Free Economics Essays - China Enterprises Overseas
The Appropriate Entry Model for IT Enterprises in China to Go Overseas
Chapter 1 Introduction
1.1 Chapter Introduction
China's integration into international economic, political and cultural relations is a vivid illustration of today's globalize world. As an emerging economy, China puts increasing emphasis on developing its innovation system, which is having a major effect globally. Chinese research has been restructured several times in the later years. The number of institutions has been reduced and the quality improved. International cooperation is encouraged, and China is performing well on indicators for scientific publications. In January 2006 China approved a new 15 year plan for research with the ambition of making China knowledge- and innovation based economy by 2020. From an investment of 1,34 % of GDP in 2005 the goal is 2,5 % in 2020. China is today the fourth largest economy in the world. China's goal is to continue its growth by investment in science and technology.
China's success in attracting the inflow of foreign direct investment (FDI) has been well documented. Less known is the initial success of China's “going out” strategy, which encourages domestic enterprises to participate in international capital market and to directly invest overseas.
In this chapter, it introduced the international business environment background today, and described the general situation of Chinese economic development and the Chinese enterprises' attempt to invest to overseas. Otherwise, the introduction chapter also contained the simple descriptions about the aims or objectives of this essay and the layout of this paper.
1.2 Research Background
1.2.1 The Chinese innovation system
One of the marked changes in China over the past decades has been the revitalization of the science and technology system. In fact, the reforms that have change China during this period have included deep changes in the science, technology and innovation system, as this system was seen to play a key role in the modernizations of China. The early reform “Four Modernizations” included deep changes in four sectors, one of them was in science and technology. The changes that were induced from the early 1980's were in particular directed towards revamping the system after decades of mismanagement through relying on the Soviet model and through the devastating Cultural Revolution.
The most notable change in the Chinese innovation system has been the commitment to invest in R&D. From a R&D/GDP ration in 1995 of only 0.6%, this ratio reached in 2005 1.34%. This is remarkable given the fact that the average economic growth rate has been some 10% over many years. R&D spending has increased by an annual rate of 19% since 1995. So even if the Chinese R&D system may still be small on many accounts, the rate of change and growth on some indicators point to a shift also in a global context that is remarkable.
However, contrary to the typical picture in OECD countries, the R&D efforts are mainly development activity. Some 70% of the R&D is experimental work, while only 6% is basic research. Only a few universities perform substantial R&D, and although a major research organisation like the Chinese Academy of Sciences has been restructured and reformed, the profile is one of too little basic research.
The Chinese economy has undergone a broad structural change from agriculture to manufacturing and services as measured in GDP. However, this has not been followed by a similar shift between the sectors in terms of employment: About 50 % of employment is still in agriculture. Over the years, there has been a tremendous growth in high-tech exports, supported by high inflows of foreign direct investment and even related imports. Hence, the Chinese economy has not been as high-tech as can be seen from the figure below, it can be paraphrased that China as some islands of excellence but that economic miracle stems to some extent from its ability to serve as an assembly workshop of the world.
Hence, there has been more “piggyfrogging” than “leapfrogging” in the Chinese innovation system (Economist Nov. 10, 2007): China has “made clever use of foreign technology - assembling it, copying it, servicing it and customising it - but their firms have yet to create very much to rival it”. However, the system has been capable of providing new combinations and finding new uses of existing technologies, thus pushing “architectural innovation” that may be scientifically modest, but may be commercially viable (ibid).
1.2.2 China's overseas investment
In recent years, China has not only jumped to the front ranks in terms of absorption of foreign investment, but has also made a leap forward in its investment overseas. Zhan Xiaoning, a senior official with the United Nations Conference on Trade and Development, said: “China is not only one of the leading recipients of foreign direct investment (FDI) in the world, but also has grown into a capital exporter.” China's overseas investment took a leap forward in the last decade. But Chinese enterprises still face a long way ahead in their march toward the world market.
