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Bachelor Thesis Organization & Strategy

ANR : 863002

Name : J.A.P. (Jeroen) Doomen

Topic : Strategy and structure of multi business and/or multinational firms

Sub topic : International expansionStudy Program : Strategic Management (pre- master)

Date : June 2010

Words: 6.373

Strategy and structure of multi business and/ormultinational firms

Foreign location decision: The differences

in international expansion strategies

A case of Google and Microsoft in China

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Management summary

The most well known way to determ ine Foreign Direct Investment is by using the

eclectic paradigm of Dunning. Accordin g to t he framework, firms have different m otives for

their location decision. Namely, natural resour ce, m arket, efficiency and strategic as set

seeking. After deter mining the motivation factors it is i mportant to look at countr y specific

factors. Dun ning describes that ther e are th ree k ey advantage s which deci de whether a

company should or not invest abroad.

In 1978, the Chinese government assigned sp ecific zones where foreign invest ment

was allowed and the country s economy grew fast. Many researchers found agglom eration

effects which means that companies te nd to in vest in locations where other companies a re

located. Beca use of this, the characteri stics of the coastal zones are attractiv e for foreign

investors. Consequence of this polic y is that the economic development is widely despaired.

Chinese government can influence the firms performance because of high level of regulation.

Google is one the largest provider on th e search- market. The market shar e was

dropping fast and the com pany could not provide the service level it wanted. T his led to t he

decision to e nter the market and as a consequence Google had to sign a pledge in which t he

company complies with self regulation of sear ch content by the Chinese government. In the

beginning of 2010, Google left the Chinese market because of ethical reasons and because of

a low market potential. If we lay the investment decision of Google next to the paradig m of

Dunning we can conclude that Google s main motive was market seeking related. Because ofthe large market potential of the countr y, Goog le wanted to expa nd their m arket share and

develop new custo mer base by ph ysically entering the market. Microsoft provi des the same

services as Google in China with their product Bing. The main difference between the two

firms i s the extent to wh ich they dive rsified their activities. Mi crosoft offers many more

services and products in C hina than Google. It is reasonable to assu me that Microsoft gains

certain economies of scope since it i s more embedded in the Chinese market. The motivation

reasons for Microsoft to start Bing is also because of market seeking.

In answer to the problem statement, the reasons Google gave t o leave the Chinese

market are mainly based on ethical grounds. If we look at economical r easons we can

conclude that the com pany made a profi t. Although it is onl y a small part of G oogles total

profit. Because of better search re sults, the company was popular with English speaking

Chinese. The market share of Microsoft in the search market is relatively low. It has however

market potential because there are, one the one hand economies of scale to be gained and on

the other hand there is market potential because of Googles retrieval from the countr y. The

main conclusion is that t he two companies had the same motives to enter the market. Google

however, in contrast with Microsoft, left the market because t he Chinese governments

regulation influenced firm performance and it damaged the brand image of the firm.

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Table of content

Management summary ........................................................................................................... 2

Table of content ....................................................................................................................... 3

Chapter 1. Introduction .......................................................................................................... 4

1.1 Problem Indication ................................................................................................................. 4

1.2 Problem statement .................................................................................................................. 5

1.2.1 Research questions .......................................................................................................... 5

1.3 Relevance ............................................................................................................................... 5

1.4 Research Design and data collection ...................................................................................... 5

1.5 Overview of the rest of the chapters ....................................................................................... 6

Chapter 2. Location decision .................................................................................................. 7

2.1 Multinational companies and the globalization process ......................................................... 7

2.2 Important factors when considering internalization ............................................................... 7

2.3 Explaining the OLI paradigm ................................................................................................. 8

2.3.1 Interaction between advantages ...................................................................................... 9

2.4 Motives of multinational companies for foreign direct investment ........................................ 9

2.4.1 Natural resource seeking ............................................................................................... 10

2.4.2 Market seeking .............................................................................................................. 10

2.4.3 Efficiency seeking of products and processes ............................................................... 10

2.4.4 Strategic asset seeking .................................................................................................. 10

2.5 Impacts of e-commerce on the OLI paradigm ...................................................................... 11

2.6 Conclusion ............................................................................................................................ 11Chapter 3. The market of China vs. Multinational companies ......................................... 13

3.1 China on the world market ................................................................................................... 13

3.2 Regulations ........................................................................................................................... 15

3.3 Motives of multinational companies to enter the Chinese market ........................................ 15

3.4 Conclusion ............................................................................................................................ 16

Chapter 4. Google and Microsoft in China ......................................................................... 18

4.1 The portfolio of Google ........................................................................................................ 18

4.2 Which factors determine Googles choice to enter Chinese market ..................................... 18

4.3 Which factors determine Google choice to retreat from the Chinese market ....................... 19

4.4. Microsoft on the Chinese market ......................................................................................... 19

4.5 Conclusion ............................................................................................................................ 20

Chapter 5. Conclusions and recommendations .................................................................. 21

5.1 Conclusion ............................................................................................................................ 21

5.2 Discussion ............................................................................................................................ 23

5.3 Recommendations ................................................................................................................ 23

5.4 Limitations ............................................................................................................................ 23

References .............................................................................................................................. 24

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Chapter 1. Introduction

This chapter describes the relevance of the thesis. Beginning with an indication of the

problem followed by problem st atement and research quest ions. Finally, this chapte r

describes the outlay on what is going to be discussed in the other chapters.

