Internationalization Process in China

Introduction

Internationalization of SMEs

The concept involved in the paper is about internationalization of SMEs in the era of globalization and issues related to it. After these, the issues related to establishment of Austrian SMEs in China are the point of review in the context of internationalization of SMEs.

The Context of China

As China is a country that has large population as well as potential customers, the entrepreneurs from countries like Austria try to establish firms in China. However, the issues and impacts when an European firm is to be established in a developing country like China are a matter of concern.

Globalization and Redtapism

Thus, the international dilemmas related to laws as well as cultural practices in business in geographical region in which the company has to operate are issues to establish a firm. The difficulties in establishment of SME´s by foreign companies and difference in doing business in China when compared to Western Countries like Austria have to face hurdles to establish SMEs and to do business.

This is one of the aspects that makes doing business difficult. The review then mentions the power structure and finds how it acts as an impediment in doing business. It further extends to loopholes in establishing a firm and investments necessary to start a business in China.

In this section, the importance of investments to get a legal base in China, which is useful to start an SME are explored. While reviewing the investment opportunities, the restrictions and easements offered by China Government to foreign investors, as well as its measures to protect the interests of local investors’ are considered.

Guanxi and cultural differences

After getting enough investment and required legal base, the review now reviews about the ‘face’ (guanxi – 关 系 ), which can be termed as reputation that is necessary to do business in China. To get the above-mentioned ‘face’ or reputation to do establish and to do the business in China the paper suggests to enter into partnerships or to acquire a minor share in a domestic firm and then to expand the business activities.

When the established SME is having enough reputation to do business, the control of Chinese government on corporate companies comes to the fore. The restrictions in China on companies to have control over them and the liberal nature of the governments in Western countries are compared and the paternalistic nature of the administration and its interference in the business activities of SME´s will be examined.

The review continues to offer a way out for foreign investors in the form of M&A by investing in domestic companies as well as acquiring their assets. After successfully establishing an SME, the cultural aspects that pose a challenge to foreign owner of the SME assume importance as partnering with other stakeholders in doing business is crucial and cultural aspects play an important role in them.

Moreover, the aspect of guanxi and networks on that name are reviewed to have an understanding about to what extent the western entrepreneurs need to deviate from the culture they are accustomed while doing business in their countries. Further exploring the behavior of the employees in China, the review points out that in Western countries they just walk out of the company when they failed to achieve.

However, this is not the case in China. Its government offers protection to employees and they too prefer a company that offers job security and is stable. Here the aspect of government interference again comes to the fore after the entrepreneur faces it while establishing a business.

Hence, this sections states that apart from cultural differences, the interference of government in business activities will be more in China when compared to the Western countries. After giving a glimpse of a picture that would be faced by entrepreneur while doing business in China, the aspect of corruption due to the exercise of power is mentioned. The review here connects the corruption with exercise of power.

As the exercising of power rests with government, the corruption of government officials who are related with the departments concerned with establishing of an SME as well doing business with play a significant role in success of an SME established by a western entrepreneur.

Thus, after estimating the extent of restrictions faced by foreign entrepreneurs, the performance aspect will be considered and the way value performance along with cultural aspects of Chinese will find place in the review.

Researching a Strategy for Internationalization

At this point the review ends and questionnaire, sampling, research philosophy, problem statement and research method as well as characteristics of research are stated in methodology. As continuity to the performance aspect reviewed at the end of literature review, the Analysis/Discussion starts with competition faced by foreign entrepreneurs and the ways and means to tackle it.

The analysis further goes on explaining the profitability changes with size and nature of the sector the SME is operating and the domination of bigger firms and in the case of SME´s, the bigger SME´s. After that ‘social capital’ the necessary aspect to get success in Chinese market is analyzed and cultural differences between China and Austria are explained by citing Hofstede, Hall etc.

In the next chapter of results and findings, the idiosyncrasies of Western entrepreneurs and differences of them with the Chinese culture is mentioned and the partnerships established to get reputation necessary for the business are explained. This is followed by effect of culture mixed with corporate governance to overcome barriers by maintain standards is explained.

The size and sector of the SME is again mentioned here as profitability is an aspect that is necessary to mention in results/findings chapter. The conclusion and recommendations follow the results/findings. Though, the road map to establish and expand business is clear, different researches that indicate different problems in doing business in China are reviewed by comparing the business culture in China and Western countries.

In the next chapters, the methods used in doing research are mentioned and around 20 questions for asking around 80 foreign entrepreneurs majority of them being Austrians are prepared.

The answers obtained from them are analyzed and the relevant literature is further analyzed to fortify the results obtained in the survey. In the discussion as well as results and findings part, the different options available for foreign investors are discussed. Finally based on all these chapters, the recommendations are given.

Research Question

What are the issues involved in the internationalization of an SME from a Western Country to China and how do the culture plays a role while doing business after establishment.

Aim

The Aim of this research is to find the solutions or the ways and means of facing problems to establish an SME by Western entrepreneurs in China.

Literature review

Internationalization of SMEs

Internationalization is a significant as well as major dimension that is necessary for the growth of an organization; in this context SME. Thus, according to Shankar Chelliah (2010, p. 27), when the SMEs are internationalized, the extent of their business activities increase and grow when compared to the SMEs in the pre globalization.

That means, the SMEs operate beyond borders of the base country and thus can compete with more number of companies to get access to new and number of markets than in the past. The reason for SMEs striving to operate in foreign countries is that they are able to generate more earnings or extra revenues by finding new markets.

However, in this context, the limitations of SMEs confined important mention to home country. According to Shankar Chelliah (2010, p.28), the success of SMEs in domestic market prompts them to go for internalization. In the context of this paper, the set up of an Austrian SME in China may result in generating new revenues rather than more revenues than in the Austria. (Chelliah S, 2010, p.27-28)

To generate new revenues, the SMEs have to find new potential markets and the attitudes of firms will be geocentric in the phase of world orientation of business, where the entrepreneurs search whole world for potential markets and the geographical locations that have policies framed on international basis.

In this context, Philip J. Rosson and Stanley D. Reid (1987, p. 25) mentions a conceptual difficulty that tries to define extent of internationalization of a company, which is in this context SME. According to them, the internationalization of SME depends on the extent of export dependence. If the export sales are less than two percent, the companies may not try to establish firms in the countries to which they export.

However, if the export sales are around 50 percent of the total turnover of the company, the SMEs may try to establish an SME in the country to which they export (Philip J. Rosson and Stanley D. Reid, 1987, p.21-25).

Farhad Simyar and Kamal Argheyd (1987, p. 223) mentions that the People’s Republic of China has radically changed its laws that are related with doing business in that country. The regulations are framed according to attract and encourage transfer of technology from developed countries.

Farhad and Argheyd (1987) further give information that there are 14 special economic zones till 1987 that give special access to foreign SMEs and other companies to invest in the country. However, Farhad Simyar and Kamal Argheyd (1987, p. 224) explains the realities of Chinese market that is not consistent with perceptions of entrepreneurs from countries like Austria.

He further suggests that a typical Chinese worker is not a potential customer and explains about major infrastructural problems that will be responsible for raising the production costs in the context of establishing an SME in China due to constrains on operational efficiency of the firm due to lack of infrastructure(Farhad Simyar and Kamal Argheyd, 1987, p.223-224).

SME internationalization as structural Equation

Even in the atmosphere of lack of infrastructure, the SME internationalization can still act as an element of economic development that results in growth of the firm. In this context, Mitja Ruzzier, Bostjan Antoncic, Robert D. Hisrich, Maja Konecnik (2007), cite Jaffe & Pastenak (1994) about well being and international reputation of a small and medium scale enterprise in a foreign country.

Consequently, internationalization that is a result of establishment of SMEs in foreign countries is an essential choice for small firm growth. As the firms considered here are SMEs, the entrepreneur’s decision-making is crucial. While citing Baird, Lyles & Orris (1994), the authors opine that the internationalization of SMEs stressed the role of entrepreneur that can show effect on export performance.

The entrepreneur’s decision making regarding the human capital elements that is capable to impact organizational outcomes in establishment of SME in a foreign country can be better understood with ‘upper echelon theory’ proposed by Hambrick & Mason (1984). According to that, the outcomes as well as strategic options exercised mixed with performance levels are linked to managerial backgrounds.

In turn, they are related to cultural aspects of the geographical location in which the company is located. Regarding this aspect, the entrepreneur is owner manager of SME and thus personal factors of these owner managers play a role in success or failure in the course of internationalization of the company.

The first aspect is that the entrepreneurs should have enough assets and that should make them find new markets as well as resources that result in new ventures. This new ventures aspect will be suitable to context of China (Mitja Ruzzier, Bostjan Antoncic, Robert D. Hisrich, and Maja Konecnik, 2007).

Globalization and Business in China

With the changes in global level environmental changes as well as transcendence of national boundaries for businesses, the firms are operating in diverse cultural atmospheres. The legal aspects may differ as well from those of the ones that are present in the home country of the entrepreneur or the base country of a Multi National Company (MNC).

Various branches of a same company should operate in different cultural atmospheres and this affects the recruitment as well as marketing of products and services. For starting a business in China the westerners experience legal as well as cultural obstacles or differences that act as obstacles for a firm or a business. Initially the entrepreneur or a firm faces the legal tangles if any in a country like China.

Till 2008, the visa restrictions in China are worrisome for western entrepreneurs as they are due to regulatory barriers. The posting on website of ‘China Supertrends’ mentions a report posted in Star Business Journal article on May 26^th 2008 about the visa regulations on business visas that are necessary for long stay of business people travelling to China.

Getting a Visa is a problem also for business people who do not have any sponsors. Due to this the Western businesses people get back from China for shorter durations and this situation hampers their business activities.

The visa restrictions are also capable of disrupting the international trade between China and Western countries as the individual entrepreneurs who come to China on their own to study business opportunities or to launch outsourcing units face problems to continue their activities they started as they have permission for only short duration.

These problems exists due to the fact that their business activities have no legal status in China and entrepreneurs may try for an offshore or a Hong Kong based company to handle the legal transactions necessary for the business activities.

