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Midstream and Petro Vietnam 1

1. Case summary
By late 1991, the offshore oil of PetroVietnam was in production just 3 year earlier. Everyday, 100 million cubic feet of gas rose to the surface during extraction of oil, causing a loss of US$500,000 per day and also a big harm to the environment. Being aware about the waste of natural gas sending to the atmosphere. Tom Higgins, president of Higgins Engineering, would like to take the opportunity to add a natural gas processing plant to the offshore oil facilities in Vietnam. He firstly assumed leadership of the project and approached Midstream to invite participation to the project in late 1991. After outlining the project details to PetroVietnam in January 1992, Midstream and Higgins had made many short trips to Hanoi for discussion with PetroVietnam. At last, they were rejected in July 1992. However in late 1992, PetroVietnam contacted Midstream and Higgins when the project was again thrown open to bid. Since the cost of the project was assumed so high, Higgins and Midstream then invited other companies from Calgary to form a consortium in order to spread the financial risk and to contribute skills to the joint venture. There are four Canadian companies in the consortium: Higgins, Midstream, Extensive Pipelines Limited and Willet Engineering, each of which brought a unique skill to the project which life was estimated at 15 years and can bring in over $80 million. After spending a lot of efforts, the consortium was still uncertain of whether being selected for the project till late June 1993, it was informed being the number one to proceed with the project. However, before the announcement about successful bidder, the Canadian joint venture had some problems with their feasibility studies. And misfortunes never come alone, one of the joint venture member, Willet Engineering, pulled out of the project.

2. Discussion question 2.1. Who are the stakeholders in this project?

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Stakeholders are those that gain or lost as a result of perceived success in project implementation. In this case, the project stakeholders including: The Canadian Government. Since it had funded the technical feasibility study of the project, so, it was assumed to be a sponsor of the project. The project consortium consisted of 4 Canadian companies; Higgins, Midstream, Extensive Pipelines Limited (ELP) and Willet Engineering. However, Willet Engineering pulled out of the project before the bidding result was announced. Higgins also hired a South Vietnamese woman, Ms. Minh Chau, to be the interpreter. The local counter part and user of the project was PetroVietnam. Other interested groups: Vietnamese Ministry of Heavy Industry, Economic and Planning Department, Production Department and Gas Department

2.2.

How would you evaluate the consortiums progress to date?

In these days, trying for gaining the contract with PetroVietnam, the Canadian JV was aiming to persuade that the consortium has considerable expertise and provide the essential credentials to make the project a success

So far, they had spent over $80,000 per company without any return in sight. At last, in June 1993, the consortium was informed that it had been selected as number one to proceed with the project.

However, the Canadian JV had formed for 6 months without setting out each member s role in a formal agreement. In addition, The project lacked a business principal approach. Moreover, their technical feasibility study was very weak. It was time to consider again all the procedure so far and probably must redo all feasibility studies. Besides, in July 1993, Willet Engineering pulled out of the project, claiming that the project was not consistent with the companys new vision.

So, the consortium was in tough situation and continuing with the project or not was a big question mark.

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2.3.

If Midstream continues with the joint venture, how can the

consortium increase the probability of being selected for the project.?


To increase the probability of being selected for the project. The consortium has bundle of things that must be considered carefully. Firstly, they should redo all feasibility studies carefully, especially the technical feasibility since the finance feasibility study has to be based on the technical feasibility study which was weak at the time. In addition, they should learn to understand in deep Vietnamese legal, taxation and banking system. And most important, setting up business principle approach. At the time, the joint venture did not have an office in Vietnam, it was one of its disadvantage. In the process of bidding for the contract, they just made several short trips to Hanoi, just for meeting and discussion PetroVietnam about the project. Therefore, it will be much better if they set up an representative office in Hanoi, the capital of Vietnam where PetroVietnam as well as the Ministry of Heavy Industry and other concerned organizations are located. The representative office would create sense of reliability to the Vietnamese side, proving that the Canadian joint venture are seriously want to do a business with Vietnam. Besides, they will have more opportunities to contact with Vietnamese side frequently, with reduced cost of flying in and out. In addition, Higgins had hired Minh Chau whose business was similar to that of a travel guide to be an interpreter. Since she did not have any experiences in technical field, it would hard for her to interpret in technological aspects or else, her interpretation would be not exactly what the Canadian meant. This fact would be very dangerous if happened. So, it will be better if the joint venture hire an engineer or technical expect who have experiences in the gas industry and many other aspects that can be the interpreter and Vietnamese consultant as well. They should also build a plan with more detail to persuade Vietnam side about the merits of project. Such plan should mention to many aspects that would draw the Vietnamese side s interest. Those can be the application diversity of gas, revenue received from gas and saving cost from stopping gas flaring, limiting pollute that derive from the flaring of the raw gas, improving knowledge and skill for Vietnamese technical staffs and workers, and also a source of opening jobs to

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unemployment since the project implementation as well as the plant afterward need many employees. In addition, their plan should clearly show how and what they have learned from the very best gas processing technology in the world. Studying the competitors is also what they must do. The consortium should learn who are its competitors, their strength and weakness, in which aspects they are better than the Canadians. In the same time, it should determine itself about its advantages as well disadvantages in financial aspect, experiences, technology, human resource and the like to build a suitable strategy of dealing business in Vietnam. Since Willet Engineering pulled out of the project. The consortium should invite another company to enter consortium, at least to replace the WE position, to contribute finance and skill as WE. Moreover, it should build a formal organization structure of the consortium and clearly clarify the roles and responsibilities of each member in the consortium. There would be many others ways to increase the probabilities of being selected for the project. But the final way we would like to mention is that, the consortium should create good conditions for Vietnamese side to understand clearly about the consortiums strategy, plan and their commitment to the project. For those purposes, it could invite some main officers and technical staffs in Vietnamese side visiting Canada and their Canadian firms premises, organize press conference in Hanoi. Besides, all the concerned documents (proposal, feasibility study, contract, etc.) should not only in English but also in Vietnamese as well.

2.4.

What cultural aspects of doing business in Vietnam should be

considered?
For being success in doing business in Vietnam, there are many cultural aspects that a foreign firm should consider. Firstly, in Vietnam, the social mobility is possible. It means one persons position in the society can be changed easily depending on his property, talent and so on. Secondly, authority is achieved through age and seniority. And Vietnamese often expect to do serious business only with those of similar rank, seniority, and

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sometimes, the same age. We can take one fact from the case that Clint Markson was a boyish good looks man in his early 30s. And dealing business with such a man was not a willing to Vietnamese officers who were usually in old age. Therefore, it would be one of reasons of the stagnation of the bidding process while using Clint Markson as the Canadian spokesperson. Another aspect would be considered that religion does not influence very much on doing business. The Vietnamese consider good relationships very important. One advantage of doing business in Vietnam is that Vietnamese characteristics are hard working and studious. So, they can be easily learn and adapt to the new technologies transferred. In addition, the labor cost in Vietnam is lower than in some neighbor countries. However, Vietnamese is a high power distance culture. One person makes all decisions and mid-level technocrats have no decision making power. Sometimes, those who make the final decision of what to do and how to do are not the one who will do. Moreover, Vietnamese display risks avert behavior. With the Vietnamese, time is not money and deadlines are irrelevant. Successful completion of a transaction is more important than keeping to schedules. They also consider long term control very important and worth fighting for. And last, Vietnam is still working with a war mentality. Some still keep skeptical to foreigners and defensive behaviors are often taken place.

2.5.

What are some of the barriers to creating an international joint

venture?
The barriers to creating an international joint venture stem from both home country (Canada) and host country (Vietnam). We will mention firstly about host country, Vietnam. Vietnamese attitudes towards business decisions is still backward that spent so much time to negotiate and discuss about the project and had to pass various management degrees for the

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final decision. This creates many obstacles for foreigners to plan and control the project. In addition, the shortcoming of language competence and expertise of Vietnamese people, who foreign firms have to deal with, also creates some restrictions in understanding as well as communicating the ideals and matters about the project, creating some obstacles to creating an international joint venture. Specially, underestimation of the role of foreign direct investment in the development of the country is probably the big reason to block the process of creating international joint venture. Moreover, Vietnamese law system is not stable, one that is not permitted today would be permitted tomorrow and vice versa. Regulations and decrees subjected to be updated and changed. And what are barriers in the home countries of the foreign firms, the Canadian side in this case. Without formal agreement of each member's roles and responsibilities in the consortium is one reason that influence their success, creating many difficulties in managing the project efficiently. In addition, disputing for influences between members to the Vietnamese partners, pulling out of the project and the like create obstacles to them. Furthermore, lacking understanding about the host country - its culture, capability, infrastructure, legal system and the like - is also a significant barrier of creating an international joint venture. are

2.6. What do you understand from this case in relation to the objectives of doing business internationally?
The objectives of doing business internationally are transferring technology, intellectual property and managerial skills. In addition, it also helps to expand the market and to use outside labor sources and others resources that have lower costs. Those things help reduce the production cost and increase the competitiveness of the firm as well as its products. So, both the home country and the host country get benefits from doing business internationally.

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In this case, Vietnamese oil and gas business is a fledgling one, it needs FDI as an opportunity to improve the technology, the offshore oil facilities, as well as technical skills of staffs. And the Canadian firms expect profits gaining from the project. However, to attract investment sources, the FDI policies should offer a favorable environment for foreign countries in doing business in Vietnam. Such good policies will help minimize the time and cost spending for creating an investment project.

3. Conclusion
In this case, we can see the process of approaching the international project of Midstream. The case focused on activities in the initial time of project implementation such as: meeting, contacting, planing, preparing feasibility studies as well as learning about the cultural aspects in the host country. The case, through a very vivid illustration of how difficult and costly it was for Midstream to win the contract with PetroVietnam, gives a experienced lesson to those who want doing a business in Vietnam and doing business internationally as well. One obvious fact is that, before making investment decision, foreign investors should learn about the conditions, policies and cultural aspects of the country where they want to invest. This helps the investor avoid the risk and minimize the cost and time spending for the project.

Ford: Exporting to Japan Case

Case Analysis
I. The likeliness and difference in Japanese and American car companies exporting strategies
American car companies Japanese car companies

Like line ss

Difference

Overseas production (including local brand) Export Hire local personnel to help establishing the firm in foreign market Focus on dealer relationships. Focus on low-cost production. Initially focus on one small niche Export to large markets market (high profile). Large-scale investment (in Small-scale investment to reduce US) the risks Produce in one foreign Export from home or local country and export to another production foreign country

Explanations: Both American car manufacturers (represented by Ford) and Japanese car manufacturers (represented by Daihatsu Co.) sell cars in foreign markets which composed partly by local production and partly by export from home. They also have to hire local personnel to help penetrate the new foreign markets especially in distribution systems. However, there are some differences in their exporting strategies: American car manufacturers ( represented by Ford Motor Company): Japan is a country with impressive cultural characteristics, for example: Japanese refer doorto-door selling, they pay much attention to the products appearances, etc Therefore, Ford policies was offer an American icon at a discount price and back it up with other models adapted for Japanese market. Also Ford focused so much on distribution systems building good relationships with local dealers. First of all, Fords target market was the youth with well-design sport cars Mustang. Japanese car manufacturers (represented by Daihatsu Co.): utilized the low-cost manufacturing at US., they invested heavily in US. And then exported to the third countries (in Asia, Europe)

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II.

The approaches of Japanese and American car companies to adapt their marketing mixes to foreign markets:
American car companies Changed product design Focus on back-up services Pricing competition Focus on local dealerships Invest more additional dealers Push strategy (door-to-door) Car trade-off Advertising Japanese car companies Fuel economy High quality Low price Local distribution Owned distribution system Pull strategy

Product Price Place Promotion

Product:
In Asia, people like to go out or make an own vacation with their family. Japanese customers for family outings and recreation for users and their families prefer the American cars with large internal space enough. Besides supplying the car basic attributes, American car companies also offered the extra features such as safety features, improved fuel economy, etc. Moreover, they also considered the Japanese physical conditions by offering the good back-up services for their customers. Generally, the product strategy of Japanese car is well known as offering fueleconomic and high quality car.