1.1 Problem Indication

In his resear ch, Sideri, 1997 focuses on the im portance of the location decision of

multinational companies in the overall globali zation process. Also Held and McGrew (2000)

are stating that multinational companies play a central role in the globalization process as they

greatly influence social and political changes. So what are the determ inants of m ultinational

companies to invest in specific foreign market s? This decision depends on diff erent factors.

Which location should we choose? A quite cr ucial decision which has major internal and

external effects on a firm his success abroad and on the overall globalization.

When we look at the wo rld market, o ne of the m ore upcoming countries is China.

According to US National Intelligence Council, 2010, China will have the second largest

economy in t he world in 2025. In Chi na, political institutions play a bi g role in strategic

decisions and also performance of a firm because of their influence on managerial incentives,

behavior of agencies and transaction costs (Li Park and Li, 2 004; Walder, 199 5). For

example, when doing business in China, co mpanies must agree with the Chinese govern ment

rules of self-censoring any information that is found inappropriate (Dann, & Haddow, 2008).According to Dunning (1 993) firms tend to avoid entering foreign markets with a

high level of macroeconomic uncertaint y. Especia lly if the size of the investm ent is larg e

(Campa, 1993). Also when entering a foreign ma rket it is not onl y im portant to take th e

market into account but also political factor s (Baron, 1995, Hillman & Hitt, 1999, Bonardi,

Hillman, & Keim, 2005). Government policy is important in formulating strategy because of

its influence on dem and and suppl y of goods and s ervices. The question that arises i s why

would multinational companies enter a foreign market like China which is characterized by

uncertainty and frequent c hanges on an institutio nal and market level? To what extent does

this uncertaint y have an im pact on firm s tr aditional way s in determ ining foreign m arket

locations?

Recently, Google retreated with all its activities from China. The two reasons Google

gave of reassessing its Ch ina operations wer e their dismay with the Chinese governments

ceaseless efforts to limit free speech on the web and the hack attack launched from China in

December 2009 that targeted G oogle's secure servers in the United States (Wall Street

Journal, 20 10). The ques tion that co mes up he re is what were the reasons for Google on

entering the Chinese market in the first place and what was their strategy?

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Another big Internet co mpany which also ope rates in China is M icrosoft. What are

the differences in international strategy between these two? By comparing differences and

similarities on the strategies in China of two of t he m ost i mportant Internet co mpanies,

Google and Microsoft, this thesis gives a total overview on this question.

In most cases resear ch focuses only on industry level how a firm reacts on a certain

happening. On a corporate level on the other hand little is known. By combining these two

levels this th esis tend to full y investigate the two arias. So by first focusing on an industr y

level, giving a theoretical framework and further on researching the case of Google in China

this paper combines these two, resulting in an total view on the problem statement.

1.2 Problem statement

What are the differences and similarities between the international expansion strategies of

Google and Microsoft with regard to the Chinese market?

1.2.1 Research questions

1. What are the general determinants of multinational companies with regard to their foreign

location decision?

2. What are the characteristics and policies of China in regard to multinational companies?

3.

What are the strategies of Google and Microsoft on entering the Chinese markets?

1.3 Relevance

This paper provides a fram ework on the sim ilarities and differences on the

international location strategies of Goo gle and Microsoft on the Chinese market. This thes is

tries to solve and explain conflicting views and findings on the subject.

By comparing and discuss ing a cas e this thesis provides a clear and comprehensive

framework in a do main where knowledge is scatte red. The results of this thesis gives insight

in corporate location decision policy of multinational firms.

1.4 Research Design and data collection

The research design of this paper is based on descriptive research and fully relies on

secondary sources. To dis cuss and evaluate the r esearch question, literature survey has to be

done by using the University library of Tilburg for scientifically articles (secondary research).

Keywords to find the right articles are for exam ple corporate expansion ,

corporate behaviour, location decision and other subjects that can be related to the sub-

and main question(s). By looking at the refere nces of an article that was used, further

information is tried to be found about a subject also known as the so called snowball method.

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After re ading different art icles, the arti cles a re categorized to the subjects th at are

discussed. By looking at the artic les that were found about one subject, they will discuss the

subject to answer the questions that lead to a conclusion of the main question.

The types of publications that are u sed fo r this literature rev iew are; Strategic

Management Journal, Academy of Management Journal, Journal of Management, Journal of

International Business Studies, Management Inte rnational review and International Business

review among others. In order to fully research the problem statement it is needed to look into

non quality journals as for exam ple Pro-Quest and ABI/Infor m. These sources provide well

substantiated articles on the subject Google an d M icrosoft in g eneral and on the Chines e

market.

1.5 Overview of the rest of the chapters

In each of th e next chapt ers, one sub question is discussed. The first chapter will

discuss the different theories on international location decision. Chapter two will focus on the

characteristics of the Chinese market. The third chapter focuses on the different international

strategies of Google and Microsoft. Finally in the last chapter all the conclusions will be put

together to give recommendations and answer the main problem statement.

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Chapter 2. Location decision

This chapter will answer the second sub question formulated in paragraph 1.2.1.

1. What are the general determinants of multinational companies in regard to their foreign

location decision?

In order to answer the problem st atement it is i mportant to understand the

determinants for a multinational company to in ternationalize to a certain country. What are

the reasons for firm s and what are th e si milarities between the co mpanies. The general

determinants of international location decision f ound in this chapter will be used in the next

chapters.

