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Executive Summary

This dissertation aimed to examine the topic The external environment in China and its effect on foreign beverage companies: A case Study of Pepsi and Coca Cola. The literature review of this dissertation concern with theoretical aspects of Environmental Effect on the Strategic Choice, Chinese Policy towards the Multinationals, FDI Motivation, Chinese Political and Cultural Influence on PepsiCo & Coca-Cola, influence of Chinese Culture and Politics, and Performance of Coca-Cola and PepsiCo in China. On the other hand, the key purpose of methodology chapter is to demonstrate research method, data collection process, limitation of the study, questionnaire design, and data analysis process. However, the author of this dissertation will design a questionnaire in order to find out the positive and negative side of the external environment in China for Pepsi and Coca Cola. This dissertation also concentrates on primary research to observe cultural and political factors for the operation of these two companies.

Problem Statement

Introduction

This dissertation critically illustrates the perceptions and attitudes of external environment in China and factors touching their motivation and exploration within the foreign beverage companies where the Multinational beverage companies PepsiCo and Coca Cola have been assessed. The dissertation has been organised and contained the five major episodes designed below-

1. Problem Statement: This chapter of the dissertation has organised with a study in wide-ranging among the selected organisations, endow with the underlying problems of the external environment in China, hypothetical principles of strategic choice and agendas for the research; raises the research questions and affirms the limitations and scope of the study used within this present dissertation.
2. Literature Review: This part of the dissertation launches with a chronological indication of external environment in China and its motivation theories; then, recites too more up-to-date literature integrating the strategies of Multinational Corporations with the aim to theoretically answering and arguing to the research questions. In addition, this part also focuses on accomplishment of conceptual framework of regularity authority in China and MNCs to ensure suitable external environment to sustaining investors confidence like PepsiCo and Coca Cola in China.
3. Research Methodology: This episode of this dissertation delivers the justification and plans the way out on how the research would be conducted, describes position and sample population selection, data assembly and treatment, develops a qualitative analysis of the data, gives description of the process and states limitations to conducting this study;
4. Findings & Discussion: This segment of the dissertation specifies the collected data, denotes unexpected results by concreting on the findings as well as hypothetical uses for the information delivered from the external environment in China for PepsiCo and Coca Cola and proposes idea generation for the research from primary and secondary data; enlightens the results in reflecting the outcomes of the research and discuss on validation of findings;
5. Conclusion: This final episode of the dissertation summaries the process, advises sensible outcomes that construct the key recommendations and promotes conclusions as well as implications of this study towards the effect of external environment in China of on foreign beverage companies such as PepsiCo and Coca Cola.

Background of the problem

Yallapragada et al (2005) has approached that the external environment for modern business communities concerning Chinas politics and culture has been inherited from the Cultural Revolution commenced in 1966 led by Mao Tse Tung based on Marxist philosophy. The political economy of China has including peoples culture, believes and faith has come out from idealism towards materialism, individual ownership of property and land had replaced with collective ownership of the society and the people were loyal to the rigid, centrally controlled communist partys regime and in this period the worlds largest population has kept apart foreign investors.

Yallapragada et al (2005) also added the ill experience of PepsiCo and mentioned that it has invested more than US$ 500 million from its journey to China in 1998 to 2005 but, cannot see the face of profit due to non-cooperative joint venture partner and lack of transparency as well as legal barriers. The straggle of PepsiCo in China has faced to the Chinese entry to WTO for major reformation.

Tse (2010) mentioned that in 2008, while Coca Cola placed its offer to purchase Huiyuan Juice, the largest domestic producer of soft drinks, the Ministry of Commerce showing the reason that it would conflict with Chinese anti-monopoly law neglected the bid. To sustain with the challenge of China market, Coca-Cola has needed to put together its upstream functions with R&D and product innovation, to build marketing podiums emphasizing on local consumers needs with one world based global strategy.

Alon et al (2009) demonstrated that at the very beginning, due to cultural constrains Coca Cola has suffered linguistic differences between Chinese and English and it was very difficult to identifying appropriate pronunciation of the brand name and stand as a major dilemma to localisation of the brand name. To overcome this dilemma, Coca Cola conducted long study and after huge spending Coca Cola utilised alternative brand approaches including brand meaning and feeling extension and dual adoptions (Alon et al 2009).

