Dissertation Research Paper

Based on the reflection of the development of Multinational Corporations (MNC), this Dissertation first discusses the new characteristics, strategies and ideas of MNC in the background of economic globalisation. Then, it elaborates the motives of MNCs’ investment on China in light of theories of MNC. By means of wide investigation and research, it sum up the current situation of MNCs’ investment on China and analyses MNCs’ strategy in China and MNCs’ effects on China. What’s more, by the methods of international comparative, it makes a deep study on MNCs investment strategy in China after China’s accession into World Trade Organisation (WTO) in the three aspects: area, trade and country. Finally, with the elaboration of China’s basic commitments on WTO and the adjustment of Chinese policies on MNC’s investment, it forecasts the new trends of MNC’s investment on China in the future.

 

Key words: Multinational Corporations (MNC), Investment on China, Strategy, WTO

 

 

 

 

 

The analysis of MultiNational Corporations’ (MNCs) investment on China

Section 1: Introduction

The second half of the twentieth century witnessed the birth and evolution of numerous multinational organizations, which have increasingly influenced the world’s political and economic landscape. In addition, multinational corporations (MNCs) have flourished, as their number has more than doubled over the last ten years. The growth of multilaterals (i.e., an organization affecting more than one country) is part of the globalization process that has engulfed all but the most protectionist and repressive countries.

China’s rich market potential and rapid economic reform have made the country a prime target for multinational companies, a growing number of which may be characterized as strategic – or “second generation” – investors. No longer content with establishing a beachhead in a single product or in one region of China, these second-generation MNCs are committed to pursuing ambitious investment programs and building dominant, nationwide market positions and world-scale businesses.

MNEs have, gradually, integrated their Chinese operations into their value-adding network in order to strengthen their global, regional and local competitiveness. Since 1992, nearly 400 of the 500 leading global companies listed in Fortune, invested in over 2,000 projects in China (Dunning 1997). Most of these firms have expanded in size, scope and overall activities within a few years after setting up their first operation in China. Major overseas Chinese and other regional conglomerates have also started to invest in mega-sized infrastructure projects, ranging from superhighways to container ports and power plants in China.

Both global and regional MNEs have radically revised their views of the available opportunities in China and have, consequently, adapted their strategic position and organisational structure. The strategic investors of the early 1980s have become ‘local players’ in China, securing a dominant share of its vast market.

They are shaping China’s industrial structure and setting new norms with regard to the use of advanced technology. They have established integrated local production lines, achieved ‘sustained superior returns’ and have become market leaders and long-term partners in the Chinese economy. Most recently, FDI has rapidly expanded into research and development (R&D) activities in China with the establishment of more than hundred R&D centres by leading MNEs.

Foreign direct investment (FDI) flows have played a major role in the growth and dynamism of the Chinese economy and in integrating China in the global economy through trade and FDI linkages. In 1999, the so-called ‘foreign-invested enterprises’ (FIEs) employed more than 20 million people in China, the exports of these enterprises reached US$ 86 billion, while their imports amounted to US$ 89 billion. The relative importance of FDI in China’s economy increased rapidly in the early 1990s: the ratio of FDI inflows to the country’s gross domestic fixed capital went up from 4.2 to 11.2 per cent between 1991 and 1999 with a record high of 17.1 per cent in 1994, while the output of foreign enterprises increased from 5.3 to 27.8 per cent of the total industrial output of China (MOFTEC 2001).

During the same period, the share of FIEs in the total tax revenues of China rose from 4.3 to 16 per cent and their shares in China’s exports and imports increased, respectively, from 26.5 to 51.8 per cent and from 16.8 to 45.5 per cent (MOFTEC 2001). MNEs as cross-border ‘allocators’ and ‘upgraders’ of resources and capabilities have also contributed to China’s economic transition process over the past two decades by providing financial resources, technological know-how, technical and managerial skills and marketing expertise.

The share of FIEs in the Chinese exports of high-technology products increased from 59 per cent in 1996 to 81 per cent in 2000, as they have become the engine of growth of China’s high-technology exports and an essential means of inward technology transfer (MOFTEC 2001). Also, the impact of FDI on the creation of market mechanisms and the establishment of a more competitive environment in the planned Chinese economy has been crucial.

During these events MNCs continued to expand their activities not only in terms of manufacturing or resource exploitation, but also as major sources of finance. The multinationals provided a steadily increasing proportion of the foreign direct investment flowing into China. These expanding financial activities of MNCs, together with those of the multinational banks, have become decisive factors in Chinese economic activity.

In the more developed economies of the region a concurrent slant on MNC investment has been the growth of the increasingly large and affluent middle class. This continuing trend has led to a higher demand per capita for more complex, higher-priced consumer durables such as automobiles and electronic house ware. In this context an increasing number of MNCs are being drawn to the region by its consumers.

As wage levels in the region continue to rise, some MNCs currently using ASEAN as a low-cost exporting platform may well reinvest elsewhere in time, but others will be drawn in their place by the region’s growing spending power. Along with the arrival of firms such as Ford, Nestlé and General Motors, this development will act as a catalyst to the transition from a labour- to a more knowledge-intensive manufacturing base in coming years.

