Chinese Multinationals

Posted: December 21st, 2022

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Chinese Multinationals

This analysis answers the question, ‘To what extent have Chinese multinationals competed successfully in different international markets, and which major factors explain these achievements and shortcomings?’ Multinationals from mainland China have continued to expand their global footprint as they support China’s strategy to open itself up to the outside world since its accession to the World Trade Organization in 2001. Companies like Huawei and Alibaba are Chinese multinationals that are recognized globally today in stark difference to the situation at the turn of the century. China has been intent on raising its citizen’s living standards and internationalizing its business enterprises, which has been critical for advancing its economy modernization ambition. Currently, China attracts the most foreign direct investments (FDI) globally. In turn, many Chinese firms have ventured into international markets using various market entry strategies with mixed results.  This analysis dwells on the extent to which Chinese multinationals have ventured into global markets and their performance record over time, alongside the critical factors that have influenced their performance. The analysis begins by identifying when and how Chinese companies internationalized and the role played by foreign direct investments (FDIs) in this transition. After that, the analysis shifts to the performance of Chinese multinationals based on their advantages, resources, and capabilities, and whether these multinational corporations have employed the linkage-leverage-learning (LLL) or the ownership, location, internalization (OLI) framework to propel their success. After that, the strategies employed in the management and organization of these multinationals are interrogated. Finally, the role of the Chinese government in stimulating inward and outward foreign direct investments (FDIs) is explained.   

FDI and Internationalization of Chinese Firms

China has continuously attracted foreign direct investments since it acceded to the World Trade Organization (WTO) in 2001. China entered the international business community by allowing the first foreign direct investments into the country in 1978, following the open door policy instituted by the then leader, Mao Zedong, who intended to end Chinese political and economic isolation. In the 1990s, the foreign direct investments into China were valued at less than $19 billion. However, this figure burgeoned dramatically after 2001 to reach $163 billion in 2020, more than the $134 billion that went to the United States (Singh para 2). Consequently, China has overtaken China as the leading recipient of FDI globally.

Many of the present Chinese multinationals were founded in the 1980s and after that through the encouragement by the Chinese government, which supported the opening up of the country following decades of isolation from the outside world.  For instance, Huawei, a large technology firm, was founded in 1987 to help China modernize its highly-underdeveloped telecommunication infrastructure. Although it was founded by Ren Zhengfei, a former Chinese People’s Liberation Army director, it has continued to enjoy government’s support through loans and tax breaks. Similarly, China Petrochemical Corporation (Sinopec Group) was founded in 1998 as a state owned enterprise (SOE) in the energy industry. In addition, CITIC Group (formerly China International Trust Investment Corporation) is a large state opened enterprise founded in 1979 as a financial investment company to attract foreign direct investment inflows in the form of financial capital, advanced technologies, and international business management and operational practices. There are numerous examples of Chinese firms in various sectors that have grown to become corporate powerhouses in the global marketplace.

China is a highly attractive FDI destination because Chinese firms are resource hungry and ambitious to catch up with the more established multinationals from Europe and North America. Consequently, the FDI China attracts go to research and development (R&D), buying operational licenses from established international brands, and acquiring advanced technology through mergers and acquisitions with innovative foreign firms.

Performance of Chinese Multinationals

Multinationals from mainland China have enjoyed mixed performance and success in the international marketplace. Chinese companies have enjoyed huge support from the central and provisional governments, who have availed huge resources to support the internationalization strategies and operations therein. The conglomerate has grown to become the largest state owned corporation with 44 subsidiaries, most of which are banks, and a huge portfolio of foreign assets in the mining, construction, oil and gas, and food industries. Another example is China National Petroleum Corporation (CNPC), which started operations formally in 1993, as a creation of the Chinese government to take over the oil exploration and refining activities from the Ministry of Petroleum. Although it was formed to exploit the China’s oil assets, it is now involved in oil industry operations in many locations outside mainland China.  COSCO Shipping is another state owned conglomerate whose operations commenced in 2018 following a government approved merger between China Shipping and China Ocean Shipping Company, as government strategy to restructure the country’s shipping sector at a time when the global marine transportation industry was performing dismally. Alibaba Group is a large technology multinational that started as an online retail platform in 1999. Although it was founded by private citizens led by Jack Ma, it intended to turnaround the Chinese e-commerce, help China export merchandises to the global market, and to address the business challenges presented by the World Trade Organization. From these examples, Chinese multinational operate in numerous industries, from financial services to petroleum, construction, shipping, and retailing industries, which demonstrated the zeal of China to participate in all sectors of the global economy. The distribution of international businesses conducted by Chinese companies is summarized in figure 1.

Figure 1. Types of foreign businesses conducted by Chinese companies and their numbers

Source: Tian et al. (3)

It is evident that the Chinese government is heavily involved in the formation and running of most of the Chinese multinational companies, thus affording them huge resource and advantage not enjoyed by other similar corporations around the world.

