Retail Services in China - Research Paper Example

? Retail Services in China In the raising of high transaction expenditures due to market imperfections, it is normally cheap for multinational corporations (MNCs) to do their businesses in new marketplaces by their inner business structures as opposed to depending on the markets. Derived from a case study of Coca-Cola’s entry option into China, this study tests the applicability of internalization assumption to revealing the entry choice of Coca-Cola Company into China. This theory discloses the financial rationale, which was main reason of Coca-Cola’s transformations in their entry choice as it changed from franchising to joint ventures (JVs) with significant local investors, and more currently to the combination of franchising and JVs. Retail Services in China Introduction When a multinational corporation or company (MNC) gets into new markets, it is fairly costly for it to do business activities owing to high transaction expenses (Mok, Dai & Yeung, 2002). These expenses take in the ones arising from the problems of opportunism, uncertainty, small share of market agents and limited rationality (Williamson, 2002). Williamson (2002) quarreled that the transaction charges of executing, implementing and writing contracts through the market exceed the expenses of internalizing the market. The matter is further exacerbated when the business transactions comprise of multifaceted contractual incidents (Williamson, 2002). Therefore, it seems that an MNC will opt to set up wholly owned subsidiaries (WOSs) to cope with market defects (Williamson, 2002). Except for the choice of WOSs, there are other frequently used modes, as well, like joint ventures (JVs). Anchored in various studies of Coca-Cola in China, this study assesses the usability of the internalization theory to elucidate the entry mode option of MNCs in China. Coca-Cola in China has been considered as the study firm for numerous reasons. First, it is the globe’s largest cola manufacturer and one of the prime MNCs (Williamson, 2002). Secondly, the corporation has a fairly long history of venture in China, since 1979, when financial reform was executed under the de facto management of Deng Xiaoping. Thirdly, going through intense rivalry from its close opponent, Pepsi-Cola, as well as a strange and extremely versatile market environment, Coca-Cola’s skill, accomplishment and endurance, in securing a huge market share, in China, makes up a motivating case by which effects might be studied for the comprehension of MNCs’ entry into the Chinese market through creating equity joint ventures (EJVs) (Mok, Dai & Yeung, 2002). Fourthly, there are just two significant earlier studies on Coca-Cola’s operation in China: PU-TU-USC (2000) and Nolan (1995) (Mok, Dai & Yeung, 2002). Rooted in an encompassing survey of the company’s bottling plant in Tianjin, Nolan (1995) did the initial comprehensive study of the micro-economic effect of just one Coca-Cola plant in the country. He argued that the firm’s business structure, in general, has encouraging effects on the labor development, product markets and rising capital in China. This study corresponds to another large-scale research done by a team of economists at Tsinghua University, Peking University and the University of South Carolina (USC) (PU-TU-USC, 2000) (Mok, Dai & Yeung, 2002). Derived from an input-output model, the three institutions estimate that the financial effects of Coca-Cola’s venture, as well as recurrent operation, comprising of the downstream (distribution) and upstream (suppliers) business associations, in the Coca-Cola business structure, in China, formed an overwhelming 414,000 jobs, 1.2 billion yuan of tax payments and 21.7 billion yuan of output in 1998 (PU-TU-USC, 2000; Mok, Dai & Yeung, 2002). Regardless of this priceless information brought out by the above studies, there is no precise literature giving theoretical foundation for the entry mode option of Coca-Cola in our concerned country (Mok, Dai & Yeung, 2002). Therefore, this study assesses the applicability of the internalization theory in discussing the choice of entry mode of Coca-Cola in this country since 1979. This paper, thus, not only offers effects for the usability of the internalization theory, but also grants an inside view into the market growth strategy of a worldwide soft drink producer in China. It must be acknowledged that other right effects of Coca-Cola, such as the financial impacts of the Coca-Cola business structure in this nation, are not the focus, and; thus, will not be dealt with in this paper. The paper will assess significant cultural and economic aspects that may have an impact on extending Coca-Cola sales in China. Transaction expenditures are always significant for international firms in the choosing of host nations for direct business ventures (Sara & Newhouse, 2005). According to Sara & Newhouse (2005), the internalization theory suggests that, in the appearance of high transaction costs, which are brought about by market irregularities, it is usually lucrative for an international firms to utilize its inner corporate organization to do business transactions instead of relying on the market (Sara & Newhouse, 2005). Irregularities can be brought about by doubt in the market, the small number of agents who are available, bounded rationality or opportunism (Sara & Newhouse, 2005). In