Price:
Perhaps, price is the most important weapon for the Ford Company in a marketing mix strategy in such a fierce competition market. How to choose an appropriate pricing strategy is a critical determinant of the firms success. When the firm tries to find out the effective price strategy, it should consider some factors that influence pricing strategy such as transportation charges, taxes, exchange rates, marketing expenses, etc. In this case, thanks to the stronger strength of yen compared with the U.S dollar helped the price of American firms product lower than Japanese. As a result, American cars priced reasonable and more attractive than comparable Japanese ones. For Japanese companies, since they have highest productivity in producing cars, cost advantage is also the strategy of them.

Place (distribution):
When American car companies entered the Japanese market, they tried to buy a number shares of domestic car companies in order to access the domestic distribution channel because customers are brand loyal and it is very difficult to access the distribution systems. After they are familiar with dealerships and the market, they build their own dealers in addition to the existing ones.

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For Japanese, the distribution problem is not serious in their export markets. They freely use their own systems as well as the well-established ones.

Promotion:
In this case, the difference in promotional mix strategy of Japanese and American car companies are clearly. Although car is a consumer product, Japanese car companies used push strategy instead of pull in Japanese market. They developed their door-todoor salespeople based on personal relationships with customers to make their sales pitches in their customers living home. This situation made American car companies had to apply this strategy although they disliked it. However, they also invested in the advertising media to gradually change the Japanese traditional buying habit in this field. At that time, two trends in Japan helped their efforts to succeed. Firstly, more and more Japanese women are working. Secondly, the typical Japanese consumer is very interested in latest modern car models that make to increase his/her value. Of course, in their largest exporting market U.S., Japanese may just apply pull strategy to access customers. Strategies may not be the same for all Japanese or American companies in all markets. The above are general. It can be different in different circumstances.

III.

What market attributes should Ford be aware of as it steps up its effort in the Japanese market?

When Ford entered into the Japanese market, there are many differences compared with the home country the American market. First, it must recognize the differences in consumer tastes and preferences there. The difference we may find in the case is that Japanese consumer is less interested in how a car drives than in how it look because the Japanese treat their car as an ornament to be polished and cared for but use only occasionally. Japanese likes going to picnic with their family for recreation and weekend. In addition, one thing can not be forgot is the nationalism of the old Japanese and the western style of the young generation. In the recent years, Japanese are also aware of environment protection for their huge population. Second, differences are in infrastructure and traditional practices. In Japan, the roads are narrow, twisting and constant stopping and starting. Additionally, improved fuel economy made the cars more attractive in Japan with very high gasoline prices. One more thing is that the exchange rate between U.S. and Japan is fluctuating so it can reduce the pricing effect of Ford.

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The third is the difference in the distribution system, most Japanese never go to an auto dealership and most are strongly brand loyal, so the door-to-door salespeople are popular. However, and more consumers are willing to go to showrooms to see the latest new cars. In addition, more Japanese women are working (they are counted for 60% of purchase), not at home for traditional sales calls. In recent years, the development and applications of Internet can create more advantage customers with the appearance of online service. These all what Ford must be aware in Japanese market for its future success and becoming the leading carmaker.

IV.

What marketing recommendations would you make to Ford to help it be successful in the Japanese market?

Because of attributes of Japanese market, there are many recommendations to be considered so that it can help Ford success in the new arena. Those recommendations are: Ford must sell the good-looking image of car to clients by advertising and product design to satisfy the preference of Japanese customers in how the cars look. The car must pay attention to product design that orient towards environment compatible. That is environment friendly and low level of pollution. The car must be flexible and easy driving for narrow roads with constant stops. Women are more and more important in purchasing power since they are working and spending their money more than ever, Ford must focus on women-fit design that reflect in product design and in advertising messages. This is the area for improvements and creative work. For example, the car design must be appreciated by women, or the control components must suit women drivers. For high nationalism, car design may have to reflect the Japanese symbol. In addition, Western style can help the car more attractive in the eye of Japanese since they prefer the foreign origin of products. These characteristics do not conflict each other. Internet and e-commerce was emerging in Japan and become very important in terms of servicing. Ford cannot forget this trend. However, e-commerce itself is not enough, it must be associated with local dealers in serving customers. The dealers are difficult to access. Salespeople are popular. Therefore Ford must treat distributors as initial customers to increase its ability to access to the whole

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target market. Ford can use more incentives than other companies for salespeople associated with building good relationships with dealers. The good relationships can be strengthened by helping them in advertising and financing. In macro level, since the trade between U.S. and Japan is imbalance with the trade surplus is on the Japan side. Naturally, Ford must be well prepared for tradebalancing efforts by Japan - US agreements. In addition, Ford had to develop its own policies to manage the exchange rate between the two countries currencies. Finally, after considering all possible attributes of the new market, Ford may identify its target customers are middle class including professionals who have spending enough for their car as well as looking for high differentiation of foreign origin, strong nationalism with professional lifestyle and high social positions.

Conclusion
To be successful in Japanese market, Ford must realize some local characteristics that very different from any other area in the world. That is the customer tastes and preferences, infrastructure, distribution etc. The largest changes occur in product design. However, other thing that is not much related to those attributes is the macro effect of international business exchange rates and trade imbalance. Therefore, it will not be enough for Ford to success if it is only response to local attributes. The company must proactively prepare for those macro problems.

Poland Dramatic Gamble

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TABLE OF CONTENT

I. THE LIKELINESS AND DIFFERENCE IN JAPANESE AND AMERICAN CAR COMPANIES EXPORTING STRATEGIES...........................................................................................................................9 LIKELINESS.....................................................................................................................................................9 II. THE APPROACHES OF JAPANESE AND AMERICAN CAR COMPANIES TO ADAPT THEIR MARKETING MIXES TO FOREIGN MARKETS:....................................................................................10 III. WHAT MARKET ATTRIBUTES SHOULD FORD BE AWARE OF AS IT STEPS UP ITS EFFORT IN THE JAPANESE MARKET?..................................................................................................11 IV. WHAT MARKETING RECOMMENDATIONS WOULD YOU MAKE TO FORD TO HELP IT BE SUCCESSFUL IN THE JAPANESE MARKET?..................................................................................12 Conclusion.................................................................................................................................................13 V. EXECUTIVE SUMMARY...........................................................................................................................1 VI. CASE ANALYSIS........................................................................................................................................1 THE OLD SYSTEM AND ITS EFFECTS..................................................................................................................1 BENEFITS OF PRIVATIZATION AND PRIVATE SECTOR........................................................................................2 THE ADAPTATION OF POLISH PEOPLE TO THE NEW SYSTEM.............................................................................3 THE RESULT OF RAPID REFORM PROGRAMS......................................................................................................4 RELATIONSHIP BETWEEN DEMOCRATIC POLITICAL SYSTEM AND ECONOMY..................................................5 RECOMMENDATION...........................................................................................................................................6 VII. BIBLIOGRAPHY.......................................................................................................................................7 VIII. APPENDIX 1: POLAND TODAY..........................................................................................................6 I. INTRODUCTION...........................................................................................................................................1 II. SUMMARY OF THE CASE........................................................................................................................1 LOGIC OF AIRLINE ALLIANCE...........................................................................................................................1

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SIA'S ALLIANCE STRATEGY.............................................................................................................................1 THE STAR ALLIANCE ATTRACTION..................................................................................................................2 III. SHOULD SIA JOIN THE LUFTHANSA-LED STAR ALLIANCE......................................................2 ADVANTAGES OF JOINING STAR ALLIANCE.....................................................................................................2 DISADVANTAGES OF JOINING STAR ALLIANCE................................................................................................3 IV. BENEFITS OF FORMING STRATEGIC ALLIANCES FOR AIRLINES AND THEIR CUSTOMERS.....................................................................................................................................................3 BENEFIT TO AIRLINES.......................................................................................................................................3 BENEFITS TO CUSTOMERS................................................................................................................................4 V. REASONS WHY SIA DISSOLVED ITS ALLIANCE WITH SWISSAIR AND FORGED A NEW ALLIANCE WITH LUFTHANSA...................................................................................................................4 VI. STRATEGIC AND OPERATIONS CONSIDERATION FOR SIA JOINING THE STAR ALLIANCE AND REASONS WHY SIA RELUCTANT TO JOIN.............................................................5 VII. ARE STRATEGIC ALLIANCES BETTER THAN ACQUISITIONS AS AN INTERNATIONAL BUSINESS...........................................................................................................................................................6 VIII. CONCLUSIONS.......................................................................................................................................7 IX. BIBLIOGRAPHY........................................................................................................................................7 X. BRIEF OF THE CASE.................................................................................................................................5 XI. ANALYSIS OF THE CASE........................................................................................................................6 XII. CONCLUSION.........................................................................................................................................11 XIII. SUPPLEMENTARY DOCUMENT......................................................................................................11 TRADE AND ECONOMIC PROFILE FOR CHINA...................................................................................11 Country Information: ................................................................................................................................11 Political Environment: .............................................................................................................................12 Economic Environment: ...........................................................................................................................13 FOREIGN TRADE BARRIERS ...........................................................................................................................15 People's Republic Of China ......................................................................................................................15

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Import Policies .........................................................................................................................................15 Tariffs and Taxes ......................................................................................................................................15 Nontariff Measures ...................................................................................................................................18 Transparency ............................................................................................................................................20 Trading Rights and Other Restrictions .....................................................................................................20 Import Substitution Policies .....................................................................................................................21 Government Procurement ........................................................................................................................24 Export Subsidies .......................................................................................................................................26 Services Barriers ......................................................................................................................................29 XIV. BIBLIOGRAPHY...................................................................................................................................33 XV. PRESENTATION SLIDES......................................................................................................................33

Poland Dramatic Gamble

V.

Executive Summary

The most important political development during the previous years in the communist world was the transition of power at the Center and State levels in a democratic tradition. The most significant economic development was the reiteration of the course of economic reforms. Since 1990, all of the Eastern Bloc countries have held democratic elections and have made some attempts to both democratize their political system and liberalize their economy. The most successful of these are Poland, the Czech Republic, and Hungary. Other countries, such as Russia and Ukraine, have not been so successful. The former Communist party cadres have reemerged in most of these states, and have even won recent elections in a number of them. That process is also emerging in other area in the world. This text covers matters concerning with the transition process of Poland. By tracing the historical events as well as making the comparison with other nations, it could be more understandable about this process, its benefit and drawback as well. Various ideas that were raised and discussed indicate an overall picture of the normal transition. The success and failure of the relevant countries would be valuable considerations for Vietnam implications

VI.

Case analysis

The old system and its effects


In centrally-planned economy, State determined all economic and social activities: production, price, wage, human resource assignment, and so on. Under this system managers of factories have no authority to make decisions, to control production process and costs. Their responsibility to plants and workers did not exist. Almost of managers were appointed by Government based on political position not on ability.

Poland Dramatic Gamble

Regarding to workers, everyone was given jobs. The jobs were guaranteed. Workers did not care of shutting down or going bankruptcy or lay-off. Every worker received the same wages which were low and not based on workers performance. They did not have to concern about their works. Qualified people were not important. All of the above characteristics of the old system resulted in many problems: Low productivity No satisfaction and incentive to make workers being efficient in their work. Managers did not have responsibility for the development of the plant and their workers. Shortage of almost everything in Polands society. Recession and inflation.

Benefits of privatization and private sector


Moving to free market economy, the Poland leaders chose a path of radical change. Privatization is one of the most important approaches to help them to reach their goals. Laws for selling state enterprises to private investors were enacted. Thank to privatizing state owned enterprises, Poland get following benefits: Creating motivation. Now the employer and employees work for themselves. The more they work the more they get. Operating more efficiently. Not like the old days, now the managers must take into account the production cost, control cost in order to make sure that they can make profit and compete to be survive and develop. The rights to making decisions in the hand of the owners now managers select qualified, skillful, productive employees so it forces employees caring of good performance. This results in more productivity.

Poland Dramatic Gamble

If a factory does not make profits, it might be shut down or lay off. Thus employees must work in a sprite of hardship.