Foreign direct investments (FDIs) play a critical role in China’s economy and have propelled the country’s economic development, making China a competitive destination of foreign investments globally. China has also become a formidable technology innovator globally by attracting FDI in the form of advanced technologies from the developed countries of the west including the United States and Europe (Zeng and Zhou 1). Therefore, Chinese firms were initially motivated to satisfy the huge and expansive domestic market that enjoyed a burgeoning middle class following the successful poverty eradication strategies of the Chinese government. However, these companies ventured into international market following the Chinese government’s ambition to open up its economy and unlock the domestic entrepreneurial potential. Notably, the internationalization of Chinese corporations have been driven by China’s intend to capitalize on its soft power capabilities to dominate the global economy and unsettle the balance of economic power, which for a longtime has been in the favor of western economies.

Many present day Chinese multinationals entered the global market through mergers and acquisitions, joint ventures, and buying stocks in foreign companies, as indicated in figure 1. These companies have managed to grow their brands after extended and sustained growth initiatives that have transformed the firms from imitators to creators and innovators. Consequently, many Chinese multinational have caught up and surpassed many well-established foreign multinationals with long-standing brand presence globally.

Figure 2. Types of foreign direct investments used by Chinese multinationals

Source: Tian et al. (3)

The internationalization strategies employed by Chinese firms have focused on accelerated internationalization to help the catch up with other well established global firms. Therefore, these firms rely on the linkage-leverage-learning (LLL) model rather than the ownership-location-internationalization model, which is outdated and not suited for the contemporary global business environment (Si et al. 544). 

Management and Organization of Chinese multinationals

Chinese multinational have undergone tremendous evolution over time as the central Chinese government allowed more private entrepreneurs to enter the economic arena. Consequently, the management and operational decisions are made more by private entrepreneurs today than government officials in the past. The evolutionary theory of economic change can explain the management and organsational transformation of the Chinese multinationals. According to this theory, agents are rational entities that act, learn and search for new approaches in ambiguous and fluctuating environments. In this regard, chines companies evolved by first imitating already existing products and services, before selecting the successful ones and abandoning those that are utilize resources ineffectually and inefficiently. Specifically, Chinese firms transited from duplicative imitation in the initial stages, to creative imitation as they developed more capabilities, and finally innovation after acquiring the requisite technology and developing their capabilities to enable autonomous and independent operations. In this regard, leaning and capability development have been the main drivers of innovation and growth in the Chinese multinationals, considering that Chinese business were seeking to catch up and overtake the already well-established corporations in Europe and North America (Malerba et al. 4).

Role of Government and FDI

The Chinese government plays a central role in stimulating FDI inflows and outflows. China has a centrally planned economy in which the government, through the Chinese Communist Party, makes economic decisions guiding businesses in the country. However, during the market-oriented reforms of the 1980s that saw China introduce market strategies in a command or planned economy, first introduced as a socialist market economy seen today. The specific changes included the central government retaining the policy development function while the provisional and local governments implemented these policies. In turn, provincial and local governments enjoy autonomy, which allows them to promote and invest in enterprises that promote local industrialization, while building political careers (Malerba et al. 27).  

However nowadays, while the government provides the strategic direction, individual companies are free to make strategic management decisions to propel their firms to global success. However, the government facilitates firm growth by availing low-interest loans, negotiating with international partners, and lowering tariffs on international business operations.

Conclusion

China is a sterling example of how internationalization and foreign direct investments can turn around the economy of a country. The Chinese economy has benefited greatly from the business activities of the Chinese multinationals. Currently, Chinese companies are involved in various projects around the world, particularly in developing countries and more so, African countries.

Works Cited

Malerba, Franco, Sunil Mani, and Pamela Adams. The rise to market leadership: New leading firms from emerging countries. Edward Elgar Publishing, 2017.

Mathews, John A. “Dragon multinationals powered by linkage, leverage and learning: A review and development.” Asia Pacific Journal of Management, vol. 34, no. 4, 2017, pp. 769-775.

Si, Yuefang, Ingo Liefner, and Tao Wang. “Foreign direct investment with Chinese characteristics: A middle path between Ownership-Location-Internalization model and Linkage-Leverage-Learning model.” Chinese Geographical Science, vol. 23, no. 5, 2013, pp. 594-606.

Singh, Kaniska. “China was largest recipient of FDI in 2020: Report.” Reuters. 25 January 2021. https://www.reuters.com/article/us-china-economy-fdi-idUSKBN29T0TC.

Wang, Huiyao and Lu Miao. Transition and opportunity: Strategies form business leaders on making the most of China’s future. Singapore, Springer, 2022.

Zeng, Shihong, and Ya Zhou. “Foreign direct investment’s impact on china’s economic growth, technological innovation and pollution.” International Journal of Environmental Research and Public Health, vol. 18, vol. 6, 2021, pp. 2839.