ISSN: 1711-6309
Internationalization of the Largest 500
Chinese Firms: An Exploratory Research
By:
Zhilong TIAN 1 , School of Management,
Huazhong Univ.of Science and Technology, China
Taïeb HAFSI, HEC Montréal et
Xinming DENG1, School of Management,
Huazhong Univ.of Science and Technology, China
Cahier de recherche N° 07-31-02
January 2007
1 Acknowledgement: This research is financed by the Research and Development Center affiliated to State
Council of China. We also acknowledge the contribution for data collection of Shuai Fan, Dong Wang, Hui
Huang, Xin Huang, Li Dai, Yingna Zhao and Yani Wang, all from School of Management, Huazhong
University of Science and Technology.
______________________________________________________________________________
Copyright © 2006. La Chaire de management stratégique international Walter-J.–Somers, HEC Montréal.
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dans la série Les Cahiers de la Chaire de management stratégique international W-J.- Somers n’engagent que la responsabilité de leurs
auteurs. Distribué par la Chaire management stratégique international Walter-J.-Somers, HEC Montréal, 3000 chemin de la Côte-SainteCatherine, Montréal, Québec, H3T 2A7. All rights reserved for all countries. Any translation or alteration in any form whatsoever is
prohibited. This document is intended to be used as the framework for an educational discussion and does not imply any judgment about
the administrative situation presented.
Internationalization of the Largest 500 Chinese Firms: An Exploration Research
ABSTRACT
In this empirical study, we analyze the characteristics of the top 500 Chinese firms’
internationalization process systematically. The results reveal that seeking resources and
markets are the major motivations at an early stage of Chinese firms’ internationalization,
while seeking strategic assets and efficiency dominate at the latest stage. The explanatory
value of the internationalization process theory for market-seeking firm, resource-seeking
firm, efficiency-seeking firm and strategic assets-seeking firm decreases in that order. The
gradual, as opposed to radical (through leaps and bounds), internationalization process is
basically supported in China from a target location perspective and it has the strongest
explanation strength for medium-sized multinational firms. Some implications of findings are
also discussed in a few concluding comments.
Key words
Chinese enterprises; Internationalization process theory; International strategy
RÉSUMÉ
Dans cette recherché empirique, nous analysons les caractéristiques du processus
d’internationalisation des 500 plus grandes firmes chinoises. Les résultats révèlent que la
recherche de ressources et celle de marchés sont des motivations dominantes au début de
l’internationalisation de ces firmes, tandis que les recherches d’actifs stratégiques et
d’efficience dominent le stade final. La valeur explicative de la théorie du processus
d’internationalisation diminue régulièrement quand on passe des motivations de marché à
celles de ressource, d’efficience et d’actifs stratégiques. Le caractère graduel plutôt que
radical (par bonds) du processus d’internationalisation est soutenu et confirmé surtout pour
une firme de taille moyenne. Quelques conséquences pour la recherché et la pratique sont
proposées en conclusion.
Mots clés
Entreprises chinoises; Théorie du processus d’internationalisation; Stratégie internationale.
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Internationalization of the Largest 500 Chinese Firms: An Exploration Research
TABLE OF CONTENTS
ABSTRACT..................................................................................................................................... 1
RÉSUMÉ ......................................................................................................................................... 1
TABLE OF CONTENTS................................................................................................................. 2
1.
INTERNATIONALIZATION OF THE LARGEST 500 CHINESE FIRMS: AN
EXPLORATION RESEARCH ............................................................................................... 3
2. INTERNATIONALIZATION PROCESS: GRADUAL OR BY LEAPS AND BOUNDS? ...... 4
3. METHODOLOGY ...................................................................................................................... 5
3.1. RESEARCH QUESTIONS AND SAMPLE ............................................................... 5
3.2. PERIODIZATION OF CHINESE FIRMS’ INTERNATIONALIZATION ............... 6
3.3. DATA GATHERING AND CODING ........................................................................ 8
3.4. SAMPLE BASIC DESCRIPTIVE STATISTICS........................................................ 9
4. RESULTS AND IMPORTANT PROPOSITIONS ................................................................... 10
4.1. THE MOTIVATIONS OF INTERNATIONALIZATION........................................ 10
4.2. MODES OF ENTRY INTO OVERSEAS MARKET ............................................... 11
4.3. TARGETED LOCATION CHOICES ....................................................................... 13
4.4. FIRM SIZE AND INTERNATIONALIZATION PROCESS ................................... 14
5. IMPLICATIONS AND FURTHER RESEARCH DIRECTIONS ............................................ 14
5.1. IMPLICATIONS FOR GOVERNMENTS AND FIRMS ......................................... 15
5.2. LIMITATIONS AND FURTHER RESEARCH DIRECTIONS............................... 15
Figure 1 - Growth rate of China’s GDP and Export.....................................................................................15
Table 1 - The evolution of domestically-funded enterprises’ operation laws and regulation
in foreign trade ....................................................................................................................16
Table 2 - Keywords used in judging whether there is internationalization ...................................................17
Table 3 - Framework for data interpretations...............................................................................................18
Table 4 - Industry distribution of international firms and the internationalization degree...........................19
Table 5 - Ownership distribution and degree of internationalization ...........................................................20
Table 6 - Types and frequency distribution of motivations............................................................................20
Table 7 - Evolution of internationalization motivations ................................................................................21
Table 8 - Frequency distribution of entry mode ............................................................................................21
Table 9 - Relationship between motivations and process of internationalization .........................................22
Table 10 - Target location distribution..........................................................................................................22
Table 11 - Timing process of targeted location choice..................................................................................23
Table 12 - Relationship between firm’s size and internationalization process.............................................23
REFERENCES .............................................................................................................................. 24
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1.
INTERNATIONALIZATION OF THE LARGEST 500 CHINESE FIRMS: AN
EXPLORATION RESEARCH
In 2004, Ruimin Zhang, the CEO of Chinese Haier Group, was engaged in a controversy
with Yuanqing Yang, the CEO of Chinese Lenovo Group, on Chinese firms’
internationalization modes. Zhang said that he prefers a gradual internationalization, while
Yang thinks that leaping forward through large-scale mergers and acquisitions is more
suitable. Media reports interpreted the argument as being a dispute between the “Japan &
South Korea School” and the “Europe & America School”. Haier Group was then seen as
belonging to the former, and Lenovo Group to the latter. In essence, it was a debate over
whether firms’ internationalization process should be gradual or comprehensive as in a leapforward. Although the argument is clear and the two companies can be easily positioned in
the debate, little is known of the characteristics and broad patterns in the Chinese companies’
internationalization process. A few scholars studied it mainly from a theoretical perspective.
