The Multinationals of China - Literature review Example

The multinationals of China Introduction The past two decades have witnessed rapid growth and development of the emerging economies. The process of internationalization of the multinationals of the emerging countries like China, India and Brazil differs from the internationalization of the multinationals from the developed countries like Japan, USA and Europe. This group of multinationals have benefitted largely from inward internationalization at home by coordinating with global players that have transferred technological and organizational skills to the multinationals of emerging countries, allowing these enterprises to undertake outward internationalization later in unconventional ways. The common trait that has been very prominent in the multinationals from emerging countries like China is that the these multinationals have used they use outward investments as springboards to acquire strategic assets so that they can compete with the global rivals to avoid the institutional and the market constraints that they face at home. Undoubtedly these firms had a lot of disadvantages when they began to enter into the world economy the foremost being that these were latecomers in the world market and were technologically backwards compared to their developed counterparts. The reasons of entry by the Chinese multinationals were quite unique and the reasons were dominated by needs rather than setting trends. The purpose of this paper is to analyze the strategies that have been used by the Chinese multinationals in their expansion in the global market. This will help in the answering the question that whether China should develop its own group of MNC’s in competing with the global players to gain a competitive advantage. The issues of China The study conducted by Nolan, Zhang and Liu (2008) has provided a great insight about the global business revolution and the challenges that has been faced by the multinationals of the developing countries (Nolan, Zhang, and Liu, 2008). Their study have observed that the neo classical economists believe that one of the best features of globalization is that when the weak firms can learn from the strong firms when they are free to compete. It was believed that the weak firm will be able to catch up with the strong firms in the long run by learning from them. However, in practice since the business revolution of the 80’s, results have been quite the opposite. There has been consolidation of industrial power mainly by the firms that operates in the high-income countries. The global powers have consolidated their leading positions and this in turn has adversely affected the interests of the firms from the developing countries. The study by the trio across four major industries has led to the same conclusion that the global powerhouse from the developed countries has transformed the industrial structure across the supply chains in all four industries. This makes the problem more daunting for the developing countries (Nolan, Zhang, and Liu, 2008). The position of China in developing multinational enterprises is quite a unique one. This is because the number of multinationals that have emerged from China is only few (Lenovo, Air China, Bank of China to name a few). Till 2011 none of these brands had entered the list of Global brands awarded by Business week. The global presence of Chinese brand is extremely less. However, in terms of revenue the Chinese companies have grown steadily in Fortune’s list of 500 companies. Merely the figures of revenue do not necessarily indicate that the Chinese companies are truly multinationals. The reasons for which China could not successfully make its companies multinationals in true sense are: Firstly, only a few multinationals in China have the resources and capital to carry out their operations on a global scale and most of them have not been able to establish global production, marketing and distribution. Secondly, the human resources of China represent another problem. The linguistic and the cultural barriers in China has been one of the major problems that has prevented the companies of the country to act on a global level. The appropriate development of the human resource is the chief requirement of China. Thirdly, the companies and their management have failed to escape the national corporate culture and their business practices. The business environment is highly politicized and the business houses prefer interpersonal relationships over institutional relationships. The business decisions are mostly geared to make short term benefits. All these reasons collectively has lead to the corruption in the business environment which has aggravated the problem. Fourthly, mergers and acquisitions have become the sole way in which Chinese companies are going multinational as they are making use of the resource and technology of the established business enterprises of the foreign countries to adopt their technological knowhow. Though this process has been successful in some cases but there are also instances when the mergers and the acquisitions has not been quite successful. Fifthly, the firms have good performance indicators and incentive programs their other aspects of management has not been strongly managed. The hierarchy of the structure within the organization of Chinese business is in a constant clash with the Western countries and this causes problem in the internationalization ventures. Sixthly, most of the Chinese companies do not want to venture out because the ones which did had to face problems in the foreign legal, political and the tax system. The companies has not been very transparent in their corporate governance and the opaque decision making process has maligned the global reputation of the companies. Finally, the problem of reciprocity is most significant in China. Most of the companies which enter into agreements with China want the Chinese to help them domestically. The situation is of a quid pro quo and the governance structure of the companies makes it even more difficult. Most of the Chinese multinational companies have a bureaucratic firewall between them which prevents the domestic division to communicate clearly with the foreign departments and this hampers the learning process (Shambaugh, 2012). Needs for global strategy All the well managed companies across the world have moved from the focus of producing customized products to the production of globally standardized products that are advanced and reliable. Empirical evidence strongly points that the American and the European companies have successfully established their global presence and has reaped the benefits. The globalization of the countries has provided improved opportunity for the companies to take the benefits of the increased business integration (Kotabe, 1985). The development of strong group of multinationals is extremely crucial for China to help itself emerge in the world economy as a dominant player in the multinationals. There can be two major issues that can arise when the companies in China decides to go multinational. The first way will be that the companies will use the home based competitive structure when they decide to expand their business and the second way is the home base augmenting behavior when they decide to compete (Yeung and Olds, 2000). This will provide the country with the opportunity to adapt to better technologies. The success of the multinational companies will add to the robustness of the growth of the Chinese economy. The globalization of the Chinese firms has started from the period of the 90’s when China had started to open up its economy to the foreign competition. There are certain objectives which summarizes the reasons for which the China should consider the fact that the domestic companies should go multinational: Firstly, the pressure for survival among the products of various companies has made it essential that the companies come up with products of superior quality. The consumers across the globe has become more aware about the quality of the products and the dominance of companies like Google and