International dimensions of organizational behavior.

Table of Contents

1. Introduction[footnoteRef:1] 2 [1: Prepared by Banruo]

2. Understanding the business environment in China1 2

a. Hofstede’s culture value dimension map of China

b. The Chinese view of negotiations

3. Key organizational behaviour issues3 4

a. How is the Chinese negotiation style different from that in the West? 4

b. The importance of Guanxi 5

4. Strategies management should use to conduct business negotiations in China[footnoteRef:2] 6 [2: Prepared by Maneel]

a. Know the context of the deal 6

b. Know your partner 6

c. Know yourself 7

5. Ideal operational strategy[footnoteRef:3] 7 [3: Prepared by Shashank]

6. Impact on overall organizational operations1 9

7. Potential costs and risks to the organizations of implementing the newly developed strategies3 10

a. Maintaining Due-diligence 10

b. Potential risks to the organization 12

8. Conclusion2 12

9. References2 13

Introduction

Conducting business with China is an increasing possibility for many businesses around the world. China has the world's fastest-growing economy, with growth rates averaging 6%, much higher than some developed countries like the US and the UK. China currently ranks as the second largest economy in the world by nominal GDP. There are many business opportunities in China, with many Chinese companies being reasonably priced as compared to their counterparts in other developed countries. Many of China’s top companies outperform S&P 500 firms.

But conducting business negotiations in China is very different from business negotiations in the West. There are many reasons for this ranging from difference in negotiation style, networking, and due diligence. Our report tries to outline these various reasons and offer recommendations based on our findings.

Understanding the business environment in China

Hofstede’s culture value dimension map of China

Developed by Geert Hofstede, Hofstede’s culture value dimension (HCVD) is a framework used to establish the dimensions of culture between different national cultures, and their impact on a business setting. It’s a great tool to analyse the functional and engagement environment of China; their HCVD map can be outlined as below:

Power Distance: 80

At a score of 80, China ranks among the highest in PDI. This is an indication that they’re a society who believe that inequalities amongst people are acceptable. There is a polarization in the subordinate-superior relationship and there is no defence against power abuse by superiors. Sanctions and are in general optimistic about people’s capacity for leadership and initiative, and individuals are influenced by formal authority. People are expected not to have aspirations beyond their rank.

Individualism: 20

At a score of 20, China behaves as a highly collectivist culture where individuals take actions in the interests of the group and not necessarily of themselves. In-group considerations are of significance, and there is a prevalence of preferential treatment for closer members of the groups; in-group considerations affect hiring and promotions. Employee commitment to the organization is low, but the same cannot be said about their commitment to the people in the organization. Relationships with colleagues are cooperative within groups and they may be cold or even hostile to those outside these groups; personal relationships prevail over task and company.

Masculinity: 66

At a score of 66, China is a predominantly masculine society which is success oriented and driven. Many Chinese will willingly sacrifice family and leisure for work. Services (such as hairdressing) are provided until very late at night and leisure time is not considered important. Migrated farm workers will willingly leave their families behind in faraway places to seek better work and pay in cities. Chinese students will care a lot about their exam scores and rank them as their main criteria for success.

Uncertainty Avoidance: 30

At a score of 30, China scores low on uncertainty avoidance. Truth may be considered relative but in immediate social circles, truth is of paramount importance with rules considered equally important. Adherence to laws and rules may be flexible to suit situation in hand, and pragmatism is considered a fact of life. The Chinese are comfortable with ambiguity as is evident in the Chinese language which is full of ambiguous meanings. The Chinese are entrepreneurial and adaptable. Majority (70% -80%) of Chinese businesses tend to be small to medium sized and family owned.

Long Term Orientation: 87

China scores 87 in this dimension, which indicates that they have a very pragmatic culture. The Chinese believe that truth is situational, and depends on context and time. They show a strong propensity to save and invest, thriftiness, perseverance in achieving results and an ability to adapt traditions easily to changed conditions,

Indulgence: 24

A low score of 24 in this dimension shows that China is a restrained society. They exhibit a tendency for cynicism and pessimism. Chinese society does not put much emphasis on leisure time, and control the gratification of their desires. The Chinese feel that indulging themselves is somewhat wrong and that their actions are restrained by social norms.

