Discuss the opportunities and challenges faced by Chinese enterprises going global.
There is no specific definition to globalisation. To begin with, Flynn and Giraldez have defined it as the permanent existence of global trade, when all major zones of the world exchange products continuously and on a scale that generated deep and lasting impacts on all trading partners. The deep lasting impact according to our understanding may refer to the economic integration that countries seek when they go global. Why and how aspects of the globalisation will be discussed later but to further emphasise on the meaning of globalization we would like to take help from some other definitions. It is also referred to as the gradual integration and growing interdependence of national economies (Cavusgil et al., 2008). Now globalisation can be explained as economies globally integrating through technology, knowledge, people and values which ultimately leads to interdependence of the countries on each other (Knight, 2004).
Globalisation has been occurring for the past several hundred years. Its increase over the past 20-30 years is largely accounted to the integration of large developed economies with less developed economies through FDI (foreign direct investment) and the reduction of trade barriers. The firms and enterprises which have entered into the global economy faced myriad obstacles and opportunities along the way. In this essay, we will be discussing some of the opportunities Chinese enterprises are seeking and the challenges they have faced for going global.
Why to Globalise?
Globalisation is seen as an objective trend in economic development. In order to develop a country, one cannot keep itself isolated from integrating to the global economy (Zhang, 2005). In case of China, the increased productive capacity of firms and the highly competitive market led it to globalisation as it was hard for them to survive in the local market due to low profitability and immense competition. Another important reason for China to go global was to acquire raw material. Over the past few years, the demand of natural resources in China and other countries has risen swiftly. By acquiring natural resources, the firms can become captive suppliers of middle kingdom (The Economist, 2010)
The go out policy was launched by China in 2002. This policy was formulated to encourage the enterprises to invest into the global markets (Liu, 2007). The policy entails the increased Chinese FDI into the foreign market. China seeks diversification in production and production methods along with brand recognition in EU and US market. Improvement in the quality of the projects was another objective of this policy. The reason to introduce this policy were the huge foreign reserves China was keeping and the increasing demand from the international community for China to float its money. In turn, China invested its money by actively acquiring assets overseas. China became a part of WTO (World Trade Organisation) in 2001. It has since then supported the enterprises to invest in the foreign markets. Support for the M&A (mergers and acquisitions) has been the main industrial policy to promote the globalisation of the Chinese firms (Schuller and Turner, 2005).
How to Globalise?
China has been a champion in exports but in order to grow further it should also find other business avenues, (Bloomberg Businessweek, 2009). As discussed above, the Chinese government has supported the firm to invest in mergers and acquisitions since their accession in WTO in 2001.. But initially Joint ventures and Greenfield investments were the major forms of investments. China has used various modes of entry into the global market. Joint ventures with Western and European companies like Huawei and 3Com, Greenfield investment (subsidiaries/organic growth) in case of Haier in US and M&A like Lenovo did by acquiring IBM s computer division are some of the examples how Chinese companies entered into the global market (Lecture, 2011).
China s Outward FDI: A Look at the Progress
China s outward FDI figures are underestimated due to the deficiencies in their statistical system. All outward FDI figures are based on statistics established by MOFCOM. MOFCOM only captures the data of approved and registered outward FDI which gives a limited understanding of China s investment overseas (Zhou & Shuller, 2009). If the records of China s FDI in OECD countries are considered, then the outward FDI could be 40% more than total established figures (Lecture, 2011).
China s outward FDI has grown massively over the past decade but it is not as fast as expected (Zhou & Shuller, 2009). The investments in M&A have been impressive. Studies conducted by Zhou and Shuller showed that Asia remains the most attractive place for China to invest but most of the outward FDI has been made in M&A with Western countries. Chinese companies seek high level of
equity participations in companies abroad. Most of the investments have been made in mining and manufacturing (Zhou & Shuller, 2009).
China has been investing in other countries from past couple of decades. The investments made in 1980s were very negligible. They were as low as 0.45 billion USD per year. In 1990s, they rose to a modest level of 2.3 billion USD on average per year but in 1994 there was a dramatic increase in outward FDI and the total investments rose to 4 billion USD. In 2001 after China s accession in WTO and the launch of Go Global policy gave it a big leap ahead and brought it in the race of high outward FDI countries. According to the statistics provided by OECD and MOFCOM, China s outward FDI rose to 6.9 billion USD. Statistics show that there was 20 times increase in Outward FDI between 2004 to 2008. By the end of 2009 the China s Outward FDI increased to 56.53 billion USD. A tremendous increase has been shown in Outward FDI stocks from 29.9 billion USD in 2002 to 245.75 billion USD in 2009 (OECD, MOFCOM) Based on the statistics a graphical representation is listed below.
Sources: Ministry of Commerce, China (Website)
By end of the year 2009, China s share reached 5.14% of 1.1 trillion USD of world s total Outward FDI. It acquired China 5th rank in all economies on the basis of total money spent in Outward FDI (UNCTAD, World investment report, 2009). Up until 2009 most of the Outward FDI has been made on leasing industry followed by mining, manufacturing, retailing etc. Another graph showing percentage distribution of China outward FDI in different sectors is listed below.
