“To the Chinese, the contract is the starting point to a relationship that will evolve” – Tom Stipanowich, president and CEO of the International Institute for Conflict Prevention and Resolution Executive Summary This report analyzes the issues directly and indirectly relating to the submission of NES AG holding company in China. This report begins by considering possible alternatives for NES AG in establishing a central unit to provide employment issues for NES given the difficulties experienced thus far and the subsequent time frame. On consideration of alternatives, it is concluded that a holding company, although requiring significant capital investment and practical disadvantages for NES, provides the mode for NES AG to establish its central administrative business unit. The report then analyses the submission process itself, identifying whether the difficulties experienced by NES thus far, may have been an error on the part of NES in failing to meet the requisite formal and informal procedures required. It is concluded that not every assurance necessary was taken on behalf of NES whereby the original submission should have been executed in conjunction with a Chinese attorney familiar with the process, questioning the time of the appointment of Chen by NES and the replication of documents. We analyzed the current state of decentralization and its influence in impeding the control mechanism of NES AG, and concluded that more autonomy must be granted to NES AG with regard to internal decision making. The effectiveness of the decentralization of NES AG was determined to be dependent also on the staffing approach adopted by NES. In order to effectively respond to local considerations we determined that Chinese nationals must fill key positions in the NES AG. Imperative to this is the adequate training of those managers with the goal of achieving NES headquarters objectives. Therefore we constructed a model conducive to training and learning and where reciprocal learning is paramount. While it was concluded that a tolerance towards gift giving should not be established, an appreciation for the role of relationship building must become apart of the corporate ethos of NES AG. A hierarchical structure conducive to such an environment was therefore developed for NES AG. A hierarchical structure will be advantageous for NES AG in implementing the strategic objectives of the organization. 1.0 Purpose of the report. JR-consulting has been hired from NES to assist the company in reaching its strategic objective to establish a holding company in the region of Beijing. Moreover, our consultation group in this assignment has been hired to provide assistance and recommendations regarding the establishment of the holding company and its subsequent consistent dismissal of its application. Based on our analysis we will identify problems, which have been impeding the approval process. In addition to this, our report will aim to bridge the existing differences between NES and the Chinese central department to ensure and maintain harmonious and long-term business relations. Based on our extensive knowledge in dealing with foreign investment in the Chinese market we proclaim that this report will aid NES in becoming a strategic leader in its industry by providing the essential insight into the indirect and direct mitigating problems in light of he recent events and providing our recommendation for future success. Thus endeavor to streamline the structural and systemized processes in the light of a long-term strategic business relationship. 1.1 Scope of the report. In this report we have included an in depth analysis and consideration of establishing a holding company in the framework of a Chinese culture. This analysis compares and contrasts advantages and disadvantages with engaging in this type of business activity. The report further considers the strategic motivational factors such as administrative governance and finance allocation relating to the establishment of NES AG’s holding company. The second part of the report critically assesses the validity of the submission of application. Due to consistent rejections of previous submissions this part of the report will aim to highlight strategic options for NES and of how your company will effectively reach this goal. We will address this problem by acknowledging cultural differences, and provide recommendations of how to bridge this gap. The third and final part of this report will address issues, which have either directly or indirectly compounded problems associated with the unsuccessful approval. Thus, subsequently highlighting cultural differences on both an operational and systematic level, with the support of empirical literature research, will emphasize these issues. It was determined that this report will not incorporate additional environmental factors such as competitors of NES within the German domestic market and how this might impact on the obtainment of the submission for NES AG. In addition we have excluded aspects such as how German nationals within their home country would perceive NES business dealings within the Peoples Republic of China, specifically the ethical concerns that have arisen within NES. Moreover this reports jurisdiction does not encompass the review of any statistical data that might influence relevant decision makers. 