The last decade witnessed a leap forward in China's overseas investment. Statistics released by the United Nations Conference on Trade and Development (UNCTD) revealed that China's overseas investment stock came to US$35 billion by the end of 2002, as against US$ 3 billion in 1991.
In the past two years, Chinese enterprises began large-scale mergers and acquisitions (M&A) activity overseas. Each of them involved millions or tens of millions of US dollars. This shows that Chinese transnational companies are growing rapidly and participating in global competition.
Chinese companies have burst onto the global mergers-and-acquisitions (M&A) scene. High-profile deals such as the 2003 purchase if Thomson's television business by Chinese television manufacturer TCL, and the 2004 acquisition of IBM's personal-computer business by the Chinese computer company Lenovo, have introduced the world to a new generation of Chinese companies with aspirations to be global competitors. Even unsuccessful mergers such as Haier's failed bid for Maytag (eventually bought by Whirlpool) and the attempt by energy gaint China National Offdhore Oil Corporation (CNOOC) to buy Unocal (which foundered on political opposition in the United States) reflect the increasing frequency with which Chinese companies are turing to M&A to penetrate global markets and acquire global scale.
1.2.3 Four types of China's overseas investment
There multiform types of China's overseas investment, in the mass, the types can be summed up to four types as follows: (1) Greenland investment, this means investment in the establishment of solely funded subsidiaries or joint ventures. This is especially pronounced in the fields of home electric appliances, electronics, and light and textile industries. Haier, TCL and Gree all have their production lines set up beyond China.
A number of non-governmental businesses in developed areas like the Pearl River Delta and the Yangtze River Delta all began to channel their capital overseas. (2) Transnational mergers and acquisitions, this practice is very common internationally but flourished in China only in recent years. It can be summed up in four categories in terms of objective or method. The first is resources exploitation. China National Offshore Oil Corporation (CNOOC) is an example, which has become the biggest offshore oil producer in Indonesia by buying off the stakes of some local companies there.
The second is the extension of production and marketing worldwide. This is the most common case. Examples are Shanghai GM and TCL. The third is reverse contracted processing. Wanxiang Group, one of the top Chinese companies in automotive parts industry, bought up UAI, an American automotive parts producer facing delisting in NASDQ, at a cost of US$2.8 million. This deal pulled Wanxiang's marketing cost down dramatically as UAI buys US$25 million worth of brakes from Wanxiang every year. The fourth is the acquisition of technologies.
This is a good way to get access to the world's state-of-art technologies by buying off the companies that possess these technologies. (3) Investment in R&D, Huawei Technologies, a leading China-based hi-tech enterprise in communication industry, has established eight regional R&D headquarters and 32 branches overseas. It holds the most patents in developing countries.
As a name brand from China, it has its trademark registered in 86 countries and regions around the world. It makes a success story about possessing independent intellectual property rights gained through overseas R&D investment. (3)Strategic integration, this refers to attainment of the objective of the grouping of strong points and transnational development through alliance with transnational companies in certain aspects. Take TCL again for example.
Its merger with French company Thompson in color TV and DVD business pushed the annual sales of its color TV to 18 million units, which is ranked first in the world, and takes up 10 percent of the world market share. This makes it possible for TCL to use Thompson and RCA brands and marketing network and to possess a highly efficient manufacturing center in each major market in Asia, Europe and America. This was achieved much faster than direct investment without the need to merge and acquire giants like Thompson.
Although there are still problems with China's overseas enterprises, the overall achievements of China's overseas investment are remarkable. On the one hand, they have helped expand the production capacities and markets for these businesses and have thus created more job opportunities and increased exports. On the other hand, they have improved the international image of the enterprise brands. What's more, overseas investment has broadened the financing sources for enterprises. All of this has created important conditions for the global expansion of these Chinese enterprises.
