Master Thesis

“Dutch Entrepreneurship in the People’s Republic of China:

problems, challenges and solutions”

Student: Boris Peters

Coach : Drs. Thomas Blekman

Co-reader: Prof. Dr. Barbara Krug

Entrepreneurship and New Business Venturing

RSM Erasmus University

Boris Peters 1

“There are more consultants that can help you start up a company in China than there are Dutch

companies operating in China. Many of these so called consultants don’t have a clue what they are

doing.”

(Ron de Goeij, 2007, Director of KOW Asia)

“When doing business in China, listen to your ‘gut feeling’, because this is the best information you

can rely on.”

(Hans Lensvelt, 2007, Director of Lensvelt)

“If even huge companies like Prada, Hugo Boss and Louis Vuitton can not protect their brand, why

even try to protect ours?”

(Hans Lensvelt, 2007, Director of Lensvelt)

“The notion of producing high quality is getting more familiar to the Chinese producers. However, as

a buyer you must be very careful for asking a lower price because there are still producers that

simply lower the quality of the product to lower the price and think that is perfectly normal to do.”

(Rienk Hamstra, 2007, Owner of Beumer Agritech)

“It is a very good thing when an expat or entrepreneur marries a Chinese woman because in that

case at least somebody knows how to do business in China.”

(Ari van der Steenhoven, 2007, Director of Eastwingate)

“Copyright in China means for the Chinese; the right to copy.”

(Jennifer Chan, 2007, Director of Sinova)

Boris Peters 2

Acknowledgements

The acknowledgement is an interesting part of a thesis as it is for the writer often the last part to write

but for the reader the first part to read. As I now write the last sentences of my thesis I am not only

finishing my thesis but also my academic career, which was definitely the most interesting part of my

life until now. I cannot help but feeling sad that this part of my life has now ended but I am

immensely grateful to all people that helped me to get where I am now.

My deep thanks go to Rienk and Susanne Hamstra who took me under their wing during my stay in

Shanghai and really made me feel right at home on the other side of the globe. I will never forget the

valuable insights that Rienk taught me as my manager at HD China.

Off course my internship at HD China would never happened without the trust and help of Aad

Kuiper who made my internship at Hunter Douglas possible and gave me an experience that I will

always remember.

I wish to thank Thomas Blekman, Barbara Krug, Wynand Bodewes, Wim Hulsink and Andreas

Rauch for teaching me a small part of their extensive knowledge. I also wish to thank Marcel

Broersma in providing me the opportunity to finish my thesis while providing me with my first real

job.

Because of the strong support and love of my friends and family I always felt motivated to keep

working hard. I am indebted to Merel Risselada and Jasmijn Nugteren, I am sorry I could not always

give you the time that you deserved, thank you for your love. I am especially grateful to my parents,

Ruud and Nan Peters who were tireless in motivating and supporting me to finish my study and I am

sorry to test your tirelessness for such a long period of time.

Most importantly, I thank my lovely girlfriend Nathalie Magnee for her endless understanding,

support and love.

Boris Peters 3

Preface

During my study at the Erasmus University I was surprised that we learned so little about the Chinese

economy and the impact on our economy. For the last quarter of a century the Chinese economy was

the fastest growing economy in the world with an average growth rate above 10%. China holds about

$ 500 billion of U.S. debt and it has a state owned investment vehicle with $ 200 billion worth of

assets under management, which is literally able to influence economies of many nations. I wanted to

learn more bout the Chinese economy and “way of doing business” and especially “how to start up a

business in China” because the chance is high that in the future I need to do business with the

Chinese.

In that same time I met an entrepreneur who told me about his exhilarating time in China while setting

up his factory. I concluded that one must be absolutely mad to start up a business in China due to all

the problems one encounters. Strangely, everyone I met who lived in China for a while told me that,

in order to understand why entrepreneurs are attracted to China, you need to go there. This fired up

my interest even more and I decided that I wanted to write my thesis about Dutch entrepreneurs

starting up in China.

I talked to Mr. Kuiper, the CEO of Hunter Douglas Europe, about my burning desire to travel to

China and after convincing the management team, I was offered an internship at Hunter Douglas

China. It was an experience of a lifetime to work and live for 4 months in Shanghai. The huge city

that never sleeps has a magical effect on everyone who lives there. It seems that everything goes twice

as fast compared to Holland; doing business, eating, driving, walking and working. The hunger of the

Chinese to grow is enormous, new huge sky scrapers are popping out of the ground every day and it

seems that no one stops working on the end of the day.

By working closely together with the Chinese employees at Hunter Douglas China I gained a lot of

knowledge about the Chinese culture and interaction. My Dutch manager Mr. Hamstra took me along

on business trips and I met many Dutch, Chinese and international entrepreneurs, businessmen and

government officials who all provided me with valuable information for my thesis. It was very

difficult to keep focused in my thesis because I learned so much more than I could write and this is

most certainly the reason why my thesis has more pages than I intended. I literally had to stop myself

many times from writing new insights but it made the process of writing my thesis very interesting

and must say I am sad that I had to finish it.

I hope that my enthusiasm is reflected in my thesis and I hope that as a reader you will have as much

interest in reading it as I had writing it.

Boris Peters 4

Table of Contents Acknowledgements..................................................................................................................................................2

Preface......................................................................................................................................................................3

Executive summary..................................................................................................................................................6

1. Research Introduction ..........................................................................................................................................7

1.1 Introduction ....................................................................................................................................................7

1.2 Problem definition..........................................................................................................................................8

1.3 Research objective..........................................................................................................................................9

1.4 Research Questions ......................................................................................................................................10

1.5 Theoretical framework .................................................................................................................................13

2. Methodology ......................................................................................................................................................14

2.1 Research design............................................................................................................................................14

2.2 Contents........................................................................................................................................................16

3 Starting up in China ............................................................................................................................................17

3.1 About China .................................................................................................................................................17

3.2 Definitions ....................................................................................................................................................18

3.3 Entry modes..................................................................................................................................................23

4 Problems when starting up in China ...................................................................................................................26

4.1 Introduction ..................................................................................................................................................26

4.2 Problems encountered while starting up in China........................................................................................26

Weak Regulatory Regime .............................................................................................................................26

The newness of private enterprise ................................................................................................................28

Incomplete property rights ...........................................................................................................................29

Problem of obtaining capital ........................................................................................................................30

Diversity of local business systems across China ........................................................................................31

Poorly functioning markets ..........................................................................................................................33

Poorly Developed Institutional Arrangements .............................................................................................34

Resource dependancy ...................................................................................................................................34

4.3 Conclusion....................................................................................................................................................36

5 Solutions derived from the literature ..................................................................................................................38

6 Qualitative Research and Results........................................................................................................................41

6.1 Case selection ...............................................................................................................................................41

6.2 Validation .....................................................................................................................................................42

6.3 interview set up and analysis........................................................................................................................44

6.4 Schematic overview of selected cases..........................................................................................................44

6.5 Case studies ..................................................................................................................................................45

Case #1: Kow Architecten............................................................................................................................45

Case #2: Lensvelt Interieur ..........................................................................................................................51

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Case #3: Holland Beumer Agritech .............................................................................................................57

Case #4: Eastwingate Consultancy ..............................................................................................................63

Case #5: Sinova ............................................................................................................................................70

6.5 Schematic overview .....................................................................................................................................77

6.6 Conclusion....................................................................................................................................................79

7 Solutions to the Problems Encountered by entrepreneurs ..................................................................................81

8 Conclusion and Recommendations.....................................................................................................................83

8.1 Conclusion....................................................................................................................................................83

8.2 Limitations ...................................................................................................................................................85

8.3 Managerial implications ...............................................................................................................................87

9 References...........................................................................................................................................................88

10 Appendixes .......................................................................................................................................................95

10.1 Questionnaire for interviews with entrepreneurs .......................................................................................95

10.2 Questionnaire for interviews with service providers (accountants, lawyers, consultants and governmental

institutions).........................................................................................................................................................96

11 People that attributed to the thesis ....................................................................................................................97

Boris Peters 6

Executive summary

Many Dutch companies are now operating in China in pursuit of the opportunities that a big emerging

market like China can provide. However, China is also a transitional market slowly changing from a

planned economy to a free market economy. The fact that the Chinese economy is not only emerging

but also in transition means that Dutch companies encounter problems setting up or operating a

business in China.

In the internationalization literature there is extensive knowledge about the problems and challenges

encountered while setting up a business in China but in my opinion it is especially valuable to provide

possible solutions to these problems. With this study the internationalization literature concerning

China is analyzed to understand the problems that Dutch companies encounter when starting up a

business in China but more importantly, solutions derived from the literature are given and

empirically tested by a multiple case study performed in China under Dutch SME start-ups.

This thesis indicates the importance of social networks as a solution to many problems encountered by

Dutch entrepreneurs when starting up in China based on the literature study and empirical results.

Moreover this thesis provides further insights into the mentioned solutions in the literature study.

Answers are provided on how to establish a network with other (Chinese) businesspeople and

government officials needed to overcome problems while starting up in China.

It seems that networks with Chinese individuals and Dutch entrepreneurs are more easily initiated

with the help of a Chinese employee working for the entrepreneur due to the emphasis that the

Chinese lay on speaking the same language and having the same background in forming a social

network. Trade fairs can be useful to meet trustworthy Chinese businesspeople because one can only

attend a trade fair when having a business licence. A network with local government officials seem to

be most helpful in comparison to other networks but the willingness of local government officials to

form a social network depend on the location and activities of the Dutch start-up.

Boris Peters 7

1. Research Introduction

1.1 Introduction

This chapter introduces the research and the problem definition and the research objective is stated.

Fallowing are the listed research questions in order to answer the main research question and finally

the theoretical framework visualizes the aim of the thesis.

Due to the ‘Open Door Policy’ in 1978 and the accession to the WTO in 2001, the Chinese market is

modernising and liberalising, changing form a planned economy into a market orientated economy.

These developments are making China increasingly attractive for foreign investors seeking a higher

turnover anticipating on a huge emerging market or low production costs due to low wages (Zhao,

2002).

Nowadays, there are increasingly more Dutch companies, setting up a business in China. In 2006,

Holland had 2.126 million euro in Foreign Direct Investments in China which was a 16% increase

compared to the previous year. According to the EVD (Dutch Economic Information Service), all the

big Dutch multinationals have an entity in China and increasingly more Small and Medium sized

Enterprises (SME’s) are starting up in China. Due to my interest in SME’s and the increase in SME

start-ups in China, this thesis focuses on (Dutch) SME’s.

The Chinese economy is not only emerging but also in transition. Emerging and transitional markets

are characterized by market failures and uncertainty. (Hoskisson, et al., 2000; Nee, 1992; Khanna,

2001). Although China seems to be an attractive market for Dutch entrepreneurs it is very likely that

problems and challenges are encountered while starting up a business in China. For scholars and

entrepreneurs it is interesting to understand what kind of problems and challenges will be encountered

while starting up. More importantly it is vital for entrepreneurs to understand how to solve the

problems and challenges in order to successfully set up a company in China.

Boris Peters 8

1.2 Problem definition

The challenges and problems encountered by entrepreneurs when starting up a company in the

Chinese market will create uncertainty, which can increase transaction costs (Williamson, 1985; Krug

and Metha, 2004). Transaction costs are known to be especially high in emerging economies, such as

in China (Hoskisson et al., 2000). Transaction costs refer to the cost of providing some product or

service through the market rather than having it provided from within the firm. In order to carry out a

market transaction it is necessary to discover who it is that one wishes to deal with, to conduct

negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to

make sure that the terms of the contract are being observed, and so on. More succinctly transaction

costs are search and information costs, bargaining and decision costs and policing and enforcement

costs or in short; all costs necessary to bring a good or service to the market (Coase, 1937).

If solutions to the problems and challenges encountered are clear, it is possible to reduce uncertainty

and thereby the transaction costs. Many scholars identified and researched the problems and

challenges that entrepreneurs encounter when starting up a company China (Krug and Mehta, 2004;

Krug and Pólos, 2004; Oi, 1996; Child and Tse, 2001; Li and Qian, 2001) however, the

internationalization literature concerning China primarily focuses on the problems and less on

solutions to these problems when starting up or operation a business in China. If solutions are given in

the literature, they are often superficial but more importantly; often not empirically tested. For

instance: Krug and Metha (2004) describe the problem of a weak regulatory regime and they indicate

that it can be reduced by forming alliances with local government officials, but HOW can a Dutch

entrepreneur form alliances with local government officials? WHY is this a good solution or are there

more solutions to this problem?

Boris Peters 9

1.3 Research objective

The internationalization literature concerning China (Krug and Mehta, 2004; Krug and Pólos, 2004;

Oi, 1996; Child and Tse, 2001; Li and Qian, 2001) primarily focuses on the problems and less on

solutions to these problems when starting up a business in China. The objective of this thesis is to

provide theoretical and empirical insights into the solutions to the problems and challenges

encountered by Dutch entrepreneurs when starting up a business in China. Therefore this thesis has

scientific relevance in deepening the knowledge of the internationalization literature concerning China

by empirically testing the solutions provided by the internationalization literature.

The problems stated can lead to uncertainty because it can affect the success of the start up. Because

high transaction costs are associated with uncertainty it is important to understand the causes of

uncertainty and deliver possible solutions to reduce the transaction costs. Lower transaction cost can

increase the performance of a company and strengthen the competitive advantage as well as lowering

the threshold for entering the Chinese market. This research can be useful for Dutch entrepreneurs

considering setting up a business in China. They will here find an overview of possible problems and

challenges encountered while setting up a business in China, but more importantly; possible solutions

derived from the literature and derived from the case studies.

My motivation is my interest in the Chinese market and the Dutch entrepreneurs that are operating in

this market. When reading the internationalization literature I get the impression that one must be

insane to start-up a business in China because of all the problems that one will encounter. Still many

Dutch entrepreneurs do it and succeed and this triggered my interest: How do these heroes do it?

This thesis focuses on SME’s that have started up in the last 5 years in China because there can be a

difference in impact of the difficulties or problems encountered in China when starting up a SME

compared to large company. Large firms often have many resources like capital, expertise and

experience. An entrepreneur has less financial resources, must hire expertise and has often limited

experience often making the effect of the problems larger.

I decided that if I really wanted to understand my interest I had only one option and that was to travel

to China and experience it first hand. Therefore I travelled to China and worked for a Dutch company;

Hunter Douglas. I lived in Shanghai from September till December 2007.

Boris Peters 10

1.4 Research Questions

Krug and Mehta (2004) and Krug and Hendrischke (2006) defined in their articles idiosyncratic

features of the business environment that generate a high level of institutional and economic

uncertainty for entrepreneurs, which are called ‘problems’ in this thesis.

In my conversations with Prof. Dr. Barbara Krug I selected six problems that Dutch entrepreneurs

encounter.

The six problems are: a weak regulatory regime, the newness of private enterprise, diversity of local

business systems, incomplete property rights, missing and poorly functioning markets, and poorly

developed institutional arrangements.

I have added additional common economic and institutional problems in the literature survey, as they

also seem to be problems that Dutch entrepreneurs encounter. The additional problems are: Obtaining

capital (Marson et al., 2002 ; Ahstrom and Bruton, 2006 ; Krug , 2007) and resource dependency

(Moran, 1985 ; Pfeffer, 1978 ; Child et al., 2001 ; Williamson ; 1985 ; Krug , 2007).

More extensive literature concerning the listed problems is provided in chapter 5 of this thesis. In

chapter ‘1.5 theoretical framework’ an overview is given of references used to lay the theoretical

foundations for the treated problems in this thesis.

The main research question for this study is:

“How to cope with the listed problems encountered by Dutch entrepreneurs when starting up a

Small to Medium sized Enterprise in China?”

The listed problems and challenges are derived from the literature therefore answers to the sub-

research questions must be provided in order to answer the main research question. The sub-research

questions are:

1. How can the effect of a weak regulatory regime be reduced?

In the literature it is stated that the effect of a weak regulatory regime can be reduced when

entrepreneurs form alliances with government officials and form a social network with other business

people, but how can a successful alliance be formed with a government official? Can a government

official be of any help for a Dutch entrepreneur?

2. How can the problem of newness of private enterprise be reduced?

Boris Peters 11

The literature indicates that the social network of the entrepreneur is very valuable and necessary in

finding good business partners and employees. How can a Dutch entrepreneur effectively form a good

social network in China when starting up? Can it be done through networks of others? Is it even

possible for a Dutch entrepreneur to form a network with Chinese business people?

3. How can the problem of incomplete property rights be reduced?

It is stated in the literature that again alliances with government officials like Party members and

bureaucrats can reduce the problem of incomplete property rights. It is also stated that alliances with

economic agencies and local jurisdiction can reduce the problem of incomplete property rights. What

kind of economic agencies or local jurisdictions can be persuaded to form an alliance? And again how

can the alliance be formed?

4. How can the problem of obtaining capital be reduced?

Also it is stated that a good social network can increase the chance of obtaining capital but is this the

only way? How can a Dutch entrepreneur effectively form a good social network in China when

starting up? Can it be done through networks of others? Is it even possible for a Dutch entrepreneur to

form a network with Chinese business people?

5. How can the effect of Diversity of local business systems across China be reduced?

In addition to form alliances with local officials it is stated in the literature that a company should

reduce the reliance on the environment by relying on the company in the home country and that

resources should be pooled with other companies. Are there other solutions to this problem? How do

companies pool resources?

6. How can the effect of poorly functioning markets be reduced?

Local officials can provide information about markets, new products and technology. Are there other

ways in obtaining information about markets? How can the local officials provide information and

when is this information given?

7. How can the problem of poorly developed institutional arrangements be reduced?

Also it is stated that a good social network can increase the chance of obtaining capital but is this the

only way? How can a Dutch entrepreneur effectively form a good social network in China when

Boris Peters 12

starting up? Can it be done through networks of others? Is it even possible for a Dutch entrepreneur to

form a network with Chinese business people?

8. How can the dependency on Chinese resources be reduced?

It is stated that Dutch firms can utilize more internal resources coming from its parents or subsidiaries

but are there more ways to reduce external dependency? Is it favorable to limit commitment to the

environment in China?

9. Are there in addition to the mentioned problems other problems and solutions to these

additional problems?

It could be possible that entrepreneurs encountered other relevant problems in addition to the

mentioned problems and found successful solutions to these problems. This sub research question can

trigger potential further research.

Boris Peters 13

1.5 Theoretical framework

Problems listed in the thesis References used in the thesis

Weak Regulatory Regime Oi, 1989 ; Krug and Mehta, 2004 ; Child et al., 2004 ; Zhou, 2002 ; Nee,

Opper and Wong, 2007 ; Peng, 2001

The Newness of Private Enterprise Zhou, 2002 ; Chen 1998; Krug and Mehta, 2004 ; Child et al., 2004

Incomplete Property rights Oi, 1989 ; Krug and Mehta, 2004; Hendrischke, 2004 ; Krug and Pólos, 2004 ;

Walder, 1995

Problem of Obtaining Capital Marson et al., 2002 ; Ahstrom and Bruton, 2006 ; Krug , 2007

Diversity of Local Business Systems Whitley, 1999 ; Krug and Hendrischke, 2006 ; Boisot, 1999 ; Hoskisson et al.,

2000 ;

Poorly functioning markets Krug and Mehta, 2004 ; Krug and Pólos, 2004 ; Hendrischke, 2004, Oi, 1989

Poorly developed Institutional Arrangements Krug and Mehta, 2004 ; Child and Tse, 2001 ; Elfrink and Hulsink, 2003 ;

Ellis, 2000

Resource Interdependency Moran, 1985 ; Pfeffer, 1978 ; Child et al., 2001 ; Williamson ; 1985 ; Krug ,

2007

Weak Regulatory Regime

The Newness Of Private Enterprise

Incomplete Property rights

Problem of Obtaining Capital

Diversity of Local Business Systems

Poorly Functioning Markets

Resource Dependancy

Less uncertainty

(During start-up phase)

Poorly Developed Institutional Arrangements

Boris Peters 14

2. Methodology

2.1 Research design

In this chapter the research design and methodology used for the thesis is explained followed by the

overview of the contents of the chapters.

