Corporate Social Responsibility Issue Concerning Doing Business in China

Introduction

Corporate Social Responsibility (CSR) is an essential factor for developing companies, and as the Chinese market is emerging to its superiority as well as becoming more integrated, it is growing increasingly important. Under the definition of corporate social responsibility, one might imply the company’s voluntary participation in the social or environmental issues beyond their regular business objectives. In recent years with the increase in global awareness, corporations around the world started to become more socially responsible and implement more projects concerning CSR. Such advancements are more evident in the late events of market globalization.

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China is one of the biggest emerging markets in the world; therefore, much attention is brought to the country, and many new businesses appear on the Chinese market. Thus, as China becomes more globally integrated, corporate social responsibility importance rises exponentially (Graafland & Zhang, 2013). CSR became a priority in China due to the vital need for a more sustainable economic growth in the role of a worldwide production leader. For the Chinese market, CSR has been an extremely controversial topic, as it involves many public scandals and numerous unresolved issues. With so many manufacturing and heavy industry companies that cause environmental damage in China, it is essential for these businesses to engage in active CSR activities. Therefore, this paper is aimed to discover the issues of corporate social responsibility on the Chinese market.

Main body

Each year the companies in China are required to put more effort into their corporate social responsibility; significant contributors to such needs are dynamic economic growth, social progress, and market change. Promotion of the future sustainability of the organization’s development and ecological awareness has been the primary focus of the majority of the corporate social responsibility initiatives. Such an environmentally responsible commitment is of major importance specifically to organizations that are connected to the heavy-pollution industries, as they are the primary contributors to the ecological state of the country. In the era of rapid technological innovations, big data, and overall advances, CSR becomes easier to implement; moreover, it establishes more creative and innovative ways to implement such initiatives. However, according to the recent study, it was discovered that even in the present time, the lack of awareness concerning the importance of the company’s social responsibility and weak initiative in the project’s realization is evidentially present (Liu & Zhang, 2017). The indicator of poor corporate social responsibility is exceptionally high among major Chinese organizations that cause the most significant environmental pollution.

China is one of the biggest marketplaces in the world, with hundreds of international companies established in the country with the goal of cooperating with local suppliers. However, many corporations are connected with the heavy-pollution industry, thus in order to decrease the harmful impact, Chinese authorities on the governmental level demand from companies to engage in CSR activities. China is one of the first countries, which added mandatory corporate social responsibility to the corporate statutes.

According to the 2006 Chinese Corporate Law, “in the course of doing business, a company shall comply with laws and administrative regulations, conform to social morality and business ethics, act in good faith, subject itself to the government and the public supervision, and undertake social responsibility” (Lin, 2018). Due to the obligation to legally follow CSR policies, Chinese companies must create initiatives that correspond with the international communities so that these businesses can expand their roles on the global market (Lau et al., 2014). Such actions caused many discussions and controversy around this issue. Many advocates of companies’ shareholders see such legislative endeavor as a threat to their clients and claim that such laws seem imperative and vague according to its explanations in the statute.

Pursuing corporate social responsibility violations on a court level in China showed that the concept of the law is incomplete, and possible CSR actions are hard to be standardized (Lin, 2018). In recent years, the requirements have been updated; however, they remain in the form of a judicial review standard rather than set criteria for every company’s behavior. Such unclear guidelines can bring numerous problems for people doing business in China, where they unintentionally may face a lawsuit for the uncertain policies in the corporate statute.

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Extreme pollution from constant factory work has also impacted the vital need for social responsibility. As the Chinese government is putting much effort in balancing economic growth with the approach to strict environmental control, companies are forced to input to the resolving of this issue. As all spheres are now expected to comply with high ecological standards and prioritize sustainability, corporations must look for new CSR strategies to adapt to the new business objectives (Jianzhong & Zhao, 2016). The pressure that is put not only on the local enterprises but also on the multinational companies is causing many issues and challenges in doing business in China, as the standards for corporate social responsibility are getting higher every day. It has become vital to include projects connected with environmental sustainability through the creation of more ecologic production and initiate programs that promote health under the name of corporate social responsibility (Li et al., 2019). Adaptation to the new guidelines poses a challenge for many businesses located in China; however, the companies, which actively implement the CSR programs take creative and innovative approaches that simultaneously act as a marketing strategy.

Increased attention to the sustainability and environment in the business brings many difficulties to Chinese companies, which consequently influences investors and financial institutions. In the recent years, stakeholders do not focus as much on the financial statements of companies, as on their corporate social responsibility connected with environment preservation since it is now used to predict the future success of the corporation (Zhang et al., 2019). Therefore, now, to build strong everlasting relationships with the investors and stakeholders, companies must use smart corporate social responsibility and invest in the sustainability of the firms. Interestingly enough, people doing business in China must keep in mind that Chinese investors value the long-term implementation of CSR, which positively reflects on the company’s performance. According to the analysis of 34,000 corporate social responsibility cases of 839 companies from 2006 to 2016 in China by Zhang et al. (2019), social and environmental projects are the ones that improve the future performance of a corporation in the future the most. Therefore, those planning on doing business in China should be aware and ready to adapt their companies to the high standards of CSR concerning sustainability.

