Internationalization of Chinese Small and
Medium-Sized Eenterprises
Thesis submitted for the degree of
MASTER OF SCIENCE in Business Studies
at the University of Amsterdam,
The Netherlands
by
YANXING LIU
Thesis Adviser: Professor Yanto Chandra
The second reviewer:
Professor Christopher Williams
October, 2009
TABLE OF CONTENTS
ABSTRACT................................................................................................................................................3 1．INTRODUCTION ...............................................................................................................................4 1.1 OVERVIEW .............................................................................................................4 1.2 RESEARCH QUESTIONS ..........................................................................................5 1.3 CONTRIBUTION OF THIS STUDY..............................................................................6 2. LITERATURE REVIEW .....................................................................................................................7 2.1 OVERVIEW OF INTERNATIONALIZATION .................................................................7 2.2 UPPSALA INTERNATIONALIZATION MODEL ..........................................................12 2.3 NETWORK PERSPECTIVE .....................................................................................14 2.4 THEORY OF INTERNATIONAL NEW VENTURES ....................................................16 2.5 ECLECTIC PARADIGM: AN OWNERSHIP, LOCATION AND INTERNALIZATION (OLI)
PERSPECTIVE .............................................................................................................17 2.6 LATE COMER PERSPECTIVE ................................................................................18 3. METHODOLOGY ..............................................................................................................................19 3.1 RESEARCH DESIGN ..............................................................................................19 3.2 SAMPLE SELECTION .............................................................................................21 3.3 DATA COLLECTION ..............................................................................................22 3.4 INTERVIEW PROTOCOL .........................................................................................22 4. FINDING AND ANALYSIS...............................................................................................................24 4.1 CASE SUMMARY ..................................................................................................24 4.2 DISCUSSION .........................................................................................................37 5. IMPLICATIONS .................................................................................................................................51 5.1 UPPSALA MODEL AND THEORY OF INTERNATIONAL NEW VENTURES ..................51 5.2 THE IMPACT OF NETWORK AND INSTITUTIONS ON CHINA’S SMES ......................52 5.3 GOVERNMENT ROLE ............................................................................................53 6. CONCLUSION ....................................................................................................................................54 REFERENCE...........................................................................................................................................56 APPENDIX ...............................................................................................................................................64 CASE SUMMARY ........................................................................................................64 PRODUCTS OF INTERVIEWED ENTERPRISES ................................................................68 2
ABSTRACT
This paper focuses on two aspects of the internationalization of Chinese small and
medium-sized enterprises (SMEs). First, it explores motivations for Chinese SMEs’
internationalization. Second, it examines the models employed by Chinese SMEs to
undergo this process. The paper is based on qualitative research; namely, it conducts
analysis based on information synthesized from interviews of six firms. The unique
internationalization process of each of the six firms was analyzed systematically to
highlight four central characteristics: (1) motive, (2) advantage, (3) initial opportunity
and (4) subsequent internationalization. Research results indicate that the primary
motivation for Chinese traditional SMEs’ undertaking of the process of
internationalization is their desire to avoid the overly competitive domestic market.
For more knowledge-intensive SMEs, active participation in international competition
becomes the central motivator. For both traditional and knowledge-intensive SMEs,
internationalization follows the Uppsala model, the network perspective, and
late-comer perspective. The international new ventures theory and eclectic paradigm,
by contrast, do not appear applicable to the process of Chinese SMEs’
internationalization. Research also indicates that, for international new ventures
development in China, the most important barriers are generally immature market
conditions, lack of sufficient finance channels and excessive reliance on “Guanxi”.
The study herein concludes that the development of Chinese SMEs has essentially
followed the Uppsala model and the network model of internationalization.
Key words: Chinese SMEs, internationalization, motive, western model
3
1．INTRODUCTION
1.1 Overview
Global competition and accelerating technological development are now forcing firms
to internationalize more rapidly than some decades ago. Internationalization has been
shown to have great significance to economic growth and job creation (Austrade,
2002).
While prior research in internationalization theories were mostly based on western
developed economies, and since the open up and economic reformation of China in
70’s, a number of leading Chinese firms have started to step into the global market
with the view of becoming the global players in an international market. Facing the
weakness of lack of innovations, limited marketing capability, and lack of brand
development, Chinese firms’ initially started internationalization through ‘inward’
internationalization by means of “joint venture partnerships” and “original equipment
manufacturer” (OEM) (Child and Rodrigues, 2005). The government also encouraged
the firms in ‘attracting foreign investment’ with a series of favorable policies. In 2004,
the total foreign investment project contracts were valued at $61 billion worldwide,
and China has become the second largest Foreign Investment recipient country
(USCBC, 2005). In the past decades, some Chinese firms with more experience and
capital have started to ‘outward’ internationalization by means of acquisition and
organic expansion abroad (Child and Rodrigues, 2005). The representative examples
include Lenovo, Huawei, and Haier. Before these “big players” entered into the world
market; they have already developed strong positions in domestic market which can
be seen as a stable foundation for them to enlarge their empire.
In the view of recent interest in Chinese business, numerous of studies have paid
attention to Chinese firm’s internationalization, but mostly were focused on
4
large-scale, mature multinational enterprises (Deng, 2004; Warner,Ng and Xu,
2004 ;Child and Rodrigues, 2005). Little attention was paid to the small and medium
sized enterprises’ internationalization in China. At present, the number of China's
SMEs registered with the Industrial and Commercial Administration has exceeded
eight million and accounting for 99 per cent of the country's total registered
businesses (China Daily, 2002). In the last few decades, many SMEs have
successfully set up activities outside of their home markets and they were increasingly
crucial in contributing to Chinese economic growth. In 2007, WTO statistics
suggested that by 2007, China had overtaken the United States and became the second
largest exporter in the world in terms of export volume (WTO, 2008). Most of these
exports came from Chinese SMEs. SMEs have contributed 68 per cent of China’s
exports (China Enterprises Association 2007). This is a much higher proportion than
any other countries in the OECD or APEC. China’s export growth is about to double
its GDP growth (China Daily, 2002).
As mentioned above, in the last decade, research on the internationalization of SMEs
was mainly in western economic context (Oviatt and McDougall, 1999,2005; Knight
and Cavusgil, 1996; Autio, 2005; Rialp et al., 2005). Chinese SME, as a major
contributor to the national economic growth, however, there are limited researches on
its internationalization.
This paper aims to research the application and practice of mainstream western
internationalization theories for Chinese SMEs. Theories include Uppsala modal,
Network perspective, Eclectic paradigm. Conclusion will be drawn through studies
and interviews of six firms; implications on the development of Chinese SMEs
internationalization will be given.
1.2 Research Questions
This thesis aims to discuss the internationalization of Chinese SMEs. There are two
main research questions to be addressed in the thesis.
5
Question 1
As shown in the literature (Deng, 2004; Warner, Ng and Xu, 2004; Child and
Rodrigues, 2005), most of prior research in the internationalization of Chinese firms
focused on large Chinese firms/multinationals, little attention has been paid on
Chinese SMEs internationalization. Why and how do they internationalize? What
facts drive and inhibit their internationalization process? Therefore, this thesis aims to
ask an important question:
What facts induce the internationalization of Chinese SMEs?
Question 2
As a late comer of the global market, Chinese enterprises play a catch-up role to
compete with those western counterparts. In particular, compare China’s SMEs with
those large enterprises; it is obvious that their capitals and resources are inadequate.
The internationalization process of SMEs in developed economy reflects an
accelerated version of the stage model perspective, and it is driven, facilitated, and
inhibited by a set of formal and informal network relationships (Coviello and Munro,
1997). These relationships affect the entry mode of foreign market selection as well as
product development and market diversification activities (Coviello and Munro, 1997;
Ellis and Pecotich, 2001). Due to most of these results are generated from SMEs of
well-developed economies, this paper’s attention will be devoted to exploring how do
Chinese SMEs internationalize? Therefore, the second research question is:
From
western
theoretical
models
to
analyze
the
characteristics
of
the
internationalization of China’s SMEs’ and bring forward recommendations. Whether
the internationalization of western theoretical models is applicable to Chinese SMEs?
1.3 Contribution of this Study
The main contribution of this study is to enrich the mainstream internationalization
6
theory by studying a new context in the internationalization of an emerging
economy—China—a developing country, a huge market in the world. This thesis also
attempts to offer some practical and policies to Chinese SMEs and the government by
understanding strength and weaknesses of Chinese SMEs.
2. LITERATURE REVIEW
2.1 Overview of Internationalization
Since
Welch
and
Luostarinen’s
(1988)
comprehensive
analysis
of
the
internationalization concept, a number of reviews have assessed and synthesized the
general internationalization process literature (eg. Johanson and Vahlne, 1990, 1992;
Andersen,1993).The
definition
offered
by
Beamish
(1990)
described
internationalization as the process by which firms both increase their awareness of the
direct and indirect influences of international transactions on their future, and
establish and conduct transactions with other countries. This definition allows for
recognition of the fact that firms may begin the internationalization process through
involvement in activities such as foreign sourcing or countertrade, i.e. reflection an
“inward” pattern of internationalization (Welch and Luostarinen, 1993; Korhonen et
al., 1995).
In last decades, research on the internationalization of SMEs mainly in western
economic context (Oviatt and McDougall, 1999, 2005; Knight and Cavusgil, 1996;
Autio, 2005; Rialp et al., 2005). With respect to Chinese firms, there are limited
researches on its internationalization. Although a great number of studies focused on
Chinese firm’s internationalization, mostly has centered on large-scale, mature
multinational enterprises (Deng, 2004; Warner,Ng and Xu, 2004 ;Child and
Rodrigues, 2005). Chinese SME as a major contributor to national economic growth,
however, there are scant research on the SMEs’ internationalization in China.
7
The recent empirical research summarized in Table 1 to show the Chinese SMEs
research gap.
Table 1 Empirical research summary
Empirical study in internationalization of Chinese enterprises
Topic of
Author(s)
Study
Theoretical
Key Findings
Framework
Examined the patterns of internationalization by
prominent market-seeking Chinese firms.
Found that Chinese firms are seeking technological
and brand assets to create a competitive position in
Child,
J.
international market. While mainstream theory
and
Rodrigues, S.B.
MNCs
(2005)
Institutional
tends to assume that firms internationalize to
perspective
exploit competitive advantages.
Found that Chinese firms are engaging in ‘inward’
internationalization by means of original equipment
manufacturer (OEM) and joint venture partnerships,
and ‘outward’ internationalization by means of
acquisition and organic expansion abroad.
Chinese
firms
strategically
use
cross-border
acquisitions to achieve goals, such as acquiring
Rui.H
and
Yip,G.S.
MNCs, OFDI
(2008)
OLI,
strategic capabilities to offset their competitive
Institutional
disadvantages
perspective
ownership advantages, while making use of
and
leveraging
their
unique
institutional incentives and minimizing institutional
constrains.
The study investigated the determinants of Chinese
Buckley,P.
et
al.(2007)
outward direct investment and extent to which three
OLI,
MNCs, OFDI
special explanations (capital market imperfections,
Institutional
special ownership advantages and institutional
perspective
factors) need to be nested within the general theory
of the multinational firm.
Examined
Luo,X
(2005)
et
al.
Transition
economy
Entrepreneurship
corporate
in
an
and substantiate an integrative framework that
characterized
8
entrepreneurship
emerging economy of china, the research proposes
determinants
for
corporate
entrepreneurship
(institutional,
organization-specific, and strategic market factors)
and consequences of entrepreneurship (sales growth
and market share performance).
Found that internationalization, firm size and age,
and market orientation all impact on the practice of
corporate
entrepreneurship,
which
in
turn
contributes to superior performance.
Found that the Chinese firms appear to be
integrating
institutional
market-oriented
changes
activities
and
to
facilitate
three
theoretical
organizational growth.
This
study
suggested
developments in relation to first, the alleged needs
Liu,X.
et
al.
(2005)
to accommodate new variables specific to transition
OLI,
MNCs, OFDI
and developing economies; second, the necessity
Institutional
for other refinements to the IDP hypothesis that
perspective
should apply to all countries; third, the theoretical
need
to
accommodate
interdependence
and
co-movement between variables.
