Wal-Mart’s Expansion to China

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Introduction

The first Wal-Mart store was set up by Mr. Walton in 1962, and the company has experienced a significant growth since then. The company’s mission, “Saving People Money, Live Better” reveals that consumers are sensitive to both the prices and quality. The company enjoys much recognition and identification with the middle-class consumers, who buy most of its products. The mass market is dominated by the middle class consumers, and Wal-Mart has capitalized on this demand to sell much of its products and earn significant sum of money, especially by gaining a competitive edge with its business rivals. Wal-Mart operates merchandise and retail businesses that it intends to expand to China. Even though it has strategically placed itself in the USA market, the pace of its growth is insignificant because it is currently facing stiff competition from its rivals. China’s economy currently shows a steady pace of growth, and it has a large population that provides potential customers for Wal-Mart (Peng, 2013).

Foreign Direct Investment (FDI)

FDI is a fundamental approach that Wal-Mart might take in dealing with its expansion in China. Wal-Mart needs to embrace Foreign Direct Investment strategy as its best approach for its expansion to China because the country has attained successful economic growth. The adoption of household responsibility system in agriculture is the major institutional reform China had undertaken. In early years, the commune system introduced collective farming to the Chinese people. Using these system farmers could not get extra reward by working hard. The reason for this is that all members of the team would share the additional output due to the additional labor. Therefore, some of the farmers initiated reforms in agriculture. They realized that if each of them works separately, they could deliver more output required by the procurement system for the government to distribute it in the economy. The commune system was changed, and land was distributed to individual households to farm separately. Therefore, each farmer got additional reward for the additional labor delivered. Such practice spread across the country and was adopted as a national policy. Success of the reform has led to the agricultural output increasing, farmers becoming richer and also economic efficiency has raised (Chari, & Madhav Raghavan, 2011).

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In order to promote FDI, China used the open door investment. For many years, China relied on the closed economy before the launch of economic reforms. The open door policy has fostered China’s opening to imports and also promotion of its exports. Many institutional reforms are used in the administration of foreign trade. It imposed strict control in order to provide exports and pay for the imports required under central planning. The provinces are also encouraged and given autonomy to promote their exports. Special treatments are given to enterprises and export firms to stimulate them to do more business. Additionally, trading companies established in cooperation with industrial enterprises manufacture products for exports, hence facilitating decentralization of trading activities. For long-term or short-term financing, enterprises and companies were allowed to obtain special loans in foreign exchange. However, this was effective after they had retained part of foreign exchange they earned. Also, Export Processing Zones (EPZs) were established at the coasts. Therefore, foreign investors were encouraged to set up their factories in these zones either jointly or independently with Chinese enterprises. Most interesting, no import duties are imposed on the materials processed for export. It has facilitated the absorption of Chinese labor and the use of capital and technical knowledge of foreign investors (Peng, 2013).

The Chinese government has regarded FDI as an important engine in economic development. The government performed a crucial function to control the market forces in order to promote modernization and China’s economic development. Therefore, it has encouraged categories of investment that are important for economic development and prohibit others. The government has encouraged investment in production of energy, transportation, and use of new technology in agriculture. Also, China has embraced World Trade Organization (WTO), and it has contributed to its economic transformation. Moreover, the foreign money has led to transfer of technology, created jobs, built more factories, and linked China to various international markets (Peng, 2013).

The other component of economic reform is the development of non-state sectors. Village enterprises flourished well leading to the millions of Chinese shifting from traditional agriculture and embrace manufacturing. Therefore, in relation to the non-state-owned enterprises, the reform has granted autonomy to enterprise managers. Managers became free to set their own goals and retain portions of firm’s profits for future investment and development. Managers have also granted bonuses and sell products to private markets at very competitive prices. The reforms allow the private sector to own their produce. Moreover, the privately owned businesses create jobs, pay states taxes and also facilitate the earning of hard currency through foreign trade. They develop consumer products that are on high demand and give the national economy flexibility it did not experience before (Kumar & Chase, 2006).

