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International development by Chinese enterprises: Key issues for the future
International Development by Chinese Enterprises: Key Issues for the Future Stephen
Young, Neil Hood and Tong Lu
Strategic Evolution of Chinese Enterprises in World Markets The rapid growth of the Chinese economy is inevitably reflected in the global expansion of some major Chinese enterprises: for example, three Chinese firms-Bank of China, Sinochem and COFCO-were represented in the Fortune global 500 largest corporations in 1996 (and had subsidiaries in the UK);’ and eight of the top 50 multinational corporations based in developing and newly industrializing countries are Chinese.’ The emergence of a small number of giant state-owned enterprises (SOEs) with global aspirations, and resources to support these, is not unexpected. What is more important is to establish the overall nature and extent of Chinese enterprise activity in world markets, its future potential with the inevitability of some form of privatization (‘shareholding economic reform’) and the implications for competition and collaboration with Western firms; these are the aims of the present article, which draws on existing research, and new evidence from interviews with the offices and subsidiaries of Chinese enterprises in the UK in 1997.* It is recognized that international business com-
*Twenty-four Chinese enterprises were identified in the UK from the China-Britain Trade Review (January 1997). Sixteen of these enterprises (7 financial services’ companies and 9 trading companies) agreed to participate in the research and were interviewed in June 1997. All enterprises were set up as new ventures (as opposed to acquisitions) and only one company had a manufacturing arm. A number of enterprises specifically requested anonymity and, therefore, names of companies are mostly omitted in this article.
Pergamon PII: s0024-6301(98)00100-9
Chinese state-owned companies are beginning to be players on the world stage. Within a developed country, such as the UK, however, the majority of investments are at present small-scale operations in trading and financial services. There are signs of the larger, longer-established enterprises evolving, as planned, towards transnational conglomerates, albeit hampered by state ownership. While not yet major competitors, Chinese enterprises offer opportunities as suppliers to and partners with UK companies; foreign direct investment in manufacturing industry in the UK is still some way off. Q 1998 Elsevier Science Ltd. All rights reserved
petitiveness is commonly linked to an evolution of corporate activity: this may commence with importing and other forms of inward internationalization, and develop from exporting via intermediaries through sales subsidiaries to production operations, strategic alliances, etc., with an equivalent path for service companies. China has had a large-scale programme involving capital equipment and technology imports and the creation of joint ventures with foreign companies within the country. On the outward side, data indicate that the country had 5000 overseas affiliates in 120 countries by 1993. The majority of these were small state-owned trade agencies with market-seeking objectives, chiefly located in indusLong Range Planning, Vol. 31, No. 6, pp. 886 to 893, 1998 0 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0024-6301/98 $19.00+0.00
[
887 \
trial countries. Four categories of Chinese outward investors have been identified, two of which are of particular interest here. First, Foreign Trade Corporations (FTCs) of the national and provincial governments, which generally lost their former monopolies in the 1980s and launched new corporate strategies including internationalization. Second, a group of banks and financial enterprises which were formed or reconstructed in the 1980s and commenced internationalization in the 1990s (the Bank of China is an exception, having branches in more than 20 countries before 1950)?
Comparative Development
Models of Corporate
The internationalization of (mainly) state-owned enterprises from a developing country such as China is not a unique phenomenon. There has been extensive study of ‘third world multinational enterprises’ (TWMNEs), focusing upon ways in which such companies develop technological competencies which could be exploited in adjoining countries. Recently there has been interest in foreign direct investment (FDI) in industrialized countries, and the use of the takeover route to acquire management, marketing and technology advantages.4,5 The conclusion of this literature is that TWMNEs may seek direct capital involvement at an earlier stage in their corporate evolution than has been apparent in the past, and that state ownership and support could encourage acquisition entry. Research on state-owned MNEs from emerging economies is also relevant to understanding Chinese overseas enterprise development. The potential for unfair competition did not appear to be utilized by these SOEs. However, state support could facilitate rapid internationalization and enable the companies to take a long-term strategic perspective on their investments. In a Chinese context, there is anecdotal evidence of enterprises making speculative and unwise investments abroad, without the constraints which would operate for a private firm. There is, finally, a great deal which can be learned about Chinese FTCs from the experiences of general trading companies (GTCs) in East Asia and elsewhere. Diversification of product, function and area, and increasing commitment in modes of operating internationally, has been associated with GTC growth and development6 The end result has been the emergence of global conglomerates with a trading company core. Such a sequencing could be in evidence among the Chinese FTCs, and certainly there are many pressures for both change and growth, especially international growth. With the ending of the monopolies possessed by the 12 original Chinese FTCs, numbers of foreign trade corporations peaked at 5000 in 1988 before over
1400 were shut down. Competition and efficiency in both exporting and importing have increased significantly since this period. Problems remain, nevertheless, including evidence of continued monopsony, and accusations of bureaucracy and of withholding information.7~8
The Internationalization SOEs
of Chinese
It is very clear that the drivers of Chinese outward internationalization are very different to those influencing MNE activity from industrialized nations. Figure 1 highlights a range of interrelated drivers, which emanate initially from state-ownership. The SOEs were the first companies to be granted the right both to engage in international trade, and to invest directly abroad to support trade or to bypass trade barriers. In the early 199Os, the State Council determined that the large trading enterprises should pursue a strategy of “business diversification, industrialisation and internationalisation” with the goal of creating “first class transnational conglomerateJs1” with “global perspective[s]” (the quotations are from company annual reports and brochures). The annual reports of banks, too, focused upon a “drive towards . . . internationalisation”, albeit with more caution, “taking precautions against the operating ratios, mainly making clear the limits of authority on examination and approval”. The sample companies regarded the elimination of business risk as a major advantage of state ownership, along with the facilitating role of government (including the provision of finance). State-ownership is linked to strategic intent in internationalization. In the survey, the top ranked factor in Chinese firms’ motivations for investment in the UK was “long-term strategic objective of the parent company”, followed by “expansion into new markets” and “access to information on foreign markets”. One long-established bank, however, remarked that the expansion of Chinese bank representative offices in London was mainly related to prestige. Demonstration effects were also in evidence, since some of the trading companies saw the Japanese and Korean conglomerate GTCs as a model for their own expansion. Studies in international business stress the need for enterprises to possess ownership-specific advantages (competitive advantages/core competencies) which are transferable across national frontiers and enable the companies to compete in unfamiliar, foreign environments. The fact that such ownership advantages were not identified suggests problems in successful internationalization. A categorization of Chinese enterprise strategies in the UK is presented in Table 1. The five banking representative offices (knowledge seekers) were all small Long Range Planning Vol. 31
December
1998
FIGURE1.The influences on the foreign investment activities of Chinese state-owned snterprises.
