International businesses contribute to Chinese economic development in two significant ways—making their products or services available to average Chinese person and employing Chinese workers, even if the company doesn’t have a market presence in the country.
If your business is evaluating expanding into China in either of these ways, it’s important to understand the pros and cons of doing business there.
Advantages of doing business in China
China is an attractive locale for global businesses large and small. Let’s explore some of the most compelling reasons to do business in China.
1. A growing middle class
As companies, particularly in the tech sector, have expanded into China over the past decade, increased demand for skilled labor has led to growing wages nationwide.
This growth has also bolstered the expansion of China’s middle class—a share of the population that can afford to purchase high-quality products, invest in their futures, and seek further class mobility.
Three major factors have influenced China’s ever-growing middle class:
- As more international companies hire in China as part of expansion, they must provide competitive wages to remain attractive to employees with multiple job options. Thus, Chinese workers’ wages and benefits continue to increase, giving them more spending power.
- To accommodate growth, workers’ demand for housing and transportation, and an increased presence of international businesses, China has invested significantly in infrastructure overhauls. This critical infrastructure—roadways, public transit, housing and commercial spaces—further increases opportunities for economic growth. With better infrastructure, domestic and international companies have more physical and functional tools to employ workers.
- Urban development has skyrocketed in China throughout the last decade. As domestic and global employment has increased, Chinese workers have flooded to cities and urban areas to access job opportunities, requiring significant investments in metropoles.
With the growth of Mainland China’s middle class, international employers have access to an increasing number of workers. At the same time, citizens are more empowered than ever to purchase goods and services from domestic and foreign companies.
2. Increasing reforms improve the ease of doing business
As China’s economy grows, the country continues to reform its existing laws to facilitate more development and incentivize global and domestic investment.
In 2019, the World Bank ranked China as one of the top 10 most improved economies in which to do business. The country scored 77.9 out of 100 points for ease of doing business.
This improved ranking is due, in part, to a variety of reforms in the last decade that have made doing business in China simpler and more profitable both for domestic and international companies.
These reforms include:
- Streamlined business registrations and licensing
- Simplified permitting processes for construction and infrastructure projects
- Greater utility access and ease of setting up electrical and plumbing connections
- Improvements to the corporate tax system that prioritize small business savings
- Increased ease of importing and exporting goods
- Enhanced ease of insolvency proceedings for companies that struggle financially
As China continues to be an attractive destination for international employers, its laws will likely evolve to maintain its competitiveness in the international marketplace.
3. Cultural commitment to innovation
In the past 10 years, China has considerably invested in innovation, challenging citizens and domestic businesses to create new technologies and systems. In turn, these innovations will draw attention to their growing market.
Why is an economy that values innovation attractive for companies seeking to expand? Three reasons stand out:
- Constant improvements to technological infrastructure make it easier for international companies to employ Chinese workers and grow their brand recognition abroad. In particular, digital and remote work developments have vastly increased access to Chinese workers for companies developing their worldwide employment presence.
- The culture of innovation encourages Chinese workers to brainstorm new ideas and become proficient with existing high-powered technologies and systems. As a result, Chinese workers have valuable skill sets that set them apart from other employees around the globe.
- Innovative cultures generally welcome increased technological advancements, even if they’re provided by international businesses and workers. After all, China benefits from welcoming inventors and mold-breakers to the country since it increases their access to worldwide developments.
4. Significant current and predicted economic growth
The middle class isn’t the only expanding sector of the Chinese economy. Every aspect of the Chinese market has grown substantially in recent years, and experts predict continued prosperity, growth and potential.
Domestic companies exemplify the significance of China’s expansion. Chinese businesses now account for a substantial portion of Fortune Global 500 brands including some of the most valuable companies in the world.
