Chapter 1:
Introduction
Shanghai is a modern city situated on the banks of river Yangtze in the heart of modern China. The city, which is one of China’s economic symbols, is about 1,000 years old (JOSHUA, 1998). Shanghai’s economic importance to China cannot be overemphasized. Shanghai is the most prominent city in central China and also is seen as the guardian of the famous Yangtze River. Shanghai is part of the Yangtze River region which also encompasses the provinces of Hubei, Sichuan, Anhui, Hunan, Jiangsu, and Jiangxi and also the Chongqing municipalities (Hong Kong Business, 2001).
The Yangtze River region generates just over one-third of the Gross Domestic product of China (Hong Kong Business, 2001). The region also accounts for more than one third of the country’s total industrial output and entire population. The Yangtze River region is the main industrial and economic vein of China. The level of foreign trade in Shanghai grew by more than 20 percent each year in periods of 1990-1999(Hong Kong Business, 2001). The amount of China’s foreign trade that flows through the city is at least one quarter whereas 60 percent of the city’s trade activities are undertaken by foreign controlled companies. (Hong Kong Business, 2001). The city represents China’s emerging planned-market economy which is the form of controlled capitalism that china prefers as the most viable avenue to transform its economy in order to solve the rising unemployment currently being experienced in Shanghai and other cities in China (JOSHUA, 1998).
Shanghai is viewed as having been a progressive city since time immemorial. Shanghai was initially just a small fishing village which gained prominence in 1843 when it was associated with the signing of treaties with western powers. Shanghai is currently a cosmopolitan city which has more contact with the rest of world than does other cities in China (JOSHUA, 1998). Shanghai has also produced some of the top leading political icons in China in the names of President Jiang Zemin and Premier Zhu Rongji. The two top flying political figures started their careers as mayors of the city of Shanghai (JOSHUA, 1998).
The transformation of Shanghai as an economic hub begun in earnest in 1992 during the administration of Deng Xiaoping who started a “spring wind” affirmation of economic reform in Beijing which spread out to other Chinese cities including Shanghai (Joshua, 1998). It was during this time that Shanghai’s real estate market started attracting foreign investors. The city was able to attract foreign investors in the real estate market because it was granted financial flexibility that favoured foreign investors. Foreign investment rules in real estate were relaxed by Shanghai city officials even as other investment sectors remained regulated. Foreign investment in real estate flowed mainly from Hong Kong and Japan.
As at 1992 the real estate sector was considered overcrowded which saw rents increase by 50 percent each year and purchase prices in real estate increase by over 300 percent (Joshua, 1998).The prices of houses have been rising annually by an estimated 7 percent (DYER, 2006).High rent prices have led to increase in cost of living in Shanghai (HEE, 2007). Shanghai has seen its economy grow annually by an average of 14.1 percent. Since 1994 the city led in attracting foreign investment which ranged more than US$ 30 billion annually. About 50 percent of these funds were however linked to real estate investment. In the period between 1994 to 1995 foreign direct investment however slipped from US$ 10 billion to US$ 6 billion (Joshua, 1998). There has been a mismatch between supply and demand of office space. Since the 1990’s
Shanghai has developed faster than most Chinese cities mainly due to its natural geographic advantage and a strong commercial history. The city has developed in the areas of logistics infrastructure, support from the government and the general commercial environment. The city has also led in innovation of new economic models and has in its portfolio various economic, trade and bonded zones which make it attractive as an investment destination (JACOBY, YANG and SHISTER, 2008)
.Overview
This chapter provides a short preview of the history of Shanghai city and the main economic activities associated with it. It also brings to the fore the main issues that are affecting its competitiveness as compared to other cities in the region and more specifically Hong Kong. This chapter also highlights the main drivers of the high cost of business and the effects of that to Shanghai competitiveness and China as a whole. In short the chapter contains the background of the study, the project aims and objectives and questions to be answered by the study,
1.1 Background
Although Shanghai grew by double digits in the 1990’s it continues to encounter high cost of doing business. According to HUANG (2008) Shanghai is a classic urban-bias model. This is because the city consciously inhibits the growth of small enterprises and only gives tax benefits to foreign controlled enterprises and politically correct businesses. Even though Shanghai is situated in the richest area in mainland China, indigenous private sector companies are among the smallest in all the cities in China (HUANG, 2008). Income from small scale businesses is among the lowest in the entire country and in fact that income is the same as in lesser economically endowed province of Yunnan whose GDP per capita is estimated to be about 15 percent of the GDP per capita in Shanghai (HUANG, 2008).
According to HUANG (2008) the political, financial, legal and socio-cultural environment does not favour small businesses and does not encourage entrepreneurship to thrive. The share of income that is allocated to labour as compared to income that goes to employers is low as compared to other cities in China(HUANG, 2008).According to HUANG (2008) the poorest of Shanghai population have lost income absolutely since 2000 and this happened during periods when Shanghai recorded double digit growth in the economy.