2.1 Multinational companies and the globalization process

Held and M cGrew (2000) state that in the global econo mic, political and social

changes, multinational c ompanies play a cen tral role. There are several reasons why

multinational companies play such a essential ro le. According to Sideri (1997), because the

production process is divided int o m ultiple loose operations, together with availability of

lower costs o f transport and communication networks resulted in a separation of locations o f

different production stages. These location choi ces of m ultinational companies have a direct

influence on the results and course of the globalization process. He also notes that the process

hereby is not constant across the world markets. Sideri (1997, 38) concludes i n his researchthat globalization is an essential process driven by economic factors.

Subramanian and Lawrence (1999) argue th is b y stating t hat national l ocations

remain distinctive. There are, for exam ple, polic y barriers at the borders, geography and

cultural differences . Buckley (2001) also notices the ability of national co mpanies to keep

foreign firms at a disadvantage. For example, the fact that domestic markets determine prices

and wages f or a significant part, local fir ms are often highl y embedded in the dom estic

economy and have good relationships with national government.

2.2 Important factors when considering internalization

Hymer (1976) and Kindelberger (1969) state th at in order to let the foreign

investment beco me suc cessful, the foreign ma rket needs to have s tructural ma rket

imperfections. They focus on the 'monopolistic' advantage to explain why firms tend to ente r

foreign markets. A firm s needs to hav e some kind of ownership advantage such as prod uct

differentiation, managerial expertise, new technology or patents. This way, it compensates the

disadvantages it has co mpared to firms that opera te in their home countr y, for example, less

information, uncertainty, cultural differences, or political regulations. Other researchers focus

on certain aspects. Caves (1971) for inst ance focuses on product differentiation as a

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monopolistic advantage. He states that im perfect competition leads to product differentiation

and foreign direct investment because of the fact that foreign direct investment was preferred

above, for exam ple, licensing. Also Knicker bocker (1973) and Flowers (1976) state that

multinational companies are active in imperfectly competitive markets. They do so because of

the "follow the leader" principal, which means that companies tend to follow other firms i n

their location decision, or as a reaction on foreign companies entering their home market

In literature, a lot of researchers tried t o determine which factors are most important

for multinational firms in the internationaliza tion process. For instance, Buckl ey and Casson

(1976) focus on the understanding of the working of multinational firms. They were one o f

the first to de sign a theory which clai med that the de cision to enter foreign markets depends

on industry, region, nation and firm specific fact ors. For example, market structure, cultural

differences, political and financial factors. Th ey also showed in their framework that

multinational companies which are active in research and development industries tend to have

a higher level of internalization.

Another well known research is the resource based approach of Penrose (1959) The

resource based approach exam ines t he possi ble co mpetitive advantages for com panies

(Barney, 1991; Penrose, 1959 & Peteraf, 1993) . The basic assumption is that t he competitive

advantage is developed by m atching the resources and co mpetences to environm ental

opportunities.

The theoretical framework u sed in this thesis is a well known way to determ ine the

extent and the pattern of FDI of multinational firms, namely the OLI paradigm of Dunning

(1977). He suggests that the location decision of a com pany depends on the abilit y to create

an advantages or m ultiple advantages toward s (potential) com petitors (Dunning, 1993).

Dunning (1998) also suggest that fir ms tend to search for locations where they can fully use

their key competences.

2.3 Explaining the OLI paradigm

The OLI paradigm of Dunning states that the multinational activities of a firm ar edriven by three ty pes of a dvantages, namely: Ownership, Location and Interna lization. The

configuration of these thr ee parameter s deter mine whether a fir m should or should not

undertake foreign activities. Dunning ( 1977, 1988, 1993, 1995) r evised his paradigm several

times to explain the changes in perceptions of multinational companies over time.

The ownership advanta ge consists of firm s intangible assets like skilled

management, patents and all kinds of tec hnology. These advantages shoul d be sufficient

enough to outweigh the costs made for ope rating and setting up f oreign activities. The

ownership part of Dunnings framework can influence the foreign direct investment decision

in two ways. The first part is that companies which have mobile ownership advantages tend to

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choose markets on which these spe cific advantages can be expl oited. Secondly, com panies

tend to combine firm specific advantages with ownership advantages who are lookin g to add

more to the factor ownership. Madho k (1997) an d Priem & Butler (2001) state that fir m

specific benefits may be more beneficial in one market than in the other.

As for the location, an a dvantage on this are a arises from the ch aracteristics of the

foreign market. For example, market size, cheap pr oduction or business environm ent. A s

earlier mentioned, companies try to choose loca tions which fit their core co mpetences. The

containment of location specific benefits helps companies with the decision to select markets

where superior m arket performance can be gained (Cavusgil & Zou, 1994 , Makino et al.,

2002 and Papadopoulos et al, 2002).

Makino, Lau and Yeh (2002) state in their resear ch that when it is possible t o

combine location factors with fir m specific factors it is possible to create ne w or im proved

competencies, which gives an advantage towards competitors.

The last fact or Internalization, which al so can be seen as effi ciency advantages,

depends on the focus of the company to produce abroad or rely on the market, for instance by

licensing. Where ownersh ip and intern alization are firm specific the location part differs by

country.

A reason for a firm to enter a market is that it allows the transf er of ownership in

such an effi cient way that is outweighs the competitive disadvantages with the local fir ms.

(Zaheer, 1995).

2.3.1 Interaction between advantages

It is alluring to look at the factors ownership and location as two separate parts.

Dunning (1993) suggests that they m ay be interdep endent. Namely , by selecting a market

(location) th e co mpany may im prove or decline the ownership factor of t he fram ework.