However, the delay in resuming the business activities results in waste of time and money in China for Western entrepreneurs, if they try to establish a legal presence. To avoid these wastages, entrepreneurs normally try to work in China with tourist visas until they establish a legal presence. Although this may avoid waste of time but cannot reduce the costs associated with visa restrictions and documentation as well as the renewal process.

Although China put into practice all commitments while entering the WTO, the visa restrictions remain. However, it opened its banking sector to private operators ensuring full competition. Entrepreneurs can use this aspect to launch a firm of financial activities or a bank and further extend their legal presence to other activities.

Though this seems to be a good idea, does not works in the context of business activities of individual or smaller entrepreneurs who want to start a business in China as establishing a legal presence with a Wholly-Owned Foreign Enterprise (WOFE) is subject to greater capital requirements as well as regulations? To get rid of these obstacles, it is better for small entrepreneurs to focus on second, third, fourth or fifth tier cities for their business activities.

Though the incomes in these cities are lesser compared to those of tier 1 cities, the population, which is more when compared to total population of tier 1 cities. The presence of more population with enables an entrepreneur who intends to start an outsourcing business to get employees for lesser salaries when compared to tier 1 cities.

The same can be true with manufacturing companies also as they can set up their production units in tier 2,3,4 cities and can market them in tier 1 cities. One important aspect that should be in the view of the entrepreneurs is that the foreigners necessary to work in these firms of tier 2 cities should work for salaries lesser than those they get in tier 1 cities.

If an entrepreneur cannot find enough foreigners working for those salaries, it is a compulsion to minimize the number of foreign employers and to manage with the locals as it is easy to find capable managers of same talent.

Though it is difficult to implement these suggestions it is not difficult and they are fruitful in long term. The business thus formed should have long term goals rather than short term ones and this still make difficult for an entrepreneur who cannot wait for a longer time for returns on investments (China Supertrends, 2008).

Hurdles for SME´s

In addition to the necessity of waiting for a longer time to get returns on investments, there are other hurdles for establishment of SME´s in China. Despite the capacity of absorbing labor and laid off people, establishing a SME is filled with constraints and the existent ones are facing challenges in a more competitive environment in China.

The reason is that the less availability of technological as well as human resources to become internationally competitive is not viable aspect in Chinese atmosphere. According to Zeng, Douglas Zhihua Zhihua, 2005, p.17) adding to the above-mentioned difficulties the SMEs are facing difficulties in getting access to finance, credit as well as technical assistance.

Getting of market information is being hampered by lack of human resources and training is facing hurdles due to non availability of expert trainers or training institutions to which the SME´s can outsources training activities. Another problem in this context is that the SME´s cannot resort to informal lending schemes as they are not well encouraged by Chinese government.

Due to the absence of or meager presence of group lending and micro-venture schemes, the SME´s find it tough and take more time in submitting financial closure while establishing a firm (Zeng, Douglas Zhihua Zhihua, 2005, 17-18).

Redtapism in China

Next to the aspect of the time constraint Western business people complain about red tape and bureaucratic regulation n China even though foreign investments continue to flow into the country. Even in the context of growth of private participation in China grows at exponential rate; the bureaucratic hurdles are not minimized.

Li, Jing. (2008, p.5) cites 2007 report of World Bank about 48 reforms in the world and financial as well as private sector development in different countries. The report states that China is still in 93^rd place though it climbed to this place from 108^th rank it holds earlier.

That means, though the situation is better in China it is not conducive enough to do business in private sectors as it is in Western or other developed countries. While considering about enforcing of contracts, Li, Jing. (2008, p.6) uses the reports of World Bank, which describes the comparatively ease of establishment of a limited liability company in Western countries to China.

In China according to Law of the People Republic of China on Sino-Foreign Equity Joint Ventures along with the 1986 General principles of the Civil Law of People’s Republic of China limits the right of establishment of Limited Liability Company only to Chinese investors.

Foreign investors, who want to invest in China in the form of Limited Liability Company, cannot invest directly and this hampers the flow of investments that are targeted to establish small firms. To invest in China in the form of limited liability Company, foreign investors have to get approval through verification process that is different from the process of establishing a limited liability company in the Western countries.

However, this is not the case in Western countries and foreign individual investors can use a limited liability company in the host country and even an individual can operate as a sole trader. This is not possible in China and thus starting a business in China involves higher investment or delay in establishment of legal base necessary for business.

For example, Li, Jing (2008, p.7) mentions just two procedures involved in establishing a business in Australia (though not a western country but similar to it) and compares with 13procedures involved in China for doing the same business.

In addition to this time, the setting up of bank accounts, adopting a corporate seal and filing for recruitment registration also take enough time thus detracting the small companies or individual entrepreneurs from establishing the businesses in China. In the next step, the actual process of company registration in China comes to the fore and is decided by State Administration for Industry and Commerce (SAIC).

Though the terms and conditions in the forms necessary to apply for a business in China are almost same with those of Western countries, the problem exists in the paternalistic fashion, the Chinese authorities operate.

One such important hindrance that delays the establishment of business in China is compulsion of providing a certificate of domicile, which can be obtained only after entering into a lease or other arrangement and this is not necessary in Western countries (Bath, Vivienne, 2007, p. 6-10).

Power and Constraints for Business

Next to the legal aspects, the advancement of new technology that changes the nature of work and controls of government on them mixed with intense competition in international business add problems to the cultural differences in different countries while an entrepreneur tries to start a new business.

Jing Zhow (2006, 80) opines that the paternalistic nature of government in a society like China may result in effecting the creativity of a group (a firm in this context). The author also mentions the influence of external actors and agents to the group, which influence their work.

As employee creativity is important in Western nature of doing business, the theoretical and empirical aspects that are related to group creativity may hamper or encourage the establishment of a business in Chinese society. Zhow (2006) cites Shalley et al., (2004) about the creativity exhibited by individual employees that grows more rapidly than the group creativity.

However, the author exempts the result that the research from which the individual’s creativity came has been guided by intrinsic motivation perspective. The intrinsic motivation needs the motivation state in which individuals experience if they are interested in and excited by the nature of the work by themselves.

As the legal situation mentioned earlier in this literature review explains the legal obstacles for the initiation of business in China by Western entrepreneurs, the motivation state of individuals cannot be observed and group’s creativity is necessary and important to start a business in a society governed by paternalistic principles of governance like in China.

Jing Zhow (2006, 80) also mentions the perspective posits that consider contextual and organizational factors that are capable of promoting or demoting the intrinsic motivation in entrepreneurs. The legal aspects and cultural principles in China act in a manner that reduces the intrinsic motivation necessary for an individual entrepreneur or a group to start a business.

Important of them are leadership and supervisory barriers as the perceptions of these aspects are different in China when compared to those prevailing in West. Zhou (2006) cites Shin and Zhou (2003) about the theorized psychological mechanism that mediates between transformational motivation and creativity, which is absent in Chinese atmosphere that is faced by entrepreneurs to start a business.

Though, Jing Zhou (2006, 81) states that the there exists positive association between intrinsic motivation and creativity both in East and Western countries, the manner that the regulations differentiate between Western and local entrepreneurs result in paternalistic control and results in obstacles for every new business posing constraints for the ground necessary to start a business.

In this regard, Zhou (2006) cites Farh and Cheng (2000) about the paternalistic leadership in Chinese family businesses and states that is due to the cultural roots of the management. The same atmosphere is faced by the entrepreneurs when they try to start a new venture in China. The first aspect is about the general research methodology as they face the arduous task of translating English leadership behaviors into Chinese ones.

Though, they can be used efficiently after that translations, the firms or entrepreneurs face difficulties to translate as they are not finding much time to stay in China before establishing legal base for their company. This results in delay in establishment and to compete with their peers in China (Jing Zhow, 2006, 81).

Loopholes to Establish a Business

The review till now states that the problems of establishment of legal base for a company are making the situation difficult for Western entrepreneurs to compete with their peers in China. However, Dean, Judith M., Lovely, Mary E. and Wang, Hua (2005, p.1) mentions about the inter-country differences in environmental regulations between China and Western Countries.

As the entrepreneurs in Western countries find it difficult to meet with the norms of environment regulations, their profit prospects in the businesses will be less if they are small investors. These type of investors have to withstand tolerate the delay in establishing a legal base in China keeping in view the weak environmental regulations to establish a manufacturing unit when compared to the regulations in West.

The weak environmental regulation in China is to attract foreign direct investment (FDI) into the country and the paternalistic governance is to enable the locals to have an opportunity to develop with the foreign investors as the latter have to invest in the formers’ companies to start a business in China.

Dean, Judith M., Lovely, Mary E. and Wang, Hua (2005, p.3) suggests that the environmental stringency did not affect the location choice and this indicates that the foreign investors or small entrepreneurs are not making use of weak environmental regulations in China to start a business or to find an opportunity to invest.

Dean, Judith M., Lovely, Mary E. and Wang, Hua (2005, p.6) suggests that China is an ideal site for a study of pollution have behavior as this country is largest recipient of FDI in the developing world since 1990.

Regarding this aspect, Dean, Judith M., Lovely, Mary E. and Wang, Hua (2005) cites Shuguang, et al., (1998) about the favorable terms in terms of environment regulation for investors who want to start a business in China.

The above favorable terms are being used by foreign investors in China to minimize the troubles and waste of money. They are trying to get a legal base to start a business in as much less time as possible. This is evident from the uneven distribution of investment in China, which is capable of rising questions about capital flows.

The capital flows are not even throughout China the foreign investors are searching locations and businesses that are suitable to weak environmental regulations in China. This means that the businesses that are not related with environmental regulation except for banking and finance are not receiving enough FDI´s and this might be the reason for the uneven distribution of investments.

Hence, it can be termed as the hindrances and regulation obstacles to start a business in China are resulting in uneven distribution of FDI´s in the country. Moreover, the interior regions of China did not receive the deserved FDI´s and this fact indicates that there is enormous opportunity in China for foreign investors in the form of two and three tier cities.

