Influences of the Chinese macro environment on the past, present and future employment these methods of foreign market entry in China

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Joint ventures and wholly owned foreign enterprises –

Influences of the Chinese macro environment on the past, present and future employment these methods of foreign market entry in China

  1. Project Summary

The attraction of foreign direct investment is one of the cornerstones of China’s policy of opening to the international trading community. That is why for the last 25 years the Chinese government has been implementing a number of internal changes which aim to improve the country’s environment for foreign investment and thus guarantee a sustained and rapid growth of the national economy. In particular, since China’s accession to the World Trade Organisation, the government has honoured many of its commitments to restructure the national investment framework in order to make this more attractive to foreign businesses.

The project presented below is an attempt to evaluate those aspects of the macro environment which are perceived to have a most pronounced effect on the Chinese investment setting. In doing so it will concentrate on discussing only the two most popular methods of market entry through foreign direct investment – joint ventures and wholly owned foreign enterprises. The report will also:

  • Explain why joint ventures were the most popular method of foreign entry in China until recently;
  • Establish why wholly owned foreign enterprises are at present becoming the preferred method of entering the Chinese market;
  • Discuss the ways in which the economic, political and legal aspects of the macro environment are likely to develop in the foreseeable future; and
  • Determine the likely positive and negative impacts these will have on foreign enterprises and their choices of market entry in China.

  1. Introduction

The author’s interest in strategic marketing issues originates from previous work experience, as well as the nature of his responsibilities while in his most recent employment with the Balloch Group in China.

The Ballock Group was founded in the year 2001 by Howard Balloch, Canada’s Ambassador to China from 1996 to 2001. The company is headquartered in Beijing and currently employs around 900 staff. The business applies its vast knowledge of the Chinese market, its extensive private and public sector relationships as well as its international business expertise towards the delivery of investment and comprehensive business strategy advice to international clients. The team at the Balloch Group has so far worked with many Chinese and foreign firms on strategic business issues and has acted on their behalf in business arrangements and negotiations.

Before commencing his Masters Degree in 2003, the author of this report was employed as a marketing researcher with the Balloch Group. His primary specialisation was in providing foreign companies with the necessary marketing information on how to best enter the Chinese market. Before travelling to the UK for his studies, the author was part of a team, which with local government support, successfully researched and built a factory in a medium sized harbour city in China. Furthermore, he has participated in many other projects, which have helped foreign companies establish sales networks in China.

Hence so far the author has had the possibility to gain access to the outstanding marketing knowledge of his current employer. This is how the interest towards the topic of market entry modes in an international environment, and specifically joint ventures and wholly owned foreign enterprise strategies, arose and developed. The author also expects that, on his return to China, he will continue to work within the same department of the Balloch Group. Consequently, he has decided to use his practical experience and combine it with the theoretical knowledge gained through the last year, to produce a piece of research which will attempt to explore the feasibility of employing the above two methods of market entry by foreign companies in China presently and in the future. This topic is viewed as being current, widely discussed and subject to much debate in China at the moment. Upon completion the author will present the research to his current employer and it is likely to be shared between departments as a part of the company’s knowledge base.

  1. FDI in China – a historical overview

The concept of investing in China is relatively new to the Western world due to the many years during which the country was isolated from the international trading community. Before 1979 the use of foreign capital to set up operations was prohibited due to the political environment in the country.

In 1979, however, the enactment of the Joint Venture Law permitted the cautious opening up of a number of Chinese sectors to FDI. In this manner the local government intended to allow domestic enterprises access to foreign management know-how, technology and practices which were not available at the time. The first industries to permit foreign participation were those where local enterprises or expertise did not exist.

Within the next 10 years a large number of foreign participation projects were set up. The interest towards the Chinese market continued to grow strong in the 1980s, and at the beginning of the 1990s a total of 34,000 companies had invested in China. Joint ventures were the preferred form of entry with $44 billion committed and $20.5 billion actually invested. Further to this in 1992 in an ambition to stimulate export industries, the Chinese government removed even more restrictions to foreign direct investment (FDI). And while the effect of the 1979 opening was modest the policy change in 1992 led to a major rise in foreign investment not only towards the exporting industries but also towards serving the growing Chinese market.

By the end of the year 2002, the level of investment in the country had increased almost 1.5 times compared to the 1979 levels as reported by UNCTAD (see Table 1). Then in April 2003 statistics declared that a total of 436 934 foreign invested enterprises had been set up in China with actually utilised foreign investment capital of $460 billion. Investors came from more than 180 countries around the world and 400 of the top 500 global multinational enterprises had established operations in China.

Table 1. Total FDI to China (1979 – 2002)

Other country observers also reported that in the last two decades Chinese FDI inflows have risen impressively from a very low base to exceed $50 billion annually. Today foreign holdings approach $500 billion, and are 34 percent of China's GDP at market exchange rates (see Fig 1 below). In one year, 2002, China even topped the league table for inflows of FDI, briefly overtaking the United States. Thus, in comparison to its economic size and despite its late start in opening up to accept inward investments, China's FDI is already broadly in line with UNCTAD estimates of the developing country average and is higher than the global average of around 22 percent of GDP.

Fig 1. Historical growth of FDI in China (1982 – 2003)

Source: Erskinomics

In spite of the above, through the beginning of the 2000s FDI activities in China were still subject to some regulations, regarding local content, contractual forms and locations, etc. all of which intended to shield domestic enterprises from competition. Then in December 2001 the country joined the World Trade Organisation (WTO) and since has launched a new series of liberalisation measures to foreign trade and FDI. Full implementation of the WTO commitment is to be completed by 2007 which implies reductions and abolishment of sectoral and geographical restrictions of FDI.