Wu (2008) conducted extensive research with external environment of China for multinationals and argued that the organisations with their internal resources and capabilities turned the external environment into a bundle of resources though the external environment including politics and culture has long been kept adverse affect on the growth of multinational during communist era. In such a background problem of external environment in China including its politics and culture, Chinas entrance to the WTO may facilitate MNCs with mew legislation to cope with the Chinese environment.

Rationale for the research

Many scholars tried to find out the solution of the question how the environment of China could influence the foreign investors and MNCs operation in the domestic market to raise their market share and to what extent the Chinese environment cooperates the foreign companies to sustain their stability and investors confidence from last era. Most of the contemporary researchers have concentrated on the FDI flow, corporate governance and regulatory reform in the market, but overarching research agenda has not been proposed yet on whether the external environment in China has a conscious drive and direct effect on the foreign beverage companies. Kao and Mao (2009) argued that the wide-ranging and effectual analysis of the external environment would facilitate the management for enhanced planning and dynamic decision-making capabilities to respond to the changing environment with successful strategies.

Wai (2010) explored that the foreign companies in China have been facing inauspicious external environment and the leadership of China is under severe constraints and to improve the situation government is taking different reformation initiatives, at the same time China with adverse external environment seeks to set up a new global political economy that replicate Chinas ideas and visions.

The rationale of this research is to analyze the external environment in China experienced by observing the real scenario of PepsiCo and Coca Cola, and to evaluate to what extent the external environment in China is effective to retain foreign beverage companies and facilitate to increase their market share. In addition, the case of PepsiCo and Coca Cola has escalated the awareness of managers to take control over the external environment in China with their internal resources and capabilities to utilise competitive advantages in China, this dissertation will assist the academia, regulators, and investors with better understanding about the external environment in China including politics and culture factors. Through this investigation, the mentioned companies will get a potential investment environment in the Chinese domestic market and get a better level of inventors confidence, which will provide the companies a practical advantage over their managers.

Research Question and Objectives

This dissertation aimed to investigate; how the external environment, with specific focus on political and cultural factors, has affected the strategic choices and performances of PepsiCo and Coca Cola in China? To structure the aim, the dissertation has designed to respond to the following research questions, the answer to this question would enable the legislators and regulating authority to organise the policy and towards a greater motivation for increased confidence of foreign investors, while the foreign beverage companies will get a better understanding to design their strategies in China. Three research objectives are listed below:

• How the theoretical framework of external environment effect on the strategic choice of business modern business?
• What is the motivation of Chinese Policy towards the Multinationals?
• How Chinese politics and culture influence the strategic choices and performances of PepsiCo and Coca Cola in China?

All of these above issues will assess under certain considerations along with theoretical background and these tasks are significant since each of those issues are closely interrelated with scenario of the proposed companies PepsiCo and Coca Cola and their performance under the external environment in China.

Limitations of the project

The researcher has suffered following problems to formulate this paper:

• Lack of reliable secondary data sources or unnecessary information was the main problem to organise the paper, for instance, relevant data on PepsiCo and Coca is not available in internet;
• In addition, the author gets a very short time for planning and conducting research;
• It was not possible to collect data from the executives or top management of PepsiCo and Coca Cola. As a result, the researcher would complete the paper based on secondary sources to overcome this dilemma;
• Budget was not sufficient to purchase relevant reports or journal articles and field survey.

Scopes of the study:

• The author has selected an exceptional topic, which gives the chance to research on various issues, for example, the external environment in China and its effect on foreign beverage companies;
• One of the main objectives of this dissertation is to evaluate the impact of external environment in China on the multinational companies;
• The researcher has scope to find out the difference between PepsiCo and Coca Cola case;
• As the issue of external environment in China interrelated with political and cultural influence, the endeavour of the researcher to fill in the gap or loophole of the outcomes of previous research;
• On the other hand, many large MNCs have suffered from the ineffective and adverse external environment in China, in this context; the researcher has scopes to give proper guidance to reduce unfavourable effect of external environment in China.