The paper applied Dunning's eclectic paradigm of
OLI advantages to the international activity and
Erdener,C.
and Shapiro,D.
performance dynamics of the CFE.
Large-scale CFEs
OLI
Found that the CFE is analytically distinct from
M. (2005)
other kinds of firms with respect to OLI
advantages.
The paper draw on institutional theory to examine
whether isomorphism and mimetic, coercive, and
normative mechanisms apply to cross-border
mergers and acquisitions initiated by Chinese firms.
Yang,M.
(2009)
MNEs,
Cross-border
Institutional
M&As,
perspective
The results of this study indicate that the degree of
conformity in cross-border M&As decreases over
time and not all strategic choices of cross-border
Isomorphism
M&As react to the forces of conformity in the same
way. Factors that significantly affect the degree of
conformity include the experiences of failure other
firms in the industry, regulatory changes, and
membership or entry into the WTO.
9
The paper based on the Dealogic database instead
of China’s official statistics to explore the pattern of
Chinese OFDI in general and cross-border mergers
& acquisitions (M&As) in particular.
The results indicated that the growth of China’s
OFDI has not been as fast as expected, while the
development of cross-border M&As has been very
impressive.
MNEs, OFDI,
institution-based,
Cross-border
resource-based
M&As
view, latecomer
Schüler-Zhou,Y.
and Schüller,M.
Second,
although
official
OFDI
statistics reveal that Asia remains the most
important investment destination, our M&A data
analysis shows that the developed countries in the
West have attracted most Chinese cross-border
M&A investments.
(2009)
Third, in contrast to the official OFDI statistics, the
findings reveal a heavy concentration of M&As in
mining and manufacturing.
Finally, the cross-border M&A data suggest that
Chinese companies predominantly seek high-level
equity
participation
in
the
acquired
target
companies abroad.
Empirical study in internationalization of SMEs
Author(s)
Topic of Study
Theoretical
Key Findings
Framework
Found foreign market selection and entry initiatives
come from opportunities created through formal
and informal network contacts.
Coviello,
and
Found network relationships facilitate rapid growth
N.E.
Munro,
SMEs
and actively influence the internationalization
Network
process and growth pattern of the small software
H.J., (1995)
firm.
Found small software firms rely on network
relationships for marketing-related activities in
foreign markets.
The internationalization process of small software
Coviello,
and
McAuley,
A. (1999)
firms reflects an accelerated version of the stage
N.E.
INVs
Stage model
model perspective, and is driven, facilitated, and
Network
inhibited by a set of formal and informal network
relationships. These relationships impact foreign
market selection and mode of entry, as well as
10
product development and market diversification
activities.
Found that social capital influences a firm to
change its internationalization mode. The roles of
social capital include the efficacy capital, the
serendipity role, and the liability role of social
Chetty,S.
and
capital. These three roles incorporate both the
Internationalization
Agndal, H.
mode
(2007)
SMEs
positive and the negative aspects of social capital.
Network
The liability role is the most frequently observed
form of social capital to influence mode change.
The most frequent type of mode change is toward a
high-control internationalization mode.
The born-global firms face three key constrains:
Freeman,
S.
Edwards,
R.,
and Schroder, B.
lack of economies of scale, lack of resources
(financial and knowledge), and aversion to risk
INVs
taking. Firms overcome these constraints by using
Network
technology to achieve competitive advantage and
(2006)
by networking competencies to develop a range of
alliances and collaborative partnerships.
Examined
the
initial
export
decision
and
internationalizing process. Found the concepts of
Psychic distance and Geographic distance were not
supported, with market selection influenced by
client followership, sectored targeting and the
industry’s trend to collaborate.
high-tech
Bell, J. (1995)
and
Findings
Stage model
SMEs
do
not
support
incremental
internationalization, and although firms exhibit
service-intensive
Network
increased commitment to exports, this is manifested
by entering new markets rather than increasing FDI
in established markets.
Questions the relevance of the stages theory to high
technology and service-intensive sectors. Suggests
that the Network approach better explains the
frequently non-linear behavior of such firms.
Ellis,
P.
Pecotich,
and
A.
Examine the influence of antecedent social ties on
SMEs
Network
export behavior in an exploratory cross-case
(2001)
investigation
11
of
a
sample
of
small
and
medium-sized exporters drawn from different
industries.Found that decision makers frequently
learn of foreign opportunities through their existing
social ties.
Sharma,
Found that born global possess international market
D.D.
and
Blomstermo, A.
knowledge before their first foreign market entry.
INVs
The selection of foreign market entry mode is based
Network
on their existing knowledge and the knowledge
(2003)
supplied by their network ties.
There are 5 mainstream theories of internationalization. The following section will
discuss each of the mainstream theories/models: Uppsala, Network, Eclectic,
international new venture, and later comer.
2.2 Uppsala Internationalization Model
The stage theory of internationalization, also referred to as process theory, states that
the internationalization of a company follows a gradual process. The theory explains
the firm’s internationalization as a process that evolves in interplay between the
development of knowledge about foreign markets and operations on one hand and an
increasing commitment of resources to foreign markets on the other hand (Johanson
and Vahlne, 2001). The Uppsala model of internationalization process describes two
patterns in the internationalization of the firm (Johanson and Wiedersheim-Paul,
1975). First, the firms’ engagement in the specific country market develops according
to an “establishment chain”. That is regular export activities are performed in the
market, then export takes place via independent representatives, later through a sales
subsidiary, and eventually manufacturing may follow (Johanson and Vahlne, 2001).
The second pattern explained is that firms enter new markets with successively
greater psychic distance. Thus firms start internationalization by going to those
markets they can most easily understand (Johanson and Vahlne, 2001).
The Uppsala model have had a considerable influence on studies focusing on the
12
internationalization of firms and significant efforts have been made to further test and
refine the ideas (Clark et al., 1997; Peng,2001; Knight and Liesch,2002). Although
research has provided some empirical support for the Uppsala model, some critics
have emerged (Reid, 1983; Forsgren, 1989a). The bigger challenge is that today many
firms simply do not follow the traditional pattern of internationalization proposed by
stage theory. A number of researchers have observed that global competition and
accelerating technological development are forcing firms to internationalize more
rapidly than ever. Some new phenomenon such as international new ventures
(McDougall, 1994; Oviatt and McDougall, 1995, 2005), Born Global (Madsen and
Servis, 1997), global start-ups (Oviatt and McDougall, 1995), and service-intensive
firms (Coviello and McAuley, 1997) arises. Then Johanson and Vahlne (2003)
combine with a new focus on network relationship base on the traditional Uppsala
Model. They hypothesize that firms learn and benefit from such relationships and,
therefore, make increasing commitments to them. Those relationships, in turn,
sometimes lead them to enter foreign markets, at times incrementally. From the
network perspective, they propose that the establishment and development of foreign
relationships determine the nature of international entry and expansion. In the
combination model, it can be seen that firms are learning in relationships, and this
enables them to enter into a new market that they are able to develop new
relationships; and such, will give them a platform for entering into other overseas
markets.
Moreover, Johnanson and Vahlne (2006) emphasized that using the same incremental
model to illustrate that learning and commitment building is not only important as
uncertainty reducing but also as opportunity development. Learning and commitment
building is more about discovering or constructing opportunities for improving on the
business. They provide an outline of a proposed integration that uses the interplay of
experiential, or tacit, learning and resource commitment in organizations as its driving
mechanism. These are, of course, concepts from the traditional Uppsala Model.
13
2.3
Network Perspective
The network perspective draws on the theories of social exchange and resources
dependency, and focuses on firm behavior in the context of a network of
interorganizational and interpersonal relationship (Axelsson and Easton, 1992). Such
relationship, which can be both formal and informal, can involve customers, suppliers,
competitors, private and public support agencies, family, friends, etc.(Knight and
Cavusgil, 1996; Coviello and McAuley, 1999). Both formal and informal networks
are important. In the case of Chinese business, a social network approach is deemed
the most appropriate for the reason of one’s social network is viewed as a fact that is
crucial to business success in Chinese society (Redding, 1991). A good social network
is considered as an efficient means of helping internationally oriented SMEs to go to
the global market more rapidly and profitably (Zhou et al., 2007).
Network perspective is widely used when trying to understand and explain the rapid
internationalization of the firms (Johanson and Mattsson, 1988; Chetty and Holm,
2000). The advantage of network is that the relationship of a company in a domestic
network can be used as a bridge to other networks in other countries (Sharma and
Johanson, 1987). Welch and Luostarinen(1993) concluded that many companies at the
earliest stages of international development through inward movement, in whatever
form, signals the beginning of a relationship between a foreign seller and local buyer,
which ultimately creates the possibility of later using that link to a foreign network
and knowledge about a foreign market. Bell (1995) contended some evidence shows
that firms enter new export markets as a result of the international strategies of their
domestic clients, which had been a key influence on both the initial decision to export
and on the choice of foreign market entry mode.
Johanson and Mattson (1993) identified four stages of internationalization which
emphasize on gradual learning and the development of market knowledge through
14
interaction within networks. In accordance with the model, internationalization of the
firm means the firm establishes and develops positions in relation to other
counterparts in a foreign network. The internationalizing firm is initially devoted to a
network in domestic market and gradually further builds business relationships in
networks overseas. This is obtained through the establishment of relationships in
country networks that are new to the firm (international extension), through the
development of relationships in those networks (penetration) and through connecting
networks in different countries (international integration). The strength of the network
model of internationalization rests with explaining the process rather than the
existence of multinational or international firms (Ruzzier et al., 2006).
Prior researches shows that inter-firm and interpersonal relationships appear to be
influential in several internationalization issues, such as foreign market selection
(Ellis and Pecotich, 2001; Coviello and Munro, 1997); international market
development and marketing-related activities (Coviello and Munro, 1995, 1997); time
of internationalization (Oviatt and McDougall, 2005); propensity to export (Westhead
et al., 2001); and degree of internationalization (Brush et al., 2002).
Guanxi is another popular expression refers to personal network in specific Chinese
context. Although guanxi can be translated to personal relationship or social
relationship in English, it is still a slight different meaning which is rooted in the
Chinese culture and customs. According to King (1991), in Chinese society factors
that promote shared social experience among individuals are considered as the core of
guanxi. It include, being a relative (close or distant), having the same ancestral origin,
being
a
former
neighbor,
classmate,
colleague,
teacher/student,
or
supervisor/subordinate, having the same hobbies, and so on. Thus, the guanxi
relationship’s form is various, does not have to involve friends, although that is
preferred, instead the relationship is basically utilitarian rather than emotional. The
moral dimension operating here is that a person who does not follow a rule of equity
and refuses to return favor for favor loses face and becomes regarded as
15
untrustworthy. In other words, guanxi is a reciprocal obligation to respond to requests
for assistance. It is not a pure interpersonal relationship (Tsang, 1998).
2.4
Theory of International New Ventures
Since the late 1980s, more and more new ventures are international from inception
and are increasingly prevalent in international business (Rialp et al.2005).These
start-ups often raise capital, manufacture, and sell products on several continents,
particularly in advanced technology industries where many established competitors
are already global (Oviatt and McDougall, 2005; Freeman et al., 2006). Oviatt and
McDougall’s (2005) defined an international new venture as “a business organization
that, from inception, seeks to derive significant competitive advantage from the use of
resources and sale of outputs in multiple countries”. Moreover, they described
different types of international new ventures by the number of value chain activities
that are coordinated and by the number of countries entered (Oviatt and McDougall,
2005).
Some current internationalization process theories of the MNE do not explain the
INVs well (Coviello and Munro, 1995; Oviatt and McDougall, 2005). In contrast to
organizations that evolve gradually from domestic firms to MNEs, these new ventures
begin with a proactive international strategy. Network is particularly advantageous for
Born Global firms to enter foreign markets (Oviatt and McDougall, 2005; Bell, 1995;
Coviello and Munro, 1995; Chetty and Holm, 2000; Freeman et al., 2006). These
firms involve in networks to facilitate rapid internationalization (Oviatt and
McDougall, 2005; Coviello and Munro, 1995).INVs largely rely on relationships with
for example, financiers, suppliers, and customers. They build network through
structures such as strategic alliances or collaborative relationships (Oviatt and
McDougall, 2005; Freeman et al., 2006). This support Bell’s(2003) observation that
the INVs use “client followership” more than traditional SMEs, relying less on
agents/distributors and more on integrating into customer and supplier channels. That
is, Alliances/licensing agreements build more integrated relationships than working
16
through agents/distributors (Bell et al., 2003).
