Book proposal and book review

1 The China Business Model. Copyright © E. Paulet and C. Rowley. Published by Elsevier Ltd. All rights reserved.2017

http://dx.doi.org/10.1016/B978-0-08-100750-1.00001-2DOI:

CHAPTER 1

Introduction: The China Business Model in Context—Setting the Scene Elisabeth Paulet1 and Chris Rowley2,3,4,5 1ICN Business School, CEREFIGE, Pole Lorrain de Gestion, Nancy, France 2Professor Emeritus, Cass Business School, City, University of London, London, United Kingdom 3Professorial Fellow, Institute of Hallyu Convergence Research, Korea University, Seoul, Korea 4Adjunct Professor, Griffith Business School and Griffith Asia Institute, Griffith University, Brisbane, QLD, Australia 5Visiting Fellow, Institute of Asia and Pacific Studies, Nottingham University, Nottingham, United Kingdom

1.1 INTRODUCTION

Since the 1980s, China has moved from a closed, centrally planned system to a more market-oriented one. Several reforms led to this situation in domains such as agriculture, fiscal decentralization, state-owned enterprises (SOE) autonomy (Li, 2011), growth of the private sector and small- and medium-sized enterprises (SMEs), creation of a diversified banking system, development of stock markets and opening up to trade and foreign direct investment (FDI). The commensurate shifts in management, marketing, accounting, as well as mergers and acquisitions, SOEs and SMEs have been noted (see Rowley & Cooke, 2010), as have those regarding labor and management, human resource management (HRM), business relations and trust, corporate social responsibility (CSR) (Dyllick and Hockerts, 2002), and bank–corporate relationships (Warner & Rowley, 2011) and finan- cial services, impression management, institutional isomorphic pressure on internationalization, international HRM, competitive strategy choices, and innovative performance of start-ups (Warner & Rowley, 2014).

The reforms and changes were undertaken gradually in order to make the transition toward a form of market capitalism. This development can also be placed in the context of different types of capitalism (see Rowley & Oh, 2016a, 2016b; Rowley & Yukongdi, 2016) and business relations. Indeed, it is commonly noted that Chinese firms are characterized by the inclination to incorporate personal relationships in decision making among which personal control, guanxi (Warner & Rowley, 2011, 2014, 2016) and interpersonal trust or xhinyong are the most well-known.

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In terms of business organization, China has renewed its support for SOEs in sectors it considers important to “economic security”—explic- itly looking to foster globally competitive national champions. There were reforms of SOEs from late-1990s onwards, with the worst closed or privatized and their employment halving from 70 million in 1997 to 37 mil- lion by 2005 (Wildau, 2016). This, however, ended with the government’s stimulus responding to the 2008 Global Financial Crisis through massive lending by government fiat to SOEs acting in the national interest. This con- sequently fueled the construction boom for factories, housing, and infrastruc- ture, which in turn increased demand for output from SOEs. Now reform is in the air again, this time by mergers—with 6 SOEs having merged in 2015 and 1.8 million coal and steel jobs to be cut, although the government remains wary of job losses with the fear of social, unrest (Wildau, 2016).

In terms of the finance area, after keeping its currency tightly linked to the US dollar for many years, in 2005 China revalued it by 2.1% against the US dollar. From then until late 2008 the cumulative appreciation of the renminbi against the US dollar was more than 20%, but the exchange rate remained virtually pegged to the dollar from the onset of the 2008 Global Financial Crisis until mid-2010. The government’s financial intervention produced economic growth, although the rate of increase has been declin- ing. This calls into question the veracity of the once-vaunted China business model, requiring an examination of its underpinnings and elements. Chinese firms are characterized by specific characteristics in their business model.

Our introductory chapter will present the current situation and sub- sequent changes, underlining the originality and limits of the China busi- ness model. The different compositional factors of business management and organization, culture, and finance and investment will be taken into account to help make the reader more aware of the ongoing transforma- tions of the China business model.

