Business operations are usually subject to various forces including the external factors that businesses have no control over. In that respect, businesses need to devise suitable strategies as a means of responding to the forces’ influence. That is applied as a means of enhancing firms’ performance and sustainability. With that view, this case analysis seeks to demonstrate how a region or a country’s economic aspects affects industries and businesses in terms of performance, value and strategies.
Synopsis and objectives
International trade is a key focus for countries in their bid to enhance growth and embrace globalization. In that respect, trade liberalization is increasingly becoming a crucial tool for enhancing economies participation in the global trade. However, the policies have varying effects on foreign and local firms, and this analysis seeks to analyze the effect on local industry and foreign firms. That is achieved regarding China and the soft drinks industry; specifically analyzing the changes’ effect on Coca-Cola. Thus, the analysis seeks to achieve the following objectives
Identify the trade liberalization trend in the Chinese market
Identify the liberalization effect on the Chinese soft drinks industry
Identify the effect of the policy change on foreign firms regarding Coca-Cola
Questions
Given the study topic and objectives, the case study analysis will seek to answer three key questions as follows
What is the trend in liberalization affecting affected in China?
What is the effect of the trade liberalization policies on the soft drink industry?
How does the policy change affect foreign firms operations and performance?
Hypotheses
Trade liberalization is economically expected to have varying effects on industries depending on their nature as well as by foreign and local firms. In that respect, the case analysis will be seeking ascertains the following hypothesis providing the expected answers to the case questions.
As an emerging market, China has increasingly been adopting trade liberalization policies.
Trade liberalization increases competition in the soft drinks industry with foreign firms entry
Foreign firms’ performance is enhanced by the policy change given the better access to markets.
In the past few decades, markets liberalization has become an important strategic development. As described by Winters (2004), trade liberalization entails reduction or elimination of trade rules that hinders a free flow of services and products from one nation to another. Trade liberalization may be involved with putting an end to trade fares like export subsidies, surcharges, and duties or non-tariff barriers such as quotas as well as arbitrary standards and regulations
China’s trade liberalization
With increased globalization, international trade is becoming a crucial tool for economic growth with participation depending on marke access as well as country’s endowment with resources that determine their competiveness. In that respect, marke access restriction and ease are crucial in determine the flow of goods and services across the countries. In that respect, trade liberalization is expected to have an effect on an economy depending on the effect it has on imports as well as exports (Winters, 2004). With that view, the following is a summary of the state of china’s economy before he policy change and the effects of the effect of Chinese trade liberalization policies on the economy.
Preceding 1970s, commodity trade in China was almost entirely determined by economic planning. The state commission on import planning determined 90% of the imports into the country. An import design was planned by the commission to increase equipment and machinery supply, intermediate goods and raw materials for the industries that were needed to meet the target in the physical production of the final goods. Similarly, there was comprehensive export plan on physical quantities beyond 3,000 units. Thus, a few foreign corporations that were controlled and owned by foreign trade ministry were the only ones engaging in planning of trade during the period preceding 1978. Every one of them typically dealt with a narrow commodity range in which the authorized company was a sole trader. Since the planning was done in the physical terms, relative prices and exchange rates played a very small role in commodity composition and determination of the magnitude of China’s foreign trade (Oetzel & Banerjee, 2008).
Before 1978 when the policy of open-door was adapted, China had already come up with a typical strategy for socialist development that was inward as it utilized the import-substitution developing a pattern common to developing countries. China`s fundamental features for the system of foreign trade were indeed an attitude extremely restrictive towards foreign economies. The political and ideological factors played a crucial role in the Chinese foreign economic relations. Under the principle of self-principle influence, the China`s foreign trade was limited such that the imports did makeup only for the domestic production shortage for the necessary raw materials as well as capital goods during the exports only provided the needed foreign currencies for the imports (Ianchovichina & Martin, 2003).
Policies consequences on foreign trade composition and value were fairly adverse in the allocation of domestic resources. China’s export share was significantly made of goods that the country did not have comparative production advantage in production. Moreover, there were no economic incentives for export goods producers to expand their sales to the international market (Oetzel & Banerjee, 2008).