addition, the internalization approach argues that a normal profit-making multinational corporation is inclined to create a WOS, either by acquiring of another organization in the host nation or by greenfield venture. Nevertheless, there are other replicas, which MNCs can put into effect to cope with market irregularities and joint ventures. It is vital to recognize the financial rationale behind the speculation that the creation of JVs might generate more competent gains when compared to the creation of WOSs for MNCs in the host nation. According to Teece (2001), the main disagreement for the attractiveness of JVs over WOSs is the odds for reaping cheap but effective benefits. Lacking knowledge of the host nation, for instance the nature of the local market, as well as the local government, it could be expensive for an MNC to take on business proceedings concerning writing, enforcing and executing multifaceted contracts with market middlemen (Teece, 2001). Nevertheless, the average attractiveness of a multinational corporation is its ownership of a rent-acquiescing asset. When a MC’s rent-acquiescing asset is fused with the assets of its locals, the consequence can lead to improved rents for counterbalancing the costs of establishing JVs (Mok, Dai & Yeung, 2002). The cost-reducing and revenue-improving potential in JVs might overshadow the benefits of WOSs (Teece, 2001). In the perspective of the transaction cost model, a clear question comes to mind: under which setting and why is JVs an improved solution contrasted with WOSs to the issues of opportunism, doubt, less market agents and partial rationality? Some of the literature has touched upon this question, e.g. Beamish (2009), Buckley & Casson (2007), and Hennart (2005) (Mok, Dai & Yeung, 2002). Cultural Aspects that have an Impact on Extending Retail Sales Services in China Culture is mainly learned behavior, rooted in earlier success, shared throughout narratives. A country’s culture is the lens through which all facts concerning the market, understood to be objective, is instinctively interpreted. Daniels, Radebaugh & Sullivan (2007) confirm that the culture of the citizens of a particular country will affect conclusions of competencies and capabilities, which echo human culture. Lack of self-awareness can cause poor strategic positioning for an organization and a pessimistic cycle of increasingly lagging choices. Interest in culture as an element of a firm’s competitive situation grew in the 70s with the growth of Japanese management (Chen & Warden, 2013). The two authors also assert culture, be it for the people or organization, includes values, norms, patterns, traditions and rituals, over time establishing a shared amassed learning. Hennart (2005) defines culture as a shared programming, which distinguishes citizens or members of one country or organization from another. Culture is like glue, which holds the citizens or a specific country together, rooted in legends and stories of past experiences. Culturally accepted behaviors are passed on to young ones through symbolic productions, which strengthen existing norms (Daniels, Radebaugh & Sullivan, 2007). Teece (2001) points out the significance of codes in comprehending cultures of consumption in his publication, Multinational enterprises, internal governance and industrial organization. National cultures help abridge levels of difficulty and globalization, but might be constructed to support a global consumer model (Williamson, 2002). Such structures are contested, and flat world models of globalization hide multifaceted dynamics, which need innovative and deep observations (Williamson, 2002). Daniels, Radebaugh & Sullivan (2007) find that culture persuades a difference of consumption. Acquisitiveness can be global, but still locally specific (Daniels, Radebaugh & Sullivan, 2007). The internalization of commercial iconography, predicted by Williamson’s (2002) warning tale of brand nationwide holidays has, to some level, come to pass, with Coca-Cola’s brand identifiable by nearly any Chinese citizen in the country, were Coca-Cola is the largest soft drink producer (Chen & Warden, 2013) but whose brand significance and meaning are localized (Mok, Dai & Yeung, 2002). The 2001-02 World Health Organization collaborative countrywide research of Health Behaviors among School-aged Children, in China, illustrated a connection between lower socio-economic status (SES), as decided by family wealth, and greater soft drink consumption, in China (Daniels, Radebaugh & Sullivan, 2007). This study also proved that consumption of soft drinks, in China, is not only persuaded by the socio-economic status of individual children, but also by the socio-economic status of the school populace. That is, it might be much harder to take soft drinks in a surrounding where other students are not encouraged or are less encouraged to do so. A survey of young adults and adolescents in China found that a majority of these young adults were more likely to take Coca-Cola compared to older Chinese citizens (Beamish, 2009). This populace also consumed considerably greater amounts of Coca-Cola compared to older citizens. Another 2004 survey of children who fell around 6 to 10 years, in China, found out that consumption of Coca-Cola to be significantly low amongst these children of Asian background, but higher in adolescents and young adults. Fewer girls compared