Understanding the Growth Models of Chinese Multinational Corporations

1
Understanding the Growth Models of Chinese
Multinational Corporations

• Yuping Du Rongping Kang Yinbin Ke

2
Abstract

• For the purposes of this paper , Chinese
  multinational corporations (MNCs) are defined as
  non-financial local corporations that were
  initially established in Mainland China which
  have since gone abroad and are developing
  overseas.
• This paper makes pertinent points about flaws in
  dominant thinking and existing literatures
  regarding MNCs , and then proposes Emerging
  Globalization MNC Theories as our new
  theoretical viewpoints to the development of MNC
  theories in the era of globalization

3

• The main methodology applied in this paper is
  case study.
• 16 corporations in 8 industrial sectors were
  surveyed as target cases. Each case companys
  initial overseas investment is defined
• By using Foreign Direct Investment(FDI),
  internationalization and MNC theories, a primary
  summary of the growth models of Chinese MNCs is
  presented based on these case studies
• The characteristics of Chinese MNCs are
  classified
• Finally a Two-stage Model of Chinese MNCs
  internationalization is proposed, which has laid
  the foundation for revising some of the MNC
  theories.

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Key words

• Chinese corporations
• MNCs
• FDI
• Internationalization

5

• Section One
• Introduction

6
Introduction

• As more Chinese companies have responded to
  international opportunities, China's overseas
  investment has increased remarkably.
• According to the Chinese Ministry of Commerce, in
  2005 Chinese non-financial overseas investment
  reached US6.92 billion, up by 25.8 percent
  compared with the same period in 2004.

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• The academic literature has begun to explore this
  new internationalization phenomenon of Chinese
  multinational corporations (MNCs)
• The objective of this research is to study the
  Chinese MNCs growth models by using an individual
  case study approach to facilitate an
  understanding of the Chinese corporations
  presence overseas as MNCs
• And to stimulate discussion in a relatively new
  area of study rather than to provide definitive
  general conclusions.

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In order to achieve the papers goal and
objectives

• firstly, secondary research of literatures was
  conducted.
• Secondly, interviews were carried out with
  Chinese management experts of Chinese Academic
  Institution of Social Science in Beijing and
  other appropriate informants. Then surveys with
  questionnaire were conducted.
• Finally, on-site data collections were gathered
  on opportunistic samples of the home offices of
  Chinese companies.

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Organisation of the Paper

• Seven major sections
• Introduction
• Literatures review
• Theory development based on some MNCs theory
  models in the era of globalization.
• Case studies and our proposition of the three
  growth models of Chinese MNCs.
• The characteristics of Chinese MNCs are analyzed
• A Two-stage Model of Chinese MNCs
  internationalization is proposed
• Lastly, summarizes the closing discussion.

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Section TwoLiterature Review
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Literature Review

• Mainstream MNC Theories
• After the Second World War, the rapid
  development of MNCs and their FDI caused
  widespread interest among western scholars. They
  adopted different research methods and created
  basic assumptions towards different research
  objects, and consequently created various MNC
  theories.

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Mainstream MNC Theories

• The Monopolistic Advantage Theory
• Hymer (1976)
• Vernons Product Life Cycle Theory (1966,1979)
• Oligopolistic Reaction Theory
• Knickerbocker (1973)
• The Internalization TheoryBuckley and Casson
  (1976), and Rugman (1980)

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Dunnings Eclectic Paradigm (1973, 1977, and
1979)

• The international production eclectic paradigm.
• The basic assumptions of the theory are that
  firms undertake FDI when meeting the following
  conditions 1) (O) - Ownership advantage
• 2) (I) -
  Internalization advantage
• 3) (L) - Localization
  advantage.
• Different combinations of the three variables
  determined the modes, industries and geographical
  distribution of MNCs international production.

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The Uppsala (Process) Internationalization Model

• The works of Carlson (1975) Forsgren and
  Johanson (1975) Johanson and Wiedersheim-Paul
  (1975) Johanson and Vahlne (1977,1990,1992) and
  Welch and Wiedersheim-Paul (1980).
• Incremental commitments manifests themselves in
  the sequence of modes of operation used by the
  firm and the sequence of foreign markets entered
  by the firm

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The Uppsala (Process) Internationalization Model

• To start and continue to invest just in one or a
  few neighbouring countries, rather than to invest
  in several countries simultaneously
• That the investment in specific country are
  carried out cautiously, sequentially and
  concurrently with the learning of the firms
  people operating in that market.
• Companies are expected to follow a sequence from
  low to high commitment modes of operation and to
  enter new markets with successively greater
  psychic distance.