The research design for the thesis is a literature study followed by a multiple case study. The reason

for this approach is that, although there is extensive literature on the problems and challenges

encountered while starting-up a business in China, the solutions given by the internationalization

literature are limited and often not empirically tested. Therefore possible solutions to the problems

should be “explored” by asking “how” and “why” questions. “In general, case studies are the

preferred strategy when “how” or “why” questions are being posed, when the investigator has little

controll over events, and when the focus is on a contemporary phenomenon within some real life

context.” (Yin, 2003). As stated earlier; China’s market is a transitional market, slowly changing from

a planned economy to a free market economy and therefore some of the problems and challenges can

be contemporary which strengthen the choice for multiple case studies.

In order to explore the problems and challenges encountered while starting up a business in China and

derive solutions given in the internationalization literature, an exploratory research was performed and

research questions were generated during the exploratory research. Further literature study answers

the research questions theoretically and provides a “framework” for the multiple case study. This

method prevent the research and results on theory that is already known. As Eisenhardt (1989)

describes in her article, this is a valuable approach because it permits researchers to gain a more

accurate insight in a construct. Due to the extensive literature study previous to the interviews, it is

possible to use the results as a framework for the interviews. The goal of the framework is to gain an

understanding of the possible problems and challenges that Dutch entrepreneurs encounter while

starting up a business in China and more importantly; the possible solutions to these problems given

in the internationalization literature.

The multiple case study is carried out to test the solutions derived from the in the literature study.

“The results of multiple case research are typically more generizable and better grounded than those

of single case studies.” (Graebner, M. and Eisenhardt, K., 2004). The multiple case study deepens the

knowledge about possible solutions to the problems and challenges encountered. For instance: if it

appears to be true that the problem of a weak regulatory regime can be reduced by forming alliances

with government officials, HOW can a Dutch entrepreneur form alliances with government officials?

WHY is this a good solution or are there more solutions to this problem? By asking these kind of

Boris Peters 15

questions and more importantly; providing answers, the knowledge of internationalization literature

will be deepened with this thesis.

There is a common concern about case studies that they provide little basis for scientific

generalisation. The answer to this concern is that case studies are generisable to theoretical

propositions and not to populations or universes. The case study represents a sample. In doing a case

study, the goal is to expand and generalize theories and not to enumerate frequencies (Yin, 2003).

Boris Peters 16

2.2 Contents

This thesis contains eight chapters. The first chapter gave an introduction on the topic of this thesis;

Dutch entrepreneurship in China: problems, challenges and solutions. Also a problem definition and

research questions are stated. Chapter two introduces the reason for research and a research design

and operational plan are formulated.

Following are the theoretical and empirical parts of the thesis. Chapter three to five conceptualize the

theoretical part of the thesis. In chapter three some background information about China is given and

definitions that are used in this thesis are explained. Finally the entry strategies into China are also

discussed. Chapter four explains the problems and challenges that are encountered when

entrepreneurs start up in China as given by the internationalization literature. Chapter five discusses

the solutions that are given in the literature to the mentioned problems and challenges in chapter four.

Subsequently, chapter six and seven form the empirical part. Chapter six contains the results of the

interviews. Chapter seven combines the theoretical part with the interview results and defines the

solutions to the problems and challenges that Dutch entrepreneurs encounter. Finally, chapter eight

contains the conclusion and defines recommendations for further research and the limitations of the

thesis.

Chapter 1

Introduction and Problem Definition

Chapter 3

Starting up in China

Chapter 6

Qualitative Research and Results

Chapter 4

Problems when Starting Up in China

Chapter 7

Solutions to the Problems Encountered

Chapter 8

Conclusion and Recommendations

Chapter 2

Methodology

Chapter 5

Solutions Derived from the Literature

Boris Peters 17

3 Starting up in China

3.1 About China

In this chapter more insight is given about China itself and the definitions used in this thesis are

explained. The different entry modes into China are also listed and explained.

China is situated in the eastern Asia and it is the third largest country in the world, with a population

of 1,288.40 million inhabitants. China is not only the world’s most populous nation, but it is also the

world’s fastest growing developing country and it belongs to the 5 largest growing economies in the

world, with an economic growth of more than 9.7 % per year since the late 1970s

(www.worldbank.org).

The country has a total land area of 9.571.300 square kilometres. The capital city of China is Beijing

and its official language is Mandarin. The actual Chinese, the Han people, form by far the largest

majority of the total population (92%). The other 8% comprises of many different ethnic groups, most

of them live in the border regions, like Xizang (Tibetans) and Menggu (Mongols).

China has a long history of civilization. Dynasties have ruled the country for almost three thousand

years, before in 1912 the last emperor Pu Yi was forced to retreat. It was in 1946 that a civil war

started. The war was won by the communists under guidance of Mao Zedong and on October 1st 1949

the People’s Republic was proclaimed. The Chinese Communist party (CCP) took over total control

of the country (Encarta, 2001). In 1978 the Chinese economy was liberalized, allowing free trade and

capitalization.

It has been in recent years that China’s economy has been improved. In the early history China was an

agricultural controlled culture. China had a weak economy in which there was an unbalance between

the light and the heavy industries. But with the years passing by the proportion between the different

industries has been improved.

The growth of the China’s overall economy was formerly driving by the primary and secondary

industries but now the secondary and the tertiary industries are driven China’s overall national

economy growth. In the tertiary industry the proportion of traditional industries like communication,

transportation and communication has declined and businesses such as banking telecommunications

and real estate have developed rapidly (Source: http://www.asianinfo.org).

Prior to the economic reform process that began in 1978 the Chinese economy was comprised almost

solely of state-owned industries. State owned enterprises were an extension of government

Boris Peters 18

organizations and were managed through the Central Administration (PWC, 2003). The Chinese state

remains dominant within the economy, although during its transition the ‘invisible hand of the

market’ has gradually been allowed more freedom. The period after 1978 is marked by a change in

the composition in the industrial sector towards more urban and rural collective participation, with

significant new participation by foreign and domestic private firms, but it was also marked by a

massive shift from team to household level economic activity in agriculture and other small-scale

sectors (Putterman, 1995).

3.2 Definitions

Culture

Culture is acknowledged in this thesis in the form that national cultural distance between the Dutch

entrepreneur and the Chinese can be a reason why problems occur when starting up in China. Cultural

distance is the degree to which the shared norms and values in one country differ from those in

another country (Hofstede, 2001) The larger the cultural distance between the interacting parties, the

higher chance for problems because cultural differences can lead to misunderstandings (Very et al.,

1996).

If cultural difference is seen as a problem it is very difficult to provide a solution because of the tools

of analysis that are used to indicate the differences. Hofstede is known for introducing 5 bipolar

dimensions in order to compare cultures. As Hofstede (1993) states: “Culture is a construct, that

means it is not directly accessible to observation but inferable from verbal statements and other

behaviors and useful in predicting still other observable and measurable verbal and nonverbal

behavior. It should not be reified; it is an auxiliary concept that should be used as long it proves

useful but bypassed where we can predict behaviors without it. The same applies to the dimensions I

introduced. They are constructs too that should not be reified. They do not ‘exist’; they are tools for

analysis which may or may not clarify a situation.”

Providing answers to problems resulting from differences in dimensions will trivialize the vastness of

different aspects of culture. “Culture is the collective programming of the mind which distinguishes

one group or category of people from another.” (Hofstede, 1993), When using the definition of

culture as described by Hofstede, one could better ask what is not culture than what is culture.

Moreover scale is something to consider in China because 1.300 million people are not readily

compared with 16 million people in Holland. China is a continental system with many cultural and

social practices. In a single province there can be a variety of languages, social practices, arts and

cuisines. I therefore agree with the vision of Goodman (2007) who states “Of course, this is not to

Boris Peters 19

argue that there is no such thing as Chinese culture, but rather that it is a concept of more limited

usefulness than might immediately appear to be the case.”

Similar to the view in the article of Krug and Hendrischke (2006) culture is seen in this thesis as “a

repository of potential mechanisms and informal institutions which are likely to emerge at the micro-

level and are open to empirical institutional analysis.” The vastness of the definition of culture makes

it simply impossible to treat cultural distance as ‘one of the problems’ in this thesis due to limited

research time and expertise.

Entrepreneur

Although many people argue that it is often very clear if someone is a typical entrepreneur, there still

is not a consensus in the literature what the definition of an entrepreneur is. Is having your own

company a good definition for entrepreneur? If that is the definition of an entrepreneur, is then

someone that has 40 percent of the shares in a company not an entrepreneur anymore? And is a small

shop owner also an entrepreneur like for instance Richard Brandson (Virgin) or Stelios Haji-Ioannou

(Easyjet) who are always looking for new opportunities and innovations? Can someone who sets up a

new venture in China for an existing company in Holland be seen as an entrepreneur and if not so, is

this person then not acting more like an entrepreneur compared to the small shop owner?

Stevenson and Jarillo (1990) define three main streams in the studies on entrepreneurship: what

happens when entrepreneurs act: why they act; and how they act. In the first the researcher is not

concerned about the entrepreneur him/herself or his/her actions but he is concerned about the results

of the actions of the entrepreneur. Shumpeter and Kirzner are well known economists that share this

point of view. The second stream is concerned about certain traits and characteristics that an

individual must possess in order to understand why someone is an entrepreneur. Researchers in this

stream use a psychological or sociological approach to define entrepreneurship. Finally how

entrepreneurs act can be studied or in other words: how to succeed at being an entrepreneur.

What happens when entrepreneurs act is a question that most economists seem to ask themselves.

Schumpeter considers entrepreneurship as a process by which the whole economy goes forward. It

disrupts the market equilibrium because of a radical change fuelled by innovation. In his book

Schumpter (1934) defines an entrepreneur as follows: “The carrying out of new combinations we call

‘enterprise’; the individuals whose function is to carry them out we call ‘entrepreneurs’.” He explains

‘new combinations’ as: the introduction of a new good, the introduction of a new production method,

the opening of a new market, a new source of supply or the carrying out of the new organization of

any industry. The entrepreneur in the eyes of Schumpeter must be an innovator who creates

disequilibrium but Kirzner (1999) argues in his article that there are also entrepreneurs that react on a

Boris Peters 20

disequilibrium or market errors. Kirzner (1973) argues in his book that an entrepreneur can also react

on a disequilibrium in stead of creating one. For instance: if someone discovers that certain goods are

sold for a lower price than the market price, he discovers a market imperfection. When he buys at the

lower price and sells them for the market price he is equilibrating the market. The Kirznerian

entrepreneur is therefore much less innovative compared to the Shumpterian entrepreneur.

In my opinion, an entrepreneur can be a Kirznerian entrepreneur or a Schumpterian entrepreneur but

neither offer a satisfying definition for ‘entrepreneur’ because they offer a definition in retrospective,

because if the individual is not yet equilibrating or disequilibrating a market, he is not an

entrepreneur. I also agree with the view of Stevenson and Jarillo (1990) that “Generally speaking, it

does not appear useful, in managerial terms, to delimit entrepreneurship by defining some economic

functions as ‘entrepreneurial’ and other as non-entrepreneurial”, because this is more semantic than

practical.

Why entrepreneurs act can also be called the traits approach and this field of research on

entrepreneurs and entrepreneurship focus on the person of the entrepreneur. They ask the question

why certain individuals start a venture when others, under similar conditions, do not? Researchers

discovered that some entrepreneurs possess certain traits that non-entrepreneurs do not have like: need

for achievement (McClelland, 1961; McClelland and Winter, 1969), locus of control (Brockhaus and

Nord, 1979; Liles, 1974) and risk taking (Bosley, and Udell, 1982, Liles, 1974).

The trait approach is, in my opinion, not the way to define entrepreneurship or the entrepreneur and I

agree with the statement of Gartner (1988): “I believe the attempt to answer the question ‘who is an

entrepreneur?’ will neither lead us to a definition of the entrepreneur nor help us to understand the

phenomenon of entrepreneurship.” The sheer number of possible traits or characteristics that have

been attributed to the entrepreneur makes it impossible to use the trait approach to define the

entrepreneur and it is extremely difficult to link particular psychological or sociological traits causally

to complex behavior like entrepreneurship (Gartner, 1988; Cooper, Dunkelberg, and Woo, 1988).

Moreover, many individuals in our society attempt entrepreneurship and succeed even while they do

not possess ‘the traits of the entrepreneur’.

Finally it is now left to study ‘how’ to succeed at being an entrepreneur or, in other words, what is

between the ‘causes’ and the ‘results’: the managerial behavior of the entrepreneur. In my obsession

with the question ‘how do these heroes do it?’ I agree with Stevenson and Jarillo (1990) that “…it

can be argued that in the case of defining entrepreneurship the question ‘how’ is the most appropriate

for business school since it focuses on understanding (and, it is hoped, improving) actual managerial

practice.”

I therefore define entrepreneurship as follows:

“Entrepreneurship is a process by which individuals –either on their own or inside organizations-

pursue opportunities without regard to the resources they currently control” (Stevenson, Roberts, and

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Grousbeck, 1989) as a result the definition for entrepreneur is: an individual who –either on his own

or inside organizations- pursue opportunities without regard to the resources he currently controls.

Opportunity is defined as: “a future situation which is deemed desirable and feasible” (Stevenson and

Jarillo, 1990) Opportunity is relativistic concept because opportunities vary among individuals over

time, because different individuals have different desires and they identify themselves with different

capabilities. Desires vary with current position and future expectations. Capabilities vary depending

upon their natural skills, training and competitive environment.

The behavioral, situational definition fits well with the common experience that the level of

‘entrepreneurship’ often varies during the life of the individual. This approach overcomes the

dilemma whether entrepreneurs are only to be found in start-up companies and it allows us to deal

with both individual and organizational entrepreneurship. The biggest advantage of the definition is

that it concentrates on practice therefore leading us to study and then teach entrepreneurial skills as

knowledge that results from training and experience.

Start-up

There are many theories on organizational life cycles and stages of development but most scholars

agree that there are certain stages of development that companies go through. Start-up, Growth and

Maturity are stages that most scholars use (Kuratko & Hodgetts, 1989; Olson, 1987; Gilbert, et al.,

2006; Terpstra and Olson, 1993). However there is not a consensus on the definition of each stage.

When has the start-up stage ended and when did the growth stage begin? Growth can be measured

using different variables such as turnover, profit, number of employees, customer base, number of

companies, etc. The point at which a company starts growing and the speed at which it will grow is

also industry dependent. Therefore many different definitions for start up and growth exist. However

the mentioned articles mention the term ‘survival’ as a basic criterion to start growing.

Shane (2008) indicates in his book that generally over 55% of all start-ups will not survive the first 5

years and after surviving this period the survival rate will increase. The start-up stage has certainly

ended for most companies after five years and therefore case study subjects in this thesis are not older

than 5 years. To define “starting up” to the interviewees it is explained that the startup stage consists

of; gathering information for location choice, getting the business licenses and legal documents,

opening a local presence, hiring the first employees needed to operate, serving the first customers and

breaking even with costs and profit.

Small to Medium sized Enterprise (SME)

This thesis uses the definition for SME as prescribed by the European Commission based on

headcount. The definition for SME consists of Micro, small and medium-sized enterprises which have

successively less than 10 employees, less than 50 employees and less than 250 employees.

Boris Peters 22

Social Network

A ‘social network’, ‘relational capital’ or ‘ social capital’ can be defined as “sets of two or more

connected exchange relationships” (Axelsson and Easton, 1992). Some scholars state that a network is

one of the most powerful assets that anybody can posses because it provides access to information,

knowledge, capital and even other networks. Having a developed network can be more beneficial to a

start –up then a less developed network. The quality of the network depends on the number of ties and

the quality of the ties. (Larson and Starr, 1993) The ties, or relations, can either be strong or weak

depending on the frequency of contacts, the emotional intensity of the relationship, the degree of

intimacy and reciprocal commitments between the actors involved (Granovetter, 1982).

National and local government

Regulations are negotiated at national level in Beijing, every province or county is free to modify or

manipulate and create its own regulations. As a result there is not a unified system of taxes, laws and

regulations (Krug and Metha, 2004). Therefore a differentiation must be made in national government

and local government. Often companies negotiate about tax, laws and regulations with government

officials on local level.

Guanxi

The Chinese place a very high value on their network that is difficult to understand for many

Westerners. The Chinese call a social network; ‘Guanxi’ but by just translating it would trivialize the

meaning of the word. It goes further than the advantage that a network can offer, when the Chinese

have a ‘Guanxi’ they will be loyal to the contact and it is far more difficult to disturb this loyalty than

in the western social network but it is more difficult build up once disturbed. The Chinese are

therefore far more critical about forming a relationship and much effort is needed to form the tie.

Guanxi is considered important in almost every realm of life, from politics to business (Gold et al.,

2002 ; Bjorkman and Kock, 1995).

Internationalization

With the click of a button it is possible to acquire information at the internet site of the Chinese

ministry of foreign affairs about setting up a business in China and within a day it is possible to be in

China from anywhere in the world to start setting up a business. It is increasingly easier to take

advantage of business opportunities in foreign countries due to low-cost communication technology

and transportation means. Foreign governments and economies are also more internationally

orientated because of these developments. These developments make it possible for increasingly more

small to medium sized companies to set up a business abroad (Oviat and McDougall, 1994).

Boris Peters 23

“Internationalization refers to the increasing importance of international trade, international

relations, treaties, alliances, etc. Inter-national, of course, means between or among nations.” (Daly,

1999).

In this thesis the term ‘internationalization’ is used to indicate the internationalization of companies,

specifically Dutch companies starting up in China. Internationalization is a very broad term that does

not have a consensus in the literature. Calof and Beamish (1995) have a broad definition of

internationalization; the process of adapting firms’ operations (strategy, structure, resources, etc.) to

international environments. Turnbul (1987) defines internationalization as “the outward movement of

a firm’s international operations.” Using these definitions mean that a company that sometimes sends

a product to a foreign country is then an internationalizing company, therefore this is not a suitable

definition.

The definition of internationalization used in this thesis is “… expanding a firm’ s business from its

original location to one or more additional geographic sites.” (Barringer and Greening, 1998). This

definition demands that the company needs to be physically present in the host country in order to be

an internationalizing company and is therefore in my opinion most suitable for this thesis. By being

physically present in the host country the entrepreneur can build up knowledge because of his

experiences and it is his knowledge that I want to use to answer the research questions.

Geographic expansion or internationalization present important opportunities for growth and value

creation. Entrepreneurs pursue opportunities in other countries because of various reasons: because

companies want to be ahead of competition or match the international market entry of a domestic

rival. (Gaba, et al., 2002 ; Root, 1987), because the entrepreneur wants to create knowledge that he

cannot access or is not present in the domestic country. (Zahra, et al., 2000 ; Barkema and Vermeulen,

1998), the home market is saturated or the foreign market is has a large potential consumer base

(Goedegebuure, 2000 ; Carliner, 2003) and reducing cost by achieving economy of scale or the

reduction of transaction costs (Buckley and Casson, 1982 ; Williamson, 1975).

