International Integration and International Business - Essay Example

The common definition of globalisation suggests that globalisation is fuelled by the interrelationship between various central trigger factors including economic, technological, socio-cultural, political and biological factors, resulting in the interconnectivity of states. In turn, the proliferation of the globalisation phenomenon has offered novel business opportunities regarding expansion in international business strategy. This has fuelled a debate regarding the appropriate mode of entry as part of international business expansion strategy. This paper critically evaluates the international integration of globalisation in international business strategy and posits that ultimately any entry mode strategy for business ultimately requires a subjective risk assessment from the business perspective going forward. Additionally, the synchronisation of a corporate strategy that understands the local market as well as local strategic alliances is vital to the success of international business growth strategy. In supporting this proposition regarding international integration in international business expansion strategy, this paper contextually examines the example of foreign companies exploiting the market liberalisation of China in attracting foreign direct investment. A. International Integration (Level of Globalisation) and International Business 1. Introduction The integration of the globalisation phenomenon into business with the increased movement of capital and commodities has had a significant impact on international business strategy (Tomlinson, 1999). The most common definition of globalisation encompasses the political and cultural and social economic aspects of regional and local territories, which integrate and have become interconnected via contemporary global methods of information exchange (Croucher, 2004). Additionally, Held and McGrew argue that globalisation represents the interconnectedness of states, societies and culture, which has thereby propelled global trade, ideas and capital (Held & McGrew, 1999). Furthermore, it is submitted that integration of globalisation in international business has primarily impacted entry mode strategies as part of international business expansion. For example, a common corporate vehicle utilised for international expansion in business is the Multinational Enterprises (MNE), which are essentially firms that “own and control income generating assets in more than one country” (Andersson, 1991: 3). As such, MNEs are often associated with foreign direct investment, which Andersson posits is linked with advantages of ownership and “internalisation along with inter-country differences in factor costs and technology” (Andersson, 1991:3). Directly correlated to this is Andersson’s assertion that “a considerable proportion of the flow of goods and factors between countries takes place within multinational enterprises” (Anderson, 1991:3); which in turn has fuelled polarised debate regarding the advantages and disadvantages of business growth through cross border acquisitions via the MNE business format versus organic growth strategy in international business. The focus of this paper is to critically evaluate the integration of the globalisation phenomenon on international business strategy. In doing so, this paper shall undertake a contextual approach by focusing on the organic growth versus cross border acquisitions via the MNE format. To this end, I shall undertake a comparative analysis of MNE and alternative business growth strategies as a result of globalisation. Furthermore, it is submitted at the outset that the efficacy of business growth strategy with MNEs is directly correlated to the national political and economic framework within any chosen host economy; which in turn shapes choice of entry to the marketplace. In considering this line of argument, I shall contextually consider the business entry strategies of China comparing the MNE structure against other cross-border trade models. 2. Globalisation, Multinational Enterprises & Entry Mode Strategies The integration of globalisation has offered novel business opportunities, impacting strategy for expansion. A common tool utilised to exploit such opportunities is the MNE and pertinent to the debate regarding appropriate business growth strategy within the MNE context is the choice of entry strategy (Muchlinski, 2002 in De Lacy, 2002 at p.249). From a business perspective, the criticised lack of accountability of MNEs is often viewed as a perceived economic advantage of using the MNE format as part of growth strategy in cross border trade due to the tax advantages (Muchlinski, 2002, in De Lacy, 2002 at pp.249-250). If consider this in context of business entry modes to China, the interrelationship between globalisation and China’s market liberalisation has resulted in significant proliferation of wholly owned foreign enterprises (WFOEs) in contrast to Equity Joint Ventures (EJV) (Charles, 2007:213; Rugman & Hodgetts). Between 1993 and 1997, the actual use of WFOEs in China grew at an annual rate. Moreover, Rugman and Hodgetts in their assert that “one of the primary reasons China is becoming a focal point for multinational investment as a result of globalisation is its low labour costs” (Rugman & Hodgetts, 2006: 591). Notwithstanding the economic policies favouring commerce and Foreign Direct Investment (FDI); the OECD in particular have regularly reported on challenges facing FDI in China’s regional development (Charles, 2007:39). If we consider the alternative entry mode strategies, various problems have been associated with the Chinese EJVs, namely joint ownership, which often involves management by at least two parent firms (Luo, 2001: 71). However, with shared management, partner disagreement can paralyse decision making (Charles, 2007). Indeed, it is evident with Sino-foreign decision making and business practices, whereby social and cultural differences contribute to the intrinsic flaw in the “today’s mercurial Chinese Markets” under the globalisation business model (Ping, 2001: 