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A Non-mainstream Theory Kojima (1978)

• The Kojima (1978) Model (Theory of Marginal
  Industrial Expansion )analyzes and explains the
  Japan-style outward direct investment.
• The theory included three basic propositions  
• 1) The labor and capital factors in
  Heckscher-Ohlin Theorem or HO Model(Case and
  Fair, 1999)could be replaced by labor and
  management resources
• 2) The differences of comparative profit rate
  were related to the differences of comparative
  cost
• 3) Different from the Japanese style, the
  American style FDI regarded management resource
  as a special production factor and the American
  oligopolistic reaction behaviors were just based
  on it.

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• This theory holds that FDI should begin from the
  marginal industry.
• FDI beginning with marginal industry can manifest
  host countrys comparative advantage due to
  invest country lacking of technology or
  productive experience.
• On the other hand, investing country can adjust
  and upgrade structure of industry by
  transformation. The behaviors of transnational
  corporations allocate industrial chains to make
  profits in the world and promote to transfer
  international industries on the principle of
  comparative advantage. In this way, less advanced
  countries (host countries) and more advanced
  countries (investing countries) both gain profit
  and fulfill the escalation of industrial
  structure.
• According to the motives of FDI, he proposed four
  styles 1) natural resource-seeking 2) labor
  resource-seeking 3) market-seeking and 4)
  production and sales internationalization.

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• Kojima summarized the differences between
  Japanese and American styles of FDI
• 1) Japanese FDI mainly focused on natural
  resource exploitation and import, standardization
  and labor-intensive industry.
• 2) Japanese small and medium corporations made
  most of the FDI, thus the scale of Japanese FDI
  is much smaller than European and American FDI.
  Most of the transferred techniques were general
  techniques, which were in accord with the
  structure and level of local production factors.
  Most of them adopted joint ventures for their
  FDI.
• 3) Japanese FDI and trade are mutually
  complementary, so this FDI was called
  trade-oriented FDI. Furthermore, the theory
  analyzed bilateral FDI among developed countries.

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Analysis of the Existing MNCs Theories
(limitations )

• Those theories were concentrated on first-movers
  of European and American MNCs, Few studies were
  focused on the large amount of emerging post-war
  late-movers of MNCs, especially overseas Chinese
  MNCs.
• The background of those theories was the economic
  and technological environment before the
  mid-1980s.MNC theories, have been based on the
  previous history, which can not explain the
  development of MNCs in recent decades.

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Section ThreeTheory Development
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Theory Development - Emerging Globalization MNC
Theories

• The business environment greatly changed in last
  decades of the 20th century.
• Such a dramatic change has inevitably raised
  many challenges to existing MNCs theories, and
  has called for the exploration and development of
  new MNCs theories that conform to MNCs practices
  in the era of economic globalization.
• We therefore propose Emerging Globalization MNC
  Theories as our new theoretical viewpoints of
  the theory models Transnationalization,
  Acquiring Advantage Theory, and Strategic
  Linkage.

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Transnationalization A Fundamental Growth Model
for Corporate Globalization

• The main premise of traditional MNC theories was
  that, compared to development in domestic
  markets, the corporations transnational
  development faced qualitative, discriminative and
  higher transactional costs.
• Therefore the prerequisite of transnational
  operation was to possess the advantage that
  competitors did not possess(Hood Young, 1979).
• Prior Competitive Advantage (Child and
  Rodrigues, 2005)

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• In our opinion, there was another connotative
  premise. This premise was that most of
  corporations could survive and develop normally
  under the condition of non-globalization before
  the 1980s.
• Transnationalization was not the prerequisite of
  surviving and developing.
• It was a typical mode of corporate growth in the
  era of non-globalization.

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• However, the development of economic
  globalization and global information-sharing
  changed that premise.
• Firstly, economic globalization lessened the
  obstacles of transnational production factors
  the practice of offering concessions to attract
  FDI is rising higher and higher in most
  countries the emergence of information
  technology. This has substantially reduced the
  cost difference between domestic and
  transnational transactions. In many circumstances
  there was little difference in the nature of
  businesses, which invalidated the Prior
  Competitive Advantage
• Secondly, one of the most important components of
  economic globalization was market globalization
  (Corsi and Akhunov, 2000).