Shanghai is also experiencing a substantial decrease in the number of annual patent grants as compared to other cities of Zhejiang and Guangdong. The level of corruption in Shanghai is also very high (HUANG, 2008). In the periods of 1994 to 1995 foreign direct investment however slipped from US$ 10 billion to US$ 6 billion and this slippage has continued since (Joshua, 1998). According to NESS (2000) shanghai continues to suffer from an economy that is subdued; a scenario contributed by a significant reduction in foreign direct investment. Rent prices have not dropped enough to have a significant impact on the cost of business and property purchase prices are still high.
1.2. Project aims and objectives
The aim of the project is to explore the factors that hamper cost reduction measures in Shanghai in its efforts to improve its competitiveness as an investment destination in China.
1.2.1 Project aim
The aim of the project is to evaluate the factors that affect cost reduction strategies that hamper Shanghai’s effort to be competitive as an investment destination in China.
1.2.2 Research questions
In order to achieve the project aim and objectives the following questions will need to be answered;
1) How does corruption affect efforts to reduce business costs in Shanghai?
2) What are the effects of rent prices on efforts to reduce business costs in
Shanghai?
3) How do taxes impact on efforts to reduce business costs in Shanghai?
4) How do property purchase prices affect efforts to reduce business costs in
Shanghai?
1.2.3 Project objectives
- To examine the relationship between corruption and efforts to reduce business
costs in Shanghai
- To explore the effects of rent prices on efforts to reduce business costs in
Shanghai
- To examine the effects of taxes on efforts to reduce business costs in Shanghai
- To explore the relationship between property purchase prices and efforts to reduce
business costs in Shanghai
Chapter 2:
Literature Review
This chapter contains an analysis of key concepts and related studies on the main variables
2.0 Introduction
This chapter contains a review of the past studies. The purpose of the review is to examine the available studies from other scholars and researchers who have done studies on the same subject under investigation. The literature available will provide a guideline to this study and offer a critical analysis of this past studies in order to avoid the duplication of previous work.
2.1 Concepts
High cost of doing business affects Shanghai’s ability to attract foreign direct investment and improve its competitiveness in the region. According to NESS (2000) Shanghai has experienced a sharp drop in foreign direct investment in the recent past and the economy is subdued and sluggish. Unemployment levels have hit an all-time high (NESS, 2000). The prevailing corruption levels has a huge impact on the cost of doing business and so does rent rates, taxes and real estate purchases prices. Shanghai must of necessity develop strategies to reduce the costs incur in doing business in order to improve its competitiveness in the region.
2.2 Related studies
2.2.1 Corruption
Corruption affects efforts to reduce business costs in in Shanghai. Corruption has the effects of increasing business costs instead of reducing it. According DEAN (2007) corruption disrupts the running of the affairs of the government. This is because when suspected corrupt officials are suspended and investigations instituted the government normally suspends all projects affected by the corrupt dealings and also suspends approval of new projects until new officials are appointed (DEAN, 2007). Kickbacks that have to be paid by enterprises to corrupt officials to secure projects increase the cost of doing business in Shanghai and other cities (DEAN, 2007).
Shanghai is home to China’s main stock exchange and corrupt deals that are publicized widely cast a shadow over the city and this discourages investors from participating in the capital markets (DEAN, 2007). When investors shy away from the capital markets the liquidity of the markets is diminished and this increases the cost of the available money which pushes financing costs up. HUANG (2008) noted that there is a tendency by Shanghai government officials to confer tax benefits to businesses that are aligned to the government only. This encourages corruption as entrepreneurs try to bribe these officials to get the tax benefits that politically correct companies are getting. This too increases the cost of doing business. According to the economist (2003) political power play affects handling of corruption cases and especially those that concern land usage in Shanghai.
Many of the recent and biggest corruption scandals in Shanghai involve property deals. The Chinese government is the sole owner of all available land in Shanghai and also the rest of China (economist, 2003).This government ownership of all the land in China is a breeding ground for corruption especially since the right to use the land is sold and more so to land developers by government officials. The developers who give the biggest kickbacks normally get more land rights than those who give less. Companies expense these kickbacks in the profit and loss account as miscellaneous expenses and this increases the cost of doing business (economist, 2003). Shanghai authorities have begun selling the land through public auction to reduce incidences of corruption (economist, 2003).
2.2.2 Rent Prices
High rent prices impact negatively on efforts to reduce business costs in Shanghai. WONG (1998) wrote that in the recent past companies’ shelved plans to expand to new areas and/or grow their operations due to high rent prices. For example Standard Chartered Bank PLC of Britain recently abandoned plans to lease five houses for its use in a property known as Shanghai Links after the renting firm Sealand Housing Corp declined a request by the bank to lower the rental prices (WONG, 1998). High rental prices increase operating expenses of companies; Rent expenses are matched with revenues at the end on an accounting period to determine the profit figures.