The simple tariff decreased from 40% on average in the year 1985 to below 10 % in 2009 accounting for only 2.5% of the total revenue tax for the year. The Chinese tariffs are all bound by WTO with the total tariff bound at 10%. The applied maximum tariff for MFN is 65%. The average weighted tariff is slightly over 4% with development of the country. It is relatively low in comparison with the key developing countries such as BRIICS; Rusia, Brazil, Indonesia, India as well as South Africa. That partly owes to the various duty exemptions as well as other measures applied to enhance exports. The liberalization also did whittle down the Non-Tariff Trade barriers’ impact to almost 5% on the WTO accession eve. The rights of Trade have also been fully liberalized; with most quotas, licensing and specified arrangements for tenders as well as price controls being removed. Further, there is many disciples on trading enterprise state for remaining subsidiaries as well as the other NTBs. The quotas on imports were fully eliminated by the year 2005; while China also agreed to the abolishment of export subsidies, inclusive of those in the agriculture, as a part of WTO commitments. The overall barriers on the borders on the trade of goods have all decreased to the levels of South-Asian while been locked at by the stronger WTO requirements with the China`s commitments for GATS also being strong. The WTO accession impact ought to be of cutting protection in a half and in practice, the country is still more protected in the service more than in its trade for goods hence more opening for industries such as the soft drinks.
In the terms of OECD FDI Restrictive Index, indeed the country is currently on par with the India but been restrictive than the Brazil and Russia. The restrictions that are above average normally appears for only major key service sectors like a fixed telecom, the banking, the air and the maritime transport as well as the electricity. In overall, China ranked the 79th in the world Bank`s Business operations ease Index for the year 2011; low rank but well ahead of India, Russia, Indonesia and Brazil. Normally it scores better than other BRIICS for exporting as well as importing costs. In World Economic Forum`s Trade Enabling Index, China holds the 48th position, that combines the indicators of the access to its markets, the border administration, the transport as well as the commercial infrastructure and business environment to the total index ranking 118 nations. It has a better score than the Indonesia’s 114th, the South Africa’s 72nd, India’s 84th, Brazil’s 87th as well as Russia’s 114th. Countries that are in front of China includes the OECD Nations as well as more advanced markets across Latin America, Middle East, Eastern Europe and East Asia.
Thus, China has been quickly climbing the Global ranking for trade as well as the FDI. It began by eliminating Japan as second-biggest world`s trading country; which is 3rd largest when EU gets counted, as well as the Germans as been the global leading merchandise goods exporters, with about 12% of the global export of merchandise by 2009. The liberalization cushions the country from the market crisis in a better way compared to other markets. China`s trade to the GDP ratio that was 56% in 2009 reflected a dramatic fall from 74% in 2007 due to the crisis. That was still higher than that of India and Brazil, as well as rather still higher for a highly populous country. Further, China as a country had 3% share of the inward world stock of FDI in 2009, still ahead of other BRIC countries. It has usually been the 2nd biggest recipient of the FDI worldwide from 2000. The inward FDI used to be 110 billion back in 2008, great increase from the 2007’s value, despite that, it did decrease to approximately $95 B in the year 2009. The investment is mainly in the manufacturing though it has rapidly increased in the services, as it accounts for more than 40% of the overall FDI. The government estimated that over 90,000 foreign enterprises have been established in various indusries in China, having an investment of beyond $160 B. In that respect, China’s trade performance has been superior even after economic reforms began a decade ago; in 1991. Currently, China’s global trade share is three times of what it was in 1953. China’s most global trade share increase occurred in the last 25 years with the trade liberalization ha began in 1978.
The Chinese fate and that of globes multinationals is tightly bound together. Two decades ago, they both benefited from the great growth in the global investments and trade: the share of China to the international`s economy increased from 4% back in the year 1990 to current 14%.
On the other hand, multinationals have seen their cumulative global economy’s share touch 25% while growth in sales by the foreign affiliates has grown to the USD32 trillion mark (Oetzel & Banerjee, 2008).
The 2nd round of the foreign trade reforms in China started in the year 1992 with trade liberalization having accelerated since then. Thus, a system of trade that is more liberal and closer to world`s economic norms is gradually being established mainly focusing on the imports regime. Additionally, the entry of China to WTO in the year 2001 has become a significant event in the recent world`s history producing far-reaching and deep implications for both China and all economies around the Globe. The Chinese economy has since the entry to the WTO prospered although domestic firms might not be in a position to overcome competition from the foreign services and goods. However, foreign firms benefit from the market’s opening for their operations and goods (Oetzel & Banerjee, 2008).
Policy change effect on China’s soft drinks industry
Policy changes are targeted at enhancing operations across an economy. In that respect, they have industry level effects depending on the industry nature as well as the policies’ effectiveness. In that respect, the following is an account of how the trade liberalization polices can affect an industry with reference to the Chinese soft drinks industry.