1.2 SETTING THE SCENE

Since 2012, China’s gross domestic product (GDP) growth has been slow- ing down: 10.5% in 2010, 9.3% in 2011 and decreased to 7% by mid-2015 (see Fig. 1.1). After the 2008 Global Financial Crisis, the government rein- forced its efforts to reduce reliance on trade and investment (The Times, January 20, 2014; Wildau & Weinland, 2016). Unexpectedly reduced global demand for Chinese goods has recently reduced output and increased unemployment—reaching 4.1% of the active population by 2016. Concerns about the debts owed by local governments that have borrowed

Introduction: The China Business Model in Context—Setting the Scene 3

heavily is contributing to a deterioration in the situation, The Financial Times issue “What China Wants” (2016) notes that local governments ran up debts of 10.7 trillion yuan (US$1.6 trillion) over the decade 2000–10— equal to about one-quarter of China’s annual economic output. The ending of the “migration miracle” (Clover, 2015; Waldmeir, 2015) as the fuel for the Chinese economic miracle—the vast rural labor force— dries up and the “demographic time bomb” of a growing aging population and shrinking workforce ticks ever louder (see Fig. 1.2), in the context of limited social security provisions.

China GDP annual growth rate

Jan 2013

8

7.8

7.5

7.9

7.6

7.3 7.4

7.2 7.2

7 7 6.9

8.2

8

7.8

7.6

7.4

7.2

7

6.8 Jul 2013 Jan 2014 Jan 2015Jul 2014 Jul 2015

Figure 1.1 Annual growth rate in China. www.tradingeconomics.com | National Bureau of Statistics of China.

Figure 1.2 Population age distribution. CIA Factbook.

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These economic developments and social conditions have affected the well-being of the population and social progress in the country (see Fig. 1.3). In 2013, 13.6% of the population was below the poverty line. This situation is partly explained by a distortion of distribution between capital and labor. According to the Gini Index, China had a distribution of family income ranking of 47.4 (2013) due to wage disparities between workers belonging to private and public companies, or people leading their activities in rural zones or industrial cities. Reduced social benefits have contributed to increasing inequalities among workers throughout the country (World Bank Indicators, 2014).

Despite these negative developments, China exhibits some potential to move in the right direction; China and Australia recently sealed a landmark Free Trade Agreement, significantly expanding ties between the world’s sec- ond largest economy and one of Washington’s closest allies in Asia. As reported by the Australian department of Foreign Affairs and Trade, the deal will open up Chinese markets to Australian farm exporters and the service sector, while easing restrictions on Chinese investment into Australia. Despite China already being Australia’s top trading partner, these commercial agreements will rein- force its position. The two countries also agreed to work jointly to combat climate change by sharing technology aimed at improving coal use efficiency.

Economic transition has produced a high degree of institutional uncertainty in China (Nee, 1992) and transaction costs remain high for firms to secure necessary inputs and legitimacy. As the uncertainty

Quality of life

Health status

Education and skills

Social conditions

Environmental quality

Material conditions

Income and wealth

Jobs and earnings

GDP

Sustainability of well-being over time

Natural capital Human capital

Economic capital Social capital

Figure 1.3 Factors explaining well-being of Chinese population.

Introduction: The China Business Model in Context—Setting the Scene 5

increases, firms more eagerly turn to guanxi networks to lower external dependence for key resources and to improve their validity. A guanxi net- work helps firms overcome the lack of resources to accommodate growth while alleviating substantial bureaucratic costs from internalizing opera- tions, aiding smooth business transactions.

As in many Western countries, Chinese firms are commonly SMEs (Cunningham & Rowley, 2010, 2011). The advantages associated with SMEs are those of entrepreneurial dynamism, internal flexibility and responsiveness to changing circumstances The SME Promotion Law in 2002 emphasized SMEs’ scientific and technological innovations and upgrading. In 2004 the constitution was amended to grant non-SOEs a legal status (Chen & Tjosvold, 2006; Zhu & Sanderson, 2009). Since most SMEs are non-state-owned, such a legislative move shows broad acknowl- edgment of the importance of the private sector, which in turn is more conducive to the further development of these firms.