Relevant Literature Review

Environmental Effect on the Strategic Choice

Zhang (2008) argued that the atmosphere of the strategy and the strategic supervision in the strategic environment and its breakdown has played a major role during the formulation and execution of the business strategies in both domestic and international market. Moreover, it is obligatory to make trade-off between firms internal resources and peripheral atmosphere for their impending strategies. Alternatively, business organisations would construct strategic success proportionately if their strategic dynamics have been relatively consistent with the transformation of both the interior and exterior atmosphere. Additionally, ecological breakdown of the business organisation has formed through scrutinizing appraisal and finally, by weighing up the gathered information, which is constructed from several ecological sources. On the other hand, firms operational tasks have outlined through three-phase hierarchy where macro and micro both environmental dynamics as well as unambiguous forces of an organisation are examined through proper manner.

The most elaborated form is the microenvironment where political stability, societal policies, legal affairs, cultural behaviour, and improvement of technology are scrutinized and as a result, potential prospects along with the hazards could be predicted. Second phase microenvironment has principally focused on four issues which have included industry structures, rivalry movements, consumers need and demand and on the supply chain management. In another term, an organisation has examined and strengthened its individual resources as well as its limitations. Thus, an organisation has elegantly gone through both friendly and hostile atmosphere. In following diagram, an elaborated form of strategic environmental analysis is plotted where every step of the environmental analysis is successively offered (Zhang, 2008).

External or macro-environment analysis

Morrison (2010) pointed out that ellipsis of the microenvironment or the external environment of an organisation has referred to as the PEST/PESTEL analysis where politics, economy, society and the technology has placed and analysed. In another form, the PEST analysis has defined as the ecological scrutinizing. For long-term strategy formulation or construction of organisations vision, PEST breakdown is a significant tool that has supervised as well as appraised dynamics under this section, which is durably influenced an organisations functional and operational actions. Several researches on microenvironment analysis have reached at a common conclusion that an organisations performance evaluation has most accurately designed through the ecological breakdown of the firm. Moreover, seize prospects and avoidance of the potential threats has successfully executed under this supervision. (Morrison, 2010)

Strategic Steps of External Environment Analysis

Moss (2009) described that the significance and definition of the macro environment of an organisation and circumstances of the peripheral atmosphere have great influences in organisations operational areas as well as in effectiveness. During discovering faster and complicated macro environmental factors and formulating the suitable strategies, the macro environment analysis has passed through four-stage technique, consequentially, they are scrutinise, supervise, appraise, and trail. More details are in the following table (Moss, 2009).

Dynamics of External Environment Analysis

Paul & Gerhardt (2002) pointed out that the dynamics of the external ecology requires preparing marketing strategies including politics, legislation, society, economics, and technology. Additionally, legislation forces have required considering the similar core elements during formulation of the strategic marketing illustration. Circumstances that supported to screening threats of the firm over and above process of assumption and scheduling overall course of actions, have principally utilised through following macro environment dynamics (Morrison 2010).

• Political factors: Those consider Political atmosphere and the level of government functionality, budget condition, internal political risk and stability, rate of tax, payroll taxes, export and import laws, global monetary flows etc. Some related legal issues are substantial wage, environmental protection, union, patent and copyright and licensing laws etc. Adequate time and energy should be devoted from organizational level for getting learned about regulations, obeying them and developing sound relationship with legislating bodies and their representatives consequently (PDO, 2009).
• Economic factors: Several sub- elements of this environment are GNP or GDP per capita, inflation and unemployment rate, economic growth, rate of currency exchange, balance of trade and payment, trading partners, rate of exchange etc.
• Socio- cultural forces: These incorporate different demographic variables, personal attitude, cultural structure etc. (PDO, 2009).
• Technological forces: Here, the sub- elements are productivity, sophisticated production method, any sort of new technology, which can affect corporate performance, easy access, and expenditure of technological orientation etc.

Legal and Political Structure

Zhang (2008) added that in case of international business operation politics, legislation affairs have a great deal of influence on the organisations decision-making procedure, functional and operational areas, and on effectiveness and efficiencies. The key objective of the political and legal affair consideration of the target markets political steadiness is to defend the unforeseen situations and occurrences in the target markets location. Effects of the unforeseen situations have large depressing effect on organisations business activities. For instance, durable conflicts, strike of the root-level employees, violent threats, etc are the unforeseen situations.