1.2.4 The IT industry in China
The IT industry has played for the economic development restructuring, and it has become a vital pillar for the economic development of China. China has become the second largest market in the world in terms of both netwok capacity and the number of subscribers.
China's information technology (IT) industry may be a relative newcomer on the world scene but it is doing something right, and in a big way. China is now the largest exporter of IT goods, surpassing the United States - up from a world ranking of 10th in 2000.
That jump, according to East-West Center senior fellow Dieter Ernst, is not a fluke. It signals rapid progress in China's innovative capabilities. Ernst says in a study that China may be a latecomer to the IT world but its 'opportunities to build innovative capabilities in the IT industry differ from those faced earlier by Japan and East Asian newly industrializing economies.'
He notes ‘China has a unique combination of competitive advantages that comprise a booming market for electronics products and services, and the world's largest pool of low-cost and easily re-trainable knowledge workers.'
But, it doesn't stop there. China has witnessed the 'emergence of sophisticated lead users and test-bed markets ... (especially in wireless telecommunications) ... and concerted policy efforts at both the regional and national levels to strengthen its innovation system.'
Ernst points out that timing also could be an important factor. As a 'late-latecomer to the global economy ... China has the additional advantage that its policy-makers can learn from past achievements and mistakes' of those nations that preceded it in the market.
Most important however is that ‘the international environment within which China seeks to develop is dramatically different from that of previous East Asian success stories ... China's technological development over the past twenty years has been inseparable from the expansion of global knowledge networks. These networks have emerged as globalization has been extended beyond markets for goods and finance into markets for technology and knowledge workers.'
The study documents that ‘China is far more integrated into global knowledge networks than were Japan and Korea at a similar stage of their development.' And Chinese firms are learning fast how to work those networks.
The inherent knowledge of its large home market has also helped China's IT industry both in developing domestic market share and in eventual entry into the global marketplace.
But, for the time being, there are limits to China's IT successes. Ernst notes that 'the successful companies have not attempted to jump right into ‘technology leadership' strategies, to compete head-on with global technology leaders through ‘radical' innovations. Instead, they appear to have focused on ‘incremental' and ‘architectural' innovations that allow them to pursue 'technology diversification' strategies.'
Ernst points to Lenovo, a large and successful Chinese IT firm, as an example. He shows how Lenovo ‘has leveraged linkages with global industry leaders to develop capabilities needed to establish domestic market leadership'. The study explores what changed once the company decided to ‘go global', by acquiring IBM's PC division. ‘To implement this new business model poses major challenges, but also provides new opportunities for learning and capability development,' Ernst notes.
Of course Lenovo, together with a handful of other successful Chinese IT companies (such as Huawei, Haier, ZTE) are still an exception in an industry that remains primarily ‘a low-cost export- oriented global factory'. But these companies provide a powerful role model for what it takes to upgrade China's IT industry through innovation.
1.2.5 General condition of the Lenovo
Established in 1988, Lenovo is the largest IT enterprise in China. Currently the company engages primarily in the sales and manufacturing of PCs, mobile handsets, servers and printers in China. It has been the market leader for seven consecutive years, commanding a 27 % share of the Chinese PC market in 2003. Lenovo was also ranked number one in the Asia Pacific (excluding Japan) with a market share of 12.6 % in 2003.
The company was forced to change its English name from “Legend” to Lenovo in 2003 after the Legend brand had been registered in various sectors in many countries, which made it difficult to promote its brand overseas. The new name, composed of two parts, namely “Le” of Legend and “novo”, which in Latin means novel, is intended to build an innovative image for the group worldwide.
Lenovo made the first attempt in internationalisation in 2001 with the opening of seven overseas offices. But the campaign failed to make any real impact. In three years the overseas sales made up for less than 3% of the total revenue, whilst the share in the domestic market slipped from more than 30 % to 27 %. In February 2004 the company announced its decision to concentrate on the domestic market, disguising a retreat from the international markets.