Credit allocation has been characterized by government interven- tion and has been biased toward SOEs (Cull, Xu, & Zhu, 2009; Li, Zhao, Tan, & Liu, 2008). The 2008 Global Financial Crisis tightened credit con- straints for SMEs around the world, and particularly in emerging econo- mies. Additionally, there are imperfections in capital markets which create a “wedge” between the cost of internal and external finance (debt and new share issues). The principal source of the “wedge” may be due to asymmetric information between firms and potential suppliers of exter- nal finance. Information problems can lead to adverse selection and moral hazard problems in markets for external finance. Moreover, the extensive use of debt finance is not appropriate for many firms, especially those whose projects have little collateral value because of asset specificity. As most Chinese firms are family enterprises (Lim & Gosling, 1983), these arguments are even more pertinent.

FDI in China grew at its strongest pace in nearly 4 years in January 2012, surging 29.4% in 1 year and reaching US$13.9 billion with inves- tors largely avoiding the troubled manufacturing sector and focusing more on services. The Chinese service sector accounted for 48.2% of China’s economic output in 2014, leading the traditional manufacturing sector by 5.6% (KPMG, 2015), including a growth of ecommerce, with annual sales reaching US$354 billion, 11/4% of total retail sales, in August 2014–15 (Clover, 2015). This growth, however, relies on super cheap delivery (just US$1.5–2 for overnight packages), creating swatches of kuaidi: exploitative, insecure, long hour, low paid, and poor status courier jobs.

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Capital market imperfections are very present in China. By law, the largest Chinese banks, predominantly state banks, were instructed not to lend to private firms until 1998. This instruction was embedded in the political notion that private firms do not rank high in terms of political status. This political “pecking order” in the allocation of credit, where private firms were disadvantaged, should have been alleviated since 1998. Evidence suggests, however, that credit constraints for private firms are still present and these may impede the growth of the economy (Huang, 2012). In fact, central and local governments define mandatory rules with different priorities and commercial banks have to obey. The various, large, specialized banks are not institutions with independent management and are responsible for their own loss and profit. As a consequence, these banks are not as concerned about the operational efficiency of credit.

1.3 AIMS AND STRUCTURE

The aim of this book is to examine the development and transformation of the Chinese business model. The impact of the financial crisis on coun- tries and China will help the reader to understand its evolution toward a form of market capitalism. We develop three main parts as a framework: The business model of companies and how it affects the performance and the management of firms; business culture and its influence of financing policy of enterprises; finance and investment and how the financial sector could help the development of companies.

The first issue considered is structural organization and management in China. Here we address the following questions: What are the main factors that explain the spatial and economic development of China? Does gover- nance have an impact on the performance of companies? Since the 2008 Global Financial Crisis, corporate governance developed a new dimen- sion regarding enterprise performance. In its broader sense, governance can be understood through the different forms of decisions and control that exist inside a firm. Implicitly, such concepts aim to define how power is distributed within a firm and the decision-making process then justi- fies the form of corporate governance. It must take into consideration the property rights specific to the institution, which could be public or private (Brickley, Smith, & Zimmerman, 1997). To enable shareholders to fulfill this role, their participation on the General Assembly Board is essential to guarantee their monitoring role concerning managerial deci- sions. Moreover, each member must have reliable information about the

Introduction: The China Business Model in Context—Setting the Scene 7

objectives of the company. Hence, asymmetric information problems should be solved. Only in this context will good management be possible in order to achieve higher performance.

