Chinese Investment Policy - Report Example

International Marketing Table of contents Table of contents 2 0Chinese outward investment and internationalisation process theory 3 1Reasons for Chinese outward Investment 4 1.2 Internationalisation process Theory 5 Conclusion 10 Reference 12 Bibliography 15 1.0 Chinese outward investment and internationalisation process theory Figure 1: Chinas outward foreign direct investment (FDI) (Source: Alon, et al., 2010) From 2004 onward China’s outward foreign investment has shown a major increment. The above given chart indicates a sharp rise in total outward FDI from 2004 onwards. China’s outward FDI is mainly in Asian nations; Investment in Hong Kong and Taiwan & Macau in also quite high. Figure 2: Geographical composition of Chinas outward FDI (Source: Alon, et al., 2010) 1.1 Reasons for Chinese outward Investment The world that we see today is the by product of globalisation. The term globalisation can be defined as “those processes that have made the world increasingly interconnected through important technological innovations in transport and communications, facilitating a spread of goods, services, information, capital, labour and knowledge across (international) boundaries worldwide” (Bell, 2005, p.20). After liberalisation, the Chinese economy became open to globalisation, as for example in 2004, trade alone contributed to 70% to the GDP of China (Overholt, 2005, p.5). At present when all the developed economies like US and UK are struggling to come out of the recession, China emerged as the fastest growing economy of the world (BBC NEWS, 2010). Liberalisation of the Chinese economy paved way for development in various other sectors. As for example, in 1990, 73% of the population was living in poverty whereas in 2003 it was reduced to 32%. This economic renaissance was largely the result of the policies adopted by the Chinese government which accelerated the rate of globalisation (WTO-a, 2006). Figure 3: Industrial composition of Chinas outward FDI (Source: Alon, et al., 2010) The “Go Global” strategy adopted by China motivates Chinese known brands to enhance their presence in international markets. As for example Lenovo, a computer maker acquired personal computer business of IBM and China National Offshore Oil Corp bided for Unocal, which was the world’s largest biggest oil company (Barboza, 2005). 1.2 Internationalisation process Theory Different scholars have different theories pertaining to the process of internalisation. These theories can be explained with the help of models which have been followed by different companies in the process of internationalisation. Few of the theories have been discussed below: Traditional internationalisation theory (Buckley and Casson, 1976): The advocates of this theory are of the opinion that some firms seek the opportunities prevailing in the foreign markets. This theory also explains that the main motto of the company is to reduce cost and to gain control on the international resources (Westhead & Wright, p.viii). As the cost of production is low in China, hence these Chinese companies do not invest in international market to reducing production cost. The main aim of foreign investment is to attract more customers in international market. Uppsala Internationalisation Theory (Johanson & Vahlne, 1990): This theory explains that internationalisation is a step by step process. Initially, the firm will produce goods for its own domestic market eventually it will export to other markets. With time the firm develops its sales subsidiary and gradually manufacturing activities shifts to foreign markets (Summer 2004, 2004, p.156). Figure 4: Uppsala’s Model (Source: Brüggemann, et al. 2007, P.10) This was the process followed by many well known Chinese brands like Lenovo or Air China in past. However being a slow process Uppsala’s model is losing its importance. A Born Global firm (Knight and Cavusgil, 1996): These are the firms which from the very beginning obtain a substantial amount of revenue from international markets. These are similar to “International New” ventures as well as “Global Set-Ups”. Hence the goods and services are designed mainly for the international clients. Advancement in technology like internet, e-mail, electronic data interchange coupled with reduced cost associated with international business have motivated the development of “Born Global” firms (Etemad, 2005, p.16). Figure 5: International performance of International firm (Source: Etemad, 2005, p.18) This model is gaining acceptance among many Chinese companies who prefer to develop an international brand. As per this model the companies design their business model that is in compliance with global contemporary business model. Stage Model of internationalisation (Czinkota & Johsson, 1981): This model explains the steps followed by SMEs in the process of internationalising their organisation. Hence this model is more appropriate for those SMEs which are in the manufacturing sector. However many scholars have criticised this theory as it does not take into account the acquisition strategy. The steps followed are: analysis, choice, implementation, review and redefinition. Figure 6: The stage model of internationalisation (Source: Witt & Greenwood, 2009, p.129) Unlike Uppsala’s model, this is also a traditional model which was used by many Chinese companies in past for internationalising their businesses. Dunnings Eclectic Mode (Dunning, 1988, 2001): This theory explains the factors taken into account by FDI while making investment in a company. These factors are Organisational, Location & Internationalisation. This model is often called OLI model because of these factors which form the core of the model. As per