According to Omig's Marck Ogradzki, one manager of the first privatized firms, "The only way for Poland is privatization. I think in the future it will be 80% private sector and 20% state or government sector". Referring to Vietnam, similarly privatization (equitizing State-own companies and develop private sector) is also one of the most important step in reform. The government's consistent policy is to develop multisector economy including the private sector1. Because private sector has a great potential and strength such as: Fueling economic growth Creating employment Having productivity, fairly good quality, competitive exporting capabilities, and high growth rate (15-20%) Contributing to development of economy (taking up to 40.2% of the GDP in 1998)

Followings are activities or programs in the effort the encourage investment in private sectors: National Assembly's approval of the Enterprise Law Implementing "The private sector Development Program" to support private sector in procedures, finance, Program to support SMEs Small and Medium Enterprises conducted by MPDF to providing training, financial assistance, helping in accessing information, consulting.

The adaptation of Polish people to the new system


Besides affects on operations of factories, the changing economic system of Poland has brought strong effects on Polish.
1

Mr. Tran Xuan Gia, Minister of Planning and Investment

Poland Dramatic Gamble

Many Poles seem to support Government program. Their reasons in terms of a national emergency and they were willing to accept sacrifices. They trusted and confident in their leaders who they could democratically elect. At one aspect, not all Poles were easy to adapt to the new reform. It was difficult for them to live in a new Poland. They felt that they were loss for country because new economic system requires them to learn to work in different ways and the old generations were not ready for change everything especially in a very short time. They need time for adaptation. Besides that some Poles were afraid that time would not wait for them because maybe the fruitful performances of the new economy come lately when they are older. However, at another aspect many Poles have not waited. They have tried learned the ways of capitalism and market through another growth industries in Eastern Europe enteprenuership education. They established and improved the link between Poles institutions and United State to promote entreprenuership and trade. All Poles had their own way to adapt to the new system of controlled management whether they like or not. However, they did everything to make their country and their life better. It is considered that Poland should take time to change the habits and the thinking of people.

The result of rapid reform programs


By choosing a rapidly reform path the Polish government played a gamble. If they had lost, there would have been a terrible calamity, not only for the Poles, but also for the West2. Fortunately, they seem to be in the right direction. The results of these policies were creating a free-market economy with 80 percent private sector and 20 percent state or government sector in a short period. The mechanism of this new market is the interaction between supply and demand. However, at the beginning, some big problems were emerged. The country was forced into recession because of rapid price increasing. Another problem was that a big portion of Polish was not prepared for new working way, a capitalist way.

According to Dr. Jeffrey, a Harvard economist.

Poland Dramatic Gamble

Many Poles have not waited. They are learning the ways of capitalism and markets through another growth industry in eastern Europe-entrepreneurship education. Poland needs western management skills, modern western technology, and western capital to succeed with its dramatic transformation. However, private investment is the key to long term development. Now, in the bottom line, the Poles have seen the light at the end of a tunnel. There are some evidences for success (See Appendix 1).

Relationship between Democratic Political System and Economy


Over the past decade or so, a number of factors have profoundly changed the outlook for global political and economic developments: the increasingly widespread acceptance of democratic institutions and market-based economic development; rapid economic growth of several economies. The government would likely implement policies that are in the special interests of the groups, even though the policy may generate net losses to the economy as a whole. Thus by maintaining a policy of free trade, an economy could avoid national efficiency losses that could arise with lobbying in a democratic system. There is general agreement that innovation is the engine of long-run economic growth. If a countrys economy is to sustain long run economic growth, the business environment must be conductive to the production of innovation. Economic freedom associated with a market economy creates greater incentives for innovation. Thus, there is a strong relationship between economic freedom provided by market economy and the economic growth. Some argue that democracy is good for growth. Democracy creates more economic freedom and a good base for market economy. However, some others argued that Democracy does not necessarily lead to development, country needs to develop discipline more than democracy. The exuberance of democracy leads to undisciplined and disorderly conduct which is inimical to development3. The current problems in the Eastern Europe were due to the fact that democracy arrived before economic reform. It seems that subsequent economic growth leads to establishment of democratic regimes.
3

Lee Wuan Yew, Singapores leader, 1992

Poland Dramatic Gamble

Democracy is not a necessary precondition for the establishment of a free market economy, e.g. South Korean, Taiwan. China maintains a totalitarian government but moved gradually toward market economy. In addition, economic progress could lead to the adoption of Democratic regimes. There is also the belief that once China has a free market system, democracy will follow. Today's globalizing world economy thus provides an historic coincidence of interests for the nations. Closer linkages between these economies are beneficial for sustained economic growth, improving living standards, eliminating poverty and promoting environmental sustainability, which will strengthen the foundations for global political stability.

Recommendation
The case of Poland may be a good model for many countries to imitate. But we must consider two things if we do not want to fall into a pitfall: is the success of Poland a result of its rapid reformation? And the risk associate with it. Many western counties wanted to use Poland as a sample to encourage eastern countries reform their political and economic system. For doing so, they invested a lot of money into Poland. It may be the cause of Poland success. Rapid reformation is too risky. Many eastern European countries did it and fail such as Russia and Ukraine. In the opposite side, China applies a gradual moving from centrallyplanned to free-market economy and keeps the totalitarian political system. As the result, the economy of China grows gradually but sustainable. According to analysis above, we think that it is better for Vietnam to implement a gradual reform program.

Poland Dramatic Gamble

VII.

Bibliography

1. Guastello, S. J. (1995). Chaos, catastrophe, and human affairs: Applications of nonlinear dynamics to work, organizations, and social evolution. 2. Hillsdale, NJ: Lawrence Erlbaum Associates. Meadows, D. H., Meadows, D. L., Randers, J., & Behrens, W. W. III (1972). The limits to growth. New York: Universe. 3. United Nations (1992). Agenda 21: Programme of action for sustainable development. New York: United Nations. 4. Dore, M. H. I., & Ward, A. J. (1994, October). Modelling intertemporally sustainable development: A nonlinear approach. Paper presented to the CASX Sustainable Development Forum II, Naperville, IL. 5. International Trade Theory and Policy Lecture Notes: 1997 Steven M. Suranovic Last Updated on 5/19/99 6. Hill, C. W. L, 1998, Global Business Today, McGraw-Hill, United States. 7. The Saigon Times Weekly, No0 51 '99 (428) December 18, 1999. 8. The Saigon Times Weekly, No0 34 '99 (411) August 21, 1999. 9. www.poland-embassy.org.uk 10. www.sarnow.com/poland

Poland Dramatic Gamble

VIII.

Appendix 1: Poland today

Source: www.poland-embassy.org.uk

Macroeconomic indeces, 1996-2000


- Source: Ministry of Finance -

1995 1. GDP 2. Consumption 3. Gross Investments 4. Imports 5. Exports 6. Unemployment 7. Inflation (Dec.-Dec.) 7.0 4.4

1996 6.0 4.5-4.7

1997 5.5 3.2-3.6 9.5-14.0 8.0-13.0 12.4 13.1-13.4 12.0

1998 5.3 3.2-3.6 9.5-12.5 7.0-10.3 10.0 12.0-12.4 8.0-10.0

1999 5.1 3.1-3.6 10.0-10.5 6.5-8.6 8.4 10.7-11.3 6.0-8.0

2000 5.1 3.1-3.6 10.0-10.5 6.5-8.3 8.3 9.4-10.2 5.0-7.0

19.0 10.5-13.0 21.1 11.5-13.6 17.0 14.9 21.6 13.4 13.6 17.0

Unemployment

Poland Dramatic Gamble

- Source: Ministry of Finance -

December to december inplation


- Source: Ministry of Finance

Case Singapore Airline Alliance: A Star attraction:

TABLE OF CONTENT
I. THE LIKELINESS AND DIFFERENCE IN JAPANESE AND AMERICAN CAR COMPANIES EXPORTING STRATEGIES..........................................................................................9 LIKELINESS..............................................................................................................................................9 II. THE APPROACHES OF JAPANESE AND AMERICAN CAR COMPANIES TO ADAPT THEIR MARKETING MIXES TO FOREIGN MARKETS:...............................................................10 III. WHAT MARKET ATTRIBUTES SHOULD FORD BE AWARE OF AS IT STEPS UP ITS EFFORT IN THE JAPANESE MARKET?............................................................................................11 IV. WHAT MARKETING RECOMMENDATIONS WOULD YOU MAKE TO FORD TO HELP IT BE SUCCESSFUL IN THE JAPANESE MARKET?......................................................................12 Conclusion..........................................................................................................................................13 V. EXECUTIVE SUMMARY.....................................................................................................................1 VI. CASE ANALYSIS.................................................................................................................................1 THE OLD SYSTEM AND ITS EFFECTS...........................................................................................................1 BENEFITS OF PRIVATIZATION AND PRIVATE SECTOR.................................................................................2 THE ADAPTATION OF POLISH PEOPLE TO THE NEW SYSTEM......................................................................3 THE RESULT OF RAPID REFORM PROGRAMS...............................................................................................4 RELATIONSHIP BETWEEN DEMOCRATIC POLITICAL SYSTEM AND ECONOMY...........................................5 RECOMMENDATION....................................................................................................................................6 VII. BIBLIOGRAPHY................................................................................................................................7 VIII. APPENDIX 1: POLAND TODAY....................................................................................................6 I. INTRODUCTION....................................................................................................................................1 II. SUMMARY OF THE CASE.................................................................................................................1 LOGIC OF AIRLINE ALLIANCE....................................................................................................................1 SIA'S ALLIANCE STRATEGY.......................................................................................................................1 THE STAR ALLIANCE ATTRACTION...........................................................................................................2 III. SHOULD SIA JOIN THE LUFTHANSA-LED STAR ALLIANCE...............................................2 ADVANTAGES OF JOINING STAR ALLIANCE...............................................................................................2

Case Singapore Airline Alliance: A Star attraction:

DISADVANTAGES OF JOINING STAR ALLIANCE..........................................................................................3 IV. BENEFITS OF FORMING STRATEGIC ALLIANCES FOR AIRLINES AND THEIR CUSTOMERS..............................................................................................................................................3 BENEFIT TO AIRLINES................................................................................................................................3 BENEFITS TO CUSTOMERS..........................................................................................................................4 V. REASONS WHY SIA DISSOLVED ITS ALLIANCE WITH SWISSAIR AND FORGED A NEW ALLIANCE WITH LUFTHANSA..................................................................................................4 VI. STRATEGIC AND OPERATIONS CONSIDERATION FOR SIA JOINING THE STAR ALLIANCE AND REASONS WHY SIA RELUCTANT TO JOIN.......................................................5 VII. ARE STRATEGIC ALLIANCES BETTER THAN ACQUISITIONS AS AN INTERNATIONAL BUSINESS.................................................................................................................6 VIII. CONCLUSIONS.................................................................................................................................7 IX. BIBLIOGRAPHY..................................................................................................................................7 X. BRIEF OF THE CASE...........................................................................................................................5 XI. ANALYSIS OF THE CASE.................................................................................................................6 XII. CONCLUSION..................................................................................................................................11 XIII. SUPPLEMENTARY DOCUMENT...............................................................................................11 TRADE AND ECONOMIC PROFILE FOR CHINA............................................................................11 Country Information: .........................................................................................................................11 Political Environment: .......................................................................................................................12 Economic Environment: ....................................................................................................................13 FOREIGN TRADE BARRIERS .....................................................................................................................15 People's Republic Of China ...............................................................................................................15 Import Policies ...................................................................................................................................15 Tariffs and Taxes ...............................................................................................................................15 Nontariff Measures ............................................................................................................................18 Transparency .....................................................................................................................................20 Trading Rights and Other Restrictions ..............................................................................................20 Import Substitution Policies ...............................................................................................................21 Government Procurement ..................................................................................................................24

Case Singapore Airline Alliance: A Star attraction:

10

Export Subsidies ................................................................................................................................26 Services Barriers ................................................................................................................................29 XIV. BIBLIOGRAPHY.............................................................................................................................33 XV. PRESENTATION SLIDES...............................................................................................................33

10

Case Singapore Airline Alliance: A Star attraction:

I.

Introduction

Joining alliance has been considered a good way to go international. It provides many benefits for individual firms as well as for customers. However, joining alliance is not a cure-all for every firm. It also has drawbacks. This case study is exemplifies how a firm and its customers can benefit from alliance. In addition, we also discuss disadvantages of joining an alliance, strategic and operational considerations for joining the alliance, and how strategic alliances are better than acquisitions.

II.

