China’s appetite for resources, knowledge and profits, and the necessity for changes in the institutional environment, business strategies and management style

Citation

Lattemann, C. and Zhang, W. (2015), "China’s appetite for resources, knowledge and profits, and the necessity for changes in the institutional environment, business strategies and management style", International Journal of Emerging Markets, Vol. 10 No. 2. https://doi.org/10.1108/IJOEM-02-2015-0023

China’s appetite for resources, knowledge and profits, and the necessity for changes in the institutional environment, business strategies and management style

Article Type: Editorial From: International Journal of Emerging Markets, Volume 10, Issue 2

China is on the way to reach the Olympus of the global economy. Recent growth of Chinese inward and outward foreign direct investment (IFDI and OFDI) has been remarkable. According to the International Monetary Fund (2014) data, China’s PPP (GDP) surpassed that of the USA in October 2014, making China the leading global economy in almost every important sector. In 2012, FDI inflows to China reached $124 billion, whereas outflows rose to $101 billion. This makes China the second largest FDI host and the third largest home of FDI outflows after the USA and Japan (UNCTAD, 2014). The same report projects that China’s OFDI will surpass IFDI within the next several years. This will make China to a net supplier of FDI.

These figures show that Chinese companies succeed in the globally competitive business environment. They are moving up their production in the value creation chain. They move from a low-cost manufacturing-based economy toward a more high-tech innovative economy. Chinese companies will soon appear as original brand manufacturing (OBM) on the global markets.

The International Journal of Emerging Markets (IJOEM) already picked up the topic of “China Goes Global” in a Special Issue in 2014 (International Journal of Emerging Markets (IJoEM), 2014). That Special Issue was the outcome of the best papers of the sixth and seventh China Goes Global conferences. The 2014 Special Issue dealt with institutional influences and public policy on Chinese multinationals, their integration in the world economy, changes in their organizational structures and globalization strategies. The Special Issue in hand is the successor of the 2014 volume. The papers are linked and refer to the latest theories, approaches and frameworks to analyze the sources of China’s global competitiveness on a country- and a company-level. They analyze how Chinese companies build innovative capabilities and identify their sources for profit making in a global economy.

Khanna and Palepu (2000) depict that the transition toward a developed economy needs a rapid growth, industrialization, as well as sufficiently developed political-economic environment, and sound market structures. These macro-level changes build the basis for Chinese firms’ global strategies, competitiveness and innovativeness. The first paper of this Special Issue, from Unger and Chan, discusses these macro-economic changes in China, namely, the transformation from a system of State Corporatism to a Market Economy. The authors compare the transformation process of institutions in the Asian Tiger nations during the latter half of the twentieth century with that currently prevailing in China. They show that these states came all from a system with State Corporatism, where organized consensus and cooperation are needed and resulted in goal-oriented harmony (toward national goals). They changed gradually to Market Economies in the past decades, where pluralist interest-groups cause competition and conflicts. Parallels between the historical developments in the Asian Tigers states and in the prevailing Chinese economical landscape exist but are nevertheless different. Unger and Chan find that organizations at the periphery, i.e. small, local associations that are not in the grip of the central state, are changing toward a market economy, but state corporatist structures generally prevail among China’s major associations. In a past issue of the IJoEM Cao et al. (2014) analyzed massive institutional changes and their effects on innovations to explore and exploit opportunities in emerging industries in Chinese firms. They came to the same conclusion that institutional changes have varied effects on Chinese firms’ behavior.

The second paper of this Special Issue, from Smith-Stegen, on the “Understanding of China’s global energy strategy”, investigates if China’s globalization induces positive economic bandwagon effect in developing countries, where China is currently involved. Do, for example, Chinese OFDI to Sub-Saharan Africa or South America induce a similar transition toward emerging markets? Smith-Stegen focusses on the energy sector and analyzes the effects of Chinas OFDI in developing countries. She comes to the same conclusion as Zhang et al. (2014) in that Chinas OFDI has not helped to develop these economies. In contrast, the influx of Chinese goods generates negative impact on the manufacturing sectors of those developing countries, by increasing resource prices and exchange rates, and by reducing the competitiveness of manufacturing sectors in their home country; hence the so called Dutch-disease-effect takes place in those developing economies.

By understanding these differences on the macro-institutional level, analyses on the micro-economic levels on Chinese companies are possible. The following papers of this Special Issue are dealing with firm level issues of companies in China and Chinese MNEs operating outside China.