Also, some descriptive statistics based on small samples and some, case studies have been
offered [REFERENCE]. But there is little empirical and large sample research analyzing
Chinese firms’ internationalization process. This study is an attempt to bridge this gap
effectively. A systematic study of the 2004 top 500 Chinese enterprises internationalization
process is the focus of our research.
Since the TCL Chinese Group spent, in 2004, 470 million euro acquiring the TV
manufacturing business of French Thomson Group, Chinese companies have begun to attach
importance to mergers and acquisitions as another route to accomplish their international
expansion. In quick sequence, the Lenovo Group acquired the PC business of IBM on May 1,
2005, the Haier Group announced its plan to acquire Maytag on June of that same year, and
China National Offshore Oil Corporation (CNOOC) revealed its offer price of $18.5 billion
to buy US oil producer Unocal2. Multinational mergers and acquisitions have long been a
common strategy for firms in developed western economies. Throughout the 20th century,
firms and MNEs mainly from America have caused four or five major waves of local and
global mergers and acquisitions (Salter and Weinhold, 1979; REFERENCE in international).
Chinese firms acquisitions in contrast have attracted much public attention, and have been
interpreted as being an attempt to acquire needed technologies. Yet as China is getting
integrated into the world economy, Chinese firms are expected to be involved more deeply
and broadly into the global business and will be headed more and more for the international
markets.
China has made a persistent and rapid progress since implementing the Reform and Opening
policy. The average growth rate of GDP per year from 1993 to 2005 has been assessed at
9.98%3, which is a highly unusual achievement. As the 6th largest economy in the world, the
development of the Chinese economy has a much closer link with world trade than ever
before. According to data from the WTO annual conference, Chinese gross trade amounts to
$851.2 billion and surpassed that of France in 2003. Chinese foreign trade grows rapidly, and
2 CNOOC’s offer has been opposed by the US Congress and regulatory authorities did not allow its completion.
3 In order to keep the historical comparability of GDP data, Chinese National Statistic Bureau has revised the
GDP data before 2004 according to the international common practice. The average growth rates of GDP per
year here are figured out on the basis of the revised data.
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the average growth rate of its export from 1993 to 2005 was 19.3%, almost twice that of
GDP (See Figure 1). China’s foreign trade accounts now for two-thirds of its total GDP
(Statistics Bureau of China, 2005). Foreign direct investment has increased steadily in the
last decade and reached 44.9 billion dollars in 2004, with investments coming from 160
countries and regions. Outward investment into other countries was also increasing, reaching
about 5.5 billion dollars, a 93% growth from 2003. In 2005 already, China was seen as a
major investing source in the world presently (UNCTAD, 2005).
In this paper we intend to focus on how Chinese firms internationalize. How Chinese firms
go abroad? What is Chinese companies’ internationalization process? In particular is it
gradual or by leaps and bounds? China is a country in transition to a market economy and its
international firms are of recent birth. They could be said to belong to a “late development
type.” As a result, Chinese enterprises confront a dual adaptation task: adjusting to the
domestic market reform and internationalizing. Their internationalization characteristics and
path can be said to be unique (Lu, 2001) and is worth studying. In order to unveil the
internationalization and offer some new insights into Chinese companies’ overall
internationalization process of Chinese firms, we look at patterns from the top 500 Chinese
companies.
2. INTERNATIONALIZATION PROCESS: GRADUAL OR BY LEAPS AND
BOUNDS?
In the middle of 1970s, the “Nordic school” mainly represented by Johanson and Vahlne
conducted research on the internationalization process of Swedish enterprises. They found
patterns similar to those described by Vernon and Wells (1976), with a four-stage theory of
the firm’s internationalization process. The first stage consists of irregular and unstable
export activities; in the second stage, exports are conducted through independent overseas
agents; an overseas sales subsidiary is established in the third stage; and finally
manufacturing takes place abroad, with possible imports back to the home country. The
Nordic theory is summarized into two basic propositions: (1) Firms’ internationalization is a
process; (2) The process indicates that firms increase commitments to foreign market. Their
internationalization process is gradual. The process is described using two dimensions: First,
in terms of foreign market entry, firms take the routes with the lowest risk, and then change
gradually to those of higher risks. Second, they choose markets according to an underlying
rationale that the market with the nearest psychic distance4 is preferred. When facing
different alternative foreign markets, firms choose relatively familiar locations, first
The internationalization process theory has attracted much attention in the international
management field. Studies such as Carlson (1975)’s research on the export activities of
Swedish firms, Bilkey and Tesar (1977)’s investigation of the export behaviour of small and
medium-sized enterprises in Wisconsin of U.S.A., Larimo’s research on the
4 Nordic scholars use the concept of psychic distance to explain the sequence adopted in choosing overseas markets when
internationalizing. Psychic distance is defined as those factors hindering or disturbing the mobility of information between
markets and firms, which consist of language, culture, political system, education, economic development stage etc. These
scholars believe that firms conform to the underlying rationale that the market with the nearest psychic distance is targeted
first
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internationalization process of Finnish enterprises, Johanson and Nonaka (1983)’s study on
the export strategy of Japanese firms, and Yoshihara’s research on Japan’s foreign direct
investment in Southeast Asia, all provide empirical support to the theory.
However in 1990s, with the development of information technology and economic
integration, more questions are being raised about the present validity of the
internationalization process theory. Buckley’s empirical study on firms in Britain and the Old
Continent indicates that there are several transition stages in the course of foreign direct
investment. Other scholars (Benito&Gripsrud, 1992; Bonaccorsi&Dalli, 1992; Ali&Camp,
1993) have also found that it is mainly suitable to explain the internationalization behaviour
of small and medium-sized enterprises. Large-scale and diversified firms show a stronger
ability to resist risk and they may choose an internationalization process which is not gradual.