operations, established to provide information and undertake research on behalf of their parent companies; to liaise with UK customers and suppliers (including correspondent banks); and to organize visits for delegations and training for headquarters staff. A further objective was to plan for commercial operations in the UK, given that all had been established in the belief that they would be granted banking licences by the Bank of England. This had not happened because of Bank of England fears about the excessive influence of the Chinese government and alleged weaknesses in supervisory and monitoring systems. There must also be concerns about the ability of the companies to identify profitable business opportunities in the UK. A characteristic of the representative offices in London was the employment of young, inexperienced Chinese personnel with varying levels of expertise in English. International Development by Chinese Enterprises
Only two companies in the sample-an insurance company and a bank (industry-specific service enterprises)-were specifically servicing the 200,000 strong Chinese community in the UK. The role and strategy of the banking enterprise is discussed in Case 1. The insurance enterprise was set up in 1983 to provide insurance to the local Chinese population, most of whom are employed in the restaurant business, and this market still represents 80 percent of the company’s turnover. Because of its small size, the company considered it would be a takeover target if it was not state-owned. Future prospects depend upon effective diversification into other insurance markets in the UK, where catering has been identified as a target; and upon the recruitment of experienced personnel. The remaining enterprises were trading companies, falling into three categories, namely, niche specialist
[
889
\
TABLE7. Chinese enterprissesin the UK Description
Strategy Knowledge
seekers (5)
Industry-specific enterprises (2)
Niche specialist (3)
service
traders
Small firm traders
Diversifiers Functional (1)
(3)
(3): diversification
Banking offices
Establishment
Employment
1990s
representative
2-7
Competitive Pre-commercial
issues activity
Banking branch/insurance subsidiary
1929/1983
30/I 85
Market knowledge and experienced personnel (1) Monopoly access to customer base (but limited size) (I)
Commodities and metals tradingphysicals, futures, derivatives
Late 1980s
2-3
Lack of experienced personnel for business development
1970s and 1980s
2-10
Imports of consumer and light industrial goods
Trading, property
manufacturing,
No business
focus.
Limited networks. Inexperienced personnel.
1979
45
Efficiency in service functions. Reputation. Large customer base. Planning weaknesses.
Related product diversification (1)
Shipping, logistics, cargo insurance, chartering and brokering
1963
143
Efficiency in service functions. Reputation. Commitment to excellence. Dangers in conglomerate diversification.
Evolving GTC (I)
Commodities and oil trading, shipping, property, European holding company
986
60
Financial strength. Buying power. International spread. Professional personnel. Weaknesses in management and organization. Service function weak.
conglomerate
Note: Figures in parentheses
indicate
number
of enterprises.
small firm traders and diversifiers. The niche specialist traders were very small employers, utilizing the skills of particular individuals, and operating in metal derivatives, metal physicals and futures, and commodity physicals. The companies should continue to be successful providing the specialist trading skills are not lost. In part this depends upon stability of personnel, but business related factors are important too: for example, one company has been restructured, with settlement activities transferred to Beijing in the wake of the Barings/Sumitomo crises. Expansion prospects are, nevertheless, limited unless the parent enterprises launch new activities (backed by management resources) in the UK. The group of small firm traders were akin to new, small business start-ups in the UK. All three companies were in the process of attempting to build profitable businesses via imports of consumer and traders,
light industrial goods from China. One subsidiary was offering a wide array of products as the parent factories converted to civilian use, including garden tools, garden parasols, measuring instruments, brake pads, hydraulic jacks, bicycles, motor bicycles, refrigerators etc. A common characteristic of these firms was a lack of direction and of clear objectives from the parent enterprises. Long term success would seem to require both patience from the parent enterprises and more experienced personnel. Corporate ambition may in fact encourage more rapid internationalization, and one subsidiary spoke of discussions concerning manufacturing investment in developed countries. The remaining three diversifiers were longer, wellestablished enterprises, undertaking different forms of diversification within the overall conglomerate strategies of their parents. The 1986 acquisition of a Long Range Planning Vol. 31
December 1998
UK manufacturing firm by the Chinese metals trading company group was not part of a planned strategy. Subsequently, lack of investment in automated equipment has meant that production activity has been declining relative to distribution. The other two diversifiers together with the longestablished bank were the most sophisticated and competitive enterprises within the stock of Chinese companies in the UK. The growth of parent and subsidiary operations are summarized in Cases l-3. Distinguishing characteristics of these enterprises included the following: l
l
l
l
There was substance to the parent enterprises’ strategies, which were designed to fulfil the charters promulgated by the State Council. At UK subsidiary level too, clear strategic directions were apparent. In the two longest-established companies, at least, the importance of a stable top management team was recognized. Thus the top executives (from China) had worked in the UK for long periods of time. In most other enterprises, rotation of Chinese staff was proving problematic. In a Chinese context longer tours of duty were viewed as essential because of the time needed to gain proficiency in English and to understand the culture and the environment. The companies could articulate clearly their competitive advantages, the challenges facing them in the future and the longer term objectives of their enterprise. There was a strong commitment to training as a mechanism for continuous improvement. To illustrate, the banking enterprise had set up an executive training centre in association with UK universities for general manager level bank staff from around the world.