In addition to that foreign investors can finance new ventures in China in two and three tier cities. One such activity that can be suggested to foreign investors is to finance new ventures in China by investing in private companies in China through Venture Capital. This can be termed as the way to create a legal base to operate in the country.

To do this in China, the investors have to go through three phases, the first being purchase of shares of a portfolio company by a venture capitalist. Then the investor becomes a shareholder and can maintain control by increasing the share in the second stage. In the third stage the investors sell their shares to other acquirers and pay tax for the Chinese government to have a legal base to establish a new business.

Though this type of startup take considerable time to start a business in China, it is inevitable and can be used to earn money by investing in venture capital, which is an activity to have legal base in china. That means, the entrepreneurs instead of wasting time in getting a legal base in China to start a business, they can earn money while trying to establish a legal base in China.

In a bid to act in the above manner, the foreign venture capitalists in china have managed to maintain their leading position as key stakeholders in country’s new venture funding market after they enter into the market after 1990. Jing Li (2008, p.2) quotes the facts that in 2007 the foreign Venture Capitals (VC), domestic VC´s and Sino-foreign co-investment funds are investing 68.3, 28.1 and 3.6 percents of total capital.

This indicates that the foreign VC´s are investing more in Venture Capital to enter into China to establish a business and they found the investments and finance an easier way to start a business in China. However, even in this aspect, there is difference in VC investment contracts in China with those of in Silicon Valley.

The investment contracts procedures in Silicon Valley are considered as economically efficient, but the Venture Capitalists have to face market access restrictions and regulatory approvals in a country like China to extend their business activities globally.

The difference in the economic efficiency is due to the governance structure offered by the Chinese Law that will not allow some key aspects necessary to address economic problems, because, the government wants the investments and offers supports the domestic investors.

Consequently, the domestic investors find it easier to invest in China than a foreigner, but it is necessary to invest to get legal base in China and to get profits for surplus funds with Western entrepreneurs. This indicates that the efficiency of corporate governance in Chinese law favors domestic investors when compared to foreign investors but does not ignore or discourage the latter (Ling ji, 2008, p. 1-5).

Investments in China to Start a Business

To get a legal base in China for a new business, one has to find the avenues and realms in which Chinese government is offering opportunities to foreign investors by inviting them into the country to increase managerial efficiency. Kwan, C.H (2006, p. 1) gives one such example, where China is pursuing a plan to transform the Big Four state owned commercial banks into corporations.

When this happens, these corporations have to be listed in foreign stock exchanges. To get this done, the government is welcoming strategic investors from foreign countries, in a view that they enhance the efficiency regarding management of banks in the country. Foreign financial institutions that are waiting to enter the Chinese market can make use of this situation. They can have capital tie-ups with local banks.

As the investments will be in big four banks of China, Kwan, C.H (2006) mentions the entry of Bank of America’s plan to invest $3 billion in China Construction Bank (CCB). Bank of America did this by acquiring a stake of 10 percent in CCB and consequently, the Royal Bank of Scotland also announced a same type of investment with Myrrill Lynch and Li Ka –Shing, who is a Hong Kong based business tycoon.

After these two firms, Goldman Sachs and American Express of US as well as Allianz of Germany announced the joint investment of $3.78 in Industrial and Commercial Bank of China (ICBC). These investments offer a way into China to establish a business. However, the examples cited till now are regarding larger investments and are only useful for bigger players.

These conditions and contexts as well as opportunities are not suitable to smaller entrepreneurs and these people can buy shares in the corporations turned big four banks of China as they will be listed in international stock exchanges.

Eventually, by listing the state run corporations in international corporations, Chinese government is offering small investors also to acquire shares in them, which paves the way to enter into China to establish a business. These types of offers from China results in increase of share value for the new corporations as well as the investment opportunities in China for foreign investors thus linking liberalization to market efficiency.

Contrast to the previous examples of A and B shares in Chinese market, the transformation of banks of China into corporations to offer investment opportunities to foreign investors increases the ways and means to acquire legal base necessary to establish business in China.

The situation is win-win for China and foreign entrepreneurs as the corporations are able to make profits and the foreign investors are able to start businesses in China (Kwan, C.H, 2006, p.1-2). In this context, the cultural aspects come the fore and the importance of ‘face’ need to be recognized by the entrepreneurs.

Reputation as ‘Face’ in Chinese Business Atmosphere

After finding a situation to start a business in China, it is important for foreign as well as Austrian entrepreneurs to know about the ‘face’ in Chinese business atmosphere. After making a decision to start an SME in any foreign country, here China it is necessary to have to select supplier partnership.

However, according to Tuomas Patto (2009, p.11) the partnership selection is still underdeveloped and constantly evolving in China.

In this regard Tuomas cites Kirby and Kaiser (2003) and Beekman and Robinson (2004) Varis, Kuialainen and Saarenketo (2005) to state that partner selection is regarded as the one that is most crucial in internalization that too in a country like China, which has a different business culture compared to West.

As it is known that ‘face’ (reputation) is important to do business in China, it is necessary to have partners who have track record of success in China. Thus the Western entrepreneurs have an obligation or a necessity to partner with the local entrepreneurs or firms to reduced the ‘liability of newness’ in Chinese atmosphere (Tuomas Patto, 2009, p.1-12).

As mentioned by Tuomas Patto, (2009) it is important for SME´s to select a partner as Bjorn Vidar Bjerke (2000, p.4) states that SME´s are established in crafts based manufacturing, sub contracting and in a growing field of franchising.

In all these sectors partnership as well as reputation in customer base is important in China to market the services or products. In addition to that Bjorn Vidar Bjerke (2000) opines that it is important o open up new markets and expands the choice of customer.

To do this more training to workers is necessary and finding them is as well difficult without reputation as even expert or meritorious employees opt for a reputed firm as they plan for long term stay and job security. However, there will be uncertainty in running an SME in China mixed with economic risk when there is no reputation for the firm in the country.

Hence, the management of a foreign SME in China need not associate itself with its founder owner and it may result in a fault step and may cause its failure in Chinese atmosphere.

Though it is not a forbidden to associate like that it is important of project the association with a famous local firm to the customer base as well as to the society. The former is to have success in marketing and the latter is to make recruiting easy (Bjorn Vidar Bjerke, 2000, p.1-5). The next step is to tackle the corporate control activities in China.

Chinese Corporate Control

Chinese stock markets have different shares offered for both domestic and foreign investors. The shares, which are known as B-shares are offered to foreign investors and dividends are paid in foreign currency. Chan, Mou-Fung and Yu, Veicheng (2009, p.1) states that like other developing countries China also has the laws that restrict foreign ownership regarding domestic equities.

This is to maintain corporate control. In an another attempt to increase competition for foreign investors and to provide the domestic investors another opportunity, on February 19, 2001 China Securities Regulatory Commission and the state administration of Foreign Exchange Bureau announced that Chinese people can invest in B-shares provided they have foreign currency deposits in their accounts with the banks in China.

Though the Chinese government allows its citizens to compete with foreign investors in B-shares, it can be termed as stock market liberalization as long as the foreign investors are able to trade in A-shares that are meant for Chinese nationals.

However, this is not happening and thus the atmosphere in China can be termed as restraint for an entrepreneur starting business in China due to the existence of much competition when compared to the domestic investors. The domestic investors in China have more opportunities to invest than the foreign investors.

In this regard Chan, Mou-Fung and Yu, Veicheng (2009, p.3) cites Kawakatsu and Morey (1999)’s document that explains the failure of liberalization in improving market efficiency as is the case in Chinese Stock Market. Though allowing domestic investors into B-share market can be termed as current account liberalization in China, it did not offer the same liberalization effects for foreign investors.

As the A and B share markets remained segmented even after opening of B market to local investors, the reason is that ‘A’ market is not open for foreign investors. Hence, still the investment opportunities in Stock markets of China will be viewed as the ones that open avenues for legal base to start a business in the country.

As Chinese government is not considering the options for foreign investors as much it considered for its domestic investors, the causal link between market liberalization and market efficiency is missing. Opening of B market for locals and not opening the A market for foreigners resulted in increase of idiosyncratic risk thought the price synchronicity has been reduced.

This resulted in information efficiency for local investors but did not result in avenues f investment for foreign investors enthusiastic of starting a business in China. This is due to the fact that the Chinese government is using the liberalization policies mixed with its paternalistic controls to benefit its citizens by offering more opportunities when compared with foreign investors (Chan, Mou-Fung and Yu, Veicheng, 2009, p. 1-7).

Setting up a Business by M&A

To overcome the regulations that benefit locals in China, foreign investors can find a way in 2006 regulation in China that sets out two types of Mergers and acquisitions that foreign investors can undertake in China in Article 2.

They are Equity M&A and Asset M&A. The first one; equity M&A occurs when a foreign investor acquires or subscribes for increasing of capital in non-Foreign Invested Enterprise (FIE) domestic enterprise in China as mentioned earlier in this review.

Afterwards the investor can convert into an FIE. That means even in this aspect of investment foreign investors have to invest in China in a domestic company and should get recognition as such. After that when the specific regulations that govern FIE by foreigners are satisfied, the government permits it to form as FIE.

According to Huang, Hui (2007, p.2) the next term Asset M&A is regarding transactions that involve establishment by foreign investor of an FIE and acquiring a domestic enterprise after that. These transactions allow any foreign investor to buy the assets of a domestic firm and enables the entrepreneur to establish a firm and FIE to operate those assets. The entrepreneur can start a company or a business.

In these activities of investment, unlike the other regulations, there is a provision to deter Chinese entities with no foreign entities from taking advantage of incentives regarding FIE as they are not applicable if the domestic company controls the overseas acquirer and proposes a minimum limit of investment as 25 percent.

This not only deters Chinese entities to use the FIE incentives but also prompts foreign investors to establish SMEs in China as investing 25 percent in a smaller company is easier for any investor. As the article 58 also insists that there is not roll back in FIE incentives even with the change of nationality, the investors have an opportunity to establish a business in China by investing 25 percent in domestic SMEs.