Petersen & Pedersen (1996) suggest that the internationalization process theory provides a
robust explanation when firms’ motivation is to seek markets. But the theory does not
explain internationalization behaviour when other motives, such as seeking resources,
seeking efficiency, and seeking strategic assets, are the drivers. It is explained that as firms
develop their international operations in some countries, they accumulate personnel, skills,
knowledge, and market experience, that could be used to leap-forward to higher entry modes.
The TCL Group and Lenovo Corp. are typical examples of such a behaviour. The Haier
Group also did not choose neighboring countries as early targets but decided to enter and
tackle what were perceived to be tough markets first, namely markets with farther psychic
distance. We expect the internationalization behaviour of Chinese firms to be more consistent
with this “mixed internationalization process” theory.
3. METHODOLOGY
3.1. Research questions and sample
This study explores Chinese enterprises’ internationalization path and process. More
specifically, the following questions guide the research: (1) what motivates Chinese
enterprises to head for international markets? (2) What are their target locations? (3) Is their
internationalization process gradual or by leaps and bounds?
We define internationalization as those substantive and stable business activities in overseas
markets5, excluding the accidental or irregular export activities6. These activities include
mainly the following: First, possession or control of overseas distribution channels or brands;
second, investment, acquisition or control of overseas production facilities; third, possession
of important overseas R&D institutions; fourth, overseas stock market listing for companies
whose headquarters are in China, or controlled by Chinese. The top 500 Chinese firm sample
5 In accordance with the original 2002 MOFTEC (now Department of Commerce) and the National Bureau of Statistics in
China, which have jointly formulated the "External Direct Investment Statistics statistical system" (labelled [2002]549 law
of foreign trade and economic cooperation), Chinese enterprises in Hong Kong, Macao and Taiwan regions which have
substantial business and trade activities are included into this research samples.
6 Our criteria for accidental (irregular) export activities are: enterprises didn’t establish subsidiaries or sales
offices in local ;2 agents didn’t sign formal contracts with enterprises ;3 enterprises haven’t signed longterm(one year or more) supply contracts with customers.
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is justified by the following reasons. First, these enterprises have a significant influence in
China and, consequently, are the focus of widespread attention from relevant media in
particular professional publications, newspapers and magazines; second, important industries
are represented by prominent firms with strong competitive capabilities in international
markets, and sufficient resources and competences to build internationalization strategies;
third, these firms all have official and regularly updated websites, and provide the
information required by the research. Since an internationalization behaviour is in China an
effective demonstration of firms’ image and competitive capabilities, it is undoubtedly
reported in details in specific web pages. In fact, firms “spare no pains to gather news/reports
related to their international activities” and relate them in the news/reports columns of their
websites.
3.2. Periodization of Chinese firms’ internationalization
Since China’s reform of economic system and the “opening policy,” the contents, formats
and degrees of Chinese firms’ internationalization have all changed significantly. We thus
divide the internationalization process history line into four stages7, and Table 1 shows the
basis (policies, laws and related backgrounds) of such a periodization.
Stage 1: 1979-1986
Stage 1 is a Preliminary period. In 1979, the Chinese reform and open policy was launched.
As a result, state-owned enterprises (SOEs) reform started, giving more power and autonomy
to managers, who could keep some of the company profit and use it with some discretion.
They had also more decision-making power in operations management, sales, price setting,
procurement, investment, human resource management and imports-exports. SOEs were also
transformed into regular corporations and performance contracts were signed with the state.
All these were deemed necessary to introduce a market-based economic system.
In 1979, Chinese authorities also promulgated the “Chinese-foreign joint venture
Management Law in the People’s Republic of China”, which symbolized the government’s
willingness to open the country to the outside world. During the period, the “Special
preferential policy” was applied to foreign capital in four special economic zones and 14
coastal cities. During this period, China absorbed foreign investment primarily through joint
ventures, in labor-intensive processing projects and in services such as hotels. This stage can
be considered an embryonic stage for the internationalization of Chinese firms, because it
was their first encounter with foreign capital in a limited number of regions (coastal economy
opening areas) and economic activities (exportation processing).
7 The time span at each stage is different, which will not influence our research results because what we
explored truly is the ratio (comparative value), and not the frequency itself (absolute value). Therefore, the
periodization of Chinese firms’ internationalization here could meet our research requirement.
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Stage 2: 1987-1998
From 1987 to 1998 an Experimental stage for Chinese Enterprises’ internationalization took
place. The Central Party Committee and the State Council have promulgated a series of
policies to further attract foreign capital. Therefore, fields and regions opening to the outside
world experienced a rapid expansion. Especially after Deng X iaoping’s 1992 Tour to the
South and the release of his Talk during the tour, foreign investment was seen as really
welcome. In fact, during the period, foreign investment structure was deeply modified and
the number of production projects and export-oriented production enterprises mushroomed.
Meanwhile, capital and skill intensive projects increased even more. The adjustments in the
open policy caused more Chinese Enterprises to establish cooperative agreements with
foreign companies, followed by a large number of Chinese-foreign joint ventures agreements
and cooperative enterprises. At this stage, the inward internationalization of Chinese firms
had made a distinct progress, with a large-scale introduction of overseas advanced
equipments and managerial experience, and a significant increase of some enterprises’
exports.
Stage 3: 1999-2001
From 1999 to 2001 the Takeoff stage of Chinese enterprises’ internationalization took place.
On the one hand, SOEs reform entered the stage of building modern institution and carrying
out strategic adjustment, on the other hand China’s entry into WTO negotiations was all but
settled. To meet the challenge of WTO, China formulated new strategies to adjust further the
economic structure and expand the opening of the economy to the outside world. The
National People's Congress passed the relevant foreign affairs law in 2001, repelling some
regulations that were not in line with international trade practices. With the preliminary
setting-up of the “Socialist market economic system,” the opening to the outside world was
expanded to services such as banking, finance, securities, and others. As a result, dealing
with foreign companies, learning from them, competing with them, Chinese enterprises have
accumulated valuable experience. After nearly 20 years of development, some Chinese
enterprises have enhanced their competences and begun to implement a real
internationalization strategy. Expanding gradually in the export market, they engaged into
more elaborate internationalization, with overseas production, and research and development.
Stage 4: 2002- 2005
China entered WTO as a member on December 11, 2001. The entry into WTO stimulated
further the pace at which the Chinese market economy was built and internationalized,
entering a whole new stage. Because of the economy growth, its fast integration into world
trade and into the global supply chain, and the globalization of regional competition, the
strengthening of international cooperation to promote enterprise’s development and growith
was unavoidable. Establishing operations and being involved in mergers and acquisitions
abroad, became more common among China-based companies.