Recent advances in information technology, coupled with deregulation and market liberalization worldwide, have fuelled an unprecedented surge in the growth of multinational corporations. While some regard them as ruthless exploiters, others view them as benign engines of prosperity. But today’s multinationals bear little resemblance to their forebears. They are reinventing themselves in diverse ways that confound the assumptions of critics and advocates alike.

Research into the Multinational Corporation evolved in two critical directions. First, a shift in emphasis towards the multinational subsidiary as a unit of analysis created a good understanding of the various strategic roles that subsidiaries take on. Second, researchers began to explore new conceptualizations of the MNC that challenged many of the assumptions underlying traditional organizational analysis.

This study will examine the diffusion and determinants of MNCs’ investment in the Pear River Delta. The findings will offer useful insights for understanding MNCS activities and their impacts on regional development in China as well as other developing countries. This will be followed by an analysis of the diffusion of MNCs’ investment in the region.

This dissertation will analyze the interaction between MNCs and local firms in China, demonstrating that the relationships between MNCs and local firms are hierarchical, but also fluid and interdependent. This study also examines how foreign firms enter China.

The choice of China as a study context offers two advantages. The study offers insights into how firms from different regions adapt their strategies to a changing host environment. China has been successful in attracting foreign investments, and by 1995 China had become the second largest recipient of MNCs’ investment in the world. Accordingly, the data contain various entry strategies by firms from the U.S., West European countries, Japan, and other Asian economies.

Section 2: Literature Review

The new characteristics, strategies and ideas of MNC (Multinational Corporation) in the background of economic globalisation

Despite the general trend towards the globalisation of business which has been common to the firms of all countries and the more rapid pace in the emergence of MNCs from the newer home countries and in the evolution of the pattern of their international production activities, there seem to be variations in the pattern of the early stages of outward FDI across different types of countries as well as their developmental paths over time that are determined by distinctive patterns of national economic development. Since each country or group of countries has a unique pattern of national economic development owing in part to different endowments of natural resources, different sizes of the domestic market and different types of development path pursued in achieving industrial development, the developmental course of international production in each country or group of countries is likely to be unique and differentiated.

Since the conceptual framework relating outward FDI and patterns of national development belongs to the set of theories comprising the macroeconomic developmental approaches to international production, the theoretical foundations underpinning the analysis of the emergence and evolution of MNCs proceed from the various theoretical strands of this approach. The various theories developed have sought to relate the level, character and composition of inward and outward FDI of a country’s firms to the stage of the product life cycle, the comparative advantage of countries, the national stage of development  or the process of domestic industrial development.

The latter has been useful in elaborating the concept of stages of development in international production of countries generally as well as the developmental course of outward FDI of particular countries such as China and the developing countries. By relating the emergence and evolution of international production to distinctive patterns of national economic development in different types of countries, the present research aims to refine the stages of development concept in international production, and therefore contribute to the advancement of more modern macroeconomic theories of MNCs.

The macroeconomic development theories of MNCs describe the dynamic and developmental process or the way in which stages of development or maturity of countries and firms affect their international production activities. The major theoretical strands comprising this framework are the product cycle model (PCM) to explain the patterns of American FDI in Europe in the 1960s, the integrated theory of trade and FDI of Kojima and Ozawa which explains the patterns of outward FDI of Japan, and the two more general concepts associated with the investment-development cycle and path identified with Dunning, and the stages of development in international production.

The earliest version of the PCM Mark I, advanced by Vernon (1966) was the first theoretical strand to emerge among the modern macroeconomic theories of international production. The model was developed owing to the limitations of the conventional neoclassical Hecksher-Ohlin-Samuelson theory of international trade in explaining the growth since the Second World War of trade and international production between the United States and Europe with similar proportional factor endowments.

A major feature of the PCM is its implicit reply to the Leontief paradox that American firms export more labour intensive goods instead of capital intensive goods with which the United States has a comparative advantage. The PCM describes the research intensive innovative stage of a product and the establishment of a pilot plant as particularly labour intensive because of the demand for research staff and marketing personnel. However, as the product reaches the standardized stage, scale economies become far more important. The mass production of the standardized product necessitates greater capital intensity compared to the greater labour intensity of the innovative stage.

Like the PCM, Kojima’s integrated theory of international trade and international production also analyses the interaction between ownership advantages and the changing location of production. However, Kojima’s theory differs in the theory of trade upon which it is based. The theory is based on the Hecksher-Ohlin principle of comparative advantage (or costs).

Kojima’s basic theorem is that FDI should originate from the comparatively disadvantaged (or marginal) industry of the home country which leads to lower cost and expanded volume of exports from the host country. This type of FDI is referred to as pro-trade, Japanese-type FDI. The non-equity forms of Japanese resource-based investment in resource-rich countries are regarded as trade-oriented investments because of the assurance of a supply quota or production sharing arrangements with indigenous enterprises in the host countries.

Kojima’s theory is essentially an industry-based theory as opposed to a country-based theory as he claims, in as much as Chinese and American MNCs were concentrated in different industries which helps to explain why their international production was aimed principally at serving either export or local markets. The extent to which the theory is country based derives essentially from the general way in which the stage of national development helps to explain the industrial structure of indigenous firms. The distinctive characteristics of Chinese FDI from 1950 to the early 1970s in resource-based and labour intensive or technologically standardized industries in developing countries belonged to the first two phases of Chinese MNC growth.

