Analysis of Business Groups in China - Essay Example

? An Analysis of Business Groups in China: Should China Be Adopting Them? BY YOU YOUR SCHOOL INFO HERE HERE Business groups are monumentally important to the Chinese economy. Research indicates that approximately 60 percent of total national economic output are supported by business groups. Research has uncovered that business groups are so successful in China due to the fact that they provide influence in changing the infrastructure for capital procurement, such as building incentive for lenders to assist business growth, and also giving the country the ability to effectively compete against traditionally-structured conglomerates internationally. Utilising two specific examples of successful business groups in China, this report recommends that China continue to embrace business groups as a key competitive advantage over other nations across the world. Findings indicate that Chinese business groups improve social welfare and also enhance the economic strength of a developing Eastern economy. There is no evidence provided showing a detriment for ongoing operations of important Chinese business groups. An analysis of business groups in China Introduction Business groups are found virtually everywhere in Asian nations. Business groups are defined as “a group of legally independent firms, which operate in many different markets, bound together by enduring formal and informal connections” (Khanna and Yafeh 2005, p.332). There are typically three different types of business groups: vertically-controlled groups (or pyramidal in design), horizontally-controlled groups and informally-bounded groups that are connected with a common social tie or a singular sense of business mission or identity. Business groups in China differ substantially from the traditional conglomerate business structure commonly found in Westernised nations. Whilst the conglomerate business structure is rather standardised, meaning a typical combination of two or more established companies operating under a single parent company, the business group structure involves a group of independent companies sharing a singular managerial relationship (Khanna and Yafeh 2005). Business groups have accounted for approximately 60 percent of China’s total industrial, national output (China Statistical Yearbook 2000). Hence, there is ample evidence that business groups have been monumentally important in creating new and self-sufficient markets, established industrial and supply infrastructures and also raised beneficial capital necessary to build an industrial and commercial empire in the country. Based on all research findings, business groups in China are highly advantageous economically, commercially and socially and should continue to be adopted by this developing nation. The development of business groups in China Between the 1970s and 1990s, emergence of Chinese business groups continued to escalate. In a country where the government plays a significant role in regulating and controlling business practices, Chinese government officials realised that the country was not advancing, in terms of competitive business output, to the rest of the developed world. In response, the government began to evolve its industrial policies in an effort to support increasing global business competition. The end result of this liberalisation in governmental business regulation established many different, large business groups that were formed, primarily, through the inheritance of large industrial plants carried over from the previous command economy (Nolan 2001). It was through governmental policy changes that large business groups were formed, sustaining adequate capital and production resources that began to put China on the proverbial map toward becoming a powerhouse of international competition. Why is the intervention of the government between the 1970s and 1990s important to understanding the potential benefits of Chinese business groups? China maintains, as a developing nation, a very feeble and under-developed legal system and a rather immature and weak financial market (He, Mao, Rui and Zha 2013). Hence, it is much more difficult for smaller-sized and independent companies to establish a competitive presence that can successfully contend for financial and commercial success with other domestic and international conglomerates. China, by altering economic and industrial policies, established the framework for business group development whereby more efficient production systems were developed as well as the foundation for modern capitalism that better services the welfare of Chinese citizens. Furthermore, due to the weaknesses of the financial market in China, it was (and oftentimes still is) difficult for smaller companies to procure the necessary capital to become efficient competitors in multiple markets. As business groups developed and began to sustain considerable profitability through their diversification and production operations, the leveraging power of these groups provided new opportunities for raising beneficial economic capital which ultimately enhanced the establishment of alternative financing channels instead of reliance on traditional banking systems which historically provided the majority of funding for emerging businesses (He, et al. 2013). At the same time, these traditional financing agents (i.e. banks) were becoming disenchanted with government-owned businesses and desired to assist privately-owned companies as there was now evidence that business groups maintained the most efficient and proven opportunities for profit growth over that of government-controlled businesses. Essentially, from an economic perspective, business groups post-1990s were becoming more trusted by internal capital market players and were beginning to provide more efficient social welfare to Chinese citizens and businesses that paved the road for China to become the powerful economy that it is today in 2013. Hence, all scenarios considered, Chinese business groups and their ability to more successfully diversify their industrial and consumer-oriented production output established a new type of market condition in which large business groups were becoming powerful economic agents that contributed substantially to the country’s total gross domestic output. China, prior to the rapid development of business groups, were more adaptability to fixing market failures that were prevalent in the previous command economy (Peng 2003). Business groups were able, through their size and ability to procure much more capital through the existing capital markets in the country, to fill a variety of institutional voids and inject a new type of industrial and production efficiency in China’s struggling economy. This was something unparalleled by freestanding, smaller