63-72). Indeed Ping refers to Vanhonacker’s reports that Lucent Technologies saw its share of the market for optical fibre transmission equipment in China decline from 70 to 30 per cent in 2000 (Ping, 2001: 63-72). Ping argues that the key reason is that Lucent’s business relied on EJVs in China as opposed to the WFOE and because of shared operational control management it had to make compromises (Ping, 2001: 63-72). Therefore if a local partner proves uncooperative, such internal problems cannot be addressed quickly enough to ensure minimum damage to market entry and market position in a foreign territory, which further appears to support the WFOE mode of entry in China and the business growth strategy of cross trade acquisition via the MNE format (Ping, 2001: 63-72). Alternatively, in terms of organic growth, international joint ventures as an option necessitates strong strategic alliances (Glaister & Buckley, 2004:138). Glaister and Buckley argue that strategic alliances via equity and non-equity partnerships are popular and that “motives for international joint venture formation include access to markets, cost and risk sharing, economies of scale, and access to new technologies (Glaister & Buckley, 2004: 138). Under these conditions, equity sharing and the contractual nature of the international joint venture enables businesses to test the market and leave if the market conditions remain unfavourable, thereby favouring the organic growth option. For example, Glaister and Buckley argue that strategic alliance decreases time to market and access to international market at a greater pace of time (2004). Directly linked to this is effective management at board level and Child and Yan (1999) argue that studies concerning IJV board composition indicate that the percentage of equity ownership of the partners of the IJV is reflected in the appointment of directors and therefore the parent’s equity share directly affects representation on the IJV board in terms of the number of IJV directors (Child & Yan, 1999). On this basis, they further argue that one method to reduce risk is the power of the boards to select senior managers, which lends itself to the cross border acquisition via MNE format argument (Child & Yan, 1999). Furthermore, the globalisation of the marketplace and China’s intentions to exploit this and attract FDI indicates a fundamentally changing dynamic of the way China is attracting foreign investment, with WFOEs becoming dominant entry mode into the market (Charles, 2007: 391). This is significant in placing a foreign company at a competitive edge in the market. Arguably, the causal effect is the disappointing performance of EJVS in China, the expectation that performance problems will accelerate along with the perception that foreign investors dissatisfaction is unlikely to change unless competitive compromises are given (Charles, 2007:64). EJVs are equity sharing arrangements between two partners or a consortium of three or more partners, whereby the risk of joint venture entity, profits and losses are shared in direct correlation to their equity ownership (Charles, 2007:64). EJVS are further considered to be a relatively risky entry mode to the Chinese market as they are inherently dependent on the success of the relationship with the managers from another company in a local territory due to the fifty/fifty equity sharing rule (Luo, 2001:137). Conversely, EJVs may reduce the risk of WFOE because local Chinese partners may help foreign companies understand how to be more successful in the Chinese Business environment (Luo, 2001, pp.137-138). Alternatively, WFOE entry modes include the development of subsidiaries either from scratch using a Greenfield approach, or through the acquisition of existing Chinese companies (Luo, 2001:89). Moreover, it has been argued that since the wholly owned strategy mode of entry has been legally acknowledged by the government in China, there is been a sharp proliferation of FDI (Luo, 2001:71). Export strategies are generally perceived as being a less risky method of doing business in China, which is considered to be unstable and difficult. The primary advantage is the low risk as no capital investment is required at this point, therefore it enables the market to be tested and early pullout with minimum financial consequence (Grant, 2005:306). However, the downside of this export strategy is that foreign exporters are often unwilling to stay behind the contract and there is no room for building up a relationship with the Chinese and as the Chinese company has a permanent presence in China, it is arguably better to utilise a Chinese distributor (Rugman & Hodgetts, 2006: 535) With regard to contractual joint ventures, in China, in addition to the problems of EJVs mentioned above, whilst termed as “joint ventures” these are more akin to licensing agreements as foreign companies will not take up ownership in ventures with the Chinese (Luo, 2001:72). Licensing agreements and technology transfers are common examples and often with the payment of a one off license fee and royalty payment structures (Luo, 2001: 72). Alternatively, the advantage of the contractual joint venture is the low risk to foreign companies (Grant, 2005:144). Most foreign companies involved in these ventures are likely to recover the cost from the up front fee. There is however opposition from the Chinese and foreign companies to this approach as the Chinese prefer to work with foreign companies who have taken some ownership in the venture (Luo, 2001: 72). Additionally, many foreign companies believe that taking minority interest in a joint venture with Chinese is disadvantageous due to the clout of major shareholders, which again sets up this medium as potentially obstructive to effective FDI (Charles, 2007: 312). This is further compounded by concerns regarding intellectual property protection as there is little protection for foreign technology in the Chinese market (Luo, 2001:106). The concern regarding technology control and the imposition of controls over is a valid concern for foreign companies because this practice could eventually result