Source: China National Bureau of Statistics, China Statistical Yearbooks, 2003 2009
Most of the Outward FDI has been made in Asia since it remained the most lucrative and desired place for Chinese investors. The graph below shows China s investment in different continents as of 2009.
Source: National Statistic; Heritage Foundation The above graphical representations give us an idea about the progress of China s outward FDI in world and more specifically on sector level. The China s overall Outward FDI stocks in 2010 crossed
300 billion USD (Heritage foundation). China has a great potential which led to its emergence as a great economy but just like European and Western enterprises, Chinese firms have also faced a lot of opportunities as well as challenges in entering global market. Some of the major opportunities and challenges will be discussed in depth in the following paragraphs.
Opportunities
China has transformed from isolated economy to globalised reflecting the government s planning for long-term economic prosperity (Zhang, 2005). China still has many hurdles in its way but there are opportunities promising rewards for those with ability to succeed. Some of the opportunities are explained below.
1-Support of Government
Most of the emerging economy governments encourage the globalisation of their firms (WIR, 2008). It is very important how the government stimulates the process of Outward FDI (Luo et al, 2010). The current government policy is believed to provide support to the Outward FDI enterprises. The policy has two aspects to it: Promotional measures and monitoring policies.
The promotional measure encompasses financial and taxation policy, risk safeguard mechanism, information service network and direction guidance of Outward FDI. The Chinese government gives support to Outward FDI enterprises. To prevent double taxation they have one corporate income tax principle which they have also signed with 89 nations (Luo et al, 2010). EXIM Bank of China provides credit funds which are processed fast and have low lending rates. Long and short term credit insurance and credit facilities are also provided by the EXIM Bank of China. These banks also provide discounted bank loans to firms investing abroad.
Chinese government in 2004 also promoted the investment in natural resources, the export of the local technology, labour and production methods abroad, R&D development centres which used internationally advanced technologies and managerial skills and M&A which increased the competitiveness of Chinese firms. International development funds were also given to all those firms which wanted to go global (Luo et al, 2010).
China has played an influential role in reducing the risk of Outward FDI firms through mutual protection agreement. Currently China has signed this agreement with 115 countries and locally it provides accident insurance to the expatriates working in subsidiaries (Luo et al, 2010). The government also keeps record of all the difficulties a firm faces when entering into the market. They
publish Obstacle rule report when investing in different countries . This sophisticated system allows firms to get the reasonable information about the risks and obstacles they might have to face when going global (Luo et al, 2010). The government also publishes a catalogue with guidance about investment overseas. Companies which follow those guidelines get financial benefits as well and favourable treatment abroad.
Chinese government have tried to simplify the monitoring policies as much as possible. The approval process has been shortened to 20 days. Government does not require a feasibility report because all they are concerned about is the investor and the direction of the investment. There are some post investment guidelines as well for the firms listing rules for accessing corporate FDI overseas (Luo et al, 2010).
2-Accquisition of Strategic Assets
Companies these days use resource based view which help them seek strategic assets or resources to be more competitive in the market. Many Chinese companies are establishing cross-border M&A to eliminate their competitive disadvantages. Few of the companies including Lenovo and TCL have took over patents, brands to be more competitive (Deng, 2008). The importance of acquiring strategic assets should be understood in order to validate its advantages for the Chinese firms.
Chinese companies are striving hard to list themselves in Fortune s global 500 but to acquire a position in the list Chinese firms need to fill significant resource gaps (Zeng & Williamson, 2003). Chinese firms do possess competitive advantage gained from access to home country resources or production capabilities, but still see themselves as having an average level of competitiveness and have a powerful motive for asset-seeking especially in industries in which they face rigorous competitive pressures (UNCTAD, 2006).
In 2001, the Chinese firms acquired strategic assets worth 450 million USD which exceeded 5 billion USD in 2005, half of Chinese total Outward FDI (UNCTAD, 2006). All these strategic assets were acquired mostly by M&A. In 2004, Lenovo over took IBM s PC unit which made Lenovo the third largest PC manufacturer immediately after the acquisition investment worth 1.7 billion USD. Along with other things Lenovo got IBM s brand, managerial control, R&D centres and distribution network (Deng, 2008). TCL and BOE technology group implemented same strategy for getting hold of strategic assets including brand name in the companies they have invested.
3-Natural resources
Natural resources are vital to the economic growth of any country. The surge in the economic growth in the past two decades has seen a prominent shortage in the natural resources of the world. Backed by the Chinese government, Chinese firms have been acquiring equity stakes in natural resources all over the world. Massive investments were made in mining and petroleum and long term procurement contracts were made in oil and minerals (Moran, 2010).