Therefore these two factors interact in the international market selection process.

2.4 Motives of multinational companies for foreign direct investment

According to Dunning (1 993) the m otives of international location decisions are

classified into four main types on which firms decide to enter a foreign market. These factors

focus on market seeking, resource seeking, stra tegic ass et s eeking or efficiency seeking.

Hereby, market and resou rce have the primary goal to generate economic profits with firm

specific assets. Strategic a sset seeking focuses on adding to the existing assets . (Kuemmerle,

1997, 1999; Narula and Dunning, 2000 & Makino et al., 2002).

Efficiency seeking m otivation com es from the r ational process which lea ds to

dispersion of co mpany ac tivities to foreign markets. In the foll owing paragraph we willexplain these types in more detail.

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2.4.1 Natural resource seeking

According to Dunnin g (1 993), t he m otivation for resource seeking com panies for

foreign investment comes from the fa ct they can get resources at a lower cost than in their

domestic market; that is, if these resources ar e available at all. In his research Dunning

categorizes three types of resource see king; (1) physical resource s, for exam ple seeking fo r

raw materials. (2) seeking for skilled and motivated labor at a lower cost level. (3) companies

looking for k nowledge on marketing, t echnology, o rganizational or m anagement level. An

important motivation factor is the willingness of a country to provide for example support and

infrastructure to foreign companies.

2.4.2 Market seeking

Firms that ar e motivated by m arket seeking are looking for inve stments that serve

markets. By this they therefore invest in certain parts or countries. Dunning d istinguishes,

besides the factors of ma rket size and expect ed gr owth rate, four m ain motivations f or

companies to invest abroad. (1) Im portant customers, suppliers localized in a certain market

and the company has to follow them in order to keep their business with the m. (2) In order to

acquire local demands of products a firm needs to adapt to local requirements and it has to be

present in the market. (3) The third possible motive is the fact that transaction and production

costs may be lower when markets are served from a local distance. (4 ) The company invests

in a specific market b ecause his co mpetitors are also present there. This r efers back to th e

statement of Knickerbocker (1973) and Flowers (1976) who say that companies tend to enter

a certain market because of the follow the leader principle.

2.4.3 Efficiency seeking of products and processes

The motivation comes from geographically dispe rse operatio ns of produ ction,

distribution, and marketing activities trough common governance or synergy. Dunning (1993)

distinguishes two m otivation factors which are: (1) scale and scope motives, and (2 )

advantages of costs. Also Cohen (2007) notes that in order to lower the costs companies need

to lower labor costs or generate economies of scale. Dunning stat es that, in order for foreign

production to take place, the designated market has to be well developed and open.

2.4.4 Strategic asset seeking

In his last motivation t ype Dunning descr ibes strategic assets as a m ain motivation

factor to engage in foreign investment. Fir ms who seek strat egic assets invest in a country

because of the fact that th ey can carry out th eir strategic objective. If we look at si milarities

between the types strategic asset ty pes of effi ciency seeking, firms are se eking to capitalize

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common ownership of a network of c apabilities and activities in different ar eas. (Dunning,

1993).

To summarize the framework, we can conclude that according to Dunning companies

first determ ine what their motives are for in ternalization. Second, the y wi ll look which

advantages are available following the OLI paradigm. This results in the following figure.

Figure 1. Summary of the Dunning framework

2.5 Impacts of e-commerce on the OLI paradigm

Dunning and Wymbs (2001) more recently proved the impact of electronic commerce

on the framework. Singh and Kundu (2002) t herefore a dded the factor Network to th e

paradigm. They fou nd t hree way s in whic h electronic co mmerce can im prove business

opportunities in foreign countries.

First of all, they conclude that Internet leads to network based advantages. According

to Hanson (2000) the num ber of members within a network represents its value. So the value

of an Internet company is directly related to the number of web-users. Secondly, the Internet

has e mbeddedness advant ages. This i s linked to the network of business relations that

improve economic action which can be separated into two classes, structural and relational.

According to Granovetter (1992), structural em beddedness refers to the level of

connectedness to the other. In Internet ter ms this would mean the level of linkage betwe en

websites. Str uctural embedddedness refers to e nhancing coordination, inform ation sharing,

better governance, reputational endorsements and information asymmetry (Granovetter, 1992;

Jones, Hesterly and Borgatti, 1997; Singh, 2001). Finally, the Internet has so called electronic

brokerage advantages. Because of the increasing number and quality of alternatives, search

costs decrease, resulting in cost savings and thus less risk of opportunism.

2.6 Conclusion

The best known way for m ultinational co mpanies to determ ine whether to invest

abroad depends on whether or not the investm ent has Ownership, Location or Internalization

advantages. The location is external for the company and it is important to gather the pros and

2. Country specific advantages

Ownership advantages

- Intangible assets

Location advantages

- Foreign market characteristics

Internalization advantages

- Efficiency advantages

1. FDI motives:

Natural resource seeking

Market seeking

Efficiency seeking

Strategic asset seeking

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cons of the country in order to determine if it is wise to enter. The OLI paradigm gives a good

basis for the decision.

To distinguis h the reasons of m ultinational com panies to enter certain markets

Dunning classifies four main types. This approach gives more insight in the decision process

of FDI. The four main motives are market seeking, efficiency seeking, strategic asset seeking

or natural resource seeking. These m otives, t ogether with the possible advantages from the

OLI fra mework determ ines in m ost c ases the d ecision to enter a foreign market or not.

