Strategic Asset Seeking. Chinese Business Groups and their Differences in Oversees Expansions - Essay Example

?WHAT IS ‘STRATEGIC ASSET SEEKING’ AND DOES IT HELP EXPLAIN WHY CHINESE BUSINESS GROUPS INTERNATIONALISE THEIR OPERATIONS? USE EXAMPLES TO SHOW WHY AND WHY NOT by Author’s Name Name of the Class Name of the Professor Name of the School City, State 13 July 2013 What is Strategic Asset Seeking? The current trend of countries’ economic performances and investors’ decisions are both influenced and have an impact on foreign direct investment (FDI). Companies are taking risks in foreign countries by transferring some of their assets to form new enterprises, from which they can receive lasting interests. Initially, the strategy of FDI targeted the developed countries, but with the improved technology, research, and development there has been impressive expansion of foreign investment in the developing countries, which contributes to the continued integration and growth in the global economy. However, as foreign direct investment increases and promotes the local communities and governments, the investors are driven by a certain motive; either to seek market, resource, efficiency, or for purposes of strategic assets as an opportunity in a foreign nation. Strategic asset seeking FDI aligns itself for reasons of achieving competitive advantage in the long run. According to Wigdor, its main purpose is to acquire resources or skills which the investors are convinced will offer, secure, and enhance the firms and its products competitive advantages.1 This type of FDI occurs at various locations to grasp the opportunities of the existing expertise and held knowledge to experience the benefits of the long term strategic objectives. Sauvant argues that it occurs when firms Trans-nationalize, obtaining proprietary assets of a foreign company wholly or partially, which narrows down to strategic alliances, mergers, and acquisitions. It also occurs when access to local distribution systems, recognized brand names, and managerial practice and expertise are improved by means of proximity of operations, or direct purchases.2 Transnational companies have formed alliances with local companies in different industrialized nations and the global south, not only to respond to the changing market conditions, but to also access the intangible assets in the foreign land, while facilitating development. Sometimes the assets are not directly transferrable through the existing market transactions, hence given that they are characterized of being exploited in their host countries, companies that are willing to access the assets can either invest in the host country, where the assets are created via the acquisition of the core personnel, or joint ventures that provide a better opportunity of technological exchange and collaboration. This is how foreign companies can tap into the resources and use them into their production processes. Chinese Business Groups and their Differences in Oversees Expansions China has a tremendous structure of business organizations and government enterprise relationship. In the context of the Chinese business groups, State owned enterprises seem to have a founded relationship with the major economic and market institutions of China, which enhance their successful operations and market dominance. With the numerous changes in the world and China’s economies, business organizations in China have evolved. Today, its business groups not only consist of SOEs and Private enterprises, but the foreign funded businesses as well. Like their Korean and Japan counterparts, Chinese Business groups employ the network based group structure, expanding into different areas and industries, while being backed up by the government in various ways, and under strict management of their established financial companies that provide finances to the member firms.3 There are also affiliated companies to the Chinese business groups (qiyejituan), which bear the costs and benefits accrued from the association. With regard to the economic reforms that began in the late 1970s, China’s economy remains tied up through the business group’s mechanism that makes it difficult for foreign multinational companies to penetrate, and compete against the internal business groups and companies. Currently, the formation and ownership of the Chinese business groups can be distinguished to either state owned or non state owned; the state owned hold the largest share of Chinese investments and are currently under SASAC control. On the other hand, as entry into the Chinese market proves difficult for MNCs, the implemented regulations, central government support to the SEOs, and group networks that all contribute to the Chinese market imperfection and lack of transparency means that Chinese business groups cannot only protect their internal markets, but use it as a platform for international advancement through partnership and strategic acquisition to tap into more assets. The SEOs still remain dominant in investment oversees, just like in China, than the private or non state owned enterprises. Clearly, there are reasons behind their power influence and the advantage they have over the non SOEs. The Chinese oversees investment saw SOEs partake 100% investment in 2005, 89 percent by 2011, with a record of 16 of the 18 top foreign asset holding Chinese firms.4 The private enterprises’ outward FDI may seem to be lagging behind, but considering they do not receive similar incentives from the government of China like the SEOs, their oversee expansion has a growing reputation though struggling. To account for the differences in the SEOs and non-SEOs investment diversification, certain motivating factors tend to favour one group over the other, thus influencing the Chinese business group competition on investment abroad. Though the Chinese government strongly supports oversees investments, it provided favourable credit and tax policies to the SEOs, excluding the Chinese private enterprises from reaping the same benefits.5 The central government involvement offers them privileged support; right from the substantial subsidies they acquire that reduce their costs of operations, to financial loses cover ups and availability of low cost funding. In contrast to this, a good number of Chinese private companies struggle to raise enough capital to obtain assets abroad, which explains their reduced power and competition in foreign investment. Apart from lacking government support, private firms require approval of government organizations, seeking their oversight before making oversees investment.6 For the SEOs, being under the control of SASAC gives them a go ahead to conduct foreign investment, as long as the type of investment is listed within the primary business