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• The globalized market and the free flowing
  production factors have changed the prerequisite
  of corporation survival and development.
• That means only when a corporation can allocate
  resources globe-wide, can it survive and develop
  normally, even though there will be variations
  between different industries.
• Therefore transnationalization becomes a
  fundamental means of way of corporate growth.

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Acquiring Advantage Theory instead of Prior
Competitive Advantage Theory

• 1) Corporations, which have some existing
  advantages exert and maintain the same advantages
  through transnational business (typical
  traditional style)
• 2) Corporations with some existing advantages
  acquired new advantages through transnational
  business.
• 3)Non-advantaged corporations acquired advantages
  through transnational business.

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• Table 1Corporations transnational styles

Source by the authors based on literature review
of FDI theories, such as Narula and Dunning
(2000) Dunning(2001), Child and Rodrigues (2005)
and Deng (2004) .
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Section FourThe Three Growth Models of
Chinese MNCs
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 Case Analysis of Initial Overseas Investment of
Chinese Corporations

• Reviews of Initial Overseas Investment of Chinese
  Corporations.
• We chose 16 Chinese MNCs as our target case
  study corporations. They are non-financial local
  corporations that were initially established in
  Mainland China, which have since gone abroad and
  are developing overseas.
• These corporations all have their facilities
  and other assets in at least one country other
  than in China. They have offices and/or factories
  in different countries and have a centralized
  head office where they co-ordinate
  global/overseas management.

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The 16 corporations from 8 industrial sectors are

• 1)The household appliances and electronics
  sectors
• Haier Group (Haier),

Hisense Group (Hisense),

• TCL Corporation/Group (TCL)

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• 2) The telecommunication and IT or equipment
  sectors Huawei Technologies Co., Ltd. (Huawei),
• Shanghai Electric Group Co., Ltd. (Shanghai
  Electric)

• 3) IT and electronic devices sector Lenovo Group
  (Lenovo used to be called Legend), BOE Technology
  Group Co., Ltd. (BOE)

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• 4) Biopharmaceuticals sector with diversified
  assets in other sectors China WorldBest Group,
  Ltd. (CWGC), Holley Group (Holley)

• 5) Energy and oil-gas sectors China National
  Petroleum Corporation (CNPC), China National
  Offshore Oil Corporation (CNOOC)

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• 6) Automotive parts and machinery components
  sectors Wanxiang Group (Wanxiang), Jincheng
  Group (Jincheng)

7) Iron and steel manufacturing and construction
sectors Shougang Group (Shougang), Baosteel
Group (Baosteel)
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• 8)      Mining and engineering sectors China
  Nonferrous Metal Mining Co., Ltd (CNMC)

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• Initial overseas investments were based on the
  domestic operations, their initial going abroad
  to conduct production and research and
  development activities in other countries or
  regions. This is a crucial turning point in the
  process of company growth.
• Before this, the companies invested and operated
  primarily in domestic markets even though they
  have been involved in some international
  activities such as exporting, importing
  technologies and international co-operations.
• After this, investment and operations took place
  in many countries or regions, some even world
  wide. The companies are in a strategic
  transformation period and will be confronted with
  an increasingly challenge for international
  resources and internal management capabilities.

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• The purpose of analysing the initial overseas
  investment is to determine the foundation and
  conditions of the initial investment, to
  illustrate the new demand of business resources
  and capabilities for initial investment, to
  analyse the strategic differences of domestic and
  overseas operations, and to put forward
  implications for companies that are preparing to
  go global.
• The analysis mainly covers three perspectives
  the domestic business operation, the
  international operation in the domestic market,
  and export. Detailed information is provided in
  appendix 1.

37
Classifications of Internationalising Chinese
corporations Two Categories of
Internationalising Corporations

• Basing on Kang and Kes (1996, 2001) prvious
  research, we classified Chinese
  internationalising corporations into two
  categories according to the growth of MNCs
  internationalising procedures first-movers and
  late-movers.

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Figure 2 MNCs growth and internationalization
categories
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(1) First-movers (A-A)

• The main features of first-movers were firstly,
  there were few MNCs in the industry when those
  corporations started their initial process of
  internationalization secondly, the core
  technology of those corporations was basically
  invented themselves or possessed by them. Most of
  the giant European and American MNCs belong in
  this category.