Summary of the Case

SIA began its history in May 1947. Over a period of half a century, SIA has earned a reputation as an innovative market leader, combining a quality product with excellent service. Today, SIA is internationally recognized as one of the worlds leading carriers.

Logic of Airline Alliance


Up to May 1996, there had been 389 airline alliances, 16% of these were equity. The nature of alliance relationships ranged from code sharing arrangements to full-fledged cooperation and complete mergers of ground service and frequent flyer programs. The motivation of joining airline alliance depended on the advantages partners wished to obtain from their cooperation both from an airline service provider and passenger points of view.

SIA's Alliance Strategy


In 1989, SIA entered into Global Excellence Alliance with Delta Airline and Swiss Air to form a global network spanning 300 hundred cities in more than 80 countries. The Alliance enabled it to effectively service a variety of destinations both in US and Europe. However, after the formation, all three partners also tied up with other airlines, including competitors.

Case Singapore Airline Alliance: A Star attraction:

The Star Alliance Attraction


In November 1997 SIA dissolved its alliance with Swissair and Delta Airline and tied up with Lufthansa in a bilateral alliance. The Star Alliance established in 1997, made up of Lufthansa, Thai Airways, United Airlines, Air Canada, Scandinavias SAS and Varig of Brazil. Joining the Star Alliance would extend SIAs market reach and help it to cut cost, provide a competitive safety net against potential alliance. However, SIA need concern about the transaction cost in negotiating and maintaining multiple alliance.

III.

Should SIA join the Lufthansa-led Star Alliance

Many firms that compete globally see strategic alliances as an important component of their strategy. Though collaboration between competitors has become fashionable thanks to a lot of advantages, strategic alliances have its own disadvantages. This is probably true for SIAs strategic alliance. Therefore, perhaps the best way to decide whether to join the Star Alliance or not is to analyze the advantages and disadvantages of joining this Alliance.

Advantages of Joining Star Alliance


SIA can get a lot of advantages from joining Star Alliance. First, Star Alliance provided SIA with opportunities to expand its market to Frankfurt, Thailand, USA, Canada, Scandinavia and Brazil. This market is much larger than the market SIA can gain through its bilateral alliance with Swissair. Second, joining the Star Alliance would not only extend SIAs global market reach and help it to cut costs by pooling resources with partner airlines, but also provide it with a competitive safety net against other alliances that may be formed in the future. Finally, SIAs customers would also benefit being part of the Star Alliance network in the form of lounge privileges, better scheduling, convenient ticket purchase, check-in and boarding, improved access to affordable shares and improved customer service.

Case Singapore Airline Alliance: A Star attraction:

Disadvantages of joining Star Alliance


Despite benefits of being part of a global alliance, SIA needed to be concerned about the transaction costs in negotiating and maintaining multiple alliances, schedule coordination and operational problems, and the cannibalization of business on certain sectors, for example those served by SIA and Thai airways in Asia. As the advantages of joining Star Alliance outweigh disadvantages, the SIA airlines should join Star Alliance. And in Tokyo, 15 October 1999, SIA Airlines announced that it would become a member of the Star Alliance in the spring of the year 2000.

IV.

Benefits of Forming Strategic Alliances for Airlines and their Customers

Benefit to Airlines
Forming strategic alliances brings significant benefits for airlines. First, alliance facilitates airlines entry into new market. Their flights no longer limit to a number of airports but enter into new ones of the partners as long as the flight schedules are coordinated. Opening market not only provides benefit for airlines, but also increases the airlines reputation. The second benefit is cost savings which are realized primarily from the capitalintensive services such as the sharing of ground services including baggage handling, check-in, and business lounges. Other operational cost savings could be realized with partner airlines spacing providing each other maintenance, catering services and exchange of personnel in times of need. Third, through joint purchasing agreement, the alliances bargaining power with suppliers would be increase. Suppliers now have to serve better to keep a big customer. Finally, forming alliance brings together complementary skills and assets that neither airlines could easily develop on its own. In operation integration, each airlines realizes its own service weakness by comparing to partners, and thereby improving their service to increase its competitive advantage.

Case Singapore Airline Alliance: A Star attraction:

Benefits to Customers
Not only does airlines benefit from forming alliance but also customers. Benefit to passengers include the ability to travel to a greater number and variety of destinations in a seamless manner on one ticket with convenient connecting flights through harmonization of partner airlines schedules. Additionally, the integration of frequent flier programs and benefits enabled passengers to redeem awards on any of the partners flights. Finally, often customers are better served and could pay a lower price.

V.

Reasons Why SIA Dissolved its Alliance with Swissair and Forged a New Alliance with Lufthansa

Although SIA and Delta Airlines and Swissair have formed an alliance so-called Global Excellence Alliance for 8 years, this relationship did not provide benefit for SIA. When entering this trilateral alliance, SIA expected that it would have effective service of a greater number of destinations both in US and Europe. However, after the formation of the Global Excellence Alliance, all three partners also tied up with other airlines including competitors, in stead of sharing a closely bilateral relationship. This does not only reduce benefits of the member airlines but also increase the threat of losing confident information. Besides, SIA seeks to cooperate with many airlines in multi-activities, e.g. with British Airways, KLM and Lufthansa in cargo services, with SAS in marketing of all cargoservices, with Malaysia Airlines and Cathay Pacific in running a viable frequent flier program to share the high cost and administrative overhead. In other words, these alliances bring many benefits to SIA. Obviously, forming alliances with other partners seem to be more profitable for SIA than with Swissair. Lufthansa is not an exception. Since Lufthansa already had a cargo and maintenance division in Singapore, forming alliance with Lufthansa is promising. On one hand, it can strengthen the Singapore-Frankfurt route as the premier trunk between Europe and Southeast Asia. On the other hand, it can lead to code sharing on flights on the Singapore-Frankfurt route and on services beyond both hubs, joint frequent flyer programs and benefits, access to both carriers airport lounges for

Case Singapore Airline Alliance: A Star attraction:

qualified members, ticketing and service assistance worldwide at offices of both airlines, and improved siting of airport facilities in both Frankfurt and Singapore to reduce transit times. For such reasons, SIA dissolved its alliance with Swissair.

VI.

Strategic and Operations Consideration for SIA Joining the Star Alliance and Reasons Why SIA Reluctant to Join

Though joining alliance ban bring about many advantages, some issues should be considered before making decisions on joining alliance as partners need to make a variety of changes in their organization, strategies, and operations. First, to benefit from joining purchasing agreements, the equipment bought by the partners (e.g., airplane type, cockpit design, inflight systems, etc.) have to be similar. Second, partners have to be better coordinate their flight schedules to extend their reach effectively. Third, each partner should consider the likelihood of success because there is no guarantee of commercial success for airlines that enter into these alliances. Fourth, partners need to be concerned about the transaction costs in negotiating and maintaining multiple alliances, schedule coordination and operational problems, and the cannibalization of business on certain sectors. Finally, the lack of consistency in service delivery of any of the Star Alliance members could have a negative effect on SIAs strong brand positioning. All of these considerations explain why SIA was reluctant to join Star Alliance at that time. The transaction costs in negotiating and maintaining multiple alliances were much higher than entering a bilateral alliance. Moreover, schedule coordination and other operational problems were much more complicated. There costs and disadvantages outweighted the benefits that SIA can gain through this bigger alliance, leading to SIAs reluctance to join Star Alliance.

Case Singapore Airline Alliance: A Star attraction:

VII.

Are Strategic Alliances Better Than Acquisitions as an International Business

Strategic alliances refer to cooperative agreements between potential or actual competitors. Strategic alliances are better than acquisitions in following aspects Ability to access to new markets and technologies: an example of this advantage is that the South-Pacific alliance combined fleet of 223 aircraft, enlarged network of airline partners covering 200 cities in 47 countries. It also introduced new around the world, around the Pacific, and around the Asia travel packages. Efficiencies promoted by flexibility and informality: an alliance can be put together in no time and fold it up just as quickly; love affairs instead of marriages. Ability to create and disband project with minimum paperwork: Many alliances entail little in any paperwork maybe only handshake, so it is very speed and economy. Multiple parties share risks and expenses: As project become ever larger and more complex, strategic alliance allows partners to share the fixed cost (and associated risk) of research and development, additionally cost saving achieved through economies of scale. Partners can retail their independent brand identification: Working with partners possessing multiple skills can create major synergies. Strategic alliances is a way to bring together complementary skills and assets and to trade core competencies that neither company could easily develop on its own .Both sides believe there is an equitable chance for gain. Rivals can often work harmoniously together: Firms ally themselves with actual or potential competitors for various strategic purposes. I m fighting with you over what the rules of the game will be but in the mean time I will be happy to work with you to play today s game as best we can. Alliances can take multifarious forms, from simple R&D deals to huge projects Ventures can accommodate dozens of participants Antitrust law can shelter cooperative R&D activities

Case Singapore Airline Alliance: A Star attraction:

Help the firm establish technological standards for the industry that will benefit the firms: Since the two technologies do very similar things, there is probably room for only one new standard. The technology that becomes new standard will be the one that succeeds. Alliance is a tactic for winning the race.

VIII.

Conclusions

Through this case of Singapore Alliance, we can see that alliance can bring many benefits to both individual firm and customers. However, in order to take advantages from airline alliance, each airline must be viable, competitive and efficient. Putting two weak airlines into an alliance is not going to help. This contributes to explain why the failure rate for international strategic alliances seems to be quite high. Therefore, strategic and operational considerations are needed before making decision of joining alliance. Finally, firms should join alliance only when it when the benefits and advantages of joining the alliance outweigh its costs and disadvantages.

IX.

Bibliography

1. Debra Sparks, 1999, 'Partners', Business Week, October 25, p. 74 2. Hill, Charles W. L., 1998, Global Business Today, Mc Graw Hill.
3.

About SIA, Available: http://www.singaporeair.com [2000, March 13]

4. Star Alliance, Available: http://www.star-alliance.com [2000, March 13]

Case Singapore Airline Alliance: A Star attraction:

SAV
Swiss-AIT-Vietnam Management Development Programme
c/o HCMC c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: SAV@netnam2.org.vn / swissait@hotmail.com

SDC

COURSE:

INTERNATIONAL BUSINESS MANAGEMENT

INSTRUCTOR: DR. GODWIN NAIR


CASE STUDY

DOING BUSINESS IN THE PEOPLE'S REPUBLIC OF CHINA

HOCHIMINH CITY - 2000

Case Singapore Airline Alliance: A Star attraction:

TABLE OF CONTENTS

I. THE LIKELINESS AND DIFFERENCE IN JAPANESE AND AMERICAN CAR COMPANIES EXPORTING STRATEGIES..........................................................................................9 LIKELINESS..............................................................................................................................................9 II. THE APPROACHES OF JAPANESE AND AMERICAN CAR COMPANIES TO ADAPT THEIR MARKETING MIXES TO FOREIGN MARKETS:...............................................................10 III. WHAT MARKET ATTRIBUTES SHOULD FORD BE AWARE OF AS IT STEPS UP ITS EFFORT IN THE JAPANESE MARKET?............................................................................................11 IV. WHAT MARKETING RECOMMENDATIONS WOULD YOU MAKE TO FORD TO HELP IT BE SUCCESSFUL IN THE JAPANESE MARKET?......................................................................12 Conclusion..........................................................................................................................................13 V. EXECUTIVE SUMMARY.....................................................................................................................1 VI. CASE ANALYSIS.................................................................................................................................1 THE OLD SYSTEM AND ITS EFFECTS...........................................................................................................1 BENEFITS OF PRIVATIZATION AND PRIVATE SECTOR.................................................................................2 THE ADAPTATION OF POLISH PEOPLE TO THE NEW SYSTEM......................................................................3 THE RESULT OF RAPID REFORM PROGRAMS...............................................................................................4 RELATIONSHIP BETWEEN DEMOCRATIC POLITICAL SYSTEM AND ECONOMY...........................................5 RECOMMENDATION....................................................................................................................................6 VII. BIBLIOGRAPHY................................................................................................................................7 VIII. APPENDIX 1: POLAND TODAY....................................................................................................6 I. INTRODUCTION....................................................................................................................................1 II. SUMMARY OF THE CASE.................................................................................................................1 LOGIC OF AIRLINE ALLIANCE....................................................................................................................1 SIA'S ALLIANCE STRATEGY.......................................................................................................................1 THE STAR ALLIANCE ATTRACTION...........................................................................................................2