Besides these motives, al so E-commerce has it s impact on the O LI paradigm. It has thre e

main advantages which can improve business opportunities in foreign countries.

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Chapter 3. The market of China vs. Multinational companies

This chapter will answer the second sub question formulated in paragraph 1.2.1.

2. What are the characteristics and policies of China in regard with multinational

companies?

This chapter describe s th e general ch aracteristics of China. As mentioned e arlier,

China is a fast upco ming country in th e worl d and to answer the problem statement it is

important to know its policy, its regulation, and its characteristics

3.1 China on the world market

The continuing economic growth rate and improved market conditions attracted lots

of investment of foreign companies into China. Herewith, it surpassed the United States as the

biggest foreign direct inv estment country in 2005. Between the period of 19 70 to 2 000 the

overall economy of China grew eight times its size (in fixed price). The inward foreign direct

investment grew from zero, to US 60.6 billion in 2004. (National Bureau of Statistics, 2003b,

p. 58; Chinanews.cn, 2005).

Main reason for m ultinational companies to enter the Chinese market as st ated by

Wei, Liu, Parker, and Vaidy a (1999). "factors such as greater international trade, lower wag e

rates, more R&D, manpower, hig her GDP growth rates, quicker im provements in

infrastructure, more rapid advances in agglom eration, more preferential policies, and closer

ethnic links with overseas Chinese positively affect FDI location".For exam ple, Chen (2008) investigated the reason why m any large multinational

companies lo cate their R &D centers in Beijing. He concludes that ther e are significant

reasons to choose this location. Chen did not only look at the cheaper labor costs in China, but

also considered the supply side and institutiona l factors. In this way we can understand in

what way and for what reason the co-development between globally innovative networks and

local economies goes. Chen states that this a pproach enriches the OLI paradigm of Dunnin g

because this gives a more dynam ic explanation of the location factor. In his research h e

concludes that the main reason for the loca tion choice is a large num ber of skilled labor,

because of t he good uni versity networks in the region. Another reason is that the fierce

competition among multinational companies for the host market and this, toget her with local

imitators, forces the m to l ocate and integrate production, m arketing and R&D in the sa me

region, in order to keep their market share.

In the year 1 978 t he gove rnment of China introduced an export orientated p olicy.

This led to t he implementation of so called special econom ic zones (SEZ). T hese are ar eas

where China allows foreign direct invest ment. In 1980, four SEZ were established. In 1984 ,

fourteen coastal cities and econo mic and tec hnological development zones within these

cities were opened. These are small zones desi gned to attract i nvestment of multinational

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companies in technology. In 1985, China opened delta economic zones open delta economic

zones which are coastal zones creating an open coastal belt. This government policy led to a

high level of FDI into the coastal areas of China. (Luo, Brennan, Liu and Luo, 2008).

According to Bai et al. (2004) and Wen (2004), China shows increasin g

agglomeration, which can be explained by these attractive Chinese market conditions. Head

& Ries (1996) and Head, Ries, & Swenson (1999) note that agglomeration externalities and

incentives goal is to attract multinational companies. They conclude that firms tend to enter

countries or locations where other co mpanies are concentrated. The main reason is that these

locations normally have good infrastructure and a good industrial base; this results, together

with policy i ncentives, in further agglomeration. Bai et al. (2 004) and Wen (2004) conclude

that the agglomeration resu lts in the lowering of the barriers on free flow go ods and services

during China's economic reform.

Other researchers like Gong (1995) & Head and Ries (1996) state that these so called

clustering effects (the location distributi on of investment in China) have a positive effect o n

agglomeration, infrastructure and government po licy. Porter (19 98) also argues that thes e

clustering effects generates a positive effect. Other researchers agree with the conclusion that

geographic c lustering results from the establish ment of the same firms or industries in a

certain area, which arises fro m agglomeration factors. e.g. high knowledg e and sharing

between companies, specialized person nel, and high input pro viders because of industry

demand. (Shaver, 1998). Fan and Wei (2006) find a clear similarity between speed and price

convergence, which is a measurement of efficiency, with the Chinese economy and other well

developed market economies. This pro vides support on t he view that China changed int o a

market-orientated economy.

Although the country is la rge and has a great number of foreign direct investment in

China, the lo cation and e conomic dev elopment, together with government polic y, is very

unevenly spread. For exam ple, zones t hat were opened earlier fo r foreign direct investm ent

have greater autonom y and authority, and have a more western- style in terms of business

culture and facilities (Luo, Luo, & Liu, 2008). Also, Buckley (2002) notes that the econom icdevelopment is very different across the provinces of China and is concentrating in the coastal

areas. A ccording to several studies, this is due to foreign direc t investm ent in m ainly the

coastal part of China.

From 1980, China began to act against regionally unbalanced macro policies. Chinese

government raised the req uirements of entry into the coastal areas. W ith this p olicy, China

tried to secure the so call ed high value investments into the country and encourage inland

investment, which had to result in more labor in these areas. (Ministry of commerce, 2007 &

Leow, 2007) . Kronenbergs research (2004) co ncluded that, although t hese measures wer e

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taken, the inland areas are still well underdeveloped co mpared to the coastal areas if we look

at for instance infrastructure and education level.