Despite the above, none of these enterprises could be regarded as mature multinational or globally integrated corporations. Speaking generally about Chinese subsidiaries abroad, one of the niche specialist traders observed that: “Most overseas companies are small scale, managed on a loose basis. We provide financial results and report twice a year to head office. The business depends upon the overseas subsidiary’s ambitions, abilities, funds and readiness to take risks”. In the case enterprises, by contrast, there was evidence of evolving formality in management styles and systems, but only limited progress had been made in integrating overseas subsidiary operations regionally or globally. The two trading enterprises had established European regional headquarters or holding companies as part of moves towards specialization by subsidiary and the prevention of internal competition. In one of these companies, specialization by commodity (types of fertilisers) also took place on a global basis. Within the banking enterprise, a regional office was regarded as a likely next International
Development
by Chinese Enterprises
step to facilitate an overview of the European market as a whole. Within this context of evolving business and organizational integration, financial control and evaluation systems were, paradoxically, still relatively loose. The shipping enterprise commented that: “Head office is getting less involved. In 1989 they decided everything, but now we are free”. Performance was judged in terms of “loose targets” for profits, turnover etc. Some of the managerial dilemmas undoubtedly stemmed from state ownership and the fact that China is still a developing country. Criticisms made of headquarters management included: heavy bureaucracy with multiple decision-making layers; poor time management; no concept of keeping appointments; meetings without agendas or conclusions: appointments and promotions based on age rather than expertise; and inadequate reward systems. Overseas subsidiaries could not operate competitively in this manner. Hence, loose control systems are almost inevitable: the problem for the globalizing enterprise is that these are not compatible with effective integration.
Managerial 1.
Implications
Chinese enterprises as competitors. It is important not to exaggerate the level of competition generated by the internationalizing Chinese enterprises. However, it is necessary to accept that among the newly internationalizing companies, there may be a tendency to upset the existing bases of competition, in particular by emphasizing price competition. Even so, there was no evidence of “unfair competition” linked to state ownership. 2. Chinese enterprises as suppliers. In consumer and light industrial products, there may be interesting opportunities for low cost purchasing by UK buyers. The survey showed that all companies are losing market share quite rapidly within China. Care will be needed in selecting Chinese suppliers as there are still problems with lack of flexibility (e.g., in producing samples), quality and delivery in some instances. And there are also some dangers in responding to Chinese enterprises which offer to supply anything that is required. On the other hand, the presence of a subsidiary company in the UK means that there is a channel for understanding Western standards and requirements and for communicating with Chinese suppliers. 3. Chinese enterprises as collaborators. Chinese companies are committed to the concept of long-term relationships with customers. They are, therefore, eager to extend these relationships into other forms of collaboration, such as joint ventures in China. One example cited concerned technology col-
laboration with a UK company for the design of a motorcycle for the Chinese market. This had emanated from earlier trade relations, and emphasizes that internationalization should be seen in a holistic way, involving inward and outward activity, and trade and investment in goods, services and technology. 4. Chinese
enterprises
as investors
in
UK manu-
facturing.
There was only one example of manufacturing investment in the UK and this was somewhat fortuitous. At their present state of development, Chinese companies do not possess the technological advantages to facilitate successful greenfield manufacturing investment. However, replication of the East Asian GTC model could see an evolution into manufacturing via the takeover route-for technology acquisition purposes primarily.
Conclusions-The Future for Chinese Investment in the UK For the future, major challenges exist for Chinese managers and policy makers at both enterprise and national economy levels. At the enterprise level, a recent World Bank study identified the following problems in large Chinese SOEs”: l
l
l
l
l
The importance of business strategy was not fully understood or its function was totally unexploited. Policy decisions on entering new markets, new fields and new regions were often made blindly. Instead of utilizing limited resources to develop core businesses and specialized subsidiaries, some companies were moving towards a structure of diversified unrelated products at every level. Excessive emphasis was placed on total assets instead of capital structures: and on production management at the expense of finance and marketing. Organization structures were inadequate to manage
Case 1-A
diversified enterprises, with parent-subsidiary relations characterised by poor communications, weak controls and internal conflicts. The Party Congress in autumn 1997 effectively sanctioned shareholding reform (perhaps including the sale of shares on national and international stock markets), a separation of the roles of government and enterprises and an elimination of losses over the medium-term. Meantime, the environment will become even more challenging as market reforms lead to increased competition from imports and from foreign multinationals operating within China. Where does this leave Chinese enterprises in the UK (and, indeed, in other foreign markets)? Unless the UK subsidiaries in the sample possess firm-specific advantages at the present time, their future looks bleak. This conclusion derives from the very considerable short/medium-term financial and competitive pressures to which their parent groups could be subject. A significant proportion of the sample firms are potentially in this category. Among the three case enterprises, by contrast, there was evidence of considerable technology transfer opportunities, especially in the generalized sense of managerial competencies as discussed above. This was the case even though the subsidiaries themselves did not recognize this reverse technology transfer process. However, the danger for Cases 2 and 3 is the possibility of being seduced into unfocused or unrelated diversification, Assuming this can be avoided, and integration of the companies’ worldwide operations is managed carefully, the goal of becoming competitive global enterprises is not unattainable. Extrapolating this evidence for the population of large, international Chinese SOEs does suggest, of course, a sizeable group of global competitors. From the evidence presented here, nevertheless, it does seem that in future this phase of Chinese FDI will prove to have been premature and anomalous. The next wave of Chinese outward foreign direct
Bank
Founded in 1905, this enterprise acted as the Chinese central bank until 1949. Since 1979, its role has been that of the specialized foreign exchange bank for China. A branch office was established in the City of London in 1929 and the company currently has about 600 branches outside mainland China, with 50% of assets abroad. 1995 worldwide net profits totalled US$2.3bn (US$1.8bn or 78% from overseas). In its early years in the UK, the bank was mainly involved in research and information activities and in the provision of trade finance. In the 196Os, retail banking commenced in the City, with a second branch being established in London in the 1970s and retail branches in Manchester, Glasgow and Birmingham following in the 1980s. Treasury Room activities started in the late 1970s and investment banking (syndications and corporate finance) in the 1990s. The bank has market responsibility for the UK and Africa, plus central and eastern Europe (unofficially). Employment in the UK is 185. At present all European branches report directly to head office; although meetings are already held biannually, a regional holding company is a possibility for the future. The UK company is not the largest or most profitable within the group, but it is the oldest and most sophisticated.
