The Impact Of Globalization On Business

Published Date: 02 Nov 2017

Greg Cole

Eric Clark

Colby Raines

Kurt Pfisterer

ACIS 5034

Dr. David Tegarden

May 1, 2012

Table of Contents

Introduction – Pg. 3

History – Pg. 3

Cultural Description – Pg. 5

Current Business/Economic Environment – Pg. 7

Current Accounting Environment – Pg.9

Business Legal Environment – Pg. 11

Human Resource Issues – Pg. 12

Risks – Pg. 13

Impact of Globalization – Pg. 15

Impact of NGOs – Pg. 16

China vs. India – Pg. 16

China and India – Pg. 17

Conclusion – Pg. 19

Introduction

The effects of globalization are rapidly changing the world in which we live. Any future decisions that the United States makes will determine our future role in this world. It can either become a large global competitor or just be the remnant of how economic powerhouses used to work. The U.S. is slowly falling out of its role as the sole leader of the free world. Although the U.S. still holds its place as the world’s largest economy, it must work in cohesion with emerging countries and learn how to adapt to this sudden shift of power. Many countries are competing with the U.S. in such areas as trade and manufacturing, however, it is still recognized as the leader in innovation.

In a time of rapid change in the U.S. business market, you must align your company with the future global competitors by leveraging opportunities presented abroad. As a multinational corporation you must take the ideas presented above and use them to your advantage. China and India make up over one-third of the world population, and it makes little sense to turn a blind eye to this fact. India and China are currently in their own industrial revolution, just like what the United States experienced in the 1800’s, except faster. There is no better time then now to take your firm to either one of these countries. It is just a matter of forgetting about whether or not you want to enter either one of these countries, but rather, how and where you want to go in China and India.

History

China has a very deep and rich history, but this discussion will begin the reign of Mao Zedong. The People’s Republic of China formed in October of 1949 by Mao Zedong, the leader of Chinese Communist Party. Zedong established the capital in Beijing and his goal was to enhance industrialization and socialization. He introduced a program called the Great Leap Forward in 1958, to increase production and stressed the advancement of agriculture. Unfortunately, The Great Leap Forward ended in what is now known as the "three bad years," spanning from 1959-1961. During this time, the People’s Republic of China experienced an economic downturn, food shortages, and abnormally high mortality rates.

In the early 1960's China began to experience tension in their foreign relations. One reason was China’s battle with India over disputed border territories in the Himalayas. However, Chinese troops were withdrawn by 1963. There was also a strain between China and the Soviet Union. In 1960 the Soviets pulled out all of their scientific and technical personnel from China. This caused increased competition between the two countries for support from the rest of the world during the Communist Revolution. The Chinese economy experienced recovery. In 1965 Mao Zedong implemented a cultural revolution that looked down upon revisionism. Mao’s Cultural Revolution faced much resentment and unrest, but the Chinese Communist Party passed the "16 Point Decision" that authorized Mao’s new cultural policy. China involved itself in some international affairs during the Cultural Revolution. An example of this was a continued struggle with the Soviet Union for global support during the Communist Revolution. China also supported North Vietnam throughout the Vietnam War in the 1960’ s-70. The United States fostered relations with China through the countries’ mutual cynicism of the USSR. After Nixon visited China in 1972, trade between the United States and China saw a large increase. The two countries developed complete diplomatic relations by the year 1979, sparking a rise in the standard of living for the Chinese during the 1980’s.

This sudden increase in standards, however, brought about the need for economic reform. "These [economic reforms] included, with varying degrees of success, reforms of the rationing and price system, wage reforms, devolution of controls of state enterprises, legalization of private enterprises, creation of a labor market and stock markets, the writing of a code of civil law, and banking and tax reforms " (6). China also began to open its borders to the rest of the world, which enabled business interactions with many other countries. China had a rapidly growing economy, but faced labor disputes and strikes starting in 1997. The rapid economic growth favored the upper class, and also polarized the haves and the have-nots. This gave rise to the "migrant worker class," which consisted of about 100-150 million people. Migrant workers would leave their homes to find work in other places. Unemployment was almost 10% in cities and 20% throughout the entire country in 2004. Despite these shortcomings, China took a step forward in regards to its economy and history as a whole by gaining membership to the World Trade Organization in 2001. This membership was awarded because of China’s emergence as an international economic leader. (6)

Similar to China, India has a vast history dating back thousands of years. Again, for this discussion, India’s history starts with the rise to Indian independence from Britain. The British colonized India from the mid 1800’s to the mid 1900’s. This was a time of growing sense of nationalism and a yearning for self-rule among the natives in India. (18)

With a goal of getting British troops to pull out of India, Mahatma Gandhi led his followers in nonviolent protest campaigns against the British. India gained independence in 1947 from these efforts; however, there was tension between the majority Hindus and the minority Muslims. The Hindus proposed a united democracy, but the Muslims wanted a separate nation setup, where the Muslims would take control of Pakistan and the Hindus would take India. This partition brought about the emigration of Hindus and Muslims that were now "on the ‘wrong’ side of new international boundaries." (18)

Nearly 20 million people were forced to move, and approximately 3 million died due to hostility occurring at the new borders. India and Pakistan engaged in a dispute over the land of Kashmir. Kashmir was under Indian rule, but the majority of people who lived there were Muslim. In 1947, Pakistan invaded Kashmir; however, the United Nations got involved and ordered a ceasefire in 1949. Kashmir was then divided one third to Pakistan and two thirds to India. (18)

In 1967, the Congress Party was no longer the dominant party in parliament. Indira Gandhi and the Congress Party won the election and returned to power in 1972. By 1975, Indira Gandhi had to resign due to election infractions. However, she passed legislation that voided her of any of these alleged infractions, which enabled her to keep her position as Prime Minister. Despite this legislation being approved by the Supreme Court, Gandhi’s actions yielded large-scale public discontent. In 1984 Indira Gandhi was assassinated, ending her personal influence in Indian Politics. (18)