2.0 Overall identification of problems This report has found valid implications that after conducting our analysis the following problems were identified and subsequently addressed. First we identified possible problems with establishing a holding company and posed the question whether it is the most optimal business strategy. Subsequently we considered alternative strategies and concluded that a holding company would be the best solution for NES. Following this, the second issue raised in relation to our analysis related to the effectiveness of the application procedure of NES AG. The third issue identified by this report related to cultural differences and their impeding nature upon the business relationship between NES and the central department of China. Finally the report acknowledged the problems relating to structural and staffing policies of NES AG. 2.1 Analysis of Holding company In light of the most recent submission of application by the Beijing Representative Office and the subsequent rejection by the central department for approval of a holding company, we determined it was of utmost importance to analyze the use of a holding company as the most ideal strategic decision for NES. In our analysis of establishing a Chinese Holding company, we considered the business and tax advantages as well as the disadvantages associated with establishing a Chinese holding company. Furthermore we considered the possible alternatives available to NES AG in its strategic decision and have made recommendations upon our analysis. Fundamental to the strategic choice was NES’s recognition of integrating training, distribution, finance allocation and marketing through an administrative center, and where imperative to this the issue of control does not remain contentious. For NES, while it is noted that the company requirements for establishing a holding company are significant, specifically regarding capital requirements, the establishment appears to be advantageous for the organisation. Particularly given the holding company will enable administrative and financial functions to be performed at the holding company level (Dietz & Zhang 2004). Moreover the holding company status will give NES a high profile in China as its investment position is substantial and is clearly established under the framework of a holding company. (Abrahamson 1995) Of further consideration to NES which we believe maybe of benefit in future decision making is the possibility of obtaining full tax refunds for reinvestment in certain technologically-advanced enterprises. Where we see a serious disadvantage in establishing a holding company is the local regulators consideration of what is believed adequate capital for the company. Dan Harris notes (2006) that the local regulator will use his (her) discretion in determining what are adequate capital requirements for the company. Even more alarming for NES is that the statutory minimum for capital required (USmillion) is rarely used as a guide for determining this capital. Consequently by performing the due diligence required and contacting the local regulator to determine this capital requirement, a firm may forego many of the prevailing problems with application approval. The problems associated with Chinese holding company approval suggest alternative strategies may need to be considered. In considering the strategic motivation for NES to gain greater administrative control and organizational guidance, we feel that a Branch Office would strategically fit. Unfortunately given the issues of control associated with a Branch Office, the Peoples Republic of China do not allow them to operate (Invest Beijing). Establish a holding company would therefore strategically accommodate the requirements of NES and providing due diligence is performed; the establishment is advantageous for the organization. 3.0 Holding company submission and application 3.1 Beijing representative team While we have determined that the strategic decision to adopt a Holding company was advantageous for NES, its success is dependent on its subsequent approval. Therefore in considering the recent failure for approval we have analysed the submission process which was handled directly by the Beijing Representative Office. Further consideration was also given to the provisional regulations (discussed in section 2.1) determining the applications rejection and have concluded our analysis proposing significant changes and recommendations to occur in light of the rejected submission. In conducting our analysis of the Beijing Representative Office we have acknowledged the team was severely disadvantaged by the illness suffered by Kai Mueller and it is from our analysis that we believe that many of the problems regarding cultural differences that the team experienced would not have been so pronounced. However two implications have arisen from this. First the team’s ability to correctly administer the submission process is questioned. Following this, while Mueller’s experience in working with co-operative projects may have alleviated many of the problems experienced, his absence does not account for the inadequate measures taken by NES AG. In considering NES AG’s Beijing Representative teams impact in the submission, the appointment of Chen to the Representative Office in June in an advisory role was long delayed. Chen’s appointment following the submission by NES AG meant that Chen was unable to provide NES AG with essential advice regarding their pre-submission process but was limited to overseeing the submitted application. The timing of the recruitment of Chen indicates NES AG’s confidence in their initial submitted application but their reliance on expert knowledge in hiring a consultant during the process indicates an avoidance of uncertainty (Hofstede 1980). The decision by Chen in June 1997 to contact former colleague Zhu and furthermore