3.3 Entry modes

Selecting a mode for entering or expanding in a foreign market, is one of the most important strategic

decisions that an internationalizing firm must take (Root, 1994).

The decision is important for two reasons according to Kumar and Subramaniam (1997) First of all, it

is costly to reverse because the firm has to commit a certain amount of resources in order to operate

under that particular mode. Secondly, the decision involves a large commitment from the firm and

future strategic decisions will be affected by the choice of the mode of entry.

Boris Peters 24

Because of the irreversibility factor and the impact on future strategic decisions it is possible that the

mode of entry has an effect on the solution found for the problems listed earlier. For instance an

exporting company has fewer (or no) problems with recourse interdependency compared to a wholly-

owned subsidiary because an exporting company needs far less resources than a wholly-owned

subsidiary.

The entry modes into China are: exporting, licensing, joint ventures, wholly-owned subsidiaries and

an representative office (Osland, et al., 2001 ; Kumar and Subramaniam, 1997 ; Root, 1994 ; Guo,

2003).

Representative Office

A representative office offers a company the possibility to set up a small office to make the first steps

into the Chinese market. With the representative office a foreign parent company can make contact

with government agencies, possible business partners and clients. It is possible to perform market

research and gather legal information needed to set up the company in China. There are restrictions to

what kind of activities a representative office can perform. Income generating activities are not

allowed, it is mandatory to hire Chinese employees and the office that is used need to be approved by

the Chinese government. The Representative office can therefore only be used to set up the company

in china (Guo, 2003).

Exporting

The company’s final or intermediate product is manufactured outside the target country and

subsequently transferred to it. With exporting, a company has the lowest degree of control. Control is

the ability and willingness of a firm to influence decisions, systems, and methods in foreign markets.

The resources needed for exporting are however low. Resources can be intangible or tangible.

Technology risk is low in exporting, technology risk is the potential that a firm’s applied knowledge

will be unintentionally spilled to a local firm (Osland, et al., 2001; Kumar and Subramaniam, 1997).

Licensing

Licensing is a non-equity, contractual mode with one or more local partner firms. A company

transfers to a foreign organization the right to use some or all of the following property: patents,

trademarks, company name, technology, and/or business methods. The licensee pays an initial fee

and/or percentage of sales to the licensor. The degree of control, and the needed resources are higher

as with exporting. The risk of knowledge spill over (technology risk) is highest in licensing (Osland,

et al., 2001 ; Kumar and Subramaniam, 1997).

Joint ventures

Boris Peters 25

Joint ventures involve two or more organizations that share the ownership, management, risks, and

rewards of the newly formed entity. Each partner contributes equity that may take the form of money,

human resources, plant and equipment, and/or technology. The degree of control and the needed

resources are higher as licensing. The risk of knowledge spill over is lower than with licensing

(Osland, et al., 2001 ; Kumar and Subramaniam, 1997).

Wholly-owned subsidiaries

Wholly-owned operations are subsidiaries in another nation in which the parent company has full

ownership and sole responsibility for the management of the operation. The degree of control and the

needed resources is the highest of all possible entry modes. The risk of knowledge spill over is lowest

for wholly-owned subsidiaries (Osland, et al., 2001 ; Kumar and Subramaniam, 1997).

With exporting and licensing there is not a physical presence of the company in China. A

representative office is restricted from making profit and can in fact only be used to gather

information in order to potentially set up a company.

In the case of a Joint venture there is a physical presence in China but it possible that many problems

listed in this thesis have less influence on the foreign company because the Chinese partner already

has elaborate knowledge of the market and regulations. The Chinese company can give advice to the

partner or combine resources with the foreign company. However, because of working together with a

Chinese partner also new problems arise; the language barrier and physical distance makes it more

difficult to make fast decisions on complicated issues, there can be a difference in the routines of the

companies which can result in disagreements and the monitoring costs are higher.

Due to the former reasons and the fact that the entrepreneur has the highest degree of control, only

wholly owned subsidiaries are selected for the case study. (more information about case selection can

be found in chapter: 6.1 Case selection.)

Boris Peters 26

4 Problems when starting up in China

4.1 Introduction

This chapter concentrates on problems and challenges encountered while starting up in China as given

by the internationalization literature. Possible solutions found in the internationalization literature are

discussed but further insights on the solutions are treated in chapter 5.

A schematic overview of the literature on the problems can be found in the chapter: ‘1.5 Theoretical

framework’. As stated in chapter ‘3.2 definitions’, culture as a concept or cultural distance as a

problem is not treated in this thesis. The vastness of the definition of culture makes it simply

impossible to treat cultural distance as ‘one of the problems’ in this thesis due to limited research time

and expertise.

4.2 Problems encountered while starting up in China

Weak Regulatory Regime

The biggest problem of the regulatory regime is the high level of taxes. On top of these come various

‘fees’ levied in a rather unpredictable way by local government agencies. These may cover local

infrastructure projects, community welfare needs, sponsorship of cultural activities, social security

contribution, etcetera, and contribute to make the tax burden a major barrier to entrepreneurship for

many organizations (Oi, 1989).

Although regulations are negotiated and agreed in Beijing, every province or county is free to modify

or manipulate and create its own regulations. Because of this reason there is not a unified system of

taxes, laws and regulations. In many cases it is not clear as to what rules apply to a company in order

to be approved to set up a company. It can also happen that a company has to pay an ‘ad hoc’ tax or

get an ‘invitation’ to contribute to local community facilities but the application of regulation and

taxes are experienced as open to negotiation to those with influence. Besides ‘ad hoc’ taxation there is

also a risk of confiscation of assets (Krug and Mehta, 2004).

In his observations Oi (1996) describes: “Under a local state corporatist system, the relationship

between banks, finance and tax offices, and county, township and village officials is very close. Local

officials at the county level help secure large loans for township and village-owned enterprises.

Bureaus sometimes provide services well outside their administrative domain. … It may use its

connections to influence other agencies, such as banks, to bend the rules in favour of a particular

enterprise.”

Boris Peters 27

China has particularly strong institutions that are embedded in the country's long administrative

tradition, in which government continues to play a prominent role in economic and social affairs. Its

institutions therefore lend a distinct character to China's business environment and importantly

determine the transition path the country is taking. Institutional change in China is highly complex

because in this formerly closed, state-dominated system, institutions have developed into a massive

inter-dependent, multi-level network whose logic of operation depends as much on political influence

and personal relationship as on concern for efficiency.

State-owned enterprises are fighting price wars, selling their products at, or even below, costs. Given

this situation, only firms with advanced technological resources or well-established brands are able to

achieve satisfactory sales and make a good profit in China (Child et al., 2001).

Political issues are interwoven into everything entrepreneurs might want to accomplish in China.

Many areas of business are simply off limits to the private sector, and even more are disallowed for

firms with foreign investment. Often, these areas are the least efficient and the most enticing to

entrepreneurs. Some entrepreneurs have done well for themselves by seeking out and exploiting

loopholes, ambiguities or gray areas, resulting from China’s underdeveloped legal and regulatory

system. It is for example common use for many non-Chinese companies in China to transfer their

profits (transfer pricing) through offices in Hong Kong in order to gain huge tax advantages. In many

cases, the government later accepts the fait accompli and builds regulations that formalize and legalize

what is already happening. In other cases, the government moves to close the loophole, resulting in

losses for some companies.

The legal structures under which new business can be registered in China differ significantly from

those in most western countries. Individual-owned enterprises were not legalized until 1986. Intended

merely to fill in the gaps in the planned economy, they were tightly restricted in their business

activities. In 1994, China’s Company Law established rules for limited liability companies and joint

stock companies. The flexibility to change investment structure is very low, so investors wanting to

sell their shares in the company can only do so with the approval of a majority of the shareholders.

Entrepreneurs can take advantage of socialistic organizational forms (such as the state-owned

enterprises). Rather than to set up a private firm, they could find a government partner and register as

a ‘collective’. However the findings of Nee, Opper and Wong (2007) and Peng (2001) indicate the

state’s inability to provide positive economic effects through direct intervention at the firm level.

Nee, et al. (2007) even found negative significant effects in the case of government involvement on

personnel decisions and strategic firm decisions. Party intervention yields significant negative effects

in the case of financial decisions and in overall perspective averaging all firm decisions.

Boris Peters 28

It is evident that the regulatory regime adds to uncertainty of doing business in China therefore

increasing transaction costs. Regulations are changing fast to keep up with the fast developing

economy but due to the fact that every province or county is free to modify or manipulate and create

its own regulations, the regulations are not always clear to the entrepreneur. The risk of confiscation

of assets, ‘ad hoc’ taxation and badly enforced regulations indicate that the control of (local)

politicians should be taken into account. Entrepreneurs need to have an extensive network of other

business people to lobby bureaucrats and politicians together. Alliances with local government

officials are needed to influence the enforcement of regulations and taxes. The bargaining power of a

network of business people is off course higher and further stresses the need for business people to

form a social network.

The newness of private enterprise

Entrepreneurs in China have a low level of expertise in organising production and management of

private firms due to their formal education. There is a lack of business knowledge that equips Chinese

entrepreneurs with assessing risks associated with doing business. There are no standardized routines

of business practice because of lack of experience (Krug and Mehta, 2004). Here the problem of

‘newness of private enterprise’ arises. Since the Chinese have little business experience due to the

state planned economy until 1980, there is a chance that clients, suppliers, business partners and

employees are incompetent.

New businesses in China suffer from a shortage of experienced staff and outside providers of support

services. Under the planned economy technical skills were prized above all while disciplines like

marketing, finance and law were nonexistent. Exacerbating this, the country’s schools and universities

were shut down entirely between 1966 and 1976. The generation that would otherwise have been

educated during this period is now between forty and sixty years old. They would otherwise have

provided a major source of middle and upper managers. Those who did receive a good education may

not have built upon this with good work experiences. In the past, students received job assignments

from the government and went to work for the state bureaucracy or equally bureaucratic state-owned

enterprises. This created a conservative, cautious attitude towards work (Child et al., 2001).

Barringer and Greening (1998) describe that growth and expansion is likely to exacerbate the need for

formal planning. The task of getting a new geographic site up and running requires planning in terms

of site selection, recruitment and selection of qualified personnel and the establishment of

communication links between the headquarters location and the expansion site. The stage models,

which depict the life-cycle of a firm as a multi-stage process, suggest that one of the most important

management challenges associated with internationalisation is attracting and maintaining qualified

personnel.

Boris Peters 29

Emphasis must be laid on the employment of personal networks to carry out needed activities to

select, monitor or add value. As Ahlstrom and Bruton (2006) state in their article about venture capital

in emerging markets, in the absence of formal institutions, firms or people need to be monitored

through informal ties to entrepreneurs and families. Links to key customers, the government and other

allied firms through personal connections are needed. This not only holds for venture capitalists but

also for entrepreneurs in selecting competent potential buyers, suppliers, business partners and

employees through their network.

Incomplete property rights

Property rights are incomplete in China and private property and intellectual property form the highest

barriers for entrepreneurs starting up in China. Asset holders in China can exclude others from the use

of the same assets under a State guaranty. The asset is however only binding when resources are used

within the politically defined market sector and where effective law enforcement agencies exist (Krug

and Mehta, 2004). Every province or country is free to modify the national regulations regarding

property rights. As a result within the sectors of local governments, local officials, village Party

secretary, township economic commission and township heads have a large influence on the

assignment of rights to individuals (Oi, 1996). The research of Hendrischke (2004) suggests that

“there is a strong informal side to the definition of property rights where administrative categories,

status or partnership contracts matter less to the entrepreneurs than the substantial property rights

that can be realized in co-operation with the local state in the form of networks.”

Granting a private property right depends heavily on local government officials therefore networks

with local government officials play a vital role in acquiring property rights by Dutch entrepreneurs.

When private property is acquired, regulation often remains unclear or incomplete. For instance in

many occasions it is possible to acquire a building (house, factory, etc) but the land on which it is

built remains property of the local government. For obvious reasons it is therefore wise to maintain

good contacts with the local government. Who owns property is sometimes difficult to find out as

boundaries between public and private enterprises in villages and townships are sometimes vague. For

instance: public assets are sometimes leased out to private individuals and private enterprises are

sometimes partially owned by government officials (Walder, 1995).

The Business Software Alliance (a US-based trade association), estimates that 94% of software used

in China is pirated. Companies selling pharmaceuticals, chemicals, beverages and other products fight

a constant struggle against mislabeled fakes, some of which are toxic or hazardous. In a number of

Boris Peters 30

cases, domestic joint venture partners of foreign firms have literally emptied the joint venture factory

and set up an identical plant down the road after learning how to manufacture and market the product.

To prevent intellectual property from being ‘stolen’ one can use different techniques for instance

giving the employees access on only one part of the production process, preventing them from gaining

‘know-how’ of the entire production process. Patents are publicly accessible which means that the

information within the patent can be used to copy the product. In cases where the product is difficult

to copy it is in some cases wise to not patent the product at all.

Theft of intellectual property, like copyrights, trademarks, or patents, is ubiquitous but the main

problem is that law in this area is much less developed than it is in the west and it is poorly enforced

even where it exists (Krug and Metha, 2004). This means that when an intellectual property right is

infringed, it is very difficult to reprimand the infringer let alone getting a compensation for loss of

income.

A specialized court for Intellectual Property does not exist and litigation is under the jurisdiction

where the infringer is located or where the alleged infringement took place. Therefore it is possible

that a trial takes place in a part of China where the knowledge of the court about intellectual property

is very limited. Outcome of a court decision is therefore mostly in benefit of the local (Jian, 2007).

The fact remains that the property rights protection and granting mainly depend on the ‘connections’

with local jurisdictions or economic agencies. Krug and Pólos (2004) therefore advice to form

alliances with the local jurisdictions or economic agencies in order to enhance the probability that the

property rights of the company are protected.

Problem of obtaining capital

China’s commercial banking system has provided little direct help to private businesses. Banks are

often pressured by government agencies to loan to large state-owned enterprises or other firms with

the implicit or explicit backing of a government bureau, leaving little for private businesses (Marson

et al., 2002).

There are alternatives to bank loans. The concept of venture capital is very new to China. Venture

capitalists count on a stable institutional regime with a predictable rule of law and enforcement regime

to facilitate and safeguard their investments. In addition to legal stability, venture capitalists look for

environments with efficient markets for corporate control and capital, which readily allow exit from

ventures as well as systems with minimal corruption. This institutional stability and predictability

reduces uncertainty and risk, and enhances the likelihood of success in new ventures. Institutional

stability is largely unknown in most emerging economies, such as China. Emerging economies are

characterized by fundamental and comprehensive institutional transformations as their economies

Boris Peters 31

begin to mature. Venture capitalists can still make and manage investments under such unsettled

conditions with little protection of private property.

Efficiency and accessibility to investors are important to venture capitalists in both developed and

emerging economies. Ahlstrom and Bruton (2006) state that in emerging economies, venture

capitalists need to place greater importance on employing personal networks to carry out needed

activities to select, monitor, add value, and someday exit from their invested firms. Personal

connections and relationships with entrepreneurs, government officials, and customers, while

important in any setting, are likely to be more important in China. With the weak formal institutions

in China, less formal institutions sometimes provide some substitute for the lack of formal

institutions. Venture capitalists monitor firms through informal ties to entrepreneurs and their

families. They create links to key customers, the government and other important allied firms through

personal connections, something that they stated was particularly important and essential in emerging

economies.

Krug (2007) states in her article that when scarcity is mentioned like the lack of (venture) capital, the

reaction of entrepreneurs is that one needs to ‘know the right people’. Huge national and local

bureaucracy or other groups control resources which indicate that the shortage is more a distribution

problem. Who one knows is therefore a valuable asset.

Diversity of local business systems across China

“Business systems are distinctive patterns of economic organization that vary in their degree and

mode of authorative coordination of economic activities, and in the organization of, and

interconnections between, owners, managers, experts, and other employees.” (Whitley, 1999)

China’s economy is characterized by a variety of local business systems that are the result of the

freedom that local governments have in forming their own economic regimes. Down from provincial

to county and township level, the jurisdiction is not hierarchically prescribed. The local businesses

interact with local governments to re-organize firms and industries in line with local institutions and

due to the fact that local governments all have different regimes, the local business systems are

different too. The difference in regimes is evident in the taxation of companies. Local governments

are free to exempt any proportion of revenues or profits from taxation, given that the national tax rates

may not be changed. Local government absorb both losses and “excess” revenues. The local

government then reallocates excess revenues to organisations as investment capital, budgetary grants

or public services (Walder, 1992, 1995). As a result there are companies in some local business

systems that would not have existed without the “help” of the local government. These companies can

have a negative impact on the Dutch start-up.

Boris Peters 32

“The central government secures support from the lower administrative agencies on whose

compliance the enforcement depends. Coordinated via contracts with the superior agencies or

informally via networks such as authority and tax sharing systems enables local governments to

capture the gains “at the margin” and thus directly profit from local economic development.” (Krug

and Hendrischke, 2006) The different economic regimes of local governments and even the different

economic regimes of different layers of government add to the complexity of entrepreneurship in

China. This does not only affect the Dutch start-up but also the local business system in which it is

operating.

According to Boisot (1999) there are two major methods for handling the complexity due to diversity

in local business systems across China; firstly to reduce complexity by bringing it under apparent

control. Entrepreneurs endeavor to do this by securing direct control over their affiliates and sufficient

external influence so as to influence critical aspects of the environment. This policy is intended to

permit entrepreneurs to apply their standard policies and practices, which are well understood and

compatible with their possible worldwide activities. In China, reducing reliance on partners and

external relationships will lower the transaction costs of social exchange, but it is likely to raise the

transaction costs of exercising direct managerial control. Moreover, this policy could be of limited

effectiveness in reducing risk because it places low value on the support of local partners and may

also alienate powerful officials in the institutional environment.

The second option is to try to absorb the complexity of the Chinese situation through enlisting the

support of local allies. This entails a greater degree of participation in local relational systems and

hence raises the transaction costs of social exchange. It also engages the entrepreneur in a greater

level of variance than he or she is familiar with, which may limit its ability to relate its policies and

practices in China to its worldwide system.

Krug and Hendrischke (2006) suggest in their article that: “The need to cope with an insecure quickly

changing environment but also the lack of private savings or capital markets and the need to quickly

acquire scarce market and political information make co-operation a profitable endeavour. Co-

operation can take the form of an alliance with local government agencies.”

Boris Peters 33

Poorly functioning markets

Krug and Metha (2004) and Krug and Pólos (2004) state that the emerging Chinese market situation is

characterized by poorly functioning markets and even missing markets. Information regarding the

availability, price or location of resources is hard to find or even missing.

Entrepreneurs in transition economies find it hard to estimate how successful technical innovations

will be, or whether and how many competitors they have when production starts. Although

entrepreneurs in market economies face the same uncertainty, entrepreneurs in transition economies

face to additional forms of uncertainty. First, entrepreneurs in transitional markets face weak

economic institutions. If economic institutions do not provide general purpose safeguards in the form

of contracts, property rights and laws, uncertainty will increase. Second, if general purpose safeguards

are provided but monitoring is infrequent and default behavior is not punished, uncertainty will

increase too. Third, as described earlier in this thesis, the newness of the whole private business sector

increases uncertainty. Dutch entrepreneurs starting up China must be aware of the fact that many

Chinese companies do not have sufficiently developed routines or business practices and makes it

hard to locate expertise. Moreover, many Chinese companies do not have past experience to rely on.

