Mainland China’s Multinationals in International Markets

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Table of Contents

Introduction
Moving Towards FDI
The success of Chinese MNCs as Multinationals
Management and Organization
Chinese Government’s Stimulation of FDI
Conclusion
References

Introduction

Globalization is a process of formation and subsequent development of a single global financial and economic space based on innovative technologies. In this context, the current stage in the development of international economic relations is characterized by the rapid growth of world markets, the interaction of which forms the basis for combining local production processes into a system of production. A broad socio-cultural transformation that affects both external and internal aspects of economic activity prioritizes the role of institutions that ensure the stable development of the world economy (Shen & Edwards, 2006). One of the types of institutional formations that provide an effective relationship between the micro and macro levels of the world economy are transnational institutions (TNI), in which market and planned economic methods are naturally combined. Multinational corporations (MNCs) are companies that operate in at least one more state other than the home country.

The present paper aims at exploring the historical and modern patterns of Chinese MNCs that succeeded as multinationals, providing examples and comparisons with other countries. First, the paper demonstrates the road to FDI of two Chinese companies in different industries. Second, it discusses the factors that made Chinese MNEs successful. Third, it overviews the peculiarities of organization and management of Chinese companies. Finally, the paper describes the role of the Chinese government. The present paper claims that the success of Chinese companies by support from the government, significant cash reserves, and unique managerial and organizational structures.

Moving Towards FDI

The historical stage of development of Chinese multinationals can be discussed through the analysis of two companies that were actively operating both in the domestic and foreign markets. Namely, Sinopec is the largest oil and chemical conglomerate, and China Mobile is the largest operator of mobile services in the world. The origins of these conglomerates vary, which is reflected in the different spectrum of their operations. The mentioned corporations trace their origins back to state monopolies created by the Ministry of the Petroleum Industry and the Ministry of the Chemical Industry in the 1950s. China Mobile was primarily focused on domestic oil and gas production, while Sinopec focused on refining, marketing, and petrochemical production. In the 2000s, the companies carried out an initial public offering with the aim of increasing capital and subsequent expansion abroad.

Sinopec started its foreign direct investment (FDI) in 2003 by investing in a joint venture (Chorell & Nilsson, 2005). Together with China National Oil Corporation (CNPC), the company invested in the Petrodar Operating Company (PDOC) in Sudan, which gave China 47% of all shares. Later, Sinopec engaged in FDI in Canada as well through joint ventures and direct purchases. There were several factors that affected the company’s decision to invest in FDI. First, the rapid growth of the Chinese production sector experienced significant shortages in energy, which had a strong negative effect on the country’s economic development (Chorell & Nilsson, 2005). In the late 1990s and early 2000s, the oil industry was stagnant due to a lack of reserves and funding (Chorell & Nilsson, 2005). Since Sinopec and other “oil giants” were largely state-owned, the Chinese government decided it was time to attract foreign capital to start growing oil production. As a result, Sinopec held its initial public offering (IPO) in the early 2000s, which helped to attract funds (Chorell & Nilsson, 2005). Even though the Chinese government retained more than 50% of shares, the company received much-needed funds to help the government solve the energy problem without overdependence on imports. Thus, the major driving force was the Chinese government trying to address the issue of energy deficiency in the country.

Second, the Chinese oil industry experienced reformation in the early 2000s. The reorganization made the companies vertically integrated, which allowed them to control the entire process from extraction of oil to distribution of products (Chorell & Nilsson, 2005). This allowed the company to become efficient and engage in every activity associated with oil and cut all the unprofitable activities (Chorell & Nilsson, 2005). Without these changes, the expansion would be impossible, as Sinopec was responsible only for refining and distribution (Chorell & Nilsson, 2005). Third, the government allowed the companies to control the retail prices, which allowed Sinopec to compete on the international market (Chorell & Nilsson, 2005). In summary, Sinopec’s first steps to FDI were motivated by the Chinese government.

Speaking about China Mobile, the turn to FDI could be explained by other reasons. The company started its FDI activities in 2007 by purchasing Paktel, a Pakistani mobile company (Bondt, 2015). The first attempt could not be called an aggressive entry, as Paktel had only a 2% market share (Bondt, 2015). China Mobile continued its FDI activity in 2014 when it entered the Thai mobile market through a joint venture (Bondt, 2015). The company acquired 18% of Thailand-based True Corp for approximately $880 million (Bondt, 2015). FDI was mainly incentivized by large cash reserves, which allowed the company to invest the money in development. However, even though China Mobile had enough money, it did not use them aggressively for expansion, as Sinopec did (Bondt, 2015). Additionally, China Mobile expanded primarily to Asian countries, while Sinopec invested money worldwide.