her recommendation that NES AG ‘quickly’ begin gift giving to speed the approval process was, in our opinion premature. The time consideration given by the Beijing Representative Office for approval was three months. However we have found that the complete application process will likely take six months (Abrahamson 1995). Chen’s hasty recommendation for speeding up the process was based on Chen’s acknowledgement that she was working within a high individualist culture, where patience is not highly valued (Triandis 1995). Furthermore, Harris (2006) notes that in larger cities such as Beijing the process tends to be even slower than in smaller cities. This further suggests that such a small time frame of three months was unjustly burdened upon the approval process due to a cultural emphasis on short-term achievement and as such has had dire implications for the remainder of the business conducted by the Beijing Representative Office (Baker & Ingleshart 2000). Specifically, Steinmann’s recommendation to Chen that a formal meeting be organized with Chinese Officials in order to negotiate changes required in Sixteen clauses. Steinmann and Dr Perrin’s strong preference for achieving this task through negotiation without considering the value of harmonious relationships in Chinese society is based on individual and company beliefs that negotiation can always be used (Altson 1989). We have considered that Steinmann and Dr Perrin’s dismissal of the importance of Guanxi may have been due to Chen’s persistent association of gift giving in Guanxi and their ethical concerns for the association of gift giving with bribery. However we have acknowledged that having prior awareness in this concept and more importantly the significance of relationships in Chinese business would not have lead to this erroneous conclusion. Of further consideration was the use of another company’s successfully submitted documents in drafting the application for a holding company. Dan Harris (2006) notes that government approval is very much dependent on the location of the project as well as its size and scope. Dr. Perrin’s role as legal advisor for NES AG would indicate that the articles of association included in the submissions would need to truly reflect these specific differences. Consideration must also be given to the application prior to submission. From empirical findings the Chinese regulator will not approve a project (holding company) that looks risky or under-funded (MinterEllison). It is therefore problematic to submit an application for a holding company approval where NES has expressed doubt over the adequacy of funding for the holding company prior to the application submission. Thus we have assumed that such information was not made available to NES AG or NES Head Quarters when the decision to establish a holding company was being considered. Adequate staff in the legal affairs of establishing a holding company would have overcome this problem. 3.2 Recommendations From our analysis we conclude that significant importance was not given to the pre-submission process and this led to many subsequent issues arising. Specifically, subsequent team difficulties would not have arisen if the importance of contacting a local regulator in determining capital adequacy were not overlooked. Therefore, we recommend NES AG engage a Chinese attorney familiar with the establishment of holding companies, to ensure that all the requisite procedures are executed in accordance with both NES AG’s position and the relevant laws applicable. However we have also considered the team’s implications on the submission process and these have been acknowledged in the following sections (4.2, 6.3 & 7.0). 4.0 Cultural differences 4.1 Long term relationship v Long term orientation The profit and growth potential of NES AG is primarily dependent on the firms long-term commitment. In order for NES to maintain a long-term commitment within the Chinese community it is important to recognize underlying cultural and philosophical values and beliefs. Hofstede, Van Deusen, Mueller, and Charles (2002) suggest that establishing a long-term relationship is imperative within the Chinese society. However adding to the complexity of this notion is the similarity and hence often interchangeability of the terms long-term orientation and long-term relationship (Hofstede 2002). For our analysis we have made a distinction between these terms as evidenced by the distinction made between NES AG and that of the Chinese officials. For NES the established operations in Beijing since 1908 and the significant capital invested in business projects since 1979 suggests that from NES’s perspective future commitment is evident. It is from NES’s task orientated perspective therefore that greater importance is subsequently placed on business achievements as a measure to the perceived long-term commitment (Hofstede 1980). However where the importance of NES’s task orientation is less valued, as is the case in Chinese society, the effects of maintaining task orientation will result in an impeding relationship development. Fiske’s (1992) relational model theory states that where there exists a deep need to belong to social groups and a desire to build and strengthen relationships are essential, reciprocal relationships’ building becomes imperative. The need to therefore explicitly cultivate interpersonal relationships is made apparent by the events leading up to and including the latest rejected submission in April 1998. Where in July 1997 Chen, a member of NES for only one month, had been assigned to meet with Chinese officials without the