In a surprise comeback move in December 2004, Lenovo concluded the purchase of IBM' PC division for $1.75 billion in cash, stock and assumed liabilities. The company was first approached by IBM in 2001 but said no almost right away. IBM will take an 18.9% ownership stake in the new company whose largest shareholder is the Chinese government with a 46% stake. Lenovo will relocate its world headquarters from Beijing to Armonk, N.Y. and it will be managed by veteran IBM executives. It is beyond wild imagination even a few years ago how a potent icon of capitalism has changed its colour from blue to red almost overnight; the new Lenovo would become a symbol of the cooperation
between the East and West. According to the deal in the new company, Lenovo will be responsible mainly for production whilst IBM will be in charge of design, sales and service. Lenovo has the right of the IBM brand for five years. This seems to be a good deal in which both sides get what they want - Lenovo gets a worldwide presence and IBM can concentrate on the high end of IT business. Lenovo's share in the global PC market currently stands at 2.2%. The combined company has an 8.6% PC market share, in third position after Dell (16.8%) and HP (15%).
The deal marks a gigantic step in Lenovo's internationalisation, described as “a turtle on the back of a rabbit”, by the company's chairman. Some Chinese commentators believe that this acquisition has accelerated Lenovo at least 10 years along the road of internationalisation. However, the real winner in the deal is IBM who, in partnership with Lenovo, gets direct access to China's lucrative corporate market that is forecast to double from $24 billion in 2003 to $47.9 billion in 2008, and eventually to overtake Europe to become the world's second largest IT market after the US (Business Week, 20/12/2004).
After the acquisition, Lenovo faces daunting tasks of integration, culture clashes and management changes. The new company will inevitably lose some of IBM's corporate customers. The company now faces a particular dilemma in branding: should it invest to promote IBM or Lenovo? However the real challenge will come in five years time when the company can no longer use the IBM brand. Although Lenovo owns the Think brand but without IBM the value of the sub-brand is very limited. Will Lenovo itself have grown into a credible global brand? It would be unwise to guess the answer at this early stage, but one thing seems to be certain: To win the competition race in the world market place, Lenovo can't rely on “sitting on the back of a rabbit” in the long term but has to transform itself into a rabbit.
Slow and steady no longer wins the race. Many Chinese companies stress that globalization is their development strategy, but courage does not guarantee success. Advanced technology, management and market strategies are needed to increase their competitiveness in the international market. Globalization teaches Lenovo to embrace risk and leave a lumbering legacy behind. In this paper, we will discuss the appropriate entry model and effective strategies for Lenovo to invest in the United States.
1.3 Research Aims &Questions
Notwithstanding the increasing importance, there has been a lack of research attention on China's outward FDI in general and internationalization strategies of Chinese companies in particular. In sharp contrast to the huge body of literature on FDI inflow to China, there have been few academic publications on China's overseas direct investment. In this paper, a multi-case method was used to analysis the foreign investment climate for Chinese IT enterprises and several Strategies have been put forward to select appropriate entry model for IT enterprises in China to go overseas.
This essay attempts to answer the following questions:
1. How about the condition of Lenovo's recent sales and market performance, including overall sales growth, competition analysis and sales performance across geographical areas and product lines?
2. The current condition of IT industry in China
3. Lenovo's strategy for investing to the USA and the R&D strategy, including R&D centers, total financial investment and key research areas,.
1.4 The Outline of the Essay
This essay included following five chapters:
Chapter 1 Introduction
This chapter introduced the international business environment background today, and described the general situation of Chinese economic development. Otherwise, the introduction chapter also contained the simple descriptions about the aims or objectives of this essay and the layout of this paper.
Chapter 3 Research method
This part is designed to help selecting appropriate entry model for IT enterprises in China to go overseas. Generally, there are three main ways to investigate the research goals in the qualitative method including questionnaire, interview, and case analysis. Through the comparison of these three methods, this paper adopted the multi-cases method.