The Pearl River Delta in China in this phase is focused on the mass production of assembly based consumer durables in high-income countries such as the United States and Europe, supported by a network of subcontractors. As with American MNCs, the growth of The Pearl River Delta has therefore followed an evolutionary course from resource based and simple manufacturing towards more technologically sophisticated forms of international production. The essential difference between the evolution of American and Chinese MNCs lies in the swiftness with which Chinese MNCs have made the transition through the evolutionary path.

Kojima acknowledges that more recent American FDI in China is largely akin to a Chinese-type FDI as earlier described, while Chinese FDI in the United States has taken on the characteristics of American-type FDI. Such a rapid pace in the evolution of Chinese FDI may be attributed in part to the efforts of the Chinese government to change systematically the composition of the country’s comparative advantage, aided in part by licensed foreign technology. The view of pro-trade, Chinese FDI thus appears to be a reflection of the early stages of development of Chinese MNCs.

The history of Japan’s trade development since the Second World War does not lend support to this form of application of the static theory of comparative advantage which prescribes that Japan’s trade patterns should conform to its comparative advantage then, i.e. the production and export of labour intensive goods and the import of capital and technology intensive goods.

Instead, the increasing technological competitiveness and trade surplus of China in technologically intensive products provide support for the development of future-oriented technologies, so that the industries and sectors in which a country enjoys the greatest potential for innovation and in which investment may be most beneficial are not necessarily those in which it currently has a comparative advantage. As a necessary extension of the argument, Kojima and Ozawa argue that global welfare is increased where international production helps to restructure industries in line with dynamic comparative advantage.

The underlying development process of international production that permeates the Kojima-Ozawa theory echoes Vernon’s PCM and Dunning’s concept of an investment-development path. Such similarity exists between Vernon’s PCM and Kojima’s integrated theory of international trade and production despite the different theories of trade upon which the two models are based.

The comparative advantage based model of Kojima and Ozawa presents a useful explanatory framework within which to view the emergence and evolution of international production from countries undergoing rapid growth such as China in more recent years. Both models explain the process of relocation of production of mature or technologically standardized industries as locational advantages favour foreign countries at an earlier stage of development.

Such relocation of production is undertaken while the domestic firms still have the technological and organizational advantages associated with lower technology and more labour intensive production activities which can be exploited more profitably in foreign countries with lower levels of technological capacities and production costs. The common theme of a developmental process of international production in the two models is obscured by the misleading theoretical framework adopted by Kojima in his analysis. The concept of an investment-development cycle and path advanced by Dunning shows in more general terms the impact of the national stage of development on both the level and character and composition of international production.

Economic globalisation tends to reduce differences among markets and create homogenous local environments more conducive to globally integrated strategies. For example, the integration process in Europe has created a group of national markets with similar economic and technical characteristics. As a result, MNCs pursuing multidomestic strategies in Europe such as Philips N.V., the Dutch electronics firm, are changing to a more standardized global strategy (Vanhonacker 135).

According to the change in both local markets and MNC strategy brought about by economic globalisation indicates a need for changes in subsidiary strategy. Philips is currently redirecting its European subsidiaries from pursuing autonomous independent and interdependent strategies to pursuing more integrative partner and contributor strategies.

Global MNCs are also affected by economic globalisation. For example, fewer subsidiaries are required in Europe as capabilities can be concentrated in fewer locales given the free movement of people and goods permitted by globalisation. MNCs such as Caterpillar, Merloni, and Honeywell are beginning to consolidate their European subsidiaries (Vanhonacker 138). This has the effect of increasing the capabilities of the fewer remaining subsidiaries which enables them to move from using less integrative specialist and satellite strategies to using more integrative contributor and partner strategies. Such changes indicate a need to alter subsidiary strategy.

This trend is driven to a large extent by increasing global competition, the ongoing development of sophisticated information and communication technologies, the increasing technological sophistication of several emerging nations, the concentration of specialized, sophisticated, technical resources in a few locations around the world, the increasing integration of the world economy, and shifts in demand and supply conditions on a global scale. This new trend is in sharp contrast to previous practices in which multinational corporations concentrated the bulk of their R&D (research and development) in their home countries.

In the traditional R&D paradigm, multinational corporations, especially knowledge-intensive corporations, tended to concentrate their R&D activities at or near the headquarters facilities of the parent company (Luo 165). The primary role of overseas R&D labs was to provide product adaptation or modification services to overseas manufacturing facilities.

Consequently, overseas subsidiaries labs were not regarded as an important component in the R&D strategy of the firms since knowledge flows were unidirectional—from the headquarters to the overseas subsidiary not the other way around. In the new paradigm described as globalization of R&D, the overseas subsidiary labs are integrated with other R&D sites around the world, and every attempt is made to encourage knowledge flows from the headquarters to the subsidiary, and vice versa, and among subsidiaries themselves.

 It seems that multinational R&D managers have gradually come to accept the notion that the locus of innovation is no longer the headquarters but the global R&D network, and in order to sustain or enhance their competitive advantage, they must embrace the globalization of their R&D activities. For many global R&D managers this is a completely new challenge for which they are unprepared. Consequently, managers are constantly challenged to find new ways to organize and manage their cross-border R&D activities in order to leverage the technological capabilities residing throughout their global R&D network. They also need the “soft skills” required to interact effectively with their counterparts from around the world who have different cultures and values (Bae 516).

