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Apr. 09

Chinese Multinationals: towards cooperation and competition

Stimulating exports and attracting foreign investment are the key variables of China's "Open Door Policy" since 1979. Foreign firms have been invited to invest in China under the conditions of working with a Chinese partner and bringing new technology to the country. The goal of exchanging market entry against technology was made clear for foreigners who, in some cases, might have underestimated the capacity to learn of Chinese companies and to build step by step their competitive advantages. Then China's entry into the WTO in 2001 and the "Go Global Policy" policy marked a new phase of internationalization of Chinese firms. 

The first Chinese Multinational emerged, investing both in mature economies and in emerging markets. Compared to Western and Japanese competitors, Chinese Multinationals have followed an accelerated internationalization process. Their competitive advantages are a cost/volume advantage associated with the size of the domestic market, as well as their innovation capabilities based on the huge R&D investments supported by the Chinese government ambition of "catching up" very rapidly with the West. 

Chinese technology giant Huawei has fulfilled this ambition and built a real competitive advantage based on innovation over its European and American competitors, which partly explains the company's current trade ban by US authorities. On the other side, European firms in many sectors such as aviation, energy, healthcare, logistics, Artificial Intelligence, etc. are developing successful cooperation with their Chinese counterparts.

By  Prof. Jean-Paul Larçon
Co-Chairman of BMI Governing Board
Emeritus Professor, Strategy Department | HEC Paris

CORPORATE STRATEGIES OF CHINESE MULTINATIONALS
by Jin Zhanming
Tsinghua School of Economics and Management

STRATEGIC MANAGEMENT IN CHINESE ENTERPRISES

China has always considered the quality of management at the company level as a key factor of China’s competitiveness. 

This was made very explicit in the Development Report of China’s International Competitiveness in 2001: “The international competitiveness of a nation depends, to a large extent, on the competitiveness of its national enterprises at the micro-economic level. In other words, without competitive enterprises, national competitiveness would be built on quick-sand and any sound macroeconomic policy would be nothing more than engaging in idle theorizing” (Renmin University, 2001). 

Management and especially corporate strategy are the key drivers of Chinese companies’ and China’s competitiveness. 

With the rapid progress of globalization, local competition has become global and global competition has become local. The implication is that Chinese enter- prises will be facing ever greater challenges, locally and globally. In such circumstances, Chinese enterprises have had to elaborate new strategies in line with the economic globalization trend. 

Multinational Companies (MNCs) are seen as key actors of economic glob- alization, which is why MNCs are a key instrument of China’s economic global ambitions. 

Multinationals have played a key role in the twentieth century and their influence will grow further in the future as a major force of resource allocation worldwide. Multinational enterprises have access to technology, physical assets and human capital, management, and markets. The opening-up of China has been accompanied by the internationalization of its domestic enterprises and the Chinese government is supporting this development and nurturing China’s emerging multinationals. 

This chapter describes these strategies based on HEC–Tsinghua SEM Research Project on Chinese Multinationals (2005–2008) and in-depth investigation and interviews with top management of leading mainland corporations. 

STRATEGY AND THE CHINESE ECONOMY

The word “strategy” in China refers traditionally to the conduct of warfare. Business strategy is a relatively young discipline in the country which has been influenced by contributions of western scholars such as Chester Barnard’s Functions of the Executive or Igor Ansoff’s Corporate Strategy

Corporate strategy provides overall direction, policies, and plans for the company as a whole to achieve long-term growth and stability in a changing environment. Strategic management traditionally includes three levels: corporate strategy, business strategies and functional strategies. This chapter deals mainly with the strategies of Chinese emerging MNCs at the corporate level. 

Yang Rongping and Ke Yinbin (2004) have identified three stages of strategic development of Chinese enterprises linked to the transformation of their economic environment. 

  • The 1980s. In this period, the dominant economic system was the planned economy and the strategies of Chinese SOEs were generally specialized in production for a specific industry. 
  • The 1990s. In this period, China embarked on the transformation from a planned economy towards a market economy. Chinese enterprises made a major change in their corporate strategies: diversification became the leading strategy in the 1990s. 
  • Since 2000. The market economy has become the dominant economic system in China. The corporate strategies in China started to diverge: diversification remained the dominant pattern even if some companies started reducing their number or core businesses and if a few companies developed successful focused strategies. 

CORPORATE STRATEGY IN CHINESE ENTERPRISES

Chinese enterprises are in a complex and unique situation that influences their strategy in a very specific way. They have to adapt their strategy to a new environment and improve their capabilities before participating effectively in global economic integration. However, strategic management of these enterprises is lagging behind other countries: 

  • There was no need for strategy in earlier times. Companies did not have the decision-making power during the previous regime of a planned economy. They could only implement the production and sales targets objectives defined by the state. They were managed as giant production lines. 
  • Property rights remain ambiguous. Companies have more decision-making power, but in many cases corporate leaders are still nominated by the government. Another problem is that the careers of these leaders are not tied to the performance of the enterprises. Naturally, they tend to ignore changes in the business environment and long-term growth issues. 
  • Strategy can be confused with planning. Some business leaders have a long-term view and commitment, but they can also be rather ambivalent towards corporate strategy. They still equate strategy to the rigid long-term plans elaborated by the state, even if the environment or the policies are changing. They have difficulty recognizing the need for flexible strategies and providing meaningful guidance for decision-making in an ever changing environment. 
  • Strategy differs from day-to-day management. Chinese enterprises started to embrace a market economy not so long ago, and there is a temptation for business leaders to spend too much time in micromanagement and neglect strategic decision-making at the top. 

The three growth avenues open to Chinese enterprises are closely interrelated and cannot be separated: integration, diversification, and globalization. When diversification and integration strategies cross the international boundary, they become part of the globalization strategy. Sometimes integration strategies and diversification strategies are combined. For the sake of analysis, however, the three strategies will be discussed separately here. 

The authors have chosen the qualitative research approach to study the new strategies of Chinese enterprises. This is done to provide Chinese and international readers with a viewpoint that is both realistic and straightforward so that they can appreciate the specificity of strategies followed by Chinese enterprises. Of course, one or two examples of success or failure cannot represent the overall mode of strategy employed by Chinese enterprises. 

Cases have been chosen based on two considerations. First, the authors focused on companies that accepted in-depth interviews and discussions on strategic issues. Second, a rather high number of non state-owned enterprises were chosen because they experienced less influence from the state. These private enterprises are investing more overseas in recent years and several of them have entered inter- national markets. Some are structuring themselves as multinational enterprises, expanding their sales network and reorganizing their production capacity on a global basis. These companies represent a leading economic force in China and a new image of the country. Their strategies will of course have a decisive impact on the future development of enterprises in China.  

Complete Chapter 1: CORPORATE STRATEGIES OF CHINESE MULTINATIONALS availabe here.