to boys consume Coca-Cola, in China, and amongst those that do, girls consume considerably smaller amounts of Coca-Cola compared to boys. Also, the large World Health Organization collaborative Chinese study of Health Behaviors in School-aged Children showed that girls mainly take less soft drink compared boys (Daniels, Radebaugh & Sullivan, 2007). It is believed that soft drinks incorporate ingredients that can make the consumer obese. Therefore, this is why a majority of Chinese girls have opted to keep away from Coca-Cola. At least a number of the issues affecting Coca-Cola consumption in boys seem not to have any effect in girls. Another study of adolescents, in China, found out that none of the culturally related factors were connected to Coca-Cola consumption in girls (Daniels, Radebaugh & Sullivan, 2007). Likewise, earlier studies in the country have noted that, even though a lot of the same predictors for Coca-Cola consumption were found in girls as boys (Mok, Dai & Yeung, 2002), girls with downbeat attitudes towards consuming regular Coca-Cola drinks were more likely to consider that they would add some weight and have excess caffeine, and; thus, they tended to evade it. However, the average female learner reasonably believed that regular Coca-Cola drinks seemed to make them gain weight and significantly considered it was vital not to gain weight, but still a majority of them drank regular Coca-Cola drinks often. It is awkward to see a fat Chinese person especially a girl; therefore, ensuring that they keep away from something that might destroy their physique is vital for them. Economic Aspects that have an Impact on Extending Retail Sales Services in China Growth rate, market size and overall profitability and success are three financial indicators, which can be utilized to evaluate the Coca-Cola Business System in China. The market size of the Coca-Cola Business System in China has been changing. The firm has a stunning market share of 46.8% in the non-alcoholic drink industry, in China. PU-TU-USC (2000) also found that the entire market value of soft drinks reached $7.2 billion in 1995 with a market value forecast of $10.1 billion in 1999. In 2004, Coca-Cola products volume was 108,367 million liters. Evidently, the Coca-Cola Business System in China is lucrative with a possibility of elevated profits, but there are numerous obstacles to overcome so as to capture the highly desired market share. The growth rate of Coca-Cola has been lately condemned due to the Chinese market diffusion of soft drinks. Chen & Warden (2013) stated that looking forward, in spite of the solid growth in consumption, the Chinese soft drinks market is anticipated slightly to slow down, echoing stagnation of market prices. This alteration is attributed to the other developing sectors of the non-alcoholic industry including bottled water (9.3%), as well as tea and coffee (11.8%). Energy and sports drinks are also expected to improve in growth as Coca-Cola competitors being to adopt new product lines. Success in the Coca-Cola Business System will remain rather firm, but market diffusion particularly in China has caused analysts to imagine an insignificant deceleration of growth in the industry (Hennart, 2005). Because of this, Coca-Cola should establish itself in alternative markets such as bottled water, snacks, sports drinks and the confections industry. In order for Coca-Cola to keep on growing and increasing profits in China, they should expand their product offerings. The soft drink industry is extremely competitive for all organizations concerned with the greatest rivalry being that from prime sellers in the industry. Coca-Cola China has to mull over the pressures that they need to overcome in order to beat the harsh competition in that region such as the pressure from rival firms in the industry, new contestants in the industry, alternate products, buyers and suppliers. The competitive pressure from opponent organizations is the supreme competition, which Coca-Cola goes through in the Chinese soft drink industry. Coca-Cola’s, competitors are Pepsi Co. and Cadbury Schweppes who are also the largest soft drinks company in the world so one can understand their significance in China. Even though, Coca-Cola holds four of the top five Chinese soft drink brands (Coca-Cola, Fanta, Sprite and Diet Coke), it had lower sales, in China, in 2007, compared to PepsiCo (Chen & Warden, 2013). Nevertheless, Coca-Cola had higher sales in the international market compared to PepsiCo. In 2004, PepsiCo subjugated China with sales of $22 billion, while Coca-Cola only had roughly $6.6 billion, with more of their sales coming from neighboring nations such as Japan, as shown PepsiCo is the main rival seller for Coca-Cola, in China, and these two firms have been in a power struggle for many years (Chen & Warden, 2013). Conclusion This study utilizes the internalization hypothesis to assess the entry mode of Coca-Cola, into China. It findings not just have consequences for the usability of this theory, but offer an insight into the approach of market of any international soft drink manufacturer, as well. To study the transformation in Coca-Cola’s entry choice into the Chinese market, this paper has utilized the internalization theory in order to deal with the subject of how and to what level shifts in a number of investment modes can lessen the consequences of market