The concept of CSR is diverse and applied in China (Warner & Rowley, 2011, 2014; Yeung, Ramasamy, & Rowley, 2016). In 2006 the most recent version of China’s Company Law became effective.1 This explains the conditions under which CSR should be applied to Chinese companies (Brohier-Meuter, 2011). This states that companies “shall comply with the laws and administrative regulations, social morality, and business morality” and “shall act in good faith, accept the supervision of the government and the general public, and bear social responsibilities” and codifies the obligation of businesses to observe the basic principles of CSR and provides a legal basis for CSR in China.2

CSR (gongsi shehui zeren) is correlated to corporate sustainable develop- ment (CSD) (Romero & Lamadrid, 2014). CSD is seen as a business strat- egy that attempts to meet the needs of organizational stakeholders without compromising the resources and interests of the local community. CSD has been the object of much work in recent decades and researchers have adopted varying perspectives.

Even if these values are now more integrated in business management, CSR’s implementation is diverse among Chinese companies for several rea- sons. First, many major corporations are SOEs and controlled by the gov- ernment. Nearly a quarter of corporate assets are state-owned (National Bureau of Statistics of China, 2009). Second, Chinese CSR implementa- tion refers to a top-down planning process, which incorporates company law, with guidelines that do not have the status of law and environmental requirements for credit and listing on the stock exchange (Brohier-Meuter, 2011). Third, the integration of company’s inherent social responsibilities has to cope with traditional Chinese business management (Lin, 2010). Fourth, SOEs are unaccustomed to authentic public accountability. Therefore, responsible corporate behavior does not develop naturally among Chinese companies, even as the economy moves toward a market model.

All these considerations help us to understand why corporate owner- ship in China is so concentrated (Claessens, Djankov, & Lang, 2000; Faccio &

1 Company Law of the People’s Republic of China (promulgated by the Standing Comm. Nat’l People’s Cong., Oct. 27, 2005, effective January 1, 2006) (hereinafter Chinese Company Law), available at http://www.fdi.gov.cn/pub/FDI_EN/Laws/law_en_info. jsp?docid=50878.

2 Chinese Company Law supra note 1 art. 5.

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Lang, 2002). The institutional context discussed earlier, together with weak legal or regulatory protection for minority shareholders, exacerbate agency problems, interest conflicts, and make the Chinese stock market highly con- ducive to “tunneling” activities (e.g., Jiang, Lee, & Yue, 2010; Peng, Wei, & Yang, 2011), whereby majority shareholders use their personal position to make additional profits. As a result, the conflict of interest between control- ling and minority shareholders, rather than the one between the delegated manager and diverse investors, becomes the central theme of agency prob- lems in Chinese firms.

Given all of the above, Chinese management is different from what is expected in the Western context. Several issues have to be considered. The first issue concerns participative management and corporate gov- ernance. In reference to our preceding argument, public firms focus on distribution policy toward their workers. For private and foreign enter- prises, interaction between managers and employees is a key issue in defin- ing “good managerial practices” in a Chinese context. The latter refers to leadership and empowerment, which are crucial to Western managerial processes. The question is how to adapt such concepts to Asia (see Rowley & Ulrich, 2012a, 2012b). In this particular context, where conflict of interest often exists in companies, it is easy to understand why Chinese employees are not really willing to share responsibility with managers. Participative management questions the traditional model, but also appeals to the construction of a new paradigm to satisfy the Chinese environment for firms.

The second issue to consider is the financing policy and performance of Chinese firms. The financing of an investment project will induce a hierarchical choice regarding the financial structure of firms. In particular, small firms prefer internal financing (internal funds, bonds) and use banking loans as the last resort. Medium size companies also have some difficulties in accessing financial markets and will privilege bank loans. Large firms operate an optimum choice between banking credit, bonds, and financial assets. These facts should be adapted to the particular form of Chinese culture where guanxi plays a very important role in business culture. As a product of Chinese traditional culture, guanxi has a huge influence on Chinese society and business behavior (Wang & Rowley, 2016; Warner & Rowley, 2011, 2014) and in the way firms finance their investment projects.

