth and power. In addition, there continues to be festering discontent in the poorer interior provinces and with ethnic minorities, farmers, and members of the unemployed. Other risk factors include the many rules and restrictions for firms operating in China. Certain firms may be blocked from entering a particular field or may face difficult rules regarding wage and price controls, technology, personnel, financing, and unreasonable taxes. Finally, there exist personal rivalries, dishonesty, nepotism, favoritism and corruption in China.

The Chinese government is, however, taking steps to create and enforce a stricter legal system, support freer commerce, and embrace the global marketplace. “The People's Republi

c of China (PRC) began developing its present legal system in the late 1970's. The passage of the Sino-Foreign Equity Joint Venture Law in 1979 was the first step by the Chinese government to build a legal structure governing foreign investment. Since then, China has continued to build a legal system that will protect their rights as well as the rights of their foreign partners” (ChinaLaw, 1998, ¶ 1). Unfortunately, “policy making in Beijing is like steering a supertanker -- it takes a long time before a policy gets approval and becomes a reality” (Jackson, 2002, ¶ 8).

There are many risks involved in expanding to China and there are also many legal avenues that Staples would have to follow in order to maintain operations in China. However, the Chinese government is taking steps to conform to WTO guidelines by creating and enforcing a stricter legal system, supporting freer commerce, and embracing the global marketplace. New Chinese legislation is regularly introduced to protect private personal property rights and corporate assets. China is expected to increase the creation and enforcement of such investment-friendly laws.

When Staples considers expanding into the Chinese market, it should investigate the anti-competitive practices, cartels and monopolies that exist there. Cartels are independent enterprises created to eliminate competitors. The leaders of a Cartel hope to create a monopoly, or an enterprise that has the exclusive control or rights to sell a product. Cartels and monopolies unlawfully enlarge their areas of trade and create unfair selling practices in order to acquire illegal income which endangers the interests of the consumers.

In the People’s Republic of China (PRC), price monopolies are prevalent. A price monopoly is seen when “some operators of State monopolized industries take advantage of their monopolistic position to pressure the government into setting a high price. They even adjust price levels or create new charge items themselves” (china.org.cn, 2002, June 7, ¶ 6). A significant hindrance of the monopolies in China is their ability to influence price setting. Without enough true market price information accessible, the government is unable to figure the actual prices for monopolized products. Currently, the Chinese government is improving regulations and laws that govern industries such as electric power, aviation, railways, telecommunications, oil, natural gas, etc. These laws will knock down monopolies in order to improve competition (china.org.cn, 2001).

Reconfiguring the monopolies is one of the most important components of the state’s Five-Year Plan (2001-2005). The premise of the reforms will be in separating government’s management position from private sector operations, allowing full freedom to companies to do business. Reforms will focus on introducing more competitors into the industries and markets, permitting outside private investment, including foreign dollars to enter economic infrastructure and even the utility supply industry.

It is apparent that cartels and monopolies are formidable obstacles for Staples and could be a bad anti-competitive factor against the success of an expansion to China. Another obstacle would be that China is a large state and the government may not successfully eliminate the large monopolies. Finally, implementation of China’s new reform laws to open up the markets to fair pricing and competition might not be successful.

Product and service standards reflect an expected level of quality and safety as identified within an industry. They serve the purpose of protecting the consumer and equally important, the manufacturer’s employees in the form of safety standards. Standards are an accepted factor in the United States, and with the formation of the Internationa

l Standards Organization (ISO) and other international organizations have become commonplace internationally. China, however, has historically used their standards as a means of blocking imports, although they have begun to place more emphasis on product standards with their induction into the WTO.

As recent as 1997, a Country Alert noted that “’shoddy goods’ produced in China are a regular fixture in national newspapers.” It goes on to describe “a corrupt business environment, in which many factories put short-term profits above quality and in which regulations on product quality and safety standards are often not enforced.” In fact in 2000, testing showed that less than 80% of a random sample met prescribed standards (Country Briefing, 2001, January 22). A sign of changing times in China is represented by the establishment of a Standardization Administration in 2001 and the first ever mandatory product recall in 2002. Maintaining a strict vigilance on product and service standards

is critical for China if it hopes to competitively succeed in the world market, as many of these standards are not only expected but required by businesses.