Rajiv Gandhi, Indira Gandhi’s son, took over as prime minister in late 1984. Horrifically, Rajiv was also the victim of an assassination in 1991, and was succeeded by Narasimha Rao. Under Rao, there was a widespread uprising of violence between the Muslims and Hindus. The risk of violence continues today and harms India as the country tries to move forward. Despite increased violence, Rao has introduced market economics into Indian business practices. He has also implemented economic reform during while he was prime minister. Rao opened India to financial investors around the globe in the early 1990’s, which helped stimulate the Indian economy. (18)

Culture

The vastly different histories of both China and India have shaped how every other country in the world views them today. However, when it comes to the citizens of these countries, their view on their own history and the perspective they gain from that is most likely different. It not only represents the hardships and victories of past generations, but it also affects how each country’s citizen defines himself or herself as a whole. Certain morals and norms form during these events and experiences over time. China and India’s amazing cultures are another great quality that makes both of these countries so similar yet so different at the same time.

Chinese culture has been measured on the basis of Hofstede’s Five Dimensions, which include power distance, individualism, masculinity, uncertainty avoidance, and long-term orientation. These dimensions are based on a scale that is approximately 0 to 100, but the scales are not restricted to this range. China has a power distance score of 80, which is on the higher end of this specific dimension. This type of score indicates a culture where power disparity among individuals is tolerable. China has very hierarchical cultural system, in which individuals are not supposed to live in excess of their own hierarchical position. Lower ranking individuals are virtually dependent upon authority figures for guidance, and there is also a potential for exploitation by high-ranking individuals. Lower ranking individuals will not challenge higher ranking members, which aids in the continuation of this never ending cycle.

China scored a 20 on the individualism vs. collectivism continuum, indicating a culture dominated by collectivism. Individuals work for the betterment of the group rather than self-interest. Personal relationships are priorities in the workplace, which creates a clique-like compliant relationship with co-workers who are in the group. This, however, incites unfriendly and unkind conduct towards co-workers who are not in the group.

China has a slight lean towards a masculine society with a score of 66. The Chinese are "success oriented and driven." This means that work is the number one priority, while family and leisure time will be given up in order to meet the demands of one’s job. This mentality of competition starts at a young age, and is shown by how Chinese students value their exam scores as well as class ranking. With a population of over one billion people, these benchmarks are the basis on which they measure success and may dictate how one progresses through society for the rest of their life.

China has a score of 30 on the uncertainty avoidance dimension, indicating a society that accepts ambiguous situations and does not need a formal set of rules. An example is the Chinese language. There are many vague expressions that the Chinese accept. When dealing with Westerners, these unclear phrases can be troublesome. Also, China has 293 different languages and dialects (27). This can make it extremely hard to understand people from different regions if one has only learned just Mandarin, for example.

China has a very high score of 118 for the long-term orientation dimension. This indicates a society in which diligence is deeply rooted. Most Chinese investments are long term in nature, and are exemplified by the tendency to enter into real estate deals. Criteria to accept a business deal is based on trust, rather than likelihood, like in the United States. The United States, and nations alike, would all score on the low end of the scale for long-term orientation. (16)

When doing business in China, there are certain customs that must be kept in mind. First and foremost, it takes time to make a business deal in China. Typically, Chinese businessmen will only do business with another party in which they have developed and established a strong and trustworthy relationship. Once this relationship is formed, it will last for a long time and the partners will be able to do business with each other for years to come. The Chinese have a fluid sense of time; there is really no strict beginning and ending times of an appointment. People trying to do business in China must show patience due to this custom. Communication is another custom that businessmen must consider when dealing with China. In the United States, dialect is very clear. China, as previously stated, uses a language that can be very vague. This makes it difficult for businessmen from the United States, for example, to decode the exact meaning of the message. Patience is truly a virtue in situations where communication styles are disjointed. (37)

China is currently dealing with multiple political and cultural issues. Inflation was measured at 5.4% in March of 2011; this is above the target level of 4% set by the Chinese government. Projected inflation is expected to stay on the rise, and has become a political issue due to consumers becoming vocal about their displeasure with higher prices (21). Total unemployment in China is at 22%. While this is a political issue, it can also be viewed as a cultural issue. College graduate skills and the current economic needs for labor do not match up. For example, China is currently an industrial environment; however, most recent college graduates have degrees involving technical skills. Annually, millions of college graduates are underemployed or unemployed due to this mismatch of skill. (34)

The culture of India has also been examined and measured using Hofstede’s five dimensions. India scored relatively high on the power distance continuum with a score of 77. This indicates a hierarchical society similar to that of China. Lower ranking individuals are reliant on higher-ranking figures for guidance, allowing inequality of power to be widely accepted. Due to this acceptance, micromanagement is often used because employees need to know their individual specific responsibilities. The flow of information trickles down from the top, and negative feedback is never shared with superiors.

With an individualism vs. collectivism score of 48, India is a noticeably collectivist society. There is a priority to be part of a larger group, and the act in the interest of the group rather than the interests of the individual. The people closest to him or her influence the individual, and the individual also wants to be thought highly of by the group. Any poor feelings from the group would cause the individual to feel lost and downtrodden.

Indian culture is slightly more masculine with a score of 56. India places a high priority on flaunting success, by having the top brand names and owning expensive belongings. Indian culture also determines success through work, making it a central aspect of an Indian’s life. Needless to say, the average Indian places a high priority on their job.

With a score of 40, India has a mild inclination towards uncertainty avoidance. Imperfection is tolerable and Indians are able to adjust to imperfection by demonstrating adaptability and patience. There is a saying that "‘nothing is impossible’ in India, so long as one knows how to ‘adjust.’"