In cases where rent prices are quite high then the company either rents less space as would have been the case or opts to close its business operations in the city all together and relocate to other investment destinations. KAHN (1994) pointed out that when real estate prices escalate the city becomes unaffordable and more so to the young people. Since young people contribute the largest number of workers, this leads to a push for salary increments. This contributes to high business costs and impacts on efforts to reduce business costs. According to Anonymous (2011) the city is trying to introduce a tax on property in its bid to reduce prices. These efforts have been lined up to reduce property rent prices because the higher the rents the higher the cost of living.
2.2.3 Taxes
Tax expenses form an important part of a business’s costs. Taxes are normally expensed through the income statement to determine the profit margins at the end of a trading period by a company. When taxes are very high they affect efforts to reduce business costs in Shanghai. TAYLOR (2009) wrote that in order to make Shanghai an international Centre for finance the government plans to offer favourable tax treatment to companies engaged in ship finance lease business and marine insurance. This therefore means that the government is fully aware of the impact of taxes on the cost of business in Shanghai. In order to increase foreign direct investment Shanghai has set up 22 special economic zones in the Pudong New Area of Shanghai city. These zones offer Value Added Tax and tax rebates and other financial subsidies to enable firms operating in these zones to be competitive. These tax benefits are not extended to other firms operating outside these zones. This makes firms operating outside the zones uncompetitive because of high tax rates that they are charged.
To reduce business costs then these tax benefits will also need to be extended to cover all businesses in Shanghai (China Law & Practice, 2004). Tax rates are very sensitive matters due to the fact that the government earns its revenues for undertaking its projects through taxes. Shanghai implements tax rates handed down to it by the national government strictly (Anonymous, 2010). The local government of Shanghai makes recommendations to national government on matters affecting tax rates (Anonymous, 2010). Shanghai has come up with property taxes to reduce soaring house prices. People occupying more than 200 square metres will be charged a special tax which will increase the cost of business in companies since most of those who take up such large space are companies and senior company executives. What this does is that it will ultimately increase the cost of doing business in the city (Anonymous, 2011). The property tax proposal however has attracted numerous critics who feel that there are too many taxes in real estate which include transactions taxes and other taxes that are levied once in real estate deals (AREDDY, 2011).
2.2.4 Real estate purchase prices
If the prices of purchasing real estate properties are high then companies will find it difficult to do business in the city. This is because big companies which are looking at investing in the city for an indefinite period find purchasing properties for their operations and even houses for their executive officers more economical than paying rent for many properties that they occupy throughout the city. The prices of purchasing real estate properties determine the rate at which companies open branch offices and the length of stay in the city.
Anonymous (2010) noted that real estate purchase prices in Shanghai are very high and this has been caused by pressures on demand for houses. To reduce the price of houses construction of low cost houses should be stepped up and demand and supply of real estate properties regulated but enacting proactive policies (Anonymous, 2010). The government also plans to build low cost housing to reduce the cost of buying houses in Shanghai (Anonymous, 2011). House prices in Shanghai are a bit higher than in Hong Kong. For example the houses located in the Hong Kong’s special administrative district are sold at HK $4.03 million whereas in Shanghai similar houses are sold at 4.32 million Yuan which is about 26 per cent more than Hong Kong prices (Anonymous, 2011). This is despite the fact that the average income at Shanghai is about one-tenth of the average income in Hong Kong which stands at about HK$391,245. It is therefore impossible for majority of workers in Shanghai to buy their own homes (Anonymous, 2011).Shanghai has perhaps the most expensive house in the region. In fact a square meter of property in Japan is sold at about 33 times Japan’s per capita income whereas in Shanghai it is 164 times (AREDDY, 2011).
Zhou Zhengyi, a property developer, is being investigated for business irregularities. He is suspected of illegally acquiring state land and bank loans. The secretive handling of the case suggests that politics is at play too. The worry is that investigations of land dealings on the scale of Zhengyi’s might expose high-level corruption in the city, possibly implicating proteges of China’s former president, Jiang Zemin, who still chairs the powerful military commission and has close ties with Shanghai. Property deals feature in many of China’s biggest recent scandals. The government owns all land in China, which creates opportunities for corruption when usage rights are sold to developers. This year Shanghai began requiring that commercial land-use rights be sold by public auction. But deals are still often made with whichever developer offers the biggest kickbacks. Zhengyi obtained land cheaply by offering to pay for the resettlement of residents.
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Chapter 3:
Methodology
3.0 Overview
The Chapter describes the research design; the researcher describes the general methodology applied in carrying out the research project. It describes the data collection procedures and the tools used in obtaining data that was required; the process of data analysis, the study design, the target population and size, together with the sampling techniques used in the research.