These differences in expansion strategies can be explained by a number of incentives from the Chinese government. Since the majority of shares in both companies are state-owned, the government was the major driving force for any activity both inside and outside the country. The government needed to cover its energy needs, which could have been achieved by attracting capital to the oil industry from other countries and letting domestic oil companies extract oil abroad to use it for domestic purposes. In other words, the Chinese government was highly interested in Sinopec’s FDI, while the mobile industry did not receive much attention. Even though China mobile had greater potential for international expansion, the government did not find any strategic benefits for the country in doing so. Thus, the move towards FDI in the oil industry was faster in comparison with the mobile industry.

The success of Chinese MNCs as Multinationals

The strategy of multinationalization is an official China’s development strategy in the context of globalization. Currently, the country’s internal policy and national economy are aimed at supporting and implementing it. For example, in 2013, the authorities took a number of steps to simplify administrative procedures related to the export of capital (Davies, 2013). The National Development and Reform Commission of the People’s Republic of China (NDRC) has set the deadline for coordinating foreign projects with Chinese investments: from $ 300 million to 1 billion – no more than seven working days from the date of submission of the relevant documents, and from $ 1 to 2 billion US dollars – within 20 business days (Davies, 2013). It should also be stressed that the approval of projects with investments up to $ 300 million was left to local authorities.

The potential of China’s investment cooperation is being realized due to the skillful policy of the state. A characteristic feature of the internal policy in this matter is the provision of enterprises with foreign participation of special benefits. This method of attracting investments was especially actively used in the initial period of the policy of openness when most investors perceived China as a high-risk market, and the restructuring of the country’s economic system was only gaining momentum (Shen & Edwards, 2006). As the inflow of foreign capital intensified, on the one hand, and the deepening of market reforms, on the other, there was a gradual alignment of economic regimes for national and foreign investors.

In general, Chinese companies were successful in the international markets due to relational advantages. Both Sinopec and China Mobile experienced a greater success when entering the emerging markets in comparison with companies from the developed countries due to low-cost inputs, ethnic connections with the host countries, and adaptation of technology and management style to the host country’s conditions (Yiu, 2011). This implies that the traditional OLI (ownership, location, and internalization) framework cannot explain the success of Chinese companies in FDI. Dunning’s OLI framework assumes that companies need to have some internally transferable advantage to be successful in the international arena (Yiu, 2011). However, this approach is not applicable to Chinese multinationals, as they are latecomers, which needed to develop strategic and organizational innovations to catch up with the global market (Yiu, 2011). Thus, the LLL (linkage, leverage, and learning) is appropriate for explaining the success of the companies, as instead of exploiting their advantage, both China Mobile and Sinopec utilized their connection with the international market to build their advantage in time through exposure to technology and managerial strategies and to learning.

Chinese MNEs learned in different areas, including marketing, technology, and human resource practices. China Mobile is an excellent example of such learning, as it developed the success of Pakistani Paktel. The firm was acquired when it had a relatively low market share and poor performance. However, after seven years of intensive learning, the company progressed to the third place in the country in terms of subscriber base, taking 18% of the market share (Bondt, 2015). China Mobile benefited from improving the marketing strategy by changing the name of Paktel to Zong and reorganizing the marketing campaign based on international practices and insights into local peculiarities (Bondt, 2015). Additionally, exposure to technology allowed Zong to become the first company to introduce 4G in Pakistan using the W-CDMA standard instead of TD-SCDMA, which was used in China (Bondt, 2015). In summary, the fact that China Mobile’s entry into the Pakistani market was not successful and further development and investment improved the situation confirms that the application of the LLL framework is more appropriate for Chinese MNEs in comparison with the OLI approach.

Management and Organization

Chinese MNEs developed a unique approach to management and organization to succeed in the FDI activity. According to Hout and Michael (2014), Chinese companies offer much to learn from their international competitors in terms of management. In particular, Chinese companies treat their employees like family, which implies care and increased expectations (Hout & Michael, 2014). MNEs are ready to invest in everything to hold to their talents and productive employees, from paying for their development to building schools specifically for the employees’ children (Hout & Michael, 2014). Chinese MNEs hire both expatriates and locals for different purposes. On the one hand, Chinese companies prefer to hire expatriates to transfer the values from the domestic company to the local branches (Zhong et al., 2015). This endeavor supports the integrity of corporate culture and values (Zhong et al., 2015). At the same time, Chinese MNEs inspire CEOs of sub-companies to look for talents among the locals (Hout & Michael, 2014). Such an approach ensures a positive relationship with the population of the host country and allows better integration into a different culture.

