Date: 13 April 2022 Author: Wojciech Adamczyk
Is outward foreign direct investment an effective way for Chinese companies to upgrade their technological, managerial and branding capabilities, enabling them to catch up with advanced economy multinationals?
The main objective of the essay is to answer the question “Whether the outward foreign direct investment is an effective way for Chinese companies to upgrade their technological, managerial and branding capabilities, enabling them to catch up with advanced economy multinationals”? Nowadays, Chinese multinational enterprises (MNEs) are extremely active in terms of outward foreign direct investment (OFDI) across the world. Among many motivations to invest abroad, undoubtedly search for the advanced technologies and improved managerial knowledge are one of the key determinants for Chinese companies to increase their productivity and improve their performance.
First of all, the paper will examine the motives behind the Chinese OFDI, with the theoretical framework created by Ping Deng, where he distinguishes four different motivations with technology-seeking investments as one of them. Going further I will focus on the institutional framework where I will characterise the “go global” policy. The next section will present the internationalization strategies of Chinese multinationals, and the main determinants for OFDI. In the next section, I will examine the OFDI of Chinese companies in terms of acquiring access and sourcing strategic assets to build a highly competitive brand that has capabilities to challenge the multinationals from the advanced economies. To do this, I will examine the mergers and acquisitions (M&As) of the biggest Chinese MNEs with the multiple-case study of Lenovo, Huawei, TCL, and Shougang, Group. On the other hand, the paper will compare the performance of these companies on the international stage with their counterparts from developed economies. To make a comparison I will use some descriptive statistics gathered from (…). The fifth and the last section will provide the conclusions with the final answer to the essay question.
To answer the essay question, firstly we should concentrate on the theoretical framework that lies behind the motives of Chinese outward foreign direct investment. Ping Deng in his paper “Outward investment by Chinese MNCs: Motivations and implications” distinguishes four different motivations for Chinese MNEs to invest abroad (Deng, 2004). The first of them is resource-seeking investments that main objective is to secure a sustainable supply of raw materials for industrial operations. The second motivation is market-seeking investments that aim to expand into foreign markets to continue the development of the company with increased production of goods. The third one is diversification-seeking investments that main goal is to diversify the risk. The last, and most important motivation are technology-seeking investments. Chinese multinationals have the objective to invest in the more developed economies to acquire more advanced technologies that could compensate for their competitive disadvantages (Deng, 2004). We may observe that this motivation turned into a continuous trend among Chinese MNEs (what will be proven in the next sections), and the transfer of technology and manufacturing know-how is usually the main goal of the companies that want to upgrade their capabilities. According to Deng, what is special about Chinese companies is the fact that they rather invest in the existing foreign companies than start a greenfield project. That can result in the obtaining of whole packages of advantages. In many situations, the transfer of technology may affect their domestic operations which might lead to the development of new products for international expansion (Deng, 2004).
On the other hand, John Dunning (Dunning, 1993) has proposed the concept of strategic asset seeking that describes OFDI made by multinationals from the emerging markets. Of course, it is one of a few categories along with the market-seeking, natural resource-seeking, and efficiency-seeking motivations to invest abroad (Meyer 2015). The strategic assets of the company define the competitive advantage and performance (Barney, 1991). Such assets may consist of for instance R&D capability, reputation, technologies possessed by the firm, and knowledge (Deng, 2009). This conception could be interpreted that Chinese companies like the SGSB group a manufacturer of industrial sewing machines decides to invest abroad to improve the capabilities of the investing firm instead of exploiting its existing capabilities. The augmentation aimed by the investor doesn’t only relate to the new technologies and innovation, but it refers also to managerial capabilities. As mentioned above, the SGSB had to acquire a small-medium enterprise from Germany, Durkopp-Adler, to upgrade its technology. The German company at that time was quite renowned among clients, also in China, but has failed to build a distribution channel in the Asian market. The synergy between these two companies resulted in a strong position for SGSB in the Chinese market and improved its capabilities to challenge Japanese global leaders (Meyer 2015).