The banking system is controlled by the government and used as a policy tool for addressing national and social priorities. Access to credit may

Introduction: The China Business Model in Context—Setting the Scene 9

be determined by political considerations as well as connections, rather than solely on a commercial basis. Many studies show that large firms and SOEs have priority in obtaining bank loans (Martin, 2012); while small and private firms have more restricted access. The market segmentations in China provide opportunities to observe how the shock in the bank loan supply affects the corporate capital structure of different firms.

A third issue is that monetary policy and bank loan supply can be frequently adopted to stimulate economic growth in countries. A recent phenomenon is the significant credit growth since 2008 in large emerg- ing markets, such as China (Onaran in Bloomberg Business Week, 2013). In China, the supply of bank loans substantially increased in 2009 and 2010 following an expansionary monetary policy. However, disparities in investment policies exist among Chinese firms across the country. Hence, three industrial models coexist: the Suman Model, characterized by local, state-directed, township and village enterprises; the Pearl River Delta Model, corresponding to externally driven development and exo- urbanization; and the Wenzhou model, composed of family-owned small business. This unequal industrial development is not specific to China. For example, there are similar situations in Italy and Germany (Hadjimichalis, 2006; Schamp, 2005). Government policies during the Maoist era of state investment made Wenzhou’s economy less oriented to SOEs and so unequal access to credit could explain the differences in Chinese industry. In particular, investment in fixed assets in rural firms came from bank loans (Peng, 1994), while Wenzhou enterprises were generally financed by extended families, social networks and “under- ground” financial institutions (Tsai, 2002). Some questions then fol- low. Could investment policy help industrial relocation to create wealth and development? And will size, ownership, and governance affect this relocation?

Despite the recent financial crisis, many enterprises have continued largely using banking credit to finance their projects. As China’s economy slows further, companies are seeking lower rates of return on investments. The system is showing stress. Standard and Poor’s noted in November 2014 (Standard and Poor’s warns on China corporate risks) that China suffered its first corporate default when a solar firm failed to make a pay- ment to bondholders. So far, central government initiatives to restrain credit growth have largely failed. Companies are even turning to uncon- ventional financing options—increasing their debts in the process. The question is how to contain debt growth without damaging the economy.

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And how does this difficulty in finding liquidity for investment projects affects the performance of firms?

Such questions naturally lead to consideration of the financial and banking system. China’s banking sector is dominated by four state-owned banks (SOBs), which prefer to provide loans to SOEs—often very large firms. There are also 12 joint-stock banks, which, in terms of size, are in between SOBs and the third banking type: city commercial banks. Due to their relatively small size and local business orientation, most city commer- cial banks target local SMEs. Universal banks, private institutions, and SOEs play a central role in credit distribution, as pointed out earlier. Despite apparent strength, the stress tests conducted by central banks and regulatory institutions have indicated the fragility of the banking system. In particular the solvency II ratio of Basel III is far from being respected by private and public Chinese banks. The task is to evaluate the measures taken by the government to ensure the stability of the Chinese banking system.

Apart from banks, financial markets are mostly underdeveloped in China. Equity financing is a relative new development and remains trivial (Allen & Shen, 2012). Enterprises rarely use direct finance for their invest- ment projects. Access to security markets is controlled by the state and constitutes a supplement of funds for large SOEs. It is highly volatile, as security prices do not appear to be efficiently set, so prices do not provide either a positive signaling function or a disciplinary factor for the manage- ment of firms. As a consequence, Chinese security markets do not provide adequate opportunities for the management of financial risks. Two ques- tions then arise. Firstly, what are the main sources of financing for Chinese firms and how will they impact on their productive investments? Second, what are the factors that influence investment in Asian countries?

Given our structure above, our book will provide answers to our ques- tions, which will allow a better understanding of the business world in China—explaining both the managerial and financial strategy of its firms. We now outline the content of our book that fulfills this aim.

1.4 CONTENT

Our book is divided into a trio of interrelated parts and a total of 11 chapters. These parts and the chapters are set out in Table 1.1. This gives readers a quick overview of the structure and content as well as the links between parts and chapters.