Long Range Planning Vol. 31
December
1998
(
892
investment, which will match the economic performance of the economy in the millennium, will most likely be private-sector driven, generated by sin-
Case
\ gle-or-related product manufacturing and based upon firm-specific advantages ” the domestii Chinese Market.
enterprises, snawned in *
2-A Shipping Company
Established in 1961 with four ships of 22,600 tons capacity, this enterprise had expanded by the end of the 1980s to own 60 ships of 17mn tons capacity (ranking it in the top ten worldwide). It has a mission to become a transnational, multi-function, multi-industry conglomerate with general cargo services at its core. The enterprise employs 2500 people outside China in 70 overseas subsidiaries, controlled through five regional holding companies (including a European operation in Hamburg). A representative office was formed in the UK in 1963; a shipping company was set up in 1979 to link Europe and Asian markets, with branch offices established subsequently in Birmingham and Glasgow, together with a joint venture with the Port of Felixstowe for repairing and cleaning containers. In the 199Os, the company has diversified successfully into property; freight forwarding; cargo insurance, air freight and European road haulage; and chartering and broking. Shipping services between Europe and N. America have commenced and will be expanded to include S. Africa, S. America and Australia: this diversification is partly driven by declining trade with China, resulting from greatly increased competition. Further diversification into finance and insurance, and UK inland transportation is planned. Won the ‘best overseas company’ award from its parent in 1993,1996 and 1997.
Case 3-A
General Trading Company
This giant trading company was ranked 26th in the Fortune 100 largest diversified service corporations for 1993, and 209th in the Fortune global 500 largest corporations for 1994. It has its roots in monopoly trading rights for chemicals and petrochemicals. A wide-ranging overseas expansion programme in the late 1980s included a number of illadvised investments, and a period of retrenchment followed. The commitment to international growth was, however, confirmed in 1994, with a charter from the State Council to build a transnational conglomerate enterprise. This would see by the early part of the next century the integration of trade, finance and industrial activities on a worldwide basis, with trade as a core activity; and industrial operations based on oil, petrochemicals and chemical fibres. In 1995 the company had 42 secondary subsidiary companies and offices outside China. 1995 turnover for the group was US$18.2bn (US$7.6bn or 42% from overseas). Among these activities are a phosphate plant and refining operations in the USA; while there are no industrial operations in Europe as yet, potash mining in central and eastern Europe is a future prospect. The UK subsidiary was set up in 1986 but mainly pursued representative office functions until 1990. Since then the core activity has been trading, with a specialization in fertilisers. Expansion in the UK has involved the establishment of an oil trading subsidiary, a shipping subsidiary, and a European holding company (1997) coordinating operating firms in five countries. UK employment in 1997 was 60 with a forecast turnover of US$550 mn.
References 1. Fortune,
6 August (1997).
2. UNCTAD, World Investment Report 1996. Investment, Arrangements, UN, New York and Geneva (1996).
Trade and International
Policy
3. H. Zhang and D. Van Den Bulcke, International management strategies of Chinese multinational firms in J. Child and Y. Lu (eds), Management hues in China: Volume /I lnternationalhterprises, Routledge, London and New York, 141-164 (1996). 4. D.J. Lecraw, Outward direct investment by Indonesian firms: motivations Journal of International Business Studies, 24 (3). 589-600 (1993).
and effects,
5. S. Young, C.-H. Huang and M. McDermott, Internationalization and competitive catch-up processes: case study evidence on Chinese multinational enterprises, Management International Review, 36 (4), 295-314 (1996). 6. C.W. Kim, The diffusion of the general trading company concept, Sloan Management Review, 35-43 Summer, (1986).
International
Development
by Chinese Enterprises
7. A. MacBean, China’s foreign trade corporations in J. Child and Y. Lu teds), Management issues in China: Volume /I international Enterprises, Routledge, London and New York, 183-200 (1996). 8. The World Bank, China, Foreign Washington, DC. (1993).
Trade Reform:
Meeting
the Challenge
9. The World Bank, Policy Options for Reform of Chinese State-Owned Bank Discussion Paper No. 335, Washington, D.C. (1996).
of the 799Os, Enterprises,
World
Stephen Young is Professor of Marketing and Co-Director of Strathclyde International Business Unit (SIBU) at the University of Strathclyde, Glasgow, UK.
Neil Hood is Professor of business Policy and Co-Director of SIBU at the University of Strathclyde, Glasgow, UK.
Tong Lu is Associate Professor at the Academy of Social Sciences, Beijing, China.