Fourth, state owned companies that operate in certain markets can have a negative effect on the

functioning of the market. State owned companies often do not need to make a profit but are

operational to employ workers or provide output. Due to policy burdens such as irrational price

control, redundant and retired workers, and bureaucratic intervention, profits or losses may not reflect

managerial competence and effort. Therefore manager of state owned companies are not accountable

for profits or losses which in turn does not provide a stimulance keep the company efficient (Peng,

2001). Information about company ownership is therefore vital in order to select partners, suppliers

and clients in markets.

The four uncertainties combined make the use of networks and alliances necessary to obtain

information about markets, technology and resources. “As there is no functioning market for assets

and high level of uncertainty with respect to political and market risk, the next best institutions (to

functioning capital markets) are networks which are driven by the need to seek full employment of all

resources under their control, and have an incentive to expand to the degree that they are able to

absorb know-how, business opportunities, and technical as well as human resources.” (Hendrischke,

2004).

Local officials can provide some information about markets or even resources as Oi, (1996) describes

in his article: “Using information and contacts that they develop beyond the locality through their

routine conduct of administrative work, local officials can provide an array of essential services to

their local enterprises. This might include raw materials, but increasingly, it has become important

for information about new products, technology and markets for finished goods.”

Boris Peters 34

Poorly Developed Institutional Arrangements

Institutional arrangements are poorly developed in China. There is a shortage in China of employment

agencies, law and accountancy firms, commercial banks, insurance companies, and chambers of

commerce. In 1997 there were only 6000 law firms in China (Islam and Chowdhurry, 1997). The

intermediate institutions are needed to support the operation of firms and help entrepreneurs to start

up (Krug and Mehta, 2004, Child and Tse, 2001). In countries with a long experience of private sector

production, these agencies described earlier act as sources of information and expertise. The demand

for intermediaries is especially high in negotiations between potential business partners. Although

new agencies are evolving, the experience of the personnel is limited and incomplete.

Because of the shortage of institutional arrangements, entrepreneurs must rely more on other

entrepreneurs to gather information. Especially for emerging companies, the value of networks as a

substitute for institutions is widely acknowledged. Elfrink and Hulsink (2003) state, that the network

of an entrepreneur can provide opportunity recognition, legitimacy and resources. Groups or networks

of business people can be used to raise capital jointly, lobby bureaucrats and politicians together,

recruit managers as a group, and pool resources to invest in new ventures. Information may be

exchanged at formal group meetings, in informal clubs, or at family gatherings; and members may

buy and sell goods amongst themselves.

Ellis (2000) also found that knowledge of foreign market opportunities is commonly acquired via

interpersonal links rather than collected systematically via market research, also stressing the

importance of networks in China.

Resource dependancy

According to the resource dependence theory, a foreign market environment is a source of scarce

resources sought by competing international operating companies (Moran, 1985), and a dependency

situation arises when these companies rely on irreplaceable resources controlled by local possessors

(Pfeffer, 1978). The term 'resources' in this theory is extended beyond physical resources and

production inputs such as natural resources, raw materials, land use, local capital and workforce to

include infrastructure resources (e.g., transportation conditions), marketing resources (e.g.,

distribution networks and consumer base), and information resources (e.g., internet use, openness of

public information and transparency of government information).

Market-seeking Dutch entrepreneurs depend not only on China's physical and infrastructure resources

for local production, but also on its marketing and information resources for local operation,

adaptation and expansion. Dependency on those resources can translate into power for China, who is

then able to increase or withhold resources. If a Dutch firm subsidiary can therefore reduce its

dependence on Chinese resources by utilizing more internal resources coming from its parent or

Boris Peters 35

subsidiaries, the economic risks or transactional costs associated with resource acquisition will be

substantially decreased. The reduction of external dependency requires improvements in parent-

subsidiary relations on a number of fronts, notably resource support and intra-network information

flow.

The dynamics of competition in China are subject to interference by authorities because the economy

is still state controled, a factor which foreign investors often find hard to predict. Under this condition,

foreign companies have to depend heavily upon their strategic resources to compete against local

rivals, especially long-established indigenous firms that in many cases maintain strong customer,

supplier and distributor networks (Child et al., 2001).

Social networks are very important in obtaining resources. “So long as a still huge national and local

bureaucracy or other groups control resources such as much needed financial capital, land, or

export-licenses, shortage appears as a distribution problem. Therefore, ‘who you know’, or guanxi is

a valuable asset.” (Krug, 2007).

When Dutch firms invest in China, an emerging market with an environment characterized by

institutional stringency, regulatory ambiguity, structural uncertainty and a weak legal system, a

reduced level of local dependence lessens their susceptibility to unverifiable and unpredictable risks

that are often beyond control of the organization. Williamson (1985) therefore states that the

transaction cost theory argues that when uncertainty is high, the firm should limit its commitment to

the environment to a minimum.

If it is possible an entrepreneur should rely as less as possible on the resources of China to reduce

risks and try to develop an extensive network to obtain needed resources.

Boris Peters 36

4.3 Conclusion

The weak regulatory regime is a problem in the form that the regulations need to change fast to keep

up with the fast developing economy and this creates uncertainty. The fact that every province or

county is free to modify or manipulate and create its own regulations, the regulations are not always

clear to the entrepreneur and this creates even more uncertainty. The risk of confiscation of assets, ‘ad

hoc’ taxation and badly enforced regulations indicate that the control of (local) politicians should be

taken into account. As enforcement of regulations are sometimes open to negotiation, the entrepreneur

needs to form a social network with other entrepreneurs or government officials.

The newness of private enterprise is a problem with many Chinese due to lack of experience, the

absence of routines and lack of business knowledge. In the time of the planned economy, technical

skills were prized above all and schools and universities were even shut down between 1966 and

1976. The generation that would otherwise have been educated during this period is now between

forty and sixty years old. They would otherwise have provided a major source of middle and upper

managers. The social network of the entrepreneur is the only option to gain information on the

background of potential customers, suppliers, business partners and employees.

Property rights are incomplete and badly enforced. There are solutions to avoid the need of protection

of intellectual property but the problem still remains. The granting of property rights and the

protection of intellectual property mainly depends on the ‘connection’ with local jurisdictions and

local government officials.

The problem of obtaining capital for Dutch entrepreneurs lies in the fact that it is not possible to

obtain capital from China’s commercial banking system. It is possible to obtain capital from venture

capitalists. But due to institutional instability venture capitalists place greater importance on

employing personal network to carry out needed activities in order to select, monitor, add value, and

someday exit from their invested firms. Therefore having a large network that can be used for due

diligence is needed.

The diversity of local business systems is the result of different local government regimes. Having an

alliance with the local government makes it possible to gain scarce market and political information,

making it easier to adapt to possible changes.

Poorly functioning markets are the result of difficult to find or even missing information about the

availably, price or location of resources. Information about the number of competitors and clients is

also limited. State owned companies can have a negative effect on the market and it is therefore

important to gain information about ownership. The network with government officials and other

entrepreneurs can be used to gather the information.

Institutional arrangements are poorly developed and there is a shortage of institutions like law and

accountancy firms, insurance companies and chambers of commerce. Entrepreneurs must therefore

rely on other entrepreneurs to gather information needed to start up.

Boris Peters 37

Resource Dependancy can be a problem because Chinese government controls certain resources. The

economy is state controlled and sometimes difficult to predict. It is therefore wise to reduce the

dependency on Chinese resources as much as possible.

Boris Peters 38

5 Solutions derived from the literature

In the literature discussed in chapter 4 it is stated that in many cases having a social network with

other international entrepreneurs, Chinese entrepreneurs and government officials can either solve the

problem or decrease the influence of the problem on the company of the entrepreneur. Ducket (2004)

describes why entrepreneurs in China use their social network:

“Markets for capital, labor, and information are underdeveloped, liability laws, property rights, and

contracts are weak, state regulation is negotiable, certain resources remain bureaucratically

controlled, and private entrepreneurs are vulnerable to political persecution. Because the private

sector emerged only in the 1980’s, after almost 30 years of state planning, would-be business people

face the ‘liability of newness’: they ‘have few models of entrepreneurship to imitate or adopt and little

understanding of how markets work. In this environment, it is rational for them to form two kinds of

alliances. They ally with state officials to make the environment more predictable and reduce risk,

and they ally with other entrepreneurs both to promote ‘a stable set of expectations of “good”

business behavior’ and to learn about doing business in a market economy.”

Although Ducket (2004) describes why it is beneficial for Chinese entrepreneurs to use their

connections with government officials and other entrepreneurs in China, having a qualitative network

is beneficial for all entrepreneurs. Dubini and Aldrich (1991) describe that the network makes it

possible to explore and exploit opportunities and even go as far as stating: “entrepreneurship is thus

inherently a networking activity.”

The social network can also offer ‘resources’, in the early phase it is necessary to access, mobilize and

deploy resources in order to pursue the opportunity. Networks facilitate the search for critical asset

providers like investment, technology partners and key customers. The critical asset providers in the

network can offer the startup access to financial resources, production know how, distribution

channel, etc. Especially in a start-up, resources need to be secured at minimum costs because paying

the market price for resources such as labor, materials, advise and commitment is often too expensive.

Therefore the social transactions through the network especially for entrepreneurs play a critical role

when starting up (Hulsink and Elfrink, 2003).

Coviello and Munro (1997) underline in their article about the network relationships and

internationalization process of small firms that the relationships abroad influence the decision to

internationalize. It can be concluded that the social network of the Dutch entrepreneur is very

important when coping with the problems encountered when starting up in China. The social network

consisting of Chinese government officials, Chinese business contacts and other entrepreneurs can

reduce risk resulting from underdeveloped regulation and bureaucratically controlled resources. It

Boris Peters 39

offers the possibility to explore and exploit opportunities, it offers support for the liability of newness,

and it gives access to resources in order to pursue the opportunity. The problem of this conclusion is

however that Ellis (2000) states that: “It is self-evident that larger, diversified firms enjoy more

opportunities to exploit network ties than smaller, less connected companies.” This means that it is

difficult for entrepreneurs to access social networks in China because their companies are smaller.

So if the solution to many problems encountered by entrepreneurs in China lies in having a good

network; another question arises which apparently haunts this thesis: How?

How can entrepreneurs access and exploit networks in China?

Ellis (2000) describes the methods used by decision makers to identify potential exchange partners. In

his article he states that smaller firms often have domestic business networks which are smaller and

less international than the networks of large companies. Therefore smaller firms place a higher

priority on attending trade fairs and using third parties to come into contact with foreign networks.

Trade fairs are exhibitions organized so that companies in a specific industry can showcase and

demonstrate their new products and services. A trade fair offers a platform to meet new contacts and

makes it possible to establish new ties with foreign networks. Ellis (2000) concludes that trade fair

participation generally results in exchange partnerships being formed. According to Ellis, third parties

that are mutually related like government agencies or intermediary companies, can also be beneficial

in meeting new contacts.

Now we found the answer on how to meet new contacts in China we need to understand how to

establish a tie with the contact. Establishing a tie and especially a strong tie is difficult in China

because the Chinese lay a lot of emphasis on ‘Guanxi’. As explained earlier in this thesis Guanxi can

loosely be translated as ‘social / business network’ but differs in the respect that they control and

influence interactions and transactions between any social actors and in particular individuals.

Business networks are concerned with relationships among organizations, therefore organizations do

not have ‘Guanxi’, only the individuals within the organization can have ‘Guanxi’ (Bjorkman and

Kock, 1995).

When the Chinese speak of heaving ‘Guanxi’ it is very difficult to disturb the contact but once

disturbed it is impossible to rebuild. Therefore in order to build ‘ Guanxi’ trust is needs to be built.

Given the high marginal cost of cultivating new relationships for the Chinese, it makes sense to do

business first with close family, then with extended family, then neighbors, then former classmates,

and only then, reluctantly, with strangers. To build up a network with Chinese is therefore very

helpful but also very difficult and time consuming (Gold et al., 2002).

Bjorkman and Kock (1995) state in their research that building up ‘Guanxi’ with a Chinese is very

difficult for a non-Chinese because one must speak the language and ‘Guanxi’ is frequently related to

Boris Peters 40

common background. The solution to this is to employ a Chinese individual from the industry in

question as he or she had some access to many social relationships ranging from competitor

employees to government officials, he or she can speak Mandarin or Cantonese and sometimes even a

dialect. Often the Chinese employee has a common background with the new contact and is therefore

able to set up ‘Guanxi’ far more easy. Bjorkman and Kock (1995) concluded that local presence of the

company before starting up in the form of a representative office in China makes it able to hire a

Chinese employee and is the most effective way to gain access to social network in China.

Boris Peters 41

6 Qualitative Research and Results

6.1 Case selection

As described in chapter 3.4 only wholly owned foreign enterprises are selected for the case study

because the entrepreneur has the highest degree of control and the company is physically present in

China.

Shane (2008) indicates in his book that generally over 55% of all start-ups will not survive the first 5

years and after surviving this period the survival rate will increase. The start-up stage has certainly

ended for most companies after five years but the knowledge about the problems while starting up is

still ‘fresh’ in the mind of the entrepreneur. Therefore case study subjects in this thesis are not older

than 5 years.

The company must be a SME in order to assure that the entrepreneur has an overview on all

operations of the company and therefore can provide detailed information on all aspects of the

company. Moreover, as stated earlier, there can be a difference in impact of the difficulties or

problems encountered in China when starting up a SME compared to large company. Large firms

often have many resources like capital, expertise and experience. An entrepreneur has less financial

resources, must hire expertise and has often limited experience often making the effect of the

problems larger. For these reasons I presume that an entrepreneur of a SME can provide more detailed

answers to my questions.

The number of cases depended on the theoretical saturation, in other words; when incremental

learning is becoming minimal the number of cases are enough. Due to the limited time that I lived in

China the cases selected are active in different market segments. I did not know (at that time) how

much Dutch entrepreneurs were active in a certain segment and to avoid data shortage I interviewed

as much as entrepreneurs as possible regardless of the industry in which the entrepreneur was active. I

also interviewed entrepreneurs regardless whether the company was providing a service or producing

a product. I know that this could distort my findings but my reasoning is that when a company is in a

start-up phase, the activities to start up are the same, which implies that the problems encountered are

the same too. Making service providing companies and production companies equal.

Boris Peters 42

6.2 Validation

In order to gain as much knowledge as possible about entrepreneurship in China it is evident that it is

best to travel to China to collect information and study the cases. Therefore I travelled to China

(Shanghai) and started to work for a big Dutch company (Hunter Douglas). In my spare time a tried to

interview as much people as possible to fully understand which problems and challenges one

encounters when starting up in China and which solutions can be used to overcome these problems

and challenges. I also travelled to Beijing, Hong Kong and Shenzhen to interview entrepreneurs in

order to discover possible regional differences in problems or solutions.

Before choosing the cases and conducting the interviews I first started in the same way an

entrepreneur would start when setting up a company in China because in doing this I came into

contact with the right people to ask questions to. Because of this approach it is also possible to gain

information from different sources and not only from entrepreneurs.

The first interviewee was the Economic Consul at the Dutch Consulate in Shanghai because most

entrepreneurs start here. I gained information about how the Dutch government supports Dutch

entrepreneurs starting up in China and what problems most entrepreneurs encounter when starting up.

The Dutch Consulate in Shanghai offers the same services as the Netherlands Business Support

Offices (NBSO) in other developing countries. The Dutch Consulate can act as an intermediary

between the Chinese government and the entrepreneur and it is also possible to come into contact with

other entrepreneurs with the help of the Consulate. The consul advised me to interview consultants,

lawyers, recruiters and accountants.

During my interviews it became evident that most Dutch entrepreneurs use consultants to gain advice

on legal, financial or human resource topics because in most cases the time and knowledge of the

entrepreneur is limited. Therefore I had interviews in Shanghai with three law firms (Yunhe Lawfirm,

CMS Legal and Holthuis Advocaten), a bank (Fortis), an accountancy firm (Deloitte & Touche), a

recruiter (Randstad) and two housing/location agencies (DTZ and SIP) to gain as much as information

possible.

Because of the background information on how the mentioned institutions help entrepreneurs starting

up in China I could verify if the research questions were the right questions in order to provide

solutions to the problems and challenges encountered when starting up in China. Interviewed two

well-known China consultants that specialize in advising entrepreneurs who are starting up in China;

Sinova and Eastwingate. Both consultants were also the owner of the company, which makes them

entrepreneurs too. The consultants were able to indicate what problems are encountered most and

Boris Peters 43

what solutions they provide to these problems. Because of the valuable information I decided to add

their responses into this theses in the form of two cases.

Finally I interviewed seven Dutch entrepreneurs who started up in China and asked them about the

problems they encountered when starting up in China and what solutions they came up with during

the process. I used three companies as a case for this thesis.

I gained access to he entrepreneurs through the tight network of Dutch expats and entrepreneurs in

Shanghai.

Boris Peters 44

6.3 interview set up and analysis

Based on the literature study and interviews with the consultants I made a questionnaire with open

questions as needed for qualitative research. I did not choose for closed ended questions as I am

interested in exploring possible other solutions to the stated solutions in the literature. I am also

interested in deepening my knowledge about the stated solutions which is difficult when choosing

closed ended questions.

The interviews were all conducted personally and face-to-face in order keep the interaction as

spontaneous as possible. I kept the interference to a minimum while finding answers to my questions.

The interviews all took more than two hours and sometimes even more therefore the reports of the

interviews are summaries of the interviews. After finishing the summaries the respondents were given

the opportunity to comment on the report to guaranty the quality of the results.

6.4 Schematic overview of selected cases

Company KOW

Architecten

Lensvelt /

Gispen

Beumer

Agritech

Sinova Easwingate

Company

type

Service Production Production Service Service

Industry Architectural

Interior design Flower

Cultivation

Business

Consultancy

Business

Consultancy

Year of

startup

2006 2004 2002 2002 2005

Employees

in China

14 90 20 22 5

Total

employees

170 400 50 27 15

Title / Name

of

entrepreneur

Director

Ron de Goeij

Director

Hans Lensvelt

Director

Rienk Hamstra

Director

Jennifer Chan

Director

Ari van der

Steenhoven

Location of

compay

Shanghai Taicang Shenyang Hong Kong Shanghai

Boris Peters 45

6.5 Case studies

Case #1: Kow Architecten

Overview

KOW architects started out of a merger between two architect firms in 1998. The expansion of the

company was mainly done through mergers and acquisitions; from their start four more companies

joined KOW.

There are five disciplines in which KOW delivers services:

Architecture (designing new buildings), Urban Planning (designing public space, landscape etc.),

Urban Renewal (new construction, renovation, restoration), Interior Design (design of interior) and

Communication (marketing concepts).

The architect firm has about 170 employees and a turnover of 14 million euro.

The entrepreneur

Ron de Goeij (1967) started his own architect firm in in Den Bosch and he also had a company that

was fabricating portable dressing rooms. The portable dressing rooms could, for instance, be used for

sport events on location. Ron de Goeij was on a trading mission to China to explore the opportunities

to sell or manufacture his portable dressing rooms when he met Arend Hilhorst who is the director of

KOW.

It turned out that KOW wanted to expand into the “achterhoek” in Holland and was also looking for

someone who had an international orientation to help KOW expand internationally. Ron de Goeij had

an interest in doing business abroad and looked for opportunities to grow his architect firm in Den

Bosch. Therefore Ron de Goeij merged his firm with KOW and became director of ‘KOW

International’ and was assigned to set up an office in Shanghai. Mr. de Goeij still sees himself as an

entrepreneur because he exploring new possibilities and is involved in setting up new businesses for

the company.