2.5
Eclectic Paradigm: an Ownership, Location and Internalization (OLI)
Perspective
The Eclectic Paradigm developed by Dunning is the most widely used frame work to
analyze the pattern, location and choice of FDI for international production among
multinational enterprise (MNE). It is ‘the dominant analytical framework for
examining the determinants of MNE activity’ in the field of international business
(Dunning, 2001). While it has been applied primarily to the Western MNE, it can also
be applied to the international business activities of non-Western types of
organizations (e.g., Dunning, 2001; Erdener and Shapiro, 2001), though little
published research has taken this approach.
The theory explains that there are three main variables that influence the
internationalization of firms from one country to foreign markets: ownership (O),
location (L), internalization (I), or OLI advantages (Dunning, 1993). Ownership
advantages are firm-specific factors such as ownership of superior proprietary
resources such as intellectual property, brands, design, or managerial capabilities that
can be applied competitively in a foreign country. Location advantages can account
for decisions to invest in foreign countries that offer superior market or production
opportunities to those available elsewhere and/or opportunities to secure valued inputs.
In
location
aspect,
Dunning
(1977)
suggests
three
primary
motivations:
foreign-market-seeking, efficiency-seeking, and resource-seeking (including a subset
that is known as strategic-asset-seeking FDI). Internalization advantages refers to
firms preference to embrace FDI rather than market mechanism such as licensing or
exporting because market mechanism can incur higher transaction costs rather than
transferring the ownership advantage within the firm across borders. Internalization
may offer clear efficiency advantages in the management of interdependencies
concerning know-how, reputation, the value chain, and marketing, and these
advantages offer a powerful explanation for the rise of the multinational enterprise
17
(Hennert, 2001). In terms of SMEs, the Eclectic Paradigm is limited application for
SMEs seldom through FDI to internationalize.
2.6
Late Comer Perspective
The mainstream perspective in international business assumes that firms will
internationalize on the basis of a definable competitive advantage that allows them to
secure enough return to cover the additional costs and risks associated with operating
abroad (Buckley and Ghauri, 1999). This perspective is largely derived from research
on Western enterprises which have obtained considerable domestic strength and
maturity before they internationalize. However, with regard to enterprises like
Samsung and LG from Korea and Acer from Taiwan, as the later entrants to
international market, these firms did not start from positions of strength but rather
from the resource-disadvantaged position of an isolated firm seeking some connection
with the technological and business mainstream (Matthews, 2002). The theory of ‘late
comer’ internationalization offers a potentially useful contribution to better
understand the international of Chinese firms. The “late comers” typically refer to
East Asian countries such as Taiwan, Hong Kong, and Korea etc. (Dore, 1973). China
is a recent example of “late comer” in the international market to “catch up” with
early developing countries in terms with technology and know-how as well as in the
development of business environments supportive of international competitiveness.
While Chinese firms have some initial competitive advantages, such as low labor
costs, these becomes less crucial as the firms move into more sophisticated market
with higher-value products (Child and Rodrigues, 2005). In this way, outward FDI
may help them fill up the gap via acquiring appropriate assets and resources.
Given the resource indicates that low levels of legitimacy are faced by many firms in
emerging economy, and they need for financial capital. These “rules” are likely to
have much greater impacts on the action and performance of new ventures than
established companies or government-supported enterprises (Filatotchev et al., 2007).
Institutions are commonly understood as the “rules of the game in a society” (North,
18
1990).Scott (1995) argues that at the most fundamental level, institutions are
‘‘regulative, normative, and cognitive structures and activities that provide stability
and meaning to social behavior’’. Then the institution can be categorized by political,
law, and societal aspects. The institutional context of developing countries, especially
government and its agents, tends to feature importantly in the context of developing
country business. Filatotchev et al. (2007) suggest that FDI strategies of firm from
newly industrialized economies are an outcome of a complex interplay of
organizational and institutional factors. China is a typical developing country where
government involvement has been particularly significant (Dunning and Narula,
1996). China therefore may well provide new insights regarding the relevance for
firm internationalization of the interplay between government and entrepreneurship.
3. METHODOLOGY
Given the freshness of Chinese SMEs internationalization topic, there are limited
academic research and literature about the topic; it is planned to conduct qualitative
research method by using case study.
3.1 Research Design
The aim of this study is to investigate what factors induce Chinese SMEs
internationalization and whether the western theoretical models are applicable in
Chinese context. Besides the universal challenges being faced by SMEs, there are
other difficulties that the Chinese SMEs are facing, such as limited resources
compared to large businesses, lack of marketing skills and expertise (Freeman et al.,
2006). SMEs in China are also facing other unique challenges, including triangle
debts and government policy constraints, etc. (Tang and Zhang, 2002). It is more
complex during the period of transition from a centrally planned economy towards to
a market-oriented system. Naturally, case study is appropriate when the investigation
must consider both phenomenon and the context in which the phenomenon is
occurring (Yin, 1989).
19
Following the recommendation of Yin (1989), multiple sources of evidence will be
used for this investigation including in-depth interviews, business plan, archival data,
and press articles. The research design will comprise several techniques for ensuring
the quality of case study research and confirming findings. This paper tries to find the
key points which are extracted from the collection text and generates theory from data
in the process of conducting research rather than beginning by researching &
developing a hypothesis, a variety of data collection methods are the first step. As for
the theory building process, the author uses Eisenhardt’s method (1989) as be shown
in Table 2.
Table 2
Process of Building Theory from Case Study Research
Step
Activity
Definition of research question
Getting Started
Possibly a priori constructs
Neither theory nor hypotheses
Selecting Cases
Specified population
Theoretical, not random, sampling
Multiple data collection methods
Crafting
Instruments
and
Qualitative and quantitative data combined
Protocols
Multiple investigators
Overlap data collection and analysis including field notes
Entering the Field
Flexible and opportunistic data collection methods
Within-case analysis
Analyzing Data
Cross-case pattern search using divergent techniques
Iterative tabulation of evidence for each construct
Shaping Hypotheses
Replication, not sampling, logic across cases
Search evidence for "why" behind relationships
20
Comparison with conflicting literature
Enfolding Literature
Comparison with similar literature
Reach Closure
Theoretical saturation when possible
3.2 Sample Selection
The definition of an SME in China is quite complex and can include relatively large
firms. In OECD and APEC economies, the definition of an SME also varies, but most
commonly is based on the number of employees. Usually an SME employs less than
200 or 250 employees, with a maximum of about 500(Australia Bureau of Statistics,
1998; European Commission, 2008). In fact, about 70 per cent of SMEs employ less
than five people or the owner works for himself/herself. The definition used for
regulatory purposes (and thus for the collection of statistics on SME exports) in China
depends on the industry category and is defined in terms of employees, sales and
assets. For example, an industrial SME is defined as having up to 2,000 employees,
while a small business has less than 300, and a medium-size business has between
301 and 2,000 employees. Consequently, an SME in China may be considered as a
large firm in west countries. However, the labor intensity and the huge size of China
still make these firms relatively small. The definitions maybe differ but they have one
thing in common; the vast majority of SMEs are relatively small and over 95 percent
of SMEs in the region employ less than 200 people. In order to enables broad
comparisons of the role of SMEs across countries despite the differing definitions, I
adopt the criterion of employees under 200 people.
SMEs discussed in this paper are mainly those within the field of knowledge-intensive
industry, such as industry, or manufacturing SMEs. Because IT and manufacturing
enterprises have potential and need to go global, the author chose these enterprises. In
general, people view SMEs as having only a few manufacturing and IT enterprises,
typically in their country of origin. SMEs will have relatively little experience with
21
establishing an international location and may only have a few employees with
international work experience. Many SMEs were founded less than five years and do
not possess a long track record of success, which may hamper their ability to obtain
loans and credit from the banks or other financial institutions.
3.3 Data Collection
The research questions of the dissertation are:
What factors induce Chinese SMEs internationalization?
Whether the internationalization of western theoretical models and models are
applicable to Chinese SMEs?
Telephone interview was used for data collection. Six Chinese SMEs were chosen as
the research objects. This specific design of research consists of telephone interviews
within five SMEs located in Beijing, Wenzhou, Dalian and Dongguan. The data
collection process involves the following steps: setting the boundaries for the research,
collecting information and establishing the protocol for recording the information.
Enterprise interviews will be carried out by telephone. A responsible person will have
an average of one to two hours of telephone interview. Through interviews of the
management of the firms and government officials, information on current operation
condition, internationalization situation and method of the enterprises could be
collected.
Whole research process will be explained in this chapter. It emphasizes that the
research is based on empirical analysis. Therefore, the collection of data is described
and the process of analyzing the structure along the model is explained.
3.4 Interview Protocol
General information of the company background
22
1. Ownership of enterprise?
2. Year of established?
3. Number of employees?
4. Main products?
5. Total annual sales？
6. Ratio of export to total annual sales?
7. Main competitors？
8. Respondent name?
9. Years in the company?
10. Respondent position in the company?
Research Questions
Motive
1. What is the motivation of the first internationalization?
2. When does your enterprise start to internationalize?
3. Whether it is the plan to develop the market or just accidental turning point?
Foreign market selection
4. What are the main overseas transaction objects?
5. In the internationalization advancement, how choose the overseas market?
6. What countries did your company first enter? Why?
Mode of entry
7. What is your entry mode?
Process
8. Could you describe the process of internationalization?
23
9. In which countries is your company operating in today?
10. What plans are regarding the future internationalization development?
11. During the internationalization process so far, what are the results regarding
enterprise overall income?
12. During your internationalization process, whether government (including nation,
local governments such as villages and towns region and county level) in policy
and operation aspect has the promotion effects? In which aspects?
Others
13. Did you or personnel in this firm have prior international business experience?
14. Why is your firm successful in international market?
15. What difficulties did you face when your firm goes internationalization?
16. By your own experience, what advantages do you think China SMEs have to be
able to enter the international market?
4. FINDING AND ANALYSIS
To address the research questions developed previously, the internationalization
motive and international growth patterns of the case firms will be presented, followed
by a discussion of the factors that influence the internationalization process and
whether the Chinese SMEs internationalization process follow the western
internationalization models.
4.1 Case Summary
To begin the case firms are briefly summarized in the Table 3.
24
Table 3
case #1
case #2
case #3
case #4
Baoying
Calen
Jiahua
Yuandong
Hardware
Fashion
Ganment
Digital
case #5
Crystal CG
case #6
Skyline
Architecture
city
Dongguan
Chaozhou
Beijing
Dalian
Beijing
Beijing
type of firm
private
private
collective
private
private
private
Knowledge
Knowledge
Knowledge
Intensive
Intensive
Intensive
Business
Business
Business
Services
Services
Services
category
manufacturing
manufacturing
manufacturing
Design
wedding
main product
electroplate
dresses and
hardware
evening
dresses
apparel made
of cotton, wool,
silk, etc
computer
project
application
visualize
design and
software and
architecture
urban
embedded
planning
software.
turnover
$800,000
$600,000
$200,000
$9,800,000
$2,500,000
$2,000,000
90%
95%
100%
90%
50%
7%
150
under 100
100
200
200
60
1987
1988
1998
2000
1995
2003
1997
1999
1998
2001
2002
2006
foreign
sales(%),
2008
No.
employees
start year:
start
international:
main
Taiwan
overseas
Hong Kong
markets
Sweden
Hong Kong
Japan
the United
Hong Kong
States
Europe
Singapore
Japan
Tokyo
Canada
type of entry
inward FDI
indirect export
mode
direct export
direct export
Dubai
Middle east
Vietnam
London.
indirect export
joint venture
FDI
direct export
Case 1: Buoying Hardware Factory
Motive
‘Baoying Hardware Factory’ (Baoying Hardware) was established in 1987 and has
25
been in a difficult operation situation since 1996 in the context of the economic
transformation in China. Firstly, the factory used to be a domestic-oriented factory in
China, while the domestic market demand was very limited at that time but the
competition was very fierce. Secondly, the factory was facing complex triangle-debt
and struggling of insufficient capital. Thirdly, there were many obstacles for private
enterprises in the market of the economy transforming from a central planning system
to a free market system. In order to search for a better environment of fair trade,
Baoying had started to enter into the global market. Therefore, the company began its
process of internationalization through cooperating with foreign investors. Guangzhou,
located in Pearl River Delta, is one of the most active economic areas in China. Many
local enterprises were trying to attract foreign investment to compensate capital
shortfall and advanced management experience. Fortunately, Baoying Hardware
found a foreign investor from Hong Kong and started its internationalization through
inward-internationalization. By using new manufacture facilities, Baoying Hardware
enhanced productive efficiency and production quality rapidly.