imperfections. In addition, the data that the study has granted show that transformations in Coca-Cola’s choice of investment have brought about a stable growth in its market share, as well as a high level of market diffusion in China. This study complements the previously present study on Coca-Cola’s entry choice into China, e.g. PU-TU-USC (2000) and Nolan (1995), and finds that internalization theory is a useful framework for the assessment of its replicas of investment in China. Nevertheless, the execution of any theoretical loom to firm-level research might be affected by government policies, as well as differences at the sectoral level. Furthermore, the Chinese culture at the macro-stage is also vital. Thus, any guesses, which are adapted from the current research of Coca-Cola’s endeavors in China, should be treated with at most care. Future studies must center on local viewpoints, mainly those of Coca-Cola’s Chinese franchisees and JV partners. References Beamish, P. (2009). Coca-Cola multinational joint ventures in China. London: Routledge. This volume puts the spotlight on how Coca-Cola has opted to operate in China since 1979. It examines Coca-Cola's strategies utilizing internalization theory (tough market conditions will support a firm to set up a entirely owned subsidiary so as maintain control). Buckley, P., & Casson, M. (2007). The economic theory of the multinational enterprise: Selected papers. London: Macmillan. This book treats organizations as adaptive systems, which have to match the difficulty of their surroundings. The nature of this difficulty is analyzed through linking an institutional Information-Space (I-Space) framework to the work of difficulty theorists. Chen, J., & Warden, C. (2013). International hypermarkets and culture misalignment in Taiwan & China. Business and Information, 3(4), 52-60. This sources offers insight on the international hypermarkets and culture misalignment in Taiwan and China. The source is influential in discussing some of the key cultural factors that might affect Coca-Cola’s entry to China. Daniels, J., Radebaugh, L., & Sullivan, D. (2007). International business: Environment and operations (11th ed.).New Jersey: Prentice Hall. This book is a reliable and engaging voice on carrying out business in global markets. This book not only offers the ideas of global business, but it also utilizes contemporary scenarios, examples and cases to assist readers successfully put theory into practice. Hennart, J. (2005). A theory of multinational enterprise. Michigan: The University of Michigan Press. This volume offers the ultimate synthesis of the current literature on the financial aspects of global business. It is encyclopedic and also full of incisive insights. Mok, V., Dai, X., & Yeung, G. (2002). An internalization approach to joint ventures: The case of Coca-Cola in China. Asia Pacific Business Review, 9(1), 39-58. The journal entry explains how the research was carried out using interviews. It compares the attractions of joint ventures and wholly-owned subsidiaries. It also offers brief information on foreign investment in China since 1979. Nolan, P. (1995). Joint ventures and economic reform in China: A case study of the Coca-Cola business system, with particular reference to the Tianjin Coca-Cola plant. Cambridge: ESRC Centre for Business Research Center, University of Cambridge. This is a case study of Coca-Cola that mainly dwelt on the Tianjin plant. The study not only dwells on the economic factors that might affect Coca-Cola’s entry into China, but also cultural and social factors that China should consider in China. Peking University, Tsinghua University and University of South Carolina (PU-TU-USC). (2000). Economic impact of the Coca-Cola System on China. Retrieved from http://mooreschool.sc.edu/UserFiles/moore/Documents/Presentations%20&%20Studies/2000%20Coca%20Cola%20-%20China.pdf This is another major study conducted by three universities on the economic impact of Coca-Cola’s system in China. The economic impacts do not only offer insight on this topic, but also some of the economic factors that might affect Coca-Cola’s choice of entry into China. Sara, T. & Newhouse, B. (2005). Transaction costs and foreign direct investment in developing countries. International Advances in Economic Research, 1(4), 317-325. This journal entry discusses the transaction costs that might cost a firm that is willing to venture into another country. It shades light into firms that are willing to venture into China, and this is extremely helpful for Coca-Cola. Teece, D. (2001). Multinational enterprises, internal governance and industrial organization. The American Economic Review, 75(2), 232-238. This magisterial journal article examines multinational enterprises in depth. It discusses how foreign investment through multinationals diffused advanced technologies and fresh management techniques, driving productivity growth in North America, Asia and Europe. Williamson, O. (2002). Markets and hierarchies: Analysis and antitrust implication. New York: Free Press. By introducing a transaction-cost dimension, this book bridges organization theory and economics. The key argument in this volume is presented in the Organizational Failures Framework, which is intended to specify which mode will be rather efficient in executing contracts rooted in a combination of human and environmental factors. Read More