With China’s accession to the WTO it is expected that it will remain a very popular destination for foreign investment. This is due to the fact that the Chinese government is gradually relaxing its regulatory environment, increasing its responsiveness to investor concerns and strengthening a number of market reforms in China. The challenge to the country now, as stated by an OECD Investment report, is “to attract more long-term, capital intensive, high-tech intensive, high-value-added projects in more sectors of the economy”. Whether China is rightfully positioned to do that in terms of its macro setting will be at the centre of this report as it examines the recent changes in the environment and their effects on international investors.

  1. Methodology

Based on the above, the report presented below will attempt to examine to what extent the two market entry strategies – namely joint ventures and wholly owned foreign enterprises – are considered appropriate and suitable for multinational investors in the country. Because the choice of a market entry method in a foreign environment determines largely the difference between success or failure for an enterprise, the dilemma of “which one?” is often one of the most important considerations for multinationals that are about to set up operations in China. Presuming companies have established that their organisational skills, capabilities, products and services are in line with their foreign expansion marketing strategies, the remaining set of factors to be considered before a one-sided decision can be taken, are those that originate from the external environment. Therefore, it is the author’s belief that businesses entering, or wishing to enter, the Chinese national market would need in all cases to evaluate to what extent the various elements of the macro environment foster the application of one or another of the above mentioned methods.

The most important benefits of employing joint ventures or wholly owned foreign enterprises are that they provide a large degree of control over market representation and profits. For this reason they are generally preferred to other entry methods, provided that the environment permits set up and operationalisation, and the stated benefits can be explored freely. The investigation of the latter within the Chinese national market will be the main aim of this report.

In order to meet it, the discussion below will concentrate on answering the following research questions:

  1. What type of direct investment methods have been employed in the past in China and why?
  2. What are the methods employed at present and what are the reasons behind this?
  3. What are the likely changes to the above in the future? What are the reasons for this trend?

It is expected that the answers to these would serve as the main cornerstones of this discussion, the research objectives of which are to:

  • Identify the most important factors of the macro-environment that impact on the direct investment methods under consideration;
  • Examine the manner in which these are likely to develop in the future; and as a derivative of the latter objective
  • Establish their likely impact on joint ventures and wholly owned foreign enterprises being chosen as the preferred method of entry in China in the foreseeable future.

The author believes that, for the purposes of this investigation, the principles of the positivist paradigm should be applied since the Chinese market is developing rapidly in a positive direction. For this reason, the hypothesis employed here states that based on the recent changes in its the macro environment China is now in a much better positions to attract more high quality foreign direct investment than at any point in the past. Furthermore, as an extension of this hypothesis, the author will also prove that these changes are fundamental and as such will guarantee an even sharper increase in foreign direct investment in the future, the greater part of which is expected to be in the form of wholly owned foreign enterprises and majority shareholding joint ventures

The theoretical basis of foreign market entry is not new; in facts it has been explored extensively in the past by various academics of both the marketing and international trade disciplines. In order to reconcile their views it is believed that a theoretical examination (literature review) would be of critical importance to this proposal. This is because the topic of market entry is fairly complex and ambiguous – it involves the analysis of many factors which vary in the different frameworks. In addition, some of those are dynamic and may change with little warning especially in the present conditions of global competition in a host of industries.

For this purpose the author will firstly perform a systematic literature review of the theoretical aspects of the motives behind a particular foreign market entry choice. In doing so, it will identify a variety of factors that can underline this choice as well as the most practical (in the author’s opinion) framework for managers within the multinational environment. When performing the literature review the academic publications of a number of authors will be taken into consideration, as well as theirs and other books, newspaper and journal articles on the topic under discussion. The results of latter will be used to establish the structural framework of the analysis to follow and to justify the theoretical base of this research.

At the next stage, in order to add flesh to the theoretical skeleton, the author will employ a form of secondary research, which will deliver the basis for the actual analysis of the country macro environment to follow. This will be necessary since statistical, economic and other information will be required to identify what aspects of the macro-environment influence the choice of entry modes in China. In order to precisely diagnose attractiveness of the macro environment for foreign investors and to be ultimately able to offer recommendations for the future, the author will review the following sources of secondary data:

  • Brochures and web sites of independent companies and the Chinese government bodies;
  • The conclusions and recommendations produced by recently undertaken research projects on the country both by academic institutions and commercial organisations;
  • Local OECD reports;
  • Studies centred specifically on certain industries in China;
  • Trading association reports; etc.

These sources may not only help to give a more objective view of the FDI attractiveness of China but they will also allow a deeper look at the key factors influencing and likely to influence this in the future.

Finally, when performing the analysis of the data gathered via the above methods, the will study employ various quantitative methods in order to isolate current and point at future trends. Using descriptive statistics in the forms of tables, graphs, etc. the report will offer:

  • An analysis of trends in market entry choice in the past few years;
  • An investigation of the reasons governing these changes;
  • An investigation of how the most significant factors contributing to this change will develop in the future; and
  • A discussion of their expected influence on the tow entry strategies under consideration.
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It is believed these are the most suitable methods of exploring the data since this investigation is of a limited nature.

This research proposal analyses some qualitative data which has been generated through secondary and primary research. The former was gathered through the investors’ opinion reports published by independent global consultancy firms that operate in China. The primary research, on the other hand, was conducted by the author himself. In this he used its employer’s knowledge base to investigate the opinions international marketing consultants on the future development of the Chinese investment environment. The majority of the qualitative ...

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