India is a moderately long-term oriented country, shown by its score of 61 in the long-term orientation dimension. Time is not the ‘end all be all’ in Indian society, like in China. In simpler terms, India is a very dynamic country and does not need to stick to a strict plan. (17)

When doing business in India, there are diverse customs that must be considered. People in India only do business with which they trust, meaning that people trying to do business in India must first establish a relationship. They must not rush into any business deals because that will turn most Indians away immediately. "It is a good idea to first be introduced by a third party, as that gives you credibility (26)." Throughout India people respect the word of others, and obtaining a recommendation is a great way to foster a business relationship. Patience is of utmost importance when doing business in India for two reasons. First, decisions are made on a hierarchical basis; therefore, they require a lot of time. Second, the overall culture of India is not very timely. Meetings are often postponed, cancelled, or rescheduled given limited warning. (26)

India has a laundry list of political and cultural issues it has to deal with at the moment. One major political issue involves relations with Pakistan. Ever since the Partition of India and the Kashmir Dispute in 1947, relations between Pakistan and India have been bitter and threats of violence still exist today. Language is another cultural issue India is dealing with. Although not nearly as many as China, the Indian Constitution officially recognizes eighteen different languages. However, there are many other unrecognized languages and dialects spoken throughout the country, causing communication in different parts of the country to be difficult. Different states in India have been allowed to pick their official language, causing further disjointing of communication. The role of women in India has recently given rise to much debate across the country. Throughout Indian history, the male played a dominant role while the female was notoriously submissive. One reason this has become an issue is that there is a lot of domestic violence in India, most of which goes unreported. Women’s courts have been erected to hear domestic violence cases and bring justice to the victims who have been harmed. (25)

Current Business/Economic Environment

The cultures of India and China will have an impact in many other areas than just the everyday life of a citizen. One of these areas that is greatly affected is their economic environment. When doing business and China and India, one must account for these differences and leverage them in their favor in order to gain a sustainable competitive advantage. Learning how to establish business relationships and how to cater to one’s employees needs is the best way for a company to establish a presence and continue as a going concern.

The U.S. has certainly made its presence felt in China over the last decade, and for good reason. Nearly all major U.S. companies now have locations throughout China, and while they’ve faced criticism for outsourcing, it makes total sense for them to be there. China is presently considered the best manufacturing outsource destination in the world, and it has already cemented itself as the leading producing nation in the world (33). The biggest reason for this can be attributed to its low production costs. Having the world’s largest population and thus, a very large labor pool, China’s labor cost is substantially lower than that of the United States. As of 2008, the average hourly labor cost for manufacturing employees was only $1.36, whereas they were $30.56 for a U.S. manufacturing employee. While low labor costs in China are a very attractive feature for U.S. multinationals, there is more to the story that should not be overlooked.

Not only are U.S. multinationals outsourcing a good deal of their manufacturing operations to China, many are seeing the benefits of expanding their operations into the country. Companies such as Wal-Mart, Pfizer, and Yum Brands have aggressively expanded to China in recent years, mainly due to greater growth potential than that of the U.S. According to a 2008 poll by the U.S.-China Business Council, nearly half of U.S. companies surveyed saw their China-based business perform better than the overall company (10). China’s outstanding economic growth is the main reason so many U.S. companies have begun this movement across the Pacific.

No other country has been able to match China in terms of economic growth. Of the twelve largest economies in terms of GDP, China has by far had the fastest growing economy since the 1990’s. During 2005-2006, China’s GDP grew at a rate of 10.7%, while the GDP of the U.S. only grew 3.3%. China’s growth will likely have the largest impact on the world economy over the next few decades, due to having the world’s largest population. According to projections, China could very well have the world’s largest economy by 2050 (15). There are, however, factors that could slow down China’s economic growth. Small business has fueled China’s rapid economic growth in the past, and its laws and regulations have tended to favor these entities. There is a possibility that China’s laws could become more restrictive and U.S. regulations could even shift towards small business. This could possibly give rise to U.S. economic growth. However, the old adage "nothing lasts forever" could easily come into play in the future. It is improbable that business and education patterns of every country will continue, and any change will likely have a substantial impact on country growth rates.

While China’s economic growth and potential does paint a rosy picture for U.S. multinationals, there are some concerns as well. For instance, it is questionable whether or not China will be able to control its interest rates, which in turn could lead to excess inflation. Products in China are becoming increasingly differentiated, which will lead to a rise in prices. Also, China has resisted all pushes to revalue its currency, in fear that it could damage its outstanding economic growth in past years. However, there has been pressure by the U.S. and other countries for China to do so, which could possibly put economic growth to a sudden halt. Lastly, China has been passing new regulations in recent years in an attempt to bring its laws up to par with that of highly developed countries. However, some of these laws have not been effective due to various reasons and China will need to address some critical areas, including anti-fraud and monopoly laws.

Like many countries, tax revenue is the most important source of fiscal revenue in China. China has built a tax system suitable for a socialist market economy, and its tax system plays a critical role in ensuring China’s fiscal revenue and sustaining the growth of its economy. Under its current system, China has 25 types of taxes that can be divided into eight categories (5); its income tax rate is 45%, 25% for corporations, and a 17% sales tax/VAT rate (4). Tax rules have a large influence in the preparation of financial statements in China, which is not common. However, this can present a problem with financial reporting. In order to satisfy the requirements of taxation authorities, preparers of financial statements often deviate from applicable financial reporting standards, with a preference towards tax regulations. As a result, treatment of certain items in the general-purpose financial statements may be different from that which should apply under the CAS (1).

China isn’t the only country that presents great business opportunities. Its neighbor to the southwest, India, has been making extraordinary strides over the years. India has a population of nearly 1.1 billion people, and it’s growing at a rate of 1.3% per year. In spite having an economy that is still developing, it boasts the twelfth-largest economy in the world, with a GDP of around $1 trillion. India’s GDP grew at a whopping 10.4% in 2010, which comes in at the fifth-highest rate in the world. Comparatively, China’s GDP grew at 10.3% in 2010, while U.S. GDP only grew at 2.8% (7). While India only accounted for about 2% of world GDP in 2004, it is projected to account for 17% by 2050, which would trail only China and the U.S (15).

