C H A P T E R 2 1
China
Chapter objectives
2. Examine the opportunities and constraints facing Western firms investing in China and the
ways in which successful firms have adapted to succeed there.
3. Analyze the degree to which Chinese firms are internationalizing, how and where they are
4. Reflect on the implications of Chinas rise, in real-world terms and for academic analysis
Chapter summary
1. One of the most important trends of our time is the economic development of China and its
growing importance in terms of trade and foreign direct investment (FDI), as a cheap
2. In terms of the scale, scope and speed of economic growth, China is unprecedented. It is
3. The Chinese government at various levels has a strong influence over the economy,
4. Inward and outward FDI have grown. MNEs are attracted to the growing domestic market
5. MNEs looking to get into the Chinese market need to be aware of its particular differences
and difficulties, including changing regulations governing foreign investors; customs, tax
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6. The current concern is that China and other emerging economies are increasingly
7. Some Chinese firms are expanding abroad. The extent and impacts of this
internationalization of a new breed of MNEs is hotly debated.
Chapter outline
Introduction
Unprecedented scale, scope and speed of growth
Lecture outline
A. Introduction
1. With over 1.3 billion people, China has the largest population in the world. Since
Prime Minister Deng Xiaopings reforms in 1978, it has been moving from a closed
B. Unprecedented scale, scope and speed of growth
1. China is the second- largest economy in purchasing power parity (PPP) gross domestic
product (GDP) and the third largest trader. It has over trillion dollars in foreign reserves
(by far the largest in the world), 170 cities with more than 1 million people, the largest
Rugman and Collinson, International Business, 6th edition, Instructor’s Manual
2. A particular boost came in 2001 when China joined the World Trade Organization
(WTO) and began to attract record levels of FDI. Since then, GDP grew at an average
3. In 2009, the global economic downturn reduced foreign demand for Chinese exports for
the first time in many years down to $1.204 trillion (2009 est.), but China rebounded
quickly, outperforming all other major economies in 2010 with GDP growth around
10%. Chinas external trade recently reached $1.506 trillion (2010 est.). This represents
almost 40 percent of GDP. Note, though, that over 50 percent of these exports came
from foreign-owned or foreign-invested firms (see Table 21.2). The Chinese
government vows in the 12th Five-Year Plan adopted in March 2011 to continue
reforming the economy and to emphasize the need to increase domestic consumption in
order to make the economy less dependent on exports for GDP growth in the future.
4. In 2008, China recorded US$108 billion of FDI inflows (many times higher than
Japans, which has always attracted relatively low amounts of direct investment).
C. The role of government
1. Government reforms and the maintenance of the critical balance between liberalization
2. Chinas central and provincial governments have worked on a three-step development
strategy such as regional development initiatives, controlling growth in the East of the
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3. Another major policy objective in China is to boost high-technology industry sectors.
Key industries, including information technology, biotechnology, aerospace, new
4. There are, however, a range of ongoing problems in China, including large disparities in
per capita income between regions; unemployment, particularly affecting previous
5. There are different levels and types of control exerted in different spheres of life in
China. For example, there are a variety of levels of government, from central, to
D. MNE investment into China
1. China holds the double attraction for MNEs of a cost-effective source of production
inputs, particularly cheap labor and a growing consumer market. The former are
2. China has a reputation as a cheap manufacturing hub so cost advantages are still the
primary motivator for many companies. In addition to low labor costs, other positives of
3. The rapid growth of the economy and the countrys growing purchasing power is
4. Most investments have been in the form of equity joint ventures or wholly owned
foreign enterprises. However, because of the evolving legislation governing foreign
5. Ten Asian locations account for around 60 percent of FDI inflows. This shows a strong
6. Around 70 percent of FDI in China each year is in manufacturing industries and
cumulative FDI in Chinas high-tech industry has topped over $120 billion, with more
Rugman and Collinson, International Business, 6th edition, Instructor’s Manual
7. Some firms have been successful in China. Other unsuccessful firms investing in China
believe, despite losing money, that they have invested in a foot in the door to the most
8. The recent shift of R&D investment from the triad to emerging market economies and
especially to China is significant. The share of foreign affiliates in R&D in the
9. There are now over 300 foreign R&D centers in China. In many cases, inward investors
10. The shortage of science, technology and engineering expertise in the West is a major
driver for R&D investments in China (input-oriented or resource-oriented
11. The Chinese government has identified foreign R&D investments as a critical part of
Chinas technology development strategy. China overall spends more than double the
E. Getting into China
1. The Chinese government has a priority list of desired investments: ventures involving
advanced technology, exports or the generation of foreign exchange are given the
2. In terms of mode of entry, firms can invest via a range of foreign direct investment
3. A recent survey by the US Embassy in Beijing and Gallup received 286 responses from
American investors in China. About half said they were profitable and a further half of
4. Drawing on a number of surveys, some key issues for foreign entrants are as follows:
(a) market-access rights from equity holdings to taxation levels vary by industry and are
changing rapidly; (b) Chinese tax laws and other regulations governing business
F. Outward investment and the new multinationals from China
1. Outflows of FDI from China have grown rapidly over the past decade, albeit from small
2. One study suggests that China’s outward FDI tends to come from state-controlled
3. When we examine the distribution of assets and sales of these large Chinese firms, we
4. Studies examining the internationalization of Chinese firms suggest that they are still
5. A notable increase in Chinese investments into Africa has been driven by the growing
demand for energy resources and raw materials in China (input-oriented investment).