Table 1.1 Structure, Content, Themes and Coverage Chapter Part Content and Themes Sector Coverage

1 Setting the scene and aims, structure, and content General I Management and Culture

2 Guanxi culture, characteristics, practices, and exchange mechanisms Role of public sector in implementation

General

3 Motives and behaviors of business owners and managers Dimensions of business motives/behaviors: corruption, favoritism, reliability,

responsibility

Private businesses SOEs

4 CSR/CSD historical perspective, theoretical framework, government role, consumer responses

Benefits to performance

Textiles and apparel Telecommunications

II Financial Innovation and Application 5 Equity gap and finance innovation

Private and public venture and capital funds Technology-based SMEs

6 Supply chain management Medicine distribution and spatial distribution

Pharmaceuticals

7 Managers and employees from different ethnic backgrounds—heterophily Stress and psychological acceptance at work and management style

US-owned Pharmaceuticals, food, cosmetics

III Finance and Investment 8 Informal finance, financial contracting, and folk lending

Banking system versus P2P lending SMEs

9 FDI and internationalization Transnational entrepreneurs and Transfer–Adapt–Scale framework

Services

10 Economic growth, competitiveness, and financial and environmental performance

FDI, banking system and financial stability

Transnational corporations

11 Implications and what we can learn General

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Part I is concerned with a discussion of the way business is conducted in China in terms of management and culture, and contains three chapters. Chapter  2, Guanxi Culture, explores guanxi, its nature and effects on busi- ness performance. After defining the guanxi culture of business companies, an emphasis is given to its impact on business performance. Guanxi can help explain business behaviors and many foreign managers regard it as key to doing business in China. The rules and codes integrated in the guanxi busi- ness model influences every aspect of the business domain, including rela- tionship marketing, supply chain management, and market performance. It is also crucial in the arguments developed in Parts II and III of our book.

Chapter 3, Interpreting China’s Model for Business: Roles of Corruption, Favoritism, Reliability, and Responsibility, positions a transition from a com- mand economy toward a market economy within a theory of comparative political economies, and addresses an interpretation of the business model. This suggests that China remains a one-party regime, resisting transition to constitutional democracy, while managing marketization and privatization. The findings provide insights concerning the roles of four dimensions of the business model: corruption, favoritism (including guanxi), political reliability, and CSR.

Chapter  4, The Evolution of Corporate Social Responsibility (CSR) and Corporate Sustainability (CS) Practices in China, focuses on CSR. The policies and regulations of the Chinese State Environmental Protection Agency aim to improve the environmental performance of corporations. This chapter covers also the evolution of Corporate Sustainability (CS) and CSR and the role of the government in leading initiatives. The global CSD reporting initiative, GRI, based on the UN Global Compact, and reporting challenges facing Chinese firms, are dis- cussed. Content analysis of reports published by Chinese companies is pre- sented in comparison to those from firms in the United States.

This first part of our book constitutes the background of how Chinese firms apply management and governance to improve their performance in the global market. Part II contain three chapters concerned with the application of the Chinese business model to different sectors and financial innovation to tackle liquidity constraints.

Chapter  5, The Equity Gap Amongst Technology-Based Small Firms: Challenges for Government-Backed Venture Capital in China, explores financing for innovation and technology-based entrepreneurs. It exam- ines the context of state intervention and the structural economic issues that embed it. The review captures the issues related to the equity gap

Introduction: The China Business Model in Context—Setting the Scene 13

for entrepreneurs and considers initiatives, responses and supply side state intervention strategies used to help to try to mitigate the finance gap. It examines what necessitates the state’s intervention and its implications for creating market imperfections and how efficient the state is in narrowing the finance gap for technology-based SMEs.