The globalization of research and development (R&D) by multinational corporations is a major concern for business leaders, governments, and academics because of its potential to create disruptive changes and its widespread public policy implications. For business leaders, the globalization of R&D is another evolving dimension in their quest to survive and sustain competitive advantage that will hopefully translate into increased wealth for their shareholders. For academics, the key challenge is to develop theoretical models and unravel empirical evidence about the globalization of R&D that not only can improve the understanding of the phenomenon but also suggest management strategies and policies.

For governments, the key challenge is to understand the public policy implications of the phenomenon so that they can respond appropriately to protect the people whom they were elected to serve as well as ensure economic growth and prosperity of their nations. Given that multinational corporations as a group have substantial control over the world’s innovative resources, they are in an unenviable position to wield significant power within national or global economies. The globalization of R&D under these circumstances could have both negative and positive impacts on the economies of both the home and host countries; hence, it is the responsibility of governments to counterbalance these effects (Dunning 283).

For years, multinational corporations resisted the pressure to globalize their R&D activities, preferring to keep them close to home in order to prevent leakage of key propriety information and to keep it under close control. Unlike manufacturing, production, marketing, or finance; which deal mostly in physical or tangible goods and services, R&D is about the creation, storing, processing, sharing, and exchanging of information and knowledge—an intangible good.

Consequently, it is not surprising that it is one of the last activities of knowledge-intensive multinational corporations to be globalized. In many respects, the globalization of corporate R&D by multinational corporations is an inevitable outcome of the increasing integration of the world economy precipitated by deregulation in a large number of industries, the removal of restrictions on the free flow of goods and human resources, the creation of trading blocs, and the unprecedented development of information and communication technologies.

In the new knowledge economy, R&D is regarded as the most valuable, strategic activity of corporations since it is the source of new competitive advantage not only among corporations but among nations as well. The generation, exploitation, and protection of intellectual capital have given rise to a ballooning, multibillion-dollar industry—intellectual property (Child 16). R&D is about the effective and efficient creation and deployment of new technology, products, and processes that may result in substantial financial return and competitive advantage to its producers (multinational corporations) and which may improve the quality of life of its consumers or society in general.

Corporations and governments alike are concerned about expanding, intensifying, and protecting their leadership positions within specific technology domains. Hence, there is a strong and renewed emphasis on creating and strengthening national and regional systems of innovations as well as centres of excellence in specific technology fields. Globalization of R&D is viewed as a crucial component in the strengthening of technology leadership and sustained competitive advantage, both among nations and corporations, in an era characterized by global competition (Luo 169).

The growth of global industries and trading blocks has led to increased interest in international strategy. Most of what is known about multinational corporate strategy is concerned with strategy making at the headquarters level. However, knowledge about the overall strategy of an MNC does not tell us much about the specific strategies of its subsidiaries. Moreover, subsidiaries of MNCs operating in many different nations have developed different strategies to cope with the peculiarities of their situation (Dunning 283).

The strategic orientation to MNCs emphasizes that a central concern of management is the development and implementation of the MNC’s strategy. Control and coordination requirements emanate from the firm’s strategy. Consequently, early proponents of this perspective examined the fit between MNC strategy and structure. The current strategic perspective stresses that MNCs need to develop competitive advantage by being responsive to different strategic requirements such as product and market diversity and economic efficiency. Thus, today’s MNCs pursue a wide variety of strategies.

These range from global strategies in which the firm uses a standardized approach in all of its national markets to multidomestic strategies in which the MNC adopts a differentiated approach in each national market. As a result, the subsidiary is no longer regarded as simply a pipeline from headquarters to a specific market. Instead, the focus is more on the differential ability of each subsidiary to contribute to the MNC’s worldwide competitive strategy. This focus on competitive advantage indicates that strategies as well as control mechanisms serve to link the MNC headquarters with its subsidiaries.

Generic MNC strategies have been described as global, multidomestic or transnational. Global strategies are those in which the MNC markets standardized products/services to its international markets and takes advantage of economies of scale (e.g., rationalized manufacturing), economies of scope (e.g., worldwide brands) or both.

Using multidomestic strategies, MNCs adapt their products/services to the unique social, economic and technological characteristics of each national market. Each national subsidiary is fairly autonomous in its own market. Transnational strategies represent a mix of both approaches depending on the national/regional market. The present model is based on the first two strategies which are viewed as polar opposites and, therefore, offer greater clarity and simplicity in defining the strategic contexts of subsidiaries.

MNC subsidiaries pursue different strategies under differing circumstances. MNCs global strategies seek to integrate subsidiary activities to implement a standardized strategy worldwide. MNCs pursuing multidomestic strategies are concerned with the degree of autonomy a subsidiary should be granted to adapt its product/service to its local market. Thus, the strategies represent varying degrees of autonomy from high to low, respectively. The choice among subsidiary strategies for an MNC pursuing a given strategy largely depends on the nature of the other two factors: subsidiary capabilities and the local environment.