Activities in China

The main goal of KOW is to serve the Chinese market, and they already do so by realizing a huge

project in ChengDu, the Chengdu Electrical Power Centre and a 5-star Hotel together with another

Chinese architect company. Although the profit do not cover the expenses yet, Mr. de Goeij is already

very optimistic because Chinese architects do not have as much knowledge about sustainable

building. KOW can offer service to the Chinese government in advising about enhancing the

Boris Peters 46

durability of a building. Isolation and double glass is still a novelty in new buildings but saving

energy is slowly getting into the minds of the Chinese people as commodities prices rise.

Increasingly more Chinese investors are also exploring the possibilities to build in Holland, by having

an office in China it is possible to serve these clients but this is not he case yet. However, not having

many Chinese clients yet does not form a problem to KOW as it uses the difference in time between

Holland and China to continuously work on design projects. The cost of designing a project is

therefore lower and projects are finished in a shorter time period.

Starting up in China

In 2006 ‘KOW international’ was founded. The reason for this decision lies in the fact that KOW is

becoming quite large for an architect firm and there are not enough projects to grow the turnover as

they want to. By serving more markets and attracting more foreign clients it is possible to grow their

turnover in a healthy rate. Currently KOW is in the process of setting up an office in Istanbul (Turkey)

and is orientating to set up an office in India, South-Africa and Great Britain.

In 2006 KOW opened an representative office in Shanghai; China. The office was obtained with the

help of ‘Science Alliance’, this intermediary organisation works closely together with universities,

companies and governments to stimulate cooperation and knowledge transfer. As a part of the ‘South

Holland-Shanghai Pudong Co-Innovation Program’, Chinese companies were stimulated to set up

business in Holland and in return KOW was one of the Dutch companies that could start up their

representative office in Shanghai for free for a certain period of time.

Mr. de Goeij states that it is very difficult to understand which formalities are needed to fulfil in order

to start up a business in China. It is possible to hire consultants that assist the start up but this is very

expensive because most of them take advantage of the limited knowledge of the entrepreneur about

legal formalities in China. Many business licences need to be written in the Chinese language and

instructions for filling in the licence application forms are also mostly written in Chinese. The

licences needed differ depending on the location in China. The licences not only differ depending on

the county but can even differ across districts within cities. The fact that it is very difficult to estimate

the quality of the consultant because of limited information makes choosing the right consultant even

more difficult.

The ‘incubator program’ was very helpful for KOW because ‘Science Alliance’ helped in providing

an office location, business licences, financial and legal services. From their small representative

office they could now focus on hiring new employees, search for a possible business partners and

Boris Peters 47

setting up a wholly owned entity. The first months the only activity of Mr. de Goeij was to build up a

network with other entrepreneurs and business people in order to gain information about starting up a

business in China.

KOW already had some contacts with the Tongji University because of the political past of Arend

Hilhorst (director KOW) and through these contacts KOW placed advertisements with vacancies in on

the internet site of the department of architecture of the university. Through the contacts with the

members of Tongji university Mr. de Goeij met with a Chinese architect that just finished her study

and worked as an architect for the university. She spoke fluently English and understood the goals of

KOW and could provide a lot of expertise on the Chinese market and help in selecting new employees

for KOW. They offered her a job to work as an architect for KOW and help setting up their business.

From the start of setting up a business in China, KOW wanted to set up a wholly owned entity. Mr. de

Goeij explains that it is difficult to cooperate with a Dutch architect office so it must be merely

impossible to a joint venture with a Chinese architect office due to business culture problems,

language problems, etc. The positive aspects of having a joint venture with a Chinese company do not

outweigh the negative aspects for KOW.

When KOW wanted to set up a wholly owned entity, they asked a Dutch law firm to arrange all the

business licenses but this was far to costly as they charged 25.000 euros. Mr. de Goeij knew some

other entrepreneurs that used a Chinese law firm to arrange the business licenses and other formalities

that were needed to set up a business, so they used this law firm which charged only 10% of the price

of the Dutch law firm.

Eventually a location was found and through the network of the new Chinese employee they hired

more employees, she even helped assessing the new employees. To use an new employee as a basis to

attract and select other new employee is risky says Mr. de Goeij but if you have great deal of trust in

the person, it is the best and cheapest solution. In the summer of 2007, only one year after the first

visit to China, the office of KOW was opened by the Dutch minister of foreign trade; Frank

Heemskerk. The KOW office in Shanghai now has 14 employees.

Difficulties and solutions when starting up:

-Weak regulatory regime

The problem with the weak regulatory regime of China is the fact that it is also a totalitarian regime.

This means that it is only possible to have influence on regulation if you organize in massive numbers

and even then, your influence will be small. If the government decides to change the regulation, the

Boris Peters 48

only thing KOW can do is react fast. A great deal of time is spend on interpreting government

statements and press releases in order to forecast what will happen. There are regulations that are a

barrier to non-Chinese firms; to design a structure that will be built in China, a Chinese architect

certificate is needed. The certificate is only granted to Chinese citizens. Therefore the first employee

that KOW hired was an architect with this certificate. In some cases the regulation forces KOW to

work together with other Chinese architect firms. This is not a great obstacle because it is very

common for architect firms to work together on a project. Hiring a Chinese employee was helpful to

understand regulations and political situations.

-Newness of private enterprise

The generation that is finishing the university is the first generation that grew up with an

understanding and education in private enterprise and open market economy. The interest in the

western economy and way of living also makes the new generation a very valuable resource. Many

Chinese students also followed an education abroad making them well educated in private enterprise

and open market economy. Most of the employees at KOW Shanghai are under 30 years of age and

recruited through the network of the Chinese employees. The first employees were selected with help

from the first Chinese employee.

-Incomplete property rights

The design work of buildings is very specific so intellectual property theft is not an issue.

-Obtaining capital

KOW did not need to lend capital from Chinese institutions because KOW Holland had enough

capital to fund the startup.

-Diversity of local business systems in China

Research on a local business system is an important activity for KOW. Before a project is accepted it

is researched what kind of licences are needed in the area, what regulation apply to the project and

how the local government interacts with the project. The local government is heavily involved in

many projects in China and often it difficult to understand in what way the government is involved

and who makes the decisions.

In China government officials have great respect it is therefore very helpful that one of the directors of

KOW; Arend Hilhorst, is the former city councilman of The Hague and advisor of the Dutch Prime

Minister. Through his network it possible to get more information from local Chinese government

personnel. A great portion of information can also be gathered through the network of the Chinese

employees.

Boris Peters 49

-Poorly functioning Chinese markets

It can be difficult to find new projects for KOW due to the fact that projects are often communicated

through Chinese networks. The network of the employees is mostly used in gathering market

information.

-Poorly developed institutional arrangements

In Holland KOW uses the ABN-Amro to arrange all their financial operations and they also wanted to

use the services of the ABN-Amro in China. KOW needed a bank account for their transactions but

this turned out to be very difficult as foreign banks can not deliver the same services as Chinese banks

due to Chinese regulations. It took many months only to open an account with the ABN-Amro. A

business associate in China recommended a Chinese bank and KOW used this bank to open an

account which took only 4 days. This example indicates that through the network of business

associates it is possible to overcome poorly developed institutional arrangements.

The exchange program offered a lot of help when KOW started as a representative office, the Chinese

government assisted in appointing the right institutions and supplied information on the needed

licenses.

-Dependency on Chinese resources

KOW is a service providing company so does not depend on physical resources. Although resources

like market data is incomplete or difficult to obtain this is not a problem because this is the same for

the competitors.

-Additional problems and challenges

It takes a long time to get all the necessary business licences and often you can not obtain certain

licences before first obtaining other licences. KOW needed a letter from their landlord to obtain a tax

certificate, the landlord was unreachable for a long period and this held up all other licences. When

starting up in China it is important to be flexible in the time to start up. It is best to stay for a long time

period in China while starting up so it is possible to deal with difficulties on site and on time.

Solutions derived from the literature

-networking with other, non-Chinese, business people

When it was known that KOW had an office in Shanghai there was attention from the media in

Holland and KOW tried to communicate as much as possible that they were operational in China.

Business people that were also operational in China felt ‘connected’ with KOW and it is very easy to

build up a network. In China many events are organised by the Dutch government, trade

Boris Peters 50

organisations, other companies, etc. The main objective with these events is to meet new contacts and

this is done much more enthusiastically compared to events in Holland.

-setting up alliance/networks with Chinese government officials

As stated before the Chinese have a deep-rooted respect for government officials therefore the

network of Arend Hilhorst (director KOW and former city councilman of The Hague and advisor of

the Prime Minister) is very useful. When KOW opened their office in Shanghai, the Dutch Minister

for Foreign Trade, Frank Heemskerk, was asked to officially open their office. At the opening also

Chinese government officials were present and through these officials KOW established their

presence. In many activities KOW tries to involve Dutch government officials to attract Chinese

government officials and trough this involvement a network with Chinese government officials can be

build up. The Dutch government in Shanghai is not only very helpful in co-operating with Dutch

companies in events nut also organises many events where it possible to meet Chinese government

officials.

-building a network with Chinese business people

The network of the Chinese KOW employees can be very useful in meeting Chinese business people.

Because of previous jobs in the design industry many KOW employees often already have contacts

within the industry. According to Mr. de Goeij Expo’s and trade fairs are a way get into contact with

Chinese industry insiders.

Additional information

Mr. de Goeij stresses the fact that an entrepreneur should keep in mind that setting up a company in

China takes much more time than in Holland and also acquires a lot of devotion of the entrepreneur in

the form that he needs to be physically present.

Boris Peters 51

Case #2: Lensvelt Interieur

Overview

Lensvelt interior was founded in the 60’s and started with the sale of barber seats. Nowadays Lensvelt

designs and produces project furniture for all purposes. Due to the modular construction it is possible

to produce made-to-measure products. The company works closely together with leading designers,

architects and artists. Lensvelt tries to produce high quality fashionable furniture for a reasonable

price.

In 2004 Mr. Lensvelt opened a wholly owned factory in Taicang (Suzhou Antriol Sheet Metal

Production) to produce labour intensive components. In 2006 Lenvelt merged with furniture producer

Gispen on the basis of a shares exchange in order to create synergy and to grow faster. Gispen wanted

to produce and sell in China and Lensvelt wanted to grow faster. The companies are now lead by a

single board of directors but the brand names and companies remained unchanged. Because of the

combination of the two office furnishers, the new merger now has the second largest market share in

the Benelux.

The entrepreneur

Hans Lensvelt (1959) started working in his father’s factory in 1985 after his graduation as an

engineer. In 1990 he took over the shares of his father. Mr. Lensvelt owned a couple of metal working

factories in Holland and later also in Taicang (China) after the merge with Gispen the factories were

sold to the management. The factories had several clients and one of them was Lensvelt himself. After

the merge the production of the Lensvelt furniture was brought over to Gispen’s production facility in

Culemborg (Holland). This created a lack of capacity in Culemborg but this capacity was found in the

Taicang Factory.

The company grew from 40 fte’s to 400 fte’s. Lensvelt is the creative director bij Gispen, co-founder

of Moooi, CEO of Lensvelt and founder of the Suzhou Antriol Sheet Metal Production in China. Mr.

Lensvelt is now planning to permanently settle in Shanghai.

Activities in China

Mr. Lensvelt just started production of labor intensive components in Taicang that are shipped to

Holland and used for the production of furniture. Beside that the company is already producing

similar products for similar companies as Lensvelt and Gispen all over the world. Mr. Lensvelt

explains that the focus is now on the start of producing complete products so the company can start

serving the high end Chinese market. Currently there are 90 employees working in China and in order

to scale up production, the goal is to grow to 200 employees within two years.

Boris Peters 52

Starting up in China

Mr. Lensvelt attended a European convention on interior design and heard about the increasing threat

of Chinese furniture manufacturers who want to supply to the Western market. Not wanting to wait

until his Chinese competitors were already selling in Holland, Mr. Lensvelt send ten business

associates an email with the request for Chinese contacts to set up a manufacturing facility in China.

He came into contact with three possible options and visited the sites together with a Chinese female

interpreter. The contacts turned out to be not very reliable and in the last days of his stay in China he

wanted to visit Taicang, a city that he heard about during his stay.

Mr. Lensvelt came into contact with the local vice mayor of Taicang through a mutual business

friend. The vice mayor offered Mr. Lensvelt a site of 20.000 square meters on the condition that Mr.

Lensvelt would register as a Wholly Foreign Owned Company. In return the vice mayor asked: a

registered capital of minimum 3 million euro, everything according the law. (Meaning no corruption),

high technology, no pollution, certain substance/scale.

Mr. Lensvelt accepted the offer and also hired his female translator (Xiongying) to set up the factory.

Mr. Lensvelt was very impressed by the female translator because she was extremely intelligent,

spoke excellent English and it turned out she had very good negotiation skills.

The vice mayor also offered a temporary office space in his local government office and even brought

Lensvelt in contact with suppliers, contractors, and even other government officials. Sometimes the

vice mayor even supported in the negotiations, for instance when the landlord of a rented building

charged too much for the electric power installation.

Within months the factory was built and the translator is now the vice - general manager of the factory

in Taicang.

Difficulties and solutions when starting up:

-Weak regulatory regime

It is impossible to have any influence on the decision making in Beijing the only thing that can be

influenced is the enforcement of the regulation on a local level. However according to Mr. Lensvelt

this is exactly what can get entrepreneurs into trouble because a ‘special deal’, that is agreed upon

with a local government official can be changed by his successor because government officials

change post and positions frequently. When having a factory in China one must also keep in mind that

the machinery, building, stock, etcetera are a very high investment and this is not something that an

entrepreneur want to have seized by the Chinese government because of ‘playing with the rules’.

Boris Peters 53

A good honest relation with local government officials is the key in getting help when, for instance,

regulation changes. It is much more helpful if government officials can advice what to do when

certain regulation changes and requirements must be met. In a less developed location it is much

easier to get into contact with high ranking local government officials. Mr. Lensvelt states that if there

is a problem he can arrange a dinner with the local mayor within a few days and the problem will

probably be solved.

-Newness of private enterprise

Chinese employees that have studied abroad are most often very interested in the ‘western way of

doing business’. Mr. Lensvelt is very impressed by the Chinese and he describes Chinese employees

as very hard workers who are smart and well educated. Mr. Lensvelt states that he did not encounter

the problem of newness of private enterprise with higher educated employees. Hiring the female

translator made it possible to test the competence of new employees by her, she hired the first

employees.

Many factory employees are not used to work efficiently because they worked in state owned

enterprises. Because state owned companies did not need to make profit, efficiency was not needed.

The newness of private enterprise is only a problem with hiring low educated employees. However,

labor is very cheap so it is not an issue that some activities are not done efficiently.

-Incomplete property rights

Fighting copying competitors is useless according to Lensvelt because the enforcement of intellectual

property rights is very bad. Mr. Lensvelt states that, if even big companies like Hugo Boss and Prada

can not protect their products from imitation, he will not be able to do so either.

Lensvelt will produce complete products in China within 6 months from now and will serve the

Chinese market. Mr. Lensvelt wants to serve a niche market with very high quality products for a

reasonable price. Mr. Lensvelt is confident that he can compete with Chinese producers on price and

quality which makes it less attractive for Chinese producers to copy his product. When the product is

copied he will use his contacts with the local government of Taicang to enforce regulations on the

infringer. He will probably not go to court to enforce the regulations due to high costs and possible

limited outcome.

-Obtaining capital

Lensvelt had enough financial reserves to set up the factory in Taichang.

Boris Peters 54

-Diversity of local business systems in China

Mr Lensvelt states that he knows that there are many differences in the local business systems in

China but due to the help of the local government in Taicang and the skills of their Chinese general

manager they did not have any problems with the local business system. Because they knew exactly

how to set up the company.

-Poorly functioning Chinese markets

Lensvelt does not yet supply to the Chinese market the knowledge about this problem is limited

however Mr Lensvelt states that gaining market information is difficult due to the fact that regulations

are badly enforced and information is not reliable. For instance in Holland almost every company has

an internet site and information given on the internet site must be true.

Information about the company can also be checked at the Chamber of Commerce. In China

manufacturers can state anything they want on the internet site because the information can not be

verified and if the information is wrong it can not be punished. Many manufacturers state they

manufacture certain products while they actually buy the products from another manufacturer. The

network of the employees and government officials can therefore offer the most reliable information

about competitors, suppliers and buyers. Also other business people can offer information about

markets.

-Poorly developed institutional arrangements

This was not a problem for Lensvelt because all the arrangements were done with help of the local

government and the Chinese general manager; they knew which institutions to contact.

-Dependency on Chinese resources

Mr. Lensvelt states that all his competitors are mostly dependent on the same resources as he is and

that he need to pay more or less the same for the resources.

Oil, steel, plastics, electricity, etc can be bought in the Chinese market by him and his competitors.

For instance; an increase in steel price has effect on the whole market so this does not only pose a

problem for Lensvelt but also for his competitors.

The only problem for Lensvelt regarding resources can be the infrastructure in which the resources are

supplied. China can control the infrastructure and that can create a problem.

It happened to Lensvelt that the road in front of the factory was under construction but nobody was

working on it thereby stopping all transportation to the factory. Mr. Lensvelt told the vice mayor

about his problem, the next day a hundred road workers were working on the road and within a day

the road was accessible again.

Boris Peters 55

-Additional problems and challenges

It is very difficult to set up a company or factory in China without the help of a Chinese citizen. One

needs someone to translate, help set up the business, and gather contacts. The biggest problem of all is

to find someone to help set up the business and to trust that person to do so.

Solutions derived from the literature

-networking with other, non-Chinese, business people

It is very easy to meet other business people on trade missions but trade fairs and fairs can be a very

valuable way to meet new people. In China there are thousands of fairs and trade fairs every year.

There are also special networking events organised by companies or entrepreneurs. Mr Lensvelt states

that he was amazed about the amount of networking events held in Shanghai every day.

-setting up alliance/networks with Chinese government officials

As stated earlier it is very easy to come into contact with government officials in a smaller less

developed region. It is also very beneficial to hire a Chinese employee to help set up the business,

however to find someone who can perform such task is difficult. Meeting people who are in the same

industry can lead to a contact with such a person.

The fact that the company brings employment to the local area and is a showcase for foreign investors

makes it very easy to come into contact with government officials.

-building a network with Chinese business people

For meeting Chinese business people trade fairs and network events are very helpful but the Chinese

lay a lot of emphasis on trust. Mr lensvelt staes that Chinese are very cautious in trusting foreigners

because they have difficulty to understand foreigners. When a Chinese employee is hired to help set

up the business it is easy to build up a network with business people because it is much easier to

communicate.

Additional information

When doing business in China it is needed to listen to the ‘gut feeling’ or ‘entrepreneurial instinct’.

The Chinese are far more emotionally involved when doing business and are very focussed in getting

to know who their business partner is and how he behaves. In a land where contracts are at best

peaces of paper to remember what is agreed upon, knowing you partner is very important. Dutch

entrepreneurs or business people tend to exclude their emotions as much as possible when doing

business but when doing business with a Chinese this can have a negative effect.

Boris Peters 56

Mr. Lensvelt stresses the fact that the local Chinese government makes it very easy for entrepreneurs

when a foreign company is started that brings employment to the local area, is stimulating to the local

economy, and is environmental friendly. The mentioned benefits to the Chinese economy are points

that government officials want to achieve and thus are the intentions of the company in line with their

political agenda. The company can be used as a showcase for other foreign investors and therefore the

chance of failure is reduced.