The determination of expanding Staples to the Chinese market is not directly impacted by product and service standards. Where they do become important is with the products that Staples stocked. Interestingly, many of these products are already manufactured in China under US standards by companies such as 3M, Pilot Pens, and Avery Dennison. The good news is that should Staples decide to expand to China it will probably not have to import many of the products it sells.

Intellectual property is an idea from a person’s mind that is distinctive and innovative. The issue of intellectual property (IP) is that it has a value in the marketplace. People are willing to pay for such things as an idea, unique name, business method, computer process, or presentation. Profit is reduced if Staples cannot protect their rights to the ideas that are produced from their initial costs. If Staples cannot protect their investments, they may be less willing to commit time and money to the production of new ideas.

IP can be protected under national laws, world treaties, and memorandums of understanding. IP laws are often regional laws that originate in one country and affect the citizens of that country. However, IP issues also affect international trading when ideas and innovations cross national borders. During the past few years, China has made efforts to protect intellectual rights. In 1985, China joined the Paris Convention for the Protection of Industrial Property. In 1992, the United States and China signed the Memorandum of Understanding on the Protection of Intellectual Property that required China to ensure certain intellectual property protection. In addition, China agreed to accede to the Berne Convention and the Universal Copyright Convention. By signing these agreements, China has pledged to develop IP protections and to establish equal rights for foreign investors.

Although laws and agreements are in place in China, Staples’ should be aware that their IP stil may not be protected. The implementation of these laws has proven lacking, due largely to ambiguities in the law and difficulties in enforcement” (Spierer, 2002, p. 1). Ambiguities in the laws create loopholes. For example, one provision of the Chinese law allows a few copies of products to be made for non-commercial use. Yet another ambiguity refers to products that are banned from publication. “The Copyright Law stipulates that works "banned from publication" shall receive no copyright protection, but does not clearly define ‘banned‘ works,” (Spierer, p. 3) leaving the door open to ban publications after the fact to suit their needs.

Aside from the ambiguities in Chinese IP law, another issue for Staples to examine is the Chinese ability to enforce the law. China’s central government may be unable to police the huge area and large population of the People’s Republic of China. The decentralization of the central government makes it even more difficult to monitor and enforce international policies. Other issues pertaining to protecting IP rights include corrupt officials, and a Chinese culture that encourages copying as an essential means of learning. Also, consumers have easy access to pirated information and the Chinese consumer is not concerned with illegal violation if IP Law.

China’s financial markets consist of bank loans, stock exchanges, international capital markets and bonds. Despite China’s efforts to liberalize its markets, they still remain largely closed. A pegged exchange rate, significant controls to limit investment and “state-owned” everything are some of the primary reasons that China is viewed as a closed or restricted market.

Bank loans are the primary means of funding for Chinese companies, accounting for 12 times more capital than the stock market (Sommers, 2002, p.15). There are four State sanctioned banks able to offer investment banking services domestically -- 1) the Agriculture Bank of China (ABC), 2) the Industrial and Commercial Bank of China (ICBC), 3) the China Construction Bank (CCB), and 4) the Bank of China (BOC)[i]. Together they “control about three-quarters of the country’s deposits and commercial loans” (Murphy, 2003, ¶5). What makes the process particularly ineffective is that “90% of loans are almost all for state-owned enterprises” (SOEs) and a huge number of them are non-performing. (Murphy)

China has two stock exchanges located in Shanghai and Shenzhen. Created for the initial purpose of providing SOEs a means of obtaining additional fundin

g, they offer four official classes of stock: A, B, C and H. As of 2002 1,200 companies offered A shares, but due to the primarily state-owned nature of the companies, only 30% of the shares are available for purchase by Chinese citizens. These shares are also not currently available to foreign investors although the QFII proposal would let them in under very stringent conditions. Conversely, B shares are open to both foreign, and as of 2001, domestic investors, but there are only a little over 100 companies that were able to obtain the necessary state approvals to be listed. Overall, only 15% of the companies listed on the exchanges are privately held.