Initial opportunity & internationalization process
Baoying Hardware had affiliated to one of the state owned company which broke up
in 1996. The present owner of the factory took over this factory and registered it as a
private enterprise. In the context of attracting foreign investment, the local
government provided a lot of preferential policies for foreign investors at that time. In
1997, through personal connection of contacting with a Hong Kong's businessman,
the owner has gotten the first foreign investment for the factory. From then on, Hong
Kong’s partner facilitated some overseas orders for the factory. The respondent said
that:
Our Hong Kong partner introduce new technology and managerial system, they provide
us the order form Taiwan and Hong Kong.
Its main customers are from Taiwan, Hong Kong. Through cooperating with Hong
Kong partner, the factory obtained a lot of knowledge and experience from
26
management and quality control. In recent years, Baoying Hardware starts to get
orders by way of opening international bid. Its product export accounts for 90 per
cent.
Competitive advantage
(a) labor advantage: in the composition of cost of hardware, the proportion of labor
costs is the highest, the employment policy of Baoying’s is: 90% of the workforce is
"imported", that is, the vast majority of the workforce of Baoying is from the less
developed regions of China’s western region. The dual advantages of the labor force
have resulted in the clear price advantage of Baoying’s products in the international
market; (b) the industrial chain advantage: industry chain advantages are the
advantages mainly due to the division of labor within the industry to form the
advantages of reducing the total cost of the final product. Dongguan has a long history
of producing hardware, in the early days of the founding of PRC, the hardware
produced in Dongguan has a certain reputation in the country. After reform and
opening up, the hardware produced in Dongguan has traveled across the country.
Focus on hardware manufacturing and hardware processing industry, Dongguan has
formed a good industrial chain. As a result of the division of relative labor of every
industry in industrial chain, species of each industry can achieve high levels of
proficiency to form a high labor productivity, and ultimately leading to a decline in
hardware products. Baoying has obtained the advantages of industrial chain, which
makes the products have significant price advantage in the international market; e; (d)
the advantages of production specialization: Since its inception, Baoying did not carry
out any production of diversification, it fully invested the limited funds in the
improvement of hardware technology, which has not only formed the specialization of
production equipment, but also formed a large-scale production equipment and
directly improved labor productivity and reduced costs, and ultimately formed price
advantage of products of Baoying’s in the international market. This is also an
important way for enterprises of many traditional industries to enter into the
27
international market.
Internationalization process:
The firm’s internationalization process was divided into two stages. The first stage is
inward-internationalization. Through capital injection of its Hong Kong partner,
Baoying imported new production facilities to enhance its productivity and production
quality. At the same time, through the cooperation with Hong Kong partner, Baoying
Hardware obtained managerial skills and formed a set of quality control system
gradually. At the second stage, Baoying Hardware started to export its products by
means of low price and high quality. With the increasing export experience and
reputation in the international market, it has stably fastened its steps in other
south-east Asian counties and regions. In recent years, Baoying Hardware has won
many overseas orders through international competitive bidding.
Case 2: ChaoZhou Calen Fashion Company Ltd
Motive
The ChaoZhou Calen Fashion Company Ltd’ (henceforth Calen Fashion) is a private
midsized firm established in 1988 and started international business in 1999. A good
relation with overseas customers and the limited domestic market are the main
reasons lead to Calen Fashion’s internationalization. There are many clothing
factories in China, especially in Chaozhou, a lot of manufactories process dresses for
foreign customers. And the purchase and ship of raw material is convenient in this
area. Then Calen Fashion started to be an OEM for foreign company. From 2006,
after it obtained the self-export right, it thought that it has a clearer planning for
internationalization.
Initial opportunity and internationalization process
Its first internationalization started from the indirect export through a trade agent of
28
Shanghai. The respondent recalled the first international opportunity:
The first export order…should be through a Shanghai’s trade company. Mr. Wang
(the founder) through his relative connected with a trade company in Shanghai. They
are sort of agent of a Japanese dressing company. From that time, we start our first
dressing export business. We got the design drawing from Shanghai, and produce the
sample mail to Japan. We revise the sample after receiving their feedback. After
several feedbacks, we start batch production.
Calen Fashion just worded as a processing factory for the customer of Shanghai’s
trade agent. Calen Fashion had not a direct connection with the exporter. Calen
Fashion started direct export to the United States through the relationship of new
partner. The new partner used to work for a large wedding and evening dress
company and accumulated some foreign customers’ resources. When he quitted his
previous job joined Calen Fashion, he contacted with the American company which is
his old customer and told them that his new enterprise can provide same quality
product but with lower price to them. Subsequently, they gave him this order and they
signed contract. This is Calen Fashion’s first direct export business. Calen Fashion
had the plan that sells its own brand’s evening and wedding dress. It has registered the
brand and started to explore the sell’s channel in the international market.
Competitive advantage
Sometime those larger companies are reluctant to accept small amount orders. Then
as SMEs, Calen Fashion can win this kind of order with a relatively low price. The
industrial cluster is another positive factor for Chinese firms’ success in the
international market. For example, this industrial cluster provides low cost suppliers
and information for actors in this cluster.
Internationalization process:
The route of the firm’s internationalization is from indirect export to direct export;
29
from assembly to OEM (Original Equipment Manufacturer) to OBM (Original Brand
Manufacturer).
When it starts its first dressing export business, most of the orders are OEM. It got the
design drawing from the trade agent of Shanghai, and produced the sample mail to
Japan. It revised the sample after receiving their feedback. After several feedbacks, it
started batch production. From 2006, it obtained the self-export right and began its
own way of direct export. In the future, Calen Fashion plan to sell its own brand
dressing to the international market.
Case 3: Shunyi Jiahua Garment Company Ltd
Motive
Jiahua Garment used to attach to Dahua Garment factory which is a state-owned
enterprise in China and worked as sub-contractor for Dahua company. On the one
hand, Jiahua Garment did not worry about the source of clients; On the other hand, it
did not form strong competitive advantage in domestic market when competes with
garment processing plants in south China. So it only worked as subcontractor of
Dahua. When the relationship with Dahua Company broke up, Jiahua Garment had to
find new customers in the international market.
Initial opportunity and internationalization process
Jiahua Garment was established as an OEM for Dahua Company which is a state
owned garment enterprise to share the orders from overseas. Just as the respondent
said:
Our factory was established with the help of Dahua Garment Company, which is one of
the famous state-owned garment companies in Beijing. Then Jiahua Garment attached
to Dahua Garment and got sub-contract from Dahua.
When Dahua company cannot get enough order to Jiahua Garment, Jiahua started to
30
explore customers themselves. Because of the lack of relevant knowledge and
connection, its first overseas order was got from a broker who is a trade company in
Hong Kong. Jiahua Garment did not have any connection with its overseas clients. All
the communications must be through Hong Kong’s company. Until today, Jialian
Garment still exports the products through trade agent.
Competitive advantage
This company was a collective enterprise. The local government provided a lot of
conveniences from its early establishment. Low cost labor and entrepreneur’s social
and business network are the advantages of this company.
Internationalization process
The process of internationalization of Jiahua Garment can be seen as a typical OEM,
although during the cooperation, the broker has changed, the business practices still
belongs to the scope of OEM, it also has plan to export directly, but it does not
implement at present.
In 2006, it had been officially separated from Dahua Garment and had to seek orders
by itself. Science the manager of the company has worked in export area for many
years, some of his business connections help the company get orders through other
trade agencies or companies, which makes up for the shortage of lack of orders when
it departed from Dahua. At that time, it found a Hong Kong trade company which was
the first-tier subcontractor of European upscale retailers. That Hong Kong company
signed a full-package contract with an European branded marketer. They undertook
design and materials procurement and Jiahua Garment works as their subcontractor
which is in charge of processing on their raw material.
In 2001, China gradually got rid of the export quota system since its entry into the
World Trade Organization (WTO). Dahua started to lose its advantage because the
company used to getting export quota as a state-owned enterprise.
31
Case 4: DaLian Yuandong Digital Co., Ltd
Motive
DaLian Yuandong Digital Co., Ltd (henceforth Yuandong Digital) was established in
December 2000. When Yuandong Digital was first established in Dalian, its goal is to
establish the best IT enterprise in China. With the development of the enterprise, the
competition in IT industry in China becomes ever hot, many companies begin to
search for oversea partners for better financial and technical support to survive in this
market. Yuandong Digital has recognized in 2003 as the ‘software enterprise’ by
Dalian Bureau of Information Industry Certification and the ‘high-tech enterprise’ by
Dalian Science and Technology Board because of its outstanding professional
competitive. To obtain advanced technical support and managerial mode is the main
reason facilitates the enterprise find foreign partner actively.
Initial opportunity and internationalization process
The respondent describes the first opportunity of going international:
If we did not meet the Japan Zhengxing Electric, maybe we won’t export the product so
quickly, but we know we will go international ultimately someday. They are our strategic
partner. And want to find a computer software provider in china. Then, through the help
of the district government, they choose us.
Japan is the first country Yuandong Digital has entered. In 2001, one of Japan’s
companies has looked for a partner in Dalian for cooperation of developing certain
software. Through local government’s recommendations, it has selected four
companies as its candidates, Yuandong Digital was one of the them. Through
contrasting the technical advantages, management mode, corporate culture, etc.,
Yuandong Digital has been selected as its partner. After the success in the Japanese
market, Yuandong Digital planned to explore the new customers in Japan through the
business connection which was built on from the first cooperation with Japanese IT
32
company. Yuandong Digital built on relationship with Japan Zhengxing Electric Mfg.
Co., Ltd., HIMACS and many other software companies and achieved greater success
in Japanese market.
Competitive advantage
The competitive advantages of YuanDong Digital include employees’ effort and
correct development policy. In more details, it has a strong strength of R & D and
self-contained facilities for development. It has a strict process of project development
and quality assurance system which enables it provides high-quality products and
services.
Internationalization process
YuanDong Digital chose the way of joint venture to form the collaborative
relationships with foreign market’s partner and expand the international business
through new established network such as distributor, sales agent, and retailer in
foreign market.
Case 5: Crystal CG Ltd
Motive
Crystal CG Ltd (Crystal CG) focused on visualizing architecture by using 2D or 3D
technology in China and the firm has built up a leading position by five years. It was
one of the most famous companies that specialized in architectures visualizing
business. The firm’s dominant position in visualizing architecture in domestic market
encourages the Crystal CG to exploit the international market. In terms of newly
digital entertainment business, internationalization is more likely to a strategic choice
to learn and transfer the knowledge into competitive advantage beyond the more
mature market.
Initial opportunity
33
The firm set up the first overseas office in Singapore. Hong Kong and Tokyo’s office
were opened soon after. The respondent described when and how they set up the first
overseas office:
We set up the first overseas office in Singapore. And Hong Kong and Tokyo’s office
were opened soon after. Actually, the first office opened in Singapore is just because one
of our partner immigrant to Singapore for his personal reason. Then we thought, ok, you
can set up an office and employ some local staff.
The first office opened in Singapore is the result of its partner immigrants to
Singapore for personal reason. In the same year, Crystal CG planned to set up the new
office in Hong Kong and serves as a gateway for our international operations. In
terms of the newly digital entertainment business, Tokyo is a suitable city to contact
with advanced technology. The business in Tokyo is more focused on film and
animation. Dubai is one of the hot places of construction. Then its office in Dubai
mainly provides architecture visualization service. The main factor that influences the
choice of cities is that the business chance and regional factor. Firstly, these cities are
dynamic. Secondly, from regional perspective, it started from Asia to Europe, and
ultimately market is might be the North America. Asian countries and regions such as
Hong Kong and Singapore are much alike with Chinese mainland from cultural
aspect.