.

Boris Peters 57

Case #3: Holland Beumer Agritech

Overview

In 1993 Gert-Jan Beumer starts a company that grows tries and specialises in horticultural architecture

and paving. In 2002 Mr. Beumer also starts to export flower bulbs to China. Beumer Agritech was

founded by Rienk Hamstra and Gert-Jan Beumer in 2002.

The entrepreneur

Mr. Hamstra started an employment agency together with a friend. Eventually he sold the

employment agency and lived a large part of his life in Asia. From 1996 Mr. Hamstra and a

Taiwanese friend started trading mostly in clothing and later in spare parts for power stations in

China. In 2003 he began working for a subsidiary of Hunter Douglas in Holland but moved to China

in 2007 to work for Hunter Douglas. He was actively involved in the start up of Beumer Agritech in

2002 because of his experience in China he is still director of Beumer Agritech but the day to day

activities are now ran by his Taiwanese friend.

Starting up in China

Mr. Hamstra was importing spare parts for power stations in China. During a business dinner

somebody asked him what his nationality was and when Mr. Hamstra replied that he was Dutch, the

Chinese man replied that he knew that Holland was famous for trading in flowers and asked if he

could also import flower bulbs. Coincidentally, the father in law of Mr. Hamstra; Mr. Beumer, was in

the horticultural business in Holland and therefore Mr. Hamstra replied that he could do so. Mr.

Hamstra thought the man was joking but the next day the Chinese man called back and asked about

the price. After consultation with his father in law he stated that the first shipment should be paid

before delivery. Within a day the Chinese man called back and asked the number of the bank account.

And from that day in 2000 Mr. Hamstra and Mr. Beumer were doing business in China.

In 2001 Mr. Beumer and Mr. Hamstra wanted to investigate the horticultural market and the

possibility of a joint venture with a Chinese state owned horticultural company. They decided not to

form a joint venture with the Chinese company due to the limited control resulting from a joint

venture.

In 2005 Mr. Beumer and Mr. Hamstra supplied flower bulbs to a horticultural exposition in Shenyang

and there they met with the son of the local mayor who offered them a low tax region and help in

setting up their company. Due to their research they knew about the flower market in China and

decided to start up a wholly foreign owned enterprise in Shenyang.

Boris Peters 58

Activities in China

The core activities of Holland Beumer Agritech is the trade of flower bulbs, cultivation of flower

bulbs, technical support to the clients for cultivation, and organising flower festivals for product

promotion.

Difficulties and solutions when starting up:

-Weak regulatory regime

A weak regulatory regime can also be an advantage because, as stated before, the mayor wanted to

stimulate the foreign investments in the area. The Chinese government wants to increase the income

of the Chinese farmers and foreign investments like Beumer Agritech delivers knowledge, labour and

economic impulse to the region. The company is also non polluting. The fact that a foreign company

invests in the region also means status for the government officials. The local government is therefore

very helpful in setting up the company and that is why all the required business licences were

arranged by the son of the vice mayor.

When Beumer Agritech was searching for a location the son of the mayor offered them a low tax

location at a technology development area that he was managing. When Mr. Hamstra said that the rent

for such a high tech location was too high and that Beumer Agritech was not meeting the

requirements of a high tech company the son of the mayor replied that they didn’t need to worry about

rent and that according to him Beumer Agritech was a high tech company. This deal worked both

ways; the son of the mayor had a new opening of a foreign company on his development area and

Beumer Agritech had a low taxation. In this case the diversity of the local business system is an

advantage but one must be sure that the goals of the local government are in line with that of the

company. If problems arise, the local mayor has the ability to influence enforcement of regulations.

-Newness of private enterprise

A Taiwanese general manager can offer a bridging function between the ’western way’ and ’Chinese

way’ of doing business. The Taiwanese have traded with the West and with the Chinese for hundreds

of years because they are an independent region. Taiwanese can speak Chinese and English and also

have a good eductional system. Taiwan is a democratic republic and has a dynamic kapitalist market

economy with gradually decreasing guidance of investment and foreign trade by the government. This

means that the Taiwanese are not new to private enterprise but also understand how to do business in

China because of their trading relations with China. Therefore the general maneger of Beumer

Agritech is Taiwanese.

Boris Peters 59

For production it is very important to set up very detailed regulations and procedures so the

employees know exactly what to do and what not to do. Inspection is also very important because this

is what the Chinese are used to.

-Incomplete property rights

In Holland there is a ‘cultivation right’ which means that the cultivator of a certain species has the

sole right to trade the seed of that species. The cultivator can grant the user a licence and ask for a fee.

In China this right does not exist so it is possible for a Chinese horticulturist to reproduce the species

without paying a fee. This makes it important for the Dutch flower bulb growers that this ‘cultivation

right’ is established by the Chinese government. However the Chinese government has a dilemma of

granting the demand of the rich westerners or the interests of the poor farmers in China. The Chinese

government has the goal to raise the income of the farmers high on the political agenda in order to

keep social stability and development. This makes the Chinese government reluctant to do anything

about the ‘cultivation right’ situation because half a billion unsatisfied Chinese farmers is not only bad

for the country but also for the world economy.

The solution is to export flowers instead of flower bulbs but this is less attractive because of the fact

that the risk of damage to the flower is higher and the transportation time must be very short and thus

increasing costs. The exporter has to decide if the risk of copying is worth the higher profit margin.

-Obtaining capital

Beumer Agritech had enough financial reserves to set up the company without obtaining capital

externally.

-Diversity of local business systems in China

It can be difficult to understand who has the decision power when negotiating with government

officials or business partners. Hierarchy is very important in China, small projects are done on a lower

level with employees and the management does bigger projects. The difficulty in uncovering the

decision power makes the diversity in business systems even more difficult to understand. As stated

before Mr. Hamstra explains that an ‘expert’ was needed to bridge the gap between the Chinese and

the management of Beumer Agritech. The Taiwanese friend of Mr. Hamstra could fill this gap and

therefore is the general manager of Beumer Agritech.

Boris Peters 60

As stated before the son of the local mayor was also very helpful in setting up the business. He

supplied valuable information about certain individuals to contact and about the connections between

individuals.

-Poorly functioning Chinese markets

Mr. Hamstra wanted to know more about the flower trade market and choose to investigate the area

around the city Shenyang which is known for its horticulture. There is very little reliable data on

about the local horticultural market because transactions are rarely computerised moreover only a few

market research companies exist in the horticultural industry. Collecting market data had to be done

by Beurmer Agritech themselves. Mr. Hamstra asked for a PESP (Programma Economische

Samenwerkings Projecten) at the department of economic affairs in Holland. A PESP is a contribution

made by the Dutch government to do a feasibility research for a joint venture. The PESP was granted

and thereby it was possible to do cheap research. Due to this research local state owned horticultural

companies and local flower farmers were identified. Not many entrepreneurs know about the

possibility of government sponsorship. Although the joint venture between Beumer Agritech and the

Chinese company was never completed, the study offered reliable information.

Beumer Agritech cultivates flower bulbs in China to gain credibility from the Chinese buyers and to

keep ‘feeling’ with the market. Flower bulbs of Beumer Agritech are also set out by Beumer Agritech

themselves by the Chinese farmers for free but the profit of the sale of flowers is then shared. The

farmer has less risk and Beumer Agritech knows how much is sold. Because Beumer Agritech works

together with the farmers, they also know the prices and stocks of the competitors because the farmers

supply this information.

-Poorly developed institutional arrangements

There is a shortage in institutional arrangements in less developed economic regions. This means that

entrepreneurs must rely on government ties. As stated before; when the goals of the local government

are compatible with the goals of the company, the local government will help the company to start up.

In the case of Beumer Agritech the son of the local Chinese mayor arranged all the proceedings to

start up the company.

-Dependency on Chinese resources

The limited infrastructure is the reason why the Chinese are very dependent on their network, the

problem lies more in the infrastructure needed for the transportation of resources. For instance road

construction is done by the local government and it is possible that a road in front of the company is

broken open for weeks because of a dispute with the local government. The resources are there but

can not be transported. Electricity can be cut of because certain ‘taxes’ are not paid. In China the

Boris Peters 61

producers do not have any power, the power lies in the network of knowledge, market and rights. This

stresses the need to cooperate with the buyers to get access to the network which can supply

information. A lot of time must be invested in the strengthening of the network ties by inviting buyers

or local government officials to dinners or trips. Before Beumer Agritech started up in China they

attended many delegations to China and supported delegations from China that visited Holland.

-Additional problems and challenges

Corruption is still a huge deep-rooted problem in China. Building ‘Guanxi’ means that it is sometimes

necessary to give presents to certain people. There is a thin line between ging a present and bribing

and many times the line is crossed in China.

Solutions derived from the literature

-networking with other, non-Chinese, business people

Mr. Hamstra states that because of their local presence in China it is possible to invite other exporters

to the region. Before the start up of the company Mr. Beumer and Mr. Hamstra attended many ‘trade

missions’ to China. Because of these trade missions it is possible to get into contact with other

agricultural companies. The focus on building horticultural expositions in China is a choice to get into

contact with various networks.

-setting up alliance/networks with Chinese government officials

Beumer Agritech attended many ‘trade missions’ before they started in China and due to these trade

missions it was possible to meet government officials. By a mutual business relation they were

introduced to the son of the local mayor of Shenyang and through his network it was possible to get

into contact with other government officials.

Because of the supply of flower bulbs and organisation of the horticultural exhibitions in China it was

also possible to get into contact with many Chinese government officials. Mr. Beumer and Mr.

Hamstra both knew that when they invited Dutch government officials to the opening of the

exhibitions it would attract Chinese government officials because the Chinese government officials

feel “important” when they can shake hands and literally be on the picture with the Dutch government

official. Status is very important for Chinese government officals.

In all the exhibitions the Dutch government was somehow involved, for instance because the ministry

of agriculture sponsored a Dutch pavilion on the exhibition. When a horticultural exhibition was

opened they always invited Dutch government officials to the opening.

-building a network with Chinese business people

Boris Peters 62

Because Beumer Agritech also grows the flower bulbs themselves they have a good presence in the

region which makes ‘Chinese business people’ (in this case the farmers) come to them. Because they

organise flower exhibitions for local governments it is possible to come into contact with government

owned companies.

Additional information

When a company really adds value to the Chinese economy or region, it is very easy to start up

because of the support of the local government because it is also in their interest that the company is

successful.

Boris Peters 63

Case #4: Eastwingate Consultancy

Overview

Eastwingate is a consulting company based in Shanghai which delivers services to entrepreneurs and

companies that want to set up a company in China.

Using their network of professionals, they deliver service and support on areas like sourcing of

products, outsourcing of products, finding suppliers, creation of contracts, and intellectual property

advice.

Temporarily office space can be offered by Eastwingate and support can be offered in the decision

making process about the internationalisation strategy (Joint venture, Wholly owned enterprise, etc.).

Needed business licences can be dealt with and it is also possible to outsource the entire start-up

process.

Support with mergers and acquisitions is also offered in the form of advice and due diligence.

The interviewee

Ari van der Steenhoven joined DSM in 1980 in Holland and moved to Japan as Vice-President of the

EPDM venture in 1988. In 1992 he was appointed in the function of ‘director Corporate and Sales

China’ of DSM, set up sales offices and was involved in the establishment of a number of joint

ventures and wholly foreign owned companies. In 2005 he retired from DSM and started a new

company in management consulting, called Eastwingate, which supports a number of companies to

set up their own organization in China. Mr. van der Steenhoven is also a member of the advisory

board of the Benelux chamber of commerce in Shanghai. Mr. van der Steenhoven lives in Shanghai

with his Chinese wife and 2 sons.

Entrepreneurs starting in China

-differences in the type of problems for an entrepreneur or a manager

The difficulties that managers encounter when they start up a new venture for an existing company

are the same as the problems that an entrepreneur encounters and the solutions to the difficulties are

also often the same. There is however a difference in impact of the difficulties or problems

encountered when starting up in China because a big firm has often many resources like capital and

expertise. An entrepreneur has less financial resources and must hire expertise. For instance when

DSM starts up a venture in China they can afford mistakes or even failures and this is not the case for

entrepreneurs.

Mr van der Steenhoven states that he considers people who start up a business in China for a small

business in Holland as entrepreneurs too because often they do not only invest financially in the start

up in China but they also invest a lot of time. They also take a risk in the form that when they fail

Boris Peters 64

setting up the business they will probably have to search for another job because a small firm can not

offer them another job within the company.

Many of the people that Mr. van der Steenhoven knows, who start up a venture for a smaller

company, have the intention to settle in China for good and often already have experience in living in

China. A manager who is assigned to set up a venture in China for a big company or multinational

often signed a 3 to 5 year contract, they are not starting up a business because they are interested in

China but they are interested to work internationally and this has an effect in they way they operate.

Managers will not learn the Chinese language because they do not have the time, they do not have any

experience in doing business in China, they do not have experience in living in China, and they have a

very short period of time to set up a business. All these limitations make the chance of failure very

high but due to the abundance of financial resources and expertise of a big firm or multinational, this

has less impact.

-difference in problems encountered in different parts of China

Depending on the location, there is a difference in the severity of the problems and challenges that

one can encounter when one starts up a company in China but the solutions to the problems are the

same independent of the location of the start up.

When a company is started in or near a small city (most of them still have about several hundreds of

thousands inhabitants) it is more likely that the entrepreneur will have easy access to local high

ranking government officials or even people like the mayor of the city. Knowing high ranking

government officials can be beneficial for the speed at which business licences are granted. Tax

benefits can also be granted to stimulate the growth of the company because local governments are

free to grant certain tax benefits and even regulation can be ‘bended’. In some cases ‘a weak

regulatory regime’ can be an advantage. These benefits can also cause problems because corruption is

much more present in remote areas and moreover, bended rules and taxations can be restored when

the local government wants.

The problems and challenges are an outcome of the still developing economic situation in China

therefore the problems are the same but less in severity in the better developed parts of China. In a big

city like Shanghai tax laws, business licences and other regulations are strictly regulated because

business is better developed and the government sees cities like Shanghai as a role model.

-Difference in problems encountered by legal entities

Although the problems are the same to all legal entities, the problems can differ in impact on the

company depending on the legal entity and even the type of business this entity is in.

Boris Peters 65

For instance; a trading company that only has an office in China earning their money in connecting

two parties and asking a certain fee, do not have to worry much about ‘incomplete property rights’. A

trading company does not have complicated technological knowledge that they can spill-over which is

a big problem for high tech manufacturers cooperating with Chinese companies. A trading company

does need to find out that the products that they trade are not illegally copied products in order to meet

the customer requirements but the trader can not held responsible. In both cases good due diligence is

needed on the Chinese partner, making the problem and solution the same but the severity of the

problem differs.

Difficulties and solutions when starting up:

-Weak regulatory regime

Regulations in China change very fast due to a fast changing economy and it can happen that within a

few weeks a new regulation is implemented. For instance; in May 2007 it became clear that China

wanted to cut the tax rebate on the export of high energy consuming commodities and in July 2007

they implemented the new tax rebates. The only option that many companies had was to change their

prices as fast as possible. In China you must be able to react to change very fast. It is possible to

anticipate on many changes because the Chinese government presents a guiding proposal every 5

years. In the last proposal it was already evident that China wanted to cut back energy consumption

and pollution.

It is also possible to gain information about reforms or new regulation through your network because

many new regulations are made in cooperation with mayor Chinese law firms. These law firms give

indications on what is going to happen. The main solution is to be able to react to change very fast and

to build up a network with Chinese business people.

-Newness of private enterprise

This problem is most evident in cooperation of foreign firms with Chinese firms. Many managers and

owners of Chinese firms are now around 40 to 50 years of age and grew up in a government

controlled planned economy. They have difficulty in adapting to free market economy because of

their routines and education. Mr. van der Steenhoven strongly recommends that a partnership must

only be engaged if it is absolutely necessary for the business because the failure rate is very high. In

some industries it only possible to start up a business in the form of a joint venture. This condition is

established in order to give sertain industries access to foreign knowledge because of local shortage.

One must therefore be very cautious because no expertise means that it is difficult to cooperate.

Young Chinese have had education on open market principles and grew up with a relatively open

market economy and moreover many of this generation had the possibility to travel or study abroad.

The generation that is in the age of 25 to 30 have also had education in the English language and are

Boris Peters 66

able to understand foreign business practices. The solution for the ‘newness of private enterprise‘ is

therefore quite simple; don’t hire anybody who is older than 30 years of age unless you need to and

don’t cooperate with anybody who is older than 30 years of age unless you really need to. Never

cooperate with somebody that works are have worked in a state owned company.

-Incomplete property rights

Mr. van der Steenhoven states that property rights are quite clear in China, it is possible to own for

instance a building or house but it is not possible to own the land on which it is build. The owner of

the private property is quite well protected with the new private property law that is accepted in

March 2007 by the Chinese government.

The land is often rented from the state for the time of 50 years. It is quite easy to find out who rents

the land and thereby who owns the property because this information is public and can be found at the

government offices. The information is however in Chinese and it takes quite some time before it is

given. The government can withdraw the right to rent and seize the land but this is not likely to

happen because this will have a very big negative effect on the popularity to invest or start up a

company in China. The most likely reason for such action will be because a road or rail needs to be

built through the property. In that case the government will compensate the owner of the property. If

land is seized it is impossible to fight this decision and therefore it is necessary to get as much

information as possible about the plans of the government in a certain area, these plans are published

in Chinese but publicly accessible.

The problem is not that the property rights are incomplete but the enforcement of the rights is very

bad. One should therefore prevent the need to go to court.

-Obtaining capital

Chinese banks will only invest huge and globally active companies like DSM and Phillips to reduce

their investment risk says Mr. van der Steenhoven. A small to medium sized foreign company will be

to much risk for a Chinese bank because it is difficult and costly for them to obtain information about

the business activities in the land of origin of the company.

In many cases the entrepreneur already has a big financial reserve or a company in the land of his

origin when he starts up a company in China and this makes obtaining capital in China unnecessary.

The problem for these entrepreneurs but also for managers that start up a new venture is not really

‘obtaining capital’ but ‘getting access to their capital’ as described later in the interview.

-Diversity of local business systems in China

Boris Peters 67

It is possible to obtain information about the local business systems at local government offices but all

information is in Chinese so you need a Chinese who can gather the information. A Chinese lawyer

who can speak English very well can offer this service. In more developed economic areas,

information about the local business system can be found in English but is outdated in many cases

because of the fast changing economy and legal regulations.

In less developed areas it is easy to get into contact with local government officials. The local

government of a low economic developed area will support the start up of a company because it will

offer employment for the local citizens and stimulate the local economic growth. It is very common

that the government officials will support the start up by supplying information about business

licences, property ownership, local markets, etc. The mayor of the area will often give information

and access to his network.

-Poorly functioning Chinese markets

In less developed economic areas it is difficult to gather reliable market information through official

institutions but this information needs to be gathered through local government officials. Because of

the lack of information about certain areas and shortage of supportive businesses the support of the

local government is high and the cost of setting up and running a company is low. The risk of doing

business is however higher due to uncertainty because of lack of information.

In economic developed areas it is easier to find reliable market information but an entrepreneur or

manager is still very dependent on his network. The Dutch government in the form of the NBSO

(Netherlands Business Support Office), the Dutch Consulate and Dutch Chambers of commerce

supports entrepreneurs by giving access to her network. Also the network with non-Chinese business

people can be helpful in supplying information.