Before I will move to the examination of M&As made by Chinese multinationals, I am going to mention the strategic intent perspective that was discovered firstly by Hamel and Prahalad in 1989. The strategy was related to the Japanese companies in the post-war period and their strategic objective which was a pursuit to become global leaders. It can be described as one of the most significant motivations that lie behind multinationals going abroad. It means maximization of the overall performance and strategic goals of the company. Among
many objectives, learning and acquiring new knowledge (also managerial) are the case that relates also to the Chinese MNEs at the current stage of development (Rui, Yip, 2007). In the research made by Rui and Yip, the authors found that the strategic intent perspective (SIP) is backed by the pieces of evidence gained from three Chinese companies which are Lenovo, Huawei, and Nanjing Automotive. They prove that all of these three companies had upgraded their technology, and managerial skills (Rui, Yip, 2007).
Institutional framework for Chinese OFDI
Since Chinese MNEs started investing abroad, the Chinese government played a crucial role in the firms’ strategies and behaviours. China with its unique political system and its institutions have been experiencing a transformation from a centrally planned to a market-based economy with some policies implemented throughout many years to liberalise and privatise the state-owned enterprises, as well as changing the legal framework (Lu, Liu, Wang, 2010). Although, in the end, the behaviour of Chinese MNEs is heavily controlled by the state the payoff is returned in huge governmental support of the companies that are investing abroad. In many cases, it has helped to create an effective strategy for multinationals to compete on the global stage. For China, the introduction of the “go global” strategy at the beginning of the 21st century was a key policy that boosted OFDI across the world. The government in a selective way have chosen the most desired types of OFDI with financial encouragement and created the “Outbound Catalogue Guidance” which is a list of the most desired countries and industries that Chinese companies should aim to invest in. Everything was followed by tax concessions, huge capital, and other incentives (Lu, Liu, Wang, 2010). Because many large Chinese banks are state-owned, Chinese MNEs are allowed to secure the funds at low-interest rates, rather than from commercial lending institutions. On the other hand, state ownership of many MNEs could be seen as a significant political and economic advantage that eases investment abroad (Wang Hong, Kafouros, Boating, 2012). China’s OFDI framework must have the aim to directly contribute to the development of the economy, specifically by obtaining natural resources and strengthening the country’s technological base (Sauvant, Nolan, 2015).
The purpose of M&As made by Chinese multinational, and its effects
To analyse whether Chinese OFDI help in an effective way to upgrade technological, and managerial capabilities of the companies it is relevant to examine first the mergers & acquisitions made by the Chinese MNEs abroad. Thankfully to the large governmental aid, Chinese firms chose M&As as the main source of outward FDI. According to Deng, the value of M&As made abroad has jumped from $60 million in 1990 up to $1.04 billion. Although most of these transactions were in the natural resources and energy sectors (Deng, 2007). However, the trend has been changing, and many multinational corporations from China have decided to use it as the foreign entry mode. The case of Lenovo which had bought $1.75 billion worth of IBM PC is one of the most common examples (Deng, 2007). The case study of Lenovo will show further that it had used the acquisition not only as a foreign entry mode, but also for technology, and managerial skills transfer.