The important aspect that eased the activities and transactions of investors is that the government allowed the share swaps for the first time and permitted regulated share swaps. Using these transactions foreign investors can merge or acquire a domestic company in China using shares listed in a foreign country.

They can use cash or combination of cash and foreign listed shares to acquire a domestic company in China to start a business. Thus, the difficulties in initiation of business might have eased, but did not nullify. However, Huang, Hui (2007, p.3) states that the situation is better than before though not the best as the regulation allows foreign investors to buy shares publicly traded by a company registered in foreign jurisdiction.

That means an investor can acquire a share in a domestic business of China from foreign land. This situation has been further bettered by special purpose vehicle (SPV) system. This defines an overseas entity, which is controlled by a company belonging to a Chinese people and based in China.

The foreign investors can acquire shares in Chinese domestic companies and can float SPV overseas and that can be used to get its shares swapped for domestic enterprise in China resulting in starting a business. After starting a business, the cultural differences and ways and means of management and marketing come to the fore (Huang, Hui, 2007, p.1-4).

Cultural differences regarding China and Austria

There are several models to describe different cultures. The three most common known instruments to determine the specifics in cultural aspects are (Rothlauf, 2006):

4 – dimension-model of Hall

5 – dimension-model of Hofstede

7– Dimension-model of Trompenaars

4 – dimension-model of Hall

Rothlauf (2006) writes, that in communication situations a certain amount of information must be transmitted, so that the receiver also understands the message of the sender. So-called “high context-cultures” and “low-context cultures” can be identified.

Figure 1: Context Orientation of Countries (Rothlauf, 2006, p. 26)

Dimension-model of Hofstede

The study conducted by Prof. Geert Hofstede can be considered as a most inclusive study about influence of culture on values in the businesses as well as in workplace.

Hofstede´s cultural dimensions

Figure 2: 5D model of Hofstede, 2008

• PDI power distance
• IDV Individualism vs. collectivism
• MAS masculinity
• UAI uncertainty avoidance
• LTO long-term orientation

Model of Trompenaars

The 7-D-Model includes following dimensions (Rothlauf, 2006):

1. Universalism (focus is more on rules) versus Particularism (focus is more on relationships). As mentioned in Chapter 7.1, Guanxi is very strong in China. Although there are many rules, focus will be on relationship.
2. Individualism (more frequent use of “I” and “me”) versus Collectivism (more frequent use of “we”). With only 20 points in Hofstedes dimension “individualism vs. collectivism” it is proven that collectivism is generally established strongly.
3. Neutral (opaque emotional state) versus Emotional (show immediate Reactions). “Losing face” must be avoided under all circumstances.
4. Specific (precise, blunt, definitive and transparent) versus Diffuse (evasive, tactful, ambiguous, even opaque). Chinese are communicating in a very diffuse and ambiguous way, it is almost impossible to get a direct answer.
5. Attainment versus attribution
6. Appreciative of time management. This sixth dimension is depending on the individual more than on the culture. Many Chinese are very sequential workers, others are more synchrony.
7. Relationship with the environment and nature – Internal Control (conflict and resistance means that you have convictions) versus External Control (harmony and responsiveness, that is, sensibility). Forbes Magazine reports that all 10 of the 10 most polluted cities in the world are in China (Malone, 2006). As mentioned by Lewis (2006, pp. 492-494), Chinese people have the following cultural factors in communication:

Chinese are courteous and considerate interlocutors in Asian manner (Lewis, 2006). Chinese express any criticism of their partner indirectly (Lewis 2006). Germans express any criticism of their partner very directly.

Chinese are also more direct than the Japanese (Lewis, 2006). So if you think it is hard to understand what Chinese really thing better forget to understand Japanese. Many Chinese often ask bluntly how someone feels about certain important matters (Lewis 2006).

According to their Listening Habits, Lewis (2006) writes that traditional Chinese have suspicion of Westerners. Finns and Swedes are especially well-received in China (modest and caring speech style). Britons, Canadians, New Zealanders and South Africans have it also easy to get along with Chinese. Latins and Americans, however, often talk too much for Chinese tastes (Lewis, 2006).

As Dowling (2008) stated, “The difficulty is being able to assess whether prospective employees have the right “guanxi”.” A guanxi base (relationship) can be classified into the following three categories (Fan, 2002): “Relationship by birth or blood, relationship by nature or relationship acquired”.

Regarding the above aspects it is prudent to remind the pragmatic approach of Chinese. This approach guarantees the sustenance and accomplishment of any family enterprises. It also acts as a social being in the form of an entity. This entity is an SME in the context of this paper.

Regarding this aspect, Sheh Seow Wah (2001, p.1) mentions that the above dual phenomena made Chinese family business management style as a mix of paternalistic and yet pragmatic. Thus this makes the criticism in Chinese firms in Chinese atmosphere will be done in indirect manner unlike the direct criticism in Austrian, German and other Western countries’ business atmosphere.

This makes the Austrian as well as remaining Western entrepreneurs and their companies to find it difficult to operate as they are not aware of organizational and managerial practices in China.

The important difference is that Chinese mix cultural values with management behavior and Western culture is to develop an organizational behavior independent of personal and paternalistic moral values. Instead managing the activities, Chinese do the people management with the help of courtesy, magnanimity, good faith, diligence and kindness.

Their opinion is that the manager and management should express the above-mentioned qualities in their behavior. These types of managerial aspects mixed with paternalistic and controlling nature of government makes it difficult to Western Entrepreneurs’ SMEs to operate in China (Sheh Seow Wah, 2001, p.1-3).

Regarding the cultural aspect, (Ya-Ru Chen, 2006, p.96) mentions social capital discussed in the West. In that view, the success of a business in China needs right personal connection. Supporting his claim, Chen (2006) cites Xin & Pearce (1996) and Nee (1992) about use of Chinese culture as reliance on personal bonds that protect against defection of employees.

Bringing trust of employees and customers towards a firm, Chen mentions psychological literature explained by Mcallister (1995) and Lewis & Weigert (1985). As the psychological literature discusses social, emotional basis affect of trust as well as a rational and instrumental based trust that is cognitive in nature, the integration of both notions can help in better understanding of cultural differences.

In this context, understanding of Chinese guanxi networks, which explain the significance of personal connections in business world of China. As the discussion is about understanding of Western entrepreneurs about Chinese culture, it is necessary to emphasize that embedded relationships differ across cultures (Ya-Ru Chen, 2006).

Nature of Western or American Businesses and Comparison

While considering embedded relationships of a business firm in Chinese atmosphere, the nature of American relationships in business need to be understood to have a perception about the differences with that of Chinese. Tanya Menon & Jenne Ho –Ying Fu (2006) explains that individualists chose their jobs and freely walk away from them if they fail to further their pursuit of happiness.

This indicates the individuals’ exercise their personal preferences and choose among thousands of products or jobs; whatever they want. However, while considering the Chinese, Japanese or Indian context, the individuals’ self is interdependent. Normally Chinese parents force their children to study for relentless hours and these results in stress.

Further the individual’s grownup in that atmosphere may be in a view of attending to and fitting with others in the work environment rather than walking in and going away after a failure. This aspect may result in good team of employees for any business, but understanding customers and competitors is different with this type of atmosphere.

Fundamentally, the American business firms should take a leap from independent self to interdependent self to do business in Chinese atmosphere. That means controlling the events in that environment need self construing with an imagination of people’s behavior in interdependent self. Hence, the decision making would be constrained.

Consequently, the management has to rely on implicit links between interdependence and constraint as well as independence in the organization. This further demands a careful buildup of organization culture that works on interdependence between different departments as well as with independence in decision making for every department.

This is possible when independent and interdependent selves in an organization act as agents and experience constraints from their surroundings (Tanya Menon and Jeanne Ho-Ying Fu, 2006, p.22-24).

While experiencing constraints the power, which is a fundamental feature in any society as well as in individual psychology, can be used to obtain success. Regarding power Chen-Bo Zhong, Joe C. Magee, William W. Maddux & Adam D. Galinsky (2006, p. 54) cites Hobbes suggestion about how power affects power possessor and in turn that individual affects the businesses and can result in corruption in some societies.

Chen-Bo Zhong et al., cite Kipnis (1972) also about the actions of the powerful that have greater social consequences and hindrances they create for cross cultural activities of the businesses. However, Western theory is that the power is often a part and parcel of the efficiency and can do what the organization or the individual wants to do.

This may not be true in all the cases of interdependent self as the power of an individual or an organization depends on a circle around the power centre. This relationship between interdependent self and power is important to work in the atmosphere like that of in China and to deal with the individuals in that atmosphere.

While explaining about dealing with the individuals and working in an interdependent atmosphere, Chen-Bo Zhong et al., cites Lau Tsu’s comment about the importance of avoidance of inaction due to the interdependence and suggests conquering inaction, which means that the interdependence should not lead to inactivity in an organization.

Taking such a suggestion and using them in an organizational behavior of interdependent self, the supreme exercise of will has to be withholding as it may interfere with the natural equilibrium of the activities in the organization.

This is completely different power exercise when compared to the western nature of using it and businesses when want to work in Chinese atmosphere should highlight the responsibility that exists in interdependent self (Chen-Bo Zhong et al, 2006, p.53-55).

Performance of Western Companies in China

The interdependent self is the one that is disturbing the Western entrepreneurs when they try to start a business or to develop an existing one. Pauluzzo, Rubens (2009, p.1) presented a paper that explains the role played by Italian companies in china and considers internal factors that affected and influenced the nature and behavior of them.

As cultural knowledge and culture is one of the internal factors in a business atmosphere, Pauluzzo, Rubens defines culture as a set of values, beliefs, expectations and artifacts shared by members of society. When an entrepreneur tries to establish a business in a different atmosphere, the company’s management as well as the team has to understand the culture and should behave accordingly.

In global scenario, when a company operates beyond the borders, the understanding of different cultures in which the business has to function is very important. The understanding of culture starts from framing the strategy by the company paternalistic type of governance if the management wants to do business in China.