India began its transition towards an open-market economy in the early 1990’s with reform. This reform led to economic liberalization in India, and included industrial deregulation, reduced control on foreign trade and investment, reduced tariffs, and new safeguards for intellectual property rights, among others. These reforms fueled India’s economic growth, which has averaged more than 7% per year since 1997 (8). India offers a diverse economy, where agriculture and industry take up a major portion, but the country is very well known for the service sector. While a little over half of India’s workforce is in agriculture, over half of India’s GDP comes from the service sector (55%). While many of these workers are providing services for businesses located in the country, a good chunk of them are providing services for U.S. multinationals at a much cheaper cost than U.S. firms can get in their own country.

Like China, India’s largest trading partner is the U.S., and the amount being traded between the two countries has grown at an outstanding rate over the last two years. Bilateral trade between the two countries was only $5.6 billion in 1990 and reached 48.75 billion in 2010, representing a massive 771% growth over the last twenty years (38). Not only has trade between the two countries grown at an incredible rate, many Indian citizens can attribute their jobs to U.S. companies. A large number of U.S. companies are outsourcing service jobs to India, in areas such as accounting, tax, and customer relations. While outsourcing has been a controversial topic in the U.S., it has created many jobs for the citizens of India and has helped fuel the country’s great economic growth.

Despite India’s impressive economic growth over the last two decades, there are some concerns that could pose a threat to its future. Controlling inflation should be a priority going forward for the Reserve Bank of India (RBI), the central banking institution of the country. The current inflation rate is around 8.8%, but reached a whopping 16% in early 2010 (19). Another potential issue is relatively poor education standards. While some Indians know the English language, illiteracy rates in India are extremely high (over half of Indian women are illiterate). Perhaps the most important issues India’s economy is facing are poor infrastructure and inequality of life. Many roads in India are of poor quality, and there is still a high number of Indians who struggle to gain access to fresh food and water. Over 78 million homes do not even have access to electricity (19). While solving these issues will likely prove to be a tough challenge, it would undoubtedly help India’s already growing economy going forward.

While India has an economy that is still considered to be developing, its tax system is well developed with clearly demarcated authority between Central and State governments and local bodies (36). Taxes only accounted for around 12% of the country’s GDP, which ranked 201st out of the world’s 210 countries (8). Foreign corporations do have to pay a relatively high tax rate of 40%, along with a 2.5% surcharge. Also, India has Double Tax Avoidance Agreements (DTAA) with eighty-two other countries. Countries who are part of the treaty determine tax rates with each other. Between India and the U.S., dividends are taxed at 20%, while interest income and royalties are each taxed at 15%.

Current Accounting Environment

The booming economic systems of China and India are unlike anything the world has seen before. The importance of bookkeeping and learning how to account for this underlying economic activity is a hot debate today for both China and India as they try to converge their own accounting methods with the International Accounting Financial Standards (IAFS).

Now, think back to our discussion about Indian and Chinese culture. Based on Hofstede’s cultural dimensions values, one would expect China to have an accounting system that is highly regulated, uniform and secretive, but also fairly aggressive (or put another way, optimistic) in terms of accounting practices. China has a society that values certainty and un-ambiguity. This would imply that China should value an accounting system that has uniform practices. Chinese society also accepts power in institutions and a hierarchy, which should result in an accounting system that is highly regulated. Having a society that values collectivism, one would expect China’s accounting system to prefer confidentiality and the restriction of disclosure of information about the business. China also ranks highly in terms of masculinity, meaning that achievement and material success is valued. In addition, China should be far from conservative, and have a more optimistic viewpoint in its accounting policies.

Chinese accounting standards originated during Mao’s communist reign. During this time, the state was the sole owner of business in China, and Chinese accounting policies focused more on balances sheets instead of income statements. Some major differences between Chinese accounting standards and that of Western countries included accounting for inventories, debt, and amortization for intangibles, for starters. Chinese accounting policies were in need of major reform due to the fact China was transitioning to a market economy. Responsibility for this task fell on the Ministry of Finance for the People’s Republic of China (MOF).

The MOF holds the responsibility of implementing and enforcing Chinese accounting and auditing regulations. The MOF introduced a new set of accounting standards to bring Chinese Accounting Standards (CAS) more in line with the rest of the world; these standards (Accounting Standards for Business Enterprises, or ASBE) became mandatory beginning in 2007 and were designed to converge with IFRS. These new standards provide for the preparation of financial statements, their disclosure and audit, and their inspection (1). Uniformity is something that previous CAS did not require, but was badly needed so investors would be able to compare financial information across firms.

China has many laws that publicly held entities must follow, including the Accounting Law, Code of Corporate Governance for Listed Companies, the Securities Law, the Company Law, and the CPA Law. Together, these laws establish the manager’s responsibilities, financial reporting requirements, the auditor’s responsibilities and obligations, and stock exchange requirements, among other things. While the United States is known for having the "Big Four" accounting firms, China has ten "big" accounting firms, and it was designed that way. China wanted ten big accounting firms in order to optimize accounting firm’s scale and structure, implementing the talent strategy, and enhancing the professional competence of CPA’s (1).

CAS has become very comparable to IFRS in recent years, as CAS has been designed in similar fashion to IFRS. Along with IFRS, CAS permits the use of both historical cost and fair value accounting. While many Chinese firms have been moving towards taking a fair value approach for valuation purposes, some corporate accountants and auditors have encountered difficulties. It has been observed that some corporate accountants and auditors face considerable difficulties in applying the concepts of fair value and impairment losses in implementing applicable standards. Also, some accountants and auditors have lacked industry-specific knowledge in applying some specific CAS (1). The two most notable differences between CAS and IFRS are accounting for the reversal of impairment losses and the disclosure of related party relationships and transactions (1).