3.1 Research Philosophy
3.1.1 Positivism
According to WEBER (2004) the reality is separated from the researcher who observes and records it. The researcher and the variable under investigation are therefore considered to be separate. Positivists try to create knowledge that is objective and exists outside human mind WEBER (2004). The researcher relied on scientifically proven methods to collect and analyze data using quantitative methods. The information collected was presented in tables and graphs of ease of understanding. This represents the positivist view which is associated with quantitative methods of research (GOLDKUHL, 2012)
3.1.2 Interpretivism
Interpretivism holds that holds that the researcher and the variable being investigated cannot be separate. The perceptions and beliefs a researcher has or holds are derived from the experiences the researcher has encountered in his life (WEBER, 2004). Interpretivists try to interpret phenomena from a subjective stand point and they constitute knowledge based on their experiences, goals, culture etc. (WEBER, 2004). The researcher also relied to qualitative information that was derived from referenced sources and research findings to try and answer the research questions. Interpretivism is associated with use of qualitative techniques to achieve research objectives (GOLDKUHL, 2012)
3.2 Research methods
The researcher used descriptive research methods as some of the variables could not be quantified and could only be expressed in descriptive statistics. Descriptive research is a process of enquiry to determine the various characteristics that describe a variable that is being studied to answer the research question. (VIVIANE, 2001). LYNN (2002) noted that descriptive research relies on the collective wisdom of practitioners, analysts and other professional resource persons. There exists a body of knowledge on strategies to reduce costs that has been researched and documented and it can be applied by Shanghai to reduce its business costs. The research was meant to determine strategies that Shanghai can use to reduce business costs.
3.2.1 Quantitative research
According to LEE (1992) quantitative research relies on statistical methods borrowed from natural sciences that emphasize use of objective, reliable, measurable and verifiable data and information in carrying out research. This approach is more useful in descriptive research and was used in this research. Quantitative research relies on statistical techniques in identifying, collecting, analysing and presenting data. This method relies on numbers and statistics (WILSON and NATALE, 2001). The method uses such terms as mode, average mean, standard and variance etc. This method relies more
3.2.2 Qualitative research
Qualitative research which borrows from the interpretivism assumptions is subjective and utilises language and description to define, collect, analyse and present research findings (LEE, 1992). This method relies on written texts, verbal exchange and observed individual behaviour to achieve research objectives; Methods that do not use numbers or statistics but some other kind of approach and are subjective are seen as being qualitative (WILSON and NATALE, 2001).
3.3 Research design
Research design is a process of meticulous selection of methods to be used to answer the research questions and solve the research problem. It specifies the framework or the blueprint for the research. WILSON (1996) noted that research design is very important because it determines the steps to be taken to achieve the aim and objectives of the project.
3.3.1 Interview
According to BRYMAN and CASSELL (2006) Interviews enable articulation of opinion and practice in a manner that is systematic. Interview is regarded as the main tool for carrying out qualitative research (BRYMAN and CASSELL, 2006); Interviews were carried out in this research project to collect data and information that was used to determine the outcome of the study.
3.3.2 Questionnaires
The information contained on questionnaires provides researchers with direct access to respondents in the sample selected (PRUNK, 1994). Knowing how to contact the respondents and the correct questions to ask often leads to collection of useful information that is essential in answering the research questions (PRUNK, 1994). Questions that are likely to be answered are those that touch on areas of special importance to the respondents. The researcher must pay attention to the order in which the questions are asked, the sensitivity of the questions, design, graphics, and colours used on the questionnaire, (PRUNK, 1994). The questionnaires that were used in this research paid attention to the prisms highlighted and here. Online questionnaires were developed and send to respondents in the selected the sample of the population.
3.4 Data collection
According to IANNACONE (2004) the researcher must ensure data collection is effective, easy to display, present and interpret
3.4.1 Primary data collection
The primary data collection methods used were questionnaires which were used to collect quantitative data and interviews which were designed to collect qualitative information
- Data analysis
Data analysis involves data synthesis and this is simply organizing data collected. It includes data sorting, rearrangement of the data in the questionnaires, data editing to identify errors that might occur during data collection, cleaning of data to check for accuracy and completion. Questionnaires and interviews were used to collect data and information.
Software that was used in the analysis was Microsoft Word and Microsoft Excel. SAMUELS and WOOD (2007) noted that use of the right software packages is important in analysis of data collected. The use of both MS Excel and MS Word is important because it enables the researcher to validate the data and remove data that might be dirty. Quantitative and qualitative methods were used to analyse and present the results and outcomes in tables and figures.
3.5.1 Quantitative data analysis
Use of spread sheets and financial modeling are some of the tools used by researchers to analyze data for decision making (DHEBAR, A., 1993).In this particular project the researcher used MS excel to analyze and present research findings in tables, graphs and figures. The questionnaire was used as the tool for collecting quantitative data
- Qualitative data analysis
In this particular project the researcher used MS Word to present the findings in tables and narratives. The interview was used as a base of collecting qualitative information.