One of the different realities, different customs and habits observed in China by the foreign entrepreneurs is paternalistic nature of governance and that makes them to frame organizational and managerial behaviors in that way. This perception is because the cultural differences affect the company’s interactions and it will be more concerning when a company is operating in China.

Considering the paternalistic governance and interdependent self behavior in China, Pauluzzo, Rubens (2009, p.2) cites Cartwright, Cooper (1993) who opined that it is necessary to understand the stakeholders’ behavior as well as the government to achieve better results.

This due to the fact that the different cultures create different psychological environments and the businesses or the companies, which want to work in China have to avoid the negative influence on firm performance by cultural adoption. The cultural adoption has to be followed by the entrepreneurs or the companies when they try to establish their businesses in China.

To act accordingly, the key success factors should be noted. The factors of internationalization are necessary to identify evolutionary path marked by slow shift from objective determinants like foreign markets and export incentives. Export incentives can be used as successful business strategy in China as the country is not depreciating its currency and still dumping its products in foreign countries.

As the country is using its cheap imports due to appreciation of its currency as well as cheap labor to manufacture the products, the entrepreneurs should make use of this policy instead of clashing with the paternalistic governance and interdependent self.

To follow this type of strategy, the foreign company that wants to start a business in China should have cultural knowledge of HRM as it cannot operate a business with entirely foreign individuals.

The necessity of recruiting local people into the company involves the understanding of HRM in China that is related to interdependent self. To do this it is important for Western companies to build work teams that are compatible with national culture of China and this makes the establishment of legal evidence and base that is necessary to start a business easy (Pauluzzo, Rubens, 2009, p.1-3).

Corporate Governance in China

Even after establishment of a legal base has been made easy, the Chinese characteristics of high volatility, state intrusion and ownership concentration are in stark contrast with the business activities and organizational behavior in Western countries.

As mentioned in the review, the corporate finance in China is a process that will be initiated before establishing a business by a foreign investor by investing in domestic company, the corporate governance will be affected by those connections. The governance ideals will be ideal, but the corporate finance rules in China may pose hurdles in implementing them.

Hence, financial technique with corporate ideals is necessary to reflect to act according to regulatory provisions in China. However, the rigid corporate rules are capable of making corporate governance worse but the government of China feels it necessary to avoid asset stripping by directors and managers of state owned companies.

According to Liu, Lawrence S (2001, p.32) China Company Law (CCL) follows the old continental style of company legislation. These legislations are more technical than ideological and thus reflect the cultural perspective of different actors and people in China the businesses established have to deal with.

As a result, China took more time to frame a policy that is part of company law before it adopted comparable corporate rules. Though the company law in China is according to the economic reform, the rigidness has not been completely removed and it took time till 2006 to frame regulation to show foreign investors more easier way to invest or establish a business in China.

The important aspect that makes difficult to establish a business in China is due to separation of registration and approval. Mere registration does not result in approval and this aspect is used by the state to have control over the corporate power and can be termed as power wielding exercise by Chinese Government.

However, in the time being China started removing hurdles but in a slow manner and that resulted in a regulation that eases the investment procedure for foreign investors in domestic companies in China. Another intellectual legal baggage that can be linked to cultural perspective of China is that, civil law tradition in China does not allow single shareholder companies.

Liu, Lawrence S (2001, p.36) opines that the CCL should recognize a company or a firm as an enterprise legal person instead of association. This aspect in CCL can also be termed as discrimination as state is allowed to be a single shareholder and the individuals are not permitted to do so.

In addition to that minimum paid up capital requirement and the high amount prescribed for it poses problems for SME entrepreneurs who want to invest in China as the entry itself is a process that consumes money and time (Liu, Lawrence S, 2001, p.32-37).

Integration of Theoretical approach and environment of host country

The concept involved in the context of SMEs searching newer business horizons by internationalization. Theoretically, it leads to establishing businesses in developing countries like China. However, the impacts of laws and regulations as well as the environment in the host country play a role in establishing and doing business. Hence, analysis/discussion and reflections of would be presented in the coming chapters.

Methodology

Introduction

The methodology involved in this paper is to analyze the procedures and ways and means that Western entrepreneurs find to start a business in China. It involves seeking answers by using a questionnaire from some Western entrepreneurs who want to start small and medium enterprises.

Research Philosophy

The philosophy involved in this research is regarding the effect on business activities due to cultural differences and legal hurdles and protectionist moves. The context of paper is to examine the case of China regarding cultural differences between it and Western countries’ business activities. In doing so, the difference in culture and the behaviour of Chinese and Western entrepreneurs need will be studied.

The obstacles that are faced by western entrepreneurs in establishing an SME due to legal restrictions and difficulty in doing business and to recruit people due to cultural differences will be the central theme of the paper.

Despite cultural differences with West and protectionist moves for locals, the potential of China in business and plenty of opportunities if offer along with management practices will be analyzed and discussed (Min-Huei Chine, 2005, p.1-2).

Research Methods

The fundamental research method followed here is qualitative research. According to Creswell (1998),

“Qualitative research is an inquiry process of understanding based on distinct methodological traditions of inquiry that explore a social or human problem. The researcher builds a complex holistic picture, analyzes words, report detailed views of informants, and conducts the study in a natural setting” (Cited in Social Research Methods, 2000).

Why Qualitative Research?

As just mentioned in 3.3 the qualitative research is an inquiry process of understanding and this process is necessary to understand the process of internationalization of SMEs.

This aspect is more related with understanding the regulations, laws and cultural differences as well, which is related to methodological traditions of inquiry that leads to the exploration of a human problem, which is establishing an SME in a foreign particularly in China and the Entrepreneur being a Westerner particularly from Austria.

The conduct of study in a natural setting is necessary and that setting in the context of this paper is the necessity and the opportunity for SMEs to internationalize and the issues of Westerner entrepreneurs mostly from Austria who are interested in establishing an SME in China.

Statement and Purpose

The statement of the problem for which the qualitative study has been conducted is as follows:

“Starting up a SME in China – Especially regarding cultural differences”

Characteristics of the Study

The study contains a questionnaire targeted at 80 entrepreneurs majority from Austria, who want establish SME´s in China.

Based on their responses, the cultural differences between Chinese and Western businesses as well as the legal restrictions and easements in establishing an SME in China by Western entrepreneurs will be analyzed and discussed. The conclusion will be given according to the analysis and discussion about the ways and means of establishing an SME in and doing business through it.

Sampling

The sampling of the people questioned is taken at quasi-random. Care is taken that all of them are Western entrepreneurs wishing to establish SME´s in China and half of them being Austrians. The total number of people questioned is 80.

Reliability and Validity of this research

The research is reliable as it compares and analyzes the responses of entrepreneurs wishing to establish SME in China with those of previous researches done on cultural differences between China and West as well as legal restrictions and easements for Western entrepreneurs in China. The sources selected according to the aspects mentioned in the questionnaire further increases the reliability of the research.

The validity of this research in legal point of exists as long as there are no major corrections or amendments to 2006 regulation in China that offers more opportunities than before for Western entrepreneurs.

If one thinks about the validity of the research in cultural terms, it exists until the Chinese do business with personal relationships and by developing networks between organizations by using them and by giving importance to Confucian values in conducting a business and while dealing with employees.

Ethical Considerations

As the research does not involves any physical and mental examination of the subjects, the ethical considerations are just regarding asking questions to the subjects without disturbing their personal feelings. The literature used in comparing and analyzing the responses will be promptly cited.

Ways and means of analysis, discussion

After getting answers for the questionnaire, they are compared to the authentic literature available about initiating a business and establishment of SME in China. The comparison will be done in analysis and discussion modes followed by results and findings chapters. The analysis and discussion chapters present a picture about the legal atmosphere for businesses in China and establishment of an SME there.

The affect of tier I cities in hampering the efforts of entrepreneurs wanting to establish SME in China and the advantages for them to start a business in tier II cities is explained. Even whilst explaining these advantages, the analysis and discussion explores the disadvantages but the preference of entrepreneurs for these cities is mentioned.

As per the information in literature review, the situation in tier II cities in China is more conducive for entrepreneurs who want to establish small and medium scale enterprises. However, there are disadvantages too. In discussion chapter, the researcher tries to find out the types of businesses that can be established in tier II cities in the form of SME´s and can indicate the type of business.

The discussion will be continued after singling out some sectors, which find the situation in tier II cities is conducive and explores the ways and means of finding legal base to establish an SME. However, the discussion will not be limited to the sector that find establishment of SME´s viable in tier II cities. It extends to cultural differences in doing business in China through an SME.

In this context the different activities in doing a business through SME that are affected by cultural differences between Chinese people and Western entrepreneurs is explored. The affect of cultural differences and the reason why still investments flow into China to establish SME´s finds place in discussion and will be included in results and findings.

What about results and findings chapter

After getting answers for the questionnaire, they are compared to the authentic literature available about initiating a business and establishment of SME in China. The comparison will be done in analysis and discussion modes followed by results and findings chapters. The analysis and discussion chapters present a picture about the legal atmosphere for businesses in China and establishment of an SME there.

The affect of tier I cities in hampering the efforts of entrepreneurs wanting to establish SME in China and the advantages for them to start a business in tier II cities is explained. Even whilst explaining these advantages, the analysis and discussion explores the disadvantages but the preference of entrepreneurs for these cities is mentioned.

As per the information in literature review, the situation in tier II cities in China is more conducive for entrepreneurs who want to establish small and medium scale enterprises. However, there are disadvantages too. In discussion chapter, the researcher tries to find out the types of businesses that can be established in tier II cities in the form of SME´s and can indicate the type of business.

The discussion will be continued after singling out some sectors, which find the situation in tier II cities is conducive and explores the ways and means of finding legal base to establish an SME. However, the discussion will not be limited to the sector that find establishment of SME´s viable in tier II cities. It extends to cultural differences in doing business in China through an SME.