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(2) Late-movers (B-B)

• Corporations that started their
  internationalisation when there were already
  numbers of giant MNCs in their industry and their
  operations occupied most of the global market
  share.
• Whats more, the core technology of these
  late-movers was imported from foreign companies.
  Most previous Japanese MNCs, and the present
  developing countries and less developed countries
  belong in this category and they are dependent
  upon others technology.

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Three Growth Models of Chinese MNCs as Late-movers

• Chinese companies are all late-movers, only
  starting internationalization in the 1980s as
  opposed to Western countries in the 1960s. These
  are classified into three major sub-types or
  models (Du, 2001). Figure 2 illustrates the three
  growth models of Chinese MNCs as late-movers.

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Figure 2 the growth models of Chinese MNCs as
late-movers
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• The three models are normal, open, and
  transitional.
• The criteria of classification were created
  according to the following elements
• system (mainly the extent of economy openness)
• domestic resources and market circumstances of
  the industry
• and specific elements of late-movers.

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• From figure 2, we can see that B-B-B is the
  normal model, C/C-C is an open model, and
  A-A-A is a transitional model.
• The environments were different when those
  corporations were founded. Normal and open
  models of corporations were founded under open
  economic environments, while transitional model
  corporations were founded under closed economic
  environments.

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• Their starting points of internationalization are
  different.
• Normal model corporations were internationalized
  in natural progression from domestic to a certain
  international extent.
  
• Open model corporations started their
  internationalization process at their initial
  stage or even before the formal founding of the
  corporations
• transitional models only started their
  internationalization when they were well
  developed in both scale and capability.

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• The routes of internationalization were also
  different.
• The normal model corporations increased their
  international management capability and level
  while their business scale and capability
  increased.
• Open model corporations increased their scale and
  capability while their international management
  capability increased.
• The transitional model corporations increased
  their scale and capability and their
  international management capability by promoting
  each other.

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• Table 3 The Growth Models of Chinese MNCs

48
Section Five The Characteristics of
Chinese MNCs Growth
49
The Characteristics of Chinese MNCs Growth

• We generalise the 16 cases into two categories
• One is companies which have existing comparative
  advantages before they invest overseas,
• The other category is comprised of those which
  first invest overseas and then acquire
  advantages.

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• The first category can be divided into three
  sub-types
• 1) the technology dominating type,
• 2) the scale of economy/low cost type
• 3) the scope of economy/ diversified business
  group type.
• The second category can be further divided into
  three sub-types
• 1) the technology resource-seeking type,
• 2) the sales resource-seeking type
• 3) the natural resource-seeking type.

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(1) Assimilation in Generic Strategy

• 8 among our 16 case corporations have the clear
  objective of building a world-class
  corporation. They are Haier Group, Hisense
  Group, TCL Group, Huawei Technologies Co, Ltd.,
  BOE Technology Group Co., Ltd., Jincheng Group,
  Shanghai Electric Group Co. Ltd., and Baosteel
  Group.
• As latemovers, the major strategies of theses
  large Chinese corporations are catch-up ones.
• World first-class corporation is Chinese
  entrepreneurs dream.

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(2)Diversification of Business Positioning

• With the objective of becoming a world first
  class corporation, Haier Group has not disclosed
  its main business, but it is determined to
  diversify.
• TCL Group has defined five business units, and
  clearly expounds its limited diversified
  scope.When TCL put forward its great strategic
  goal Dragon Tiger Plan in 2003, there was no
  clear identification about its cultural business.
• Hisense Group doesnt have a clear positioning of
  its business but only has computer products and
  will have business in Internet terminal unit in
  2010.

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Table 4 The Characteristics of Chinese MNCs
GrowthCategory One Having existing advantage,
then go abroad
54
Table 4 The Characteristics of Chinese MNCs
GrowthCategory Two First go abroad, then
acquiring advantage
55
Section SixThe Two-stage Model
56
The Two-stage Model of Chinese MNCs
Internationalization

• Stage Oneinward internationalization or
  inward internationalization /FDI,
• Stage Two outward internationalization or
  outward internationalization /FDI.

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Table 5 The Two-stage Model of Chinese MNCs
58
Table 5 The Two-stage Model of Chinese MNCs
59
Section SevenConclusion Discussion
60
Conclusions and Discussion

• Western scholars have conducted substantial
  research on internationalization, MNCs and FDI,
  yet their conclusions were not completely
  applicable to late-movers of FDI and
  transnational operational Chinese corporations
  and MNCs. In this paper, some mainstream and
  non-mainstream MNCs theories were reviewed. Based
  on globalization theories and models, Emerging
  Globalization MNC Theories of Internationalizatio
  n and Acquiring Advantage Theory, were proposed
  as our new viewpoints to the MNCs theory
  development from the perspective of Chinese MNCs
  as late-movers.

