Chinese companies worldwide

Philippe Gugler, 23 August 2008

a

A

Some of the recent, high profile acquisitions of Chinese companies have become widely known. The acquisitions of IBM’s personal computer business by the Chinese Lenovo or MG Rover by Nanjing Automobile Group Corporation are famous examples. After all, we will soon see the first Chinese car company actually producing vehicles in Europe! Other outward investments of Chinese companies, such as investments in the natural resources industry in Africa, are known to the wider public as a phenomenon, but with few insights into the Chinese companies executing these investments. Finally, who would have guessed that already in 2004 there were 360 Chinese companies invested in the German city Hamburg alone?

Looking at the motivations of Chinese multinational enterprises (MNEs) to go international, most scholars agree that classical motivations play the key role for Chinese companies to invest abroad: Chinese MNEs are to various extents market-seeking, resource-seeking, and strategic asset-seeking.1 Market-seeking motivations are the logical consequence of China’s export-oriented policy over the last years. Investments abroad mean an avoidance of trade barriers and the facilitation of exports of domestic products. Famous examples for market-seeking investments include home appliance and consumer electronics manufacturers such as Haier, TCL, and Huawei Technologies. China’s tremendous need for natural resources is in sharp contrast to the poor availability of resources in the country. Chinese companies have thus developed great activities in resource-seeking FDI and execute them basically independently from the target country or region. Destinations for Chinese outward FDI in natural resources include African as well as Central Asian countries, along with Australia, Russia and Canada. Due to the strategic importance of the sector, most active Chinese multinational enterprises are state-owned – the top three Chinese outward investors are SINOPEC, CNPC, and CNOOC. Finally, strategic asset-seeking motivations play a key role for Chinese investors abroad. Investments to purchase assets are often aimed at the acquisition of business information and concrete intangible assets such as advanced proprietary technology, as well as immobile strategic assets. The acquisition of foreign technologies and brands is often regarded as a short cut to establishing a company as an internationally known, quality producer with a portfolio of the latest technologies and services and an efficient distribution channel.2 Industry knowledge reports a large number of famous examples of Chinese strategic asset-seeking FDI, including SAIC, the largest Chinese car producer acquiring the Korean SsangYong, the Holley Group acquiring Philips CDMA chip design departments, and the D’long Group investing in the German Fairchild Dornier.3

To this extent, Chinese outward FDI may well be explained with the established theory of multinational enterprises.4 Do outward FDI activities of Chinese MNEs thus also constitute a classical example of this theory? It does not seem so.5 The theory, originally developed in a Western context and for Western companies, may not be able to completely explain the phenomenon and reveal all motivations and characteristics of Chinese multinational enterprises. A number of aspects seem to be particularly unique to Chinese companies. They may be categorised as expertise and technology-based features, access to home country resources, and features of cultural proximity. Chinese firms may have a particular expertise in managing large, complex markets, such as infrastructure projects in telecommunication. Moreover, multinational enterprises with a Western background tend to be experienced in operating in stable markets with transparent regulation and weak government influence. Contrary to that, Chinese firms are likely more capable of dealing with troublesome regulation and navigating around opaque political constraints, given their greater experience with such institutional features. Such experiences may put Chinese firms arguable in a better position than many other non-Chinese firms.6 Home market characteristics also play a very important role for Chinese companies. In a broader perspective, all extensive government interference with the activities of firms may be seen as an element of home country activities. In China, for example, companies that have been designated as “national champions” will receive the government support necessary to overcome their late-coming disadvantage internationally. This can include financial aid and political interference. Finally, cultural proximity in a wider sense constitutes an explanation for investments in various culturally proximate regions, be it real, physical proximity or perceived proximity due to a similar culture. These factors may take the function of a door opener and catalyser for business development.

The main motivations of Chinese multinational enterprises to invest internationally are thus motives derived from their operation in an international capitalist market economy. Chinese MNEs have mostly market-seeking, resource-seeking, strategic asset-seeking, and efficiency-seeking motivations. Chinese MNEs are to this extent part of global business undertakings. The traditional theory on multinational enterprises offers valuable tools to analyse their activities. However, the particular Chinese characteristics in this process are eye-catching and make the emergence of Chinese MNEs a special phenomenon. It is becoming increasingly obvious that the most important differences between Chinese and Western MNEs going international are not found in their motivations but in the special characteristics of their home country in terms of resources and the Chinese institutional and cultural context. In coming years, we will see whether these differences constitute a temporary facet of Chinese firms until they can fully compete internationally or whether the theory of multinational enterprises must adapt to consider these characteristics as ongoing elements of multinational enterprises’ motivations and strategies.

Footnotes

1 See for example Buckley, P. J., Clegg, L. J., Cross, A.R., & Liu, X. The Determinants of Chinese outward foreign direct investment”, in; Voss, Hinrich; and Zhen, Ping (2007) Journal of International Business Studies, 38, pp. 499-518, or Morck, R., Yeung, B., & Zhao, M. (2007). Perspectives on China’s Outward Foreign Direct Investment. Journal of International Business Studies.

2 See Child, J. & Rodriguez, S. B. (2005). The Internationalization of Chinese Firms: A Case for Theoretical Extension? Management and Organization Review, 1:3, 392.

3 Hagiwara, Y. (2006). Outward Investment by China Gathering Stream under the Go Global Strategy. Economic Review Vol.1 No.17, The Bank of Tokyo-Mitsubishi UFJ, Ltd, Economic Research Office, p. 5.

4 As introduced and outlined extensively by Dunning, lastly in: Dunning, J. H. & Lundan, S. M. (2008). Multinational Enterprises and the Global Economy. Edward Elgar, 2nd Ed..

5 Philippe Gugler and Bertram Boie (2008), The Emergence of Chinese FDI: Determinants and Strategies of Chinese MNEs, NCCR-Trade, WTI Berne.

6 Morck, R., Yeung, B., & Zhao, M. (2007). Perspectives on China’s Outward Foreign Direct Investment. Journal of International Business Studies, p. 346.

 

Topics: Global economy
Tags: China, China multinational enterprises foreign direct investment, foreign direct investment, multinational enterprises

Professor at the University of Fribourg, Switzerland

Most Read