- Criteria of research
Two main methods were applied in enhancing the credibility of the research and these are reliability and validity
- Reliability
According to LEE (2004) reliability has to do with the consistency in data collection methods. Reliability is compromised if the questions in the questionnaire are confusing or the interviewer misinterprets some of the questions. The researcher made sure each question is understandable to the respondents (LEE, 2004). The researcher also asked the same questions in different styles to ensure respondents understood the questions well (LEE, 2004). The research methods used were reliable as well as the research findings.
3.6.2 Validity
LEE (2004) noted that validity of a research ensures the questionnaire measures what is intended to be measured to answer the research questions. The researcher in this research project ensured the research measured the intended variables needed to answer the research questions.
According to LUNDIN (2011) it is absolutely crucial to consider ethical matters in the process of carrying out research. Some of the main considerations like the dictum that thou shall not fabricate nor falsify research results were strictly followed (LUNDIN, 2011). The researcher also obeyed other research ethical issues such as keeping respondents identity secret; not and not withholding crucial information that is important to achieve the objectives of the research (LUNDIN, 2011).
The research encountered several limitations which related to the process of data collection and also could have affected the results directly. The first limitation was that the research could only establish correlations between variables; causality could therefore not be implied. The second limitation was that this was a cross-sectional study and there was a possibility of differences among industries in the city as different industries have different cost structures. The third limitation was possible biasness on the part of some of the respondents especially government employees in Shanghai. The final limitation was time to cover all possible respondents due to the large scope of study the population.
Chapter 4;
Data analysis and findings
This chapter presents research findings derived from data and information collected using questionnaires and interviews
4.0 Overview
This chapter presents results and discussions of the study from the data collected from the questionnaires and interviews through frequency tables, percentages and graphs with clear interpretation provided.
4.1 Quantitative analysis
Out of all the questionnaires despatched to respondents 90 percent were filled and returned. Out the remaining 10 percent, 5 percent were spoilt and the remaining 5 percent were not returned. The researcher analysed data contained in the questionnaires and came up with the following findings;
4.1.1 The effects of corruption on efforts to reduce cost of business in Shanghai The main question was whether respondents strongly agreed, agreed, disagreed or strongly disagreed that corruption affects efforts to reduce business costs in Shanghai. Strongly agreed and agreed was represented by “Yes” and strongly disagreed and disagreed was represented by “No”
The respondents replied as shown in the table below;
Table 4.1.1
| Category | Percentage |
| Yes | 95% |
| No | 5% |
| Total | 100% |
Source: Author (2013)
Figure 4.1.1
Source: Author (2013)
According to the research findings 95% of the respondents were of the opinion that corruption does affect efforts to reduce business costs in Shanghai.
4.1.2 Effects of rent prices on efforts to reduce business costs in Shanghai
The main question was whether respondents strongly agreed, agreed, disagreed or strongly disagreed that rent prices affects efforts to reduce business costs in Shanghai. Strongly agreed and agreed was represented by “Yes” and strongly disagreed and disagreed was represented by “No”
The respondents responded as follows;
Table 4.1.2
| Category | Percentage |
| Yes | 90% |
| No | 10% |
| Total | 100% |
Source: Author (2013)
Figure 4.1.2
Source: Author (2013)
Of the respondents 90% felt that rent prices affect efforts to reduce prices in Shanghai while 10% disagreed that rent prices affect efforts to reduce business costs in Shanghai.
4.1.3 Effects of taxes on efforts to reduce business costs in Shanghai
The main question was whether respondents strongly agreed, agreed, disagreed or strongly disagreed that taxes affect efforts to reduce business costs in Shanghai. Strongly agreed and agreed was represented by “Yes” and strongly disagreed and disagreed was represented by “No”
The findings were as follows;
Table 4.1.3
| Category | Percentage |
| Yes | 80% |
| No | 20% |
| Total | 100% |
Source: Author (2013)
Figure 4.1.3
Source: Author (2013)
Of the respondents who replied and returned the completed questionnaires, 80% agreed that taxes affect efforts to reduce business costs in Shanghai while 20% disagreed.
4.1.4 Effects of property purchase prices on efforts to reduce business costs in
Shanghai
The main question was whether respondents strongly agreed, agreed, disagreed or strongly disagreed that property purchase prices affects efforts to reduce business costs in Shanghai. Strongly agreed and agreed was represented by “Yes” and strongly disagreed and disagreed was represented by “No”
The respondents who filled and retuned the questionnaires replied as follows;
Table 4.1.4
| Category | Percentage |
| Yes | 75% |
| No | 25% |
| Total | 100% |
Source: Author (2013)
Figure 4.1.4
Source: Author (2013)
Of the respondents who replied to the questionnaires, 75% agreed that property prices affect efforts to reduce business costs in Shanghai while 25% disagreed that property prices affect business costs reduction efforts in Shanghai.
4.2 Qualitative analysis
The researcher conducted interviews with several interviewees who were drawn from several interest groups. The first group of interviewees was drawn from officials of Shanghai city authorities. The reason for interviewing these officials was because these are the people who are charged with the mandate of enforcing central government policies in Shanghai. These are the main perpetrators of corrupt practices in Shanghai. They also the ones who demand kick backs to grant land usage rights to developers. This is also the group that is charged with the responsibility of reducing the cost of doing business in Shanghai. They formulate policies that they present to central government for enactment.