Competitive advantage
Firstly, Crystal CG has technology advantage and expertise of the employees. With
help from excellent employees the firm achieves today’s success.
Secondly, it has
focused on architecture visualization business for 14 years. New business expanded
from the core technique – visualization. From the beginning, it has provided
architecture visualization service for architect and their customers. Now it has
provided visualization service in some other field such as city planning, documentary
film, and even other type of film. These are the base of our success in domestic
34
market. During the enterprise’s internationalization process, they take use of more
comparative advantages in the international market, includes excellent technicians and
experience. Also the price is another advantage they have compared to our foreign
counterparts.
Internationalization process
The firm’s internationalization process follows Uppsala process model. The
international process of Crystal CG was achieved through the establishment of its
overseas office. Through establishment of overseas office, it tried to deeply exploit the
local market. In knowledge-based service industry, reputation is very important. The
professional competence has helped the firm to win customers and the service can
help it to maintain a long-term relationship with customers. The relationship with its
customers was also important for the growth, and many of its business in China was
from customer recommendations.
Case 6: Skyline Architecture Firm
Motive
Skyline Architecture has collaborated with foreign design firm from 2004. Through
cooperation and working in a foreign country, the firm realized the gap between
western and traditional Chinese companies. It felt that the most valuable thing it has
learnt was that the advanced design concept and standardized processing control.
Besides that, its international project experience was very useful to build up its firm’s
image. Since some domestic customers have blind faith in foreign firms, they consider
products from overseas are always better, international work experience has promoted
firm image to a great extent.
Initial opportunity and internationalization process
35
The respondent describes the first opportunity of international business:
In 2006, Chinese Construction Company contact with us through my business
acquaintance. They got a business in Qatar and want to find a design firm draws
construction drawings. And we sign a contract with Chinese Construction Company start
to our international business. Our first international project is by chance. But from then
on, we considered seriously exploring opportunity in the international market.
The subsequent international projects were introduced by the owner’s business
connection. It has tried to take part in the international contest, but did not win any
projects through this way.
Competitive advantage
The advantage of Chinese design firm is that it knows Chinese market well. China is
one of biggest market for architecture design companies all over the world. In
addition, a low cost for human resources is also another advantage of the company’s.
Internationalization process
Skyline Architecture’s internationalization is a good example of Bell’s ‘client
followership’ which indicates that the firm entered new markets as a result of the
international strategies of their domestic clients. First of all, through the cooperation
with the domestic construction company which develops international market in Qatar,
it finished the design of the project. And then, it has designed for the project in
Vietnam
which
is
another
Chinese
client’s
overseas
project.
From
its
internationalization process so far, all the international businesses are from the
domestic client’s overseas projects. As China's market is a big cake of the
international construction market, the main goal of Skyline Architecture is in China's
domestic market. Skyline Architecture upgrade its image and reputation through the
two projects abroad and takes advantage of its own well established network
relationship in the industry to achieve the ambition in domestic market.
36
4.2 Discussion
4.2.1 Motives of China's SMEs’ internationalization
When analyzes the motives of China's SMEs’ internationalization, it is slightly
different due to the characteristics of the industry. The traditional manufacturing
industry, such as garment and hardware, has a long history of development in China
and there are fierce competitions in these industries. The internationalization of the
SMEs’ in these industries is mainly for avoiding intense internal competition. As
mentioned above, Baoying Hardware, Calen Fashion and Jiahua Garment, started
their journey of internationalization for the purpose of avoiding intense competition in
China’s domestic market. Those knowledge-intensive industries such as IT and
architectural design are the emerging industries in China. Although the SMEs of these
industries are facing less competition than the above enterprises in domestic market,
lack of corresponding technology and management experience are the difficulties they
are facing and hope to overcome through internationalization. Another motive is the
international expansion for many Chinese enterprises. These enterprises attempt to
escape the limits of their domestic situation and, in order to achieve this; they have to
remedy their main competitive weaknesses. Potential to learn and transfer that
knowledge into competitive advantage from a more mature market provides the
motivation for firm’s internationalization. The difference motives between the
manufacturing and knowledge-intensive industries drive the SMEs go international.
All the respondents have mentioned that a lower cost is the main advantage in the
international competition. Low-price is the main strategy conducted by Chinese SMEs
to win the international market. The cases examined indicate that the Chinese SMEs
exploit the low-cost advantage in the international market.
Macroeconomic environment is counted as another main reason to facilities the SMEs
goes international. China has begun to liberalize the economic policy since 1980s. As
part of these changes, the government encourages, inward FDI. This has opened up
the domestic market for foreign MNEs, who can now access the generic
37
location-specific advantages in Chinese emerging market. The case firms’
internationalization such as and Baoying Hardware Yuandong Digital are result from
the inward FDI and their partner plays the driving role in firm’s internationalization.
These changes also have resulted in higher competition in the home markets of the
emerging economies. As a result, firms with asset-based ownership advantages are
encouraged to go abroad and exploit new markets. Moreover, in the case of China,
Chinese firms pursue outward FDI to avoid a number of competitive disadvantages
incurred by operating exclusively in the domestic market (Child and Rodrigues, 2005).
Then, in contrast to the assumptions of conventional international business theory, the
Chinese SMEs were not go abroad to exploit a competitive advantage that was
developed in the domestic market, but to avoid a number of disadvantages incurred by
operating exclusively in the domestic market such as lacking of developed intellectual
property rights and limited access to capital.
4.2.2 Initial opportunity
There were few cases have systematically searched for international opportunities.
The initial internationalization triggered by serendipitous encounters. All the
respondents’ initial entry strategies were with low involvement, which is consistent
with other research findings of those firms in developed countries and the
internationalization strategies used by SMEs. These strategies first occurred
accidently through company networking activities. Companies in case studies
reflected the patterns of the first internationalization opportunity which was rely on
entrepreneur’s extensive social network; and most of such social network is the
entrepreneur’s private relationship. However, along with the development of
international trade, this private relationship has turned to an internal network of the
firm. They have built a strong organizational relationship from private relationship.
But for the knowledge-intensive firms, the initial stage of internationalization depends
on business and technical networks. Along with more involvement in the international
market, systematic search and evaluation is more important. The entry market
38
selection in five cases was influenced by existed networks. Cultural difference and
geographic distance are not the main facts that influence the decisions.
4.2.3 Route of internationalization
Generally speaking, Chinese manufacturing SMEs is an immature industry. In the
cases mentioned above, most of the manufacturing SMEs still work in the lower-end
of the industry chain. There are two routes for manufacturing SMEs to start
internationalization. The first one is working as a project subcontractor to large
Chinese SOEs, and undertaking indirect export and working as OEMs for foreign
companies. Advantages of indirect export include lower costs, less risk, without
affecting current profitability. Moreover, enterprises can make use of sales success in
the international market to gradually increase its exports and enter into new target
markets. Indirect export is an effective way for enterprise to gain international
experience. Calen Fashion and Jiahua Garment are the examples entering into the
international market through OEM OEM is a popular way conducted by Chinese
manufacturing SMEs’ internationalization. Generally, Chinese SMEs always
manufacture products for foreign big brands in order to gain profits. Engaged in OEM
production not only make full use of existing competitive advantages, such as low
cost, large scale, but also make up for the shortage of products’ low reputation, hence,
these Chinese SMEs could take full advantage of profit margins of international
brands to take market share rapidly (Swink and Mabert, 2000). At the same time, in
the process of internationalization, China’s SMEs product qualities and technical
standards cannot meet the international standards immediately, it needs to learn
technological progress, standardize production methods and improve the management
level. In addition, it does not involve in market development and it does not assume
the risk of product sales. Therefore, in such a great environment, especially the
Chinese products have frequently suffered anti-dumping cases in foreign countries;
OEM model is still an effective way for China's export enterprises to choose at this
39
stage. In the cases, Calen Fashion and Jiahua Garment adopted OEM model to
participate the international competition. As a knowledge-intensive enterprise Skyline
Architecture also follows the way of working as a project subcontractor to involve in
the international market. Thus, the OEM is not a typical way for traditional
manufacturing firms’ internationalization but also for Chinese knowledge-intensive
SMEs.
Second approach is to find a foreign partner to found a joint venture. A joint venture
means that a foreign company and a local company share the ownership, capital and
other resources; and co-manage and share profits. The joint venture provides Chinese
firm more effective channel for the transfer of tactic knowledge, not just in production
and distribution but also in other areas where internationally competitive standards
need to be achieved (Simomin, 2004). The transfer of tacit knowledge can be
especially important for enabling the Chinese recipient to make food use of
technology. Thus, this is also the suitable way for knowledge-intensive SMEs to go
global. The knowledge-intensive SMEs facing less competition compare to
manufacturing enterprises in domestic market, but they do lack the corresponding
technology and management experience, which they hope to obtain through
internationalization. Through joint ventures with foreign multinational corporations
and cooperation, the SMEs can not only have access to capital, introduction of
technical equipment, but also build relations with local suppliers, customers, banks
and government officials through local partners’ network. This strategy enables
enterprise products to go into the international market through the networks of
international production systems of transnational corporations. Baoying Hardware and
Yuandong Digital are the cases which through cooperation with foreign companies to
open the South Asian markets.
The third way is the organic international expansion route. This route toward
international expansion involves Greenfield establishment of subsidiaries and
facilities within targeted markets. It is initially aimed at securing differentiation
40
advantages in terms of adjustment to local market needs and tastes (Child and
Rodrigues, 2005). Crystal CG provides an example of a Chinese firm that has
internationalized primarily through the organic expansion route. It has gotten
domestic advantages before its first internationalization. The main internationalization
goal of Crystal CG is at highly developed regions, although it established subsidiaries
after 2002 in nearby countries and regions.
4.2.4 Market choice
The choice of market depends largely on established network and the companies’
capacity to take on the uncertainties or risks. Most of China’s SMEs are likely to
choose markets which are closest to the domestic market geographically, culturally
and linguistically and have less restrictions or regulations for trade and investment for
setting up business to avoid uncertainty and risk. The established networks secure the
low risk of first time entering a new market. The subsequent market choice is mainly
depended on the professional capability of the firm.
4.2.5 Role of government
The institutional context of developing countries, especially government and its
agencies, tends to be featured importantly in the context of developing country
business. China is one of the largest developing counties where government
involvement has been particularly significant (Dunning and Narula, 1996). The
Chinese government plays an important role for promoting SMEs’ internationalization.
From policy perspective, the OEM and joint venture route has been long benefitted
from macroeconomic policies.
In early 1999, the Chinese government adopted the experience from other Asian
economic developed countries for reference and launched the ‘Go Global’ policy,
which encourages Chinese enterprises to invest in overseas in order to increase their
41
competitiveness and to secure an international business presence. This policy signifies
the determination of the government to promote outward FDI in the context of huge
inflows of foreign exchanges. Some of those large enterprises have been fostered by a
protected domestic market and considerable state supports in the form of soft loans
and protected marketing channels. For the Chinese SMEs, lack of credibility has
blocked the access to the loans from the banks and capital shortfall has caused them
do not have sufficient funds to invest in a foreign market. But this is also the
opportunity for SMEs to take advantage of the policies to attract foreign investments
to improve their competitiveness. Moreover, two of three knowledge-intensive case
firms have mentioned the foundation. The local government issues all kinds of funds
to promote the knowledge-intensive and knowledge-based enterprise development.
This is another specific measurement that encourages competitive knowledge-based
enterprise to develop.
There are four out of six cases has been benefited directly from the support of the
local government and other two cases has enjoyed indirectly from the government
policies, such as official legitimization of private firms. On the other hand, the more
benefits the government provides, the more intervention occurs. This is the case
especially occurred in the large enterprise with the complex state ownership system
(Meyer and Lu, 2004). While the ownership status of the six firms in this thesis help
them to keep distance from bureaucratic intervention, their relative autonomy also
owes something of the firms.