Implementing corporate social responsibility projects in China may be difficult due to the corruption in such essential areas as business and government. Even though China has been actively battling corruption, it is not entirely eliminated from the country. Therefore, starting socially responsible initiatives can meet many obstacles in a way, and corruption is one of the highest on the list. To minimize the levels of corrupted businesses, Global Compact was created – an initiative whose priority is to fight corruption and to support human rights movement and environmental issues, and over 300 Chinese companies have already joined it (“Corporate Social Responsibility in China,” 2016). Such initiatives give hope for improving the implementation of vital CSR projects and for more sustainable operation of both local and multinational companies. Moreover, the disclosure of social responsibility can majorly contribute to environmental improvements, promote a more sustainable way of living, and develop the future economic directions of China.

The political factor is one of the most important when it comes to upholding issues of corporate social responsibility in China. Many projects within CSR tend to be connected with the idealistic Chinese development concept of the “harmonious society,” which is often linked to the religious roots and is clearly stated in the country’s five-year plan (“Corporate Social Responsibility in China,” 2016). As it was previously mentioned, the obligatory implementation of corporate social responsibility has also been a push for companies to keep the competition as they overlook yearly reports from all the businesses on their CSR accomplishments. However, different regions may have completely diverse images of what corporate social responsibilities in a company must be. For instance, better-developed areas of China like Beijing, Shanghai, and the Pearl River Delta have a better understanding in implementing more extensive projects and initiatives than companies in the western part of the country. Enterprises in west China have a less developed economy and do not have as many corporations concentrated in one region (“Corporate Social Responsibility in China,” 2016).

A major challenge for operating companies in China is high competitiveness, which significantly reflects on corporate social responsibility effectiveness and productivity. Such a competitive environment forces many suppliers to make short-term arrangements, rather than think of the longer perspective as it might be a threat to their plans of development due to the ever-changing economy. Consequently, from such financial relationships, companies may have low-profit rates and, as a result, have the much less financial ability to implement powerful CSR investments (Graafland & Zhang, 2013). Planning long-term in case of corporate social responsibility is proven to increase the overall revenue of corporations; however, not many companies are willing to take such risks because of the need for major investments in the beginning stages. As enterprises mainly focus on surviving high competition on the Chinese market, top-management omits significant investments into corporate social responsibility projects (Graafland & Zhang, 2013). Owners compare CSR to the burden that will not contribute to a better business relationship with the buyers, stakeholders, or other partners.

As an example of a responsible commitment to CSR, the construction industry has shown much sustainable development. It is known that in China, the construction industry is a major contributor to the worsening of the environmental background of the country. However, it brings many economic profits to China, few of them being a 7% contribution to the country’s GDP as of 2018 and over 30 million jobs for the citizens (Wang et al., 2018). Even though the construction industry is trying to implement numerous corporate social responsibility initiatives, just like in many other industries, the effect on the sustainable development of the country remains unsatisfactory, which is mostly caused by the cost of the strategies that have to be implemented in order to balance the harmful impact of the industry.

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Several examples of CSR initiatives created by the construction business involved expensive projects like granting education to young people, volunteering to assist the less fortunate countries in construction work, and other philanthropic gestures (Wang et al., 2018). These projects did not benefit the economic state of corporations, rather than caused financial burdens and killed the interest in social responsibility, as such initiatives do not bring any monetized profit to the organization. Therefore, doing construction business or any type of heavy industry will bring many financial losses in terms of corporate social responsibility, as the bigger the business, the larger projects they are expected to implement.

Significant financial losses from CSR are evident not only in the construction industry but also in many others. It is proven that in some cases, corporate social responsibility can reduce the reaction speed to the crises through the decrease in stakeholders’ trust. Such effects consequently cause making financial planning and prediction less accurate and reducing exposure to the risk of conflicts with stakeholders (Zhang et al., 2019). Stock price crash is a big risk that can also be possible in case of unsuccessful implementation of corporate social responsibility, specifically in China. Advancing the use of internal control in CSR can reduce the risk of stock crash among companies operating on the Chinese market; however, it does not completely eliminate it. The stock market crash through CSR can also lead to the financial debt of the companies, which was confirmed in the study by Zhang et al. (2019). Researchers found evidence that the corporations with extremely high or low indicators of corporate social responsibility were at high risk of debt financing costs in China.