Case Singapore Airline Alliance: A Star attraction:

III. SHOULD SIA JOIN THE LUFTHANSA-LED STAR ALLIANCE...............................................2 ADVANTAGES OF JOINING STAR ALLIANCE...............................................................................................2 DISADVANTAGES OF JOINING STAR ALLIANCE..........................................................................................3 IV. BENEFITS OF FORMING STRATEGIC ALLIANCES FOR AIRLINES AND THEIR CUSTOMERS..............................................................................................................................................3 BENEFIT TO AIRLINES................................................................................................................................3 BENEFITS TO CUSTOMERS..........................................................................................................................4 V. REASONS WHY SIA DISSOLVED ITS ALLIANCE WITH SWISSAIR AND FORGED A NEW ALLIANCE WITH LUFTHANSA..................................................................................................4 VI. STRATEGIC AND OPERATIONS CONSIDERATION FOR SIA JOINING THE STAR ALLIANCE AND REASONS WHY SIA RELUCTANT TO JOIN.......................................................5 VII. ARE STRATEGIC ALLIANCES BETTER THAN ACQUISITIONS AS AN INTERNATIONAL BUSINESS.................................................................................................................6 VIII. CONCLUSIONS.................................................................................................................................7 IX. BIBLIOGRAPHY..................................................................................................................................7 X. BRIEF OF THE CASE...........................................................................................................................5 XI. ANALYSIS OF THE CASE.................................................................................................................6 XII. CONCLUSION..................................................................................................................................11 XIII. SUPPLEMENTARY DOCUMENT...............................................................................................11 TRADE AND ECONOMIC PROFILE FOR CHINA............................................................................11 Country Information: .........................................................................................................................11 Political Environment: .......................................................................................................................12 Economic Environment: ....................................................................................................................13 FOREIGN TRADE BARRIERS .....................................................................................................................15 People's Republic Of China ...............................................................................................................15 Import Policies ...................................................................................................................................15 Tariffs and Taxes ...............................................................................................................................15 Nontariff Measures ............................................................................................................................18 Transparency .....................................................................................................................................20 Trading Rights and Other Restrictions ..............................................................................................20

Case Singapore Airline Alliance: A Star attraction:

Import Substitution Policies ...............................................................................................................21 Government Procurement ..................................................................................................................24 Export Subsidies ................................................................................................................................26 Services Barriers ................................................................................................................................29 XIV. BIBLIOGRAPHY.............................................................................................................................33 XV. PRESENTATION SLIDES...............................................................................................................33

Doing business in the People Republic of China

X. Brief of the case


Seneca, a small US steel company, was set up in 1974. It was 3 miles away from its supplier, which is a larger mill. For the first 5 years, Seneca operated profitably. It bought hot-rolled steel bars from the larger mill and then created cold-drawn products with customized specifications. Seneca was able to meet customers fluctuating delivery and specification requirements. After 1980, competition increased and thus drove many of Senecas customers out of business. The supplier was also forced to reduce production. As a result, Seneca had to buy raw steel from mills 500 miles away. The costs went up while its ability to meet customers requirements decreased. Facing difficulties in the domestic market, Seneca saw an opportunity of doing business in China. This is a potential market with a great deal of resources. The policy of open door was also being applied in China. To enter this market, Seneca must transfer technology to China. Seneca identified some alternatives: Compensation-trading: Seneca would sell production lines of small-sized products, which are now obsolete in the US, to China, then buy back finished products and resell to US customers. Processing-and-assembling trade: Seneca would acquire raw materials from Pacific Rim Countries, send to Chinese partners for cold-drawing and then resells finished products to US customers. Establishing a joint venture: Chinese partner would supply hot-rolled bars to Seneca for making cold-drawing steels. The J.V could also serve the Chinese market. Wholly foreign-owned enterprise: Seneca could set up its own business in China. Seneca need to consider some constraints before making such an important decision: foreign exchange, labor practices, legal aspect, and relationship with Chinese partners, and location.

Doing business in the People Republic of China

XI.

Analysis of the case

We now understand the situation facing Seneca. The increased competition in the domestic US market and therefore the diminishing market share were major pressures which forced the company to look for a new direction of investment. Meanwhile, China was realized as a promising market. Lets now take a look at Chinas investment environment in more details to see how attractive this Asian land is to Seneca. We are to talk about a stable and reliable political environment of China. The President Jang Zemin has been embracing his policy of transforming Chinas economy into a Western-style market system while maintaining the Soviet-Union rule, which is known as totalitarianism. Unlike its former socialism friends in Europe, typically Soviet Union and Czech & Slovakia which have not been able yet to get rid of chaos and conflicts, the political framework of China is still rigid and rather stable under the Communist Party unique control. The picture of the economic environment in China is also bright and promising. Since 1979, its former centrally planned economy has been moved to one that is more market-oriented. In recent years, China has recognized as one of the fastest growing economies in the world. The GDP has grown at least 10% annually. In 1998 alone, per capita GDP of China reached $2,800. With a huge population of more than 1.2 billion, China is really a great potential market with high demand and purchasing power. In addition, Chinas open-door policy implemented since 1979 has seemed to be effective in encouraging foreigners to make investment in the country. Despite the Asian financial crisis, Chinas economy was much more resilient than others nations in the region. Rapid growth will likely continue but at a declined rate, of course. One turning point of Chinas economy is its joining into the 135-nation World Trade Organization (WTO) in a couple of years. This is really an advantage for foreign companies like Seneca, since they would be given the right to trade and invest in China with higher self-confidence. In fact, preferential policies, for instant tax exemption, have been applied step by step to encourage foreign investment in western and central China. Its attempts to improve the cooperation relationship with foreign partners, especially with U.S companies, are motivators for foreign investment to be significantly promoted.

Doing business in the People Republic of China

We come back to our case of Seneca. Along with more friendly policies issued by the Chinese government, Seneca, if investing directly, could gain preferential treatment because steel is one of strategically important industries in the country. The country has still to import this kind of commodity, mainly from U.S. We have discussed opportunities as well as motives for foreign companies in general, and Seneca in particular, to enter the new market of China. In fact, however, opportunities are always accompanied by challenges. There are many other things involving political, economic, legal framework, and cultural aspects we, as investors, need to take into consideration before making decision. Political environment and legal framework

Although China has recorded achievements in transforming its political and economic system into a Western-style market, the operational structure is still much conservative. Regulations and laws are arbitrarily applied. Moreover, the lack of transparency in administrative procedures is also a constraint for any investor. Therefore, key contacts should be established by foreign firms in advance to ensure their active position in negotiations. Economic environment

Apart from significantly meaningful open-door policies, the Chinas economic environment has also revealed challenges for foreign investors. In China, anti-competitive practices, such as provisions of subsidies and authority to fix prices and allocate contracts to domestic industrial conglomerates, were created in order to improve the profitability of State-owned enterprises. As a result, such monopolistic practices may restrict market opportunities for foreign enterprises. The lack of uniformity in standards on goods is also one thing that needs to be paid attention. With the highly personalized nature of business, actually, China adopts unique standards that differ from international standards. Particularly, for manufactured goods, a quality license is required before the goods can be imported to China. Meanwhile, obtaining quality licenses is time-consuming and expensive. Labor practices in China are also an important issue since hiring is rather complicated. Although many U.S. companies are allowed to hire and fire based on demand and performance and pay wages according to market rates, they are still required to hire,

Doing business in the People Republic of China

recruit or register all local labors through state labor service agencies which collect large monthly fees for each employee hired. This means the cheap Chinese labor is not cheap at all. Location is another factor that can affect the result of business in China, due to big differences among areas in terms of not only population and infrastructure but also supporting services and investment rules. The last, not the least but may be the most, important issue involving foreign investment in China is foreign exchange. Since the Chinese People' currency (Yuan) has no value on international currency market, foreigners prefer payment in US dollar or some stronger currencies. However, the Government of China places tight control over foreign currencies, which are usually used for important strategic purposes. Therefore, in order to avoid contradictions and be also profitable, foreign investors should be well prepared for negotiations on terms of payments before signing contracts. Cultural environment

Talking about doing business in the Chinese market, there is a valuable advice that we should understand the countrys cultural characteristics. Guanxi, i.e. relationships and influences, is very important in China. When conducting business in China, if you have right connections and you know the right people, business organizations risks, frustrations, and disappointments are more likely to be minimized. Building reputation for trustworthiness and dependability is also an essential factor contributing to success in doing business in this vast market. Additionally, nationalism is also such a typical characteristic of the Chinese that should not be ignored when examining the willingness of local customers to purchase the product. So far, we have analyzed both opportunities and challenges for foreign enterprises, including Seneca, in making investment in China. It is now the time for us to give suggestions to Seneca managers on which alternative (among the above four) to be chosen. For a persuasive conclusion we had better compare advantages as well as disadvantages among these alternatives, based on four criteria: expected return, cost, level of risk, and level of control. If Seneca decides in favor one of the first two alternatives, i.e. compensation trading or processing-and-assembling, it will lose an opportunity to access, with its own products,

Doing business in the People Republic of China

the huge and potential market of China. When finished steels produced by Chinese firms then are exported back to the U.S. by Seneca, the company may suffer difficulties in foreign exchange and complexities in procedures. Significant transportation costs will make the price higher, adversely affecting the sales and profits. Because cold-drawn steels are produced in China, they may not successfully meet U.S. customers specification and delivery requirements, which usually change. It means the cost for collecting sufficient information will not be minor. In addition, in the long run, potential competition is very much likely when Chinese firms have already become masters in manufacturing both hot-rolled and cold-drawing steels. Moreover, with advantages of available cheap raw materials and labor, they can export directly to the U.S. market at lower price. Obviously, with these two solutions, risks seem to be low since Seneca can avoid local ownership problems. It will be able to enter the Chinese market without suffering high costs of establishing own production facilities of steel. However, it has to suffer costs for information, marketing, transportation, and for other transactions. Most importantly, expected return is uncertain for Seneca, especially when it has little control over operation and therefore the quality of the product. The problem of such uncertainties is likely to be secured by another alternative, i.e. setting up a wholly foreign-owned enterprise. As a wholly owned enterprise, Seneca will have full control over its operation. It is able not only to protect technology but to maximize return on investment (if profitable) as well. However, a range of other risks is more likely to arise. The wholly owned enterprise requires greatest degree of commitment. It will take Seneca long time to earn profit due to the very high initial costs. The company has also to bear the risks of chaos in the bilateral (U.S.-China) socio-economic and political environment. As mentioned in the previous part, restrictive investment laws, lack of transparency in administrative procedures as well as discrimination in China all will become great constraints for Seneca and any other foreign investors. Here foreign firms are not given the right to own and manage distribution networks, wholesaling outlets, or warehouses. In stead, they are required to use State-owned companies to distribute their goods.

Doing business in the People Republic of China

10

Such restrictions, fortunately, still have exception in case of collaboration between the foreign firm with a Chinese partner. It seems that we are now in the right direction towards the alternative of setting up a joint venture. Operating in a joint venture, Seneca could benefit from the local partners knowledge of Chinas competitive conditions, culture, language, political systems, and business systems. As a result, Seneca could have quick access to the new market with available resources. Unlike compensation trading and processing-assembling, potential competition can be avoided if Seneca joins such a venture. While the U.S party provides technological know-how, the local firm provides its marketing expertise. Seneca could also avoid local tariffs and non-tariffs barriers. The costs and even the risk can also be shared with the Chinese partner. Particularly, Seneca could gain benefits from Government preferences when the local partner has ability to influence the host Governments policies. We all know that steel production has been always considered a strategic important industry in China. Setting up a J.V does not ensure 100% success at the beginning, however. Since ownership as well as control of operation and technology is shared with the local partner, conflicts may still unavoidable. Therefore, a comprehensive agreement should be prepared by Seneca and approved by the other party. In the future continuous efforts should be made to ensure and push up the sustainable investment of Seneca in China. In short, in our points of view, establishing a joint venture is a reasonable choice for Seneca.

Doing business in the People Republic of China

11

XII.