Chapter 4 Analysis
Analysis is the most important for this paper maybe. Because the important findings and discussion is present in this parts for the evidences of competitive Of course, the basic ground for analysis is the multi-cases choosed in the paragraph of research method.
Chapter 5 Conclusion
Some suggestions described and present based on the previous research in order to conclude that this paper could be helpful for the IT enterprises in China to go overseas and achieve successes.
The phenomenon of FDI by emerging country firms was identified by Wells in 1983, but has only recently begun to receive significant empirical research attention. One early example is a study of Indonesian firms by Lecraw (1993). In terms of testing theories of internationalization, emerging country studies overall have been fairly limited. What research that has been done into global strategies of emerging market firms has tended to focus on the internationalization decision.
For example, in examining foreign investments by Chinese multinationals, Deng (2003) found that they had similar motivations to those found elsewhere; viz. seeking resources, technology, markets, diversification and strategic assets. Where they differed, however, was in the role of government in shaping the country's outward investment, the importance of "pull" rather than "push" factors, and the relative unimportance of cost minimization as a driver. Another recent study examines outward foreign investment from the Czech Republic, Hungary and Slovenia (Jaklic and Svetlicic, 2001). Post-transition, these countries' firms demonstrated market-seeking motivations for international expansion, and the development of firm-specific advantages combined with specific locational drivers.
There is some evidence to suggest that existing internationalization theories are supported in the case of Korean, Chinese and Central European firms. A study of Korean multinationals, for example, tested a model based on the concept of psychic distance (cf. Johanson and Wiedershiem-Paul, 1975), and found support for a view of international expansion driven by an incremental approach to uncertainty avoidance during the early waves of investment, with economic factors becoming more important in later waves (Erramilli et al., 1999).
What is missing from these studies is an appreciation of the fact that some emerging market firms are becoming global leaders, and their strategies also warrant attention. An examination of the relevance of internationalization theories for such emerging market MNEs should be done in the context of two issues. First, there is the question of whether internationalization theories provide a generalizable approach to explaining firm behavior.
In this regard it should be noted that others have expressed reservations about the applicability of internationalization theories to microenterprises (Fillis, 2002), services, and high technology (Axinn and Matthyssens, 2002). Second, there is the question of whether emerging market MNEs are different from their developed country counterparts with respect to their decision-making processes and outcomes. The logic of focused strategies for firms in emerging markets, for example, has been questioned by Khanna and Palepu (1997).
Buckley and Casson (1976) provide a useful starting point for looking at theories of internationalization (Rugman and Verbeke, 2003). As noted by Dunning (2003), there are two strands to this approach. One, based on an exchange paradigm, looks at why firms internalize transactions, while the other, based on a value-adding approach, looks at how firms transform inputs. The eclectic paradigm of internationalization as articulated by Dunning (1988) builds on this work, and provides a good basis to examine global strategies.
The eclectic paradigm attempts to explain how firms choose to expand globally, in terms of the interplay of Ownership-specific advantages, Locational attractiveness of countries or regions, and Internalization advantages of MNEs; the so-called OLI approach. The first of these variables directs our attention to a firm's specific competencies, and to an understanding of how they develop.
The second variable points to a requirement to examine international growth opportunities and to an appreciation of the transferability of a firm's competencies between markets. The third variable reinforces the need to examine alternative modes of market entry in a competitive context, and to understand the potential for opportunism in uncertain environments. Empirical support for the OLI framework has found that it offers both descriptive and normative benefits (Brouthers et al., 1999).
The eclectic paradigm has been extended into a strategic management perspective to explain MNE activities (Li et al., 2005). In this extension, ownership advantages correspond with strategic resources and dynamic capabilities, while locational factors relate to both local adaptation to host market conditions and knowledge resources that are tied to a particular location. In terms of internalization advantages, structural decisions are both a response to market failure and a way to create further organizational advantage.