The Chinese view of negotiations

The Chinese word for negotiation Tan-pan is a combination of two characters which mean to “to discuss” and “to judge”. Negotiation exists primarily as a mechanism for building trust, from a Chinese perspective, so that the two parties can work together for mutual benefit. The Chinese view negotiations as a mechanism for building trust. There is a process that involves dialogue that allows each partner to judge the other, appraise their competences and assess each other’s relative status. Negotiations are viewed as an ongoing and dynamic process that takes into account practical matters and context.

Key organizational behavioural issues

Some of the key issues businesses in the west face when doing business in China is that China has a very different negotiation and operation style to businesses in the West. Several changes will have to be made with respect to organizational behaviour to facilitate a profitable business in China. The first step to identifying them is to understand the Chinese view of negotiations and the key differences between negotiations and operations of businesses in the West and China.

How is the Chinese negotiation style different from that in the West?

A significant difference between the Chinese and the Western style of negotiation is that the Chinese prefer not to involve in contract-based absolutes. While adapting to the Chinese style of negotiation, foreign partners must for slower paced and seemingly abstract building of interpersonal relationships. It is also important to understand the local circumstances before crafting a plan.

Any situation involving two or more entities in China require negotiation in some form, from informal, friendly discussions to formal bilateral talks. Businesses in the West are more inclined to creating contract-based absolutes; negotiations are impersonal, situational and are focused on the current issue. Negotiations in China involve a process of building and nurturing relationships to produce mutual benefits; it is a process that does not end unless the relationship is severed. Negotiations in the West are task-based, time conscious and look for quick settlement of issues.

In order to be successful, foreign companies must therefore commit adequate resources and time to understanding and nurturing local China relationships for the long run.

The Importance of Guanxi

What is Guanxi?

Guanxi (pronounced gwon-she) is a Chinese term meaning "networks" or "connections" that open doors for new business and facilitate deals. Guanxi is essential to generate business in China and it is a generally acknowledged fact.

Why is it important?

In China, guanxi oils the wheels of almost all businesses. It is often through personal trust, strong relationships, obligations and exchanging favors that businesses can get their wheels rolling in China. Any business looking to do successful business in China must build a framework that garners guanxi. Relationships are taken very seriously in China, with them often being more important than the business presentation itself! Long term engagements in China require building and honouring guanxi with Chinese clients.

Working with Guanxi

Businesses in the West tend to prefer to keep business engagements brief and to the point. Once a deal is done, the usual practice is to shake hands and go their separate ways. It is therefore important for Western companies to extend their relationship with business partners beyond work. Support must be extended to Chinese businesses beyond the business engagement, sometimes, and favors must be offered in extracurricular forms, where possible.

The amount of favour given and extended must be taken account of and it must be ensured that the amount of favours taken should never exceed the amount of favour given by too much. Investment and dedication must be given and exchanged in the relationships with the business partner, and relationships must never be approached in a relaxed manner unless appropriate.

Strategies management should use to conduct business negotiations in China

Know the context of the deal

When doing business in China, it is critical to understand the circumstances and the environment in which the business takes place. This is because the business context in China can be different from the West and it is highly recommended to invest resources in broad ranging due diligence.

Foreign parties are generally expected to know of and work well within the local context, it therefore becomes an important precursor to make ready access to local information and insights before sitting down at the negotiation table. It is also important to obtain pre-negotiation guidance from local staff, local contacts and external advisors prior to and during the negotiation. The answers received in the context of the local business environment may also be evaluated and interpreted. A foreign partner who’s more knowledgeable about the local situation and circumstances is therefore more credible in the eyes of a Chinese partner.

It can be easy to underestimate the degree to which government and businesses are linked in China. A lack of clarity on the Chinese government regulations, industrial policy and relevant stakeholders at the governmental, national, provincial and local levels can lead to wrong strategic approaches to negotiations. For example, if a foreign corporate’s objectives conflict with local directives, the efforts to arrive at an agreement with a Chinese partner may slow or stall without a clear understanding as to why. Adequate knowledge of the business context is the best way foreign companies can position themselves to achieve the best possible outcomes.

Know your partner

It is important for foreign companies to become familiar with prospective Chinese partners on the organizational and interpersonal levels. It is also important to verify the credibility of these partners by looking at past track records and understanding their objectives for entering into a business relationship. Partners must not be chosen based on English-language capability alone or at informal meetings, but should be sent through a strategic screening process. A reputable local partner who is closely aligned on mutual goals is essential for successful negotiations and a lasting business partnership.