Because it does not fit with the definition of international behaviour in our study, stage 1 is
not included in our research. Stage 2 (1987-1998) is the beginning stage of the
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internationalization, as a few outward internationalization has taken place, through exports
primarilly. Therefore, the internationalization process in this research refers mostly to stage
2, stage 3, and 4.
3.3. Data gathering and coding
3.3.1. Data gathering
The data collection method chosen in this study is the “structured content analysis”
(Jauch,Osborn&Martin,1980) which has also been used by Chen (1988), Smith,
Grimm&Gannon(1992), Ferrier, Smith&Grimm(1996), Shaffer, et al.(2000), and
Quasney(2003) to study firms’ actions. While our data collection method is similar to
that of earlier studies, we must reiterate that we had to compile an original data set for
this study.
We made content analyses of news/reports posted on the official websites of the
Chinese top 500 firms. First, we had to decide whether firms had a substantial
international activity in line with our definition by looking for some key words (See
Table 2). To make the best choice of key words to identify a firm’s
internationalization practices, we submitted our selection to a panel of
scholars/experts. The purpose was to assess the accuracy and representativeness of
chosen keywords. We collected the experts’ feedback, and then make necessary
revisions. With a set of keywords as a guide, we made the actual content analyses to
evaluate the existing internationalization behaviour and then generalize about the
specific activities involved in entering overseas markets, the target locations, the
internationalization motivations, and the specific timing process of each attempt to
enter international markets.
The website content analysis is appropriate given our research question. All replies
required could be obtained through this second-hand material. By analyzing all of the
news/reports we collected, we chose 297 firms as having substantial business
activities in overseas markets, accounting for 59.64% of the total 500 firm sample.
We analyzed their foreign markets entry mode, the specific time of each entry, as well
as targeted locations of entry, and then we concluded with a judgment about the
corresponding driving forces and the typology of the internationalization process.
3.3.2. Coding
Categories for analysis were formulated after an extensive review of the extant
literature. In particular, we adopted the typologies of firms’ internationalization
motivations explored by Dunning (1981, 1994) (see Table 3). Meanwhile, on the
basis of related internationalization process theory, we mainly define the
internationalization process from two perspectives, namely entry modes and target
location choice. For each category, a term was classified into the proper sub-category
through an examination of the whole content.
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Internationalization of the Largest 500 Chinese Firms: An Exploration Research
Because firms’ foreign markets entry modes, target locations, and time of entry are
objective, our analyses on this information did not require a pre-research. However,
because the research on the motivations and process of internationalization involves
many subjective judgments, in order to ensure the validity and accuracy of the
analyses, we made a systematic coding work.
Two trained coders with Ph.D.-level educations analyzed and coded the data. After
training, both coders were given 10 randomly selected and identical items and made
an initial analysis study independently. Then their judgments were compared and
disagreements were resolved through discussions among themselves and with the first
author. Inter-coder reliability was 97% out of all the items coded, which was
acceptable in this type of study (Kassarjian, 1977). The coders subsequently analyzed
the remaining items during a period of one week. Several reasons are attributed to the
high inter-coder agreements: (1) extensive training and the initial analysis; (2) close
supervision by the first author. Two weeks after the completion of the analysis, 5% of
the items were re-analyzed and the test-retest agreements were 98%.
3.4. Sample basic descriptive statistics
Of the top 500 Chinese enterprises, only 297 firms, or 59.64% of the sample, have any
substantial international business activities. In this section, we analyze this sub-sample in
more details, looking in particular at industry and ownership distributions.
3.4.1. Industry distribution
Table 4 shows that, in China, the enterprises having substantial business activities in
overseas markets are mostly from industries such as steel, telecommunications and
building materials & construction. The gross internationalization in steel and
telecommunications industries is the largest, accounting for 11.45% in each. Building
materials & construction industry rank second. However, it must be noted that firms
in these industries are generally large and state-owned. The industry concentration
ratio is high. Thus, given their size and importance, it is only normal that their part in
overall internationalization is the largest. Yet, the internationalization of firms in each
industry is relatively not high and stands at 64.58%, 64.15% and 61.82% for building
materials & construction, telecommunications, and steel, respectively.
In contrast, looking at such mature industries as light manufacture, heavy
manufacture, and electrical home appliances, their part in the overall gross
internationalization is not high, but the internationalization of firms in each industry is
relatively high, at 87.50%, 77.78% and 75%, respectively. As a matter of fact, for
such mature industries, domestic markets tend to move closer to saturation. With an
excess production capacity, they are pushed to shift excess resources and expand their
international market (Chandler, 1962).
Additionally, traditional labor-intensive industries such as textiles or clothing, are still
key industries in Chinese economic development. They have moved abroad first and
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for example the textile industry ranks first in internationalization and yet accounts for
a large 7.07% in gross internationalization.
3.4.2. Ownership distribution
Table 5 shows that from 2002 to 2004, the number of privately-owned firms in the top
Chinese 500 firms increased by nearly 32%, but that of state-owned and state-holding
enterprises decreased by 33%, which indicates of the growing strength and
capabilities of privately-owned enterprises firms. Among the 297 international firms,
the degree of internationalization of private-owned enterprises is largest, with
67.39%8. Foreign-investment firms ranks second, with 62.07%, while state-owned
and state-holding enterprises are only at 57.02%. FDI inflows into China not only
promote growth of the economy, but also offer good opportunities for Chinese
enterprises to study and learn how to make foreign direct investment. It is widely
believed in China that only when a large number of Chinese enterprises with more
efficient and higher value-added are active in international market, will China’s longterm international competitive capability be improved.
4. RESULTS AND IMPORTANT PROPOSITIONS
4.1. The motivations of internationalization
Internationalization motivations is outstanding as an unresolved problem in the process of
foreign direct investment (Madhok, 1997), and it is also a key aspect to grasp the overall
characteristics of a firms’ internationalization process. The following are our exploratory
results on the frequency distribution of the motivations and their timing process.