Regarding output–oriented or market-facing investment by Chinese firms, it is interesting to
6. Local Chinese firms and other firms based outside the triad are able to learn via
7. Lenovo, a high-profile Chinese firm, made the news in December 2004 when it bought
IBMs PC business for $1.75 billion. This was a landmark deal for China, not least
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8. Some observers argue that the growth of a new breed of multinationals from emerging
economies warrants a new theoretical approach or set of explanatory frameworks
Answers to review and discussion questions
1. What indicators point to the increasing importance of China and Chinese firms in the
global economy? Describe two factors that have helped Chinas recent economic
growth.
2. What makes China an attractive location for inward FDI by MNEs?
3. Give some examples of the national development policies pursued by the Chinese
government. Explain how these affect the options open to foreign firms investing in
China.
The Chinese government has emphasized market-led growth by raising personal incomes and
consumption while helping newly privatized industries increase productivity through
4. What makes China an attractive location for foreign R&D activities?
The shortage of science, technology and engineering expertise in the West is a major driver for
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5. What modes of market entry are open to foreign firms investing in China?
In terms of mode of entry, foreign firms can invest via a range of foreign direct investment
6. What guidelines must MNEs follow when doing business in China? Identify and
briefly describe three specific difficulties for foreign firms breaking into the Chinese
market.
One of the most important guidelines is to secure the support of a local partner, partly to help
develop appropriate local relationships with other local firms and Government agencies. MNEs
7. What are the main pros and cons of establishing a joint venture with a local firm for
an MNE looking to sell products to the growing consumer market in China?
In a joint venture, the local partner firm is typically responsible for providing the land and
buildings, for developing relationships with local Government and for carrying out local
8. Do you think China will remain a manufacturing hub? How might Chinese firms
develop competitive advantages in high-technology and service industries, and what
are the implications for triad-based MNEs?
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9. What kinds of Chinese firms account for most outward FDI from China?
10. Explain why Chinese firms are investing in Africa.
A notable increase in Chinese investments into Africa has been driven by the growing demand
for energy resources and raw materials in China. In recent years, up to 40 percent of the global
11. Do you think Chinese MNEs warrant a new theoretical approach to understanding
multinational firms and their reasons for internationalizing?
Answers to real cases
Citigroup in China
1. How can a foreign organization such as Citigroup make an initial assessment of a host-
country market (such as China) in deciding how to do business there? What is
involved in this process?
When entering a host country, Citigroup must conduct an initial assessment to determine the
level of potential or actual market demand for its services, the level of competition and the
2. What kinds of opportunities and constraints does Citigroup face in China? Despite its
early mover advantages why does it appear to have limited presence there?
Chinas market potential always attracts Citigroup. Continuous deregulation by the Chinese
3. Why is the Chinese government an important influence in banking and the financial
services industry? How has it tended to intervene in the market to assert its influence?
China has evolved from a closed, centrally planned system towards an open, market-oriented
economy. As such, government reforms have guided the development of capitalist enterprises
Nanjing Auto makes the MG
1. How have foreign car firms historically established themselves in the Chinese market
(what form of FDI?), and why is this mode of market entry normally used?
2. List some examples of firm-specific advantages (FSAs) that are held by foreign car
manufacturers and some examples of country-specific advantages (CSAs) in China
relevant to this industry.
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3. What are the relative costs and benefits of acquiring particular kinds of FSAs, in the
way that NAC has done, compared to establishing a joint venture?
Benefits of acquiring particular kinds of FSAs are that it can trigger a system-wide adjustment
and improvement by providing the recipient firm with the capabilities not just to operate the