As there is a lack of organizational transparency in China, it becomes critical for companies to spend time understanding their counterparts, especially in areas like revenue sources, funding of capital assets and operations, and ownership structure. It is imperative for Companies to take time to confirm whether there is a basis for sustainable business, before investing in discussions. Make sure the business partner has the necessary legal tie ups to conduct the desired business.

Know yourself

It is equally important to understand your strengths and weaknesses and plays a vital role in knowing how best to prepare for negotiating in China. Clarity about resource commitment, high-level objectives, and managerial support for business in China are driving factors for internal pre-negotiation positioning on a corporate level. This helps the company prepare opening statements about its track record, background, commitment, and value to Chinese partners. The “big picture” story is standard in the opening phase of Chinese-style negotiations. The effectiveness of this approach relies heavily on knowledge on how to position the foreign company’s pitch in the local Chinese business context.

It is common to encounter negotiation circumstances when Chinese businesses may ask the effect a recent international court ruling significant to the business partner may have on the corporate relations with a domestic regulatory agency. Proclaiming such a circumstance could be insignificant can result in the loss of credibility even among long term business partners. It is important to know the “Big picture” issues that affect the partner organization.

Ideal operational strategy

It is important to align internal organizational resources to work most effectively to induce a manner of operational readiness in Chinese-style negotiations. Most important among these is the creation of a highly disciplined and cohesive negotiation team that follows a unified communication plan. This is different from typical, impromptu Western-style negotiations, where each member of the team has an individual voice in the process and is encouraged to use it.

In this unified-team approach, there is generally one designated speaker and if other team members speak, it should be from a plan or script, showing corporate consensus. Team members should never question each other, openly disagree, or air unresolved internal issues in front of the Chinese partners, even in side-talks. Saying less is always better than saying too much, in Chinese-style negotiations.

It is also important to designate individual duties for each team member. These often include that of translator, note-taker, cultural interpreter, and intermediary. All of these functions are typical and expected in Chinese-style negotiations and functions may overlap. The note-taker serves an important role because the Chinese partner may refer back to concessions or statements made in the past. It will be difficult to contest specific statements without accurate documentation, as is common in Chinese-style negotiations.

Foreign companies should use their own Chinese translator even if an official interpreter is provided. Without access to the full breadth of discussions in both languages, much can be lost in translation. With the use of an effective translator, many insights can be gleaned from the other side’s internal discussions. It is viewed as a sign of goodwill to show a willingness to use both languages.

Apart from verbal interpretation, a cultural interpreter provides insight into cultural factors, nonverbal developments, and outside influences that the foreign party may not be aware of. Chinese-style negotiations are “big picture” and highly contextual in nature. Therefore Western negotiators are usually at a disadvantage if they lack a valuable cultural interpreter. A cultural interpreter can also be useful in telling a foreign negotiator whether the Chinese partner is constrained from giving concessions by his environment or by management and suggest what is possible to “push for” in the negotiations.

Companies should also not neglect the role of the intermediary within the team. Having someone who can speak informally to the Chinese team is necessitated from the Chinese proclivity for avoiding direct confrontation and personal embarrassment. The intermediary can be very helpful to ask for clarification, exchange ideas, influence attitudes, and otherwise work behind the scenes. In Chinese-style negotiations, often the most pivotal information for advancing negotiations is conveyed over dinner or in “small talk” in the hallway. A trusted intermediary can act as a conduit for all-important informal discussions and should be an important part of the operational strategy.

Impact on overall organizational operations

Businesses in the west generally have a business outlook which is competitive and are task oriented in work ethic. Business outlooks in China are more cooperative and work ethics are relationship oriented; this will be the first area where organizational operations will have to be modulated to fit with the Chinese mode of functioning. Management objectives should be modified to be less competitive and should be made to appear more cooperative with the objectives of the Chinese partner.

The objectives of the Western company should be made to appear to fit more congruently with the Chinese partner. For instance if the Chinese partner has an annual financial objective which requires the earning of X million yuan by the third quarter, then the annual objectives of the Western company should mention something similar. The same principle should be applied to other areas of business as well, such as geographic and demographic growth, etc.