4.1.1. Frequency distribution of internationalization motivations
Table 6 shows the frequency distribution of Chinese firms’ internationalization
motivations. Our analyses reveal that among the 297 international enterprises,
“seeking overseas markets” and “seeking strategic assets” are both the most obvious
and the most direct international motivations. The number of market-seeking and
strategic asset-seeking firms are 179 and 164, accounting for 60.3% and 58.8% of the
total number of international enterprises. Seeking efficiency is also an important
factor motivating internationalization. The number of efficiency-seeking firms is 162
or 54.6% of the sample. Additionally, eliminating institutional obstacles or gaining
institutional benefits and industrial promotion are also motivations that cannot be
ignored, taking up 22% and 9.7% each, which could suggest that policy could be
strengthened further to encourage more Chinese enterprises to be active in
international markets. This could be done by reducing examination and approval
8 Since 2002, the Chinese Ministry of Commerce, as well as the State Administration of Foreign Exchange
(under the People’s Bank of China) closely cooperate with one another and take such measures as grant
program reduction, labour regulation simplification, and division of power, to reform overseas investment
approval. This has played an important role in increasing FDI in privately-owned enterprises.
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procedure for foreign investment, improving overseas investment laws and
strengthening government’s protection of Chinese enterprises’ overseas.
4.1.2. The evolution of Chinese firms’ international motivations
Table 7 describes how international motivations have changed over time and suggest
the forces that are driving internationalization of Chinese enterprises. In the first stage
(1987-1998), the proportion of the market-seeking enterprises is highest among all
enterprises having been abroad during the period, up to 43.52%, but this proportion
has been on a decreasing trend since. Resource-seeking enterprises hold the same
trend and represent 32% of all internationalizing firms. The rates of firms seeking
efficiency or strategic assets are 16.5% and 15.3% respectively. By the second stage
(1998-2001), the proportion of efficiency-seeking and strategic asset-seeking firms
increase obviously, accounting for 25.1% and 27% separately. Though the proportion
of market-seeking firms at this stage is still the highest, it has dropped to 32.4%. The
figure for resource-seeking firms decreased more rapidly and stands at only 15.4%. At
the third stage (2002-2005), seeking strategic assets and efficiency have been the
main motivations and strategic asset-seeking firms account for 31.6%, ranking first.
Efficiency-seeking firms take the second place, up to 30%. Meanwhile, the
proportions of market-seeking and resource-seeking firms drop to 24.2% and 14.2%.
Proposition 1: Seeking resources and markets are the major motivators at an early
stage of Chinese corporations’ internationalization, and seeking efficiency and
strategic assets dominate at the late stage.
The rapid growth of transnational direct investment for strategic assets-seeking
purposes suggests that Chinese firms are driven by the need to develop their own
organization capabilities and improve their global competitiveness (Madhok, 1997).
This indicates that these firms do not rely solely on utilizing their existing competitive
advantage to immediate gains as they did first, but pay more attention to protecting
and strengthening such an advantage by acquiring new strategic assets.
4.2. Modes of entry into overseas market
To enter overseas markets, firms seek a suitable tipping point and an ability to adapt to
achieve performance. Choice and adjustment of entry modes in international markets are
considered crucial. In the next section, we provide the results of our exploratory study of
entry mode frequency distributions and of the relationship between entry motivation and the
nature, gradual or by leaps, of entry.
4.2.1. Frequency distribution of foreign market entry modes
Table 8 shows the frequency distribution of the modes by which enterprises enter
overseas markets. It shows that “export” is still the most important mode for Chinese
enterprises to go abroad. Among those firms, 167 companies chose “direct export”,
accounting for 56%, whereas 69 or 23% selected “indirect export.” While there are
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Internationalization of the Largest 500 Chinese Firms: An Exploration Research
only 36 and 25 enterprises, 12% and 8.4% respectively, that went abroad through
“building overseas factories” and “mergers and acquisitions”. Thus, the
internationalization of Chinese enterprises appears to be still at an initial stage. To be
truly integrated into the international division system and head for the upstream value
chain of internationalization, as well as to invest overseas and build overseas
factories, Chinese firms still have a long way to go.
However, we can see that Chinese enterprises have begun to try different, more
adaptive modes of entry into overseas markets. The most obvious phenomenon is that
they have begun to use “listing abroad”, an effective internationalization mode.
Among the 297 enterprises in the sample, 49 firms, or 16.5%, have adopted this route.
Furthermore, the “establishment of R&D institutions abroad” has developed into an
important mode in recent years, with a total of 26 enterprises adopting it.
4.2.2. Relationship between motives and the nature (gradual or by leaps) of
internationalization
As Table 9 shows, nearly 83% of market-seeking firms follow the gradual approach
to internationalization with only 17% preferring the leap-forward path. Similarly, only
24% of strategic assets-seeking firms take the gradual internationalization route, 76%
leaping forward. As to resource-seeking firms, 65% choose a gradual process to
implement their international strategy, which is less than market-seeking firms, but
higher than efficiency-seeking firms (31%) and strategic asset-seeking firms.
Correspondingly, 35% of resource-seeking firms take the leap-forward path of
internationalization, which is higher than market-seeking and less than efficiencyseeking (69%) and strategic assets-seeking firms.
Proposition 2: The explanatory power of the internationalization process theory
decreases regularly as we consider market-seeking, resource-seeking, efficiencyseeking, and strategic asset-seeking firm strategies. Conversely, the probability to
take the leap-forward path of internationalization grows regularly as we consider
these four types of firm strategies.
This proposition confirms that the internationalization process theory does not fit well
the overall internationalization practices of Chinese firms. Their strategic behaviour
does not seem to be the result of a “deliberate” strategy, but rather of an “emergent”
strategy that changes constantly over time in response to environmental changes
(Mintzberg & Waters, 1985). The interactions between these two strategies
(deliberate and emergent strategy) shapes these firms’ final strategic behaviour.
Specific firms’ internationalization process follows the same pattern, with each firm’s
final internationalization mode differing slightly, but the stable and smooth gradual
process remains the same. Different firms face different environments, such as
different countries and different times, and confront unavoidable dynamic
environmental changes, such as a host-country’s policy adjustment, and other
unexpected opportunities and threats, that shape their internationalization process.
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Internationalization of the Largest 500 Chinese Firms: An Exploration Research
4.3. Targeted location choices
4.3.1. Distribution of target location
Table 10 describes the targeted location distribution of internationalizing enterprises.