business entities prior to economic and commercial policy liberalisation in China that occurred between the 1970s and 1990s. In an attempt to facilitate a firm comprehension of China’s big businesses, business groups must be examined as the pioneering entities that provided China with a much more potent competitive business presence internationally. Without the ability of these business groups to create new and innovative sources of capital funding and solve various market failures that once continued to depreciate the holistic economic value of the Chinese economy, it is likely that China would not maintain the very high competitive presence in a wide variety of international marketplaces that the nation has been able to accomplish today. Examples of successful business groups in China The ChangChung Business Group, operating as a subsidiary division of Global Bio-Chem Technology Group Limited in China, is a large business group specialising in chemical product manufacture such as Arginine Hydrochloride and Malto-Dextrin (Bloomberg 2013). Only just incorporated in 1996, ChangChung Business Group has operated as a business group subsidiary of Global Bio-Chem since 2005. This business structure is horizontal, meaning that the relationship between parent company and the business group division shares managerial decision-making as well as economic leadership. In 2005, ChangChung Business Group was instrumental in incorporating the ChangChung Zhucheng Group Co Ltd. that further diversified Global Bio-Chem to include industrial capabilities for production of security door products. This was accomplished by utilising the ability of the parent company to more easily procure new capital and utilise its human capital competencies in the horizontal structure to develop more efficient strategic leadership practices which assisted in identifying new market opportunities and how to close a variety of industrial voids. ChangChung Business Group now boasts production facilities that cover 126,000 square metres and utilised its managerial capital to build powerful supplier and vendor networks both domestically and internationally. Under the weak governmental structure and previously under-developed capital markets available for raising financing, China would not, today, be boasting the many economic and commercial opportunities that were provided by the strength of this business group. Having identified the successes of ChangChung in bringing China more potent industrial capabilities, it helps to define the importance for China to continue to adopt business groups in order to maintain its standing as an influential and dominant global business competitor. Unlike Western countries, such as the United States and France, which have much more dynamic capital-raising systems completely out of the control of government regulation, the Chinese capital markets are continuously under a variety of mandates that prevent substantial capital procurement. Small companies in Western countries can more easily seek venture capitalists, lending institution support such as banks, and private investment in order to launch a new business model or industrial strategy. In China, due to inefficient and rather short-sighted government influence, only the collective strength of business groups provide the incentive for lenders to lobby government officials to loosen and liberalise pre-existing restrictions regarding the methodologies by which companies are allowed to seek financing and other capital-raising activities. Hence, it should be recognised that business groups such as ChangChung Business Group served as the initial influencer of governmental change that would not have occurred without the cooperative authority and inducements provided by business group strength. A recent research study focusing on ChangChung Business Group identified that the company was able to increasingly diversify its production outputs to attract more business clients and improve its market share through new firm development (Lu and Hung 2010). None of these improvements, which not only improve China’s competitive position in international markets but also improve social welfare, could have been accomplished without the power of business groups to change lender attitudes and governmental policy development. Smaller companies attempting to provide similar products without establishment of a powerful business group would be hard-pressed to make the rapid and economically-important commercial gains that so benefit the contemporary Chinese economy. Yet another example of why business groups are highly advantageous to the Chinese economy can be witnessed with the Yatai Group in China, a leading cement producer and distributor in the country. Yatai was established in 1993 operating as a small-to-medium-sized enterprise upon its foundation. In just five years, utilising its horizontal structure to engage a variety of subsidiary managers and executives, Yatai Group further diversified to include new activities in real estate development, construction, heating supply production and even hotel and restaurant development and management (WCP 2013). Yatai Group was able to utilise its collective authority achieved through rapid capital procurement to create many different subsidiaries within a rapid timeframe that could not have been successfully accomplished with smaller organisations. Today, the rapid development of a diverse set of products and services boasted by Yatai Group has given Yatai Group the ability to secure its own lending system that continues to provide financial capital support for many of its subsidiary companies. In October 2013, Yatai Group guaranteed loans totalling RMB 890 million for all of its subsidiaries (Reuters 2013). This is something unparalleled under the traditional conglomerate structure, where various subsidiaries of the parent company must seek financing and capital procurement independently utilising traditional, existing capital markets such as banking institutions. Why is the rapid success of Yatai Group constructive in understanding the successes of Chinese business groups? The horizontal structure in which Yatai Group operates provided the business with a new type of experience as a financial lender, further diversifying the managerial competencies and prowess of those managing under the structure. Today, Yatai is not only equipped to provide available funding for subsidiary development (thereby improving its production capacity and efficiencies), but created a new infrastructure for alternative capital-raising that is not currently supported within a highly regulatory governmental environment. In Western nations, it often takes decades to achieve the rapid physical capital and economic capital necessary for expansion and product diversification; which is a