Employees should be coached on the tendency of Chinese businesses’ focus on long term relationships, team-achievement-centric motivations, intuitive and relational decision making processes. Planning horizons should be instructed to be more implicit, oral and formal, and communication should be trained to be more non-verbal. The Chinese preference to respect past achievements, events and relationships must be inculcated in every aspect of engagement. Tradition must be respected with very little change introduced in the engagements. Knowledge transfers must be implicit and situational.

The major areas of impact in operations can be classified as below:

· Approach to work

· Business outlook

· Work Ethic

· Work Style

· Interpersonal

· View of achievement

· Relationships

· Decision making process

· Interaction

· Knowledge

· Learning

· Communication

· Long term engagement

· Planning Horizons

· Sense of Time

· View of change

Potential costs and risks to the organizations of implementing the newly developed strategies

There are some potential costs and risks to the organization for implementing these newly developed strategies. The costs to the organizations can be broadly classified under maintaining due diligence and the training costs within the organization to facilitate the necessary changes in operations. Due diligence can be elaborated as below.

Maintaining Due Diligence

Maintaining due diligence is of very important to conducting business in China. Businesses are expected to maintain due diligence over the duration of the business and not maintaining required diligence can lead to failure of businesses in China.

There are also several circumstances when due diligence can be of utmost importance. Carrying out due diligence in China is strongly advised when:

· Investing in a Joint Venture;

· Investing through a merger or acquisition of a Chinese company;

· Investing in start-ups;

· Cooperating with a Chinese partner either for producing your products, parts, or for distributing products or parts;

· Operating through a Wholly Foreign-Owned Enterprise (WFOE) or a Foreign-Invested Commercial Enterprise (FICE) to verify internal operations are straight;

· Hiring a new manager or senior level staff.

Apart from maintaining due diligence from a negotiation point of view, it also needs to be maintained in several aspects of the business for its healthy running. They are further described, below.

Operational Due Diligence

Due diligence is essential in the operational side of the business. It is essential at the beginning of the business and at periodic intervals to perform due diligence on important and supporting documents. Post due diligence, it is advisable to perform on-site visits; they are key to gathering hidden and any unsavoury information the partner may be hiding through an informal audit in China.

Low level staff and security guards can sometimes be the best sources for information about practices that can compromise the business engagement. Management personnel are often trained beforehand to answer the investigator’s questions in advantageous ways for the company.

Financial Due Diligence

Due diligence is also important in the financial side of the business. Accountancy and Tax due diligence are the two major types. There are some questions the business should ask their potential business partner in order to successfully maintain these diligences.

Accountancy Due Diligence

· Are fixed assets reflecting the reality of the company’s operations?

· Are all receivables backed up by contracts and invoicing?

· Are other payables and liabilities (such as social insurance payments, salaries, pension payments for previous employees, etc.) reliable?

· Are accounting and reporting made on accrual basis?

· Are there some factors that cause income or cost to be unrevealed?

· Are payments authorized or approved by the management with supporting documents?

· Are invoices authentic?

Tax Due Diligence

· Are Chinese accounting standards readable by the foreign investor?

· Does the company industry benefit from preferential tax rates? If yes, for how long?

· Does the Chinese company comply with all foreign exchange regulations?

· Is the company fulfilling its withholding tax responsibilities?

· Does the company follow all customs regulations?

· Are the monthly, quarterly, and annual tax filings in compliance with the relevant tax regulation?

Potential risks to the organization

The potential risks to the organization can be classified under

· Failure of current employees to meet with the standards of the changes necessary in the operations.

· Potential costs associated with hiring new recruits to replace or add to the existing team due to the lack of said team to fulfil the needs of the changes to the operations.

Conclusion

Business negotiations in China work very differently from those in the west. There is a high emphasis on maintaining relationships with there often being a requirement to maintain them with favours and support beyond the business engagement. Western companies looking to conduct business in China must temper their need for quick settlement and situational engagement, and work on building due diligence with their Chinese business counterparts.

The biggest costs to company involve the training and structuring of internal resources for effective synchronization with their Chinese business counterparts. Areas of impact include attitudes to work and communication styles as well as the long term orientation of the engagement. Careful effort must be put in order to align objectives with the Chinese counterpart, and networking must be taken seriously. Account must be kept of the amount of Guanxi involved with each business partner and it must be ensured that the amount owed is always greater than the amount due. Due diligence must be maintained in business, operational and financial aspects.

If all these requirements are fulfilled, any Western company looking to conduct business in China will meet with success!

References

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