India is quite similar to China based on Hofstede’s cultural dimension values. Like China, India would be expected to have an accounting system that is heavily regulated, uniform, secretive, and optimistic. The only category where India is not extremely close to China, in terms of relevant Hofstede’s values, is individualism. China ranks 20th and India 48th in the respective category, meaning both countries do value collectivism. Even though India deviates from China in this category, it still ranks low in its world ranking in terms of individualism.

The Companies Act of 1956 originally paved the way for accounting standards to be set in India. The act was enacted by India’s parliament and enabled companies to be formed by registration, as well as set out a company’s responsibilities. The Ministry of Company Affairs (MCA) is a ministry of the Indian government, and it administered the Companies Act of 1956. The MCA is responsible for regulation of Indian companies in the industrial and service sectors. The MCA notified the Indian Accounting Standards (Ind AS), and the Institute of Chartered Accountants of India (ICAI) formulated them. These standards have recently converged with IFRS, but India technically has two sets of accounting standards. Along with Ind AS, India also has the existing accounting standards set forth under the Companies Act. The (Indian GAAP) Companies Act set up the National Advisory Committee on Accounting Standards (NACAS), and it recommends the Ind AS to the MCA. The MCA has yet to implement Ind AS, but it is likely that Ind AS will eventually be the sole resource for accounting standards in India.

There are some notable differences between Indian GAAP and IFRS. Indian GAAP typically requires financial statements to be prepared by using historical cost, and IFRS mainly emphasizes the fair value approach in terms of valuation. As India continues to move towards IFRS, fair value will likely be the main valuation method going forward. Indian GAAP also tends to be driven by written contracts and the form of transaction, instead of substance. This is a direct divergence from IFRS and will likely change once India fully implements Ind AS. Disclosure is another major difference between Indian GAAP and IFRS, where IFRS is more focused on qualitative information for stakeholders instead of quantitative information (23). There is some common ground between IFRS and Indian GAAP however, as both use the accrual basis of accounting.

Business Legal Environment

When entering into a country such as China or India, one must not overlook the many legal aspects of starting and running a business in a foreign country. Issues such as property rights, government regulations, and different laws relating to specific industries could place a hold on any entrepreneur’s dreams of operating an organization abroad.

As spoken about in an earlier section, at the heart of India’s business legal system lays the Companies Act of 1956. The Indian government enacted this in order to regulate the many aspects of a business including its formation, financing, day-to-day operations, and eventually its liquidation. This legislation allows for the central government to inspect the books of any registered company, and also launch an audit if necessary. The central government also has the authority to prosecute any company that is deemed in violation of this act. (33)

As one may imagine, the legal environment in China is vastly different from that in India. For many years the Chinese government has not had a legal system, in terms of business regulation, that was comparable with those seen in parts of Western Europe and the United States. Many aspects of the weak Chinese government may raise concern to a foreign investor; however, on July 1, 1994 China enacted a Company Law that allows foreign companies to open branches (33, Pg. 143). These branches, although becoming more lenient, are still restricted to those of banks, insurance companies and accounting firms (33, Pg. 143). One must also take into account the vast differences in local governance and industries when deciding where to place a business unit. According to Mike Saxon "In China, most things are open to interpretation. One may interpret something one way, and the government official whose approval one needs may interpret it differently" (33, Pg.141).

To an American, the idea of property rights may not be the first thing that comes to mind when starting a company, because for years Americans have had guidance from the government on what belongs to a company and what doesn’t. However, when entering into a foreign country, the idea of property rights may not be as clearly defined as it is in the United States.

Luckily, there is an annual study called the IPRI (International Property Rights Index) that ranks countries against each other in terms of their property rights protection. There are three components that are rated, using a pre-determined formula on a scale of 0-10 (10 representing the strongest property rights), in order to determine an aggregate score in which the country is eventually ranked against others with; these include legal and political environment (LP), physical property rights (PPR), and intellectual property rights (IPR). (20)

The legal and political environment is judged based on judicial independence, rule of law, political stability, and control of corruption (20, Pg. 20). This category brings to mind that even with the most comprehensive property rights, a country will not achieve the result it wants unless it can enforce them. With respective scores of 4.5 and 4.7, China and India are very equitable when it comes to this category, leaving them amongst the middle of the 129 countries rated. The United States comes in much higher at 24th with a score of 7.1, and Mexico was 83rd with a score of 4.2. These scores should not discourage anyone from entering into China or India; nonetheless one should take extra caution when it comes to contracts, and other legal transactions that may take place while abroad. (20, Pg. 29)

The second category that is included in the IPRI is physical property rights (PPR). This category is judged based on the registering and protection of physical property, as well as the access to loans that one may have (20, Pg. 20). Weighing in with scores of 6.8, 6.6, and 7.1 respectively, China, India, and the U.S. have very similar protection of PPR. These scores should alleviate some stress when it comes to worrying about whether or not the new office space one just purchased will actually be in one’s name when one arrives in Bangalore! (20, Pg.29)

Finally, intellectual property rights (IPR) is the last category that is rated in IPRI. Intellectual property rights have to do with creations of the mind, and other intangible assets. Specifically the annual report looks into the protection of these rights, protection of patents, and the level of copyright piracy that occurs. These rights should be on the top of any businessperson’s list, especially in industries where a competitive advantage has been built upon different patents that have been developed and copyrights that exist. China and India both came in around the middle of the countries, as with LP, with respective scores of 5.2 and 5.5. The United States scored an 8.4, which can put in perspective the risk one’s intellectual property may be at when entering into one of these countries. However, as discussed when talking about legal protection, with the proper contracts and relationships built with local governance the risks can be mitigated and assurance that one’s property is safe can be reasonably provided. (20, Pg.29)

Human Resource Issues

When one begins to think of the structure of almost any company in the United States, there are certain departments that come to mind including marketing, manufacturing, accounting, IT, and of course the human resource department. This department is in charge of the human capital that is available at any given company. It is almost vital to have a department devoted to HRM nowadays, especially in the case where unions exist and the HR department is in charge of discussions with the representatives. However, is HRM really a necessity in developing countries such as India and China? If so, what trouble would one run into when attempt to manage a company’s personal as efficiently and effectively as possible? These are both questions that will be answered in the following discussion.