Chinese companies also prefer simple corporate organization, which allows easy control from the top and almost complete autonomy of the sub-companies. According to Hout and Michael (2014), the simple structure of organizations helps to add and delete branches without complications. Such an approach to organizational management can be explained by the fact that Chinese companies had to operate in rapidly changing political environments and economic instability, which made their structures to be flexible and easy to adapt to outside changes. In other words, FDI created incentives for the Chinese companies to aim for even greater decentralization through a simple organization.

Apart from the characteristics mentioned above, Chinese MNEs have other managerial peculiarities that should be mentioned. In particular, Chinese MNEs usually have a low tolerance for debt and prefer to fund their operations and expansions with cash or shares (Hout & Michael, 2014). Additionally, company leaders rely on personal relationships more than on ratings, as they value trust and devotion the most (Hout & Michael, 2014). These companies develop new products quickly and give them local flavor to ensure integration with the culture of the host country (Hout & Michael, 2014). In summary, Chinese MNEs developed unique features that helped them succeed in their FDI activities.

Chinese Government’s Stimulation of FDI

The Chinese leadership set a goal to make China an innovative country by 2030. It is quite clear that the task can be accomplished only with a balanced application of internal and external mechanisms for the development of the state, including the use of foreign investments. To strengthen the role of Chinese TNCs in the context of globalization, the Chinese government actively develops international cooperation. Namely, it enhances and develops the mechanisms for cross-border movement and optimal placement of production infrastructure (Li et al., 2020). The active development of technical and economic relationships with other countries is to be achieved on the basis of mutual benefits. While implementing a strategy for multinationals to go abroad, the existing interest of TNCs in external investment and transnational economic activities is taken into account.

The government also tries to position TNCs towards abroad give-and-take processing with an emphasis on industry-specific benefits, thus encouraging them to diversify manufactured products. In this context, Li et al. (2020) assume that the creation of Chinese multinational companies by merging several companies and by acquiring shares and placing their shares on the stock markets of other countries is proposed. Chinese enterprises are stimulated to participate in design and construction, as well as the provision of other labor services abroad (Li et al., 2020). To support international economic cooperation at the regional level, multinationals should adopt a purposeful and consistent policy aimed at creating favorable conditions for the functioning of foreign trade, the development of transportation, and the inflow of investments.

Currently, China is the global leader in outward FDI, which can be explained by two factors. First, in comparison with Korea and Japan, China has the highest level of incentives from the government to give OFDI loans (Gallagher & Irwin, 2014). Second, China has the greatest capacity to give OFDI loans in comparison with other Asian countries due to high reserves (Gallagher & Irwin, 2014). Thus, as mentioned several times in this paper, the Chinese government stimulated the FDI of Chinese MNEs through policies, financial help, and direct interventions into companies’ strategic planning.

Conclusion

The central driving factor of the success of Chinese MNEs was support from the government. The majority of shares in MNEs often belong to the government, which allows it to have both direct and indirect control over their operations, which can be seen in Sinopec’s and China Mobile’s examples. The large influence of the government has both positive and negative effects on the companies, as it provides funds in the forms of FDI loans but reduces its ability to compete by controlling prices. At the same time, Chinese MNEs benefit from the unique management and organizational style, fast learning, and high adaptability. The success of these companies can be explained by the LLL framework.

References

Bondt, M. (2015). The drivers behind outward foreign direct investment in the Chinese telecommunication sector: A case-based analysis [Master’s Thesis]. Web.

Chorell, H., & Nilsson, E. (2005). Chinese FDI in the oil sector. Web.

Davies, K. (2013). China investment policy: An update. OECD Publishing. Web.

Gallagher, K. P., & Irwin, A. (2014). Exporting national champions: China’s outward foreign direct investment finance in comparative perspective. China & World Economy, 22(6), 1-21.

Hout, T., & Michael, D. (2014). A Chinese approach to management.Harvard Business Review. Web.

Li, C., Luo, Y., & De Vita, G. (2020). Institutional difference and outward FDI: Evidence from China. Empirical Economics, 58(4), 1837-1862.

Shen, J., & Edwards, V. (Eds.). (2006). International human resource management in Chinese multinationals. Routledge.

Yiu, D. W. (2011). Multinational advantages of Chinese business groups: A theoretical exploration. Management and organization Review, 7(2), 249-277.

Zhong, Y., Zhu, C. J., & Zhang, M. M. (2015). The management of Chinese MNEs’ expatriates. Home Expatriate Management Research, 3(3), 289-302.

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