Because the privately held Chinese companies aren’t able to get their funding from sanctioned banks or the stock market they are turning en masse to the International capital markets through foreign direct investment (FDI). Even the mis-managed and often financially troubled SOEs are eager to sell, but a 30% equity limit is a significant restriction. (Wonacott, 2002) The bond market is yet another example of the closed nature of China. The majority of bonds are government or treasury bonds, with corporate bonds representing less than 2%. Once again the government has left private companies out of the funding opportunity although Beijing has promised to rectify this in the future.

Its important to note that lack of money in China isn’t a problem, as it has one of the highest annual savings rates in the world. Unfortunately, the majority of investment opportunities are in poorly run state-owned companies. “Industry remains dominated by state-owned enterprises (SOEs), despite the government’s recently articulated commitment to the private sector. Where free-market practice runs ahead of what the law countenances, the government periodically intervenes to reverse developments” (Country Briefing, 2002, December 30, ¶2). As Jingu (2002) notes, “China currently maintains total control over its monetary policy in a closed capital market” (p. 5).

The term "monetary policy" refers to the measures taken by a central bank to influence the availability and cost of money and credit. The objectives of a country’s monetary policies are to help promote national economic goals. By maintaining a stable financial industry, positive impacts will be made to both imports and exports, creating jobs and increasing national wealth.

The Federal Reserve establishes the monetary policy for the United States by making changes in the open market operations, the discount rate, and the reserve requirements. The result is an influence on such events as the interest rate, money supply, unemployment, and ultimately, the costs of goods and services. In China, the monetary policy is established by the People’s Bank of China (PBC). The PBC, similar to the Federal Reserve, implements policies that will promote

economic growth and ensure the stability of the Chinese financial industry. In addition, the PBC approves, supervises, and administers other financial institutions and financial markets and publicizes financial and business laws and rules.

The existing monetary and credit structure created by the PBC appears to be very successful, but there are some identifiable risks. Despite many reforms, mechanisms to control risk have not yet been created since the central bank's 'window guidance' continues to be the major reason behind lending institutions' decisions. There continues to be political pressure from the PBC to expand loans during stagnant economic conditions, generating poor performing loans. Another negative aspect of the Chinese monetary system is that strong government control of the PBC and resulting fiscal and credit policies make it difficult for the financial systems to mature. Banks and businesses will be concerned less about the costs and risks if the central bank robustly controls credit policies. Lack of equitable money distribution also prese

nts a problem, with the majority of available money eventually flowing to only a small group of big-name firms with reliable credit record. Finally, the current PBC credit policies, successful or not, may not be able to maintain their strong control in the long run. Private and foreign companies are becoming an increasingly major force in the Chinese economy. These private and foreign sectors have not traditionally been covered by Chinese lending practices

Even with the above mentioned risks, China appears to have been more successful than the United States in surviving the recent turbulent financial crises while maintaining a level growth. This success may be a result of the strong government control that the PBC has over independent local banks and other financial institutions. Under this central control, the Chinese government directs banks to lend to specific industries according to a national plan. Oppositely, the U. S. must rely on a free market and federal incentives to guide specific industry development and investment and other economic changes.

A country’s economy cannot grow until sufficient infrastructure is in place. China’s infrastructure is very complex (Hand, 2002), and consists of “those services provided by public and private utilities which foster production, trade, and consumption” (Sullivan, 2002, p. 475). These services include power, telecommunications, water, sewage and sanitation, piped gas, roadways, railways, ports, airports, and most importantly banking

Over the past two decades, China has revitalized its infrastructure. Much of China’s success stems from its promotion of the privatization of enterprises, the breakdown of its monopolies to provide fair competition for all entrepreneurs, and the creation of treaties, agreements, etc. that promote foreign business relations (china.org.cn, 2002). Of critical importance to Staples will be the adequacy of China’s infrastructure in transportation, foreign trading, finance, telecommunications, and the Internet.