Long Range Planning Vol. 31
December
1998
Young, Neil Hood and Tong Lu
Strategic Evolution of Chinese Enterprises in World Markets The rapid growth of the Chinese economy is inevitably reflected in the global expansion of some major Chinese enterprises: for example, three Chinese firms-Bank of China, Sinochem and COFCO-were represented in the Fortune global 500 largest corporations in 1996 (and had subsidiaries in the UK);’ and eight of the top 50 multinational corporations based in developing and newly industrializing countries are Chinese.’ The emergence of a small number of giant state-owned enterprises (SOEs) with global aspirations, and resources to support these, is not unexpected. What is more important is to establish the overall nature and extent of Chinese enterprise activity in world markets, its future potential with the inevitability of some form of privatization (‘shareholding economic reform’) and the implications for competition and collaboration with Western firms; these are the aims of the present article, which draws on existing research, and new evidence from interviews with the offices and subsidiaries of Chinese enterprises in the UK in 1997.* It is recognized that international business com-
*Twenty-four Chinese enterprises were identified in the UK from the China-Britain Trade Review (January 1997). Sixteen of these enterprises (7 financial services’ companies and 9 trading companies) agreed to participate in the research and were interviewed in June 1997. All enterprises were set up as new ventures (as opposed to acquisitions) and only one company had a manufacturing arm. A number of enterprises specifically requested anonymity and, therefore, names of companies are mostly omitted in this article.
Pergamon PII: s0024-6301(98)00100-9
Chinese state-owned companies are beginning to be players on the world stage. Within a developed country, such as the UK, however, the majority of investments are at present small-scale operations in trading and financial services. There are signs of the larger, longer-established enterprises evolving, as planned, towards transnational conglomerates, albeit hampered by state ownership. While not yet major competitors, Chinese enterprises offer opportunities as suppliers to and partners with UK companies; foreign direct investment in manufacturing industry in the UK is still some way off. Q 1998 Elsevier Science Ltd. All rights reserved
petitiveness is commonly linked to an evolution of corporate activity: this may commence with importing and other forms of inward internationalization, and develop from exporting via intermediaries through sales subsidiaries to production operations, strategic alliances, etc., with an equivalent path for service companies. China has had a large-scale programme involving capital equipment and technology imports and the creation of joint ventures with foreign companies within the country. On the outward side, data indicate that the country had 5000 overseas affiliates in 120 countries by 1993. The majority of these were small state-owned trade agencies with market-seeking objectives, chiefly located in indusLong Range Planning, Vol. 31, No. 6, pp. 886 to 893, 1998 0 1998 Elsevier Science Ltd. All rights reserved Printed in Great Britain 0024-6301/98 $19.00+0.00
[
887 \
trial countries. Four categories of Chinese outward investors have been identified, two of which are of particular interest here. First, Foreign Trade Corporations (FTCs) of the national and provincial governments, which generally lost their former monopolies in the 1980s and launched new corporate strategies including internationalization. Second, a group of banks and financial enterprises which were formed or reconstructed in the 1980s and commenced internationalization in the 1990s (the Bank of China is an exception, having branches in more than 20 countries before 1950)?
Comparative Development
Models of Corporate
The internationalization of (mainly) state-owned enterprises from a developing country such as China is not a unique phenomenon. There has been extensive study of ‘third world multinational enterprises’ (TWMNEs), focusing upon ways in which such companies develop technological competencies which could be exploited in adjoining countries. Recently there has been interest in foreign direct investment (FDI) in industrialized countries, and the use of the takeover route to acquire management, marketing and technology advantages.4,5 The conclusion of this literature is that TWMNEs may seek direct capital involvement at an earlier stage in their corporate evolution than has been apparent in the past, and that state ownership and support could encourage acquisition entry. Research on state-owned MNEs from emerging economies is also relevant to understanding Chinese overseas enterprise development. The potential for unfair competition did not appear to be utilized by these SOEs. However, state support could facilitate rapid internationalization and enable the companies to take a long-term strategic perspective on their investments. In a Chinese context, there is anecdotal evidence of enterprises making speculative and unwise investments abroad, without the constraints which would operate for a private firm. There is, finally, a great deal which can be learned about Chinese FTCs from the experiences of general trading companies (GTCs) in East Asia and elsewhere. Diversification of product, function and area, and increasing commitment in modes of operating internationally, has been associated with GTC growth and development6 The end result has been the emergence of global conglomerates with a trading company core. Such a sequencing could be in evidence among the Chinese FTCs, and certainly there are many pressures for both change and growth, especially international growth. With the ending of the monopolies possessed by the 12 original Chinese FTCs, numbers of foreign trade corporations peaked at 5000 in 1988 before over
1400 were shut down. Competition and efficiency in both exporting and importing have increased significantly since this period. Problems remain, nevertheless, including evidence of continued monopsony, and accusations of bureaucracy and of withholding information.7~8
The Internationalization SOEs
of Chinese
It is very clear that the drivers of Chinese outward internationalization are very different to those influencing MNE activity from industrialized nations. Figure 1 highlights a range of interrelated drivers, which emanate initially from state-ownership. The SOEs were the first companies to be granted the right both to engage in international trade, and to invest directly abroad to support trade or to bypass trade barriers. In the early 199Os, the State Council determined that the large trading enterprises should pursue a strategy of “business diversification, industrialisation and internationalisation” with the goal of creating “first class transnational conglomerateJs1” with “global perspective[s]” (the quotations are from company annual reports and brochures). The annual reports of banks, too, focused upon a “drive towards . . . internationalisation”, albeit with more caution, “taking precautions against the operating ratios, mainly making clear the limits of authority on examination and approval”. The sample companies regarded the elimination of business risk as a major advantage of state ownership, along with the facilitating role of government (including the provision of finance). State-ownership is linked to strategic intent in internationalization. In the survey, the top ranked factor in Chinese firms’ motivations for investment in the UK was “long-term strategic objective of the parent company”, followed by “expansion into new markets” and “access to information on foreign markets”. One long-established bank, however, remarked that the expansion of Chinese bank representative offices in London was mainly related to prestige. Demonstration effects were also in evidence, since some of the trading companies saw the Japanese and Korean conglomerate GTCs as a model for their own expansion. Studies in international business stress the need for enterprises to possess ownership-specific advantages (competitive advantages/core competencies) which are transferable across national frontiers and enable the companies to compete in unfamiliar, foreign environments. The fact that such ownership advantages were not identified suggests problems in successful internationalization. A categorization of Chinese enterprise strategies in the UK is presented in Table 1. The five banking representative offices (knowledge seekers) were all small Long Range Planning Vol. 31
December
1998
FIGURE1.The influences on the foreign investment activities of Chinese state-owned snterprises.