The next group was drawn from multinational corporations operating in Shanghai. The researcher interviewed this group because these are the ones who are affected directly by the high cost of doing business and know what really is causing the high cost of business. They are also able to come up with recommendations which to reduce the high cost of doing business in Shanghai. This is also the group that also perpetrates corrupt practices in an effort to secure favourable terms from the governing authorities in Shanghai.
The next group was drawn from land lords and real estate developers. This group was interviewed because they are the ones who understand the cost components that they put into account in determining how much they charge for rent and also how much they sell their properties at. This group is also guilty of perpetrating corrupt practices as they are the developers that seek for land use rights from the shanghai government officials to develop new properties.
The next group of interviewees was drawn from employees of various companies operating in Shanghai and its environs. This group was interviewed because they shoulder the burden of paying high rent prices. This is the group that demand for higher salaries and wages to enable them pay the high rent prices to continue living and working in Shanghai.
The next group of respondents was drawn from indigenous companies run by native Chinese entrepreneurs. The main reason for drawing from this group was because these are also affected by the high cost of rent and taxes. This group also understands main issues that influence the cost of business in Shanghai. The information collected in the interviews conducted is as follows;
4.2.1 The researcher sought to get the interviewees opinion on the effects of corruption on efforts to reduce business costs the researcher found that incidences of corruption do affect business costs in Shanghai. Those interviewed noted that government control of land rights is a fertile ground for corruption as developers try to get land rights to access prime lands that they need to obtain competitive advantage. The respondents said that at times they are requested to pay huge kick backs to be allocated land rights to access the particular piece of land that they need to carry out their operations. The respondents also noted that the major obstacles in opening new branches offices within the city and its environs are the corruption issues that they face in accessing land to put up new buildings to operate from. Corruption is also affecting the duration that some companies wish to operate in Shanghai. Several of the executives interviewed indicated that they had already put proposals to their headquarters to consider relocating to other cities in the region with lower incidences of corruption. Several other interviewees especially those drawn from indigenous Chinese entrepreneurs said that the Shanghai government officials favoured business that were politically connected. This created unfair competition; a fact that has traditionally forced many of these businesses to close down.
4.2.2 The interviewer/ researcher sought to get the interviewees opinion on the effects of rent prices on efforts to reduce business costs in Shanghai the respondents agreed that indeed the high rent prices do hamper efforts to reduce business costs in Shanghai. Respondents who were interviewed said that Shanghai has some of the highest rent prices in the region and that it is in fact more than rent prices charged in any other city in the region including Hong Kong. Company executives interviewed said that high rent prices prevented them from opening branch offices in other parts of the city and its environs. Shanghai city officials agreed that high rent prices have indeed contributed to the sharp drop in foreign direct investment as they have made the cost of doing business prohibitive. High rent prices have also reduced the purchasing power of many of the city’s residents adversely which has reduced their ability to participate in the general economic activities of purchasing goods and services. Reduction in the level of consumption has dampened the economy. The respondents noted that high rent prices are forcing workers to demand for salary increments to meet the high rent prices which are increasing the cost of business instead of reducing it. High rent prices are therefore increasing the cost of business in Shanghai instead of reducing it which undermines the efforts the Shanghai city officials put in place to reduce business costs in order to boost foreign direct investment.
4.3.3 The researcher sought the opinion of the respondents/interviewees on the effects of taxes on efforts to reduce business costs in Shanghai. The respondents said that various taxes that have been introduced recently have only helped to increase the cost of business in Shanghai instead of reducing it. Company executives who were interviewed said that the city levies many forms of taxes which increase the cost of business in Shanghai. The government has proposed a new property tax that is intended to reign on the high property prices. Company executives interviewed noted that this property tax will be punitive to them because it targets those companies and individuals that take up space measuring about 200 square meters. Much of that space is taken up by corporate companies and the new tax will increase the cost of doing business in Shanghai. Many executives hinted that their companies are considering relocation to other cities in China and serve their Shanghai customers through distributors. The respondents further noted that the new property tax will not therefore help either as it will only increase further the cost of business in Shanghai which undermines the efforts the city is putting in place to reduce business costs to make it competitive in the region.
4.3.4 The researcher lastly sought the opinions of the respondents on the effects of property prices on efforts to reduce business costs in Shanghai. The respondents noted that high property taxes increase the cost of doing business in Shanghai. The respondents noted that the prices of real estate were even higher than in Hong Kong where the per capital income was noted to be higher than Shanghai. The executives said that high property prices prevented them from purchasing real estate properties to operate which will save on rent expense which keeps on rising every year. Rising property prices therefore only serve to increase the cost of doing business which undermines the city’s efforts to reduce business costs to make it the preferred investment destination in China and other cities in Japan, Singapore, India, Philippines etc.