4.2.6 Competitive advantages
Chinese SMEs have comparative advantages for small-scale advantages and small
projects that are easy to be set up and converted. For instance, China's textile, toys,
umbrella, shoes, hats and other industries, the products prices are low but with better
qualities, these types products are better meet the needs of the market in developing
42
countries. For Calen Fashion, as a small factory, can be benefit through flexible
production changes base on the market demands.
Most of the interviewees claimed that the main comparative advantages that Chinese
SMEs have are raw materials, daily operations and human resources. All the
respondents indicated that are partially derived from low cost, in particular, labor cost.
A large number of small and medium enterprises in China make use of China's
abundant labor resources (Zhao and Xu, 2003).
4.2.7 Competitive disadvantages of China's SMEs’ internationalization
China's SMEs’ international competitive disadvantage is mainly reflected in:
(1) The enterprises’ internationalization is limited to lack of entrepreneurs and
experienced personnel.. Both of the facts have been playing important roles during the
enterprises internationalization process and somehow, these two facts are the barriers
for the Chinese SMEs.
(2) Low risk control capacity. Once the enterprise has to face the risks from the global
market, it has little ability to provide downside protection.
(3) Lack of comprehensive and deep understanding of international market. Doing
business in a global market is a comprehensive business activity, and such move
needs a good understanding and familiarity of the market. Hence, the enterprise would
be able to forecast the market and take appropriate actions.
4.2.7 Comparison of Chinese SMEs internationalization and Western
internationalization models
Uppsala model
International growth patterns of six case firms are summarized in Table 3. This figure
captured the internationalization process in terms of a list of facts, such as the firm’s
43
orientation towards to international expansion, time frame associated with
internationalization, foreign markets entered, and the modes of entry used.
44
Table 4(1): Uppsala model – stage model
STAGE
Baoying Hardware
Calen Fashion
Jiahua Ganment
Yuandong Digital
Crystal CG
Skyline Architecture
1988-1999: manufactured
No regular exporting
1987-1997: fouse on
the accessory of the
domestic market, no regular
evening and wedding
exporting activity.
dressing and focused on
2000-2001: no regular
1995-2002: no regular
export activity.
export activity.
2003-2006: focused on
domestic market, no regular
international business.
domestic market.
Exporting via
2000 - Now: export the
independent
products via a Chinese
representative
trade company.
1998- 2006: As the
2006: the firm started the
subcontractor of a
first overseas project in
state-owned manufacturing
Qatar, in cooperation with a
enterprise and export the
Chinese client, Chinese
product through this
Construction Company, to
factory.
provide the conceptual
2006-now: As an OEM for
design for its Qatar clients.
a European company.
2007: Work for another
Export the products via a
Chinese client’s project in
Hong Kong trade company.
1997-now: form a joint
Exporting via sales
subsidiary
Vietnam.
2001-now: signed a joint
venture with a Hong Kong's
2007 - Now: export the
partner, started to export
products directly to the
through its Hong Kong
USA and Canada.
marketing agreement with a
Japanese software
distributor and started to
export to Japanese market
partner's sales department.
through the partner.
2002-now: Set up the
offices in Singapore.
2003-now: Subsequently,
Overseas manufacturing
office in Hong Kong,
Dubai and London were set
up.
45
Table 4(2): Uppsala model – psychic distance model
PSYCHIC DISTANCE
MODEL
Baoying Hardware
Calen Fashion
Jiahua Ganment
China's nearby country
1998: Taiwan
1998-2006: Taiwan, Hong
and region
1998: Hong Kong
Kong
Yuandong Digital
Crystal CG
2002: Singapore
2003: Hong Kong
1999: Japan
Other asia countries
2000: Japan
2003: Dubai
2004: Japan
Europe and America
2000: Sweden
2007: the United States
2007: Canada
1998-2006: Europe
2006-now : the Netherlands
via Hong Kong
46
Skyline Architecture
2008: Britain
2006: Middle east
2008: Vietnam
Table 5: Network and internationalization
Baoying Hardware
Initial
internationalization
The subsequence of
internationalization
Taiwan and Hong Kong via
Formal network - Joint
venture partner
Sweden via open bidding
Calen Fashion
Jiahua Ganment
Japan via
Taiwan, Hong Kong via
Informal network- Relative
Formal network - partner
the United States and
the Netherlands via Hong
Canada via informal
Kong via
network – entrepreneur’s
informal network-
business connection
entrepreneur’s friend
47
Yuandong Digital
Crystal CG
Japan via
Singapore via
Formal network - Joint
Informal network-
venture partner
ex-employee
Japan via
Formal network - Joint
venture partner
Skyline Architecture
Middle east via
Formal network - client
Hong Kong, Dubai, Japan,
and Britain via formal
Vietnam via
network- target market’s
Formal network - client
partner or client.
The stage model of internationalization was indicated in the case findings. In terms of
firm orientation, the SMEs had a large domestic focus at the initial stage regardless of
manufacturing or knowledge-intensive enterprise. The second stage was characterized
by those small firms becoming involved in their first forting market via independent
representatives except Baoying Hardwear, Yuandong Digital and Crystal CG. The first
two firms went to the third stage directly through their foreign investors. Crystal CG
is the only case firm went to the fourth stage which was characterized by set up
manufacturing factory or office in foreign market.
In terms of the foreign markets firms entering, Table4 (2) shows that all the firms
started internationalization by going to those markets that are close to China
geographically and psychically. With the development of internationalization process,
further psychic distance foreign markets were chosen. These six case companies
reflected patterns of internationalization which occurred fairly step by step across the
international market. To a certain extent, this supports “stage” theory of
internationalization, which suggests a more gradual international market development
path linked to incremental experience knowledge and comfort. This behavior was
perhaps influenced by the nature of the risk aversion. Also, the competition in
domestic market for these firms was very fierce, thus necessitating international
expansion to allow for growth.
Network model
Johanson and Mattson proposed that the establishment and development of foreign
relationships determine the nature of international entry and expansion. They
explained that the internationalization of the firm means the firm establishes and
develops positions in relation to other counterparts in a foreign network. The
internationalizing firm is initially devoted to a network in domestic market and
gradually further builds business relationships in networks overseas. Table5 shows
that four case firms started the internationalization from domestic networks such as
clients, alliance partners, and ex-employees. Two of six case firms went to
48
international market through joint venture partners. These six case firms testified prior
researches on internationalization from network perspective, which is, inter-firm and
interpersonal relationships appear to be influential in several internationalization
issues, such as foreign market selection and degree of internationalization. However,
heavy reliance of network is partially impeding the internationalization of the case
firms. For instance, Jiahua Garment and Skyline Architecture were staying with the
experimental export stage and do not have strong willing to expand business in the
international market. Calen Fashion’s international expansion relied on the
entrepreneur’s social network. The small scale of the firm impedes the firm to get the
order through the public bidding or trade fair.
INVs
Table 4(1) shows that the manufacturing SMEs have spent over 10 years from the
beginning to the establishment of the first international business except one case firm,
Jiahua Garment, which was set up as a manufacturing subcontractor by a state-owned
enterprise
from
the
inception,
whereas
the
knowledge-intensive
SMEs
internationalization history is shorter than manufacturing firms, from one year to
seven years.
Nevertheless, these three case firms are not defined strictly as INVs. Yuandong
Digital has achieved 90 per cent export to Japan market within three years
establishment, but this firm went to foreign market through joint venture with
Japanese partner and focused on Japanese market only.
Crystal CG started its internationalization after seven years establishment. Skyline
Architecture’ international business only accounted for 7% after three years
development. However, from the develop pattern, all the case firms are involved in
the international market gradually along with gaining knowledge or revenue.
49
Eclectic paradigm
The Eclectic Paradigm developed by Dunning is the most widely used frame work to
analyze the pattern, location and choice of FDI for international production among
multinational enterprise (MNE). The theory assumes that there are three main
variables that influence the internationalization of firms from one country to foreign
markets: ownership (O), location (L), internalization (I), or OLI advantages. With
respect to the case firms in this thesis, there is only Crystal CG through FDI to expand
the business. There is not significant relation between the internationalization
behavior and the OLI advantage theory. In case of Crystal CG, its internationalization
based on the strong attempt which obtain advanced technology and managerial
knowledge. The incentive for Crystal CG to commit to a higher level of
internationalization is that it promises access to superior technology, managerial
knowledge, and brands. There is no strong ownership advantage in Chinese SMEs.
The choice of FDI country is based on foreign-market-seeking instead of
efficient-seeking and resource-seeking. On the whole, seeking efficiency and
resources in terms of cost minimization is not a major motive for Chinese companies
to invest abroad, and such, this is different from most MNCs from developed
countries.
Latecomers
Generally speaking, China’s SMEs are latecomers in their respective fields when they
enter the international market. The case firms conform more closely to the latecomer
perspective than to analyses derived from the exploitation of firm-specific advantages
by already strong companies. While exporting from china is based primarily on the
intrinsic advantage of low-cost labor, combine in some cases with modern production
facilities that may have been developed with foreign inward investment (Marsh, 2005),
move toward a higher level of internationalization require the remedying of
disadvantages through the seeking of new assets. The most important assets being
sought are intangible ones, such as brand reputation, technical knowledge and
50
competence to manage a global corporation. Then, the late-comer perspective based
on the research in the undeveloped nations. It is give the reasonable explanation about
the Chinese firms’ internationalization process includes the Chinese SMEs.
As latecomers, Chinese SMEs should follow the central maxim of latecomer survival:
adapt through differentiation. Ability to imitate others and learn new technologies etc,
with relative ease and haste is the central advantage of being a latecomer, but those
products that latecomers produce at the same level as forerunners generally cannot
succeed in the open market. The case firms show up features of late-comer in the
international market and stay with a stage of internationalization because lack of the
capability of innovation and customer-focus strategy. These are the obstacles for the
Chinese SMEs to achieve the higher level of internationalization.
5. IMPLICATIONS
5.1 Uppsala Model and Theory of International New Ventures
The Uppsala model of internationalization of enterprise was founded by Johanson and
Vahlne (1977). It believes that the internationalization of an enterprise is a
progressive development process
and proposes
the stage
model of
the
internationalization. However, a number of SMEs are almost embarked on the road of
international development from the beginning. The development process of
internationalization of this type of enterprises broke the traditional approach (Knight,
1997 Oviatt & McDougall, 1994) and posed a challenge for the traditional view that
the enterprise must enter into the international market through the progressive
development approach, and after experiencing the various stages proposed by stage
model, such enterprise would become a global enterprise. However, such theories of
INVs are highly persuasive when explaining the enterprises which are in the
developed countries or dedicate to high-tech industry.
With respect to China, the reality shows that the current economic condition is not in
51
line with the economic environment being required in the theory of INVs. With
immature market condition and imperfect regulation, the development of international
new ventures is facing a series of obstacles, such as lack of capital supply and finance
channels. The internationalization pattern of case companies in this thesis reflected
step by step across international market. To a certain extent, this supports “stage”
theory of internationalization, which suggests a more gradual international market
development path linked to incremental experience knowledge and comfort. This
behavior was perhaps influenced by the nature of the risk aversion. Also, the
competition in domestic market for these firms was very fierce, thus necessitating
international expansion to allow for growth. Therefore, Uppsala model is more
applicable for the process of internationalization of China's SMEs than the theory of
INVs, because it is more conducive to China's SMEs to avoid risks.
5.2 The Impact of Network and Institutions on China’s SMEs
Forsgren (2002) held that enterprise could be through other the relationships with
other enterprises and networks to obtain new knowledge, through the intimate
interaction, collaboration to obtain more complex work experience knowledge to
provide themselves a faster access to international markets. With respect to Chinese
SMEs, network not only enables them to learn experience and knowledge, but also
provides them the approaches of finding overseas markets through inter-firm
networks. Network as a vital resource, is hard to imitate by other competitors. Based
on the analysis, heavy reliance on the network was observed in all the cases. This is
partially because of the rooted culture of planned economic system. Another reason
need to be considered is the undeveloped market regulation of Chinese market. For
example, the intellectual property rights and other knowledge-based property are not
being well protected. All forms of innovation is can be easily imitated by the
competitors and the network is the vital resource which is hard to imitate or stole by
competitors. However, the heavy reliance of the network is partially impeding the
internationalization of Chinese SMEs and it is much harder for Chinese SMEs to
52
build their network in foreign countries due to cultural and physical distance. Hence,
the strategy which is successful in domestic market may not work in overseas market.
