Globalization of Chinese Companies - Case Study Example

Abstract Globalisation is a process where a firm considerably depends on foreign markets for its operations in order to obtain and improve its power in international production, managerial skills, and resource distribution. Most Chinese companies have taken their operations overseas. Nevertheless, these companies have faced several strengths and weaknesses when penetrating the overseas market as it will be explained in this paper. The paper will also explain the concept of globalization. There are two different types of businesses based on ownership namely; state-owned enterprises (SOEs) and privately owned enterprises (POEs). SOEs are owned by the State or country while POEs are owned by individuals. The paper will also use examples from actual enterprise practice to explain the difference between between state-owned enterprises (SOEs) and privately owned enterprises (POEs). Name College Course Tutor Date Globalisation of Chinese Companies The emergence of China is an exceptional and a historical occurrence. The whole world is focusing on China because of its development rates of about nine to ten percent over the past several years (Lin 2004, p.14). China has risen to a global super power such as the United States. Experts believe that sustained development of China is a key example that will result to a constant move of financial hub from the Western countries to Eastern countries. China decided to go global in an effort to expand its market. Globalization surfaced as a key strategic subject for Chinese business soon after the global recession breakout in 2008. Experts stresses that opportunities formed by financial globalization and State’s unremitting efforts to grow a good market financial system have helped China’s economy to achieve a lot in a short period. Integration into the international economy has characterised China’s reform history and exposure. The growth of EMMs (emerging market multinationals) and the surfacing of a multi-polar globe have transformed the circulation of world financial power. Thus, globalization has become the current trend in the world today. Globalisation refers to the process where a firm considerably depends on foreign markets for its operations to obtain and improve its power in international production, managerial skills, and resource distribution (Zahra 2005, p.20). Globalised enterprises do not restrict themselves to local markets in their approaches, invention of strategies, organisational culture, and decision making. Instead, such companies utilise the international market as the only context for activities. Globalisation level of an organisation is measured by its managerial and operational abilities in the international market. Operational capabilities reflect the level of dependence on foreign markets while managerial abilities reflect managerial expertise, resource distribution, and business allocation. Global managerial and operational abilities include an international vision, R&D, coordination capabilities, brand management, and cross-cultural communication. Based on the ratio of foreign business in the overall dealings of an organisation, globalised companies are categorised into any of the three globalisation stages namely: the original stage, export oriented, taking part in globalised businesses, or concentrating on value-chain optimisation. The globalisation of businesses in China can be tracked to the original stage of the State’s opening up and transformation. The government declared the ‘going out’ approach for companies. Chinese businesses did not start to accelerate their international attempts until the 21st century (Lin 2004, p.17). The 2008 global recession presented China with an opportunity to venture globally. Since then, China has recovered effectively compared to other nations that continue to recover slowly. This position has presented Chinese businesses with an exceptional opportunity to expand on the foreign stage. The State’s globalisation has astonished the whole world. Consequently, China’s FDI (Foreign Direct Investment) has increased recently (Zahra 2005, p.25). Phases of Globalisation a) The Initial Phase A business in the initial phase is already shifting into foreign markets, although its global operations are small (Clarke 2003, p.494). Additionally, it boasts modest international managerial and operational abilities. Most Chinese businesses are currently in this phase. b) Value-Chain Optimisation Phase This phase is identified by businesses that generate some of their profits from exports and tend to own assets in foreign countries. However, they still remain embedded in the domestic marketplace. Companies in this phase can globalise by shifting upwards in the value chain through R&D (Research and Development), promotion channels, technology, as well as branding means such as acquisitions, strategic associations, and mergers. c) Globalised Operation Phase A business operating in this phase is actually globalised regarding senior management, product-oriented allocation, people, and markets. International operation comprises of a considerable fraction of its overall business (Lin 2004, p.22). The organisation has the abilities required to control its international operations. Also, the organisation views foreign and domestic markets as equals. Only few organisations in China have acquired this phase. Strengths and Weaknesses of Chinese Enterprises when Expanding Overseas China has faced tremendous successes in its industrial growth that can be identified through market development, technology, and reputation of trust (Goldeng, Grunfeld, and Benito 2008, p. 109). These factors have allowed China to start investing in different countries especially in Africa. The world remains astonished by the rate at which China is growing and expanding its operations. Alternatively, China firms have several weaknesses that can make expanding to the global market difficult. The first strength of Chinese enterprises when expanding overseas is its sound market (Clarke 2003, p.495). Healthy demand in both overseas and Chinese market has contributed to the growth of industries in China. Different measures at different times protects Chinese domestic marketplace but overseas businesses have attained considerable proceeds due to increased openness. Simultaneously, the multilateral trade system and overseas businesses remain indispensible