In 2010 alone 55% of oil was imported from overseas including Africa where Chinese firms have invested (China daily, 2010). The globalisation of the firms can lead them to take control of natural resources directly. This could help the frequent supply of natural resources to China and also on stabilised prices. CNPC and SINOPEC, two of the largest companies in China have invested n i Kazakhstan, Russia, Canada and Switzerland. These investments have been supported by the Chinese government for the stable flow of natural resources to meet the demand of the Chinese economy.
Due to increased labour costs in China, firms have shifted their production units to other places in the world to deal with costs effectively and to reap more profits. The go out policy established in 2002 has played a great role in taking Chinese companies abroad which has brought China in the race of some of the top Outward FDI companies.
Challenges
China has faced a host of challenges in establishing their firms abroad. Most common challenges faced include human resource management, technological backwardness and cultural differences. , All these challenges will be explained one by one in later paragraphs.
1-Human Resource Management
As more and more Chinese indigenous companies invested abroad it created a need for people with competencies to compete successfully in the global economy (Tung, 2007). If Chinese firms fail to produce human talent pool with first class managerial skill then they might not be able to compete successfully with the multinational giants and its outward FDI aspirations will be thwarted (Tung, 2007). China needs skilled people to take informed decisions and the evaluation of acquisitions abroad. Managing processes and international staff is also the most important task for which experienced managers are required. As for financial skills, Chinese corporate leaders are still at the fundamental stage (Gupta and Wang, 2009).
The torrential flow of FDI in China coupled with the desire of indigenous Chinese companies to invest abroad (Accenture, 2005) has created a need for people referred as shortage among plenty by Farrell and Grant (2005). This explains the fact that despite of China s biggest population in world there is still a critical shortage of skilled people to serve its objective of being prosperous locally and successful abroad (Tung, 2007). China s management pool number 5000 when it needs 75000 mangers to run Chinese firms (Farrell &Grant, 2005). The surge in shortage of human resource is not only restricted to China but it s a world phenomenon. Companies strive to get hold of th best e employees with the greater technical knowledge about the job (Tung, 2007).
In 2005, a survey of 25 Chinese international firms where respondents were asked to identify barriers, both internal and external, to OFDI, suitable human resources emerged as the most significant challenge (Tung, 2007). Many students from China fly abroad to get foreign education who will replenish people at managerial posts. Many western executives when interviewed said that the next generation of Chinese executives, in their 30s and 40s today, with more international education and experience, would prove far more effective than the present cohort of chiefs. Over the past two decades the old guard has taken a rusting industrial base and from it made gleaming corporate giants. Yet if those firms are to achieve their full potential abroad their creators may have to relax their grip (The Economist, 2010).
2-Technological backwardness
Except for few companies which have technologies comparable to US and Japan, most of the sectors still lag behind as far as advanced technology is concerned. China s regulations for FDI and Outward FDI encompass the introduction of advance technology within China along with many other things. According to Nolan and Zhang (2005), only oil and petrochemical industrial technology in china meets the standard of technology used in US and Japan. Regardless of the advancement in economy as a whole, increased FDI and Outward FDI, china still is still backward technologically.
3-Cultural difference and business model
China follows a whole different set of norms and culture when dealing in business which creates hindrance when Chinese firms deal with other firms from across the world. The Economist in one of its article published that the sense of mission, opacity and the high esteem in Chinese corporations can raise difficulties in dealing with the western firms. It also mentioned interviews from western executives who appreciated their Chinese counterparts but show express their concern about lack of openness and discussion which leads to resistance among employees (The Economist, 2010).
Spencer and Chao (2008) mentioned in their article about Lenovo s executive and the difficulties they had faced when dealing with IBM. The Chinese members of delegation kept quiet when they disagreed with some point, the silence was taken a sign of agreement by the western counterparts (The Economist, 2010). Chinese business models on the other hand are not efficient to operate at home as well as globally. The global governance and the management system should be aligned to manage operations in offshore as well as in China. The gaps in business models need to run companies overseas keep Chinese firms from taking full advantage of globalisation.
China has also faced some political challenges within the country. Embargos and sanctions by EU and US on China s trade and human rights violation have been in talks for long. China needs to address all these issues in order to fully benefit from the globalisation for which they have tried really had and in fact have been successful for past many years.
Conclusion
According to the figures of 2009 China ranks 5th with 56.52 billion USD in the race of countries with higher Outward FDI. Chinese firms have a lot potential to win this race by negotiating all the challenges they face in going global. The immense support from government gives them an advantage to flourish in the global economy. At the same time Chinese firms also face some political problem within the state like we have seen in case of China National Offshore Oil Corporation. China has shown an aggressive integration into the world economy. China Outward FDI has grown faster than Japan which show s its steep acceleration toward globalisation and potential for more growth.
China s Outward FDI growth seems quite sustainable. The government support for the promotion of firms in global market, the appreciation of Chinese currency and the acquisition of natural resources proves its sustainability. The firms in China are becoming more open towards international trading and therefore have the tendency to become global players. The challenges have always been there but a good approach and strategies can easily tackle them. Chinese firms have innumerable opportunities which if channelled in the right direction can lead China to become the number one global player.
References
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