It shows that overseas regional markets attracting Chinese firms’ FDI are, in
decreasing order of importance, Southeast Asia, America, and European Union. We
find that nearly all internationalizing enterprises, 97.31% of them, chose Southeast
Asia markets, . 41.2% of them selected Japan and South Korea as their target
locations, and Hong Kong is also one of the market that Chinese mainland enterprises
favor, chosen by nearly 21% of them. Looking further, nearly 66% of Chinese
enterprises have entered America, of which 45.92% chose the U.S.A. as their target
location. Russia, Middle East area, Africa are also target locations which Chinese
enterprise choose often.
It appears that Chinese internationalizing firms’ target location strategy are based on
Southeast Asia, and give consideration to such developed areas as European Union,
America, Oceania, and explore such developing country markets as Middle East,
Russia, and Africa for a multi-directional exploration of international markets and
international resources.
4.3.2. Evolution of target location choice
Table 11 summarizes the evolution of international firms’ target location choices. At
an early stage (1987-1998), Southeast Asia was chosen 76 times as a target location,
accounting for 48.1% of total frequencies at this stage. However, at this stage
European Union and America choice frequency are only 10.79% and 15.8%
respectively. In the second stage (1999-2001), the choice of Southeast Asia is 98,
dropping to 36.6% of total frequencies at this stage. The number of firms choosing
European Union and America rises to 15.3% and 21.3% respectively. By the third
stage (2002-2005), this trend is more obvious. With the increase of enterprises’
internationalization experience, target location choice changes. By the third stage,
Southeast Asia as target location choice frequency drops to 30.2%, while those of the
European Union and America increase to 20% and 29.9% respectively.
Proposition 3: Chinese multinational corporations’ target location choice fits with the
Nordic school’s view, when enterprises face different overseas markets, they choose
as target locations first those countries that have the same market conditions, and
culture background as the home country.
The order usually is local market→neighbouring overseas markets→global market. A
valid and traditional explanation is that it is more likely for Chinese firms to operate
successfully in a relatively familiar environment like Southeast Asia than in such a
relatively strange markets as those of the European Union, or America.
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4.4. Firm size and internationalization process
Some scholars such as Benito & Gripsrud (1992), Bonaccorsi & Dalli (1992), or Ali & Camp
(1993), argue that the process theory is mainly suitable for the internationalization behaviour
of the small and medium–sized enterprises, the gradual characteristic of the
internationalization process of large-sized enterprises is not obvious. Therefore, we
summarized the relationship between firm size and the nature, gradual or by leaps of Chinese
firms’ internationalization process on Table 12. The data of Table 12 indicate that nearly
77% of large firms took the leap-forward path of internationalization and only 23% chose a
gradual process. The proportion of small-sized firms taking the leap-forward path is 69%, but
the characteristic of medium-sized firms internationalization process is not obvious; the
proportion of firm taking the gradual or the leap-forward route are 52% and 48%
respectively.
Proposition 4: The internationalization process theory has the strongest explanatory power
for medium-sized multinational firms. However, for large-sized and small-sized international
enterprises, the process theory has weaker explanatory power.
The explanatory power of the internationalization process theory for the (gradual or leap)
route that medium-sized firm, small-sized firm, and large-sized firm use to internationalize
drops gradually, which is not in line with some scholars’ test of the process theory (Benito &
Gripsrud, 1992; Ali & Camp, 1993). The theory is still suitable for medium-sized enterprises,
but the gradual characteristic of the internationalization process of the large-sized and smallsized firms is not obvious. More small-sized international firms take the leap-forward path of
internationalization, which is contrary to our expectation. It indicates that during Chinese
transition, the small-sized firms have stronger internationalization consciousness and they
relatively prefer some faster and more advanced internationalization modes for the purpose
of entering overseas markets.
5. IMPLICATIONS AND FURTHER RESEARCH DIRECTIONS
Studies that led to the internationalization theory were based on the of pre-globalization era
condition, and they focused on gigantic multinational corporations, generally based in
developed countries
China, a developing country, is in transition. Inevitably, Chinese enterprises’
internationalization activities are likely to have distinct characteristics. Also, Chinese
companies have a very short international history. They are still at the early stage in the
development of their international activities. Our study has therefore both an academic and a
practical value.
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5.1. Implications for governments and firms
Our findings can be used to guide a firm in the formulation and implementation of its
internationalization strategy. Also, government policy-makers may find value in our findings
when building policies to help firms’ internationalization.
The government has an irreplaceable function, especially during the early periods of
enterprises’ internationalization. They are expected to create conditions that are favorable to
enterprises’ internationalization. .This is particularly necessary in developing countries,
where the economy is weak and still poorly structured. Firms’ competitive capabilities are
still developing, and are not sufficient to compete with strong multinationals or simply
experienced foreign companies. Policies that provide support to local firms internationalizing
is necessary if these firms are to reach a reasonable level of international competitiveness.
Chinese companies haven’t reached the high-end value chain of internationalization.
Manufacturing abroad and mergers cover only a small proportion of their international
activities. Therefore, Chinese companies should choose suitable way, adopt multiple entry
modes, and be ready to adapt to a very dynamic global environment. The leap-forward
internationalization route is riskier but sometimes necessary to leapfrog competitors and
reach faster stable and defensible situations. Yet risks are bearable only if government
policies make them acceptable. Firms should also do their part, to weather risks involved
with changes in the exchange rates, and with the difficulty of establishing fruitful
relationships with different cultures and traditions.
5.2. Limitations and further research directions
This research is not comprehensive enough. The top 500 Chinese companies cover only a
small proportion of firms that are internationalizing. Also, information obtained through
official websites is somewhat static and perhaps not updated regularly, which may leave out
much of the internationalization activities. Yet, this work is a basis from which other
research, with larger samples can be designed. Another weakness could be related to the
content analysis. Secondary data are less reliable than a research which is specifically
designed, especially through questionnaire and interviews, to gather the data needed.
Figure 1 - Growth rate of China’s GDP and Export
Growing Rate
40.00%
30.00%
Export Growing Rate
20.00%
GDP Growing Rate
10.00%
0.00%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Year
Source: China Statistic Yearbook and China Foreign Economy and
Trade Yearbook, related editions.