for the economic growth of China. China has been dubbed the “world’s factory” because of its vast market in Europe, Japan, and the United States. The Chinese in-house market is a huge and fast growing mass marketplace that helps the growth of industries because such market does not require high-tech technologies and the fact that affordability is required to become competitive (Zahra 2005, p.24). For instance, Lenovo increased its sales in the Chinese market through mid-range commodities that serve middle-class customers in China. Chinese automobile products are competitive and forms about 40% of the market. China has also accomplished its fast economic development by effectively catering for overseas demand. This export-driven development has been attributed by overseas nations that welcome products made in China under overseas-related firms and free multilateral trade structure. Nowadays, Chinese exports make up 40% of China’s overall GDP (Gross Domestic Product). This dependency level is a lot higher compared to the United States that accounts for 13.8% and Japan that accounts for 15.19% (Megginson and Netter 2001, p.100). A good example of China dependence on overseas marketplaces includes the solar panel business. The swift growth of Suntech Power and other manufacturers of solar panel can be credited to overseas demand, mostly Europe. Therefore, China continues to benefit from its domestic and foreign market when expanding overseas. The second strength of Chinese enterprises when expanding overseas is technology (Goldeng et al 2008, p. 115). Technology has contributed to economic growth in most countries including China. China’s history as a successful economy can be reviewed with regard to its efficient approaches to ease technology relocation from overseas companies. After the Second World War, the Soviet Union initiated technology relation to China with an intention to reinforce bilateral connections throughout the Cold War. China has been acknowledged as a successful economy but Western firms have also offered technical assistance (Clarke 2003, p.497). This success enabled Japanese firms to take part in modernizing Chinese civilization. The Chinese administration needed overseas investors in different businesses to build joint ventures with Chinese companies. This success has placed Chinese businesses in the global market. International customers acknowledge that China fabricates premium PCs (Personal Computers) and high-performance goods (Megginson Netter 2001, p.118). Other consumers believe that China-made devices with Apple emblems such as iPhones and iPads are sophisticated and attractive. Undoubtedly, globalization, of companies’ activities, which is a model in the 21st century, has considerably improved the image of China-made products. Huawei is a good example of a firm benefiting from advanced technology. Its relations with Japanese and United Stares corporations are many and remain significant for maintaining and improving its status in high-technology rivalry. Therefore, Huawei can spread its wings to overseas nations because of its capacity to do so as well as technology that can be used to produce devices that can compete with other global companies in the global market (Lin 2004, p.26). Even though Chinese firms are more dynamic on the international stage compared to other businesses in the world, some of them still remain in the initial stage of globalization (Goldeng et al 2008, p. 348). They have garnered tremendous gains from going global. However, Chinese enterprises have portrayed several weaknesses when expanding overseas. The first weakness of Chinese firms when expanding to the overseas market includes cross-cultural hurdles. According to Clarke (2003), Chinese businesses face cross-cultural impediments, for example differences in the responsibility of labour unions, outlooks toward intellectual assets, and corporate governance configuration, created by diversities in social structures (p.494). Therefore, Chinese companies wanting to operate globally can advance these impediments by surmounting them. The second weakness of Chinese firms when expanding to the overseas market includes inadequate talent expertise in overseas languages, global management practices, international regulations, and local cultures (Zahra, 2005, p.27). Fewer supervisors want to operate their firm’s international businesses because of progressive living standards in China as well as abundant career growth opportunities. Most businesses are facing problems positioning qualified supervisors in other branches mostly in developing nations (particularly in harsh regional conditions). The third weakness of Chinese firms when expanding to the overseas market includes inadequate experiences with the management and coordination of complex and large-scale overseas operations (Lin, 2004, p.28). Technology in China can be seen as strength and weakness. China is able to adopt fresh technologies and overturn engineering but it cannot create fresh ideas and invent innovative technologies. Therefore, Chinese firms must optimize their processes and formulate strong globalization approaches. When creating globalization approaches, companies should respond to three major questions such as: a) What are the required actions? b) What is the location of performing those activities? c) How are these activities going to be done? Companies will only be able to reply to these queries depending on their globalization abilities and goals, including the features the industries they compete in. State-Owned Enterprises (SOES) and Privately Owned Enterprises (POES) The first difference between State Owned Enterprises (SOEs) and Private Owned Enterprises (POEs) is that; SOEs operate under the government-based governance model system with the state holding the controlling shares while POEs operate under family-based governance model system (Chen and Ding 2000, p.4). Although private ownership is the leading form of ownership in most market-oriented societies, state ownership exists. Yet deliberate and dynamic privatization and liberalization policies, particularly for the past 20 years, have resulted to significant decline in the number of SOEs (state-owned businesses) in China. There is a continuing discussion about the advantages and disadvantages of SOEs. The second difference between POEs and SOEs is their difference in remuneration system. In POEs, the remuneration