in new international competition for the foreign companies who were putting up technologies in this pool (Rugman & Hodgetts, 2006). However, the main concern from a foreign company’s perspective is finding suitable partners in China and most available partner organisations in China are state owned companies, which imports the inherent problems of the political and legal framework directly into an FDI initiative (Pei, 2006: 114). These Chinese parent companies, mainly state owned companies and government departments, creates a breeding ground for conflict (Pei, 2006:132). Additionally, foreign company concern is the lack of control on investment in China and Chinese have in certain cases ceded control to foreign companies even when they had majority ownership of a venture (Pei, 2006:106 & 114). On the other hand, whilst foreign companies prefer to use wholly owned subsidiaries, the common problems underlying all of the possible entry modes into the Chinese market are cultural differences, foreign exchange, quality of local employees, training needs of the Chinese, the high cost of doing business in China and intellectual property (Luo, 2001:106 &119). Accordingly, notwithstanding the economic drive towards globalisation and proliferation of FDI, many barriers operate to effective FDI in China, which is inherently rooted in the entrenched political framework wanting to retain tight controls, which is intrinsically paradoxical with a capitalist market (Pei, 2006:). As such, this effectively narrows the wide range of entry modes into the Chinese market with the selection of an adequate and worthwhile entry strategy proving a difficult task. Indeed, aside from the Chinese business and political environment, some foreign companies have expressly referred to the local Chinese business environment as “hostile” to foreign enterprises (Grant, 2007). To this end, it is submitted that ultimately any entry strategy for business in China requires a subjective risk assessment from the business perspective going forward. On the other hand, whilst foreign companies prefer to use WFOES, the common problems underlying all of the possible entry modes into the Chinese market are cultural differences, foreign exchange, quality of local employees, training needs of the Chinese, the high cost of doing business in China and intellectual property (Luo, 2001:198). This highlights the crucial issue for integration of globalisation as part of international business expansion strategy. Therefore, in considering the most efficacious business model for continued growth and expansion, it is submitted that combining effective corporate strategy and understanding the local infrastructure is vital and a prime example is the success of KFC in China. KFC firstly opened in 1987 and now has 2,000 outlets in China. Cho argues that “the improbable success of KFC China can be attributed to a few key ingredients: context, people, strategy and execution” (Cho, 2009 at www.knowledge.insead.edu accessed 6/6/09). Additionally, in Liu’s “KFC in China: Secret Recipe for Success” (2008), he argues that in terms of international joint ventures, “strategy is context-dependent” and that “in order to be successful, especially for foreign companies or non-local companies, a deep understanding and a broad understanding of that market context is critical to success (Liu, 2008). 3. Conclusion Accordingly, it is submitted that the above analysis highlights that in integrating the possible opportunities offered by globalisation of traditional business models in international business expansion, there are clearly advantages and disadvantages of both the organic growth model and the cross border trade MNE acquisition model. As such, it is submitted that the central determinant factor to international business strategy in terms of the concomitant impact of globalisation is the national framework of any chosen state. This impacts choice of entry strategy, which in turn determines the appropriate growth model. Indeed, the intrinsically complex nature of corruption, which differs at state level, renders it difficult to implement an all encompassing framework for entry mode strategy This is further evidenced by the contextual consideration of China in particular. For example, notwithstanding the economic drive towards globalisation and proliferation of FDI, many barriers operate to effective FDI in China, which is inherently rooted in the entrenched political framework wanting to retain tight controls, which is intrinsically paradoxical with a capitalist market (Pei, 2006). As such, this effectively narrows the wide range of entry modes into the Chinese market with the selection of an adequate and worthwhile entry strategy proving a difficult task. Whilst on the one hand the organic growth strategy may at first hand appear less risky in the Chinese marketplace, aside from the Chinese business and political environment, some foreign companies have expressly referred to the local Chinese business environment as “hostile” to foreign enterprises, which thereby impacts both organic and MNE growth strategy (Grant, 2007). This is further compounded by the instability of the Chinese infrastructure evidenced by recurrent policy alterations and lack of effective enforcement provisions for the protection of technology transfer. To this end, it is submitted that ultimately any entry strategy for business ultimately requires a subjective risk assessment from the business perspective going forward. Additionally, the synchronisation of a corporate strategy that understands the local market as well as local strategic alliances is vital to the success of international business growth strategy. Bibliography Andersson, T. (1991). Multinational investment in developing countries: a study of taxation. Routledge. Boilot, Jean-Jospeh; Michelon, Nicolas, (2000). The New Economic Geography of Greater China: China Perspectives Volume 30 Charles, W. C. (2007). China’s financial transition at a crossroads. Columbia University Press. De Lacy, J. (2002). The reform of United Kingdom Company Law. 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