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Table 1 - The evolution of domestically-funded enterprises’ operation laws and regulations in
foreign trade
stage
Time
1979
Stage 1
Mar. 1985
Jul. 1988
Sep. 1992
1992
1993
Stage 2
1993
Jan. 1997
Sep. 1998
Jan. 1999
Stage 3
May.1999
Jul. 2001
Dec. 2001
Jul. 2003
Apr. 2004
Stage 4
Jun. 2004
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Policies, laws & related background
Only a few state-owned foreign trade companies are allowed to engage in
foreign trade.
“Interim Regulations of Establishing Foreign Trade Companies and the Process
of Examining and Approving” was enacted by the Ministry of Foreign Trade
“Administrative Rules on the related Problems of Examining and Approving
Foreign Trade Companies” was enacted by the Ministry of Foreign Trade
“Administrative Reply on the Problems of Examining and Approving to
Establish Foreign Trade Companies” was released by the Stage Council
The State Council forwarded “the Opinion on the Related Problems of Entitling
Productive Enterprises to Engage in Import and Export Business” to the
Ministry of Foreign Trade and the Production Office of the State Council.
“Interim Regulation of Entitling Technological Institutions to Import and Export
Technological Products” was enacted by the Ministry of Foreign Trade and the
State Scientific and Technological Commission
The State Council forwarded “the Opinion of Endowing Experimental
Commercial and Material Companies with Self-determined Import and Export
Entitlement” to the State Economy and Trade Committee, the Ministry of
Foreign Trade and the Ministry of Domestic Trade.
The Ministry of Foreign Trade released “the Interim Regulation of Productive
Companies in Special Economic Zones Automatic Registration of Selfdetermined Import and Export Entitlement”.
The Ministry of Foreign Trade released “Interim Regulation of Endowing
Private Productive Enterprises with Self-determined Import and Export
Entitlement”.
The Ministry of Foreign Trade released “the Note about the Registration and
Record System of Large-scale Industrial Companies Self-determined Import and
Export Entitlement”.
The Ministry of Foreign Trade released “the Note about Adjusting the
Qualification Standard for applications to Import and Export Entitlement and
Consolidating Upper Administration”.
The Ministry of Foreign Trade released “Import and Export Qualification
Regulations”
The protocol of China entering WTO was brought into effect. The Chinese
governments promised unlocking the foreign trade power from Dec.11, 2004.
The Ministry of Commerce released “the Note about Adjusting the Qualification
Standard for Foreign Trade Operators and the Sanction Process”.
Foreign Trade Law, which changed license system to record system, was put in
force.
“Foreign Trade Companies Record and Registry rules” was released by the
Ministry of Commerce. The license system ceased to function and the record
system was brought into effect. Restrictions on foreign trade operators were
abolished.
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Internationalization of the Largest 500 Chinese Firms: An Exploration Research
Table 2 - Keywords used in judging whether there is internationalization
Issue
Keywords
direct export, overseas factories establishment, listing abroad,
international integration, forward international integration, backward
international integration, backdoor listing abroad, take up shares
overseas-based companies, overseas stock transferring, overseas share
restructuring, overseas subsidiary company establishment, overseas
Internationalization
brand registration, overseas R&D institution establishment, overseas
or not
joint venture establishment, overseas wholly-owned firms
establishment, international acquisition, international mergers,
international project contract, apply overseas patent, foreign direct
investment (FDI), international strategic alliance, overseas technology
cooperation, transnational labor services exporting
Source: Authors’ compilation based on discussion with panel of experts
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Internationalization of the Largest 500 Chinese Firms: An Exploration Research
Table 3 - Framework for data interpretations
Categories
Subcategories
Seeking markets
Seeking
resources
Seeking
efficiency
motivations
Seeking
strategic assets
Eliminating
institutional
obstacles or
gaining
institutional
benefits
Industrial
promotion
Gradual
Internationalization
Process
Leap-forward
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Related explanations
Host and neighboring markets are included here, and the
motivations to seek markets are the larger potential for profits
in target market or to better meet customers’ needs,
expectations and preferences.
Resources here consist of natural resources and production
factors, and seeking resources aim to obtain cost or price
advantage of factors.
Seeking efficiency is to obtain scale and scope economy using
a rational manufacturing process.
Seeking strategic assets is for the purpose of solidifying and
strengthening the long-run competitive capabilities, namely
enhancing the organization competitive advantage like
implementing an internationalization strategy to obtain such
key assets as technology and organizational capabilities etc..
To avoid domestic institutional risk or obtain favorable policy
from government via internationalization strategies.
Industry development situation (competition structure, industry
life cycle, and industrial development phase etc.), which
promotes internationalization strategies.
Local operation→Export or overseas
agents→Overseas sales subsidiaries→Foreign
Entry mode
investment (R&D, production, listing abroad,
and mergers & acquisitions)
Target
Local market→market with near psychic
Location
distance(developing countries) →market with
choice
far psychic distance (developed countries)
Local operation→Overseas sales
companies→Foreign investment (R&D,
production, listing abroad, and
Entry mode merger&acquisition)
Local operation→Foreign investment (R&D,
production, listing abroad, and
merger&acquisition)
Target
Local market→market with far psychic distance
Location
(developed countries)
choice
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Internationalization of the Largest 500 Chinese Firms: An Exploration Research
Table 4 - Industry distribution of international firms and the
internationalization degree
Distribution of top
500 firms
Industry
Textile
Light Manufacture
Heavy Manufacture
Electrical home
appliances
Building materials
& Construction
Telecommunications
Steel
Medicine
Chemical
Automobile
Manufacture
Transportation
Post & Finance
Energy
Trade and travel
Food & Catering
Agricultural product
& Tobacco
Metallurgy
Comprehensive
2002 year
2004 year
21
7
32
24
8
36
Distribution
of international firms
(2004 year)
21
7
28
16
20
39
Industrial
Gross
internationalization internationalization
degree (2004 year) degree (2004 year)
87.50%
87.50%
77.78%
7.07%
2.36%
9.43%
15
75%
5.05%
48
31
64.58%
10.44%
70
44
18
17
53
55
17
21
34
34
10
12
64.15%
61.82%
58.82%
57.14%
11.45%
11.45%
3.37%
4.04%
22
32
18
56.25%
6.06%
25
21
38
44
25
30
15
41
40
17
16
8
20
19
8
53.33%
53.33%
48.78%
47.50%
47.06%
5.39%
2.69%
6.73%
6.40%
2.69%
23
19
9
47.37%
3.03%
13
25
14
10
5
2
35.71%
20%
1.68%
0.67%
Source: Authors’ compilation based on relevant data available on websites.