3.2 Regulations

In their strategy , firms not onl y focus on formulating strategies which lead to high

performance but they also have to take political factors into account (Baron, 1995; Hillman &

Hitt, 1999 a nd Bonardi , Hillman & Keim, 2005) . The gl obal character of industrialized

countries which are regulated to a large extent often determine the fast pace of market entries

and the strong commitment to this market. The first reason for this is th e concentrated

location of these industries and the tendency to have a monopolistic character. Secondly, there

is the possibilit y t hat market entry will be restricted by the governm ent. Thirdl y, the

government tend to own important parts of the industry. Because of these characteristics it is

important for multinational co mpanies to estab lish operations quickl y whe n the y arise.

(Sarkar et al., 1999).

In China, inst itutions play a big role in strategic decisions and performance of a firm

because of their influenc e on m anagerial incen tives, behavior of agencies, a nd transaction

costs (Li Park & Li, 2004 and Walder, 1995). I n these r egulated markets governments have

the power to alter the profits of firms considerably (Henisz, 2000 and Henisz & Zelner, 2001).

This leads u s to the question on h ow appropria te the traditional views of fi rms locating

decisions in an e merging market ar e, when the market is charac terized by unpredictable and

frequent changes in the market and institutional system.

3.3 Motives of multinational companies to enter the Chinese market

Looking back at the previous chapter where Dunning (1993) classifies locations into

four different types, Luo et al., (2008) stat e that the location decision for multinational

companies into China, and especi ally for inla nd areas, concentrates on three aspects. These

are: natural resource se eking, m arket seeki ng, and efficiency seeking of product and

processes.Dunning (1993) mentions that natural resource seek ing concentrates on the fact that

locations who have natural resources and re lated communication, infrastructure and ta x

incentives are far m ore attractive for multinational companies. Wei (1999), Hsiao and Shen,

(2003) proved that the i mprovements of the comm unication i n China lead to increasing

foreign direct investment into China. Also, the fact that has been proved by several empirical

studies is th at in countries like USA and China there is a positive link between good

infrastructure and investment inflows. (Head et al., 1995 & Shaver, 1998).

The Market seeking argument concentrates on market potential. Dunning suggest that

looking for n ew markets is a great motivation for FDI. Chinas econom ic d evelopment is

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widely despaired. Several studies proved that Chinese provinces which have larger gross

domestic product (GDP) l arger per capita and higher GDP rates attract more FDI (Head &

Ries, 1996, Broadman & Sun, 1997 and We i e t al., 1999). Multinational co mpanies

characterize t he central an d west of China as complex and uncertain because of the higher

degree of interference of the government in these parts and because of the cultural distance.

The argument on efficiency seeking concentrates on factors like agglomeration level,

quality and cost of labor and proxim ity of the location. As earlier mentioned, agglomeration

has i mpact o n location decision. On the part of labor cost, lite rature shows us different

opinions. Some say that higher labor costs k eep off investm ent (Coughlin and Segev, 2000 ;

Belderbos an d Carree, 2002). Others find that there is a statistical insignificant relation

between the cost of labor and the geographic distribution (Chen, 1996; Head an d Ries, 1996;

Broadman an d Sun, 1997). In later research, Cassid y, (20 02); Wei et al., (1999) and Fu ,

(2000) concl ude that ther e is a negative re lation b etween wage and incom ing FDI. Chen g

(2006) argues this conclusion and finds a positive relation between wage and FDI. The fact is

that FDI depends on different factors. What we can say is that areas with low labor costs and

high productivity results in increasing F DI in China and areas with low productivity will not.

Firms who decide on efficiency usu ally re quire highly qualif ied personne l, which is,

according to Dunning (1993), associated with higher level of wage.

On the part of the qualit y of labor, empirical studies have found a positi ve im pact

between the quality of personnel and FDI. (Glickman and Woodward, 1988; Coughlin an d

Segev, 2000 & Sun et al., 2002). On t he contrary , Broadman and Sun (2 002), which used

Chinese data, have found that lower qualification of labor has a negative effect on FDI.

Another part of efficiency seeking firms is the proximity of the location. Coughlin and Segev

(2000) find that a geographical proximity to metropolitan location in the USA is an advantage

in attracting FDI. They estimate that for China this also is the case. The resea rchers see this

increases in the FDI investment into a province as evidence of agglomeration externalities.

3.4 ConclusionLooking back at the research question we can conclude that the overall characteristics

and pol icies of China differ per region . Since the i ntroduction of the po licy in 19 79 that

allowed foreign direct investment into certain zones, FDI increased significantly. This growth

mainly focused on the coastal areas which led to high level of disparity of development of the

overall country.

Several researchers find agglom eration effects whic h means that firms tend to enter

locations where other companies ar e located ; because of t he different policies and

agglomeration effect s, the coastal provinces have a relative good infrastructure, qualified

labor, closer ethnic link and a west ern-style of business. Because of th e focus of governm ent

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on technology they also have a high R&D level in certain areas. This last factor led to a high

level of R&D centers in for instance Beijing.

There are se veral reasons for firm s to enter China but m ost of them make this

decision because of natural resource se eking, market seeking and efficiency seeking We can

conclude that overall, China scores well on all three arguments which leads to a high level of

foreign investment. However, when we look back at the first chapter, I discussed that market

imperfections were necessary for firms to decide to enter a market. The case of China shows

us that the advantages of a high level of regulation outweighs the disadvantages.

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Chapter 4. Google and Microsoft in China

This chapter will answer the last sub question as formulated in paragraph 1.2.1.

3. What are the determinants of Google on entering the Chinese market?

After discussing t he different location strategies of m ultinationals on the world

market and describing the characteristics of China in the second part, this chapter will answer

the strategy which Google followed when entering the Chinese market.