It is important to answer the question of whether cross-border acquisitions create value and help Chinese companies to catch up with their counterparts from welfare states. In the study written by Li, Li, and Wang the authors have used a sample of 367 cross-border M&As in the period since 2000 until 2011 by Chinese MNEs. In the paper, they use the standard event study method, which can be described as the measurement of value creation by M&As that is based on stock price reaction. In their findings, they discovered that the stock price performance after M&As made by Chinese listed companies has risen approximately by 2-4% (Li, Li, Wang, 2016). Supporting this evidence with the information that the main motivation for all of the cross-border M&As made by Chinese MNEs was strategic asset seeking we may interpret it as an effective way to increase the value of the company (Li, Li, Wang, 2016). In another paper, Ping (Ping, 2012) has described the acquisitions made by Chinese MNEs as the opening doors for overcoming major weaknesses possessed by Chinese MNEs’ such as weak branding prowess. Although the author speaks about the huge technology and management gaps between multinationals that decide to invest abroad. He mentions that Chinese MNEs in general lack English-speaking managers with the preparation for the international business which creates a natural border between Chinese managerial staff and local counterparts in the host countries. The same usually happens in terms of the technological capabilities of Chinese firms (Ping, 2012). The linkage, leverage, and learning (LLL) framework could be useful to explain the behaviour of Chinese MNEs deciding to acquire a company in the developed economy. Guangxi which can be translated as networking could be used to identify and bridge gaps. Although what’s more important is learning that creates a chance for MNE to transfer world-class technologies or brands with the know-how to compete on the international stage (Ping, 2012). However, the author points out that even if the number of M&As made by Chinese MNEs has increased, these companies in many cases are far from being able to “take over the world” (Ping, 2012).
Multiple case study of Lenovo, TCL Group, Huawei, BOE Technology Group
To answer the key question of OFDI made by Chinese multinationals improves their position on the international stage I will use the multiple case study
consisted of three different Chinese MNEs that have decided to “go global”, and made the cross-border M&As.
The first company that will be analysed is TCL Communication Technology Holding Limited. According to the official website of the company, it originated in 1982, as a small cassette-tape assembler, and turned into “a global mobile terminal manufacturer and internet service provider (TCL, 2017).” In 2009 the company had revenues worth $6 billion. The development of the company was hugely supported by the local Chinese government, and in the past acquired companies like Schneider Electronics in 2002, then in 2003 acquired US’s GOVideo, and in 2004 merged with Thompson with the joint venture “TCL-Thomson Electronics” (TTE) worth $560 million (Deng, 2009). What’s more, in 2004 it sets p a 55% owned cellular phone joint venture TAMP by merging Alcatel’s mobile phone business. Undoubtedly these moves approached by the TCL had the objective to improve their international position and increase competitive capabilities to challenge the counterparts from the developed economies (Deng, 2009).
Another company that had decided to invest abroad to upgrade its own technological and managerial capabilities is Lenovo. Lenovo is a world-renowned and largest PC vendor that was established in 1984 starting with a capital of approximately $25,000, and currently, it’s worth US$46 billion. It is ranked #202 on the Fortune 500 list (Lenovo, 2017). In the paper written by Chuan Zhi Liu, CEO and President of Legend Holdings Ltd he describes how in the 1990s, Lenovo as already the largest PC manufacturer in China suffered from many disadvantages that created obstacles to competing internationally with brands like HP, or IBM. The most crucial part of its global expansion started when Lenovo decided to acquire IBM PCD on the 8th of December 2004. It is worth mentioning that this transaction was perceived as more likely to fail than succeed, and it was a real surprise for the whole industry, that a small company from a less developed country has bought a leading company in the PC industry (Liu, 2007). The whole transaction was estimated at US$1.25 billion. What has changed, and what Lenovo has gained? Since the acquisition, Lenovo’s shares have increased by about 300 per cent, while other big players in the industry have been far behind Lenovo in the Standard & Poor’s 500 Index (Bloomberg, 2014). Despite it, Lenovo through this transaction has secured access to the international distribution channels and reduced the costs of entering the new markets. It has increased the Research & Development potential of the company which has improved the innovation of sold products. Due to acquisition, the transfer of managerial capabilities was quite successful too. Lenovo could conduct internal training with the usage of IBM mechanisms (???, ???, 2012). Undoubtedly, Lenovo has also improved its world reputation while getting the powerful and stable IBM brand. Going further it has also created a well-designed corporate management plan, where it decided to appoint two foreign managers as CEOs, while Chinese managers were learning from the advanced managerial skills of former IBM staff (???, ???, 2012). Of course, we can assume that still there is many things that could be improved for instance more proactive marketing team, and the culture conflict that is still a challenge for the employers from Lenovo. Different wages at the beginning and cross-cultural differences could cause many former IBM employees would choose to leave Lenovo. That’s why Lenovo have to keep a distance from interfering with R&D centres formerly owned by IBM. This example clearly shows that in the answer to the question, OFDI with motivation to upgrade various capabilities of Chinese companies can be done effectively, and in the end it allows them to compete globally with excellent results ((???, ???, 2012).