Conclusion

From the open door policy up to now, China has made a steady progress in its economic reform. The progression can be illustrated by some economic indicators such as annual economic growth of about 9%, international reserves of $ 150 billion, GDP per capita 2,800 US in 1998. The above fruits of China have derived from many factors such as open-door policy, favorable rules and regulations for foreign investment, and strategic industry development. Apart from that, China government has recently focused on some important issues such as: enforcement of anti-corruption laws, encouragement of foreign investment, reduced tax rates, less government expenditures, low inflation rate, financial liberalization, enforcement of financial regulations, fewer restriction on imported goods, low interest rate. These have significantly contributed to the success of China. China has been and will be a good, stable and promising environment for foreign investors. So the ideas of American entrepreneurs of investing in China are obvious. Especially, when the Sino-US relationship is being enhanced. That is why it is advisable for Seneca to invest in China in term of joint venture so as to maximize its benefits of investing in China.

XIII.

Supplementary document

Last Updated: 3/14/2000

TRADE AND ECONOMIC PROFILE FOR CHINA Contents: Country Information | Political Environment | Economic Environment

Country Information:
Type of government: Communist party-led state. Administrative divisions: There are 23 provinces in China. China considers Taiwan to be its 23rd province. There are also 5 autonomous regions and 4 municipalities. Executive branch: The Chief of State is the President. There is also a Vice President.

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The term of office of the President and Vice President is five years; no more than two five-year terms can be served consecutively. The National Peoples Congress elects the President and Vice President for five-year terms. The Head of Government is the Premier. There are also several Vice-Premiers. The Premier and Vice-Premiers are nominated by the president, and confirmed by the National People's Congress. State Council: The State Council is the executive body of the Chinese government -the Chinese government's Cabinet. Legislative branch: China has a unicameral legislature called the National People's Congress (2,977 seats). Members are indirectly elected and represent China's 30 provinces, autonomous regions and municipalities. They serve five-year terms. When the Congress is not in session, its permanent organ, the Standing Committee, exercises state power. Judicial system: The Supreme People's Court is the highest judicial body in China. Population: 1,246,871,951 (July 1999 est.) Language: Standard Chinese or Mandarin (Putonghua, based on the Beijing dialect), Yue (Cantonese), Wu (Shanghaiese), Minbei (Fuzhou), Minnan (HokkienTaiwanese),Xiang, Gan, Hakka dialects. Make-up of population: Han Chinese 91.9%, Zhuang, Uygur, Hui, Yi, Tibetan, Miao, Manchu, Mongol, Buyi, Korean, and other nationalities 8.1% Currency: Yuan GDP: $4.42 trillion (1998 est.) Per capita GDP: $2,800 (1998 est.)

Political Environment:
Following the death of Deng Xiaoping in 1997 the President of China, Jiang Zemin, consolidated his position as the preeminent political figure in the country. President Jiang has continued his mentor's policy of transforming China's economy into a

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Western-style market system while maintaining Soviet-model rule. The September 1997 15th Party Congress of the Chinese Communist Party (CCP) set the stage for further economic reforms under President Jiangs secured leadership. The Chinese government began to crack down on spiritual movements such as the Falun Gong and others and have portrayed these groups as a public menace. China banned the Falun Gong in July 1999 and have started to move against a meditationexercise sect called Zhong Gong. Chinese authorities have called the groups "evil cults".The popularity and organizational flair of such groups have alarmed Chinese leaders who fear they might undermine Communist Party rule.

Economic Environment:
China has in recent years boasted one of the fastest growing economies in the world. Since 1978 the Chinese leadership has been trying to move the economy from a sluggish centrally planned economy to one that is more market-oriented but still within a rigid political framework of Communist Party control. The result has been a quadrupling of GDP since 1978. Coastal areas near Hong Kong and across Taiwan have especially benefited from foreign investment. China faces several long-term threats to its economic performance. Population control programs have been weakened and must be strengthened in order to maintain growth in living standards. The deterioration in the environment, notably air pollution, soil erosion, and the steady fall of the water table especially in the north. In addition, as many as 150 million Chinese may be unemployed. Furthermore, China has not been spared from the economic turmoil that has hit Asia. There has been little or no increase this year in private domestic investment. Domestic demand is still weak and Chinas banks are in bad shape. Also, China's exports and imports have slowed. Weak demand from neighboring Asian countries and regional currency depreciation has affected China's export growth. Despite the Asian Economic Crisis, Chinas economy was much more resilient than other economies in the region. Chinas economy slowed but it did not collapsed like it

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did in other parts of Asia. Rapid economic growth will likely continue but at a declining rate. Bringing free markets to the sprawling, inefficient state sector is the remaining major unfinished task in China's 20-year reform drive. Although state firms now account for less than half the goods and services in China, they dominate strategic sectors and employ the bulk of the urban work force. Finally, China has been trying to join the World Trade Organization (WTO) for the past 13-years. The United States and China signed a bilateral trade agreement on November 15, 1999, in Beijing. The agreement with the U.S. overcomes the largest obstacle in China's quest for WTO membership. China has to still strike bilateral agreements with the European Union and four other countries before the WTO will formally consider China's petition for membership. Additionally, the U.S. Congress has to approve this trade agreement. In this agreement China says it will lower barriers on American products, the United States, in turn, will agree to support China's 13-year quest to become a member of the 135-nation World Trade Organization, the Genevabased organization that sets the rules for world trade.

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Foreign Trade Barriers People's Republic Of China


The 1998 U.S. trade deficit with China reached $56.9 billion, an increase in the deficit of $7.2 billion from 1997. U.S. exports to China in 1998 totaled $14.3 billion, representing an increase of more than 11 percent from the previous year, making China the 12th largest U.S. export market. U.S. imports increased by $8.6 billion to $71.2 billion in 1998. In 1997, U.S. foreign direct investment (FDI) in China was $5 billion, primarily concentrated in the manufacturing, energy, and financial sectors. U.S. actual and contractual foreign direct investment in China for 1998 stood at USD 3.2 billion and USD 5.1 billion respectively, matching 1997 levels. U.S. FDI in China again has been concentrated largely in the manufacturing and petroleum sectors.

Import Policies
China restricts imports through a variety of means, including high tariffs and taxes, nontariff measures, limitations on which enterprises can import, and other barriers. For example: China has used prohibitively high tariffs -- which in late 1998 still reached over 100 percent on some motor vehicles -- in combination with other import restrictions and foreign exchange controls to protect its domestic industry and restrict imports. These high nominal tariff rates -- to which China adds applicable value-added taxes and, on some goods, consumption taxes -- contribute to inefficiencies in China's economy and pose a major barrier to U.S. commercial opportunities. While China has generally met the requirements of the 1992 market access memorandum of understanding (MOU) to remove various explicit nontariff barriers, such as quotas and licensing requirements, China still maintains a large number of nontariff administrative controls to implement its trade and industrial policies.

Tariffs and Taxes


Until the mid-1990s, China's tariffs were often high enough to preclude most imports. In 1996, China lowered its average import tariff from 42.1 percent to 23 percent, and

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on October 1, 1997, further lowered the average import tariff to 17 percent. On January 6, 1999, the Minister of Finance announced that there would be further tariff cuts for 1,014 products in the forestry, textile and toy sectors retroactively effective January 1. Despite these reductions, U.S. industry continues to express concern that tariff rates for sectors in which China is seeking to build its international competitiveness, such as chemicals and motor vehicles, remain extremely high. In the 1996 and 1997 tariff reductions, the largest cuts were reserved for products that are imported in small volumes. According to China Customs trade data, China's total imports in 1997 decreased 1.23 percent, while imports from the United States increased 4.35 percent. For 1998, total imports dropped to USD 144.4 billion, while imports from the United States as measured by China Customs increased 1.5 percent for the same period. In addition to high tariff rates, unpredictable application of those rates creates difficulties for companies trying to export to, or import into, the Chinese market. Tariffs may vary for the same product, depending on whether the product is eligible for an exemption from the published NTR tariff. Tariffs may also vary depending on the geographical point of entry. Also, local tariffs may be applied to imports even after the importer paid the national tariff at the port. High-technology items whose purchase is incorporated into state plans, for instance, have been imported at tariff rates significantly lower than the published NTR rate. China implemented a new import tariff-exemption plan for some goods under revised investment guidelines on January 1, 1998. The Plan is designed to increase investment in high-tech manufacturing by domestic and foreign firms. China's Customs General Administration (Customs) has also granted preferential tariff rates through special exemptions or more informal means. For example, in notices issued on July 10, 1997, China Customs granted 20 percent import duty rates to two Chinese automobile manufacturers for their imports of certain automobile parts. The Notices cited domestic content exceeding 80 percent in sedans manufactured by the two automobile manufacturers as the basis for granting preferential import duties on parts imported by the two manufacturers. China's 1998 import tariff schedule shows automotive part duties ranging as high as 50 percent on parts from MFN trading partners.

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U.S. and other foreign businesses selling goods into China also complain about the lack of uniformity in customs valuation practices. Different ports of entry may charge significantly different duty rates on the same products. Because there is flexibility at the local level in deciding whether to charge the official rate, actual customs duties, like many taxes, are often the result of negotiation between business persons and Chinese Customs officers. Allegations of corruption often result. In August 1998, Customs launched an ambitious program to standardize regulatory enforcement as part of an anti-smuggling campaign. Early reports indicate that the program has reduced the flexibility of local customs offices to 'negotiate' duties but it is too early to measure the permanent effects of the program on customs enforcement. China has taken steps to reduce tariffs pursuant to its bilateral commitments and to support its WTO accession bid. Many tariff reductions are still under negotiation in the context of WTO discussions with 36 trading partners. U.S. and Chinese negotiators continue to discuss the specific rates to be applied to the many items of export interest to U.S. companies. In addition to tariffs, imports may also be subject to value-added and other taxes. U.S. industry has complained that the current value-added taxing system (VAT) amounts to an added surcharge on both imported goods and domestic products and discourages consumers by raising prices. China's VAT is usually 13 or 17 percent, and China levies that VAT after first imposing the import tariff and applicable consumption tax and incorporating those amounts into the base on which the VAT is applied. Thus, a product subject to a 17 percent import tariff, a 17 percent VAT, and a consumption tax would be taxed ultimately at a rate in excess of 34 percent. Since some domestic and foreign firms are able to avoid the VAT through negotiation, foreign firms which "play by the rules" are at a competitive disadvantage. As a means of stimulating the flagging export sector, the state administration of taxation raised VAT rebates three times in 1998. From January 1, rebate rates on textile exports were increased two percentage points to eleven percent. In June, rebate rates for exports of ships, steel, cement and coal were also raised to eleven percent. InAugust, rebate rates for exports of telecommunications, power generating, agricultural and engineering machinery, automobile parts, bicycles, timepieces, shoes ceramics and lighting equipment were increased from nine to eleven percent, retroactive to July 1.

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The effectiveness of the rebate program has been offset by operational inefficiencies. Exporters complain that it takes several months to obtain the rebates and amounts are often miscalculated. On October 1, 1997, China introduced a sliding duty on newsprint for which the United States has been an important supplier. The sliding duty is sensitive to import prices, and as import prices drop, the duty payable increases to as high as 45 percent for newsprint from NTR trading partners. China's previous ad valorem duty rate on newsprint was 15 percent in 1996. It has been the practice for Chinese buyers to purchase large quantities of newsprint on the international spot market when prices are low. Following a petition filed by domestic newsprint producers, however, the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), working with the State Economic and Trade Commission (SETC), decided to implement the sliding duty. In addition, in late 1997, China launched an antidumping investigation against Canadian, Korean and U.S. newsprint producers. On July 10, 1998, MOFTEC announced a preliminary determination that newsprint from the three countries had been dumped in China at margins of up to 78.93 percent below domestic prices. On an interim basis, importers of newsprint from the three countries must post cash guarantees equal in value to the margin assessed against it. A final determination on the case is expected to be announced early in 1999.