support of Dr. Perrin and Steinmann, interpersonal relationships with government officials were not being established. The subsequent meeting organized by Dr Perrin and Steinmann in November with Chinese officials was indicative of a negotiation and hence task orientated structure adopted by NES AG. Where the negotiated meeting was considered a ‘failure’ is primarily a result of the differences toward orientation (Hofstede 1980). Had Steinmann and Dr. Perrin recognized this importance of relationship building in Chinese society prior to the formal meeting, negotiations would not have been used. 4.1.1 Recommendations We acknowledge that NES has made great efforts in establishing relationships within China through the strong commitment of initiating scholarship programs for Chinese nationals, signifying their commitment beyond the requirements expected by most multinationals to forge harmonious relations. However previously where NES business transactions have been concerned with Joint Ventures, negotiations and contracts to establish business, the relationships founded were contractually driven. NES was able to maintain this relationship on a contractual basis as the superior technology and expertise that NES has developed has been much sort after and valued by Chinese local industry. However, the strategic decision to move the organization under the framework of a Holding company signifies a shift in the organizational relationship NES plans to develop within the Chinese local industries as well as the broader Beijing community (Alston 1989). This shift must be supported by an organizational commitment to cultivating relationships with the focus on sustaining the relationship for the long-term. It is fundamental for NES in order to develop this relationship, to adopt the notion of Guanxi (discussed further in Appendix A). Understandably Dr Perrin and Steinmann cynicism and reluctance towards nurturing Guanxi is due largely to its association with crony-capitalism, which has flawed state-owned enterprises throughout China (Nielsen & Soloman 1998). We endeavor to overcome this problem by developing with NES a tolerance towards informal relationship building, and maintenance of its high ethical standards which will flow throughout the organization and in turn translate into a competitive advantage for NES. 4.2 Guanxi v Gift giving From our analysis we believe that both Dr Perrin and Steinmann overlooked Chen’s persistence on the importance of Guanxi, largely due to the high perceived uncertainty with informal relationships (Hofstede 1980). Furthermore, Western business exchanges do not necessitate a need for close business relationships while Chinese business practices do (Chenting 2003). The perplexing notion of Guanxi is further clouded for individual societies when issues of gift giving arise. After discussing the notions of gift giving within Chinese business further with Allan H. Lee, senior accountant of assurance Price Waterhouse Coopers, he indicated that ‘today in China it is not acceptable for multinational firms conducting business to engage in practices such as gift giving’. From our discussion we concur with the sentiments expressed and we do not recommend that NES forego its high ethical standards for the sake of gift giving. However we believe that adopting the concept of interpersonal relationships is imperative to promote the building of long term relationships while discouraging gift giving. We recommend therefore that, for NES to build trusting relationships, adopting a similar approach to that taken by Motorola in China will be beneficial to the organizations success. We have found from our analysis of Motorola in China, that most Chinese government officials complete executive MBA programs (Executive MBA China). Therefore it is our recommendation that NES support an MBA executive program with Peking University in Beijing enabling NES AG’s key positions holders to attend the same program offered to government officials, allowing relationship building to take place, whilst developing a better understanding of Guanxi (Dunfee & Warren 2003). 5.0 Decentralization We have found that there is a preference amongst German MNC’s to centralize strategic decisions to the German Head Quarters and decentralize the host country subsidiary to enable it to respond to the host country conditions (Hodgetts & Luthans 2003). Thus it is important to consider the preferences of the local conditions with regard to the subsidiaries structure. NES AG has taken this approach, with strategic decisions centralized to the German Head Quarters and operational decisions decentralized to the subsidiary of NES AG. Furthermore, in determining where inefficiencies have impeded the approval process, we have assessed the relationship which exists between NES AG and NES Germany as well isolating and assessing the organizational structure of NES AG in determining the degree of decentralization within that organization. 5.1 Decentralization: Relationship between NES AG and NES Germany While NES AG ‘s decentralized structure has allowed decisions concerning operational objectives to be made directly by Dr Perrin, Steinmann and Chen it has not allowed the organization to fully benefit from the use of decentralization. Key decisions regarding the use of negotiation in relationship development were made directly by Dr Perrin, Steinmann and Chen allowing the operational development of NES AG to function with greater autonomy. However, it appears that NES Germany was reluctant to relinquish strategic decision-making to NES AG which seriously hindered their ability to make localized decisions (Chakravarthy & Perimutter 1985). The required approval by NES Head Quarters of any modification of documents for the Holding company resubmission had diluted the empowerment of the Beijing Representative office. We regard NES Germany’s control efforts as a natural consequence of a company wary of a young subsidiary and where risk avoidance is paramount. However, as Li Degang (CFO Asia 2006), deputy general manager of Beijing-based RAC China-Japan Business Consulting notes, ‘Companies that insist on tight controls over subsidiaries and a hierarchical reporting process will miss many opportunities.’ 