Another company that can clearly show that outward foreign direct investment can be an effective way to upgrade the capabilities of the company to compete with its counterparts from advanced economies is Beijing Shougang Construction Group Co. Ltd. According to the official website of the group, the company was established in 1956, and currently is one of the most advanced manufacturers of large-scale iron and steel items. What’s more, it is involved in industrial and civil construction, and municipal engineering (SGJS, 2017). The company itself started implementing its strategy to upgrade its capabilities through the importation of foreign technology and equipment, but since 1988 has been engaged in outward foreign direct investment as well. This year, Shougang acquired the American engineering company with the main objective to transfer the state-of-the-art design technology for steel rolling (Young, Huang, McDermott, 1996). It has made also some greenfield projects such as one conducted in 1990 when Shougang, decided to invest in food processing on Turks & Caicos Island. It has acquired at least 10 wholly-owned subsidiaries and joint ventures to become one of the top MNEs in the world. Currently, Shougang is one of the largest steel-producing companies in China, it’s listed on the stock exchanges, and is a worldwide recognisable steel maker (Young, Huang, McDermott, 1996).
The final company that can be taken as an example is Huawei Technologies Co. Ltd. This case study could be considered a manipulative one, although I have decided to mention it because it clearly shows that the Chinese OFDI in terms of upgrading its capabilities can be effective.
Huawei was created in 1987 by Ren Zhengfei and since then it has grown into one of the most renowned companies in the information and communications technology sector (ICT) with its products and services in over 170 countries. In his case study, Zhang describes that strategic alliances are interdependent with FDI in the period of catching up with the leaders in the sector. He has also pointed out that Huawei has become a successful enterprise on the global scale because of absorptive capacity which was defined by Cohen and Levinthal in 1990 (Zhang, 2009). It tells that absorptive capacity is “a firm’s general ability to value, assimilate, and commercialise new, external knowledge (…) absorptive capacity is developed cumulatively, path-dependent, and based on prior investments in its member’s absorptive capacity (Cohen, Levinthal, 1990).” Concentrating on Huawei, Zhang has examined the innovation performance of the company while collecting the patent data from three different sources which are SIPO, USPTO, and EPO. It can be concluded that since Huawei started investments in innovative capabilities in 1998, this company has reached almost 16% of all patents applied in USPTO each year. The main objective of the company is to be “abreast with the latest technology and quickly incorporate advanced technology into its knowledge base (Zhang, 2009).” The reason that it has reached international success in such a quick period is the strategic- alliances and comparatively large investment into R&D. It has opened 14 R&D centres across the world and started collaborating with many universities, suppliers, and leading players. The strategic alliances have been founded by the creation of joint ventures for instance with Siemens, and Motorola to research, manufacture, and sell with the long-term strategy to develop its technology (Zhang, 2009). Although not only gaining new technologies was the goal of Huawei. It has created alliances with world-renowned consulting companies to advance the process of adapting managerial knowledge in areas such as financial management, and quality control. It is worth noting, that the alliances were created in the majority with the companies from advanced economies like Japan, the USA and Europe as a whole. All of the allied MNEs have to have a larger technology base and should be relatively high in reputation (Zhang,2009).