timeframe that Yatai did not have to encounter simply as a result of being an influential business group with considerable economic clout in the nation. Essentially, involvement in a business group provided Yatai Group with much better inter-firm performance, a phenomenon recognised by Guillen (2002) as being a positive outcome of business group affiliation. Furthermore, a new type of economic embeddedness was created through Yatai’s affiliation as a business group entity, allowing better and more efficient access to a variety of scarce resources (Granovetter 2005). This is unparalleled for smaller-sized business organisations and those businesses which must rely on governmental approvals and support to gain access to said insufficient economic and tangible product resources. A holistic evaluation of business group advantages In further discussion of the potential welfare advantages provided to the Chinese nation as a result of business group involvement, it should be recognised that business groups do not reduce positive welfare outcomes in society (Aoki 2001). Depending on the structure of the business group (i.e. pyramidal or horizontal), business groups maintain the ability to strengthen social relationships (Yiu, Lu, Bruton and Hoskisson 2007) that have lasting impacts on Chinese culture. Why is this? Under the horizontal structure, it is primarily managerial control that is shared between different subsidiaries within the group structure. A respected definition of business groups illustrating inter-connectivity between different business units through informal structures illustrates that various independent business subsidiaries often share a similar cultural identity or shared set of goals. Rapid growth of business groups (i.e. hasty capital growth and production capacity improvements) allow inter-dependency at the managerial level to occur within the business group whereby different cultural backgrounds begin to work collectively to create new strategic intentions for the entire business group. These internal connections change attitudes of employees to embrace diversity of thought and behaviour whilst also building a new type of managerial human capital that produces more efficient and loyal workers. The long-run impact on the Chinese economy is the rapid production of better skilled workers which adds more clout to the human resources competencies within a variety of business units. Additionally, outside of human capital improvements created by business group growth and development, affiliation in the business group also provides opportunities to be more effectively responsive to changing market conditions. Michael Porter, a respected business theorist internationally, identifies that some of the most significant competitive threats to all business types is growth and emergence in competition, bargaining power of raw product suppliers, and also international competitive rivalry (Porter 2011). As one example supporting strength of Chinese business units, the horizontal structure which facilitates more internal cooperation between subsidiaries allows the business to more effectively examine changing market conditions and make strategic-oriented changes to ensure the business can maintain dominance over suppliers (which impacts overhead and other procurement costs). For instance, by being able to rapidly procure credit and other necessary funding capital, business units become highly influential in setting prices and demanding certain quality standards with various raw materials suppliers that support production capabilities of the business group. Other small-to-mid-sized businesses often have prices dictated by their suppliers since the diversity of available buyers to the supplier are substantial. Business groups have the ability, through internal cross-communication and subsidiary development, to act much like a business entity operating in an oligopoly. Under macroeconomic theory, oligopolies are market structures dominated by a small volume of businesses (Hirschey 2009). By establishing collective partnerships that work toward a common economic or production-oriented set of goals, size becomes a significant influencer that gives the business group more buyer power and also serves to drive out smaller competition with this authority in price negotiation. Essentially, the business group becomes a dominant market player simply through coordination and scope of business operations which has immediate impact on improving the lifestyles of Chinese citizens and also enhances the total gross domestic product outputs currently boasted by the Chinese government. Rather than spreading the commercial wealth between many different smaller-sized business entities across the country, the monopolising effects of business unit affiliation provides more rapid production outputs and economic gains for the government and the people of China. Conclusion Research did not uncover any significant hindrances to business group affiliation that would suggest the country should abandon its current adoption of business groups. As illustrated by the research, these business units provide significant social welfare gains for the country, enhance the speed by which market players can achieve production outputs, creates alternative sources of funding that assists in competitive business developments, and even changes the governmental stance on business support legislation that would not be accomplished without maintaining a dominant force in improving the national economy. Business groups are highly influential in controlling costs along the supply chain by improving their bargaining power with suppliers which has significant implications for consumerist China and those who support commercial activity through product purchase behaviour. There is ample evidence that China should continue to embrace business group growth and development as the many economic and lifestyle gains provided by their rapid acceleration and ability to procure necessary capital for expansion are unparalleled by any other type of business structure commonly found internationally. Business groups have much more leveraging power due to the enhancements to human capital development than other business structures commonly found in Western countries, something necessary to improve the country’s overall competitive position against international competitors in a wide variety of industries. Without the development and growth of business units in China, it is likely the country would still be struggling with finding its authority as a competitive nation in multiple markets, still today relying on smaller-sized businesses to attempt to create a very diverse set of production outputs that continue to enhance contemporary Chinese lifestyle. 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