With 1.2 billion people, India is home to the world’s second largest population, half of which is under the age of 25 (28). Due to the size of the population, the workforce in India is extremely large. India, however, has historically had such a large disparity of wealth that there really was no "middle class." This has begun to change in recent years. According to Eugene Makar, "recent estimates put the size of this emerging middle class and the people depending on it at up to 325 million, nearly 30 percent of the country's population" (28, Pg.112). This "middle class" in India is the size of the entire United State’s population! India also has a vast supply of skilled and educated workers. Many of these people have earned their degree in information technology. An issue that often arises is the migration of unskilled agricultural workers to and from the metropolitan areas. Eugene Maker said, "…Agricultural workers often migrate from farming areas into expanding metropolitan areas in search of unskilled-jobs. When the planting season rolls around, they simply migrate back" (28, Pg.112). Another issue is the quantity of skilled workers. The amount of skilled and qualified workers in India is relatively small, and firms that have already entered into India are in a race to capture this talent pool.

These are all issues that can be mitigated or resolved with effective HRM. Also, a department added to aid in the educational development of all citizens, although not recently established, will play a huge roll in India. The Ministry of Human Resource Development was established in 1985, and is still working to increase the number of students who receive primary as well as secondary and higher education (28, Pg.113).

Whenever anyone thinks about doing business in China, the first thing that comes to mind is being able to build a product at a lower cost. In order to build anything at a lower cost, finding less expensive labor is a must. In his book, An American’s Guide to Doing Business in China, Mike Saxon makes it a point that China may not be a cure all for every problem a company may have, however he does say "[China] has an extremely large supply of educated, cheap labor" (33, Pg.8). He makes it known that China’s population is not necessarily better than any other countries, however the cost that it comes at is what makes China’s workforce so competitive. Saxon also points out the many costs that should be accounted for when considering moving the labor aspect of a company into China. Although the cost of the labor in China is extremely low, there are multiple other costs that one may not even take into account before hiring their first Chinese employee. Mike Saxon says, "While the direct price may be cheaper, there are many hidden costs that will be incurred to attain a lower cost. These hidden costs include mistakes due to communication, misunderstanding, and different customs, ethics, and standards" (33, Pg. 8-9). All of these costs are discussed in more detail in the other sections.

Risks

When evaluating the risk of China and India, one should take into consideration everything from government corruption, to the stability of financial systems, as well as one’s personal well being. In regards to risk, Eugene Makar says it best by stating, "Regardless of how much or how little you know about India, the first step is to very clearly define the goal and then determine how much risk can be tolerated" (33, Pg.187). This can also be said for China, or in that case for any country one considers entering. In determining risk one must take into consideration internal factors that have to do with the industry one is in, as well as external risks in China and India’s political and legal systems.

A.M. Best Company provides an annual report that places countries into different Country Risk Tiers (CRT’s), which are rated on scales of 1-5 with 5 posing the most risk. On their website A.M. Best gives their definition of country risk as "the risk that country-specific factors could adversely affect an insurer's ability to meet its financial obligations" (9). Before designating a number to a country, A.M. Best provides a detailed assessment of the economic, political, and financial system risk that is posed by each country and rates them on a scale of "Very Low" to "Very High."

The economic risk entailed in entering a country is very important when considering corporate expansion into either China or India. A look into what is going on in both countries’ economies can give one a valuable insight and the ability to determine the viability of an investment. China received a rating of "low" for its economic risk. Do not forget that China has the second-largest economy in the world, and this is due to an ever-increasing export sector, increasing state government spending, and developing infrastructure. China is beginning to develop more of a capitalist-style approach when it comes to their economy. India has slightly higher economic risk, receiving a rating of "moderate." The sectors in the Indian economy that can be attributed most of the growth are those of information technology and business services. The report also points out the weakness in India’s monetary policy as it states that it is likely to remain "tight." (9)

Both China and India were rated "high" when it comes to risk in their political systems. This is not a surprise considering the communist past of China’s central government, but as mentioned before, tensions have been rising due to the capitalistic industrial East. China’s local governments has increased spending, but with this has come a large increase in debt for these entities which have already been hurt by the global recession of 2008. More of a surprise comes from the well-known democratic government of India. This rating can be characterized by a large disparity in wealth, national security issues, and of course the strained relationship with Pakistan that has been going on for years. Much of this risk can be mitigated with attention to details when researching different areas in either China or India to locate one’s business. Looking into different laws and regulations, and being sure to get interpretations from local officials could save one a lot of trouble in the future when it comes to facing fines and other forms of punishment. Considerations of different types of entities, such as a joint venture, may be a viable alternative to committing all of one’s resources in one of these two countries with unstable political systems. (9)

One of the most important risks to consider before entering into China or India is the strength of their financial systems. Of the two, India was ranked as having the more risky financial system with a rating of "high." Their financial market is characterized as being illiquid and having little foreign participation. Also, as discussed earlier, India is still in the stages of coordinating their own accounting measures with international standards. China was ranked as having a "moderate" risk when it comes to their financial system. All of the big financial institutions are state owned in China, which is caused by their high risk and highly involved government. China will need to continue to liberalize these markets, which will be necessary as they move towards their new capitalistic economy. Also, with the recent increase in small government spending and increased capital being delegated to infrastructure, the amount and size of loans in China is ever increasing. This brings to question how volatile these loans may be. (9)

The three risk areas summarized above are by far the three most important to consider when not only entering China or India (or both!), but any other country. Based on these three scores, each country is assigned one cumulative rating which was discussed previously. China was rated as a CRT-3 country, which translates to a moderate overall risk. India on the other hand has been scored as a high risk with a final rating of CRT-4; this score represents an overall high risk. However, India’s large dynamic workforce can alleviate some of this risk and aid in the country’s growth.