In this context the different activities in doing a business through SME that are affected by cultural differences between Chinese people and Western entrepreneurs is explored. The affect of cultural differences and the reason why still investments flow into China to establish SMEs finds place in discussion and will be included in results and findings.

Analysis/Discussion

Responses of 80 foreign/Western entrepreneurs to Questionnaire

After surveying 80 entrepreneurs from Western countries half of them from Austria, 60 of them and 30 out of 40 Austrians expressed their willingness to establish business in China. The entrepreneurs are SME owner-managers or the people who want to establish their small or medium scale business in China.

All the people who are willing to start a business in China are in that view as they found a vast market in that country. The entrepreneurs of different sectors have this same perspective about the market for their products or services in China.

The reasons of the entrepreneurs who are not willing to start a business in China are also enquired. Most of them responded that they are scared about the legal hurdles as well as cultural obstacles in recruiting personnel as well as doing business in China.

Most of the entrepreneurs stated that the atmosphere in China is conducive to do business in China. The naysayers are scared about delays in getting legal permissions and problems due to regulations that favour the locals against foreigners.

Some respondents are in a view that, though the atmosphere in China is not conducive, they want to establish a business in China.

The reason is that they feel that the conduciveness is according to the perspectives of different people and in their perspective; it is not a problem to overcome the problems posed by regulations and laws in China. The market availability for their products and services is making them to overlook the problems and issues to establish a business in China.

All the entrepreneurs who want to start a business in China cited legal, cultural and human resources problems to start a business in China.

However, they found that investing in a venture capital is the best way to establish an SME in China as it offers a way to get a legal base for a foreigner in China.

After getting a legal base, all the entrepreneurs want to establish their businesses in Tier I cities, ignoring the benefits in establishing businesses in Tier II cities.

SWOT Analysis

As SMEs find competition from bigger companies, it is important to perform a SWOT analysis while establishing an SME in China.

Strengths

The strength involved in establishing an SME in China is vast market it offers to the western firms.

Weaknesses

1. The weaknesses involved in establishing and doing business by an SME in China are laws, regulations and differences in Culture.
2. These include the aspect of giving partnership to Chinese companies if a Western entrepreneur wants to establish an SME in China.
3. Delays in getting permissions and legal base to establish business in China.

Opportunities: The opportunities are in the form of the options provided by Chinese government to overcome the restrictions regarding investments.

1. The weakness that is involved in the form of giving partnership in business for a Chinese firm can be changed into opportunity as the firm can use that aspect to get enough reputation in China.
2. In an attempt to establishing legal base, the entrepreneur can earn profits by investing in venture capital activities in China and by entering into stock market of that company.
3. Another weakness that exists in Western entrepreneurs after starting a business is difference in culture that is necessary to a business. The cultural aspects helps in marketing and those problems can be solved as the entrepreneur will partner the business with a local firm. However, the recruitment and making the personnel work for the company maintaining supply chain networks are also important and cultural weaknesses may result in breaking of those networks.

Hence, it is important to follow guanxi principles mentioned in literature review and the entrepreneur needs to maintain networks with personal relationships while saving ‘face’ to do business.

Threats

The most important threat is about lack of infrastructure in tier II cities and expensive infrastructure in tier I cities. To establish a business in China after overcoming all the weaknesses and removing threats, it is necessary to use the laws and regulations to invest in Venture capitals.

This will make and entrepreneur to get a legal base as well as profits in getting it and enables the person to start an SME. After the SWOT analysis the entrepreneur can make a plan to start a business and after that, it is the competition and the extent of success the owner-manager (here entrepreneur of SME) gets in overcoming it decides the course and profitability as well as sustenance of the business.

Competition faced by Western SME´s in China

In addition to the above answers, the responses of the entrepreneurs are regarding the crucial problems in establishing an SME in China as well as the competition faced by it after establishment. The competition in their perspective is unfair in a market-based economy as the situation is favorable for local firms.

According to Broadman, Harry G. (2001, p.10) there are small and medium sized State Owned Enterprises (SOE) that pose competition to private sector. As SOE´s have financial backing from government, they can withstand loss for a long time and wait for a period with minimum profits or wait for more time compared to private firms to reach breakeven.

However, this will not be the case of private firms established by western entrepreneurs, who spend money and time in getting a legal base to initiating an SME in China. Naturally, the strenuous efforts that precede the establishment of an SME in China make the entrepreneurs to think about profits in near future.

However, if they are operating in a location, where a small and mediums sized SOE is operating, they have to face uneven competition from it and this aspect results in lesser profitability for SME´s. Moreover, as China’s SOE sector employs more than half of urban workers, the private SMEs in cities may find recruiting a problem as skilled and efficient workers in that sector may opt for SOE.

Moreover, the availability of finance to run the firm is more for SME´s in SOE as government offers implicit subsidies to them to prop up loss-making SOE´s. This is not available to private SME´s and thus the competition is unfair (Broadman, Harry G, 2001, p.10-12).

To liberate the private SME´s from the above-mentioned constraints, the government in China should help SME´s in adopting lean manufacturing techniques as well as cost effective production methods. By doing so, the economy of China can witness surge in production, as establishment of SME will be easier than an establishment of a big corporate firm.

Then the resulting situation could increase of GDP for a country that is already surpassing the developed countries in producing automobiles (Richard F. Doner., Gregory W. Noble. John Ravenhill, 2006, p.9-10).

Differences between Sectors

As per the review and analysis until now, it is evident that the establishment of an SME is full of constraints in China, but they are not same for all the sectors. For example, Wendy Dobson., A.E.Safarian (2008, p.307) survey revealed that the Research and Development (R&D) expenditure for electrical equipment manufacturer is 1.5 -2 percent despite heavy competition

. However, this is 3.3 percent in electronic equipment manufacturing firms and the survey further revealed that this difference is due to profitability of the industry. This means, the investors or entrepreneurs who are establishing SMEs are investing according to the profitability in the sector and this affects the competitiveness of the sectors of which the profitability is less.

For example, the profitability of electrical industry is less than electronic industry and this is resulting in lesser investments in former sector when compared to the latter. The companies that produce general machinery parts are finding less profitability when compared to electronic industry. The electronic companies are not facing this problem as they emerged to capture the market, which was available due China’s IT boom.

One can understand from this aspect, that the profitability depends on demand for the product and government is not doing enough to minimize these types of differences between different sectors. As a result, the entrepreneurs other than IT sector may face problem due to lack of profitability.

However, China is not considering this as a problem as the country is able to increase its automobile production remarkably due to SOEs and MNCs.

The success story of industry due to the heavy production of MNCs in sectors other than electronics is making the government of China callous towards the need of encouraging the establishment of SMEs by liberalizing the regulations and easing the financial restrictions. However, the government is not doing the needful (Wendy Dobson., A.E.Safarian, 2008, p. 307-308).

Domination and Advantage for Bigger Firms

When the government is not doing needful, the entrepreneurs who are keen to establish SMEs in different sectors may be ready to face the situation that is due to the difference in profitability between various sectors, but the size of a firm also matters in China’s economy. SME´s are at disadvantage when compared to bigger firms or SOE´s, which are in a process to be converted to non-state firms.

Regarding this aspect, Chen, Chao, Shi, Haina and Xu, Haoping (2010, p.13), states that the inherent relationship between state owned enterprises and the government of China, the firms are less marketized than non state owned enterprises as they have government intervention in doing business.

In addition to this aspect, the NSOE´s have more incentives when compared to SOE´s if the former wants to hire an underwriter to indicate earnings and they are independent too.

However, Chen, Chao, Shi, Haina and Xu, Haoping (2010, p.14) state that the issuer size is employed as another proxy and they found that the larger sized firms can have more capability to set up contacts with governments and can turn them into relationship more quicker than their SME counterparts.

This makes the larger sized firms to get more support from government when compared to small and medium sized enterprises. Eventually, underwriter reputation is negatively associated with management of earnings in the context of small issuer and the same has no association with management of earnings, which are from the large issuer.

The negative association keeps the small sized firms far from mobilizing the capital necessary for extension or production activities and the same problem does not exists to larger firms as they can buy stocks and can sell to the public easily when compared to their smaller counterparts. The banks show much interest in buying stocks of larger companies compared to the SME´s.

Hence, the larger issuers have two opportunities to get capital; one from selling of stocks easily than SME´s and they have easy access to the credit from banks. These two options are not available to the managements of SME´s and these companies cannot be successful unless their profitability is more due to the market conditions (Chen, Chao, Shi, Haina and Xu, Haoping, 2010, p 13-15).

Trust, Culture and SME´s

The owes of SME´s in doing business or establishing it do not end with financial and legal constraints and they stretch into cultural attributes after the establishment process. According to Tan, Justin, Yang, Jun and Veliyath, Rajaram (2009, p.1), while doing business in China personal contacts, connections and trust dominate efficiency and productivity.

The authors mention that the business literature in China contains instances of aborting the potential collaborations as well as negotiations that are deadlocked.

Tan, Justin, Yang, Jun and Veliyath, Rajaram (2009)s express their views that unlike the efficiency and productivity that rule the business relations in Western economy, the personal relations as well as trust mixed with efficiency and productivity dominate the Chinese business atmosphere. The domination of efficiency and productivity in Western business demarcated the personal and business relationships.

These are different from personal trust based transactions present in Chinese business atmosphere. Hence, in business activities in China, the betrayal of personal trust may result in wider consequences and can deny future credibility as well as the social capital takes a setback. Chinese customers see the reliability of a firm also. This poses a problem in marketing for new SME´s promoted by Western entrepreneurs in Chinese market.

The same situation exists in the people who are seeking employment as they see the stability of firm they join in terms of long run and bigger size. This makes the marketing and recruiting activities of new SME´s costly. The new SME´s also face the above-mentioned situation, as the Chinese business atmosphere is not as much market economy as is present in Western economies.

Though the country witnessed the transition from a centrally controlled economy to a market economy, the accompanying institutions and practices are still in a transition mode. Hence, these institutions and practices that rely on efficiency and productivity more than the personal relations did not direct the transition of the economy of China.