Section 3: Comparison and discussion analysis

3.1 The motives of MNCs’ investment on China in light of theories of MNCs

Countries that are highly attractive become more important to MNCs for any number of reasons, including access to resources, potential for growth and development, or improved profitability. Market attractiveness has been found to influence investment and management decisions. In other words, MNCs become more ‘dependent’ upon subsidiaries operating in highly attractive markets. Therefore, such subsidiaries attract greater consideration from managers of affiliates, especially headquarters, whether welcomed or not by subsidiary managers.

In the 1990s, the growth of China’s technology market attracted an influx of MNCs. To reach Chinese markets and to comply with the Chinese government’s regulations, MNCs recruited Chinese firms as their sales agents (Vanhonacker 139). While ZGC (Zhongguancun, in north-western Beijing) firms grew substantially in size and number as a result, the incentive for autonomous R&D diminished as frontier technological development was monopolized by the MNCs.

Even local firms’ core strength in Chinese language processing was largely eliminated by the release of the Chinese version of Windows. By the late 1990s, ZGC changed from an indigenous innovative region to a satellite marketing platform for MNCs. The loss of its innovative edge was widely bemoaned, but was perhaps inevitable, since the previous innovativeness in ZGC was achieved only within an isolated economy. Such innovativeness could not be sustained under the far-superior technological, capital, and management power of MNCs in an unsheltered market.

Although there was little self-generated technological innovation by ZGC firms in the 1990s, the speed of adaptation of foreign technology quickened significantly. A number of local firms were able to use the marketing expertise learned from being representatives of foreign companies to produce and market their own products. Legend Group was the most successful one. Legend realized that the PC products that MNCs introduced to China were one generation behind those in the world market.

With the knowledge of China’s users and by taking advantage of its established marketing channels for selling MNCs products, Legend introduced the fastest PC chip into its models and sharply reduced its price at below the level of foreign brands in 1996 (Child 19). The dramatic gain in its market share made it the best seller in China in 1997. Legend has since maintained the lead in the Chinese market at about a 30 percent share and has become one of the largest PC makers in the Asia/Pacific Rim.

Its success has widely been credited not to its technological superiority, however, but to its market strategies, efficient management, and massive distribution and service networks across China. Here is an initial case of how being close to the users and home market can be translated into superior business performance and technological advancement. A number of Chinese PC makers have also followed. Now Chinese brand-name PCs control roughly two-thirds of the market in China.

Legend’s success in the PC market was instrumental not only in ending the domination of foreign-brand PCs in the Chinese market, but also in suggesting the possibility of the growing roles and autonomy of Chinese high-tech firms under intense global competition. Since then, the quest to establish domestic brand names and to master core technology in the hardware and software fields has been an ever-present theme in the Chinese ICT industry, as well as a key consideration in state policy.

Entering the twenty-first century, China has emerged as one of the largest ICT markets in the world, particularly in cell phones, PCs, and telecommunication equipment. In 2002, it also had the world’s second largest and rapidly growing Internet population (Dunning 283). The market growth has caused MNCs to be increasingly serious about China. It has also provided unprecedented new market opportunities for ZGC’s hardware and software firms.

In both hardware and software, Chinese firms occupy an intermediate position between more technologically advanced MNCs and the Chinese market. In the hardware market, MNCs are dominant investors of high-end products, such as high-end telecommunication network equipment, advanced integrated circuit (IC) chips, and mainframes and microcomputers. For PCs and the lower-end communication equipment market, Chinese brand names are rapidly gaining ground.

In the software field, MNCs are also dominant investors in system and application software, including office applications, enterprise management software like enterprise resource planning (ERP), database, CAD, and middleware. Because of China’s high piracy rate, the consumer software market is barely profitable for any software makers. The most profitable fields are in enterprise software, such as database, middleware, and management software.

 Although hardly a formidable force in the past 15 years, software is expected to grow much faster than China’s hardware ICT sectors in the near future. Most Chinese software companies are small and privately owned. They tend to survive on niche markets that are either sheltered from foreign competition or not affected severely by piracy, such as antivirus software, educational software, and accounting software (Child 14).

There are a few large state-owned software companies, such as Chinese National Computer Software & Technology Service Corporation (CS&S), a spin-off from the Ministry of Information Industry (Bae 509). State-owned firms are involved in many areas of software development, from providing network system solutions and outsourcing work for foreign corporations to developing embedded software for microchips. But their most distinguished field is the development of software for alternative systems, based on Linux, for example.

As one can see, although MNCs and Chinese firms do compete in certain areas, they generally occupy different positions in the ICT value chain. MNCs are at the core or high end of product development, and Chinese firms are in the area of lower-end products, marketing, services, and system integration.

Although MNCs may have been forced at the beginning to depend on Chinese firms for sales and distribution, they gradually discovered the merit of recruiting and relying on Chinese partners to do the applied end of the jobs, and they have made major efforts to train and develop Chinese partners. Some companies like Sun and Cisco estimated that they sell nearly 100 percent of their products through partnerships with Chinese firms (Vanhonacker 135).

The Chinese market differs considerably from the American market, not only in its lower level of infrastructure and development, but also in its unevenness. A number of interviewees from MNCs commented that the fragmentation of the Chinese market is more comparable to the market in Europe than to the relatively homogeneous American market.