5.1.1 Recommendations Our recommendations to NES is to permit more autonomy within NES AG Chinese holding company to ensure, as the local subsidiary, that they are able to make more decisions directly affecting the host country, effectively removing some of the layers impeding the efficiency of NES AG which require issues and decisions to be made in NES Head Quarters, Germany. Specifically the issue of modification of documents and subsequent approval of these modifications by German Head Quarters would not arise if greater autonomy were granted. Provisional upon autonomy being granted to the NES holding company in China is for NES Germany and NES subsidiaries in China to have confidence in NES holding company to be able to make effective decisions regarding their administration (Distefano, Distefano, Imon & Lee 2004). We recommend for NES AG to effectively administer their duties it will require the parallel execution of an the effective staffing policy from NES, by implementing and providing ongoing training and support to enable staff to make proficient decisions, as well as adequate resources for NES AG (discussed in greater detail in section 6.1). This would instill a stronger sense of confidence with NES AG holding company and cultivate more efficient management practices within NES subsidiaries in China (Hodgetts & Luthans 2003). 5.2 Decentralization within NES AG In order to determine the degree of decentralization within NES AG and moreover the impact of Chinese culture, we have analyzed specific occurrences which reflect the organizational structure and highlight the need for structural adaptability. The practice of decentralization adopted by NES in all of its subsidiaries irrespective of whether the market fosters such a structure is connected to the concept of universalism (Hamped-Turner & Trompenaars 1996). This concept of universalism is not bound within NES Germany, as it is a national cultural trait and is consistent within many western firms’ structures. However the implications of such an approach are evident in a culture where the acceptance of inequality regarding power are high (Hofstede 1980). The degree of flexibility found in Chen’s role when making decisions and referring recommendations to Dr. Perrin and Steinmann indicate a lack of authority and defined roles. This appears to have caused conflicts within NES AG representative team in which Chen’s personal recommendations were conflicting with NES’s business ethics. Furthermore the importance of established authority in guiding the decisionmaking and interaction between business relationships is highlighted where there is a disparity in the value of power distance in cultures. Our analysis of NES AG highlights the distinction between the structural guises of German Firms operating in China. Specifically, where NES AG has valued greater equality amongst employees and where emphasis on accorded status is not evident, in contrast to the greater value placed on authority and interpersonal relationships in Chinese culture (Hwang 1987). As NES AG is so decentralized the roles of the team was not clearly defined and importance was not placed upon such titles. The preliminary meeting with government officials, which was not attended by Dr. Perrin and Steinmann demonstrates the distinction in the importance of authority in their roles. Their roles as authority figures for NES AG were seen as important by the Chinese officials yet this significance was neglected by Dr. Perrin and Steinmann largely due to low value of status symbols in German culture (Fang 2003). Therefore the importance of Hierarchy in Chinese society and its influence upon organizational structures must be considered and furthermore the significance of high power distance in Chinese culture emphasizes the need to adopt a structure which will encompass these traits. Traditional forms of hierarchical structure appear to overcome the short comings faced by NES AG. However we note that traditional hierarchal structures are readily associated with the structures of state owned enterprises in China where many levels of authority characterize these structures (Jain, Malik, & Cruickshank 2006). As NES AG is a new holding company it is important to adopt the optimum management structure, which reflect the contemporary nature of the company and distinguish it away from authoritarian and bureaucratic business models, thus creating an environment where employees thrive (Westerhuis 2004). Such a practice complements the evolving nature of NES in China as a business leader over the last 100 years. Furthermore, the Chinese economy is at a transitional stage and it is thus important to recognize these factors and create a structure, which does not resemble the levels of authority of ‘traditional China’ (Westerhuis 2004). 