Impact of Globalization

Globalization has had a very positive impact on China for a number of reasons. First of all, globalization has been the leading driver behind their economic growth throughout the past 30 years (11). China’s export surplus has been the reason why their economy has been growing so rapidly; these exports are primarily demanded by the United States. Poverty alleviation has only occurred to those living in the business centers near the coast of China (11). However, the majority of Chinese citizens, who live inland, are considered to live in extreme poverty. Due to the constant economic growth, there has been a mass exodus of traditionally agricultural workers moving from the mainland to the coast in search of better paying jobs (11).

Globalization has also lead to some negative effects in China. Due to China still be an emerging nation, they do not have environmental legislation that follows the mold set by many of the G7 and other developed nations (22). As a result, the air quality in many of the cities is poor and many city-dwellers are suffering from asthma and shorter life spans (22). The movement of people away from farms and into the business world has also lead to a loss of traditional Chinese culture in much of the younger generation (42). Without parents around to instill these values, many of those in the cities have adopted more western attitudes and cultures. Globalization has also had other negative impacts such as the greater need for food to support the population in the cities, which as previously stated, is lowering the water table in the north (2). This is a problem that will need to be addressed before the land becomes completely unusable and widespread famine results. They are also depleting many of their natural resources, which is a long-term issue that they do not seem to care to address in the short term (13). Much of the manufacturing jobs were formerly taken by blue-collar American workers have now been outsourced to China, due to labor being much cheaper. Additionally, advances in automation have caused many manufacturing jobs to go overseas to China. While this is good for the Chinese, it is one of the contributing factors to the high unemployment rate in the U.S. There has also been a lot of controversy in China about the use of sweatshops and child labor to make products sold in the U.S.

In India, globalization has had many positive effects. Since India has the largest English-speaking population in the world, their IT support sector has fueled a lot of their economic growth (31). Their growth has been largely dependent on U.S. companies using their English-speaking population as cheap labor. This has also been the reason for great infrastructure being built in major cities (32). It has also greatly increased the living conditions of those in the cities, although there are still job shortages and living conditions are still substandard in much of the country. Even in the large cities, much of the population is still living in shantytowns constructed with whatever they can find. The need for infrastructure to be built has also created multiple jobs in the construction sector (40).

Like China, globalization has also had its fair share of negative effects in India. Most of those living in India have not yet benefited from the job creation and are still living in extreme poverty (3). India is a very diverse culturally rich country, with many long standing traditions and customs. Much of this is lost when the younger population moves to the cities and is forced to adopt the customs of Western culture (in order to fit in at the workplace). When Indians are hired at IT help support jobs, they start by learning how to speak like Westerners, are given American names to use when on the job, and thus essentially forced to abandon their traditional values (30). Another negative impact of globalization in India is the large amount of outsourcing of American jobs to the country. While this is good for the Indian populace, it has recently sparked controversy in the U.S. and other developed countries.

Impact of NGO’s

Non-Governmental Organizations (NGO’s) in China have made an impact despite being stifled by the government’s restrictions on these types of entities. The Chinese government has many requirements that make setting up NGO’s quite the burden, and as a result many opt not to start them (12). Another issue is in Chinese values, which do not dictate a lot of trust in non-governmental organizations, meaning that funding can be hard for those attempting to establish NGO’s (24, Pg.3). Regardless, NGO’s have made a considerable impact on Chinese society. They are needed to improve areas where the Chinese government is not dedicating enough resources (12). For example, there are many NGO’s in China presently attempting to improve the environment, which the government should be addressing (39).

There are 3.3 million NGO’s in India, meaning there is a NGO for every 400 Indians, yet their impact is largely unknown (35). There is a good deal of dispute as to how much good they actually do, and the average lifespan of a NGO in India is only 10-15 years (14, Pg. 5). What is known is that they tend to serve as grassroots organizations for the impoverished of India. They are a great way for the government to interact more closely with the needs of local groups (14, Pg. 38). NGO’s and the Indian government do have a fair share of interaction, as they assist them financially and work together on forming policies (14, Pg. 73). This has had a very positive impact on the Indian people as they can be heard by the government through grassroots NGO’s, rather than waiting for the government to make policies that attempt to appease every group within the country.

China vs. India

While China and India have many similarities, they are still very different nations in terms of culture, business environment, and English fluency. Both China and India offer different opportunities for multinationals to leverage when expanding globally. Multinationals need to contemplate what line of business they should pursue, and align their business model with the competencies of either China or India. Managers need to accumulate a vast amount of information in order to make an informed decision when entering either China or India.

Regarding culture, China and India differ on one of the five dimensions of Hofstede’s cultural research; this dimension is long-term orientation. China and India received a 118 and a 61 on the long-term orientation respectively. While India is considered a patient country, China takes the long-term orientation dimension to the extreme. The Chinese develop corporate level strategies that span multiple generations. India does not place a very high importance on time and has a collective countrywide consciousness of patience. When compared to Western countries, India is more long-term oriented. Alternatively, when compared to China, India is much less long-term oriented. This vast difference in the long-term orientation dimension should require managers to think before entering either China or India. (16,17)

China and India also have different economic environments. China’s economic environment is geared towards the manufacturing industry while India’s economic environment is focused on service industries. According to the book Getting China and India Right, "China’s manufacturing sector is currently five times as large as that of India" (15). Multinationals will benefit greatly from the economies of scale available in China. Chinese manufacturing provides new entrants with better infrastructure and lower labor costs, when compared to India. Additionally, China has a very weak dollar in comparison to the U.S. therefore making the export of manufactured goods highly profitable. While China leads India in terms of manufacturing industry, India is superior to China regarding the service industry. "India’s services sector is more than five times as large as that of China," explains the book Getting China and India Right (15). The reason why India has a superior services industry is due to greater knowledge, experience, and more fluent English speaking population.