As per the research of Tan, Justin, Yang, Jun and Veliyath, Rajaram (2009, p.2) regarding 20 privately owned companies in China from 1979 to 2005, the role of personal trust in business dealings due to unique cultural context has been enhanced. The emergence of privately owned companies in Chinese economy has only enhanced the role of personal trust and reliance in the business activities and strategies of the firms.

The new firms did not accept or inculcate the values and activities of West while doing a business. This made difficult for the western entrepreneurs to find employees and make them to work according to the goal and philosophy of the company. This resulted in deprivation of necessary SMEs to absorb the laid-offs in China (Tan, Justin, Yang, Jun and Veliyath, Rajaram, 2009, p. 1-3).

Social Capital that is formed with Guanxi

When western owner managers (entrepreneurs who established SMEs in China) were not able to find enough customers as well as human resources, they realized the importance of social capital. As the social capital is capable to influence the financial decisions of the firms, the Western entrepreneurs tried to understand the social capital structure adopted by Chinese SME´s and tried to follow them to enter and be successful in China.

In this regard, Du, Jun, Guariglia, Alessandra and Newman, Alexander (2010, p. 3) suggests that the factors of dominance of social and business relationships involve executives of other firms, bank officials as well as government officials.

Maintaining close contacts and relationships regarding business activities will be easier for Chinese entrepreneurs due to advantage of culture when compared to the western entrepreneurs trying to establish an SME. In this regard, Du, Jun, Guariglia, Alessandra and Newman, Alexander (2010, p.4) used a sample of 65,551 enterprises across China to understand the decisions regarding finance in SME´s.

This has significance effect in understanding the cultural and institutional environment. The researchers found a positive relationship between investment in social capital and both total and short-term advantage. However, the relationship is opposite when it comes to asset structure. To overcome this problem, the Chinese SME´s work with a combination of both social capital and asset structure.

The former is used to establish necessary relationships with their financiers like financial organizations and banks or with their executives and asset-structure is necessary to consolidate the established relationships. As asset structure somehow expresses efficiency to some extent, westerners can use this aspect to habituate themselves to Chinese way of doing the business. In this regard, Austria plays an important role regarding it.

In this comparison, it is important to study the cultural differences between China and Austria (Du, Jun, Guariglia, Alessandra and Newman, Alexander, 2010. P.1-4). Moreover, the Chinese family businesses have certain commonalities in terms of management, which can be observed from the sociological point of view. This is about seeing a family as a fundamental unit of society.

In a Confucianist society, family plays an important role. It stays as centre of all relationships. Hence, when one views this from an economic point of view also while a family runs a business enterprise it is understandable that the family is not confined to a basic unit, but also can be considered as economic entity. This results in Chinese entrepreneur to have pragmatic approach for the sustenance of the business or the company.

The resultant activity is paternalistic as well as pragmatic nature of the management style of Chinese business. Though the Westerners are pragmatic, they normally do not mix that with paternalistic style and this is major difference between attitudes of them and Chinese. To do business in China Westerners have to learn to balance the business principles family interests accurately.

This needs integration of cultural values with the management style observed in doing business. This type of management style created managerial practices that are unique to Chinese and resulted in centralized decision making in an organization. While doing business in China, the Westerners have to mix cultural values of China with their managerial practices.

In doing so, it is important for the management of a Western SME to identify the crucial aspects that are necessary for a good manager in Chinese perception. This style of management develops cohesiveness in the Chinese firms.

To run a business in China the cohesiveness is necessary for any organization. There is an opinion that Chinese value good conduct, reliability, trustworthiness against the performance. The Westerners can value performance while considering the collective human relationship in the activities of an organization (Sheh Seow Wah, 2001, p.1-4).

Results/Findings

Cultural Issues

Considering the relationships and culture, the entrepreneurs of SMEs observed that Hofstede’s idiosyncrasies along with the 5-dimensional model mentioned above played important role in maintain relationships.

In this regard, the owner-managers understood that, Hofstede (1993, p.1)’s opinion about American management theories that contain a number of idiosyncrasies states about stress on market processes, stress on individual and focus on manager rather than on workers are not applicable. However, the managements are able to apply them in China when they accustomed with the business culture of China.

The entrepreneurs who are not accustomed to business culture in China, they found that the situation similar to ‘Alice in Wonderland’ in which Alice was forced to play a croquet game, which is always won by her opponent; Queen of hearts. So the entrepreneurs can stay alive in business, if they do the same with culture in China.

Hence, it is necessary for western entrepreneurs to be alive with Culture in China while establishing an SME or doing business through an SME in China though, the Chinese lack characters of modern management. The reason found in this research is that the Chinese depend on networks. Using the networks with other organizations, they execute some essential functions in the organization.

The basis of these networks is personal relations, which are not used by westerners in deciding the business terms. The entrepreneurs, who did not recognize this aspect, normally find it difficult to compete with Chinese firms in China.

As the family owned industries or companies in China have centralized decision-making, thrift, and persistence, the managements of Austrian SMEs also should do the same. Chinese attitude made great gains through small money and work force. This when applied to international business tried to favor the companies formed by locals against the SMEs established by Westerners (Hofstede, 1993, p.1-6).

The foreign investors found an aspect that is in favor of them. According to Fung, Hung-Gay Gay, Yau, Jot and Zhang Gaiyan (2006, p. 1) Chinese government under- reported exports and over -reported imports. This means the exports oriented goods got tax rebates as the government under reported the countries’ exports. The foreign investors got benefits from this activity of government by establishing export-oriented goods.

However, they found that these gains are possible if they work in partnership with a government company in China. In this context Fung, Hung-Gay Gay, Yau, Jot and Zhang, Gaiyan (2006) cite Coase (1937) argues that firms acted in a way to reduce transaction costs like information asymmetries as well as market impediments.

The authors further cite Mehta and Fung (2004) about the goods market and financial market along with foreign exchange market as parts of hierarchy. As the business interactions happen through arbitrage, the entrepreneurs’ finding is that the firms that are interested in investing in China have overcome market impediments by participating in other markets.

The participation in other markets made possible only by creating new products. This meant that the successful company or entrepreneur who wanted to invest in China did not stick to produce a single product or to offer a single service.

The diversity of products or services offered by firm increased the possibility of success after it had a ‘face’ (reputation) by acquiring a share in the domestic firm also called as selecting a partner to do the business in the country. Hence, before investing in a domestic company in China, the many of the foreign investors considered two aspects.

The first one being the ‘face’ of that firm in China and the second one is the capability of that firm to be ready to produce diversified products or whether it can offer diversified services to the customers (Fung, Hung-Gay Gay, Yau, Jot and Zhang, Gaiyan, 2006, p.1-3).

Culture and Corporate Governance

When Westerners establish SME´s, they studied the corporate governance regulations in China.

These are different from those of West as according to Liu, Lawrence S (2001, p.1) the Civil law system in China emphasizes on socialist market economy with Chinese characteristics. Due to the result of SOE´s in China, the groups of affiliated companies are pervasive in China and this affected the activities of SME in production as well as marketing activities.

In addition to this, the state intervention in China linked with privatization of SOE´s. In China, the boards of SME´s or other companies had two-tiered board system. Other than executive board, the presence of supervisory board existed for labor representatives.

Managements found that the viability of supervisory system was prone to challenge and the proposal of having independent directors in the boards further intensified this challenge. However, as the SME´s do not have the necessity of independent directors, they are not affected by that aspect in Civil Law (Liu, Lawrence S, 2001, p1-6).

As SME´s do not appoint independent directors, the choices offered by article 2 of 2006 regulation gave them an opportunity to acquire share in a non-FIE domestic enterprise by subscribing for capital increase. This regulation offered a foreign investor to acquire share in a domestic company of China by allowing them to establish a legal base to start a business.

The regulation also allowed the foreign investors to buy the assets of domestic enterprise and then using them to establish a new firm. This legal process helped foreign entrepreneurs to understand the culture of the business in China as well as to have a partnership that gives necessary ‘face’ (reputation) to establish an SME and to do the business.

As ‘face’ is important aspect in Chinese business atmosphere, the foreign investors carefully invested in domestic enterprises before establishing a new one. After investing in domestic firms they used ‘Asset M&A’ to acquire a domestic enterprise by purchasing its assets through FIE.

However, still there are restrictions on round tripping investments as if a foreign investor acquires a domestic enterprise then the company is not eligible for FIE special treatment. This clause in the article 9 of 2006 regulation encouraged the investment of foreign investors in domestic enterprises and then to establish their own firms using the reputation of local firms.

This not only gave necessary face to foreign investor to do business in China, but also the local partner benefited from skills and technology of foreign enterprise or investor. This indicates that whilst allowing the foreign investors to invest in China, the government is encouraging them to acquire shares in domestic firms, so that they can develop necessary skills for global business (Hui Huang, 2007, p.1-3).

Despite different options in 2006 regulation, the culture guides civil law in China. The culture of warlords ignored the centralized command in the present context of internationalization of business.

According to Fuller, Gregory H (2008, p.1), economic warlords ignored the central command system the government wanted to opt. The author mentions the execution of Zheng Xiaoyu in which central government took extreme measures to ensure adherence of SMEs or businesses to domestic regulations and international agreements.

However, the economic and political system that evolved the de facto federalism in China resulted in cultural differences in business activities when compared to West. The establishment and sustenance of SMEs was also different in China when compared to West, where the de facto federalism is not present in economy.

The reason for this situation of de facto federalism is the interplay between legal, economic and cultural attributes of the Chinese government and this led to a political atmosphere that formed local regulations, trade activities and environmental reforms as per the global impact.

Hence, the Western entrepreneurs were allowed to invest to establish SMEs in China, but with a caution due to a mixture of cultural and legal attributes that favor locals. After establishment, the next aspect is doing business in China (Fuller, Gregory H (2008, p.1-3).

Standards and Barriers

The cultural aspects in business activities as well as policies of China resulted in standards and conformity assessment procedures that constitute barriers to international trade. The absence of commons standard and anonymous partners in market as well as in an SME resulted in non-compatibility in production as well as marketing activities of an SME.