5.2.1 Recommendations Therefore we recommend from extensive consideration of these factors that NES AG adopt a ‘pseudohierarchical’ structure. A pseudo-hierarchical structure will encompass distinct levels of control where the organizations levels are obvious but importantly not extensive (Triandis 1995). Important to note, within a vertical culture such as China and where ethical codes may not be evident or not enforced, ethical dilemmas may become realized. However the maintenance of NES’s high ethical standards and a further cultivation of these standards with those Chinese managers identified and trained by NES Head Quarters will overcome the ethical dilemmas of cronyism which regularly flaws hierarchical structures. Thus the structure we have adopted for NES is referred to as pseudo-hierarchal. Ideally the key position holders will maintain and coordinate a level of control above those administrative employees of NES AG, ensuring a sense of authority is developed. Developing a pseudo-hierarchal arrangement will enable a structural revitalization of NES AG and recognize the cultural distinction signifying the companies’ commitment for long-term success. 6.0 Staffing Approach 6.1 Ethnocentric Our analysis has further identified a relating problem to the structural impediments within NES AG, which has adversely influenced the applications approval. Moreover if not resolved, it is our opinion that this problem will hinder the establishment of a harmonious long-term business relationships. Our analysis has found that NES are engaging in a staffing policy referred to as an ethnocentric approach. Specifically NES AG key position holders are of German and French origin. Moreover the 2000 trained Chinese engineers since 1979 have been trained within a German culture, adopting the nationalistic philosophy and values inherent in the NES headquarters. For a deeper explanation of ethnocentrism, see In further support for the notion of an ethnocentric approach, our analysis found valid implications regarding NES AG where the key positions are held by German and French expatriates and where the remaining nine business units are operated in the same manner. From NES’s perspective this would facilitate the process of maintaining a constant corporate culture where business ethics are highly valued (Chakravarthy & Perimutter 1985). In contrast however, we believe this approach to be shortsighted due to a lack of diversity and critical thinking, and has directly impeded NES AG to gain leverage in relationship building. While Dr. Perrin possessed adequate legal understanding of Chinese business his dismissal of Guanxi and his efforts in negotiation suggest that this approach his hindering NES AG ability to effectively function. Moreover where a critical dependence on government-business interaction is noted as essential by the Ministry of Foreign Trade and Economic Cooperation, the current staffing system appears to adversely affect NES (MOFTEC). 6.2 Solutions We have identified three possible alternatives to NES’s current staffing approach, which are identified in Appendix C. 6.3 Recommendations We recommend that key management positions in NES AG be filed by both host country nationals and German nationals. This is pursuant to a polycentric approach but it considers the transitional period by blending the current ethnocentric approach to overcome short-term costs of high failure rates of either host country nationals or German nationals. This combination of the two approaches is a short-term approach and the implementation will be over an eight-twelve month period. Critical to the success of NES AG is for the implementation of a staffing policy which identifies Chinese nationals that will fill key positions in the subsidiary and where in-house internship at NES headquarters will provide those Chinese Nationals with the required training and an adoption of NES corporate culture. NES will develop the competencies in relationship building when working with Chinese managers. The approach is similar to the training program designed by NES to develop Chinese engineers. However, the important difference is that it is cultivating Chinese managers and reciprocal learning will take place. We have designed a model which incorporates these functions, known as the ‘Cultural Reciprocal Learning Model’. In essence this would lead to managers trained in German culture but whom encompass the fundamental and unique Chinese cultural values based on Confucianism ideology and the notion of Guanxi. For a more in depth analysis of this ideology we refer to Appendix B. A long-term approach would be to ensure the continued effective training of host country nationals in order to implement a geocentric approach whereby the best person for the positions are filling the jobs. These managers will offer a competitive advantage and have the ability to operate as effectively as possible within the Chinese market. In addition by harnessing the connection between German headquarters and the Chinese holding company, corporate culture will gradually reach a common ground and in a long-term perspective signal to the Chinese market that NES has the willingness to adapt to and adhere to local values, beliefs, and traditions (Kali, Lovett & Simmons 1999). 