This is more obvious in traditional manufacturing enterprise. For most of the Chinese
manufacturing SMEs, the internationalization is fast at first through OEM, but such
process will decelerate when it reached to a certain level. On contrast, the
knowledge-based enterprise focuses more on professional competence and advanced
technology to form their competitive advantage. They adapt the international norms at
the beginning even prior to their internationalization. The initial internationalization
pace may slow compared to OEM SMEs in China, however, their internationalization
process is more stable and sustained.
5.3 Government role
Different levels of government play positive roles while promoting the
internationalization of SMEs. In the transformation economy, the government loses
control of economic and market activities gradually and the SOEs gradually lose their
natural advantage. SMEs with SOEs background were forced to convert to
concentrate on market-driven entrepreneurial activities in order to compensate those
gradually disappeared political capital or legitimacy advantages. From institutional
perspectives, non-SOEs background SMEs obtain relatively fair institutional
environment. There was less discrimination against smaller firms within the SME
category during the economy transition process. The economic policy became more
neutral and it was an important foundation for the development of Chinese SMEs’
internationalization.
From this study it can be seen that China's SMEs shall choose the methods that are the
most suitable for them to carry out the process of internationalization and to achieve
good results. However, most of the manufacturing SMEs still remain a low-end of
value chain in the international market. Although the form of internationalization is
mainly work as OEM and indirect export, most of the SMEs have plan to take
methods of direct investment and OBM to carry out international trade in the future.
53
With respect to the knowledge-intensive SMEs in china, the internationalization
process is more comply with the Uppsala model and the theory of INVs. Moreover,
the network is the vital fact for SMEs internationalization in both manufacturing and
knowledge-intensive industries. The intensive network do facilitate the enterprise’s
internationalization, however, the reliance of the network also impede the enterprise
to go on to the next stage of internationalization.
6. CONCLUSION
Since the economic reformation of china thirty years ago, more Chinese firms have
started to step into the international market including both large enterprises and SMEs.
The internationalization of Chinese firms has a number of features that require
consideration in current theory. The research results indicate that the primary
motivation for Chinese traditional SMEs’ to undertake internationalization was their
desire to avoid over competitive domestic market. For more knowledge-intensive
SMEs, the willing of obtaining advanced technology and managerial knowledge
through international competition has become the central motivator. For both
traditional and knowledge-intensive SMEs, internationalization follows the Uppsala
model, the network model and late-comer perspective. The international new ventures
theory and eclectic paradigm, by contrast, do not appear applicable to the process of
Chinese SME internationalization. Research also indicates that, for international new
ventures development in China, the most significant barriers are: generally immature
market conditions, lack of sufficient finance channels and excessive reliance on
“Guanxi”. The study herein concludes that the development of Chinese SMEs has
essentially followed the theories which are Uppsala model, the network model and
late-comer perspective.
This thesis has carried out research on the process of internationalization of China's
SMEs’ from a macroscopic perspective. Since this is an explanatory study which is
facing limitations such as insufficient cases, the conclusion above shall be seen as
54
suggestions for further research other than conclusive statements and such conclusion
could enhance the understanding of the internationalization process of Chinese
medium size firms.
55
REFERENCE
Austrade, P. and de Clercq, D. (2005) ‘A network-based approach on opportunity
recognition’, Small Business Economics, Vol. 24, No. 3, 249-265.
Australia Bureau of Statistics (1998).Business Longitudinal Survey, 1994-1998,
Canberra.
Autio, E. (2005) ‘Creative tension: the significance of Ben Oviatt’s and Patricia
McDougall’s article “Toward a Theory of International New Venture”’, Journal
of international Business Studies 36(1):9-19.
Axelsson, B. and Easton, G.(Eds.) (1992) Industrial network: a new view of reality.
Routledge, London.
A. W. Coats. (1996) ‘The internationalization of economic policy reform: some recent
literature’, History of Political Economy, Jan 1996; 28: 337 - 354.
Beamish, P.W. (1990) ‘The internationalization process for smaller Ontario firms: a
research agenda’, Research in Global Strategy Management – international
business research for the twenty-first century: Canada’s new research agenda, ed.
A.M.Rugman,pp.77-92. JAI Press, Greenwich.
Bell, J. (1995) ‘The internationalization of small computer software firms- a further
challenge to “stage” theories’, European Journal of Marketing 29(8),60-75
Bennett, R. (1997) ‘Export Marketing and the Internet’, International Marketing
Review, Vol.14, N o.5:32 4-344
Brush, C., Edelman,L. and Manolova, T. (2002) ‘The impact of resources on small
firm internationalization’, Journal of Small Business Strategy, Vol. 13 No. 1, pp.
1-17.
56
Buckley, P. J. and Ghauri, P. N. (Eds.) (1999) The Internationalization of the Firm,
London: Thomson Business Press.
Buckley, P.J. and Casson, M. (1993) ‘Economics as an imperialist social science’,
Human Relations, 46, 1035–52.
China Daily, (2002) ‘Legally Promote Sound Development of Small and Mid-sized
Enterprises’, July 30, 2002.
Chetty, S. and Holm, D.B. (2000) ‘Internationalization of small and medium-sized
manufacturing firms: a network approach’, International Business Review (9),
77-93.
Clark,T., Pugh,D.S., Mallory,G. (1997) ‘The process of internationalization in the
operating firm’, International Business Review, Vol. 6 No. 6, pp. 605-23.
Child, J. and Rodrigues, S.B. (2005) ‘The internationalization of Chinese firms: a case
for theoretical extension?’, Management and Organization Review 1:3 381-410
1740-8776.
Child, J. and Tse, D.K., (2001) ‘China’s transition and its implications for
international businesses’, Journal of International Business Studies, 32, 5-21.
Coviello, N.E. and Munro, H.J., (1995) ‘Growing the entrepreneurial firm networking
for international market development’, European Journal of marketing, Vol .29, 7,
pp. 49-61.
Coviello, N.E. and Munro, H.J., (1997) ‘Network relationships and the
internationalization process of small software firms’, International Business
Review, Vol .6, No. 4, pp. 361-386.
Coviello, N.E. and McAuley, A. (1999) ‘Internationalization and the smaller firm: a
review of contemporary empirical research’, Management International Review.
57
Deng, P. (2004). ‘Outward investment by Chinese MNCs: Motivations and
implications’. Business Horizons, 47, 8-6.
Dore, R. (1973) British Factory-Japanese Factory, London: Allen & Unwin.
Dunning, J. H. (2001) ‘The eclectic (OLI) paradigm of international production: Past,
present and future’, International Journal of the Economics of Business, 8(2),
173–90.
Dunning, J. H. and Narula, R. (Eds.) (1996) ‘Foreign direct investment and
governments: catalysts for economic restructuring,’ London: Routledge.
Dunning J. H. (1995) ‘Reappraising the eclectic paradigm in an age of alliance
capitalism [J], Journal of International Business Studies,’ 1995 (3).
European Commission (2005) SME definition: Commission Recommendation of 06
May2003,http://ec.europa.eu/enterprise/enterprise_policy/sme_definition/index_e
n.htm.
Eisenhardt, K.M. (1989) ‘Building Theories from Case Study Research’, Academy of
Management Review, Vol 14, No 4, 532-550.
Ellis, P. and Pecotich, A. (2001) ‘Social Factors Influencing Export Initiation in Small
and Medium-Sized Enterprises’, Journal of Marketing Research, Feb 2001, 38, 1;
ABI/INFORM Global, pp. 119.
Erdener, C. and Shapiro, D.M. (2001) ‘The Internationalization of Chinese Family
Enterprises and Dunning’s Eclectic MNE Paradigm’, Management and
Organization Review, 1:3 411-436.
Filatotchev, I., Strange, R., Piesse, J., and Lien, Y.-C. (2007) ‘FDI by firms from
newly industrialized economies in emerging markets: Corporate governance, entry
mode and location’, Journal of International Business Studies, 38(4), 556–572.
58
Forsgren,M. (1989a) Managing the internationalization process, Routledge, London
Freeman, S. Edwards, R., and Schroder, B. (2006) ‘How small Born-Global firms use
networks and alliances to overcome constrains to rapid internationalization’,
Journal of International Marketing, Vol.14, No. 3, 2006, pp. 33-63.
Herrera, A.O. (1989) ‘The advantages of being a late-comer to what?’, Social Science
Information, Dec 1989; 28: 823 - 840.
Knight, G.A. and Cavusgil, S.T. (1996) ‘The Born Global Firm: A Challenge to
Traditional Internationalization Theory’, in S.T.Cavusgil and T. Madsen (eds.)
Advances in international Marketing, Vol. 8, pp: 11-26.
Knight, G.A. and Cavusgil, S.T. (2004) ‘Innovation, organizational capabilities, and
the born-global firm’, Journal of international Business Studies 35, 124-141.
Knight, G.A.,and Liesch, P. (2002) ‘Information internalization in internationalizing
the firm’, Journal of Business Research, Vol. 55 No. 12, pp. 981-95.
Hamill,J. and Gregory,K. (1997) ‘ Internet Marketing in the Internationalization of
UK SMEs’, Journal of Marketing Management, Vol. 13, No. 1: 9-28.
Hennert, J-F. (2001) Theories of the multinational enterprise, In Rugman, A. M. and
Brewer, T.L. (Eds.). The Oxford Handbook of International Business (pp. 127–49).
Oxford: Oxford University Press.
Jane Knight. (2001) ‘Monitoring the Quality and Progress of Internationalization’,
Journal of Studies in International Education, Sep 2001; 5: 228 - 243.
J Cantwell and L Piscitello. (2000) ‘Accumulating technological competence: its
changing impact on corporate diversification and internationalization’, Ind. Corp.
Change, Mar 2000; 9: 21 - 51.
Johanson, J. and Vahlne, J.E., (1977) ‘The Internationalization Process of the Firm-A
59
Model of Knowledge Development and Increasing Foreign Market Commitments’,
Journal of International Business Studies, Volume 8, Issue 1
Johanson, J. and Wiedersheim-Paul, F. (1975) ‘Internationalization of the firm：Four
Swedish Cases’, Journal of Management Studies, 12, 305-22
Johanson,J. and Vahlne, J.-E.
(1990) ‘The Mechanism of Internationalization’,
International Marketing Review 7.4
Johanson, J. and Mattsson, L.-G. (1993) ‘Internationalization in industrial systems – a
network approach, strategies in global competition’, in Buckley, P.J., Ghauri, P.N.
(Eds), The Internationalization of the Firm: A Reader, Academic Press, London,
pp.303-22.
Johanson, J. and Vahlne, J.-E. (2003) ‘Business Relationship Learning and
Commitment in the Internationalization Process’, Journal of International
Entrepreneurship, 1, 83-101
Johanson, J. and Vahlne, J.-E. (2006) ‘Commitment and opportunity development in
the internationalization process: a note on the Uppsala internationalization process
model’, Management International Review, Vol. 46, 2006/2, 165-178
Matthews, J.A. (2002) ‘Competitive advantages of the latecomer firm: A
resource-based account of industrial catch-up strategies’, Asia Pacific Journal of
Management, 19, 467-488
McDougall, P.P. (1994) ‘The effects of industry growth and strategic breadth on new
venture performance and strategy content’, Strategic Management Journal, Vol.
15 No.7, pp.537-54.
Madsen, T.K., Servais, P. (1997) ‘The internationalization of born globals: an
evolutionary process?’, International Business Review, Vol. 6 No.6, pp.551-81.
60
Maria Holmlund, Sören Kock, and Vladimir Vanyushyn. (2007) ‘Small and
Medium-sized Enterprises' Internationalization and the Influence of Importing on
Exporting’, International Small Business Journal, Oct 2007; 25: 459 - 477.
Ministry of Commerce (2006), SME Briefing, Vol 91, SME Division of National
Development and Reform Commission on 28/10/2006
North, D. C. (1990) Institutions, institutional change, and economic performance,
Cambridge, MA: Harvard University Press.
Oviatt, B. and McDougall, P. (2005) ‘Toward a Theory of International New
Ventures’, Journal of International Business Studies, 36, 29-41
Peng, M.W. (2001) ‘The resource-based view and international business’, Journal of
Management, Vol. 27 No. 6, pp. 803-29.