sector. Hence skipping the procedure of oversight required for private enterprises from government organizations. Similarly, in focus to acquire foreign assets, Chinese firms, especially the SOEs are ready and willing to offer a higher price than the normal market valuation, a ‘china premium’ to secure the targets.7Very few private business groups with large shareholdings can compete to such a level, but the majorities are those that shy away from such investment strategies, due to struggles in raising finances. Some of the SOEs have successfully acquired the assets and enhanced their outward FDI through such premiums, limited for private companies. However, as the Chinese business groups go global, they all risk being vulnerable to countries’ and the world economic shock. The Chinese global wave risks critics and continues to face challenges in the developed and developing countries. Economies are questioning China’ SEOs agendas behind their mergers and acquisitions, and they are criticized of lacking openness and transparency. This has led to them being perceived as strategies of experimenting by a failed economy, and ways of neo-colonialism in the global south. Compared to the SEOs, the private business groups investing abroad try to escape the Chinese institutional pressure on business operations, by employing the offshore holding companies. Private companies are financially constrained and the offshore system assists them to raise the required finances to acquire the foreign assets. To an extent, the benefits of offshore holding companies offer them certain incentives, though not comparable to the SEOs’ Chinese government support, but enough to decrease regulatory uncertainties and the tax requirements. Explaining why Chinese Business Groups Internationalize their Operations OLI paradigm: China has been one of the major emerging economies that have heavily concentrated on outward FDI around the globe. Its investment policy encourages massive and strategic investment, which is one of the reasons why most economist wonder why the focus, even in the global south. Apparently, most of its investing firms are highly motivated by the internationally strategic asset seeking FDI. Considering that the competitive enhancing assets in the modern world have shifted to the intangible mode, these assets have made it easier for investing firms to tap and utilize them at any opportunity. Dunnings’ OLI theory explains the strategic asset seeking reason of Chinese firms’ internationalizations through their investment and production around the globe. The theory is based on three firm’s competitive advantage O (ownership), L (Location) and I (Internalization); it argues that the firm owner- specific advantage is an intangible asset of the firm that can be transferred abroad, the location features in the foreign country must be able to attract the firm’s investment, and enable it to utilize the competitive advantage, while internalization focuses on enabling the firm to maintain its competitive position through attempting to control the entire value chain, especially where it functions poorly.8 Of recent, the Chinese firms’ investment in business services has grown at a higher rate than investment in the financial sector and manufacturing. Strategic asset seeking has proven right for most of the Chinese business groups in the developed nations, specifically the cities and popular urban areas of Europe and the US. They have been able to acquire more assets, invest in automobiles, manufacturing, research and development opportunities via partnerships, developing knowledge and innovation, client and distribution networks, and expand their market. The Nanjing Automobile group corporation is one of the major examples of automobile investment in Europe after acquisition of MG Rover, followed by SAIC acquisition of Korean Ssang Yong.9These group companies were established in China and come with their Brand names in the international scene. When Nanjing bought the failing MG Company, it acquired its brand and the technology of the British firm, from which it could exploit and restructure to create more of its products. Take an example of Huawei technologies business group, which is a large private owned company from China. As a business group, it has over 30 240 granted patents applications in the globe, with more awaiting, a competitive investor in research and development, with a dedication of $19.3 billion over the last decade and 45% of its employees to it, not forgetting to mention its yearly rising contribution to the Chinese outward FDI.10 In addition to the patents, it has a wide known registered trademark, which enables it to penetrate markets and steer production. For an effective business friendly environment, Europe hosts a number of well performing economies with a civilized population. Even though most economies are struggling with the Euro zone debt crisis, they still hold the location advantages, which are heavily relied on by multinational companies in determining the host country of their investments. One of the key strategies of the Chinese business groups is targeting the economies in crisis, so that they can contribute in stabilizing the economic growth of such countries, while targeting on acquisition of assets that can offer them more production and competitive advantage. Denmark is well recognized for design work and provides a highly skilled workforce as an intangible capability from the human resource, which avails the quality factor of production at a lower cost for the Huawei Technologies investments in telecommunication.11From the internal market in Denmark, it can be able to benefit from the local government policies, security, and political atmosphere by encouraging investment in ICT, utilizing the right talent, targeting and accessing the potential European and closer regions consumers, to sustain its future progress. The activities of Huawei technologies are an investment that adds on to the existing Denmark investment, which is evident to Huawei strategic asset seeking, to complement its existing competence. In the internationalization process, Huawei technologies and iSoftStone Holdings Limited formed a joint venture called ISST, with an aim of deepening the domain knowledge in the technology and communication sector.12 This is one way of creatively using the available intangible assets provided by the two partners. The theory, in conjunction with the motive of seeking assets can be proven in the developed nations, compared to the developing economies. Transaction cost theory: Chinese firms face the challenge of high transaction costs operating back home, due to lack of enough stability and a conducive environment to facilitate economic exchanges among the economic players in China’s market institutional environment. With a focus on achieving maximum profits and seeking self interest, some business groups opt to establish a form of trust (through mergers and acquisitions) with other companies in foreign countries, where the assets are readily available, since this reduces the cost of operation. The established governance through the trust works out to minimize the costs associated with establishing, controlling, and enforcing agreed upon exchanges. Based on the transaction theory of the firm, companies source out activities or expand to the international scene for the purpose of economizing costs of exchanging resources within the environment, and the bureaucratic costs of exchanges within the company. 