-Poorly developed institutional arrangements

There is a lack of high quality institutions like law firms, accountants and bank and therefore

experience is needed to find out which institution delivers the best service. Many Dutch banks can not

offer all the services that they offer in Holland due to restrictions. Many Dutch law firms are not

licensed to offer legal defence in court, they can only give advice and are very expensive. A Chinese

law firm can offer many services and is relatively cheap. A Chinese lawyer can offer financial

information about potential business partners as only they can access the information at the Chinese

department of commerce. The tax return of many Chinese companies can be acquired at Chinese

banks as al this information is public.

Boris Peters 68

Information can be gathered and institutions can be accessed but this costs a lot of time to find out. It

is recommended to use the service of a consultant (like Eastwingate) to help gather information and

support decision making.

-Dependency on Chinese resources

Except for the wages of local employees, many resources are more expensive in China because of

shortage. Many commodities need to be imported and this often makes the local price higher

compared to global prices and the availability is uncertain. The problem has however effect on all the

companies in China. The only solution to the problem is fast reaction to developments.

-Additional problems and challenges

The turnover in personnel is a big problem for many companies. The Chinese are not very loyal to

their employer and they easily switch jobs when they are offered just a small amount more compared

to their current employer. Money is important for the Chinese because the government does not

provide a healthy ‘safety net’ like the government in Holland. However, money is not the only

important factor for the Chinese because clear opportunities to build a career are very important

because eventually this also means getting an increase in income.

Solutions derived from the literature

-networking with other, non-Chinese, business people

As stated before, the Dutch government gives access to her network and is actively organising

network possibilities in the form of trade missions, social drinks, official banquets, etc. It is also very

normal to offer somebody your business card in the beginning of the conversation. Mr van der Steen

states that it is very normal if one returns from a social drink at the Dutch consulate with about 50

business cards. Business people know the importance of the network in China and are therefore much

more actively networking.

-setting up alliance/networks with Chinese government officials

In China it is very common to have official parties or ceremonies. Mr. van de Steenhoven therefore

recommends that entrepreneurs or managers use as much as occasions as possible to organise a

ceremony. For instance when opening a office or factory or when reaching a certain mile-stone.

Inviting Dutch government officials seem to attract Chinese government officials because Chinese

have deep respect for the government due to the fact that China had a totalitarian regime. When a

Dutch company has Dutch high ranking government officials as a guest in China the Chinese are

easily impressed because they think the entrepreneur has high reaching contacts within the Dutch

government. The Chinese government officials feel honoured when they are invited and are then more

easily contacted.

Boris Peters 69

-building a network with Chinese business people

To build up a network with Chinese business people is difficult and takes time because the network of

Chinese business people is very closed. They are reluctant to give a foreigner access to their network

and therefore it is best to use Chinese employees to build up a network with Chinese business people.

Chinese business people can easily be met at trade fairs and trade missions.

Additional information

Information is not centralised as in Holland which makes it difficult to find. In many cases

information can be gathered but one needs to know where to look and to speak Chinese as much

information is in Chinese. Good preparation is needed when starting up a company in China but more

important help from a Chinese is necessary in gathering information.

Boris Peters 70

Case #5: Sinova

Overview

Sinova offers consultancy for European companies wishing to set up China or Hong Kong. Sinova

also helps Chinese companies wishing to set up in Europe. Sinova also offers strategic business

advice, legal advice, accountancy, financial consaltancy and matchmaking.

The interviewee

Born in Hong Kong, Ms. Jennifer Chan, spent most of her young life in the Netherlands following her

university education on the before settling down in Hong Kong. Starting from 1991, Ms. Chan

worked for 11 years with Dutch Banks Rabobank and ABN AMRO and Belgium-Dutch bank Fortis,

with a portfolio covering both small and medium-sized enterprises and multinational companies.

Entrusted with a couple of projects by several long-term European clients to assist them with large

investments in China, Ms. Chan founded SINOVA in 2002. In 2005 Ms. Chan also opened an office

in Shanghai. The last office opened in 2006 in Rotterdam. In total Sinova has 27 employees, most of

them work in China.

Entrepreneurs starting in China

-differences in the type of problems for an entrepreneur or a manager

Ms. Chan states that whether someone is a manager or an entrepreneur is matter of definition. A

manager setting up a company in China for an existing company in Holland can be seen as an

entrepreneur because he encounters the same problems as the entrepreneur, he has the same tasks as

an entrepreneur and in many cases the same responsibilities. There are managers or so called ‘expats’

that have the task to set up a new company in China for a large company in Europe. They have about

3 years to set up the company and then have to leave China. The interesting thing about this task is

that the failure rate is very high because 3 years is too short to successfully start up a company,

Sinova can offer the best added value in these cases. The cases with a high success rate are the

managers that have the intention to stay in China for many years or for the rest of their life and the

managers that are assisted by a Chinese manager that helps them to start up. Ms. Chan further

explains that the problems that are encountered by entrepreneurs or manager are the same but the

impact of the problem can differ depending on the size of the company.

A manager for a large company has access to a bigger financial reserve compared to an entrepreneur

or manager of a small or medium sized company. This means that for instance the application for al

the needed business licences for a large firm can be done by a well established international law firm

which is to expensive for a small or medium sized enterprise. The problem is therefore greater for a

SME compared to a large company, however it is a problem for all companies.

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-difference in problems encountered in different parts of China

In the mainland of China an entrepreneur will encounter the same problems but again they differ in

the impact they will have on the start up. In well developed economic regions like Shanghai, Beijing

or Shenzen the regulations are clear and properly enforced. Also institutional arrangements are well

established and business systems are clear. The disadvantage of well developed economic regions is

that labour, taxation and rent is far more expensive. The problems that are encountered when starting

up in less developed economic regions can have more impact. However if the company adds value to

the local economy, the local government often will help with the start up and offer all kinds of

solutions to the problems. The encountered problems while starting up in China are the same in

different parts of China but the impact differs depending also on the type of business. Ms. Chan

explains that a company that offers business services must have a location in a city and will encounter

minor problems while starting up. A manufacturing facility needs to be located in a low cost area but

it depends on the product that is manufactured if the start up will be assisted by the local government.

A manufacturing facility that is environmental friendly, high tech and offers employment to a large

quantity of Chinese, will probably be assisted by the local government.

-Difference in problems encountered by legal entities

Incomplete private property rights are for instance a problem but the severity depends on the legal

entity of the company. A joint venture with a Chinese partner has much more risk of knowledge

leaking compared to a wholly owned company in China. In most cases the foreign company possesses

the knowledge and the Chinese company possesses the distribution channels, clients and low cost

production possibilities. The chance of leaking knowledge to the Chinese partner can therefore be

very high because they want the knowledge and already have the other requirements. Having a wholly

owned company in China reduces this problem but does not eliminate because the employees, clients

and suppliers can also cause knowledge leakage.

Difficulties and solutions when starting up:

-Weak regulatory regime

Local governments are free to enforce certain regulations and it depends on the type of business and

location how or whether this enforcement will be executed. In all cases an entrepreneur should be able

to act fast on a new or altered regulation because when the regulation is enforced it is impossible to

change the decision because of the totalitarian regime.

One must understand that the economy of China is interwoven with politics. Every 5 years a party

congress is held and a 5 year plan is presented, it is possible to draw conclusions about the future

Boris Peters 72

economic guidance of the government and the plans for the economy. Furthermore press conferences

are held and local government plans are also often presented. There are also many events organized

for instance by accountancy firms, law firms and chambers of commerce. These events address

certain topics about doing business in China. Because regulations change fast, one must actively

collect information about the changes and this can be very time consuming. The advice is to attend

informational events or hire a consultant or a Chinese employee to stay updated on certain

developments. Sinova has a research team that actively searches for information for their clients.

-Newness of private enterprise

Many young Chinese employees do not have any problem working for private enterprises, they have

had education that taught them the basics of an open economy and they grew up in an economy that is

opened up for private enterprises. This is different for the older generation that did not have education

about open market economy and grew up in a totally government controlled economy. Although

China is gradually decreasing the number of state owned companies, still half of China’s workers are

employed by state owned companies. State owned companies define success in output and

employment rather than profit or value creation and therefore the employees of a state owned

company are not used to work efficiently and cost effective. According to Ms. Chan one should avoid

hiring employees that worked for a state owned company.

Ms. Chan states that one should be very cautious with cooperating with state owned companies or

partially state owned companies because their goals can differ substantially. Performing due diligence

is very important but also problematic because of limited information. Chinese lawyers can gather

information on the business licenses, number of employees and financial status of a company at the

Chinese Ministry of Foreign Trade. The Chinese banks can also supply financial information on

government controlled companies due to the fact that this information is publicly accessible. The due

diligence can be performed by Chinese lawyers or certain consultancy companies, it is impossible for

a Dutch entrepreneur to do this without help because all the information is in Chinese and widely

spread. Due to lack of time and financial reserves, many entrepreneurs do not perform a well due

diligence although it is vital for successful operation.

-Incomplete private property rights

The problem with intellectual property is not the fact that it is incomplete, the problem lies in the

amount of violations and the limited capacity of the authorities to enforce the regulation. Ms. Chan

advises that if a patent is violated it is best that the company takes matters in their own hands which

means that evidence must be gathered by the company to prepare a legal action. To collect evidence it

is possible to organize a raid but the local authorities need to support the raid, in most cases the

company should pay for the raid.

Boris Peters 73

To prevent leakage of intellectual property, knowledge should be protected by keeping strategic

knowledge outside China if possible. Employee turnover should also be minimized to prevent

employees in taking certain knowledge to the competitor. Employee turnover is very high in China

because Chinese employees choose for another job quite easily if they are offered a higher wage.

Social security does not exist in China and therefore wage is very important to the Chinese. Employee

turnover can be minimized not only by offering a relatively high wage but also by emphasizing team

spirit. Chinese are rather social people and therefore small trips to other cities or even karaoke are

very beneficial for team spirit.

Ms. Chan indicates that remarkably many companies that are operating in China simply forget to

register their company name or trademark, making it possible for Chinese companies to use the

trademark or company name especially because China has ‘first to file’ jurisdiction. Many Chinese

companies already registered trademarks, logo’s and other intellectual property of companies that are

not yet operating in China which makes it very important for companies to register in China. Because

of this problem for instance Hunter Douglas, which is a big Dutch multinational famous for their

Luxaflex products, can not use their logo in China because ‘Huang Ding Window Covering’ has

registered their logo many years ago.

-Obtaining capital

In order to become a member of the WTO in 2001, China had to cancel many restrictions that were

enforced on foreign banks. Although many restrictions are still maintained for foreign banks, it is

possible for these banks to offer more services like granting loans and opening accounts but many

services are still restricted. However obtaining capital in the form of a loan by a foreign bank is not

likely because of the high risks involved in starting up in China. Chinese state owned banks only

invest in large Chinese companies and state owned companies even if the company is not profitable.

For a Dutch entrepreneur it is therefore unlikely to obtain capital in China often the entrepreneur

already has a company in Holland to use as fund supplier.

-Diversity of local business systems in China

Before starting up in China it is advisable to map the local business environment, a consultancy firm

like Sinova can offer this service. Business licences can be applied by a Chinese lawyer. It can also be

very informative to visit the location in which the company will be started up and search for other

foreign companies. In many cases the management will be very helpful in providing information

about for instance networks, local law enforcement and competition.

Boris Peters 74

-Poorly functioning Chinese markets

As stated earlier state owned companies define success in output and employment rather than profit or

value creation and therefore the employees of a state owned company are not used to work efficiently

and cost effective. This can lead to problems when cooperating with a state owned company. It is also

possible that a state owned company has an unfair competitive advantage because of tax advantages,

financial support from the state and cheap resources like oil and electricity offered by the state.

Due to these differences in state owned companies and private owned companies certain markets are

functioning differently. A research on the local Chinese market is necessary to minimize this problem

but this can be difficult because it is not always clear if certain companies are state owned, partly state

owned or privately owned. Using the network of government officials, Chinese business people and

international business people information can be gathered regarding markets and the working of the

markets.

-Poorly developed institutional arrangements

The Chinese do not value contracts like Westerners do because the economy and therefore regulations

are changing fast. As a result contracts are also often outdated fast. When drafting a contract it is very

important to have trust in the Chinese partner because this is the basis on which Chinese do business.

When a Chinese partner is distrusted one must contemplate if it is a good idea to do business with the

partner in the first place.

All contracts must be approved by the Mofcom (Ministry of Commerce) but in most cases the

contracts are approved when the Chinese company is in the advantage. The contract can be drafted in

English and Chinese but translation can cause problems when going to court because the court only

passes judgement on the Chinese contract.

As stated earlier, foreign banks can not offer the same services as they do in other countries and

Chinese banks offer only a few services needed for doing business. Because of China‘s membership

of the WTO the foreign banks are subject to less restrictions compared to a few years ago however

most foreign banks are located in the big cities. The Chinese banks can offer slightly more services

like leasing, insurance, commercial mortgage and pension plans.

Ms. Chan states that there are many consultants in China but the quality of the offered services are

very poor because consultancy is not a protected profession and as a result anyone can adopt the title;

consultant. In many cases the lack of knowledge of the entrepreneur is misused and high fees are

asked.

Because China is still a developing economy it is not very surprising that business services are not

developed well yet. Ms. Chan indicates that consultancy fees of respectable consultancy companies

Boris Peters 75

are too high for SME’s but for these companies it is often sufficient to hire a Chinese lawyer,

accountant and base their decisions on their own research.

Many Chinese accountants and lawyers are particularly short on business skills because of lack of

experience and education. For instance; those wishing to become certified accountants in China can

only acquire the qualification at the Chinese Institute of Certified Public Accountants (CICPA). Like

other stages in the Chinese education system the emphasis in CICPA exams tends to be on

compliancy and not on giving advice to the management based on forecasting or budgeting.

Moreover there is a shortage in lawyers and accountants and especially English speaking lawyers and

accountants. The problem of poorly developed institutional arrangements is very hard to overcome

because the shortage in numbers and low business skills of the lawyers and accountants can not be

solved by the entrepreneur. According to Ms. Chan it is even more difficult for SME’s because of lack

of financial reserve. Ms. Chan advices to gather as much information as possible before going to

China for instance at the EVD (Economische Voorlichtingsdienst) and other Dutch institutions. In her

opinion many entrepreneurs do not know about the shortage of lawyers and accountants in China and

they also do not know that the business skills of the lawyers and accountants are very limited. Ms.

Chan states that many entrepreneurs do not prepare their start up well before going to China.

-Dependency on Chinese resources

Ms. Chan explains that; if information is seen as a resource, the dependency on Chinese resources

regarding information can be seen as a problem. Media and internet are government controlled in

China which means that it is not likely that all information is reliable and some information is

concealed. It is widely known in China that statistics on political stability, unemployment and income

levels are not reliable. Although it is obvious that the source of the information should be checked, Ms

Chan notices many foreign people drawing conclusions on unreliable information because they are

simply not used to the fact that the government in China controls and alters information. Information

must therefore always be checked by asking the available network of the employee for background

information.

-Additional problems and challenges

For many foreign SME’s it is difficult to serve the domestic market in China because distributors are

often limited to small areas. A company must therefore find many distributors and this is very time

consuming. Advertisement is an activity that many Chinese companies do not understand yet and

therefore finding distributors is even more difficult. Distributors can be found on the internet but

many companies are pretending to be a distributor while being a intermediary. The most reliable way

to meet distributors is through trade fairs because all information is at hand and Chinese companies

Boris Peters 76

can only participate at a trade fair if all business licences are shown. It is possible to do some due

diligence at the fair.

Solutions derived from the literature

-networking with other, non-Chinese, business people

The expat communities in China form are networks characterized by very easy accessibility and large

size. When signing up for a network sites for expats it is easy to come into contact with many

international business people. The Dutch and Belgian chamber of commerce (BENCHAM) also

organises many information seminars where mainly Dutch business people can be met.

-setting up alliance/networks with Chinese government officials

In many cases government officials do not want to form an alliance with entrepreneurs because of

conflicting interest.

-building a network with Chinese business people

Meeting other business people and companies is time consuming because associations do not exist in

China as they do in Holland. Advertisement is also very new to many Chinese companies which

means that it is often difficult to find potential Chinese partners or clients. Trade fairs are still the best

way to meet Chinese business people because, as stated earlier, it is possible to do some due

diligence, participation is only possible with business licences and it shows the dedication of the

Chinese company to cooperate with other international companies. The network of the Chinese

employees can also be very helpful in meeting Chinese business people.

Additional information

Often the network of an entrepreneur or manager is limited to knowing other internationally operating

business people except Chinese business people. The reason for this is the fact that they do not speak

Chinese so in many cases they can not communicate because many Chinese can not speak English.

The solution is therefore very simple; learn to speak Chinese!

Boris Peters 77

6.5 Schematic overview

Below a schematic overview is given derived from the case studies in order to detect whether the

entrepreneur encountered the stated problem and what solution was given.

Beumer Agritech KOW Lensvelt Sinova Eastwingate

Weak regulatory regime

* Help from son of local mayor

* Rep office * Local government support (exchange program) * Competent Chinese employee

* Local vice mayor

* Info from Chinese employee * info at events organized by law firms, accountancy firms etc.

* fast reaction on information from Chinese network of government officials * Chinese bus people * non-Chinese business people

Newness to private enterprise

* Taiwanese manager * avoid state owned companies

* Employees age: <30

* Competent Chinese employee

* Employees age: <30 * avoid state owned companies

* No ex-government employees * Employees age: <30

Incomplete property rights

* Making copycat behaviour unattractive * bad enforcement

* service is to complicated

* Contacts with local government to influence enforcement

* Limit employee turnover * bad enforcement

* The rights are not incomplete, enforcement is bad.

Obtaining capital * Not needed (Dutch mother company)

* Not needed (Dutch mother company)

* Not needed (Dutch mother company)

* Often Dutch mother company

* Often Dutch mother company

Diversity in local business systems

* Help from son of local mayor * Taiwanese manager

* Info from local government (due to political career of director KOW)

* Local vice mayor * Competent Chinese employee

* Get information from other international companies in the area (network)

* Hiring Chinese expert * local government (less developed regions)

Poorly functioning markets

* Own research * Network with Chinese business people

* Network of employees

* Contacts local government * Network of employees * other businesspeople

* Use all networks available

* local government (less developed regions) * Dutch institutions (NSBO/Consulate) * business people

Poorly developed institutional arrangements

* Help from son of local mayor

* Rep office * Local government support (exchange program)

* Local vice mayor * Competent Chinese employee

* get information at Dutch institutions

* Don’t use Dutch corporate institutions like banks, accountants and lawyers (they are restricted)

Resource dependency

* Infrastructure is the problem

* Service orientated company; problem is same for all competitors

* Infrastructure is the problem

* Check info with network

* Everybody is dependant on Chinese resources therefore no problem

Boris Peters 78

In many cases the entrepreneur stated that the network of non-Chinese business people, government

officials and Chinese business people could provide a solution to the problems encountered while

starting up. The schematic overview below shows how they got access to the network.

At the end of the interview the entrepreneur was asked to state an additional problem that were not

mentioned in the questionnaire but was a problem for them while starting up. The given answers are

given in the below diagram.