operations, established to provide information and undertake research on behalf of their parent companies; to liaise with UK customers and suppliers (including correspondent banks); and to organize visits for delegations and training for headquarters staff. A further objective was to plan for commercial operations in the UK, given that all had been established in the belief that they would be granted banking licences by the Bank of England. This had not happened because of Bank of England fears about the excessive influence of the Chinese government and alleged weaknesses in supervisory and monitoring systems. There must also be concerns about the ability of the companies to identify profitable business opportunities in the UK. A characteristic of the representative offices in London was the employment of young, inexperienced Chinese personnel with varying levels of expertise in English. International Development by Chinese Enterprises
Only two companies in the sample-an insurance company and a bank (industry-specific service enterprises)-were specifically servicing the 200,000 strong Chinese community in the UK. The role and strategy of the banking enterprise is discussed in Case 1. The insurance enterprise was set up in 1983 to provide insurance to the local Chinese population, most of whom are employed in the restaurant business, and this market still represents 80 percent of the company’s turnover. Because of its small size, the company considered it would be a takeover target if it was not state-owned. Future prospects depend upon effective diversification into other insurance markets in the UK, where catering has been identified as a target; and upon the recruitment of experienced personnel. The remaining enterprises were trading companies, falling into three categories, namely, niche specialist
[
889
\
TABLE7. Chinese enterprissesin the UK Description
Strategy Knowledge
seekers (5)
Industry-specific enterprises (2)
Niche specialist (3)
service
traders
Small firm traders
Diversifiers Functional (1)
(3)
(3): diversification
Banking offices
Establishment
Employment
1990s
representative
2-7
Competitive Pre-commercial
issues activity
Banking branch/insurance subsidiary
1929/1983
30/I 85
Market knowledge and experienced personnel (1) Monopoly access to customer base (but limited size) (I)
Commodities and metals tradingphysicals, futures, derivatives
Late 1980s
2-3
Lack of experienced personnel for business development
1970s and 1980s
2-10
Imports of consumer and light industrial goods
Trading, property
manufacturing,
No business
focus.
Limited networks. Inexperienced personnel.
1979
45
Efficiency in service functions. Reputation. Large customer base. Planning weaknesses.
Related product diversification (1)
Shipping, logistics, cargo insurance, chartering and brokering
1963
143
Efficiency in service functions. Reputation. Commitment to excellence. Dangers in conglomerate diversification.
Evolving GTC (I)
Commodities and oil trading, shipping, property, European holding company
986
60
Financial strength. Buying power. International spread. Professional personnel. Weaknesses in management and organization. Service function weak.
conglomerate
Note: Figures in parentheses
indicate
number
of enterprises.
small firm traders and diversifiers. The niche specialist traders were very small employers, utilizing the skills of particular individuals, and operating in metal derivatives, metal physicals and futures, and commodity physicals. The companies should continue to be successful providing the specialist trading skills are not lost. In part this depends upon stability of personnel, but business related factors are important too: for example, one company has been restructured, with settlement activities transferred to Beijing in the wake of the Barings/Sumitomo crises. Expansion prospects are, nevertheless, limited unless the parent enterprises launch new activities (backed by management resources) in the UK. The group of small firm traders were akin to new, small business start-ups in the UK. All three companies were in the process of attempting to build profitable businesses via imports of consumer and traders,
light industrial goods from China. One subsidiary was offering a wide array of products as the parent factories converted to civilian use, including garden tools, garden parasols, measuring instruments, brake pads, hydraulic jacks, bicycles, motor bicycles, refrigerators etc. A common characteristic of these firms was a lack of direction and of clear objectives from the parent enterprises. Long term success would seem to require both patience from the parent enterprises and more experienced personnel. Corporate ambition may in fact encourage more rapid internationalization, and one subsidiary spoke of discussions concerning manufacturing investment in developed countries. The remaining three diversifiers were longer, wellestablished enterprises, undertaking different forms of diversification within the overall conglomerate strategies of their parents. The 1986 acquisition of a Long Range Planning Vol. 31
December 1998
UK manufacturing firm by the Chinese metals trading company group was not part of a planned strategy. Subsequently, lack of investment in automated equipment has meant that production activity has been declining relative to distribution. The other two diversifiers together with the longestablished bank were the most sophisticated and competitive enterprises within the stock of Chinese companies in the UK. The growth of parent and subsidiary operations are summarized in Cases l-3. Distinguishing characteristics of these enterprises included the following: l
l
l
l
There was substance to the parent enterprises’ strategies, which were designed to fulfil the charters promulgated by the State Council. At UK subsidiary level too, clear strategic directions were apparent. In the two longest-established companies, at least, the importance of a stable top management team was recognized. Thus the top executives (from China) had worked in the UK for long periods of time. In most other enterprises, rotation of Chinese staff was proving problematic. In a Chinese context longer tours of duty were viewed as essential because of the time needed to gain proficiency in English and to understand the culture and the environment. The companies could articulate clearly their competitive advantages, the challenges facing them in the future and the longer term objectives of their enterprise. There was a strong commitment to training as a mechanism for continuous improvement. To illustrate, the banking enterprise had set up an executive training centre in association with UK universities for general manager level bank staff from around the world.