Nontariff Measures
Nontariff barriers to trade are administered at national and subnational levels by the SETC, the State Planning Commission (SPC), and MOFTEC. China's traditional nontariff barriers include import and export licenses, import quotas, and other import controls. The levels of specific nontariff barriers are the result of complex negotiations between the central government and various ministries, state- owned corporations and trading companies. Central government agencies determine the levels of import quotas through data collection and negotiating sessions. Officials at central and local levels evaluate the need for -- or quantitative restrictions on -- particular products for individual projects. Once "demand" is determined, central government agencies allocate quotas that are eventually distributed nationwide to end-users and administered by local branches of

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the central government agencies concerned. China provides little transparency regarding the quantity or value of products to be imported under a quota. MOFTEC uses import licenses to exercise an additional, nation-wide system of control over some imports. Many products are subject both to quotas and also to import licensing requirements. For these products, after permission has been granted by other designated agencies for importation, MOFTEC must decide whether to issue a license. MOFTEC officials claim that import licenses are issued automatically once other agencies have approved an import. China has removed over 1,000 quotas and licenses on a wide range of key U.S. exports such as telecommunications digital switching equipment, computers, many agricultural products, and medical equipment. Despite the removal of these quotas and license requirements, required under the 1992 MOU, there are indications that China is erecting new barriers to restrict imports. During 1998, China drafted new pharmaceutical price control regulations which will restrict profit margins on sales of many pharmaceuticals, issued a requirement that new power plants of less than 600mw use no foreign equipment (though government authorities have insisted that this decision originated with the power companies themselves), imposed a ban the import of diesel and gasoline, and initiated a "buy local" campaign intended to diminish reliance on imports of telecommunications equipment and components. In addition, restrictive trading rights have affected crude oil imports, even though quotas have been removed. China announced in early 1996 that, effective April 1, 1996, tariff-rate quotas (TRQs) would apply to imports of wheat, corn, rice, soybeans, and vegetable oils. By late 1998, China had still not announced TRQ administration rules or quota volumes, perhaps because this issue is being negotiated as part of its WTO accession. Out-ofquota tariff rates are as high as 121.6 percent. A lack of clarity and information complicates trade in these goods. On January 1, 1999, China Customs announced that the number of products requiring export licenses had been cut from 707 to 395, a 44 percent reduction. Products still requiring licenses included mostly raw materials, lethal chemicals and food products. Some manufactured goods -- certain kinds of textiles, electric fans, computers, black and white televisions and bicycles -- are also included.

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Transparency
The 1992 bilateral market access MOU laid the foundation for China to improve significantly the transparency of its trade regime, including the publication of a central repository for all central government trade regulations and publication in the provinces of all trade and investment-related trade regulations. The MOFTEC gazette was established to carry official texts of all trade-related laws and regulations at the national level. The gazette has contributed significantly towards transparency, but it is sometimes incomplete and not always timely. Moreover, it does not feature laws and regulations from other agencies which can have a significant impact on U.S. firms. In addition, the Chinese Government has established several web sites (among which www.cei.gov.cn and www.moftec.com.cn are the most significant) in Chinese and English which carry government news and the texts of newly promulgated laws and regulations. The opaque nature of customs and other government procedures, however, still compromises the important steps taken towards improving transparency in the import approval process, especially for industrial goods.

Trading Rights and Other Restrictions


China restricts the types and numbers of entities that have the legal right to engage in international trade. Only those firms with import trading rights may bring goods into China. In addition, some goods that are of great commercial value to both China and its trading partners, such as grains, cotton, vegetable oils, petroleum and certain related products are imported principally through state trading enterprises. In some cases, specific bureaus or ministries impose informal market access barriers for imports that fall under their jurisdiction. Some agencies require that only a certain group of companies be allowed to import; end users are sometimes required to obtain purchase certificates before they can receive permission to import. As a result, China's real demand for these types of imported products greatly exceeds the supply available through the official system. For example, U.S. industry estimates that, prior to the summer 1998 customs crackdown, only five percent or less of imported distilled spirits entered the Chinese market through official channels. Thus

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a large quasi-illegal "grey market" for products such as spirits, consumer electronics, computer equipment, cigarettes and automobiles grew up around the official system. The growth of the grey market resulted in revenue losses for China due to corruption and smuggling. In the context of its World Trade Organization accession negotiations, China has pledged to liberalize the availability of trading rights, i.e., the right to import, export and have access to China's distribution system, over a three-year period. At the end of that transition period, all foreign and domestic enterprises will have trading rights. U.S. and third-country firms expect that trading rights liberalization will enable them to deal directly with customers and not be forced to go through intermediary companies that have the right to import goods into China. China's restrictive approach to licensing the scope of a business's operations (defining and limiting the types of goods a company can deal in and operations in which a company may engage in China) will also have to be dealt with to ensure that liberalization of trading rights is meaningful.

Import Substitution Policies


Import substitution has been a longstanding Chinese trade policy. Nonetheless, in the 1992 MOU, China stated that it had eliminated all import substitution regulations, guidance, and policies, and that it would not subject any products to import substitution measures in the future. This constituted a commitment, for example, that a Chinese Government agency would no longer deny permission to import a foreign product because a domestic alternative exists. Despite this commitment, in late 1998 the Ministry of Information Industries (MII) issued a circular instructing telecom companies to buy components and equipment from domestic sources. Also in 1998, the Chinese Government announced that power generation facilities of 600 mw or smaller could not use imported equipment. Another example was China's 1994 automotive industrial policy that included import substitution requirements. This policy, designed to foster development of a modern automobile industry in China, explicitly called for production of domestic automobiles and automobile parts as substitutes for imports, and establishes local content requirements, which would force the use of domestic products, whether comparable or not in quality

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or price. China's industrial ministries can have considerable impact on U.S. firms through import substitution policies. In December 1998, the state council released new pharmaceutical pricing regulations, effective January 1, 1999. The regulations discriminate against imported products. Price formulas vary based on whether domestic substitutes exist and receipt of certain benefits (such as exceptions from limits on profits) has been conditioned upon whether a product replaces an import. The United States is consulting with China bilaterally and in the context of its WTO accession negotiations on the elimination of these policies and ensuring that future policies do not contain such provisions.

Standards, testing, labeling and certification


China maintains statutory inspection requirements (conformity assessment procedures) on about 780 imported goods, and an even greater number of items are subject to statutory inspection requirements upon export from China. In addition to these conformity assessment inspections, China also imposes safety licensing requirements on certain products. On January 1, 1999, China imposed mandatory safety inspections for imports of electronic products, including personal computers, monitors, printers, switches, television sets and stereo equipment. This measure further stipulates that as of January 1, 2000, these same products will require an import commodity safety license. In the context of China's WTO accession negotiations, China has identified over one hundred tariff-line items that are subject to safety licensing requirements. Major problems with China's standards system include the lack of transparency, difficulty in determining the appropriate standards, use of different standards on imports from different countries and different standards from domestic goods, and adoption of unique standards that differ from international standards for no identifiable reason. China passed the "import and export commodity inspection law" establishing a separate regime for safety inspections of imported goods on February 2, 1989. The first catalog of nine commodities covered by the law was announced on August 1, 1989, with compliance required as of may 1, 1990. A second catalog of commodities covered

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by the law was announced on August 1, 1995, and contained a list of 38 categories of equipment, the first 20 of which became subject to safety inspection and certification on October 1, 1996. The last 18 of these equipment categories became subject to safety inspection and certification as of October 1, 1997. As noted, U.S. and other foreign traders often encounter difficulty in learning which Chinese standards apply to their goods. Officials of the state administration entry-exit inspection and quarantine (now under the jurisdiction of the Customs Administration) have said that for some goods for which China has not yet developed its own standards, the standards of the country of origin will apply. Therefore, a particular good from the United States may have to meet a different standard at the Chinese point of entry than does the same good taken from the European Union. For manufactured goods, China requires that a quality license be issued before the goods can be imported into China. With a few exceptions, China does not accept U.S. certification of product quality or manufacturing procedures. Obtaining quality licenses to export to China can be time-consuming and expensive. While the inspection and licensing requirements vary according to commodity, U.S. industry considers most to be burdensome and contrary to the principles of the WTO Agreement on Technical Barriers to Trade. The 1992 market access MOU requires that China apply the same standards and testing requirements to nonagricultural products, whether foreign or domestic. The United States and other foreign suppliers have complained, however, that the safety and inspection procedures applied to foreign products are more rigorous than those applied to similar domestically-produced products. Foreign suppliers have also had difficulty in learning exactly how and by whom inspections are conducted. For some types of product inspections, China does not use the same inspection agency for domestic and imported goods. China's phystosanitary and veterinary import quarantine standards are often overly strict, unevenly applied, and not backed up by modern laboratory techniques. An example was China's use of past Mediterranean fruit fly occurences in certain areas as a reason to ban the entry of citrus fruit from all parts of the United States. The Chinese Government also continues to require foreign pesticide producers to submit to costly testing and registration procedures, but does not apply these requirements to domestic

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producers. U.S. companies report that complying with these regulations costs more than USD 5 million per agriculture chemical. China committed in the 1992 Market Access MOU to base its agricultural import standards on "sound science." since 1992, China has made some progress on agricultural sanitary and phytosanitary issues, signing bilateral protocols for several agricultural items, including live horses (September 1994); apples from Washington, Oregon and Idaho (April 1995); ostriches, bovine embryos, swine, and cattle (June 1995); cherries from Washington (March 1996) and grapes from California (may 1997). However, China's sanitary and phytosanitary measures still prohibit imports of U.S. citrus, plums, and pacific northwest wheat. In early 1997, China announced a one-year trial period for imports of meat for the retail market. Under this scheme, China allows meat imports into the general market from selected plants in three countries (Australia, Canada and the United States) during an indefinite 'trial' period which began on June 1, 1997. Only five U.S. plants were approved to export a total of 26,800 MT of beef, pork, turkey and poultry. As of January 1999, no meat had been imported under this project. With a tariff of 45 percent and a VAT of 13 percent, informal importing channels are preferred. Access for meat and poultry from other plants are limited to use in hotels, restaurants and food processing facilities in China. In addition, pork imports face restrictive import licensing requirements: licenses are only issued by the State Administration for Entry-exit Administration and Quarantine (SIQ) in Beijing. The industry estimates that up to USD 400 million worth of U.S. chicken parts made their way to China through Hong Kong in both 1997 and 1998; total U.S. beef, pork and poultry direct exports in China amounted to just over USD 60 million.

Government Procurement
China's government purchasing actions and decisions are subject to China's general laws, regulations and directives. Despite its commitment under the 1992 Market Access MOU to publish all laws and regulations affecting imports and exports, China has not yet published any laws or regulations regarding its government procurement practices. Although one government entity, the national tendering center for machinery

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and electrical appliances, published a tendering guide, procurement procedures are unclear and lack transparency. The State Development and Planning Commission (SDPC) began drafting a national procurement law for China in 1997. The draft law was forwarded to the State Council in late December 1998 and approval is expected in March 1999. Once promulgated, the law will include ten regulations on procurement of goods and services, especially in construction and for the military; scientific research projects; charges for bidding agencies; qualifications for bidding agencies; disputes in procurement procedures; and the establishment and discipline of bid evaluation committees. Like many countries with developing procurement markets, two types of procurement exist in China: procurement funded by the world bank or other international organizations procurement funded by the Chinese Government. For projects using foreign loans provided by international organizations such as the World Bank, a loan condition requires that tendering procedures comply with standards set by the subsidiaries of state-owned trading companies or the state council's national tendering center for machinery and electrical equipment. The Chinese Government seldom uses the same transparent and competitive bidding procedures in procurement it funds. In fact, most of these procurements allow for preferential treatment of domestic suppliers' goods and services. Even when procurements are open to foreign bidders, such suppliers may be discouraged from bidding by the uncertainty of obtaining foreign exchange. Moreover, the Chinese Government routinely seeks to obtain offsets from foreign bidders in the form of local content requirements, technology transfers, investment requirements, counter-trade or other concessions, not required of Chinese firms. In fact, bidding documents, including those for internationally-funded procurement, often express a "preference" for offsets. The problem of official corruption remains widespread as the government continues to call for improved self-discipline and anticorruption efforts at all levels. (Premier Zhu Rongji, in particular, has held the senior leadership charge against corrupt practices.) For procurement contracts decided according to competitive procedures, there is little direct evidence that corrupt practices have influenced awards or result in failure to enforce competitive measures. However, competitive procedures are not followed for the bulk of procurement in China. U.S. suppliers complain that bribery and corruption

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in China puts them at a competitive disadvantage. While this dilemma is less severe in sectors where the united states holds clear technological preeminence or cost advantages, it does undermine the long-term competitiveness of U.S. suppliers in the Chinese market. The growth of the Chinese economy, the proportion of the economy still managed by the State, and the demand for the type of high technology goods and services that the United States provides all suggest that government procurement contracts would offer significant commercial opportunities if current restrictions and non-transparent practices were removed. Sectors of highest demand include infrastructure development (especially energy, petrochemicals, transportation and environmental protection), telecommunications and value-added services, machinery, electrical equipment and precision instruments, and certain agricultural and forest products.