4.3 Summary
In summary corruption increases the cost of doing business in Shanghai and therefore undermines the efforts being put in place by the city’s authorities to reduce the cost of doing business to improve its competitiveness in the region.In fact 95% of those who respondent to the questionnaires agreed that corruption hampers efforts to reduce business costs in Shanghai whereas 5% disagreed that corruption affects efforts to reduce business costs in Shanghai. The respondents added that the fact that the government sells land rights to developers is a major fertile ground for corruption deals to crystallize. The respondents noted that on many occasions Shanghai city officials’ demand for kick backs to allocate these land rights and this increases the cost of business in Shanghai.
The research also unearthed that high rent prices affect efforts to reduce business costs in Shanghai. Of those who responded 90% felt that high rent prices undermine efforts made to reduce business costs by city officials whereas 10 percent disagreed. The respondents also noted that rent prices in Shanghai were higher than in any other city in China. The research also found that taxes really affect efforts to reduce business costs in Shanghai. Of those who responded 80% felt that high taxes do indeed affect efforts to reduce business costs in Shanghai whereas 20 percent disagreed. Those who interviewed noted that the new property taxes will not help either as they will only increase the cost of business in Shanghai. The research found that property prices affect efforts to reduce business costs in Shanghai. Of those contacted 75% felt that property prices increase the cost of doing business in Shanghai and was higher than in many other cities in the region. The 75% of the respondents therefore agreed that high property prices affect the cost of business in Shanghai whereas 25% disagreed.
Chapter 5:
Conclusion and recommendations
5.0 Overview
This chapter gives the conclusion of the research project and demonstrates whether the research questions were answered and also whether the objectives and aim of the research project were achieved
5.1 A summary of findings
5.1.1 The first research question was whether corruption affects efforts to reduce business costs in Shanghai. The research found that indeed corruption does increase rather than reduce the cost of business in Shanghai. Of the respondents who respondents to the questionnaires presented 95% felt that indeed corruption does hamper efforts to reduce business costs in Shanghai while 5% felt that corruption does not hinder efforts to reduce business costs in Shanghai. Those interviewed noted that allocation of land usage rights creates a fertile ground for corruption to thrive. The respondents also noted that city officials asked for huge kick backs before they allocate land rights. Most executives hinted that their companies are considering the possibility of relocating to other cities in China and serve their customers in Shanghai using appointed distributors. Corruption therefore undermines the city’s efforts to reduce business costs. Reducing business costs is meant to turn around the sharp decline in foreign direct investment and make Shanghai the preferred investment destination in China.
5.1.2 The second research question was whether rent prices undermine efforts to reduce business costs in Shanghai. Of the respondents who responded to the questionnaires presented, 90% felt that rent prices do indeed undermine efforts to reduce business costs in Shanghai whereas 10% of the respondents felt that rent prices do not hinder efforts to reduce business costs in Shanghai. Those interviewed said that rent prices in fact tended to increase business costs instead of reducing them. High rent prices prevent companies from opening branch offices in other parts of the city and also from increasing the office space. High rent prices also increase the cost of living in the city and reduce the cost of doing business in the city. This reduces the purchasing power of consumers and reduces the rate of economic activity. In fact high rent prices are partly responsible for the sluggish economy in Shanghai. Employees have also demanded for salary increments to cushion themselves from the high cost of living caused by high rent prices. High rent prices therefore increases the cost of doing businesses and therefore undermines the city’s efforts to reduce business costs to spur growth of the economy.
5.1.3 The third research question was whether taxes affect efforts to reduce business costs in Shanghai. Of those who replied to the questionnaires, 80% agreed that taxes do indeed undermine efforts to reduce business costs in Shanghai whereas 20% felt that taxes do not hinder efforts to reduce business costs. The respondents noted that businesses were in fact paying various forms of taxes all of which were increasing business costs instead of reducing them. The respondents noted that the new property tax will only serve to undermine efforts to reduce business costs as it will just increase business costs. Business executives interviewed noted that the new property tax be punitive to big business. This is because it seeks to impose a tax on companies and individuals who take up space measuring more than 200 square meters. Since only companies take up such space this tax will increase their cost of business and effectively undermine shanghai’s efforts to reduce business costs to spur economic growth.
5.1.4 The final question was whether property prices do affect efforts to reduce business costs in Shanghai. Of the respondents, 75% agreed that property prices do affect business costs in Shanghai whereas 15% felt that they do not. Those interviewed noted that property prices in Shanghai are the highest in the region. The high property prices prevented firms from buying their own properties to save on rent expense which keeps on increasing every year. In fact some companies are looking at the possibility of relocating their operations to cities which have lower property prices and serve Shanghai customers through appointed distributors.