China’s complex transportation infrastructure consists of old and new roadways, antiquated railways, undeveloped rural dirt roads, ancient waterways (along the major rivers), and booming air traffic, all responsible for moving more than 1.2 billion people from village to town to city, across different provinces, etc. (Xinhuanet, 2003). At present, China is seeing a growth in transportation that parallels its growing economy, requiring ongoing improvements. Currently, the last section of a double-track line on the Beijing-Kowloon Railway (a major North-South route) is being laid. And plans to continue numerous highway and railway construction projects are in place. Air travel is another major mode of Chinese transportation that has also undergone change. Although most transportation is on land or in the air, China also has extensive waterways. Chinese shipping companies are ranked among the world's largest and provide services to all of the world's major ports (Gates, July/August, 2001).

China’s telecommunications and Internet infrastructures have grown and helped to boost the

efficiency of communication for both domestic and foreign businesses. Ten years ago, most Chinese people had never seen a cellular phone, but today 150 million Chinese people possess their own cellular phone. Staples should be aware, however, that the development of telecommunication and the Internet is uneven among provinces, with growth much slower in the central and west regions.

China’s financial infrastructure appears to be very strong. In the past seven years, China has received more foreign direct investment than any other country in the world except the U.S. Currently global multi-national companies are actively investing in China, and more than 400 of the top 500 global companies have investments in China (china.org.cn, 2002, November 13). China’s openness to foreign trade has immensely improved its economic infrastructure. Over the past three decades, treaties and agreements, such as the Sino-US Relations, the WTO accession, etc. have increased Chinese imports and exports.

Despite the state’s economic gains and success in modernization, the economic infrastructure is still undergoing many changes and there is no promise that these changes will produce further success for China.

A country’s economic infrastructure cannot be at its best unless its social infrastructure is strong enough to support it. China’s social fabric is growing stronger every year and as a result quality of life has dramatically improved over the past 30 years. As Staples considers expansion into China it must take into account two primary aspects of the social infrastructure that directly impact productivity: education and health. Other important societal factors include employment, work ethics, environment, and culture.

China is the most populated state in the world and continues to grow, with expectations of 1.5B people by 2050 (Populations.com, 2003). The average life span is 71 (China.org.cn, 2003), and as the population grows the employment sector grows. China’s employment rose from 650 to 730 million between 1990 and 2001. With an unemployment rate that remains steady at about 4%, there are plenty of employment candidates available to Staples. (China Daily, 2002, November 12)

Since 1949, the Chinese government has placed an emphasis on education, initiating reforms that have increased the number of students. Today, 91% of China has implemented compulsory primary education resulting in almost 99% of school-age youth attending school and a declining dropout rate (China.org.cn, 2001, April 4). The literacy of young and middle-aged people has increased by 7% and the illiteracy rate among China’s adults has been reduced from 22.23 to 8.72 percent in a 10 year-period.

Concurrent with a restored status at the World Health Organization (WHO) in 1972, China’s healthcare system improved resulting in better overall health for the people. China now has an average 2.33 hospital beds and 1.6 doctors for every 1,000 people (Xinhuanet, 2003), and the mortality rate has dropped to an all time low of 6.5%.

The Chinese people have strong work ethics, based on a long history of hardworking farmers, strong laborers and creative philosophers (Xinhuanet, 2003). As the population grows more educated, the two trends have the opportunity to combine and offer a stellar workforce for Staples.

Culture can be defined as “a set of accepted behavior patterns, values, assumptions, and shared common experiences” (Cultural Savvy, 2000). Culture is extremely important from a business perspective as it will shape employee behaviors and expectations, determine acceptable management styles, and influence interaction with outside entities.

China’s culture is founded on the 2500 year old Confucius teachings of “the importance of society, the group, and hierarchical relationships within a society.” It is collective in nature, directly contrasting the individualistic culture found in US businesses. (Ralston, Holt, & Terpstra, 1997) According to Sullivan (2002) the Hofstede dimensions are one of the best known means of examining culture used in international business. Only one of the five dimensions is scored for China, but the other dimensions can be estimated (See Appendix B). China’s degree of individualism would be on the low end due to its collective nature, and focus on the group v. the individual. Guanxi, loosely translated as relationships, is very important in the Chinese business culture. The bureaucratic, state-owned businesses lend themselves to the high end of the power distance scale due to their hierarchical nature. China has an extremely high intolerance for uncertainty, again stemming from the state-owned bureaucracy exemplified by a lack of risk or uncertainty. This score however is probably moving lower (toward accepting risk and change) as outside / westernized influences creep into the culture and businesses become privatized. The degree of assertiveness would be located on the lower end of the scale, toward nurturing and cooperative living, but also supported by the hierarchical nature of businesses. Finally, the one Hofstede score that is provided is for long-term orientation and is off the scale on the high end, which tracks, since China has one of the highest rates of savings in the world (40% GDP).