Under liberalization of trade, there can be an increase in two trade types: Intra- and inter- industry. Trade in Inter-industry mostly depends on initial factors endowment level. For example, a country like The US with abundant capital is normally expected to rank among the highest exporters of products that are capital and labor intensive under liberalization. As this type of trade greatly depends on the endowment of the initial resources differences, trade volume increase as a result of trade barriers’ reduction does not change the trade pattern drastically. Simply, trade volume increase means one directional export increase or import. In the intra- industry case, two kinds of explanation exist as to why the similar good are traded among countries. In fact, there is a prediction by the two explanations of different trade effects by liberalization on trade in intra-industries. Under the model of increasing return to scale, products are usually expected to be under production of IRS technology. As a result of economy of scales, none of the countries by itself is in a position to adequately produce the products, thus, each country only produce a part within its possible range even though the products are similar, hence the increase in trading between them (Meyer, 2004).
Barriers to Trade prevent specialization by countries; hence countries producing most of the goods for own demand. However, with a reduction in trade barriers, the economy of scale result in specialization by countries and trading with others increases a result. Thus, as the trade barriers results to increase the volume of trade, substantial changes start occurring in the trade pattern until it reaches perfect specialization for an industry. Under the assumption of IRS, trade barriers reduction induces the relocation of firms due to transport costs and economies of scale into markets that are larger such as the Chinese soft drinks industry. This suggests that large countries have the possibility of enjoying a more than a proportionate increase in trade, which is referred to as trade liberalization effort by the local market. Within this model, expectations are that more gains will be enjoyed by Chinese industry from the liberalization of trade for the differentiated soft drinks industry. However, under IRS, goods production technology effects on the local market are reversible under two situations. First, in short-run, differentiated goods-producing firms cannot easily relocate, so the firms’ number is fixed, under this case, small countries firms are enabled by liberalization of trade to increase their share of the market in large countries as it improves consumers’ access in the large foreign industries (Oetzel & Banerjee, 2008).
With trade liberalization, MNC’s established their operation units or factories in China with the aim of maximizing their profits. Ball et al. (2009) explains that companies only enlarge operations in a jurisdiction outside their native jurisdiction if they get great scope for making profit hence because the MNCs prosperity in China. Further, there is a wider market for quality and new services with the country having a large population and increasing the change in customer taste. Policies by Chinese government on FDI have been of great benefit to the soft drinks industry MNCs in great ways and have attracted their operation including direct investments and exports. Those policies that were preventing foreign corporations from investing there have since been withdrawn as enough attention has been given by China to FDI attraction. For a very long time, China had FDI restriction policies that limited foreign firms operations in the soft drinks industry. However, the Chinese government currently tries in every manner to attract the direct investment mainly by reducing several obligations as well as relaxing some policies shifting from the closed economy. In that respect, many international corporations are showing interest in investing in China’s soft drinks market while other increasingly exports their products resulting in increasing industry competition.
Policy change effect on Coca-Cola
Policy changes effects on industries trickles down to individual firms hence influencing their positioning as well as sustainability. That owes to the opportunities as well as the threats that the polices presents for the individual firms. In that view, the following is a summary of the Chinese trade liberalization polices change effect on an individual firm with reference to Coca cola as a foreign company.
The ownership restructuring, control, and industrial policies decentralization have been key institutional changes in implementing China’s market liberalization affecting the performance of the firms. That is through the effect on agency costs as well as transactions shaping incentives for the management as well as resources allocation in various industries. Further, Differences in regions’ deregulation pace significantly relate to MNCs performance. Particularly, firms in places where the rapid deregulation approach has been undertaken have lower performance compared to firms in places where the liberalization process was more deliberate and slower. Additionally, the longer it took since the beginning of deregulation of the sector, the poor the firms’ financial performance. Further, local firms have low performance compared to foreign firms owing to increased competition (Meyer, 2004).
Coca-Cola was founded in 1886 in Atlanta, and its carbonated drinks are available in all parts of the world, making the brand well recognized across the globe. Since the year 2000, ranking by Best Global Brand has placed Coca-Cola Company as the best inter-brand and only in 2013 that it was surpassed by Google and Apple that were ranked the best. Thus, it is not surprising that international markets generate about 60 percent of the business’ revenues. The business has always pursued an international expansion strategy building and leveraging its brand across the globe, with a core mission of refreshing the world.
Coca-Cola Company’s experience in China provides an example that is fascinating for the global business participation throughout the Chinese market liberalization process. While China continues to evolve greatly from the command economy to market-oriented operations with the international business such as Coca-Cola helping in stimulating the economic growth, tax revenues, and employment. In 1979, the introduction of a law on Joint Venture was the main turning point of the open door trade policies in China. As a result of the gradual liberation policies for trade, the foreign trade grew by twentyfold in comparison to 1980, thus reaching $1154B in value by 2004. China`s accession in 2001 to WTO did increase the trade liberation as well as ease the foreigners’ access to the Chinese market and is clearly of a great appeal to the transition of firms. That is because of the domestic market size, high growth rate, and the cheap labor. Coca-Cola brand was among the first companies to attain the potential, having already entered China in the year 1920 (Mok, 2002).