From these case studies, we may conclude that OFDI, in general, can be an effective way to catch up with the multinationals from the advanced economies. The examples of Lenovo, and Huawei especially, show that the technological, and managerial gaps can be overcome by a good strategy of foreign investment to upgrade the capabilities of companies to compete even with the most advanced companies in the world. What’s important is the strategy and selective process of M&As or joint ventures. It is also worth noting, that these strategies can be applied by different companies from developing countries, not only by China.
Competitiveness of Chinese MNEs compared with multinationals from the developed world
In this section, I will attempt to examine the overall economic performance of Chinese companies that invest abroad to upgrade their capabilities while concentrating on the examined companies in the previous section. Another aim is to compare their performance with the multinationals from the advanced economies, specifically from the USA, and European countries.
To be considered a large company in China, the firm has to have more than 2000 employees, more than 300 million renminbi in sales and one hundred million more in assets. What can be observed is the huge rise of large companies domestically. What’s important about it is the fact that the compound growth rate of the top 100 Chinese firms has reached 37.5 %, which is twice as much as for 19.6% growth rate among Fortune Global 500 firms (Qiu, Xu, Sun, 2016). Despite the examined companies in the previous section, many Chinese MNEs have become large, but at a globally-large scale. According to Qiu, Xu, and Sun, “ in 2008, 26 out of the Fortune global 500 firms were Chinese companies”. In comparison, in 1998 there were only five Chinese MNEs that were ranked on the Fortune Global 500 list (Qiu, Xu, Sun, 2016). Furthermore, the focus on high-technology investment has surged from 2008 onwards, when the Chinese MNEs started targeting companies possessing advanced technologies in the advanced economies. In his paper, Professor Dilip K. Das has identified that the main source of growth of Chinese MNEs was M&As, wherein in 2012 almost fifty % of Chinese OFDI was in the form of mergers and acquisitions (Das, 2014). He also pointed out that thankfully to the financial crisis from 2008, Chinese companies have used the chance to increase the OFDI and improve their international position. Although, what seems more important is that in terms of OFDI flow China has overtaken most of the advanced economies like the United Kingdom or Germany, and France (Das, 2014).
According to the report written by MergerMarket, in 2016, Chinese companies have overpassed their yearly average by the end of August with 173 deals worth $128.7 billion and up to today, it can only compete with the USA in terms of mergers and acquisitions (Forbes, 2016). What’s interesting about it is that the main industries that were targeted by Chinese companies are the energy, technology, and chemical sectors. That shows the trend that is undergoing in China intending to adopt a production of high-end goods and acquire high-tech R&D (Forbes, 2016). According to the paper written by Savant and Nolan, “China had 16,000 multinational enterprises (MNEs) that had established 22,000 foreign affiliates in 179 countries and territories by the end of 2012.”
Among many motivations that lead Chinese MNEs to make OFDIs upgrade their capabilities, technology-seeking investments, and efficiency-seeking motivations in more developed countries have the aim to upgrade their competitiveness in the international markets. The “go global” strategy which was launched in 2000 has given huge governmental support to Chinese companies that we’re encouraged to invest abroad in specific industries and countries, mostly to increase their capabilities through for example transfer of technology. Despite the general trend of increased M&As made by Chinese MNEs, and overall better performance, the case studies of Lenovo, TCL, Huawei and BOE group have shown that the strategies to upgrade their technological, managerial and branding capabilities were extremely effective, and nowadays these companies can compete internationally, year by year improving their performance. Despite the companies mentioned above another example of successful OFDI is the SGSB group that was also mentioned in the paper. M&As that account for more or less half of all OFDI made by Chinese companies in 2012 are opening the doors for Chinese MNEs to overcome major weaknesses and compensate for the disadvantages before the foreign investments. Overall, we may conclude that China is on the right track to increasing the competitiveness of its MNEs, and in many cases, the increased activity overseas has paid off with huge gains on international markets and won the competition over the largest companies in the world.
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