Export Subsidies
The Chinese Government claims that direct financial subsidies on all exports including agricultural goods ended on January 1, 1991. While this may be true for direct budgetary outlays, China continues to use a variety of measures to support and promote exports. For example, Chinese exporters allegedly benefit from preferential loan policies (e.g., access to funds on non-commercial terms), preferential tax policies (e.g. reduced income taxes), and preferential energy and raw material supply policies (e.g., access to freight services and input supplies on non-commercial terms). In December 1998, the People's Insurance Company of China (PICC) announced that it would raise the ceiling on export insurance for many countries that import Chinese commodities. MOFTEC is discussing a proposal to contribute export funds to PICC to cover part of the program, enabling the PICC to slash its fees. In addition, the export and import bank of China in late December contracted to provide the Shanghai Machinery Export and Import Co. Ltd. With export credits worth USD 180.72 million over three years. The contract will give strong support to China's exports of machinery and electronic products. The government also generates exports by imposing export requirements on Chinese foreign trade corporations (FTCs) and foreign-invested enterprises. These requirements tend to make FTCs over export, resulting in systematic financial losses.

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These losses are often covered by state commercial bank loans; the chronic nature of these losses strongly suggests that much of the lending is not on strictly commercial terms. State companies are also subject to constraints that make them export in volumes not consistent with their import costs or other commercial considerations. China is attempting to bring a greater degree of uniformity in the type and amount of taxes and duties imposed on enterprises in China, domestic and foreign- funded alike. As a result, preferential tax and duty policies that benefit exporters in special economic zones and coastal cities are being revised. It remains to be seen, however, whether uniformity will be achieved, particularly with respect to income and other direct taxes imposed on exporters. China's recent corn exports (over 4 million metric tons in 1998) demonstrate clearly the continued willingness of parts of the Chinese Government to export. Most of China's 1998 corn exports were sold at prices USD 25 to USD 45 per metric ton below domestic wholesale corn prices. In the context of negotiations on its accession to the WTO, however, China has agreed not to use export subsidies for agricultural products. Reaching an understanding on what practices constitute subsidization is key to the value of this commitment >LACK OF INTELLECTUAL PROPERTY PROTECTION Based on the 1995 and 1996 bilateral IPR agreements and extensive follow-up work with Chinese officials, China now has a functioning system to protect intellectual property rights (IPR). Enforcement of intellectual property rights has become part of China's nationwide anti-crime campaign; the Chinese police and court system have become actively involved in combating IPR piracy. According to Chinese Government statistics, China seized some 35 million illegal audio-visual products from 1994 to year-end 1998. It has shut down or fined 74 assembly operations for pirated VCDS and seized over 20 million smuggled VCDs during the same period. Regional cooperation on enforcement of IPR at the border has also increased. However, as China has closed down illegal production lines and prevented importation of additional lines, the number of production lines and the manufacture of infringing product in Hong Kong and Macau have increased. We have urged Customs authorities throughout the region to work together to stop the flow of infringing product and machinery across borders.

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Training on IPR enforcement has been a key part of building the necessary infrastructure for continuing enforcement efforts. More than 3,000 judges in China have received training on IPR laws and the subject is now taught at several major universities, including Beijing University, Harbin Engineering University and Shanghai's Fudan University. U.S. Government agencies and industry groups have provided specialized IPR training and technical assistance to Chinese Government personnel pursuant to the 1995 agreement. The PRC Government reorganization in March 1998 abolished the State Science and Technology Commission's IPR Working Group Executive Conference, the U.S. Government's main counterpart in U.S.-China IPR negotiations. The State Intellectual Property Office (SIPO) was established on April 1, 1998 to coordinate IPR protection efforts and to take over the functions of the executive conference. MOFTEC remains a key interlocutor on the trade-related aspects of IPR. Although China has revised its laws to provide criminal penalties for IPR violations, the U.S. remains concerned that penalties imposed by PRC courts do not act as a deterrent. Industry sources point out that unauthorized optical disks are still widely sold in China and urge better IPR enforcement at a retail level. End-user piracy of computer software, especially the sensitive issue of piracy within PRC Government ministries, costs U.S. companies millions of dollars each year. The lack of agents in China authorized to accept trademark applications from foreign companies makes it difficult for foreigners to register trademarks. Regulations on the use of copyright agents by foreign companies have not yet been finalized; this effectively inhibits foreign companies from using agents to license copyrights. The lack of clear procedures to protect well-known trademarks makes it extremely difficult to oppose or cancel well-known marks registered by another party. U.S. industry estimates of intellectual property losses in China due to counterfeiting, piracy, and exports to third countries have exceeded USD 2 billion. Some U.S. companies estimate losses from counterfeiting account for 15 to 20 percent of total sales in China. One U.S. consumer products company estimates that it loses USD 150 million annually due to counterfeiting, a growing problem, in China. The destructive effect of counterfeiting has discouraged additional direct foreign investment and threatened the long-term viability of some U.S. business operations in China. The

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inferior quality of counterfeit products also creates serious health and safety risks for consumers.

Services Barriers
Restrictive investment laws, lack of transparency in administrative procedures and arbitrary application of regulations and laws severely limit U.S. service exports and investment in China, especially in the financial services, telecommunications, audiovisual, distribution, professional services and travel and tourism sectors. In most sectors, foreign service providers are only allowed to operate under selective "experimental" licenses. Strict operational requirements mandate limits on the forms of establishment for entry and restrictions on the geographic scope of activities. Once in the market, the lack of transparency and sometimes discretionary application of Chinese laws and regulations, along with the denial of national treatment, make doing business difficult for most foreign service companies. Hiring issues are also complicated. Although many U.S. companies, such as those involved in joint-ventures, are allowed to hire and fire based on demand and performance and can pay wages according to market rates, the representative offices of U.S. service suppliers are still required to hire, recruit or register all local staff through state labor service companies which collect large monthly fees for each employee hired. In some services sectors, particularly professional services, there are strict limits on the hiring of Chinese professionals. Expatriate staff are also subject to strict limitations on their activities. In line with its efforts to join the WTO, China has begun to allow greater foreign participation in a few services industries on a 'trial' basis. For example, the state council has followed up on plans announced in January 1996 to allow foreign banks in Shanghai's Pudong area to conduct local currency transactions on a restricted trial basis. To date, nine foreign banks have obtained permission to conduct local currency business in Pudong. U.S. and other foreign financial institutions, however, still need approval -- granted on a discretionary, case-by- case basis -- for new representative offices and branches. By the end of 1998, China approved a total of 151 bank branches, seven joint-venture

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banks, and five wholly foreign-owned banking firms in 19 cities. The scope of activities for these banks and branches is limited almost exclusively to business denominated in foreign currencies, essentially carving out the entire domestic market and leaving only international trade- related business for foreign financial institutions. Steps by the PRC to crack down on unauthorized foreign exchange transactions in late 1998 have resulted in disruption of the operations of foreign banks and importers in China. Evidence of unauthorized capital outflows prompted the government to tighten documentation requirements, causing payment delays and increased transaction costs. With respect to insurance services, China passed a new insurance law in 1993 and is taking steps to reform the domestic industry. In 1998, the Chinese Government created the Chinese Insurance Regulatory Commission (CIRC) to help facilitate the development of the industry in China. At present foreign insurers are, with one exception, only permitted to operate in Shanghai. Despite this restriction, by the end of 1998 over 100 foreign firms, including 23 from the U.S., had applied for permission to open branch offices in Shanghai. To date, only two U.S. firms have been allowed to operate in China. The licenses granted to foreign companies restrict each company to a narrow range of operations. Permission to compete directly with the state-run insurance company, the people's insurance company, or with other quasi-private Chinese companies such as Ping an or China Pacific, has not been granted. In telecommunications services, U.S. companies continue to face investment barriers. Current regulations governing providers of basic and value-added telecommunications services limit the management or ownership of these types of services to domestic companies. Disturbingly, in August of 1998, the Ministry of Information Industries (MII) moved to restrict the nature and scope of foreign participation in China's telecom services market. Officials called for an end to the Chinese-Chinese-Foreign (CCF) joint venture formula that had been the only apparently legally acceptable means (though not officially sanctioned by regulation) of foreign participation in China's telecom services market. A final decision on how to deal with existing operations is still pending. Currently China Unicom has more than 40 joint venture arrangements with foreign companies. Uncertainty surrounding the future of these arrangements has effectively halted foreign investment in telecom services. Information services also remain a difficult and sensitive area for U.S. firms in China. In April 1996, for example, the State Council announced plans to apply severely

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restrictive regulations governing the activities of foreign information providers. U.S. efforts in 1997, however, resulted in Chinese assurances that appear, for now, to have addressed the concerns of financial information providers and allowed their continued operation. Audiovisual services is another sensitive area where participation by foreign firms is highly restricted, in part because of Chinese concerns about politically sensitive materials entering China. The websites of foreign news organizations are routinely blocked and news service providers remain wary that new restrictions could be imposed on their activities. Distribution of sound recordings, videos, movies, book and magazines is highly restricted. Inconsistent and subjective application of censorship regulations act as a further impediment to foreign participation in the market. In 1998, U.S. companies involved in direct sales had their operations temporarily shut down as a result of a Chinese Government crack down on pyramid schemes. After the issue was raised by the United States, the companies were allowed to reopen but under restrictions that effectively change their business to traditional retailing. Here, as elsewhere in the retailing sector, geographic and quantitative limits on the number of services suppliers prevent firms from competing effectively against local retailers. Restrictions on the ability of foreign firms to set product prices, quantity, import composition, and quality undercut any competitive advantages foreign firms might bring to the market. Foreign retailers are also only allowed to sell the products of their parent company and cannot engage in the sale of domestic goods. In the distribution services sector, U.S. companies are again significantly restricted in the scope of their activities. Business licenses often do not allow firms to provide the full range of services, including marketing, maintenance, after-sales services and customer support, except in collaboration with a Chinese partner. Foreign firms are not given the right to own and manage distribution networks, wholesaling outlets, or warehouses. Foreign firms do not have access to transportation services on a reasonable and nondiscriminatory basis and are required to use state- owned companies to distribute their goods. In professional services, U.S. engineers and architects have enjoyed a relatively more cooperative and open relationship with the Chinese Government. These professions have operated in the Chinese market through joint venture operations with relatively

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few regulatory problems. Foreign law firms and accounting firms, on the other hand, have been more tightly regulated. China has permitted the establishment of foreign law firms in designated cities on a case-by-case basis only. As of February 1998, China had licensed 93 foreign law firms, of which almost 30 were U.S. firms, in 15 cities. China limits a firm's practice to a single city and foreign attorneys are not permitted to employ Chinese lawyers or establish partnerships or form other types of associations with Chinese lawyers or law firms. Accounting services are almost as restricted. In accounting, China limits the scope of activities for representative offices to consultancy. In addition, China is imposing forced localization. For example, foreign partners in accounting firms must gradually reduce their equity share to 33 percent by 2001. Finally, travel and other tourist-related services are under tight regulation. Activities of foreign firms are limited to 11 areas in China. Current Chinese law prohibits nonChinese companies from establishing full service travel agencies in China. China also imposes numerous restrictions on the guides and tourist agents that can be hired.

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XIV.

BIBLIOGRAPHY

5. Mooney Paul, 1999, Cautiously Optimistic, Far Eastern Economic Review, October 7, p. 72 6. Hill, Charles W. L., 1998, Global Business Today, Mc-Graw Hill.
7.

Http:// www.usia.gov/regional/ea/uschina/prcnte99.htm

8. Http:// www.itds.treas.gov/itds/itta/china.html XV. PRESENTATION SLIDES