The two following chapters illustrate the situation of two specific sec- tors of Chinese economic development. Chapter  6, Assessing the Impact of the New Medical Reform on China’s Pharmaceutical Supply Chain: The Case of Essential Medicines Distribution in Yuping, Luochuan, and Minhang Regions, analyzes supply chain management as it becomes more prevalent in Asia. The new round of reform in China’s medical system is said to be bringing about significant improvements in the pharmaceutical supply chain. This, in turn, has led to unprecedented opportunities and challenges for operators and consumers alike. The reform has also brought about an urgent need for rigorous analysis of the impact this may have on the country’s pharmaceutical supply chain, especially as it relates to the rural areas.

As Asia constitutes an attractive market, foreign investors are attracted to businesses in this part of the world. Management can come from American or European countries. Chapter 7, Exploring MEH (Manager- Employee-Heterophily) in US-Owned and Managed Plants in Taiwan, explores the influence of managers coming from different ethnic and cul- tural backgrounds on local workers in Taiwanese firms. Sources of dishar- mony between employees and managers could cause stress that may be improved through HRM practices. Managers, expatriates from overseas parent companies, need to take into account different organizational cul- tures which will impact on HRM.

As a whole, this second part of our book gives insights into the inter- actions of Chinese business culture and management. Part III contains three chapters concerned with financial aspects of management. The com- parative analysis presented in this part will help the reader to better under- stand the specificity of Chinese management.

Chapter 8, Monitoring Maturation in Chinese Financial Intermediation, examines shifts from folk-lending [民间借贷—Mínjiān jièdài] to peer- to-peer online lending platforms [P2P 平台—ping tai] by the maturation in Chinese financial contracting involving SMEs. Its analysis helps under- stand why peer-to-peer online lending has exploded in China since 2010 and why Wenzhou is one of the main centers for so-called P2Ps. As already mentioned in Part II of our book, SMEs have difficulties in finding the

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necessary liquidity to finance investment projects. The use of the P2P platform is a way to reduce or even avoid such liquidity constraints.

Suggesting that this change in financial context requires a paradigm shift, Chapter  9, Internationalization Strategy and Service Adaptation in China: Perspective of Transnational Entrepreneurship, proposes a new FDI model suited to services. This strategic Transfer–Adapt–Scale framework is specifically tailored toward transnational entrepreneurs (TEs). Many study multinational companies in China, but few focus on TEs. It suggests that TEs in China are in a unique position to utilize this unparalleled change of context as the Chinese service sector expands. The aim of this chapter is to give an emphasis to cul- tural values that TEs need to consider in order to successfully conduct their business. Applied to the service sector, this will give readers insights regarding the adaptation stage TEs must set up when doing business in China.

Chapter  10, China Versus India: Emerging Giants in the World Eco- nomy, provides knowledge about China, in comparison with India, in order to illuminate the factors needed to understand their investment climates, development, and the basic foundation required for investing in these countries or initiating business opportunities. As per the Global Competitiveness Report (2014–15), which covers 144 countries, India is ranked 71st and China 28th. They have achieved high rankings in key parameters like Market Size (3rd for India, 2nd for China), Innovation (49th for India, 32nd for China), and sound financial market development (51st for India, 54th for China). The purpose of this chapter is to give the reader an insight into financial factors that explain the economic develop- ment of these two countries.

All these considerations in Part III will help readers to better under- stand how financial structures are organized and how they can contribute to productive investment.

1.5 CONCLUSION

We have set out our aims and the commensurate logic, rationale, link- ages, and structure for our book. We have provided a context and over- view of the chapters. As the economy slows, China’s business model is under strain and stress—and hence, reevaluation. The model is composed of many interlocking and self-reinforcing factors, which we grouped into a trio of: management and organization; culture and finance; finance and investment. We looked at these in detail and conclude that these issues

Introduction: The China Business Model in Context—Setting the Scene 15

will provide a better understanding of the business world in China by explaining both the managerial and financial strategy of firms in the new economic context, albeit in the traditional culture of guanxi. In addition, it will help the reader to clarify the strengths and weaknesses of firms.

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