Beumer Agritech KOW Lensvelt Sinova Eastwingate

Network with non-Chinese business people

* Local office * Trade missions * Expositions

* Rep office * Network events * Media

* Trade fairs * Network events * Trade missions

* Expat network easy accessible * Network events

* Trade fairs * Network events

Network with Chinese government officials

* Trade missions * Son of local mayor * Use Dutch government

* Dutch government events * Dutch political contacts * Trade mission

* Local vice mayor * Trade mission

* Not possible due to conflicting interests of government offcials

* Use Dutch government * Ceremonies

Network with Chinese business people

* Local office * Expositions

* Trade fairs * Expositions * Rep office * Chinese employees

* Trade fairs * Chinese employees

* Trade fairs * Chinese employees

* Chinese employees * Trade fairs * Trade missions

Beumer Agritech KOW Lensvelt Sinova Eastwingate

Additional problems

* Bribing * Long procedure time

* Finding the first competent Chinese employee that can help set up the company

* finding good product distributors

* employee turnover * Information is not centralized

Boris Peters 79

6.6 Conclusion

Based on the diagrams in chapter 6.5 a short conclusion is given based on the case studies, in chapter

7 the solutions to the stated problems are explained more elaborately.

To overcome the problem of weak regulatory regime, four out five entrepreneurs stated that help from

the local government can overcome the problem. The two production companies located in less

economic developed areas got help from high-ranking government officials in overcoming the

problem of weak regulatory regime. Getting information in order to adapt fast to the regulatory

regime can be gathered with help of the first Chinese employee(s).

The newness to private enterprise can be overcome by hiring employees under the age of 30 years and

not hiring ex-employees from state owned companies. Hiring a Taiwanese or English speaking well-

educated Chinese manager to fulfil a bridging function between the Dutch entrepreneur and Chinese

employees is also very beneficial. Working together with an state owned company should be avoided.

Incomplete property rights seem not to be a problem for most of the entrepreneurs it seems that the

property rights are complete but badly enforced. The entrepreneurs therefore state that the need to

enforce the property rights should be prevented. In the case of intellectual property, knowledge should

be prevented to leak reducing employee turnover can be a prevention but not a solution.

Obtaining capital is not a problem encountered by the Dutch entrepreneurs because they all had a

Dutch mother company providing the capital needed to start up in China, it is however recognised that

it is very difficult to obtain capital in China.

The diversity in local business can be overcome by accepting help from the local government

according to four out of five entrepreneurs. The two production companies again stated that the high-

ranking government officials helped them in giving information about the local business system. It is

evident that an expert is needed to overcome this problem. Hiring a Taiwanese manager or English

speaking well educated Chinese manager can also help in getting the company to comply to the local

business system.

The problem of poorly functioning markets seems to be the dispersion of information. Information can

be overcome by gathering information from all networks available. The network of the Chinese

employees can also provide information about markets. The Dutch NSBO and Consulate can also

offer information about markets. The network with other non-Chinese business people can also be

used as an information source.

The problem of poorly developed institutional arrangements was in three cases overcome by the help

of the local government. Dutch institutions can be used to gain information but Dutch institutions in

China such as banks, accountants and legal expert should not be used as consultants due to their

restrictions.

Boris Peters 80

Four out of five entrepreneurs do not consider resource dependency a problem. Two entrepreneurs

indicate that it is the dependence on the Chinese infrastructure is the problem in gaining access to

resources. Two entrepreneurs state that the resource dependency is the same for all competitors in the

Chinese market making the problem not a particular problem for Dutch entrepreneurs. One

entrepreneur states that, if information is regarded as a resource, that information should always be

checked with available networks because information is often unreliable.

Having a network with non-Chinese business people, Chinese government officials and Chinese

business people was stated as being the solution to all of the listed problems encountered by the Dutch

entrepreneurs except for the problem of newness to private enterprise. Therefore the entrepreneurs

were asked how they build up the network or gained access to these networks.

Gaining access to a network with non-Chinese business people can be done at trade missions and

network events. Having a representative office or other physical presence in China seems to be

beneficial. Trade fairs are also helpful in gaining access to a network with non-Chinese business

people.

Gaining access or building up a network with government officials is regarded as difficult but

possible. In less developed areas it is easy to form an alliance with high-ranking government officials.

Dutch government officials seem to attract Chinese government officials making it easier to form an

alliance. The owner of Sinova states that it is impossible to form an alliance with government officials

due to conflicting interests. Other cases seem to contradict her statement. This explains why Sinova

did not stated ‘having a network with government officials’ as a solution to the listed problems.

A network with Chinese business people can be build up at trade fairs and expositions. Having a local

presence can offer an advantage because the Chinese employee(s) can also give access to Chinese

business people.

Boris Peters 81

7 Solutions to the Problems Encountered by entrepreneurs

It is evident that the main solution to the listed problems encountered by the entrepreneurs is to build

up social networks.

Because all Dutch entrepreneurs recognize the importance of building up a network, it is therefore

very easy to build up a network with other non-Chinese business people. The Dutch government,

companies and social clubs organize many networking events. Business cards are exchanged more

easily because everyone harvests as many contacts as possible. It is not unusual to leave a social event

with a big stack of business cards.

Trading missions make it possible to make new contacts but building up a social network is time

consuming therefore it is very beneficial to have a local presence in the form of a representative

office.

Trade missions are often used as a vehicle to meet Chinese government officials. Dutch government

officials always attend trade missions to China because it seems that Chinese government officials are

attracted to Dutch government officials. The Chinese have a deep-rooted respect for the government

due to the former totalitarian regime and contemporary interference of the Chinese government in

their everyday life. It is very helpful to use Dutch government officials to contact Chinese government

officials.

It much easier to come into contact with high-ranking Chinese government officials in less economic

developed areas because the Dutch company can bring employment to the region and stimulate the

local economy. If the company is also high tech and environmental friendly, it can be the case that the

entrepreneur is assisted in setting up his company because the local Chinese government and Dutch

entrepreneur have the same objectives. The existence of the Dutch company is often protected

because the company can serve as a showcase for other international investors. All the listed problems

are reduced or solved if the local Chinese government actively supports the Dutch entrepreneur by

supplying information, help negotiate with other parties and arrange needed licenses and procedures

to start up. In one case the entrepreneur could even use the local government office as his office

showing the devotion of the local government to help set up the company.

To build up a network with Chinese business people is difficult for the entrepreneur if he does not

speak the Chinese language. It is also very time consuming as the Chinese lay a lot of emphasis on

building up a contact. Hiring a competent experienced English speaking Chinese employee can help

the entrepreneur to make contact with other business people because Chinese, similar to all other

people in the world, make easier contact with the same language and background.

Boris Peters 82

The Chinese employee can also help set up the company and help in hiring the first employees. In

three cases used in this thesis this competent Chinese came from within the network of the

entrepreneur. In one case a Taiwanese employee was hired because educated Taiwanese speak

Chinese and English, are used to trade with China and the West, which means that they know how to

deal with both cultures and they are used to capitalism as Taiwan has a capitalist market economy.

Hiring an employee in China is only possible if one has a local presence in China further stressing the

need for starting up a representative office prior to the start up of a company in China.

It is recommended only to hire employees under the age of 30 years old because these young Chinese

had good education and grew up with the understandings of capitalism. It is not recommended to hire

ex employees of state owned companies as they have difficulties to understand the workings of a

private enterprise. Working together with government enterprises should also be avoided for the same

reason.

According to all entrepreneurs interviewed for this thesis, visiting trade shows is the best way to gain

access to a network of Chinese business people. Daily there are a huge amount of trade shows held in

China, indicating a preference of the Chinese to use trade shows to make new contacts and gain

information. This is not surprising because as stated earlier; information is dispersed and unreliable.

The Chinese government only approves a trade fair if al the participants have a business license,

making a participant of a trade fair more reliable. Again using a Chinese employee to make contacts

at the trade fair is recommended.

Boris Peters 83

8 Conclusion and Recommendations

8.1 Conclusion

It is confirmed by the empirical results that the main solution to many problems encountered in China

while starting up is to build up social networks (Ducket, 2004; Krug, 2007; Oi, 1996; Krug and

Hendrischke, 2006). Although I could not identify substantial number of other solutions to the

mentioned problems, I was able to provide further insights into the solutions mentioned by the

internationalization literature. I rejected ‘incomplete private property rights’, ‘obtaining capital’ and

‘resource dependency’ as being a problem while starting up in China.

Hiring a competent, well educated, English speaking Chinese or Taiwanese employee seems to play

an important role in helping the entrepreneur to start up the company by acquiring needed

information, applying for business licenses, establishing contacts, hiring the first employees and

gaining access to Chinese networks. Remarkably three out of five of the respondents had help from

this kind of employee and the employee was found within the network of non-Chinese business

people. The other two respondents mentioned the importance of hiring such an employee. From now

on I will refer to the competent, high educated, English speaking Chinese or Taiwanese as; the first

employee.

In order to hire a Chinese employee the company is obliged to have a local presence confirming the

advantage of having a local presence such as a representative office mentioned in the

internationalization literature (Bjorkman and Kock, 1995; Gold er al., 2002).

Hiring a ‘first employee’ can be beneficial in gathering information about the regulative regime at the

country level in order to act fast upon changing regulations. The ‘first employee’ can also help solve

the problem of ‘the diversity in local business systems’ by making the company compliant to the

regulations of the local business system.

Hiring employees under the age of 30 years old and avoid hiring ex-government employees or

employees of state owned companies can solve the problem of newness to private enterprise regarding

employees. The ‘first employee’ can also be very helpful in overcoming the problem of newness to

private enterprise by help selecting new employees, buyers, suppliers and business partners.

Working together with state owned companies should be avoided due to the fact that state owned

companies define success in output and employment rather than profit or value creation and therefore

the employees of a state owned company are not used to work efficiently and cost effective.

Boris Peters 84

A network of Chinese government officials can help solve the problems of ‘a weak regulatory

regime’, ‘diversity in local business systems’, ‘poorly functioning markets’ and ‘poorly developed

institutional arrangements’. The network of local Chinese government officials seems to be the most

helpful in comparison to all other networks. Although Chinese government officials can easily be

contacted at trade missions and with the help of Dutch government officials, it is regarded as difficult

to build up a network with the officials. It seems that local Chinese government officials are only

willing to form a network with the Dutch entrepreneur and help the entrepreneur to start up if the

start-up can stimulate the local economy, brings employment to the region, is high-tech and is

environmental friendly, or at least meets one of the criteria.

This implies that locality is an important factor for gaining access to a network of government

officials.

The dispersion and unreliability of information seems to be the main reason for ‘the problem of

poorly functioning markets’. Although obvious, gathering information from all available networks

seems to be the solution to this problem.

Gathering information as a whole is difficult as information is often ‘intangible’ and stored within the

Chinese networks. The Chinese network can offer valuable information about local business systems,

regulations, and markets but are difficult to access by Dutch entrepreneurs because of language

problems and due to the fact that a Chinese social network is often based on similar backgrounds.

Again the help of the ‘first employee’ can make access to Chinese networks possible.

Meeting Chinese business people in order to form a network seems rather easy when attending trade

fairs, confirming the importance of trade fairs mentioned in the literature (Ellis, 2000). As stated

earlier information is dispersed and often unreliable, making trade fairs a valuable source of

information due to the fact that the Chinese government only approves a trade fair if all the

participants have a business license . This explains the popularity and the enormous amount of trade

fairs organized in China.

It is striking that although the non-Chinese network can be valuable in finding ‘the first employee’ it

is not used by the Dutch entrepreneurs to solve any of the mentioned problems.

Boris Peters 85

8.2 Limitations

I am aware of the fact that by not including the influence of culture I could have potentially left out an

important effect on the mentioned problems. But due to the limited time available to write the thesis I

could not include the role of culture in my thesis. Moreover, during my research I was surprised about

the misuse of cultural differences to explain encountered problems. A good example is the

explanation used by many people that the bad enforcement of regulation is the result of the Chinese

wanting to make more money because money is important in their culture. I am more willing to

believe that the bad enforcement of regulation is the result of the fast changing economy and the

government not being able to keep up.

Regardless whether the company was providing a service or producing a product I selected the cases

for my research. I had to make this decision due to the limited time I stayed in China and wanting to

prevent data shortage. Although I am aware that this could have distorted my findings I believe that

the problems encountered while starting up are the same due to the fact that the company is not

producing or providing the service yet. Not being selective turned out to be an advantage because this

lead to the results that location is of great influence in order to establish a social network with local

Chinese government officials. Production companies are often situated in less economic developed

areas in order to achieve cost advantages. The local government officials in these regions are more

willing to form a network in order help set up the company and thus stimulate the local economy.

The entrepreneurs did not consider incomplete property rights a problem but the enforcement and

protection of the property rights is considered a problem. This indicates that I could have more

valuable results when I used the term: ‘enforcement and protection of private property’ as a problem

while starting up in China. It is however interesting that some entrepreneurs understood my mistake

and gave a solution. They stated that the only solution to this problem is to prevent knowledge

leakage by keeping knowledge dispersed. One entrepreneur stated that employee turnover should be

kept to a minimum in order to reduce the chance of knowledge leaking. One of the entrepreneurs also

stated that the high employee turnover rate in China is also an additional problem indicating an

interesting topic for further research.

Obtaining capital in China is recognized as a problem when starting up in China it is probably only a

problem for Chinese entrepreneurs as Dutch entrepreneurs obtain capital in Holland and not in China.

The interviewed Dutch entrepreneurs are all supported by a Dutch mother company supplying needed

capital. Selecting Dutch entrepreneurs starting up in China without the support of a mother company

could have provided insight into this problem.

Boris Peters 86

The Dutch entrepreneurs do not see resource dependency as a problem as this is a problem for all

actors in the Chinese market. The infrastructure such as roads, electricity networks and the internet are

needed to gain access to the resources. The infrastructure is seen as a problem because that is often

government controlled or badly maintained which implies that this can form a problem to some

entrepreneurs, also indicating a mistake in the formulation of problems encountered while starting up.

While doing research I discovered many more flaws in my approach, which I was unable to correct.

The mentioned problems often overlap which means that I was unable to provide a single solution to a

single problem. I did not include companies that failed to set up a company in China in order to verify

if the solutions are really the key to success. I did not find an indication but it could be possible that

the problems encountered while setting up can also be dependent on the industry in which the

company operates. While writing my literature study I even questioned whether the use of network is

unique to China.

Although I am well aware of the limitations of my study I can state that the learning experience of

living and working in China in combination with doing this research is tremendous and if possible I

would do it all over again in a heartbeat.

Boris Peters 87

8.3 Managerial implications

For my own amusement I made a 10 step plan which can greatly improve the success when wanting

to start up a company in China:

1. Only continue to the next step if you have already a healthy Dutch company.

2. Go to meetings for entrepreneurs wanting to start up organized by the Dutch government and

other institutions.

3. Ask other entrepreneurs if they have a contact who can help you with finding a suitable

Chinese employee to help set up the company in China and hire him.

4. Look for a location in China where the company can offer added value to the region.

5. Invite Dutch government officials to attend your business trip.

6. Use your Chinese employee and the Dutch government officials to come into contact with the

Chinese government officials.

7. Make sure you are supported bu the local Chinese government while starting up.

8. With help of your Chinese employee hire other Chinese employees who are younger that 30

years old and never worked for a government owned company or the government.

9. Reduce employee turnover by organizing many social events.

10. Visit many trade fairs together with your Chinese employees to gather information and new

contacts.

Boris Peters 88

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10 Appendixes

10.1 Questionnaire for interviews with entrepreneurs

1. Company • What are activities of the company? • Is the company only located in China? (If not, which countries?; Head office?) • What is the entity of the company? (Why this choice?) • How many employees does the company have? (How many Chinese employees?) • Does the company serve the Chinese market?

2. Entrepreneur • How did you start as an entrepreneur? • Why did you choose China as a location for the company? • What are your goals in China? • How did you start up the company / which steps did you take? • Do you think there is a difference in the type of problems encountered when a manager starts up

a new venture in China for an existing company compared with an entrepreneur starting up a company in China?

3. Problems / Challenges when starting up the company Do/Did you have any problems or challenges;

• Because of a weak regulatory regime? Due to the newness of private enterprise for Chinese employees/business partners?

• Due to the incomplete private property rights in China? • With obtaining capital in China? • Due the diversity of local business systems in China? • Due to poorly functioning Chinese markets? • Due to poorly developed institutional arrangements? • With the dependency on Chinese resources? • That are additional to the mentioned problems and challenges?

4. Solutions of the entrepreneur • How did you solve the mentioned problems and challenges? (if there were any) • What would you do differently in starting up in China knowing what you know now?

5. Solutions in the literature • How did you start networking with other, non Chinese, business people? • How did you start business networking (Guanxi) with other Chinese business people? • How did you form alliances with government officials?

6. Tips • Do you have tips or additional information for entrepreneurs that want to start-up their business in

China?

Boris Peters 96

10.2 Questionnaire for interviews with service providers (accountants, lawyers, consultants and

governmental institutions)

1. Company / institution • What are activities of the company/institution? • Does the company / institution serve the Chinese / foreign market?

2. The interviewee • What is your function? • What is your background?

3. Entrepreneurs starting in China • Do you think there is a difference in the type of problems encountered when a manager starts

up a new venture in China for an existing company compared with an entrepreneur starting up a company in China? • Is there a difference in the problems encountered in different parts of China? • Is there a difference in the encountered problems when starting as a JV, WOEFIE, Rep.

Office, etc?

4. What can an entrepreneur do to solve the following problems / challenges? • Newness of private enterprise for Chinese employees/business partners? • Incomplete private property rights in China? • Obtaining capital in China? • Diversity of local business systems in China? • Poorly functioning Chinese markets? • Poorly developed institutional arrangements? • Dependency on Chinese resources? • Are there additional to the mentioned problems and challenges?

5. Solutions in the literature • How can an entrepreneur start networking with other, non Chinese, business people? • How can an entrepreneur start business networking (Guanxi) with other Chinese business

people? • How can an entrepreneur start form alliances with government officials?

6. Tips • Do you have tips or additional information for entrepreneurs that want to start-up their

business in China?

Boris Peters 97

11 People that attributed to the thesis

I express my deepest thanks to the following people who attributed to my thesis by giving their time

and effort.

Derek Swan, Project Coordinator, Sip Project Management

Bart Berende, Marketing Executive, SIP Project Management

Marco Hoekstra, Vice President Asia Partner, Talent & Pro

Griet A.A. Hautekeete, Manager, Deloitte

Matteo Coradini, Director Italian Desk, Deloitte

Zach I. Lichtblau, Lawyer, Holthuis International Lawyers

Choy Yiu Chan, Lawyer, Holthuis International Lawyers

Abram Bruijs, Chief Representative, Promolding

Annemarieke Beekman, Operations Manager, Randstad

Tina Chen, Chief Representative, Science Alliance

Olivier Dubois, Manager Business Advisory, Sinova

Karolien Verhaert, Event & Marketing Manager, Benelux Chamber of Commerce

Maarten Roos, Senior Consultant, Wang Jing & Co. Law Firm

Hugo Muller, Lawyer, HIL International Lawyers & Advisers

Jan van Weijen, Consul, Consulate General of the Kingdom of the Netherlands

Eric Verwaal, Consul-General, Consulate General of the Kingdom of the Netherlands

Siem Bierman, Assistant Manager, DTZ

Onno Schreurs, General Manager, The Collection

Mascha ten Bruggencate, Head of Commercial Banking, Fortis

Emile Mac Gillavry, Managing Director, Maximum

Chunyang Shao, Attorney at Law, Jun He Law Offices

Hans Lensvelt, Founder, Lensvelt

Ron de Goeij, Director, KOW

Jennifer Chan, Managing Director, Sinova

Rienk Hamstra, Owner, Beumer Agritech

Ari van der Steenhoven, Director, Eastwingate