13 The state owned Industrial and Commercial Bank of China (ICBC) has continued to establish subsidiaries around the globe, increasing its bank’s equity share and control in most economies. ICBC strategic oversees expansion remains aggressive; as of end of 2010, it had $351.6 billion total oversees assets, which increases its international reserves to finance the Chinese businesses investing abroad and lowers the transaction costs of domestic exporters, when facilitating cross border transactions with the RMB currency.14 Such Chinese business’ groups are investing varyingly without being biased on the North, to strategically seek the interested assets. The global South has been China’s firma target in accessing natural resources and investing in energy projects unlike the North, in which China only invests in business services and technology. They hence are able to maximize efficiency when firms are located in static foreign environments that provide stable consumer preference, technology, and opportunity for competition as argued in the theory. 15 Through this, firms can evade competition with competitive brands in over-invested economies. The business group has formed various alliances in the international level, such as with standard Bank among others, and this provides an opportunity not only to expand its international business, but as a strategy to acquire more assets and businesses. As a joint stock company in Hong Kong stock exchange, the 2012 annual report indicated a consecutive growth in ICBC total Assets, recording 97.57, 117.85, 134.58, 154.76, and 175.42 in RMB 100 millions as from 2008 to 2012 respectively.16 The internalization process has enabled the business group to confront the great uncertainties and risks that hike the transaction costs. The alliances provide a hierarchical mode of governance that enhances efficiency and reduces the transaction costs, through a form of trade off with the bureaucratic costs arising from hierarchy governance. This is how such large Chinese business groups dominate the market through the established governance structure, conduct large asset specific investment abroad, and counter the various uncertainties. Other Motives for Chinese Business Group Operations Internationalization Big Push theory: One of the other reasons for Chinese groups’ internationalization is resource seeking, which is much evident in the global south and emerging countries. These economies pose a lot of uncertainties, but focus their energy on growth and development. Therefore, Chinese multinational enterprises have undertaken outward foreign direct investments in the large parts of Asia, as well as in Africa and Latin America, which has been of benefit to the interest of the Chinese commercial firms and host countries via development. The big push theory bases it argument on the existence of indivisibilities in the production function, demand, and supply of savings, such that a minimal level of investment must be devoted to a critical minimum development programme, to sustain growth and counter development challenges once investment occurs.17 The poor countries have the necessary resources and labour, which the Chinese business groups can make effective use of, as an existing comparative advantage after investment in the countries. Take an example of Zambian subsidiaries of CNMC (China Non-Ferrous Metal Mining Corporations), its strategic location in Zambia, and investment in the copper smelting plant. It takes advantage of the copper resources, providing employment and steering economic growth and development in the host country. The Chinese Financial bank and Exim Bank are the two Chinese financers of the Angola public investment projects in Agro business, telecommunication and infrastructure, where the loan is paid through the natural resources, as agreed in the oil backed deals.18 More investment in agriculture for raw materials, as well as transportation and energy projects have taken place in rich mineral countries of the African continent, while some African producing firms form partnerships with Chinese enterprises, giving them a push to overcome externalities, and remove barriers to allow them compete in the international markets. Oligopolistic theory: Chinese SEOs’ and private firms cannot be separated from the motive of market seeking in their internalization process. Most of them have done tremendously well back home, and are expanding to access other markets and retain a substantial share of the market, in the world’s imperfect market. The theory explains why firms invest in a targeted market, country, or nation so as to increase their market share. Hence, firms would engage in FDI oversees to exploit the firm specific advantage (market location) and secure its foreign market share. The large private Lenovo Company from China not only enjoys the monopoly status in the personal computer market in China, but as a Chinese multinational enterprise, it acquired the IBM personal computer business and its ‘Thinkpad’ brand, which is a crucial internalization strategy that works to increase its sales and market share in the US and around the globe. Its sales continue to grow in the industrialized and emerging markets. Besides the mergers and acquisitions, Lenovo has production plants in 7 countries, strategic locations for packaging plants in more than 7 countries, which enhances its sales, access, and market share in about 80 countries around the globe.19It aims at seeking ready and potential markets overseas through FDI, to avoid being edged out by rival oligopolistic firms that operate in the same industry. Conclusion Numerous theories try to explain the various motivations behind internationalization of firms operations. Firms on the other hand may be driven to overseas investment for various reasons, which rely on a number of theories. Some focus on both market expansion and strategic asset seeking, while others focus on resource seeking and efficiency in their internationalization process. 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