On the other hand, business firms need to analyze business and commercial acts of the government, legitimacies of the tax payment, privatization policies, and labour laws, legal documents with the MNCs, regional trade affairs, and consumer rights. Among these legitimacies, there are significant roles of the MNCs policies. Additionally, commitments of the WTO¹ members and instruction of the IMF² are also considerably noticed in this section. Finally, mission and goal of the commercial and business legislations instruct a business organisation to look after their business operational areas to stay free from the unforeseen situations and uphold continuing social and consumer responsibilities as well. (Zhang 2008)

Economic Policies

Datta (2005) stated that the economic policies of a country have covered following areas and other than these indicators, there are several significant regions, which have also equal involvement during formation of countrys economic policies. Additionally, these economic dynamics are also indispensable for the continuation of business operation in both home and abroad.

• Economic growth: it determines whether a country would be treated as developed, emerging, and developing or under developed;
• Inflation: high inflation rate resists prosperous economic development
• Monetary and fiscal policies: Monetary and fiscal policies are modes of foreign exchange rates, foreign reserves, stability of the commodity prices, employment ratios and most importantly gold reserve of a country,
• Foreign exchange rates,
• Income changes and distribution policies of the government,
• Annual budget deficits

Additional economic dynamics

• Establishment of the international trade based on countrys industrious power.
• Foreign Direct Investment³
• Gross Domestic Product⁴
• Investment criteria and flexibility as well
• Consumption percentage
• Balance of payments
• Banking structure and performance

Societal and Cultural Forces

In broader form, society and cultural forces have compacted with both demographic and physical circumstances in which following components are indispensably correlated. Additionally, cultural diversification of the society has also influenced a lot (Datta, 2005).

• Percentage of the potentiality to transform profession or occupation
• Change of habitual lifestyle
• Assumptions of the social responsibility or common peoples awareness
• Demand of both individual and social ethics and norms as well
• Initiatives to protect and prevent environmental pollution
• Workforce diversity
• Common peoples living standard along with per capita income

Technological Development

Technological development of a country refers to the literacy rate or in other words, to the ratio of the skilled and trained human resources or workforce. Following are terms of positive technological development (ALOA, 2004).

• Modern technological development
• Modernization of the methodology
• Modernization of the product and service quality
• Invention of substitute technologies
• Modern technologies to develop information infrastructure
• Exchange of technological advancements
• Percentage of Internet users

Chinese Policy towards the Multinationals

The Peoples Republic of China (PRC) is the inhabitant of socialist economy, and it turned into the raising tiger of global economy whilst under the full control of communist party. The Politburo of the Communist Party is the supreme authority that has driven to the market economy and welcomed foreign investment from seventies with strong reservation and control of the party upholding the national interest.

Kroeber (2006) pointed out that the economic growth model of China has integrated the objectives of the traditional open economic development viewpoints though the policy makers are rigorously controlled by socialist political economy due to the complete monopoly of Communist Party at the stare power. As a result, the extent that is necessary for quick raise of open economy to bring massive reformation has been delayed in the name of political stability, the esteem openness for the MNCs has not been allowed for investment and trade, but due to emerging economy, MNCs are eager to take entry in Chinese market and straggling for reformation.

The Chinese policy respond to the MNCs is to check and balance among the high FDI flow, huge offshore manufacturing, education and technological development and the low cost human resource while the MNCs is eager for reformation towards an open economy and uncontrolled local market and exercise to influence at the policy level.

FDI Motivation

Ford et al (2010) pointed out that the development literature of China has been deeply concerned with the relationship among extensive stage of FDI and economic growth though it has not been determined the interdependence of FDI and GDP growth due to there are some influential factors those deliberately kept positive role for proper use of FDI for national prospect. The endogenous growth theory pointed those influential factors as household capital stock, skilled human resource, innovative technology, openness, and slow, but sure liberalisation of the economy has ensured the FDI flow to utilise in productive means though FDI has significantly direct influence on creating employment opportunity.