this theory the organisational factors can be trade mark, entrepreneurial skills, production skills and return on sales. The location factors can be attributed to abundant supply of raw material, low wage rate, advantage in taxes and tariff. The internalisation facts are related to internationalisation (Twomey, 2000, p.8). Figure 7: Decision Tree of FDI as per OLI Model (Source: Welch, et al, 2007, p.31) Apart from this model, international B2B strategies are also vital as it explains the reason behind firms going international and the manner in which progress is made. The B2B strategies often focus on intangible components because it is not possible for the firms to experience the products physically. In majority of the cases differentiation is done on the basis of services. Considering the changing market conditions, companies often develop strategic collaboration to gain competency. The three strategic collaborations are discussed below: Forward integration: Where the firm integrates with distributors; as done by British Airways. Backward integration: Where the firm collaborates with suppliers; as done by Tesco. Horizontal integration: Where companies in the same business merge to gain synergy; as done by Barkley’s Bank as well as Lloyds TSB. With advancement in technology and growing use of internet assists Chinese firms to enhance their business in foreign countries through mergers and strategic collaboration. The Chinese firms are actively accepting B2B business model. After considering different theories on internationalisation, it appears that “Born Global Firm” process is quite suitable for the Chinese firms. According to this process, the companies design and develop products for international clients from the very inception. As compared to developed nations, cost of production is quite low in China; hence many international companies are outsourcing products and services to China. Hence “Born Global Firm” is the best suited strategy for the Chinese firm to attract international companies. Conclusion As compared to many developing countries in East Asia, China is one such nation which emerged as the fastest growing nation even during the worst hours of economic crisis. (WTO-b, 2005). Properly planned strategy for internationalisation was instrumental behind this success. In past many Chinese firms have made heavy investment in Asian regain but investment in US as well as in European nation is still low. This results in a misbalance in the outward FDI portfolio. In past many Chinese companies succeeded in entering international market through mergers and acquisition. As per the “Best Chinese Brands 2007”, Chinese firms have acquired high brand value in telecommunication sector (China Mobile), Financial services (China Construction Bank), IT sector (Lenovo) and many others (Interbrand, 2007, p.7). However the Chinese brands suffer with the halo effect of “made in China” that symbolises cheap products and low quality standards. If the Chinese firms have to build a sstrong international brand name, they need to come out of this halo effect as soon as possible. This will assist them to acquire the coveted position in the global market. 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Department of the preliminary Library. 1995. Reform of China’s Foreign Trade Policy. [Pdf]. Available at: http://www.aph.gov.au/library/pubs/rp/1995-96/96rp19.pdf [Accessed on May 21, 2010]. Etemad, H. 2005. Aspects of the internationalization process in smaller firms. Gabler Verlag. Interbrand. 2007. Best Chinese Brands 2007. [Pdf]. Available at: http://www.interbrand.com/images/studies/07BCB_071206.pdf [Accessed on May 24, 2010]. Summer 2004. 2004. Journal of Small Business and Entrepreneurship. Published by Canadian Council for Small Business & Entrepreneurship. Vol. 17, No. 3. Overholt, W. H. May 2005. China and Globalization. Rand Corporation. [Online]. Available at: http://www.rand.org/pubs/testimonies/2005/RAND_CT244.pdf [Accessed on May 21, 2010]. Twomey, M. J. 2000. A century of foreign investment in the Third World. Routledge. Welch, L. S., Benito, G. R. G. & Petersen, B. 2007. Foreign operation methods: theory, analysis, strategy. Edward Elgar Publishing. Westhead, P. & Wright, M. 2000. Advances in entrepreneurship, Volume 1. Edward Elgar Publishing. Witt, H. D. & Greenwood. 2009. Internationalization of Higher Education in the United States of America and Europe. IAP. WTO-a. April 2006. Economic reform has produced impressive results but important challenges remain. Trade Policy Review: China. World Trade Organization. [Online]. Available at: http://www.wto.org/english/tratop_e/tpr_e/tp262_e.htm [Accessed on May 21, 2010]. WTO-b. September 2005. Lamy lauds Chinas contribution to world economy. [Online]. Available at: http://www.wto.org/english/news_e/sppl_e/sppl01_e.htm [Accessed on May 21, 2010]. Bibliography Bennett, R. & Blythe, J. 2002. International marketing: strategy planning, market entry & implementation. 3rd ed. Kogan Page Publisher. Bradley, F. 2005. International marketing strategy. Financial Times/Prentice Hall. Guerrero, D. G. M. & Manji, F. 2008. Chinas new role in Africa and the south: a search for a new perspective. Fahamu/Pambazuka. Guthrie, D. 2008. China and globalization: the social, economic and political transformation of Chinese society. Taylor & Francis. Master of Arts Daniela Margardt. 2009. A Critical Comparison of Internationalisation Theories: Eclectic Paradigm of Dunning Vs. Uppsala School. GRIN Verlag. Mooij, M. K. & Mooij, . No date. Global Marketing and Advertising: Understanding Cultural Paradoxes. SAGE. Zhang, Y. 2003. Chinas emerging global businesses: political economy and institutional investigations. Palgrave Macmillan. Read More