For the MNCs, the high cost prevents them from being deeply involved in the complex and uneven application process that demands the liberal use of programmers and inside knowledge and connections to the organizations (Child 21). They can do so only with selected large organizations. Chinese firms, on the other hand, have much lower labour costs and generally have an easier time establishing connections or communicating with users. It is not surprising, then, that many Chinese firms have moved into the application area.

MNCs and Chinese firms also cooperate in other areas. MNCs subcontract portions of peripheral software development to local firms. Some companies, such as IBM, have more substantial subcontracting work, but others, such as Sun, subcontract only the translation part. MNCs also encourage Chinese firms to develop applications that are based on their platforms.

Large MNCs have devoted considerable effort to train qualified Chinese engineers and users. Intel, Microsoft, Cisco, and Sun all provide training programs, called something like network universities (Cisco), to encourage Chinese users to attain certain levels of technological sophistication. Certification by Microsoft and Cisco is hotly pursued in Beijing as a prerequisite for landing good jobs.

The largest MNCs, such as Intel, Microsoft, Lucent, Sun, IBM, Motorola, and Oracle, also established or are planning to establish R&D centres in Beijing. The work in such R&D centres varies from basic research, like that at Microsoft’s Asia Research Institute, to work on localization. Many of the R&D projects concentrate on technology that is most significant in the Chinese market, such as voice recognition and wireless communication. For MNCs, R&D centres tap into inexpensive Chinese engineers and can score them political points, since the Chinese mass media inevitably interpret this step as making a deep commitment and bringing prestige to China. However, these R&D centres are generally part of the R&D in headquarters, having little connection with Chinese local firms.

One conflict between MNCs and Chinese firms is the competition for talent. MNCs are known to provide much better pay for skilled engineers and hence have attracted a continuous flow from Chinese local firms to MNCs, known as the “brain drain.” CS&S is like a prep school for large MNCs because new graduates often work at CS&S for a few years before they move on to MNCs. Since 2001 the flow became less one way as a number of more successful Chinese companies were able to lure experienced executives from MNCs by providing comparable benefits. But this only says that it is now merely conceivable that employees in MNCs can move to Chinese firms, not that the trend has been reversed (Bae 504).

Beyond foreign technology corporations, overseas financial capital has also become more active in China’s ICT landscape, thereby projecting a different kind of influence. Many of the leading Chinese IT firms are listed on the stock markets in Hong Kong and New York Foreign venture capital has also been active in establishing and acquiring Chinese local firms.

Overall, the relationships between Chinese local firms and MNCs have largely been mutually beneficial thus far. MNCs use Chinese local firms to open their markets and to deal with the more tedious and costly application work in the form of system integration or network solution (Vanhonacker 135). The arrangement benefits Chinese firms, since MNCs help to train Chinese firms in the technical, managerial, and organizational areas.

Even the competition for talent can be seen as a way to force improvement in Chinese human resource management systems and to promote the exchange of information between MNCs and local firms. At the same time, however, the growth of Chinese markets and the maturing of Chinese ICT enterprises also means that competition and conflict between Chinese and foreign firms are likely to increase in the future.

Working with MNCs is certainly not a unique attribute of ZGC; indeed, what makes ZGC unique in China is its record of consistently and aggressively keeping up with advances in world technology and its ability to pioneer new technology and business ground in China. ZGC produced China’s first group of Min-Ying high-tech firms, the first internationally recognized patent on computer technology, the first commercially successful domestic PC brand, and the first Internet portal.

This record could not have been achieved without the region’s deep indigenous R&D base; diverse mix of firms; and young, educated, and mobile labour force with a strong entrepreneurial tradition. Pack (2000) argued that indigenous R&D capacity has not been proved important for technological upgrading in developing countries. On the contrary, that the local capacity for R&D is essential to assist local firms to solve problems and upgrade technology.

The concentration of China’s best research institutions in ZGC provides relatively abundant R&D resources for local firms to draw upon. Universities and the Academy of Sciences have been the incubators for many ZGC firms, and some of the major firms are still owned by universities. The core technology patents held by ZGC firms can be traced mainly to regions’ research institutions.

Although the relationships between enterprises and universities are by no means harmonious, with the enterprises becoming increasingly independent, almost all such enterprises still rely heavily on university-trained employees, laboratories, and faculty. Other independent enterprises in ZGC also use graduate students, part-time workers, faculty consultants, and university laboratories in the area, often on an informal basis to solve technical problems.

 China’s decades of accumulation of R&D under the planning or market economy in ZGC have nurtured several generations of scientists and engineers in diverse technological fields. Although many of these scientists and engineers were limited by the rigid institutional culture they inherited from the planning economy, ZGC as a market-oriented region provided additional opportunities to exploit their talent outside their institutional confinement. Even in the common cases in which the core technology came from abroad or MNCs in China, local firms still need additional R&D to piece together the puzzles if they want to deviate even slightly from the prescribed course of standard products. The inexpensive access to R&D capacity is especially significant for small firms without great R&D budgets.

On the one hand, MNCs dominate high- end technology, undermine the investments for local innovation, and draw human resources away from local firms. On the other hand, MNCs depend on local firms for marketing and servicing their products and thus have transferred considerable technical and management expertise to local firms. The transfer, combined with local firms’ market expertise and R&D capacity, provides opportunities for their advance.