system for managers and firm operators offer little incentives unlike the relatively monotonous remuneration system for managers in SOEs. In POEs, the remuneration system includes pension schemes, social welfare benefits, housing contributions, training, internal profession path, employees’ shares, and salary incentives. The third difference between POEs and SOEs is their different equity structure (Chen and Ding 2000, p.6). The survey of governance system of private firms in China found out that in China, the ratio of private stocks of owners in Privately Owned Enterprises (POEs) is around 66% while in SOEs, the equity of legitimate individuals to the overall equity is higher. Government-owned stocks cannot be distributed on stock markets but can be shifted to legal individual shareholders in contractual type of acceptance. The fourth difference between POEs and SOEs includes the different internal governance. In POEs, the internal governance is family-based and blood relatives are involved in the balance and distribution of power (Shi 2000, p.4). Spouses married to POEs proprietors are also involved in marketing and purchases. Reviewed from an internal governance angle, the government is not an effective shareholder in state-owned enterprises. Managers have strengthened their power and have intensified the control influence de facto by capitalizing on the supervising vacuum and limiting power after the collapse of a premeditated economy. The fifth difference between POEs and SOEs is that in POEs, individual proprietors are involved in decision-making despite the presence of shareholders and board of directors unlike in SOEs where an individual can serve as the general manager and the chairman of the board of directors (Chen and Ding 2000, p.5). The sixth difference between POEs and SOEs includes different external governance (Shi 2000, p.5). From the family control angle, POEs do not depend on the outside market system to constrain and encourage managers unlike SOEs that rely on external governance, particularly in the appointment of managers and operators, examination and approval of key decisions, and external supervision, as well as restrictions over functioning activities of managers and operators. The seventh difference between SOEs and POEs is the different competition levels. In POEs, competition is higher than in SOEs. The standard Cournot theory as highlighted by Zahra (2005) states that monopoly lease is competed away if the number of companies increases in a marketplace (p.22). Therefore, although a government owned company is inefficient, for instance because of problems of management inducement, its performances with respect to profits may be bigger compared to a private owned organization because it faces less severe competition. It is important to highlight that SOEs could suffer more from sound competition than POEs if less effective SOEs contend with POEs in a particular market. Without more flexible budget limitations, SOE must egress the market or re-invent its approach in an effort to enhance competitiveness. Therefore, SOEs may suffer less from strong rivalry compared to POEs. Businesses with flexible budget limitations, like numerous SOEs, supervisors can gain from sound competition with learning (Goldeng et al 2008, p. 634). If POEs egress the marketplace, SOEs can use more time to adapt to the rivalry using imitation and learning. Researchers also indicate that supervisors concentrate on the performance of other supervisors. Owners can also gain from sound competition because decline in slack reserves because of competition restrains the discretionary conduct of managers and the ability to benchmark managers’ performance against the paramount practices amongst competing organizations. Let’s imagine that POEs maximize proceeds and individual principals do not have issues with information irregularities. In such an instance, POEs will reduce costs despite the rate of competition. Sound competition will only cause fewer profits. This case would be different in SOEs. If SOEs operate in aggressive markets, profits would decline but production would become efficient through the delineated learning technique. This indicates that sound competition may cause fewer damages in the long-`run to SOEs than POEs. In conclusion, globalisation is the current trend in the business world whereby most companies want to venture into international markets. Nevertheless, companies with advanced technology and strong markets survive globalization. China’s ability to entice international consumers as well as its advanced technology has helped Chinese companies venturing globally to survive. Nevertheless, lack of knowledge on other cultures has been a weakness for most Chinese firms. Inability to innovate new technologies has also been a weakness to most Chinese firms. Therefore, it is important for Chinese firms to support their employees into learning new cultures before venturing globally. Some companies are owned by governments (SOEs) while others are owned by individuals (POEs). SOEs are unable to compete in aggressive markets like POEs because they lack enough capital. Profits for Privately Owned Enterprises (POEs) increase in aggressive markets unlike SOEs profits that decrease although production becomes effective. Therefore, it is easier to conclude that POEs are easier to operate than SOEs. Reference List Clarke DC, 2003. Corporate Governance in China: An Overview. China Economic Review, 14, (1), pp. 494-507. Chen X and Ding D, 2000. Movement of Equity toward Multi-Factors, Corporate Performance and Industrial Competition. Economic Research. No. 8. Goldeng E, Grunfeld, LA, and Benito RG, 2008. The Performance Differential between Private and State Owned Enterprises: The Roles of Ownership, Management and Market Structure. Journal of Management Studies, 45, (7), pp. 22-2380. Lin TW, 2004. Corporate Governance in China: Recent Developments, Key Problems, and Solutions. Journal of Accounting and Corporate Governance, 1, (1), pp.1-23. Megginson M and Netter J 2001. From State to Market: A Survey of Empirical Studies on Privatization. Journal of Economic Literature, 39, (1), pp. 321–89. Shi D, 2000. Equity Structure, Corporate governance and Efficiency Performance, Economic Research.No.1. Zahra SA, 2005. A Theory of International New Ventures: A Decade of Research. Journal of International Business Studies, 36, (1), pp. 20-28. Read More