At the beginning of 1980s, China has achieved enormous success in utilising foreign investments throughout manner of FDI. Consequence of this employment, their economic growth has boosted up massively and as well besides FDI, MNCs has significantly donated key role in the advancement of Chinese economy. From the beginning of 1990s to mid 1990s China has titled as the second leading FDI country in the world⁵, for instance, within 1996 China was employed $283.94 billion FDI invested by the famous MNCs. Due to the FDI graph has touched the boom point, now China has the most accelerating economic restructuring nation globally. Chinese open door strategies were the key motivation for entrance of the FDI remarkably and therefore utilise their largest inhabitants in terms of economical labour approach. Now after the end of 2003, China has established themselves as a gateway for both of FDI and MNCs (Zhang, 1998).

Conversely, the renowned MNCs like Intel, Microsoft, Coke, PepsiCo, McDonalds and so on in China has now treated as an intercontinental host to produce and promote their products and services globally. Additionally, MNCs market penetration as well as highlighting them both in the developed and developing countries China has opened several universities for the innovation and development of new technologies. Consequently, China has targeted their three imperative cities⁶ to execute spacious market orientation, modern technology invention, and expert workforce development (Motohashi, 2005).

Objectives of MNCs & PRC

To widen economic growth China has mostly focused on durable economic forcefulness and it has earnestly employed its futuristic schemes. Thus, futuristic strategies of China have embraced ample scale of FDI, M and A of innovative skills, and joint ventures, franchising and licensing have cultivated, but to spirit up Chinese local industries, PRC has made available subsidiaries in terms of both discounted loans and interest free loans. Here, it has to be emphasized that PRC has always concentrated on common peoples living standard first through economic sovereignty, privileged tax payment and welcome entire entrepreneurial initiatives taken by the local industries and national defence.

Additionally, PRC has preferred to fortify their software industries by cut down tax payment, export privileges and hence PRC has estimated to earn RMB $10 billion during the current year. Besides the PRC, MNCs in China has also wished to proper behave with the open door policies in terms of employing young and skilled workforce though their key purpose to seek profit from China. For example, foreign IT firms⁷ have enjoyed several of unethical advantages to protect their intellectual properties by either legitimately or illegitimately. However, in several cases China has suffered from spoiled of their researchers proposals. Thus, in several cases Chinese vision to shore up their software industries and reduce unemployment ratios has held down by the MNCs. At last, it can be pointed that both the PRC and MNCs in China has still faced conflict over their strategic limitation or inflexibilities (Jackson, 2010).

Conflict among MNCs & PRC Government

According to the view of Blanchard (2007), within last 30-years MNCs over the world has boosted nine times compared to 1970s when there have only 7000 MNCs globally. At present, globally, there have in excess of 60,000 MNCs internationally whilst thousands of most famous MNCs have contributed on 80% international industries, but among them only 4.3% global GDP has resulted by only hundred leading MNCs. In case of China, from 200406 their number of MNCs has increased over 30,000 than previous period while this large number of MNCs has added an outstanding function in the economic escalation of China. Moreover, in China, MNCs has occupied more than twenty four million workers and 90 of the entire Chinese exporters have overlooked their several market segmentations as well as several industries like beverages. During this globalization era, MNCs has grasped immense power by utilising their huge returns, logistics, and supply chain management, brand image. Hence, MNCS in the international market have privileged to enjoy over local industries. All of these profit-oriented tasks have inspired to affect international government policies and ultimately generate inconsistency with the international administration.

The Microsoft case analysis in China has evaluated that all of the inconsistent matters arrived as an outcome of the School of Thoughts where JVs of the Microsoft in China has primarily occurred through an agreement of acquiring Microsofts software. On the other hand, Chinese administration has obliged the Microsoft to invest into their economy in terms of opening educational institute, training centre, and research organisation. Additionally, China has demand for discounted option during sale of PCs in China. Microsoft has denied this proposal and hence impact of the strategic School of Thoughts has assembled inconsistencies between these two parties (BruceHall & Biersteker, 2002).

Corporate Strategy & Chinese Economy

Chinese people have treated the term strategy as the behaviour of struggling whereas practice of business strategy has become rather modern in China. Hypothetically, corporate strategies have drafted entire guidelines in order to establish both stable and durable economic atmosphere. Corporate strategies of the Chinese MNCs have mostly concentrated on profit seeking by utilisation of the three-phase strategic formulation model. Following are the significant segment of Chinese economic development (Zhanming, 2001).