Sound market institutions and structures, and a developed political-economic environment are the pre-requisites for generating profitable businesses and innovations. Until recently most Chinese firms did not compete in highly sophisticated industries. Research shows that the reasons for this was their poor domestic innovation system and the weak innovative capabilities in China (Child and Rodrigues, 2005; Rugman and Doh, 2008). But to catch up, firms have to adapt their internal structures and business philosophy to the international, competitive environment.

In the third paper of this Special Issue, Jansson and Söderman discuss the philosophy of strategic management, knowledge management and innovation in MNE hybrids in China. They provide a deeper understanding of major strategic management types in China and their changes from indigenous management systems to western styles. The authors conclude that “the basic difference between Chinese and Western management lies in how managers think”. This particular Chinese thinking, i.e. Yin Yang management, is rooted in the Taoism and the epistemology of harmony. The authors find that Chinese organizations have been westernized in several organizational dimensions, which confirms the previously published research (e.g. Lattemann, 2014). As Chinese companies compete on the global stage, they turn to more formal relations and bureaucratic behavior, they are opening their businesses to outsiders (e.g. via financial statements and reports), and they adapt their governance systems to western modes. However, they still follow their traditional organizational habits in terms of trust and morality. The persistence on these elements of the indigenous Yin Yang management is, according to the authors, the basis for Chinese firms’ flexibility in a changing environment.

The two following papers from Wan, Lähtinen and Toppinen, and Gugler and Vanoli, state that Chinese firms enhance their technological capabilities through international activities and links with foreign firms.

Wan, Lähtinen and Toppinen analyze the strategic transformation and the learning process of globally active but locally producing Chinese firms in China. The authors state that the international competition is a major source for Chinese firms to acquire new knowledge and innovative capacities. They show that Chinese firms in China continuously learn from their global competitors and from their customers. Wan et al. show how companies gradually move from non-branded manufacturing to original equipment manufacturing and further to an original brand manufacturing strategy.

The fourth paper of this Special Issue, from Gugler and Vanoli, also emphasizes on the role of trade and investment flows in acquiring new knowledge and innovative capacities. In contrast to Wan et al., they focus on the role of foreign location competitiveness as an asset to provide technological capabilities to Chinese affiliates. The authors show that IFDI and OFDI play a significant role in strengthening the innovative capabilities of Chinese firms, and that Chinese innovations are primarily based on foreign knowledge, mainly from firms originating from developed countries. Their analysis reveals a lack of technological capabilities by Chinese MNEs. Hence, Chinese MNEs need to follow the strategy of strategic-asset seeking investments as a decisive tool to strengthen their innovative capacity. Gugler and Vanoli’s paper shows that Chinese firms operate in developed countries to gather knowledge and innovativeness.

The last paper in this Special Issue, from Yuan and Pangarkar, confirms Gugler and Vanoli’s findings. The authors describe that Chinese firms operating in developed markets gather knowledge from their partner firms (JV or other form of mergers). But subsidiary expansions by Chinese firms in developed countries do not boost their performance. Foremost, they generate the bulk of their revenues by increasing the number of their subsidiaries in developing countries. The work of Yuan and Pangarkar also confirms the findings from the paper by Jansson and Söderman in this Special Issue, and the findings from Cao et al. (2014) in that internal routines, procedures and philosophies in Chinese firms are changing, and that some of them are now on the way to catch up with firms from developed countries in terms of dynamic capabilities for innovating and learning.

Overall, the presented papers shed a light on the dual strategy approach of Chinese firms: they learn from developed countries’ MNEs to produce high-end products and to climb up the value creation chain. As long as they are not on the highest step of the value creation chain, they make their profits in developing markets where they gain from their flexibility advantages.

But Chinese firms learn fast. They will manufacture their own branded products and will compete on the markets as original design manufacturers (ODM). In the meantime, they are using the developing markets, i.e. in Sub-Saharan Africa, as a springboard to the developed countries, i.e. European markets.

More research on these fascinating topics will be discussed in the upcoming conferences on China Goes Global, and the best papers will continually be published in the future issues of IJOEM.

Dr C. Lattemann, School of Humanities and Social Sciences, Jacobs University, Bremen, Germany, and

Professor W. Zhang, Rollins China Center, Rollins College, Winter Park, Florida, USA

References

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