Experts attribute this exponential Chinese growth to:
- Decades of Western imports of inexpensive Chinese goods have increased the value of their economy and nationwide buying power
- Increased domestic debt management and risk mitigation regulations, helping China secure its existing capital and responsibly manage their future profits
- Reduced tariffs and relaxed laws that facilitate foreign investment, helping international companies and consumers continue to inject money into the Chinese economy
For businesses considering expansion into China, the country’s growing economy provides a fertile ground for potential profits and employment success.
Disadvantages of doing business in China
Although business opportunities in China abound and the growing economy continues to attract international interest, there are drawbacks. Let’s review some notable disadvantages of expanding to China or hiring within the Chinese labor force.
1. Intellectual property protection gaps
Businesses inventing and developing new products, systems and services typically seek protection for their valuable innovations. Intellectual property (IP) laws serve this purpose by legally prohibiting theft of proprietary ideas.
However, IP laws in China leave much to be desired. The country’s legal system usually punishes counterfeiting and IP theft with little more than a slap on the wrist, making product pilfering a low-risk, high-reward proposition.
Even if you only want to employ Chinese workers and don’t plan on selling your product to the Chinese consumer market, you should take every possible precaution to keep your IP closely guarded.
For companies with exciting and disruptive IP, working in China can endanger those new ideas. However, experts predict that changes are on the horizon. As international companies and governments doing business in China demand improved IP laws, domestic companies are beginning to ask for the same.
2. Prioritization of domestic businesses
After a long history of economic lethargy and a weak presence in the global market, China has become very protective of its current domestic prosperity.
Despite increased international presence and competitiveness, the Chinese economy protects its own first, prioritizing home-grown Chinese business and workers over a wholly foreign-owned enterprise.
China makes it difficult for international businesses to gain a foothold in a few ways:
- Chinese law isn’t particularly transparent, making it difficult for a foreign company to research compliance and employment procedures.
- While changing regulations have made it easier for Chinese companies to operate, developing laws have made it slightly more difficult for foreign investors to secure licenses, permits and patents.
- Domestic legislation promotes and protects a Chinese company more than its foreign business counterparts, exposing international brands to increased risk.
3. Market break-in difficulties
Success stories of foreign brands in China certainly exist. For instance, both Nike and Walmart have expanded very successfully in the country. But as China continues to grow and prioritize domestic development, it’s increasingly difficult for international companies to overcome Chinese market entry hurdles.
Businesses looking to employ Chinese workers or sell products in China will likely encounter one or more of the following roadblocks:
- Increased infrastructure investments facilitate growing domestic business development, which increases the competition for foreign companies.
- Domestic companies receive regulatory preferential treatment, which can lead to difficulties in foreign business registration and compliance conflict resolutions.
- China has more resources than ever to improve their historically low-quality domestic goods, giving more opportunities for Chinese consumers to purchase products domestically. Foreign brands will encounter increased competition as the quality of Chinese goods continues to grow.
4. Rising costs
As consumer demands for urban housing, infrastructure, utilities and high-quality goods increase, prices will inevitably do the same. China used to present opportunities for inexpensive labor outsourcing, but it’s becoming more expensive for international companies to do business in China.
Several factors influence these rising costs:
● Foreign and domestic companies in China are growing, increasing the demand for skilled labor and creating expectations for higher, more competitive wages and better severance pay in China.
- Improving infrastructure comes at a significant cost. China’s prices are steadily rising to cover the costs of developing new utilities, roadways and public services.
- Along with infrastructure improvements, a significant migration to urban centers has increased Chinese real estate property values. Businesses hiring Chinese workers must account for steadily increasing cost of living when determining salaries.
A low-risk way to break into the China market
For seeking to enter the China market, the growing economy can seem like a viable opportunity for increased profits and improved employee skill sets.
However, before fully committing to the country through entity establishment and the cost and operational difficulties that come along with it, companies can test the water and add workers through a global employment partner like an employer of record.
A China employer of record can help you add workers in the country through, quickly and in compliance with all local employment and payroll requirements, as well as provide guidance from local HR teams. Learn more by speaking with a global solutions advisor today.