Where the US focuses on individualism, equality, achievement, change, taking risks, and immediate gratification, China is more collective, valuing cooperation within a hierarchical structure, the status quo, and decision making only after careful and detailed analysis. (Sullivan, 2002). Because “China and the U.S. represent ideological opposites in the work environment, in spite of the present move toward capitalism in China,” (Ralston, Holt, and Terpstra, 1997, ¶24), US based companies such as Staples will face quite a few challenges. Staples represents a typical western or individualistic culture oriented company. Based on their recruiting slogan from staples.com, the typical Staples employee is entrepreneurial, individualistic, risk taking, and assertive. This is in direct contrast to the classic Chinese employee.

Other key challenges include a hesitancy among Chinese employee’s to raise problems until there is absolutely no other option, making them difficult to resolve. This stems partially from the state-owned aspect of many business

es which has created a culture with little incentive to take responsibility. These SOEs guarantee employment and benefits and whenever they run into issues are bailed out by the government. “Under the collective system, where conformity meant anonymity, and anonymity meant a peaceful life, there was a disincentive to use initiative or to take responsibility for a situation.” (China Business Desk, 2000, ¶6)

The good news is that as the SOE’s are replaced by privatization, the values are slowly changing. Job insecurity, the need for stakeholder management resulting from tightening budgets and unsecured losses, income for performance and other capitalistic business practices are slowly being accepted although perhaps not yet embraced by the Chinese. And entrepreneurship is becoming a “respectable occupation.” (Zapalska, and Edwards, 2001, ¶21)

As Sullivan (2002) points out, a country analysis should not just be a data dump, but rather it should “interpret” the information in regards to the company needs and strategy. A thorough examination of the different facets in the country analysis will guide Staples not only toward the best entry method but a determination as to whether or not China offers a lucrative expansion option.

The first step is to examine the costs and benefits to doing business in China based on the information collected in the previous sections:

Costs / Benefits Analysis of Doing Business in China
*Costs*	*Benefits*
Communist / Socialist Philosophy	WTO Membership
Stringent rules and restrictions for foreign operations	Foreign investment welcomed – highest FDI in the world excluding US
History of nepotism and corruption	A new generation entering the workforce
Prevalence of bureaucratic state-owned enterprises and price monopolies	Trend toward privatization of state-owned businesses and entrepreneurial endeavors
Product quality and safety standards not always enforced	2001 creation of the Standardization Administration and a realization that quality is necessary to compete globally
Decentralization of the government	Decentralization of the government
Lack of funding available to private enterprises	Highest savings rate in the world
Relatively closed financial markets	Newly proposed reforms to provide citizens and foreign entities increased investment opportunities
Government controlled economy	Significant economic growth
Rural areas not well connected	Burgeoning telecommunications (including Internet) infrastructure
Increased poverty and disgruntled citizens	Emerging middle class

China is clearly a country in transition. Realizing the need to put on Friedman’s (2000) Golden Straightjacket, the government is in the tailoring process,

“moving toward, the following golden rules: making the private sector the primary engine of its economic growth, maintaining a low rate of inflation and price stability, shrinking the size of its state bureaucracy, maintaining as close to a balanced budget as possible, if not a surplus, eliminating and lowering tariffs on imported goods, removing restrictions on foreign investment, getting rid of quotas and domestic monopolies, increasing exports, privatizing state-owned industries and utilities, deregulating capital markets, making its currency convertible, opening its industries, stock and bond markets to direct foreign ownership and investment, deregulating its economy to promote as much domestic competition as possible, eliminating government corruption, subsidies and kickbacks as much as possible, opening its banking and telecommunications systems to private ownership and competition and allowing its citizens to choose from an array of competing pension options and foreign-run pension and mutual funds” (p. 105).