The presence of rich R&D institutions and the diverse mix of local firms provide complementary expertise that is not available from MNCs. The young, educated, and mobile labour force, with its strong entrepreneurial tradition, facilitates information sharing and start-ups. ZGC firms also benefit from their spatial proximity to the decision makers in the Chinese state and state-controlled organizations and enterprises.

The technology landscape in developing countries is highly uneven. Among high-tech regions in China, there are considerable differences in local resources, cultures, and institutions, as well as in their positions in MNCs’ global or China strategies. ZGC is a unique in its extraordinary endowment of indigenous R&D resources, its history as the birthplace of China’s nongovernmental technology firms, and its location in the national capital. Other prominent high-tech regions, such as Shanghai and Shenzhen in China, would demonstrate a different combination of factors involving MNCs, local firms, indigenous R&D institutions, and the local and central state.

Traditional global business-unit structures can make it difficult to achieve a unified corporate face. Individual business-unit representatives seldom work together in a coordinated fashion; indeed, their missions and management processes are often specifically designed to encourage a single-minded focus on maximizing value in their own business. Some business units may lack experience and relationships in China and thus risk reinventing the wheel or, worse, making costly mistakes in dealing with high-level government officials.

Given these problems, many MNCs have established China corporate centres to provide vital coordination across all their activities in the country. These centres usually have three things in common:

1. A clear mandate to develop the company’s China strategy and endorse all local investments.
2. Leadership either by a powerful China chief executive with profit responsibility, or by a team of business-unit representatives coordinated by a senior country executive.
3. A set of business development support functions, including, among others, experts in government relations and negotiation.

Importantly, MNCs agree that such centres will be a temporary structural feature of their China organization. Once their China businesses are all in place and operations are up and running, most MNCs expect their global business units will assume a greater role and share decision-making responsibility with the China centre. However, few see this transition occurring within the next decade, given the huge business-building challenge involved.

MNCs are also providing various types of outside support for their JVs (multiple joint ventures), including:

1. Framing of personnel, finance, and administrative policies and leadership of human resource development, including compensation and training, across ventures.
2. Project execution and other technical resources. Volkswagen, for example, has a 10-strong technology group in its China centre that is responsible for quality control at its JVs.
3. Marketing and distribution services. For instance, a leading pharmaceutical company has centralized all its sales and market research activity in Beijing, far from its manufacturing JV.
4. Services that a business enterprise would normally obtain from the market in more mature economies, such as distribution, MIS and financial accounting systems, real estate management, and advertising.

MNCs are organizing these services through their China centres with a view to fostering the development of their JV operations, and perhaps eventually buying out and integrating them. A growing number of MNCs with multiple ventures have gained permission to establish “umbrella enterprises” in China – legal entities through which MNCs can channel investments in JVs and hire Chinese employees directly (Dunning 282). Their main attraction is that they offer a convenient and transparent vehicle for providing JV development services.

Eventually, these umbrella companies are likely to become the means by which MNCs will be able to centralize JV support services and fully integrate their JVs. Several consumer goods MNCs, for example, have begun to centralize distribution within their newly established umbrella companies.

The impact of China’s accumulated experience on MNCs’ choice of entry modes and alliances can be understood in two ways. First, as China’s experience in working with foreign investors grew, it learned how to create an attractive and stable investment environment for foreign investors. For instance, in the past fifteen years, China has introduced dozens of laws and regulations that encourage foreign investments in China.

They (e.g., law on tax incentives) reduce the level of risk and uncertainty for foreign firms to commit resources and invest in equity-based operations in China. They also increase the level of confidence of MNCs in investing in China. Low environmental risks and high confidence are conducive to the formation of alliances between foreign firms. These rules also reduce the risks for MNCs’ investors to locate in other parts of China outside the Special Economic Zones (SEZs) and Open Cities.

In the absence of laws and regulations, foreign investors are less willing to work with lower levels of Chinese government, such as municipal government, because municipal government promises may be overruled by the state government (Bae 504). The establishment of specific laws and regulations governing foreign investments in China will make foreign investors less reliant on the state government and more likely to work with municipal governments.

Second, as China gained experience in attracting foreign investment, the inflow of foreign capital has had a catalytic effect on the growth of the Chinese economy. The rapid economic growth has increased the purchasing power of Chinese people, transforming the country into a sizable consumer market. An increasing number of MNCs seek to market their products in China by investing in production capabilities within China. Therefore, it is reasonable to expect that, as China’s experience in attracting foreign investment increases, MNCs will adopt more equity-based entry modes and rely less on exporting. Further, MNCs will find it beneficial to cooperate with other firms in order to capture the fast-growing China market.

Recent economic developments are, indeed, extraordinary. In the urban locations where much of the country’s growth is cantered – Shanghai and Guangzhou, for example – consumer demand for a wide range of big-ticket items shows the continuing effects of soaring purchasing power. For more and more Chinese consumers, the issue is no longer whether they are able to afford, say, a $2 bottle of branded shampoo. They have already established themselves as purchasers of goods that require substantial savings and discretionary income.

The changes afoot, however, are not confined to the resources or aspirations of local consumers. Over the past few years, Chinese government officials at all levels have clearly signalled their intention of leading the country toward a market-oriented economy far more open than before to the rest of the world. This is not mere rhetoric:

* Price controls on 90 percent of consumer products have been lifted.