Apple has shown that good quality products are always in high demand. If China has to enter as a global brand in these industries then creating an own group of MNC is essential for the company. Secondly, expanding the scope of development is also an integral part of the development of multinationals. This is because the scope of development can improve when companies develop through a worldwide network. Thirdly, the globalization of the Chinese business firms will help them to move up in the value chain. This will provide the country with competitive advantage and establish the companies as truly globalized companies (Hitt, Ireland and Hoskisson, 2008). This multinational company has great potential to enhance the productivity of a country through capital investment, research and development and trade. If China is successful in creating a group of strong multinational companies then this will also help the country to create strong position in jobs and other social sector of the economy (Pontes, n.d.). This has become particularly more important in the context of the global financial crisis when a lot of people in the country are losing their jobs. China is one of the countries which have high resources in the labour markets. Yet the technological development of the country has not been very strong which has provides a very big reason for the country to globalize its business operations and gain a strong global foothold. The analysis of the present problems in the Chinese context shows that a change in the corporate governance of the existing large businesses in the country is a precursor for the establishment of successful business network. The human resource problem that the country faces mainly in the form of linguistic barriers indicate that the country make advancements by building a strong base of young managers who can overcome the linguistic barriers. The development of multinationals will allow the people from the country to work in the foreign companies and learn from the new processes (Accenture, 2008). The opportunity that can arise from the economies of scale for the country will be huge when the companies have a global scale of operation. This becomes beneficial for the multinationals as they enhance the productivity of the companies. This will eventually lead to rise in productivity of the country which will propel further growth. The most important fact is that no nation can realize its full growth potential unless it opens itself up to the world economy and this makes optimum use of all the resources. This is the reason why the corporate structure of the businesses in China requires a revamping to establish itself as one of the countries whose companies are truly multinational (Venables, 2004). The progress made this far The eclectic theory of John Dunning is quite useful to explain the internationalization of the MNCs. This theory has been developed from the 1980’s and till date has been quite successful in explain the internationalization of MNCs (Dunning, 2001). The eclectic paradigm of multinational advantage developed by Dunning shows the advantages that the international firms can draw from their operations abroad. These advantages mainly come from three factors namely the ownership advantages, locational advantage and international advantages. The initial model developed by Dunning has been extended both by himself and by other scholars who have stretched the model to understand the new developments that has been occurring in the actions taken by the multinationals. These new developments include the rise of international mergers and acquisitions, joint ventures, collaborative alliances and the rapidly extending newcomers (Mathews, 2006). The experience of China is not very bad in the context of internationalization of multinationals in the global market. The experience of China shows that the multinationals from this country are taking aggressive cross border mergers and acquisitions (Suna, et al., 2012). This difference in the nature of the industries in their expansion process has made them unfit to be explained by the existing theory of Dunning. The research conducted by Suna et al. (2012) developed a comparative advantage of model by identifying five major attributes national-industrial factor endowments, dynamic learning, value creation, reconfiguration of value chain and institutional facilitation and constraints. Their research has made certain forecasts about the multinationals of China and India using the comparative advantage ownership features. The study conducted by Luo and Tung (2007) studies the various features by which the multinationals from the developing countries are using the mergers and acquisitions to add to their advantages. These firms are constantly absorbing the technological knowhow from their developed country counterparts. These firms are seeking sophisticated technology and advanced technological knowhow by acquiring the foreign companies (Luo and Tung, 2007). This behavior differs widely from the ways in which the multinationals from the developed countries behave. It has been observed that the developed country multinationals have been exploiting their ownership specific advantages in their expansion in the foreign countries. The multinationals form the developing countries on the other hand have taken up upfront internationalization to fill the void of resources they have. This has also helped them to a great extent to overcome the disadvantages of being latecomers in the business. These studies show that the emerging economy enterprises are a new breed that can pose threat to the global players if they can strategically place themselves in the global markets. However, these studies are more about firms and industries at an individual level and not at an aggregate level. The present cases show that China. The cross border mergers and acquisitions have become the new mode of internationalization in the global market. So the pertinent question is that whether the group of Chinese multinationals should form their own group so that they can gain an advantageous position in the global supply chain. If this happens the direct advantage of this will be that the multinationals from China will become the major integrators in the extended value chains. Under these circumstances the ‘cascade effect’ as has been discussed by Nolan et al (2007) will be reversed and the consolidation of power by the industrialized nations will stop. Conclusion This paper discuses the development of the multinational companies by China. Presently the scenario of multinational company is largely dominated by the Western countries like America, Europe and Japan. These countries have strong presence in the international brand scenario. The situation for China is that though the companies in China has been hugely successful in exporting the products to the foreign country but has not been quite successful in creating multinational companies in the truest sense. There has been a host of reasons which has been pointed out that acts as the weakness for China to develop its companies as truly multinational. However it can be said from studying the present situation that the first step needed by the country has already been taken and this has manifested itself by the fact that a large number of companies in China have taken the route of merger and acquisition with the foreign companies to improve the technological aspects of the company. This move has been quite successful as the multinationals from the emerging countries lack to some extent the ownership advantages that are enjoyed by the developed countries. The country needs to take more proactive measures like FDI in foreign countries to make their presence global instead of just exporting the products. This will be important as given the importance of multinationals in the overall economic development of any country; the same move by China will contribute to the overall economic development of the nation and at the same time to prevent the consolidation of powers by the multinationals by the developed countries. 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