Following the topic of financial challenges concerning corporate social responsibility, while doing business in China, it is known that the country prioritizes dynamic economic growth over other factors. However, due to the increase in investments that focus on sustainability and ecology, some corporations that previously had strong CSR campaigns can be in risk groups of losing their superior roles in the financial sector (Lau et al., 2014). In the case of poorly managed companies, such a scenario is highly possible to become true if the top-management of the firm does not pay enough attention to the needs of stakeholders and investors; a dangerous financial burden could be possible. Weak corporate management also poorly reflects on the CSR disclosure quality and corporate bonds cost, which also implies to the businesses that are located in economically weaker regions like western China (Gong et al., 2016). Thus, in a well-managed firm with the increased focus on its financial performance, interest in need of investors, and direct involvement of top branch management in CSR projects, losing positions on the market is almost impossible.

It is important to mention Chinese corporate bonds and their relation to corporate social responsibility, as they are evidently different from those in Europe or America, which can be an issue for foreigners doing business in China. The first obstacle can be the difference in issuing such corporate bonds because in China, they are usually issued by certain CSR laws that were mentioned previously. Companies, which issue them, are usually connected to the finances or healthcare field, contrary to other developed countries, where absolutely no rules or restrictions on issuing corporate bonds exist (Gong et al., 2016). Moreover, the rules of CSR would only grant corporate bonds to the companies with higher investment grades; other companies cannot publically confirm the possession of a corporate bond. On the contrary, in the higher developed countries, there is a special category of companies, who have corporate bonds but score below the investment grade, which are referred to as a “very speculative” category.

Even though the CSR statute was issued in 2006, the regulations and laws on this topic are still in active development in China, contrary to clear and comprehensive recommendations in the developed countries. Therefore, a foreigner stumbling across numerous regulations and rules on corporate social responsibility that must be followed could pose a dangerous challenge and threaten the future development of a company. Due to the unclear regulations on CSR disclosure in China and the questionable reliability of the information, business owners and investors can also have doubts about starting doing serious business in China.

To depict a clearer picture of the corporate social responsibility projects in China, some data were collected from recent studies. According to the research by Li et al. (2019), the CSR projects implemented between 2006 and 2013 were steadily growing in numbers; however, after 2013, initiatives took a different approach and were significantly decreasing up until 2016. In the first years of obligatory corporate social responsibility, companies focused on environmental issues and sustainable development, with the help of the government encouragement to do so. Thus, the decrease in the CSR projects is commonly associated with an increase in their realization cost and consequent reduction in support from the government or outside sources.

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Moreover, the same study analyzed the dynamics of corporate social responsibility projects in 31 different Chinese provinces (Li et al., 2019). The results showed that more developed Chinese provinces such as Beijing, Shanghai, Jiangsu, implemented over 7 000 CSR projects since 2006. On the contrary, less economically progressive province Gansu Province realized only 28 projects collectively by all companies. Such a distinctive difference in the numbers is associated with the socioeconomic disparity between the provinces, wherein the western part of China, economic level development, is much less progressive than in higher developed areas. For a better example, it was discovered that the highest rate of corporate social responsibility projects was in Shanghai with 92 projects, wherein the Gansu province there was only seven (Li et al., 2019). Therefore, when deciding to do business in China, the area and province of the country can play a significant role in the future development and success of the enterprise.

Conclusion

In conclusion, the paper discussed the challenges and issues connected to corporate social responsibility in China. Considering that law in this country regulates the CSR initiatives, it is evident to be considerably different from European or American countries. Many factors contribute to the challenges of corporate social responsibility in China like high competitiveness, ecological factors, financial responsibilities, and relationship with investors and stakeholders. Collectively these issues combine into a major challenge for business owners operating in China, both native and foreign.

References

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  9. Zhang, F., Li, M., & Zhang, M. (2019). Chinese Financial Market Investors Attitudes toward Corporate Social Responsibility: Evidence from Mergers and Acquisitions. Sustainability, 11(9), 2615. doi: 10.3390/su11092615

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NerdyRoo. (2022, February 16). Corporate Social Responsibility Issue Concerning Doing Business in China. Retrieved from https://nerdyroo.com/corporate-social-responsibility-issue-concerning-doing-business-in-china/

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"Corporate Social Responsibility Issue Concerning Doing Business in China." NerdyRoo, 16 Feb. 2022, nerdyroo.com/corporate-social-responsibility-issue-concerning-doing-business-in-china/.

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NerdyRoo. "Corporate Social Responsibility Issue Concerning Doing Business in China." February 16, 2022. https://nerdyroo.com/corporate-social-responsibility-issue-concerning-doing-business-in-china/.

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NerdyRoo. 2022. "Corporate Social Responsibility Issue Concerning Doing Business in China." February 16, 2022. https://nerdyroo.com/corporate-social-responsibility-issue-concerning-doing-business-in-china/.

References

NerdyRoo. (2022) 'Corporate Social Responsibility Issue Concerning Doing Business in China'. 16 February.

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