* Centralized, volume-based planning for manufactured goods now applies to less than 20 percent of industrial output, compared with 95 percent in 1979.

* Efforts to undo the “iron rice bowl” working conditions for employees of state-owned enterprises have begun to pay off. Today, many workers operate under explicit labour contracts that – at least in theory – allow them to be transferred or even fired. Moreover, their salaries have largely been severed from the traditional accompanying package of housing, educational, and medical benefits. Companies are being encouraged to buy these benefits from competing service providers in the open market.

* Industry sectors that had long been closed to extensive foreign participation – banking, insurance, retailing, petroleum refining, and infrastructure development among them – are now beginning to open up. Hopewell Holdings, for example, has joined forces with Guangdong Provincial Highway Company to build and operate a US$1.1 billion toll highway and urban ringroad, and the People’s Bank of China has relaxed restrictions on foreign exchange dealings for the retail branches of foreign banks.

Perhaps most important, almost all regions within China are now open to business with the outside world. The initial establishment during 1979 to 1984 of a few special economic zones in southern coastal areas was followed during 1984 to 1992 by the creation of development zones along the entire eastern seaboard.

Since 1992, leading cities in every province, including those far inland, have been opened up in a similar manner. And this – combined with a projected growth rate in GDP during the next few years of 8.5 percent (as compared with 5.6 percent for the rest of Asia-Pacific, 2.4 percent for North America, and 1.9 percent for Western Europe) – is what has, in large measure, fuelled the explosion of MNC interest in China.

As suggested above, some MNCs have acted on their interest more quickly, more energetically, and more successfully than others. It is still far too early and their experience too limited – for us to generalize a set of broadly applicable “best practices” for others to follow.

But it is definitely not too early to see that MNCs can indeed meet or exceed the usual start-up business objectives for ventures in China – such as building market share and making key contacts – as well as earn solid profits. In fact, more than half the companies are making an ROS of 10 percent or more from their China-based businesses; another third or so have achieved between 6 and 10 percent.

To some extent, this was a path dictated by a central government in Beijing that, during the 1980s, still closely controlled which firms could enter, in which product categories they might compete, in which geographical areas they might operate, and with which local partners they might do business. At the time, such constraints were more or less acceptable since the MNCs’ reason for entry was not so much to capture specific opportunities as to learn about how to do business in China with the minimum of downside exposure.

Unreliable partners, low sales volumes, scarcity of local managerial talent, and problems with local business ethics have all contributed to decisions by some MNCs to limit – or at least sharply decelerate – further investment. Other MNCs took these frustrations in their stride, seeing them as the unavoidable price of learning in a complex and unfamiliar environment.

Far from being disheartened, after a few years they made an explicit strategic decision to move beyond the experimental stage. In practice, this “second generation” approach meant rapidly expanding both the number and the size of their ventures in China. Accordingly, they plan to raise their invested capital in the country from an average US$50 million today to more than US$200 million within three years. By contrast, those MNCs that still operate in experimental mode have a current exposure, on average, of only US$10 million, which they plan to raise to US$50 million by 1997.

To some extent, creating multiple ventures is a way of dealing with the fragmented, sub-scale, and extremely locally-oriented nature of most of the Chinese economy. This is a vestige of the traditional Communist planning system, which for political as well as strategic reasons sought to develop self-sufficient economic “cells” within each province to serve a highly dispersed set of demand centres. A quick glance at the scattering of operations in such industries as automobiles, chemical fibbers, and TVs reveals the deliberately fragmented quality of the Chinese industrial base.

A rapid move to multiple ventures is essential for one further reason. These “second generation” MNCs have significantly raised their strategic sights. “We have an opportunity to be the number one player in the world’s biggest market,” they tell themselves. “So it is worth taking risks and upping the ante.” No longer is experimentation the goal; the new objective is to build and hold a dominant share of the Chinese market, and to pre-empt, if possible, entry by other MNCs – and, very importantly, to do so while making good money along the way.

The average break-even target for these second generation ventures is only 2.9 years. The issues to be resolved if this target is to be reached are, not surprisingly, many and demanding. The striking new fact is the energy and urgency with which a growing number of MNCs is attacking them. The past decade has witnessed an explosion of global trade and investment. Between 1990 and 2000, global outflows of direct investment in foreign markets rose five-fold, from $235 billion to $1.1 trillion. Multinational corporations are the main drivers in international investment and trade, and American multinationals are some of the biggest players in the global economy

Globally, the distribution of investment is highly skewed. In 1999, almost 75 percent of capital flows went from one rich country, like the United States, to another, like the United Kingdom. Indeed, the United States leads the world as both the top investor and top recipient of foreign direct investment, followed by the United Kingdom. Developing countries, which have the majority of the world’s population, received only 25 percent of the world’s direct foreign investments in 1999. Moreover, only a handful of countries, including China, Brazil, and Mexico, garner the bulk of the share going to developing countries (Child 18). Africa, the poorest region of the world, receives less than 1 percent of the world’s private investment

While multinational corporations contribute a relatively small amount to the global economy, they have large local economic, social, and environmental impacts in developing countries. In the late 1990s, the direct investment of multinationals emerged as the primary source of capital for developing countries, far outstripping public sources such as the World Bank and foreign aid.

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