However, as a result, the China’s uprise, the Coca-cola company was pushed out of the country, and its plants nationalized. However, Coca-cola later re-entered the country in the year 1979. The re-entry was coherent with Uppsala Model that was developed in 1977 by Valve and Johanson where the establishment of the company was incremental and gradual; as the company got knowledge of foreign market, the uncertainty reduced allowing for increase in their commitment of resources so as to leverage the knowledge of the market. During its initial expansion stage in China, the company experienced uncertainty and limited operations given the restrictive policies that sought to protect the local firms. Most significantly, it was exposed to the opportunism vulnerability; because of the restrictions of the government as the bottling plants in China were owned by the state. The market agents` goals were not on par with those of Coca Cola`s strategy of long term while they focused on their bottom line; this opportunistic behavior did greatly hinder the coca cola`s expansion. In that respect, the firm faced tight government policies limiting its internalization as a result of high cost of transactions (Meyer, 2004).
However, after the reforms and consistent with the 1979 policies for attracting the FDI, the government of China allowed foreign investments only in the form of the JV or the full Foreign ownership but mainly preferring the JV. The preference for the JVs normally underlined the will of the government to have technology access as well as the know-how of the foreign firms as well as its fear for the likelihood of losing market control. That was a change as the Coca-cola firm had been rejected the formation of JV as the carbonated drinks did fall in category of the foreign investments that were to be controlled but not to be encouraged by state policies. In 1994, the first JV was allowed, and the Company signed an agreement with former Light Industry Ministry. Coca-Cola's another milestone with he liberalization process was in 1996 when it negotiated successfully to develop a concentrate plant that was wholly-owned in Shanghai. Ownership specific factors related to Coca-Cola's secret concrete recipe as well as fear of knowledge leakage, justified the need for a fully owned subsidiary, but not JV. Further, by 1992, Coca-Cola had been able to establish ten plants for bottling, partnering with the local agents by use of the JV agreement (Mok, 2002).
However, Coca-cola still experienced a bounded rationality problem; the lack of its local knowledge complicated the communications and the exchanges with local partners limiting the growth potential of Coca-cola. While attempting to internalize the transactions as well as increase the efficiency, the firm did opt to manage the local partnering via the franchise agreement together with foreign partners including the Kerry Group from Malaysia’s as well as Swire Group from Hong Kong (Mok, 2002).
Further, partnering together with the local companies, which gets engaged in the sourcing of capital and human resources, underlies the company’s hybrid strategy success. The coupling of Coca-cola with Kerry & Swire did enable it to leverage the local knowledge, opening up a competitive advantage as well as getting access to the local resources like distribution networks as well as relationships with vendors. Additionally, while both of the groups did bring management right to the JVs bottling in China. The Company was in a position to reduce the high risks involved in the direct investment, earn the benefits of synergistic from its new triad; the company, the bottling and local partners while aligning its strategic objectives together with its own agents. In 2009, Coca-Cola had already tried acquiring the Chinese most top juice producer Huiyuan Juice through an offer of $2.4 billion. Finally, it has commands a 60% market share in the current Chinese market for the carbonated drinks (Zhang & Zhang, 2010).
Conclusion
Given the analysis, it is clear that globalization has had great effect on economies, industries, and individual firms operations as well as performance. That is demonstrated by the effects that policy changes seeking to enhance global business operations through international trade have had on countries and specific industries. With that it has been demonstrated that liberalizing markets attract foreign firms’ operations and investments; a scenario that have two effects. First, the foreign firms get more opportunities to expand their operations in the new market. Second, the local firms face increased competition with the foreign firms’ entry. Regarding the Chinese case, it has been shown that the country initially had restrictive policies that sought to protect its local businesses for development purposes. However, with increased global markets growth and pressure from international trade organizations such as WTO, the country eased its trade restrictions to allow foreign investments and increased imports. With that, there was increased entry by foreign firms that sought to maximize on the new and large market that featured high demand given the country’s high population as well as developing status. Specifically, the policy changes have been identified to have had great effects on industries including the soft drinks industry where companies such as Coca-Cola have had experiences with the trade restriction and liberalization. The company experienced limited access to the market prior to liberalization to an extent of being kicked out of the market but later re-entered after liberalization resulting to massive growth in operations and market share. In conclusion, the analysis answers the case questions in that China has been experiencing increased trade liberalization. The liberalization has had effect of increased foreign firm entry in industries enhancing performance of foreign firms
Works Cited
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