4.1 The portfolio of Google

The Internet portfolio of Google consists of three main products. First of all they

provide users products and ser vices which find, create and organ ize information. Secondly,

for advertisers, which revenue 96 percent of the total earnings in first quarter of 2010, Google

provides diff erent way s to make online adds as offline advertisement on television to

customers across Google sites and the Google network. The third pr oduct is aimed at

members of the Google network and other conte nt prov iders. Google pro vides different

service programs which are meant to extend the reach of advertisement of the advertisers.

The international results of the co mpany increased to 53% of the total revenues tha t

were made in the first quarter of 2010. This is because of the increased acceptance of th e

advertisement program an d because of the fact that Google tries to develop and adapt to

localized versions of their products in the international markets. The company is localized and

has offices all over the world. (Google annual report, 2009)

4.2 Which factors determine Googles choice to enter Chinese market

China has more than 330 million web u sers in 2009. On the search-market the

Chinese companies are dominant. Baidu dominates the search market with 58,4%. Google has

a market share of 35,6% in the sam e year. (Business week, jan 2010) Google is mainly

popular with English speaking Chinese who state that the local sear ch engines are

insufficiently global.

Before Google decided to phy sically enter China by setting up an establishment, the

search function could already be accessed. Name ly, through local Internet providers it was

possible to access the search engine indirectly. However, the performance of this servic e was

slow and very inconsistent. Representatives of Google stated in a congressional testimony that

one of the main reasons to enter the Chinese market was due pragmatic c alculation. By

entering the market and setting up a operating unit Google would be able to access google.cn

with far better quality and giving a better experience. This also would give significant benefits

to Google and generate the opportunity to develop a new customer base. (Levi, 2006).

Dann and Haddow (2008) state in their research that part of the reason for Google to

physically enter the Chinese market was th at it was losing market sha re to Chinese

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competitors as for exam ple Baidu, who raised its market share with over 40% between 2003

and 2005. Besides competition, Googles share decreased below 30% of the total market. This

pragmatic calculation, whi ch indeed wo uld stop the downfall of the market share to a lower

point and give Google the ability to give faster service to the customers led to the decision to

sign the so called Public pledge of self-regulation and professional ethics for China s

Internet industry which meant that com panies who are active on the Internet- market in

China self sensor their services.

4.3 Which factors determine Google choice to retreat from the Chinese market

Former vice president of Google Schrage states in a testimony that it not meaningful

for Google to be present i n China when users can not fully access information and m iss out

on m any features and to ols of Goo gle. Another reason was the hack attack launched from

China in Decem ber 2009 that targeted Google's secure servers in the United States. Chines e

government gained access in Gm ail accounts on U.S. secure servers and was able to read

subject lines. (Wall Street Journal, 2010).

Another main reason was the fact that many stakeholders of Google found the com panys

approval to com ply with censorship as betrayal of the core values dont be evil (Financial

times, 2006b).

Last deter minant was the fact that Google sim ply did not had much at stake. the

company earned around 300 m illion dollars in one year in China. One third of this am ount

was from Chinese fir ms using Google- ads outside of China. This leaves 200 million loss,

which is less than 1 percent of the tota l global income in 2008. ( Wall street jo urnal, april 6 ,

2010).

4.4. Microsoft on the Chinese market

The portfoli o of Microsoft is m uch wider co mpared to Google; t he co mpany has a

higher level of diversification. T he companys relatively long pr esence in the countr y gives

experience advantages com pared to Google. The online services business of Microsoft isrelatively the same and consists of an advertising platform, information offerings as Bing and

personal communication services a s for example e-mail services. The revenues mainly come

from the advertising part. In 2009 Microsoft launched a new version of the search engin e

Bing. The way Microsoft is trying to distinguish it from their competitors is by bringing faster

and more relevant information. (Microsoft annual report, 2009).

Microsoft introduced Bing search in the may 2009. In China the search engine ha s

with almost 1 percent m arket share a very sma ll part of the se arch market in China. The

retrieval of Google from China results in opport unities for other com petitors as for instance

Microsofts Bing. Because of the absence of Googl e there is an open m arket space of about

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30 percent. (Canadian business magazine, 2010). Shortly after the announcement of Google to

leave the Ch inese market Microsoft s leaders said that they have the intention the stay in

China and comply with the regulation rules. (Dow Jones and company inc, 2010).

4.5 Conclusion

As mentioned before, t he decision of Google to p hysically ent er China is i ndeed

pragmatic: it would stop the downfall of market sh are and it w ould give the co mpany the

opportunity to give faster service to the custo mers and it would g enerate the opportunity to

exploit and develop a new customer ba se, The high degree of regulation, t he stakeholders

disproval and low market potential led to the decision to leave the search- market in China

Microsoft has because of its longer presence i n the count ry relativel y more

experience with doing business in China. At this moment Microsoft has a very small market

share. The services that they provide are co mparable with Google if we look at the search

market. Although the regulation rules Microsoft will continue its business in China.

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Chapter 5. Conclusions and recommendations

This chapter will give an overall conclusion a nd answer the problem statement as formulated

in paragraph 1.2.1.

What are the differences and similarities between the international expansion

strategies of Google and Microsoft with regard to the Chinese market?

In this chapter we will look back at a ll the inf ormation gained and m ake an

conclusion in order to answer the problem statement.