India has a very strong service sector, due largely to the fact that they have the largest English speaking population in the world. This can be seen through the amount of outsourcing to India that has occurred in the consumer support desk industry. Given that they have such a large English speaking population it eliminates the language barriers usually met by American multinationals, allowing for an easier transition into India. On the contrary, China has a relatively small English speaking population, making the transition of American multinationals more difficult than in India.

China and India

Throughout this discussion, there have been multiple discussions on a facet of issues from both China and India’s histories to the type of accounting system each country uses. These topics show many reasons why entering both China and India are a good reason, and what one may encounter when he or she finally makes a decision to move across the Pacific Ocean. China and India are very different at a glance; however, they both share very similar opportunities.

In his book "Seeing the Elephant" Peter Marber describes the world as changing from having a Micro Domestic stance to Macro Quantum world in which "policy-making bust be a proactive, constant process, involving many actors, both sovereign and civilian." Marber’s idea takes into account seven interlinking areas that every country must pay more attention to in the future in order for his Macro Quantum world idea to succeed. These topics are trade and finance, energy, security, immigration, health, environment, and poverty. Many of these areas have been discussed in greater detail throughout this paper and therefore will just be touched upon in in this section. (29)

China has become the biggest emerging market in the world today, growing at an outstanding rate of 9-10% for the last twenty years. China is at the core of the BRIC countries (Brazil, Russia, India, and China), where the combined population of these countries makes up over 40% of the entire world. Going by current trajectories, BRIC should pass the G7’s economic output sometime between the years 2040-50. China’s economic growth can mainly be attributed to its thriving manufacturing sector, while India has become a world leader in information technology and in the service sector. Also, in recent years, China and India (particularly the former) have become major buyers of U.S. treasury bonds, which have boosted their hard currency reserves. (29, Pgs. 43,45)

China is creating a huge demand for energy at the moment, and is now the second largest energy consumer in the world (only behind the U.S.). China and India are both major producers of coal (China produces 38% of world output; India at 6%), but both countries are depleting its reserves (29, Pg.104). In fact, both countries are experiencing increasing energy deficits. This could be a problem for U.S. multi-nationals that are outsourcing parts of their business to the countries, as they won’t be able to fully operate if they’re not fully powered.

China has accumulated a high number of nuclear weapons and long-range missiles for many years. China also had its first successful antisatellite test in January 2007, which many countries have found troubling. China’s defense budget is actually growing faster than its GDP, which is hard to believe given its massive GDP growth. In fact, China’s behavior has actually raised questions about its commitment to a peaceful global world. However, both countries have declared a no-first-use nuclear policy, and would only resort to the weapons of mass destruction in retaliation. Meanwhile, India also possesses a decent number of nuclear weapons and missiles. India’s defense budget has been growing at an incredible rate as well (40% from 2002-2006). China has the largest active military in the world (2,285,000), while India has the 3rd-largest (1,325,000) (29, Pg.153).

In recent years, China and India have been hit hard from losing people due to immigration. From 2000-2005, China and India lost 390,000 and 280,000 people, respectively, good for 2nd and 4th-most during that time span (29, Pg.190). They lost most of these immigrants to the U.S., seeking "better" opportunities. This has not painted the best picture, however, as many U.S. politicians and unions have accused China and India of stealing American jobs. Immigration has also created a problem in both India and China, as they are losing a good chunk of their "best and the brightest," who are pursuing better educational opportunities.

When considering hiring an individual in any country, one must take into account the price of health insurance, how many sick days an employee will have, and as well as the risk of losing the employee to a health related problem. These are important, because as with time, health is literally money. As with most areas, however, proper prevention can reduce large outlays of cash in the future. One area we can compare India and China in is their lost productive lifespan due to cardiovascular disease per 100,000 people. China actually comes in closer to the United States then one would think with lost years totaling 1,595 for China and 1,267 for the U.S. India on the other hand has 3,572, which should raise some sort of concern (29, Pg.222). This number is a bit shocking, because along with Thailand, India is a major hotspot for medical tourism today.

Environment is one of the areas that have previously been discussed. China’s addiction to coal energy has not only had an effect on them, but has also hurt every other country in the world due to depletion of the ozone layer. As Marber would most likely point out, this is also a direct link to health issues because it has resulted in an increase of asthma as well as the black lung. For this reason, one area that is easy to compare China and India between is total carbon dioxide emissions. According to the CDIAC, in 2010 China held a dominant lead with 8,240,958 tons of emissions, and the U.S. came in second with 5,492,170 tons. India was third, but had much less emissions with a total of 2,069,738 million tons. However, when translated into a per-capita amount, the United States and it’s over consumption puts them at the top with 17.6 tons per person and China and India at 6.2, and 1.7, respectively (29).

Finally, Marber focuses on poverty as the last interlinkage in the world. Biofuel, primarily an energy topic, is one topic that surprisingly plays a huge role in this area. With multiple countries attempting to cut back on fossil fuels, many have turned to using corn and sugarcane as source of fuel. This does help a little, however the effects on food prices create a huge problem. Due to the large amount of mouths to feed in both countries, China and India feel the effects of this as much as any other country and have little difference here. However, China has much more of an effect on raising prices in multiple areas, especially in food due to a high consumption and low production, but also in terms of natural resources including farmland and oil, because of their unprecedented growth. (29)

Conclusion

China and India both offer interesting histories and cultures that are reasons alone to learn more about the two countries. However, they also present great opportunities for your corporation to leverage your business and benefit from the advantages they present. This discussion has only touched the s