China still has a long way to go before the jacket fits comfortably and during the transition phase China doesn’t want to upset the proverbial apple cart, or cause the financial upheaval and crises other countries have faced as they’ve transitioned. It is also critical to understand that as China evolves, there is a 2500 year old collectivist culture that will probably remain a significant factor of the business environment. The Economist.com summarizes it perfectly in its most recent Backgrounder (see Appendix C).

The new China, after it transitions to a more open and capitalistic philosophy, offers significant benefits to a company such as Staples. With a population of 1.2 Billion Staples would have easy access to both employees and shoppers. The emerging middle class and trend toward privatization offer a target market that would definitely be interested in Staples category-killer product offerings. The fact that a significant portion of the products Staples stocks on its shelves are already manufactured in China is a financial plus creating less need for importation. To enter this market, Staples has several options available and needs “to evaluate the pros and cons of” foreign direct investment through, “joint ventures, subsidiaries, or a mix of these as a mode of future involvement in the country” (Sullivan, 2002, p. 523).

Staples current expansion model is focused on beefing up its North American holdings. Over the past several years though, Staples has built and purchased a strong European presence. Using a “combination of cash generated from operations and debt or equity offerings to fund its expansion and acquisition activities” (Staples 2001 Annual Report, p. 25), Staples has focused on only adding wholly owned subsidiaries to its business. Staples has also expanded via its Internet presence. According to their 2000 annual report, they “recognize the long-term potential of electronic commerce and plan to continue to aggressively address this market.”

To expand into China, Staples has several options of FDI including setting up a wholly owned subsidiary, purchasing an equity position in a currently existing company, creating a joint venture and a very rarely used option of establishing a branch office. For each of these options there are numerous restrictions enforced by China on foreign firms that Staples will need to evaluate.

Wholly Owned Subsidiary. The legal policies and regulations appear to be a little unclear as to the specific requirements or impediments to operating a wholly owned subsidiary in China. According to a Country Briefing (2002, December 30) there is a foreign-owned cap of 65% that cannot be exceeded. The briefing discusses Carrefour, a French retailer, that recently came under scrutiny for violating the ceiling and was “ordered to reduce their holdings to the permitted limit” (¶3). Fortunately for the long-term, the ceiling will be increased as a result of China’s new membership in the WTO, but in the meantime, China is hoping to give its domestic chain stores the opportunity to consolidate and become more efficient before facing stiff foreign competition.

An exception apparently can be made if at least half of the annual output is exported or if the nature of the operations relies heavily on advanced technology that is beneficial to China. In this situation, Staples would maintain control of their business activities with little interference from the Chinese government although it would be considered a Chinese legal entity under the jurisdiction of Chinese law. Staples would also have to employ Chinese labor in accordance with local and central government labor laws and would be encouraged to establish trade unions. (ChinaLaw, 1998)

Unfortunately as Staples is a seller of manufactured goods, there would be little export involved negating Staples ability to open a wholly owned subsidiary. This could be a good thing though as Jin & Partners (2002) note that “traditionally the wholly foreign owned enterprise has rarely been the chosen method for investment in China. The independence offered to the foreign investor is often outweighed by the lack of direct links to the domestic economy.”

Joint Venture. An equity joint venture is one of the most common means of FDI. “Joint ventures are usually established to exploit the market knowledge, preferential market treatment, and manufacturing capability of the Chinese side along with the technology, manufacturing know-how, and marketing experience of the foreign partner” (Paglee C. 2005. Par 1).

To establish a joint venture in China, the host party submits “a project proposal, preliminary feasibility study, and a letter of intent” to the local government. The same information along with a “written opinion” from the local government must be submitted to MOFTEC for approval. It’s important to note that “Joint ventures are supposed to export their products rather than supply the domestic market” (Australia China Business Council, 2000).

In a joint venture scenario, Staples would be required to contribute a minimum of 25% capital. Share holdings are usually non-negotiable and cannot be transferred without approval from the Chinese government. Also, Staples would be restricted from withdrawing registered capital during the life of the joint venture contract. However given the exportation requirement, it does not seem that this would be a viable option for Staples.

