Entering China: Business Opportunities, Potential Return and Risks

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Content

1. Introduction        2

2. Business opportunities and potential return        3

3. Risks        5

             3.1. Political        6

             3.2. Economic        7

             3.3. Ethical        9

             3.4. Cultural        10

4. Examples of failure and success        11

5. Root’s model and market entry strategy        13

6. Conclusion        14

7. References        15

1. Introduction

International trade and global expansion have become increasingly important for businesses, especially in terms of firms’ long-term goals and business strategies.
This essay will analyse Sainsbury’s business opportunities and potential return by investing overseas into China, as well as define different kind of risks that have to be considered when entering the Chinese market.

Examples of competing companies will attempt to give a better understanding of how the market is organised and what to expect when choosing to expand.
A conclusion at the end will summarise all main findings as well as introduce a suitable market entry strategy for that business.

2. Business opportunities and potential return

Sainsbury’s is the second largest supermarket in the United Kingdom as of 2015 (Butler, 2015) with a total share of the UK supermarket sector of 16.4 percent (Duncan, 2015). The supermarket chain has already established a dominant position in the supermarket sector and is considered to be part of the so called “big four”, a name given to the four leading supermarket chains in the UK, including Asda, Morrisons and Tesco (Silvera, 2013).

Therefore, expanding and investing overseas could strengthen Sainsbury’s overall market power and influence in the global competition. A market that might offer profitable business opportunities could be China.

The IMF^[1], an international financial organisation, has rated China as the world’s largest economy, surpassing the United Nation’s GDP^[2] of 16 percent by 1 percent in 2014 (Kamrany and Jiang, 2015). [pic 4]

(IMF, 2014)

The chart shows China overtaking the U.S. as the world largest economy based on the GDP measured by the IMF in market exchange terms as well as in purchasing-power terms. With increasing purchasing-power among consumers, there could be higher sales revenue and higher profitability for companies as well, provided that their supply match the demand of the consumers.

Furthermore, a steady shift of economic power from developed countries to emerging countries has been happening over the last years, they report rapidly growing economies and have advantages of economies of scale and scope, as well as rising productivity and improving innovation (Daniels et al, 2014).

China is part of BRICS, an association of five national emerging economies, including Brazil, Russia, India and South Africa. They play a major role in the world economy, currently producing about 30 percent of the world’s GDP with expectations tending up to 38 percent by 2020 (Daniels et al, 2014).

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(Daniels et al, 2014)

With economic growth, income increases of both individuals and businesses, which in turn, leads to higher demand for goods and services and therefore more spending. The Chinese middle class is growing and is “poised to become the principal engine of consumer spending over the next decade” (Barton et al, 2013).

Moreover, China does not only offer promising prospects regarding cheap and unskilled labour force, it also has the biggest pool of highly-skilled workers, being the largest supplier in the world of college graduates, especially in sectors like technology and engineering (Censky, 2015). The number of college graduates has increased to 7.5 million in 2012 and according to McKinsey Global Institute, China is expected to account for 30 per cent of all college-graduated workforce globally by 2030 (Towson and Woetzel, 2014). Large investments have not only been made in education, but in R&D^[3] as well, having led to growth in innovative outputs and improvement in high technology production. About 1.1 per cent of China’s national income has been invested in R&D, making it comparable to that in the UK with 1.5 per cent (Griffith and Miller, 2011). Its transition from research to actual outputs has been greatly successful as well, being the fourth largest filer of patent applications in 2010 to the World Intellectual Property Organization (Griffith and Miller, 2011).

3. Risks

When trying to expand the potential market by investing overseas, different kind of risks have to be taken into account, depending on which market is considered to be entered.

3.1. Political

The overall attractiveness of a country is determined by costs, risks and benefits whereas the political economy refers to the political, economic and legal system of a country which influence the level of economic prosperity and which have a relation of interdependence between each other (Hill, 2014).

The prevailing ideology in China is one of collectivism, meaning that the society’s utility is considered to be more important than the goals of an individual (Hofstede, 2010). The Chinese Communist Party (CCP) is the currently ruling political party of China and its political system tends more towards totalitarianism than democracy, meaning that it has maintained monopolistic political power and control since its founding (McGregor, 2013). China’s rapid economic growth has increased social unrest and political destabilisation that challenge its position as one of the leading global players. Since the Tiananmen democracy riots in 1989 and the collapse of the Soviet Union in 1991, CCP has shifted to a more democratic political regime in order to ease pressure coming from the media and the society but the fear of social unrest is still persistent.