China has more than 1.3 billion people, making it one of the largest markets in the world. Its economy has grown rapidly over the past two decades. While these facts make China appear attractive to foreign businesses, they present only one side. Doing business in China also has several disadvantages.
Historically, the cost of human and land resources have been considerably lower in China than in nearby markets. That's changing, particularly in the major cities, according to the U.S. China Business Council's 2013 survey. Demand for qualified workers has increased, meaning companies must compete for the best talent. In 2012, about 30 percent of companies surveyed increased wages between 10 percent and 15 percent. While most businesses are still reporting profits, materials and land costs also are a growing concern.
Licensing and product approvals move slowly in China at all levels of government. In fact, more than 70 percent of companies surveyed indicated that they'd experienced delays in getting approval to sell products, expand operations or obtain a business license. The Chinese central government is working to lessen the number of approvals required, but so far has made little progress, according to USCBC. Regulatory enforcement also is uneven in China, with agents enforcing the rules for U.S.-owned companies when they don't enforce them for their Chinese competitors.
The Chinese government fails to protect intellectual property to the standards of many Western countries. Almost half of the companies the USCBC surveyed indicated they limit the products they manufacture in China because intellectual property rules go unenforced. Some companies feel the government lacks understanding of the importance of protecting trade secrets. A Deloitte study shows that foreign companies are reluctant to form technology-sharing partnerships with Chinese companies for fear the local companies will renege on agreements once they receive the technology. While courts are improving, only about 20 percent of companies sued successfully, the USCBC reports.
Perhaps one of the most troublesome disadvantages is the perception that the Chinese government favors domestic businesses over foreign-owned ones. About 34 percent of foreign companies surveyed have tangible evidence that their local competitors received subsidies that they didn't; another 51 percent suspected this but have no tangible proof, according to the USCBC. Companies also indicate that domestic competitors gain product approvals and licenses more quickly and receive preferential treatment in gaining government contracts. Federal laws also restrict foreign ownership in several sectors, including financial services, agriculture, data centers, hospitals and petrochemicals.
Lack of Transparency
Laws and regulations are not always published and easily accessible in China, nor do federal, state and local governments necessarily keep all drafts open for comment for the full 30-day period to which they're committed. The State Council, for example, published less than 15 percent of its own rules in 2013. The lack of transparency often contributes to foreign companies' beliefs that they are being treated unfairly in licensing and regulatory enforcement.
While China has begun investing billions to improve its infrastructure, businesses still face significant challenges in moving goods. According to "Fortune," China is home to 20 percent of the world's population but less than 6 percent of its roads. The country also lacks sufficient rail lines and airport capacity to allow and encourage growth. China also lacks sufficient water to meet the needs of its residents, much less many manufacturing businesses.