Financial and banking institutions stimulated the economy by giving loans to businesses and individuals. The loans were channeled to investment projects, which generated some income into the GDP stream of the country. The central bank was a mono-bank with branches all over to accept deposits from the citizens. It also issued currencies and loans to state enterprises, according to approval by the planning authority. With the launch of reforms, the banking systems in the market economy progressed gradually. Under the reforms, the Communist Party gave autonomy to the Central Bank, and the growth stimulus was transferred to other commercial banks. Other financial institutions also changed whereby the government formed China International Trust and Investment Corporation (CITIC) to attract foreign capital. Similarly, more investment trusts followed under the sponsorship of provisional government. In addition, under new social security system, pensions were provided and became part of sources of saving and investment. Also, foreign insurance companies have been allowed to operate in China hence facilitating economic development. Therefore, Wal-Mart would enjoys great benefits under the FDI strategy (Chari, & Madhav Raghavan, 2011).

Challenges of Foreign Direct Investment

Wal-Mart’s FDI strategy to expand to China faces several challenges, since it has some potential investment risks. Portfolio risks occur because the systems of politics and governments in China are dynamic, and this negatively affects performance of the business. In order to minimize this kind of foreign exchange risk, Wal-Mart should combine its domestic and foreign asset portfolio. Moreover, the company can successfully manage its currency by investing in other foreign currencies (Chari, & Madhav Raghavan, 2011).

Wal-Mart’s currency risks can be hedged against its futures, and this approach involves the use of a certain risk in offsetting another one. This kind of option is good for cushioning fluctuations that are evident in the foreign exchange rates (Peng, 2013).

Leveraging Politics and Law

Wal-Mart could leverage politics and laws for a successful deal in China by using legal courts and informative approach using the existing education system in the country. The approach includes the legal institution and education system. Since the start of economic reforms, China’s education system has improved and returned to normal. The Ministry of Education has sponsored programs by cooperating with foreign educational institutions in order to improve education in China. Also, private universities have been granted freedom to invite foreign scholars to lecture to their students. Universities have adopted modern textbooks and also sent their students abroad. Similarly, efforts have been made to translate modern texts and write new texts in Chinese (Kumar, & Chase, 2006).

The education policy of China has also changed. Therefore, the soviet style, which includes specialized and separate education at the university level was changed to a more liberal and broad-based education. It was offered by more comprehensive universities. Privately initiated and funded education systems were established by education-minded Chinese population. Also, rich farmers in rural areas started primary schools in order to improve education of their children. On the other hand, entrepreneurs and educators in urban areas are engaged in establishing professional schools and colleges. The government of China has also made serious efforts towards modernizing the legal system. Its efforts were encouraged by the need to strike deals with international business communities and agenda to modernize China. In the early 1980s, the Ministry of Education began programs for legal education. The government’s record on modernizing the legal system has been impressive (Peng, 2013).

Wal-Mart’s Resources Commitments

Even though China has the predominant large population, Wal-Mart must commit to providing sufficient financial resources to cater for the intended employee’s packages. Financial resources would act as a pool of capital for Wal-Mart to start its initial investment in China. It would also finance the company’s operations and marketing expenses. Operational costs include expenses incurred in settling the deal, for instance, legal costs, lease, and licensing. On the other hand, marketing costs include selling and promotional expenses. In addition, it must have people with technical knowledge and expertise to handle its processes. Moreover, the liberal democracy plays a critical role in the human resource management. The reason for this is that the company consults and engages its employees before any decision on the management of resources is made. Effective management of human resources in the country determines efficiency and service quality of the company. It also affects social and economic development directly (Chari, & Madhav Raghavan, 2011).

Individuals pay much attention to the governmental state’s central position in the economy as well as the society. The component of a well-planned public human resource management promotes economic growth. For example, China’s socialist construction believes in the collective management of public human resources. The economy of China currently grows at a steady rate that attracts global attention, and its economy shows significant growth. The growth is due to the communist ideology that propels people to work collectively for the common good of the country. On comparison, the United States believes in the spirit of capitalism. China embraces communist ideology that is good for its economic growth, but the USA encourages capitalism, which does not stimulate economic growth, especially among the majority of population. Therefore, Wal-Mart (US) must see the way of balancing these different economic ideologies before it gains entry in China (Peng, 2013).

Conclusion

In conclusion, Wal-Mart is fast shifting focus to the international business environment in the wake of continuing globalization. The focus is China that has the potential market because of its large population and steady economic growth. The results of such moves are notable in the increased market existence and subsequent amplified profitability. It should be noted that prior to effecting internationalization strategies, Wal-Mart must come up with effective evaluation of markets and overall environment that the company seeks to engage in. The analysis should inform the company on the potential risks and advantages that the company stands to gain from the venture. Internationalization strategies vary from company to company. For instance, this company may opt to seek a different strategy after an in-depth analysis of the market and nature of the business or the line of products the company deals in.

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