7.0 Recommendations & Implementation The following recommendations are primarily founded on the conclusion that the strategic implications for establishing a holding company are determined to be advantageous for NES AG when adequate funding exists and where due diligence is performed. We therefore recommend that for the short term where submission approval is imperative that NES review its financial position, specifically regarding the concerns raised for its ability to maintain the capital required for financing. This financial consideration must be performed with the acknowledgment that the statutory minimum required for the establishment of a holding company is rarely used by the local regulator in determining capital adequacy. Consideration is therefore given by the local regulator to the location of the proposed holding company along with its size and scope of business. We strongly recommend therefore that NES engage the services of a local Chinese attorney, knowledgeable in the provisional requirements and whom we recommend contact the local regulator to determine capital requirements. It’s our recommendation that consideration also be given to the size and significance of NES AG establishing a holding company in Beijing. We recommend that it is imperative for NES AG to recognise the significance and size of the investment in Beijing thus far in order to support their objectives for a long-term commitment in China. By recognizing this commitment, an essentiality and desirability for establishing relationships beyond a contractual obligation will thus be realized. Therefore considering the long-term commitment that NES AG has in Beijing, we recognise it is imperative that this commitment be aligned with the structural and staffing approaches to support the local conditions and a local responsiveness within Beijing. At its current state, NES AG’s decentralized structure does not reflect the Chinese environment in which it operates and if maintained, will hinder NES AG’s long term commitment. We have determined that NES AG therefore adopt a structure which recognises the importance of hierarchy in Chinese business and the influence of this confucianist culture while also remaining decentralized to effectively administer control. We have proposed a pseudohierarchical structure which incorporates these differences and will allow the firm to respond to the transitional state of economy in China (section 5.2.1). A pseudohierarchical structure will also enable NES to continue maintaining its high ethical standards by cultivating these standards within Chinese managers. However we have concluded that it is problematic to maintain these high standards where effective business practices are constrained. From our analysis the maintenance of these high ethical standards has impeded the ability of Dr Perrin and Steinmann to function within the framework of the broader Chinese culture, particularly where building interpersonal relationships was concerned. We recommend therefore a staffing approach which maintains these high ethical standards and also reflects the Chinese environment in which NES AG operates. In order to do this we recommend that the parallel execution of two staffing approaches be implemented. First, we recommend an identification program be designed to determine those prospective Chinese managers within NES AG to fill key positions along side German nationals in the Beijing Representative Office. We have presented a model in which Chinese managers are trained at NES Germany to foster a greater understanding of NES’s culture and organizational objectives. This model is known as the ‘Cultural Reciprocal Learning Model’ whereby NES also gains a greater understanding of Chinese culture (Section 6.3 – Figure 1.0). While this cultivates and ensures a greater understanding between the two cultures for future managers, it does not resolve the current relationship difficulties by the Beijing Representative Office. It is therefore our recommendation that NES support an MBA executive program with Peking University, Beijing which will enable current management to establish a relationship with those government officials attending the same program (section 4.2). This approach has been adopted with success by Motorola in China and we believe it is fundamental in harnessing a greater understanding for relationships. Through consideration of the factors affecting NES AG in China we have concluded that through the successful implementation of our recommendations, NES AG will be more effectively equipped to successfully gain approval of a holding company and ensure NES has continued future success within China. However, critical to the implementation of our recommendations is for NES to embrace the notions we put forth in this report to strategically reach the desired objectives within the expansive Chinese economy. It must be met by a total organizational commitment where the organization does not deviate from the objective of harnessing greater interpersonal relationships within the Chinese community, as only then will the success of NES in its long-term commitment be realized. The closest meaning for Guanxi is ‘connection’. Guanxi, however, does not only mean connection; rather, it defines the mutual obligations and reciprocity of relationships with others in Chinese society. It’s been argued that Chinese when conducting business they do not differ between business and interpersonal relationship (Cheen, 2001). Guanxi is also related to a long-term perspective and could be linked with Hofstede’s (2002) dimension of long-term v short-term orientation. In this context the Chinese business environment value long-term relations. Confucianism – The Chinese way of life and all its aspect are strongly influenced by deeply rooted philosophical theories and constructs. Confucianism advocates benevolence, righteousness, harmony, loyalty, humility, and learning (Bell, 1999). This concept relates to a general welfare of society and its members. 9.0 Bibliography Abrahamson, J 1995, ‘China begins in holding regime’, International Tax Review, vol. 6, no. 6, pp. 39-40. 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