5.1 Conclusion

In general research ers agree on the fact th at the foreign location that multinational

companies choose has impact on the globalization process. The factors that are im portant in

de foreign location decision are divers, because of th e fact that there are a lot of elements that

are i mportant in the choice. Where res earchers agre e on is that there must be so me key

benefits on the location. One focuses hereby on market im perfections, and th e other focuses

on how to exploit key competences of the company. Another conclusion is that some sectors,

as for instance research and development firms relatively are more willing to physically enter

a foreign market. To underpin the foreign st rategy of co mpanies many o f them use a

framework. De most well known is the paradig m of Dunning. He describes that it is first

important to lay down the motives that are important. He distinguishes four main types whichare, market s eeking, natural resource s eeking, efficiency seeking or strategic asset seeking.

After determining t his com panies need to cat egorize advantages co mpanies have on t his

element. The framework has th ree main types of advantages na mely: Ownership advantages ,

location advantages and ownership advantages. The main conclusion is that FDI of firm s

depends on the one hand on the motives of companies, and the other side on countr y specific

factors, which combined leads to a foreign investment or not.

China is one of the countries that is developing f ast. By the year of 2005 is has

surpassed the United States as largest f oreign investment countr y. After the decision of the

Chinese government to set special economic zones, which allowed foreign fir ms to invest i n

the country the investment rate grew rapidly. We can conclude that although Chinas growth ,

this mainly focuses on the coastal areas. Researcher conclude that the main rea son for this is

the attractive terms of these zones. Many researchers see that there are agglomeration effects,

which means that foreign direct investors focus on parts where other companies are located to

profit of the attractive te rms. These t erms are for exa mple ch eap but skilled labor, good

infrastructure and good international trade. Beside s this resear chers note parts of China a

more market orientated approach. Because of t he fact that China appointed special

technological zones we can conclude that the country focuses on this business area.

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The regulations of t he government has influence on managerial incentives, behavior

of agencies and transacti on costs which influe nces the perfor mance of the f irm. Also th e

political influence is despaired, where so me researchers note tha t the coastal areas have a

more western style of business.

If we look back at the first chapter wh ere we described the main m otives of

companies together with countr y specific factors we can say that in China three of the four

motives are most used. These are n atural resource se eking which content focuses on

communication and infrastructure. Proved is that the im provement in comm unication and

infrastructure will lead t o m ore invest ment. The second part is m arket seeking which

concentrates on market potential. Multi national companies characterize the central and west

of China as complex and uncertain because of the higher degree of interference of the

government in these parts and the cultural distan ce but also note great market potential. The

last part is efficiency seeking m otives whic h focuses on quality and cost of labor and

proximity of the location . As earlier mentioned, agglom eration has im pact on location

decision. The main conclusion from this part is that although the regul ations of the

government has impact on the firms performance, the advantages and agglo meration effects

led to the fact that many multinational companies invest in the country.

Google is together with the local co mpany, Baidu, the largest provider on the search-

market. The motives of Google t o enter the Ch inese market lies with pragm atic calculation.

The market share was dro pping fast and the co mpany could not provide the service level it

wanted. This led to the decision to enter the ma rket and sign a pledge which contains that the

company approves self regulation of search content by the C hinese gover nment. In the

beginning of 2010 Google left the Chinese market because of ethical and low market potential

reasons. If we lay the investment decision of Google next to the paradigm of Dunning we can

conclude that its main motive was market se eking related. Because of the large market

potential of the countr y, Google wanted to expand their market share and develop new

customer base by physically entering the market.

Microsoft provides with the beginning of may 2010 the same services as Google inChina with their product Bing. The main differe nce between the firms is the d iversification

of Microsoft compared to Google. We could say that Microsoft has certain economies of scale

where it i s li kely to be more e mbedded in the Chinese market. We c an conclude that the

motivation reasons for Microsoft to start Bing part is also because of market seeking.

In answer of the pr oblem statement the reasons Google gave t o leave the Chinese

market are purely ethical. If we look at economical reasons we can conclude that the company

made a profit. Although it is a small part it is still a profit. Besides this the co mpany had

market potential with English speaking Chinese b ecause of better search results. The share of

Microsoft is relatively low. It has market potential becaus e on the one the one hand

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economies of scale and because the retr ieval of Google from the countr y this probably will

give new market potential for the company. So the main conclusion is that the two companies

have the same motives to enter the market. Th e difference lies with the part that Google

decided that, other that Microsoft, the regulations of the Chinese government influenced their

firms performance to greatly.

5.2 Discussion

In this thesis the most well known theory around foreign location decisions is chosen.

There are a lot of researchers who have done studies around the subject. For this case study

this framework fits. It is possible that for other market types another framework could be used

as for example network based companies. Therefore it is not wise to take general conclusions

on the subject. The specific charac teristics of firms and countries differ fro m each other and

the cannot be generalized

5.3 Recommendations

In this thesis I mainly focused on the search -market. Because of the large a mount of

research and development co mpanies in China it is maybe interesting to res earch the way

large co mpanies of this sector co mpete on this market. And the level of marketing and

innovation play a role.

It could be interesting if in other busi ness s ectors have the s ame strategies a s

described in this thesis. Maybe it is possible with more ca se s tudies to generate a gen eral

theory around this process.

5.4 Limitations

The main pr oblem that was f aced was the lack of quality journals for the fourth

chapter. Because the recent retrieval of Google from China and the introduction of Bing the re

was not a lot of information about history, strategy and performance of the com panies in the

country. The refore I had to base my thesis mainly o n colored articles as for exam plebusiness week and financi al times. Although this, I think that the interpretation of the divers

opinions is well succeeded.

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