Hence, harmonized system, which is capable of removing information asymmetries regarding culture for an SME facilitated communication. In this context, the standards came to fore as they served diverse functions in an SME from production to marketing as well as PR, which depends on personal relations, guanxi and networks.

The standards that are necessary for an SME in the atmosphere of China reached common expectations on performance and offered network compatibility, which formed the basis for personal relationships as well as the relationships between company and its stakeholders, government and prospective customers.

The important standards that minimized the cultural information asymmetries are the ones that specified conditions to be met in a manufacturing process, which further decided the communication between different networks (Lu, Xiaomeng, 2008, p.1-8).

Even in the presence of regulations that encouraged the foreign investments in an order to accommodate the local firms and domestic investors in their businesses, the protections for properties of domestic firms at local level are a concern for Austrian firms investing in China. As the country lacks enough formal property rights and legal systems at national level, the institutional arrangements acted as substitute functions at local level.

Hence, entrepreneurs felt the pinch of absence of uniform property rights and protections like that of Austria. As a result, the foreign firms studied the local property rights and protection while investing in a firm present in particular location. This aspect prompted foreign firms like that of Austrian ones to prefer for tier I cities as the property rights and protections in those cities are well noted and the details of them are easily available.

Though investing in tier II cities is easier than Tier I cities, the lack of information about property rights and protection made the foreign investors to hesitate to invest there. Investors found from their experience while doing business that due to hierarchical governance the property rights at the local level are secure.

However, it will be useful for entrepreneurs to cite Zhang (2006) who in turn cites Qian and Roland (1998) about formalizing the idea of fiscal decentralization. This resulted in budget constraints to local governments as cost of subsidizing the inefficient enterprises increased. This is because; the local governments raised the revenues to offer local public goods as well as services to the people.

Hence, these local governments encouraged the establishment of enterprises by foreign investors and the incentives offered by local governments nullified the problem due to asymmetric property rights. This enabled the foreign investors, to bargain with the local governments for a better property rights and made tier II cities also conducive for investing and establishing SMEs by westerners (Xiaobo Zhang, 2006, p.1-12).

Size of Enterprise and the Sector it is operating

After investments and establishment as well as the relations, the size of the enterprise and the sector it is operating affected the profitability as well as the sustenance of the firm.

According to Woo, Wing Thye and Zhang, Wei (2010, p.2) China can eliminate the trade deficit between maintaining aggregate demand and to ensure economic efficiency by putting market friendly growth drivers in place of macro stimulus. The legalization of small and medium sized private banks helped in easing up the interest rate.

This resulted in promotion of new businesses due to availability of credit. The availability of credit is due to presence of more number of private banks after privatization and liberalization. The growth of China made the policy makers to neglect the SME sector despite the prospects of increasing employment and group owned enterprises.

Though the increase of private entrepreneurs in China will have three major benefits, not much comfort existed for foreign SME´s due to cultural differences as they hampered the administration as well as production and marketing activities.

In addition to these, the growth of real estate sector in urban areas of China made it difficult to western entrepreneurs to establish SME´s in tier I cities as getting land for a firm is difficult in China without personal contacts and due to tough regulations.

However, some aspects lubricated the process of establishment of SME´s by Western investors. One such aspect is legalization of the private banks to ease credit to SME´s established by western investors. This further encouraged the increase of small and medium size banks as well as small and medium sized enterprises and offered employment.

This further developed modern banking system so that the credit crunch the SME´s established by foreign investors are facing eased. This implies that the increase of involvement of private sector in banks can also minimizes the cultural differences though not be eliminated and can encourage the establishment of SME´s by foreign entrepreneurs (Woo, Wing Thye and Zhang, Wei, 2010, p.1-13).

After the management of SME´s understood cultural a well as legal aspects of doing business, investing in establishment of financial institutions provided informal credit or small and medium scale banks were explored by foreign investors. According to Chunxia Jiang., Shujie Yao (2010, p. 3) Joint Stock Commercial Banks, City Commercial Banks performed better than State owned commercial banks.

Authors opine that this result gave a strong selection to foreign investors as initial public offerings improve profitability in the short term. Though the state ownership of banks and financial institutions in China is in transition, the investors with low financial capacity can get high returns from informal credit given to different firms.

As China is a transition economy, normally the private owned banks or financial institutions perform better than the government owned ones.

Hence, foreign investors found it safe to invest in establishing small and medium scale banks or financial institutions, but they are aware of the fact that the domestic private organizations in the same sector are in general more efficient than foreign owned institutions due to organizational diseconomies.

As a result, again the same aspect of investing in a private domestic firm to get a ‘face’ as well as to get access to business channels in the country is important. Hence, the foreign investors who are interested in investing in establishing a small and medium sized bank or financial institution, also understand that this sector also needs the acquiring a minor share in a private bank and then to expand the operations in the country.

Conclusion

This is to conclude that the establishment of an SME by foreign particularly Western and more particularly Austrian investors in China has been somewhat eased after the implementation of 2006 regulation about foreign investments. Though it is better than before, the restrictions on establishment of an SME by foreign investors is not as easy as it was in Austria and other Western countries.

Moreover, the situation of establishment of an SME before 2006 in China is much more difficult than now as obtaining a legal base is a time taking and investment oriented process.

Even after 2006, the Western companies find that it is a compulsion to have a partnership with Chinese firms in China both legally and culturally. In legal point of view, government allows foreign investments through acquiring share in domestic firms. In a cultural point of view, it is a compulsion for foreign investors to have a ‘face’ (reputation) to do business in China.

In addition to that the partnership with domestic firms not only helps in logistics and expansion operations, but also in implementing guanxi and other Confucian principles similar to those of family run businesses in China.

Recommendations

1. The foreign investors who want operate in China need to develop a view about the managing practices that work on the basis of relationships and networking between organizations.
2. To enter into a market like China it is necessary to act in a prudent manner financially and to be ready to spend enough time to get a legal base.
3. In order to get a legal base the foreign investor should be ready to invest in shares meant for foreign investors.
4. After investing in the shares that are meant for foreign investors, one has to acquire a minor share in a domestic firm.
5. This will be useful in acquiring assets in China as well as to understand business culture that prevails in the country.
6. The foreign entrepreneurs should be ready to spend time not only for getting legal base to start business operations but also be prepared to work with local partner to understand culture.
7. If the investors have enough experience in financial matters, they can enter into business in China through joint ventures or venture capitals.
8. By investing in venture capitals the investor will get firsthand information about the behavior of organizations in China.
9. This helps in understanding the way the power executed by government in China and to use the legal aspects and regulations according to the business.
10. After selecting a sector to do business in China, finding a way to get a legal base, investing initially in a venture capital, getting a ‘face’ to operate in China it is important to the entrepreneur to know about the culture of organizational behavior and how to deal with employees. That means the HR observed in China should not be the same as in Austria.
11. The entrepreneur should recruit the persons who can expedite the business activities through personal relations.
12. Another aspect is to recruit the personnel who are experts in working with networks between organizations.
13. The networking between organizations need partner selection and this should help in logistics as well as cultural aspects.
14. When the entrepreneur is ready to establish a partnership selection, the asset M&A can be suggested.
15. It is suggestible to investors to study the 2006 regulation as it allows to acquire assets in a domestic firm and then enables the investor to start an own business.
16. Depending upon the nature of the business, service and product, the investor has to decide the location.
17. As the property rights in China depend on local governments, before acquiring the assets it is necessary for the investor to select a suitable location that suits the business interests.
18. It is better to think about tier II cities for an entrepreneur who wants to establish an SME, as the tier I cities are too costly regarding using infrastructure or property acquisition. Hence, if logistics facilities are available the SMEs can prefer tier II cities in China, which offer incentives for the firms to establish the businesses.
19. To withstand the competition from local or domestic firms, it is necessary to continue the partnership with the domestic firm with which the investor acquired assets to get a legal base in China and a share in the business.
20. After that while expanding business, the entrepreneur should use the domestic partner as minority shareholder to continue the relationship and reputation while doing the further business.

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List of abbreviations

CPI – Corruption Perceptions Index

CEO – Chief Executive Officer

e.g. – “exempli gratia” – for example

etc – et cetera, and so further and so on

FDI – Foreign Direct Investment

FIE – Foreign Invested Enterprise

GDP – Gross Domestic Product

HRM – Human Resource Management

HSBC – Hongkong and Shanghai Banking Cooperation

Ing. – “Ingenieur” – an Austrian title

IDV – Individualism vs. Collectivism

JV – Joint Venture

LTO – Long-Term Orientation

MAS – Masculinity

MNC – Multi National Corporation

MOFTEC – former Ministry of Commerce

M&A – Merger and Acquisitions

PDI – Power Distance

PRC – People´s Republic of China

R&D – Research and Development

SAIC – State Administration for Industry and Commerce

SME – Small and Medium Sized Enterprises

SOE – State Owned Enterprise

UAI – Uncertainty Avoidance

VAT – Value Added Tax

VC – Venture Capital

WOFE – Wholly-Owned Foreign Enterprise

WTO – World Trade Organization

Table of figures

Figure 1: Context Orientation of Countries (Rothlauf, 2006, p. 26)

Figure 2: 5D model of Hofstede, (Hofstede, 2008), adopted by the author

Appendix

Title of research project: Starting up a SME in China, especially regarding cultural differences.

Name and position of researcher: Ing. Heinz König, Final year student, MBA, University of Gloucestershire, Cheltenham

1. Are you generally interested in starting a business in China?
2. If you are interested, what are your main reason(s)?
3. If you are not interested, state the main reason(s).
4. Did you find the Chinese atmosphere conducive to start a business?
5. Even though the atmosphere in China is not conducive to start a business, do you still want to establish an SME in that country?
6. What are the obstacles you have encountered while starting a business in China?
7. What have been the most important obstacles to overcome while establishing a business in China?
8. What has been the way to overcome the legal obstacles to establish an SME?
9. After establishing a legal base, what type of cities you want of establish businesses?