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• From the initial FDI of the 16 sampling cases
  studies, we concluded that the intrinsic
  characteristics of Chinese internationalization
  towards MNCs were all later-movers which are
  classified into three models normal, open, and
  transitional model.

62

• The mainstream MNC theories were more suitable
  for first-movers in developed countries, but
  Dunnings Model and the Uppsala Model have
  profound impact on Chinese MNCs development. The
  non-mainstream Kojima Model is very instructive
  for Chinese MNCs FDI and the new globalization
  MNCs theories were more applicable to China, but
  still this could not cover the specific complex
  situation and explain the hidden reasons behind
  the superficial phenomena of Chinese MNCs. By
  using these existing theories, we analysed two
  categories and six sub-types of the
  Characteristics of Chinese MNCs so as to explore
  the hidden drivers and motives of Chinese MNCs.
  Based on Dunnings Paradigm, the Uppsala Model
  and Kojima Model, we proposed a Two-stage Model
  to further explain the existing stages of Chinese
  MNCs internationalization from another
  perspective, which enhances the Acquiring
  Advantage Theory.

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• Strategies of implementing each corporations
  internationalization were clustered into five
  major features assimilation of building
  world-class corporation in generic strategy but
  a strong level of diversification of business
  positioning half of them lack of compatibility
  between overseas strategy and generic strategy
  and even had no corresponding dependent overseas
  strategy and most of them had irregular
  correlation between the formulation of overseas
  strategy and the first FDI.

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• The mainstream MNC theories were more suitable
  for first-movers in developed countries while new
  globalization MNCs theories were more applicable
  to China but still could not cover the specific
  complex situation and explain the hidden reasons
  behind the superficial phenomena of Chinese MNCs.
• Competing internationally is a critical step in
  corporate evolution of Chinese corporations, but
  from the analysis of the strategies of the 18
  sampling companies, we can see they lack key
  successful factors and strategic linkages of
  global corporations, even though they ambitious
  and anxious to acquire advantages to embark on
  the MNCs. The 18 companies merely the first wave
  of expanding abroad in trying to be real global
  MNCs.

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• This paper has laid the foundation for revising
  some of the MNC theories by tracing the various
  growth models, characteristics and
  internationalization stages of Chinese MNCs. In
  the absence of more systematic firm-level data,
  we only relied upon case study evidence. The 16
  corporations merely the first wave of expanding
  abroad in trying to be real global MNCs. All the
  Chinese MNCs will face challenges in making the
  leap to global stage through organic growth. More
  systematic and in-depth researches should be
  conducted, such as, the role of government, the
  relations between entrepreneurs and institutions,
  and the liability of foreignness, and the
  comparisons with other emerging market
  internationalization cases.

66
Notes

• 1 We only chose non-financial firms as our target
  cases in the absence of more systematic financial
  firm data.
• 2 Sources Hong Kong Trade Statistics, Census
  Statistics Department / Hong Kong Trade
  Development Council.
• 3 first-movers and late-movers Generally
  speaking a first mover is a company that aims to
  gain an advantageous and perhaps insurmountable
  market position by being the first to establish
  itself in a given market. In this paper we use
  these words for two different kinds MNCs.
• 4 Prior Competitive Advantage is taken from
  Child and Rodrigues (2005). It means the
  theoretical requirement of corporations that they
  must have already had existing comparative
  advantage at home before investing abroad.
• 5 High liability of foreignness, according to
  Child and Rodrigues (2005), which means problem
  of managing acquired assets and preserving equity
  of acquired brand.

67
References

• Omitted

68
Authors of the Paper

• 1. Yuping Du, PhD Candidate, Economic and
  Management School of Wuhan University,430072
  Ass. Professor of International Business
  Management, Guangdong University of Foreign
  Studies, 510420,
• E-mail yupingdu_at_126.com.
• 2. Rongping Kang, Senior Researcher and Division
  Chief of Institute of World Economics Politics,
  Chinese Academy of Social Sciences, 100732,
• E-mail kangrp_at_sina.com
• 3. Yinbin Ke, Chief Consultant of Beijing Third
  Dimension Enterprise Consulting Co., 100083,
• E-mail  oldke1963_at_tom.com.