Equity Position. Another option open to Staples is to gain an equity position in an already existing office supply store via a merger or acquisition. According to Bath & Grams (2001), this method of foreign investment is much quicker in regards to getting through approval processes as a result of China’s WTO membership. Historically, China’s “ill-fitting patchwork of laws and regulations” made it extremely difficult for foreign equity owners to have any input into restructuring their host nation businesses. The new laws however, have created an environment where M&As are often more advantageous to foreign companies.

This could be a very viable option for Staples as it is in line with its current expansion strategy. The difficulty, similar to the joint venture option will be in finding a similar company in China. Instead, Staples may have to look at purchasing a number of smaller, localized, stationary, office furniture, and supply stores and restructuring them to create a superstore or category killer. Or they could search for companies that might be looking to divest themselves of secondary offer supply businesses. Bath & Grams (2001) note that this is becoming a common event; “The M&A Provisions are being used even by companies in relatively unsaturated industries because as both domestic and foreign- invested competitors move in to claim market share, pressure is exerted on the less efficient operations to shed excess capacity, dispose of non- performing entities or simply downsize to focus on core operations.”

Branch Office. A final option for Staples is the establishment of a Branch Office. In 1993, Chinese law adopted a method for establishing a foreign branch office that would have manufacturing and selling capabilities but would not be considered a Chinese legal person. This law would allow Staples to conduct business in China while not requiring them to make the more sizable investment required when setting up a wholly foreign owned enterprise. A branch office would be a Staples, rather than a Chinese, legal entity. This will leave Staples open to liabilities from its China operations, should things go wrong, but give them the opportunity to conduct business. Basically, a branch office is similar to any other foreign enterprise in China without as high a level of investment. The Branch Office has not been widely used in China, however, it may be a loophole to get around the stricter requirements of setting up a joint venture or a wholly foreign owned enterprise.

The country analysis tells us to proceed with caution. Before making a final determination about expansion into China, we recommend that a SWOT analysis be conducted along with a competitive assessment of China. The SWOT analysis must take into ac

count product offering, distribution methods, marketing communications, manufacturing options, financing and management from a global perspective, specific to China. If the additional analysis further justifies immediate expansion into China, Staples should set up a Representative Office to act as a conduit between the U.S. Staples Corporation and China. “The registration of a representative office is required in order to lawfully employ Chinese nationals, to open a bank account, to import personal effects duty-free, to import office equipment without an import license, to obtain direct telecommunication lines, to display signs with the company name, or to use business cards that identify the company's presence in China” (Paglee, 1998). This office will provide Staples with time to gain experience and understanding of the Chinese Market along with the equally important rules and regulations that must followed to gain entry. It will also allow Staples to formulate an acceptable exit strategy based on its entry options.

If the decision is made to move forward, we believe Staples best options for entry would be via a Branch Office or Wholly Owned Subsidiary depending on the time frame. The Branch Office would be the first point of entry but as China becomes more global and the regulations regarding FDI or loosened further a Wholly Owned Subsidiary option would probably become viable.

Whatever method it chooses, Staples needs to remember that Chinese culture is based on 2500 years of Confucius teachings that will be difficult if not impossible to overcome. The result is that Staples needs to be ready, willing and able to integrate some of this culture into its every day business operations in China. Relationships will have to be cultivated all along the supply chain as well as with the employees and customers. Management expectations of initiative taking, individualistic, self-motivating employees may need to be tempered slightly to accommodate the more group oriented, tentative Chinese. This can be done through the use of teams and motivations to encourage initiative.

Staples will also need to determine the best location for its store placement. Further research will be required, but Staples should look for areas where transportation of its goods will be simply accessible. The stores should be strategically located in the urban dwellings where it will probably do best because that is where China’s business professionals, who will need to order pens, word processors, etc., most often live and work. Staples, should examine cellular and Internet access as an indicator of locations because the users will typify the target market, and these users are more likely to need services from Staples.

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	Individualism	Power Distance	Uncertainty Avoidance	Assertiveness	Long-Term Orientation
United States	91	40	46	62	29
China	~25	~70	~85	~39	118