Despite the above, none of these enterprises could be regarded as mature multinational or globally integrated corporations. Speaking generally about Chinese subsidiaries abroad, one of the niche specialist traders observed that: “Most overseas companies are small scale, managed on a loose basis. We provide financial results and report twice a year to head office. The business depends upon the overseas subsidiary’s ambitions, abilities, funds and readiness to take risks”. In the case enterprises, by contrast, there was evidence of evolving formality in management styles and systems, but only limited progress had been made in integrating overseas subsidiary operations regionally or globally. The two trading enterprises had established European regional headquarters or holding companies as part of moves towards specialization by subsidiary and the prevention of internal competition. In one of these companies, specialization by commodity (types of fertilisers) also took place on a global basis. Within the banking enterprise, a regional office was regarded as a likely next International
Development
by Chinese Enterprises
step to facilitate an overview of the European market as a whole. Within this context of evolving business and organizational integration, financial control and evaluation systems were, paradoxically, still relatively loose. The shipping enterprise commented that: “Head office is getting less involved. In 1989 they decided everything, but now we are free”. Performance was judged in terms of “loose targets” for profits, turnover etc. Some of the managerial dilemmas undoubtedly stemmed from state ownership and the fact that China is still a developing country. Criticisms made of headquarters management included: heavy bureaucracy with multiple decision-making layers; poor time management; no concept of keeping appointments; meetings without agendas or conclusions: appointments and promotions based on age rather than expertise; and inadequate reward systems. Overseas subsidiaries could not operate competitively in this manner. Hence, loose control systems are almost inevitable: the problem for the globalizing enterprise is that these are not compatible with effective integration.
Managerial 1.
Implications
Chinese enterprises as competitors. It is important not to exaggerate the level of competition generated by the internationalizing Chinese enterprises. However, it is necessary to accept that among the newly internationalizing companies, there may be a tendency to upset the existing bases of competition, in particular by emphasizing price competition. Even so, there was no evidence of “unfair competition” linked to state ownership. 2. Chinese enterprises as suppliers. In consumer and light industrial products, there may be interesting opportunities for low cost purchasing by UK buyers. The survey showed that all companies are losing market share quite rapidly within China. Care will be needed in selecting Chinese suppliers as there are still problems with lack of flexibility (e.g., in producing samples), quality and delivery in some instances. And there are also some dangers in responding to Chinese enterprises which offer to supply anything that is required. On the other hand, the presence of a subsidiary company in the UK means that there is a channel for understanding Western standards and requirements and for communicating with Chinese suppliers. 3. Chinese enterprises as collaborators. Chinese companies are committed to the concept of long-term relationships with customers. They are, therefore, eager to extend these relationships into other forms of collaboration, such as joint ventures in China. One example cited concerned technology col-
laboration with a UK company for the design of a motorcycle for the Chinese market. This had emanated from earlier trade relations, and emphasizes that internationalization should be seen in a holistic way, involving inward and outward activity, and trade and investment in goods, services and technology. 4. Chinese
enterprises
as investors
in
UK manu-
facturing.
There was only one example of manufacturing investment in the UK and this was somewhat fortuitous. At their present state of development, Chinese companies do not possess the technological advantages to facilitate successful greenfield manufacturing investment. However, replication of the East Asian GTC model could see an evolution into manufacturing via the takeover route-for technology acquisition purposes primarily.
Conclusions-The Future for Chinese Investment in the UK For the future, major challenges exist for Chinese managers and policy makers at both enterprise and national economy levels. At the enterprise level, a recent World Bank study identified the following problems in large Chinese SOEs”: l
l
l
l
l
The importance of business strategy was not fully understood or its function was totally unexploited. Policy decisions on entering new markets, new fields and new regions were often made blindly. Instead of utilizing limited resources to develop core businesses and specialized subsidiaries, some companies were moving towards a structure of diversified unrelated products at every level. Excessive emphasis was placed on total assets instead of capital structures: and on production management at the expense of finance and marketing. Organization structures were inadequate to manage
Case 1-A
diversified enterprises, with parent-subsidiary relations characterised by poor communications, weak controls and internal conflicts. The Party Congress in autumn 1997 effectively sanctioned shareholding reform (perhaps including the sale of shares on national and international stock markets), a separation of the roles of government and enterprises and an elimination of losses over the medium-term. Meantime, the environment will become even more challenging as market reforms lead to increased competition from imports and from foreign multinationals operating within China. Where does this leave Chinese enterprises in the UK (and, indeed, in other foreign markets)? Unless the UK subsidiaries in the sample possess firm-specific advantages at the present time, their future looks bleak. This conclusion derives from the very considerable short/medium-term financial and competitive pressures to which their parent groups could be subject. A significant proportion of the sample firms are potentially in this category. Among the three case enterprises, by contrast, there was evidence of considerable technology transfer opportunities, especially in the generalized sense of managerial competencies as discussed above. This was the case even though the subsidiaries themselves did not recognize this reverse technology transfer process. However, the danger for Cases 2 and 3 is the possibility of being seduced into unfocused or unrelated diversification, Assuming this can be avoided, and integration of the companies’ worldwide operations is managed carefully, the goal of becoming competitive global enterprises is not unattainable. Extrapolating this evidence for the population of large, international Chinese SOEs does suggest, of course, a sizeable group of global competitors. From the evidence presented here, nevertheless, it does seem that in future this phase of Chinese FDI will prove to have been premature and anomalous. The next wave of Chinese outward foreign direct
Bank
Founded in 1905, this enterprise acted as the Chinese central bank until 1949. Since 1979, its role has been that of the specialized foreign exchange bank for China. A branch office was established in the City of London in 1929 and the company currently has about 600 branches outside mainland China, with 50% of assets abroad. 1995 worldwide net profits totalled US$2.3bn (US$1.8bn or 78% from overseas). In its early years in the UK, the bank was mainly involved in research and information activities and in the provision of trade finance. In the 196Os, retail banking commenced in the City, with a second branch being established in London in the 1970s and retail branches in Manchester, Glasgow and Birmingham following in the 1980s. Treasury Room activities started in the late 1970s and investment banking (syndications and corporate finance) in the 1990s. The bank has market responsibility for the UK and Africa, plus central and eastern Europe (unofficially). Employment in the UK is 185. At present all European branches report directly to head office; although meetings are already held biannually, a regional holding company is a possibility for the future. The UK company is not the largest or most profitable within the group, but it is the oldest and most sophisticated.