5.3 Conclusions and Recommendations
According to the research findings corruption really does increase rather than reduce business costs in Shanghai. The fact that the government owns all the land in China and allocates rights to use land creates a fertile ground for corruption to thrive. City officials demand for kickbacks to allocate land to companies which increase the cost of doing business in Shanghai. The research also found that rent prices in Shanghai are very high and in fact was the highest in the region. This in fact affects business costs in Shanghai in several ways. The first way is that workers in Shanghai are forced to demand for higher salaries to meet rent charges so as to continue living in Shanghai and working for the companies that have employed them. This increases business costs inform of salaries and wages expenses which are born by the respective companies. The second front is that high rent prices affect businesses from taking up more space to grow their businesses. High rent prices indeed hamper business growth plans of various companies. The other finding is that taxes indeed do affect efforts to reduce business costs in Shanghai. In shanghai companies have to pay several types of taxes which increase the cost of business and undermine the efforts being put in place to reduce business costs. Property prices are another variable that does affect business costs in Shanghai. Companies are unable to purchase real estate to house their employees and operate from to reduce rent expenses which are rising very fast. This only serves to undermine efforts being put in place by Shanghai authorities to reduce business costs to spur economic growth in the city.
In order to reduce business costs Shanghai authorities will need to address the issues of corruption by formulating procedures that will govern land administration with a view to sealing any loopholes that may be used to carry out corrupt practices. Shanghai authorities will also need to reduce rent and property prices in order to reduce business costs in Shanghai. The authorities also need to rethink their taxation policies as the current tax codes have only served to increase business costs instead of reducing them.
Researchers could also do research in future on related aspects of business costs such as research analyzing various tax codes to determine which ones really impact the cost of business more and which codes will have the biggest impact if scrapped or reduced. Future research can also be conducted to determine strategies that can be used to enhance competitiveness of Shanghai as a business destination. Future research can also be carried out to determine factors that have contributed to the persistent sharp fall in Foreign Direct Investment in Shanghai
5.4 Value of the research study
The research findings will benefit the government of China in its efforts to reduce the cost of doing business in Shanghai and other cities in China. The research will also benefit Shanghai city officials to formulate policies that will address the rising rent prices, property prices and corruption incidences to reduce the cost of doing business in Shanghai. The research will also assist the city officials to come up with a common stand point on tax codes that they need to lobby the government to implement to reduce the cost of business in Shanghai. The study will also benefit other researchers as a reference point for future research on factors hindering reduction in the cost of doing business in Shanghai and other cities in China.
Chapter 6:
Self-reflection and development
6.0 Introduction
This chapter outlines experiences learned during the research process. The chapter also provides the researcher with an opportunity to give his suggestions for future development of the project and enables him to share his feelings about the project as a whole.
6.1 Time Management and Allocation
Time management and allocation was very crucial in carrying out this project. Each project had to be undertaken in set time lines and meeting timelines was very crucial. There was however a delay in time management as respondents took longer than expected to fill and return the questionnaires. Interviews also took quite long since some interviewees kept on postponing interviews while others requested to be interviewed at their convenient times all of which affected the time allocated for these activities.
The process was on course and did not at any one given time deviate from the proposal presented and was in fact in line with the proposal presented.
6.2 Lessons learned from limitations of the study
The research encountered several limitations which related to the process of data collection and also could have affected the results directly. The first limitation was that the research could only establish correlations between variables; causality could therefore not be implied. In future research i recommend causal research method which enables correlation between variables to be determined. I would also do and exploratory research to understand the root cause of the behaviour of the variables.
The second limitation which was that the research was a cross-sectional study and there was a possibility of differences among industries in the city as different industries has different cost structures. To address this limitation in future I would do an industry to industry research instead of doing a study that covers a wide cross section of industries. The third limitation was possible biasness on the part of some of the respondents especially government employees in Shanghai. The final limitation was time to cover all possible respondents due to the large scope of study the population. On this last limitation given the opportunity I would allocate adequate time to ensure that all respondents willing to respond to questionnaires actually do respond.
The researcher given the opportunity in future would choose a smaller industry so that he can more come up with a more representative sample than was the case. The researcher would also allocate more time than was the case in this research to enable him collect the views of more respondents that was the case he collected.
6.3 Personal Achievements
The whole process of carrying out the research has improved the researcher’s analytical skills, communication skills and also presentation skills. The researcher fells more confident in his ability to undertake academic writing than before.
6.4 Future development
The researcher feels that going forward he should undertake further studies on advanced regression and correlation analysis skills to improve his skills in presentation of research findings.
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APPENDIX 1- GANTT CHART
| TASKS | 0CT | NOV | DEC | JAN | FEB | MAR | APR | MAY | |
| 1 | Background reading | ||||||||
| 2 | Formulation of research strategy | ||||||||
| 3 | Research design | ||||||||
| 4 | Writing proposal and submission | ||||||||
| 5 | Draft structure | ||||||||
| 6 | Choice of research methods | ||||||||
| 7 | Literature review | ||||||||
| 8 | Data collection and analysis | ||||||||
| 9 | Write several drafts | ||||||||
| 10 | Final submission |