Redding, S.G. (1991) ‘Weak organizations and strong linkages: managerial ideology
and Chinese family business networks’, Business networks and economic
development in East and Southeast Asia, pp. 30-47.
Reid, S.D. (1981), ‘The decision-maker and export entry and expansion’, Journal of
International Business Studies, Vol. 12 No. 2, pp. 101-12.
Reid, S.D. (1983) ‘Firm internationalization, transaction costs, and strategic choice’,
International Marketing Review, Vol. 1 No. 2, pp. 45-56.
Rialp, A., Rialp, J. and Knight, G.A. (2005) ‘The phenomenon of early
internationalizing firms: what do we know after a decade (1993-2003) of scientific
inquiry?’, International Business Review 14(2):147-166.
Ruzzier, M., Hisrich, R., and Antoncic, B. (2006) ‘SMEs internationalization research:
past, present, and future’, Journal of Small Business and Enterprise Development,
Vol. 13 No. 4, pp. 476-497
61
Schüler-Zhou, Y. and Schüller, M. (2009) ‘The internationalization of Chinese
companies: what do official statistics tell us about Chinese outward foreign
investment?’ Chinese management studies, Vol. 3, 1, pp 25-42.
Scott, W. R. (1995) Institutions and organizations, Thousand Oaks, CA: Sage.
Sharma, D.D. and Johanson, J. (1987) ‘Technical consultancy in internationalization’,
International Marketing Rreview, Winter, 20-29.
Swink, M.L., Mabert, V.A. (2000), ‘Product development partnerships: balancing the
needs of OEMs and suppliers’, Business Horizons, Vol. 43 pp.59-66
Tang, Y.M., and Zhang, Y.L. (2002) ‘Challenges Facing SMEs in China: A
Preliminary Analysis’, in Proceedings of ANZMAC (Australia and New Zealand
Marketing Academy Conference) 2002 Conference Proceedings (CD), Melbourne,
Australia.
USCBC,
(2005)
Foreign
Investment
in
China,
available
from:
http://www.uschina.org/statistics/2005foreigninvestment.html
Warner, M., Ng, S-H. and Xu, X. (2004) ‘Late development experience and the
evolution of transnational firms in the People’s Republic of China’, Asia Pacific
Business Review, 10, 324-45.
Welch, L.S. and Luostarinen, R. (1993) ‘Inward and outward connections in
internationalization’, Journal of International Marketing 1(1):46-58.
Wesson,T. (1999) ‘A model of asset-seeking foreign direct investment driven by
demand conditions’, Canadian Journal of Administrative Science, 16, 1-10
Westhead, P., Wright, M., and Ucbasaran, D. (2001) ‘The internationalization of new
and small firms: a resource-based view’, Journal of Business Venturing, 16,
333,-358
62
WTO, (2008) Trade Profiles (China), available from:
http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Co
untry=CN
Yin, R. (1989) Case study research: design and methods, Beverley Hills, CA: Sage
Publications.
Yang, M. (2009) ‘Isomorphic or not? : Examining cross-border mergers and
acquisitions by Chinese firms, 1985-2006’ Chinese management studies, Vol.3, 1,
pp 43-572.
Yuan Jianwen. (2002) ‘Enterprises’ internationalization and global logistics,
Enterprise Economy’, (2002) 07, 10-11.
Zahra, S. A. (2005) ‘A theory of international new ventures: a decade of research’,
Journal of international Business Studies, 36, 20-28
Zhao, Y., Xu, H. (2003) ‘The internationalization of small and medium enterprises’
under the conditions of modern information technology, - an analysis based on
knowledge perspective’, Research and Development Management, (2003) 05,
11-15.
Zhou, L. Wu, W. and Luo, X. (2007) ‘Internationalization and the performance of
born-global SMEs: the mediation role of social networks’, Journal of
International Business Studies, (2007) 38,673-690
63
APPENDIX
Case summary
Case 1: Baoying Hardware Factory
‘Baoying Hardware Factory’ (Baoying Hardware), located in Dongguan, Southern
China, was a hardware manufacturer established in 1987 and manufacture; It is the
main section of Guangzhou-Shenzhen economic corridor. This factory mainly
produces all kinds of precision metal accessories, electrical, plugs and aluminum, zinc,
alloy products, and metal and plastic hardware accessories. The factory has
approximately 150 technical workers and it was affiliate to one of the state owned
corporation which had been reorganized in 1996. Mr. Li took over this factory and
registered it as a private enterprise. In order to attract foreign investment, government
provided many favourable policies for foreign investors at that time. In 1997, through
through personal connection, Mr. Li contacted with a Hong Kong businessman and
received a foreign capital injection for the factory. With such capital boost and this
partner’s assistant, Baoying Hardware purchased new overseas production facilities
and facilitated overseas orders from for the factory. Most of the customers are from
Taiwan, Hong Kong. Through cooperating with Hong Kong partner, this factory not
received the capital injection but also gained knowledge and experience, such as
management approach and quality control. In recent years, Baoying has started to
receive orders by opening international bids. Its product export account for 90 per
cent.
Case 2: Chaozhou Calen Fashion Company Ltd
Chaozhou Calen Fashion Company Ltd’ (Calen Fashion) is a private midsize firm
with an area of 1500 square meters. It was established in 1988 and located in the
wedding dress town —Chaozhou China. The firm mainly manufactures variety types
of beads, machine embroidery of wedding dresses since its inception. From 2000, the
64
firm started to focus on processing wedding dresses and evening dresses. The first
time it entered into the foreign market was a direct result of the connection with the
founder’s relative, who introduced the trade company in Shanghai. Calen Fashion
started to produce evening and wedding dresses for a foreign trade firm in Shanghai
exporting to the Japanese market. The export share of the firm has always been close
to 100 per cent as it is heavily dependent on OEM (original equipment manufacturer),
i.e. producing for other firms and brands. Mr. Cai, the partner of Calen Fashion,
joined Calen Fashion in 2006. He has been working for a large-scale import and
export company for 5 years, mainly engaged in the field of evening dressing .During
that time; he accumulated export experience and overseas customers’ resources. In
2006, he met the factory’s founder Mr. Wang through a working relationship. After
being in contact several times, Mr.Cai decided to cooperate with Mr. Wang to run
Calen Fashion together. Mr.Cai used his knowledge and experience to obtain the
self-export right for Calen Fashion and registered its own brand for the domestic
market in 2006. From 2007, the firm obtained export rights and started to accept
orders also from the US and Canada, which was mainly facilitated by Mr. Cai. Japan
still accounts for 60 per cent of the export, but this is decreasing. The full focus of
Calen Fashion has been OEM for the international market, thereby having close to
100 per cent export. In 2006, the company registered an own brand for the domestic
market, which now accounts for 5 per cent of the sales.
Case 3: Shunyi Jiahua Garment Company Ltd
The ‘Shunyi Jiahua Garment Company Ltd’ (henceforth Jiahua Garment) is a
township garment process factory located in Beijing. The company was established in
1998 and is producing apparel made of cotton, wool, silk, etc., e.g. leisure shirts. The
firm was established in 1998 and until 2001 it was a township enterprise attached to
Dahua Garment Company Ltd., which is one of the biggest state owned garment
factories in Beijing. Dahua Garment subcontracted its foreign orders to cooperative
65
process factories; Jiahua Garment was one of them. In 2001, China gradually got rid
of the export quota system since its entry into the World Trade Organization (WTO).
Dahua started to lose its advantage because the company used to get export quota as a
state owned enterprise from Chinatex Corporation, which is a large-scale state-owned
group corporation engaging production and trade of raw materials, textiles and
garments. Under the circumstances, Jiahua started to seek orders from other trade or
agent companies to make up for the shortage of orders from Dahua. In 2006, Jiahua
officially separated from Dahua Garment and built up a relationship with a Hong
Kong trade company. The Hong Kong trade company was the first-tier subcontractor
of European upscale branded marketers or retailers and undertook design and
materials procurement. Jiahua as the second- tier subcontractor was in charge of
processing on giving materials. The export share of the firm has always been 100 %
by indirect export.
Case 4: DaLian Yuandong Digital Co., Ltd
Dalian Yuandong Digital Co., Ltd (Yuandong Digital) was established in December
2000 and registered in the Dalian High-tech Park. It is a high-tech enterprise
specialized in system design and development.
When Yuandong Digital was first established in Dalian, its goal is to establish the best
IT enterprise in China. With the development of the enterprise, the competition in IT
industry in China becomes ever hot, many companies begin to search for oversea
partners for better financial and technical support to survive in this market. The better
way is to accelerate the pace of internationalization. Yuandong Digital mainly
engaged in the design and development of computer application software and
embedded software. Its products are mainly for the international market. Since the
inception, Yuandong Digital has recognized as the ‘software enterprise’ by Dalian
Bureau of Information Industry Certification and the ‘high-tech enterprise’ by Dalian
Science and Technology Board. Since 2003, it has been appraised as outstanding
software enterprise by the local government.
66
Case 5: Crystal CG Ltd
The Crystal CG Ltd (Hereinafter referred to as Crystal CG) was established in Beijing
in 1995. Crystal CG is focused on visualizing architecture by using 2D or 3D
technology in China and built up a leading position by 5 years. It was a most famous
company which is specialized on architectures visualizing business. In 2000, the firm
expanded into different business sectors such as digital entertainment, education
based on the technology and strong work force. With the development of Chinese
economy, some famous foreign Architecture firms started to compete in the Chinese
market. Therefore, Crystal CG started to accept orders from foreign Architecture
firms through their Chinese coordinator’s recommendation.
Since 2002, Crystal CG has been progressively building its Asia Pacific business and
has established three offices outside Mainland China in Hong Kong, Singapore and
Tokyo. The Hong Kong office is multi-functional and serves as a gateway for our
international operations. Indeed, Hong Kong has been the base for setting up the
offices in Singapore, London and Dubai. The team in Hong Kong has undertaken the
planning and implementation work and sent Hong Kong staff to manage these new
offices, enabling Crystal CG to reach out and go further in promoting Chinese
creativity to the world. Crystal CG architecture sector still focuses on visualize
architecture buildings and has a workforce of 200 in headquarter office, mostly
technical staff based in Mainland China. Employees in its Hong Kong office are
mainly managerial and frontline staff engaged in creative work, client communication
and overseas liaison. Until 2008, the firm’s overseas turnover accounted for 50% of
total revenue.
Case 6: Skyline Architecture Firm
The Skyline Architecture Firm (henceforth Skyline Architecture) is a private midsized
architecture design firm located in Beijing. The firm was established in 2003, firstly
undertaking project design and urban planning for domestic realty companies.
67
According to Chinese construction regulation, foreign architecture companies which
are involved in construction projects in China should choose a Chinese architecture
firm as a coordinator. From the beginning, through business and personal connections,
the firm got many opportunities to work with foreign design firms in China’s project.
In 2006, the firm started the first overseas project in Qatar, in cooperation with
Chinese Construction Company to provide the conceptual design for Qatar clients.
From then on, skyline architecture firm tried to engage in international architecture
competition in order to explore international market. However, the main customer is
still in China. They aim to build up brand reputation and managerial competence to
compete with foreign architecture firms in the Chinese market. In 2008, through an
old business partner who works as the project manager in a Vietnam realty company,
skyline architecture firm obtained their second overseas project. Until 2008, the firm’s
overseas turnover accounted for 7% of total revenue. Mr. Chen, the interviewee, is a
co-founder of the firm. He has been working for one of the biggest state owned
Architecture Design & Research Group. The other partner, Mr. Cui, has been working
in Hong Kong for 5years. They set up skyline in 2003 and focused on catering to
domestic realty companies. Mr. Chen said most of the new customers were introduced
by business networks.
Products of Interviewed Enterprises
ChaoZhou Calen Fashion Company Ltd
68
Shunyi Jiahua Garment Company Ltd
MAN’S WEAR
69
WOMAN’S WARE
Skyline Architecture Firm
North Latitude 40°, Beijing
70
National government employees, Beijing
Crystal CG Ltd
Architecture visualization
71
3D City Touch(CCTV building’s 3D visiting)
72
73