Note: Industrial internationalization degree is the ratio of the number of international firms to
the number of top 500 firms in each industry; Gross internationalization degree is the ratio of
the number of international firms in each industry to total international firms (297 firms).
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Internationalization of the Largest 500 Chinese Firms: An Exploration Research
Table 5 - Ownership distribution and degree of internationalization
Typology
Private-owned
firms
Foreigninvestment firms
Stock companies
state-owned and
state-holding
firms
Collectiveowned firms
The number of top
500 firms
The number
of international firms
(2004 year)
Internationalization
degree (2004 year)
2002 year
2004 year
70
92
62
67.39%
37
29
18
62.07%
30
24
15
62.50%
361
349
199
57.02%
2
6
3
50.00%
Source: Authors’ compiled data.
Note: Internationalization degree is the ratio of the number of international firms of each
typology to its corresponding number of top 500 firms.
Table 6 - Types and frequency distribution of motivations
Types
of
motivations
Frequency
Seeking markets
179
Seeking
strategic
1641
assets
Seeking efficiency
Types of motivations
Seeking resources
Frequency
973
Industrial promotion
674
Eliminating institutional
obstacles or gaining
institutional benefits
Source: Authors’ compiled data.
1622
295
Note 1: Because, sometime, one overseas market entry action has more than one
corresponding motivation, repeated calculation problem is taken into account in the
course of counting the data. In the data here 16 firms have been eliminated because of
double counting. Note 2: The same as above and in the data we have eliminated 14
firms. Note 3: The same as above and in the data we have eliminated 12 firms. Note 4:
The same as above and in the data we have eliminated 14 firms. Note 5: The same as
above and in the data we have eliminated 5 firms.
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Internationalization of the Largest 500 Chinese Firms: An Exploration Research
Table 7 - Evolution of internationalization motivations
19871998
%
19992001
%
20022005
%
Total
Seeking
markets
37
Seeking
resources
21
Seeking
assets
14
strategic Seeking
efficiency
13
43.52
24.7
16.5
15.3
100
67
32
52
56
207
32.4
15.4
25.1
27
100
75
44
98
93
310
24.2
179
14.2
31.6
971
1641
Source: Authors’ compiled data.
30
1621
100
602
Total
85
Note 1 : In these data double counting has been eliminated; The arrows show the increasing
trend in percentage.
Table 8 - Frequency distribution of entry mode
Entry modes
Direct export
Overseas sales subsidiaries
establishment
Indirect export1
Listing abroad
Frequency
167
87
69
49
Entry modes
Frequency
Overseas factories
25
establishment
Wholly-owned firms
21
establishment
License
16
Transnational export of labor
15
services
Strategic alliances
13
Franchising
12
OEM
11
Management contracts
5
Joint venture establishment
41
Engineer contract
41
Merger and Acquisition
36
Overseas technical cooperation
34
R &D institutions establishment
26
Source: Authors’ compiled data.
Note 1 : Indirect export here refers to those firms heading for overseas markets through
indirect export, but in association with other modes.
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Internationalization of the Largest 500 Chinese Firms: An Exploration Research
Table 9 - Relationship between motivations and process
of internationalization
Seeking
Process
markets
characteristic
Seeking
resources
Seeking
efficiency
Seeking strategic assets
Gradual
63 (83%)
27 (65%)
21 (31%)
57 (24%)
Leapforward
13 (17%)
14 (35%)
48 (69%)
13 (76%)
Total
76 (100%)
41 (100%)
69 (100%)
70 (100%)
Source: Authors’ compiled data.
Note: We organized the 297 international firms into four categories, namely market-seeking firm,
resource-seeking firm, efficiency-seeking firm, and strategic assets-seeking firm. The criterion used to
classify firms is the type of internationalization motivation with the largest frequency. Additionally,
because the numbers of firms motivated by industrial and institutional factors is only 29 and 12, we
didn’t analyze the relationship between motivations and process of internationalization of these two
type firms; the arrow shows the increasing trend in percentage.
Table 10 - Target location distribution
Target location
Southeast Asia
America
Amount
2891
119
60
12
10
141
1962
107
11
115
47
22
66
95
134
Total
S. Korea and Japan
Hong Kong
Macao
Taiwan
Others
Total
U.S.A.
Canada
Others
Oceania 3
Central Asia and West Asia
Africa
Russia and the Middle East area
European Union
Source: Authors’ compiled data.
Note 1: 1Because firms may enter simultaneously Taiwan, Hong Kong, and Macao there is an
inevitable double counting. To avoid mistakes, repeated counting have been taken into account and
eliminated. This happened in 53 cases. Note 2: The same as above and with 37 cases of double
counting eliminated. Note 3: Oceania only includes New Zealand and Australia.
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Internationalization of the Largest 500 Chinese Firms: An Exploration Research
Table 11 - Timing process of targeted location choice
%
1987-1998
1999-2001
2002-2005
Total
76
98
115
2891
%
European
Union
Southeast
Asia
48.1
36.6
30.2
17
41
76
134
10.7
15.3
20
America
%
25
57
114
1961
15.8
21.3
29.9
Russia
and the
Middle
East area
Africa
Oceania
Total
17
36
32
85
14
19
23
56
9
17
21
47
158
268
381
807
Source: Authors’ compiled data.
Note: 1We have eliminated the repeated calculation firms; the arrow point shows the
increasing percentage trend
Table 12 - Relationship between firm’s size and
internationalization process
Process
Gradual
Leapforward
Total
Large-size
Income ≥ 12.1
billion RMB
30 (23%)
99 (77%)
129
Medium-size
12.1 billion RMB >
Income ≥ 6 billion RMB
60 (52%)
55 (48%)
115
Small-size
Income < 6 billion RMB
16 (31%)
37 (69%)
53
Source: Authors’ compiled data.
Note: We divided international companies into three types, that is large-sized firm, mediumsized firm, and small-sized firms, according to the income in 2004 of Chinese top 500 firms
ranking above the 150th (12.1 billion RMB) and below the 350th place (6 billion RMB), then
analyzed the relationship between firm’s size and internationalization process.
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Internationalization of the Largest 500 Chinese Firms: An Exploration Research
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Internationalization of the Largest 500 Chinese Firms: An Exploration Research
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