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1998
(
892
investment, which will match the economic performance of the economy in the millennium, will most likely be private-sector driven, generated by sin-
Case
\ gle-or-related product manufacturing and based upon firm-specific advantages ” the domestii Chinese Market.
enterprises, snawned in *
2-A Shipping Company
Established in 1961 with four ships of 22,600 tons capacity, this enterprise had expanded by the end of the 1980s to own 60 ships of 17mn tons capacity (ranking it in the top ten worldwide). It has a mission to become a transnational, multi-function, multi-industry conglomerate with general cargo services at its core. The enterprise employs 2500 people outside China in 70 overseas subsidiaries, controlled through five regional holding companies (including a European operation in Hamburg). A representative office was formed in the UK in 1963; a shipping company was set up in 1979 to link Europe and Asian markets, with branch offices established subsequently in Birmingham and Glasgow, together with a joint venture with the Port of Felixstowe for repairing and cleaning containers. In the 199Os, the company has diversified successfully into property; freight forwarding; cargo insurance, air freight and European road haulage; and chartering and broking. Shipping services between Europe and N. America have commenced and will be expanded to include S. Africa, S. America and Australia: this diversification is partly driven by declining trade with China, resulting from greatly increased competition. Further diversification into finance and insurance, and UK inland transportation is planned. Won the ‘best overseas company’ award from its parent in 1993,1996 and 1997.
Case 3-A
General Trading Company
This giant trading company was ranked 26th in the Fortune 100 largest diversified service corporations for 1993, and 209th in the Fortune global 500 largest corporations for 1994. It has its roots in monopoly trading rights for chemicals and petrochemicals. A wide-ranging overseas expansion programme in the late 1980s included a number of illadvised investments, and a period of retrenchment followed. The commitment to international growth was, however, confirmed in 1994, with a charter from the State Council to build a transnational conglomerate enterprise. This would see by the early part of the next century the integration of trade, finance and industrial activities on a worldwide basis, with trade as a core activity; and industrial operations based on oil, petrochemicals and chemical fibres. In 1995 the company had 42 secondary subsidiary companies and offices outside China. 1995 turnover for the group was US$18.2bn (US$7.6bn or 42% from overseas). Among these activities are a phosphate plant and refining operations in the USA; while there are no industrial operations in Europe as yet, potash mining in central and eastern Europe is a future prospect. The UK subsidiary was set up in 1986 but mainly pursued representative office functions until 1990. Since then the core activity has been trading, with a specialization in fertilisers. Expansion in the UK has involved the establishment of an oil trading subsidiary, a shipping subsidiary, and a European holding company (1997) coordinating operating firms in five countries. UK employment in 1997 was 60 with a forecast turnover of US$550 mn.
References 1. Fortune,
6 August (1997).
2. UNCTAD, World Investment Report 1996. Investment, Arrangements, UN, New York and Geneva (1996).
Trade and International
Policy
3. H. Zhang and D. Van Den Bulcke, International management strategies of Chinese multinational firms in J. Child and Y. Lu (eds), Management hues in China: Volume /I lnternationalhterprises, Routledge, London and New York, 141-164 (1996). 4. D.J. Lecraw, Outward direct investment by Indonesian firms: motivations Journal of International Business Studies, 24 (3). 589-600 (1993).
and effects,
5. S. Young, C.-H. Huang and M. McDermott, Internationalization and competitive catch-up processes: case study evidence on Chinese multinational enterprises, Management International Review, 36 (4), 295-314 (1996). 6. C.W. Kim, The diffusion of the general trading company concept, Sloan Management Review, 35-43 Summer, (1986).
International
Development
by Chinese Enterprises
7. A. MacBean, China’s foreign trade corporations in J. Child and Y. Lu teds), Management issues in China: Volume /I international Enterprises, Routledge, London and New York, 183-200 (1996). 8. The World Bank, China, Foreign Washington, DC. (1993).
Trade Reform:
Meeting
the Challenge
9. The World Bank, Policy Options for Reform of Chinese State-Owned Bank Discussion Paper No. 335, Washington, D.C. (1996).
of the 799Os, Enterprises,
World
Stephen Young is Professor of Marketing and Co-Director of Strathclyde International Business Unit (SIBU) at the University of Strathclyde, Glasgow, UK.
Neil Hood is Professor of business Policy and Co-Director of SIBU at the University of Strathclyde, Glasgow, UK.
Tong Lu is Associate Professor at the Academy of Social Sciences, Beijing, China.
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