Lecture 2 Foreign direct investment in China 2014

MOD001068 Chinese Economy: Issues and PoliciesModule Leader: Dr Jonathan Wilson (3rd Floor, LAIBS Building) [email protected]

WEEK 2 Foreign Direct Investment in China 2014

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Lecture 2: Foreign Direct Investment in China

Structure:

WTO

Market entry

Threats to foreign firms investing in China

IJV success factors

Case examples


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What is the WTO?

World Trade Organisation Replaced GATT in 1995 Global Organisation – deals with the

rule of trade 149 members (accounts for 97% of

world trade) Aims to allow smooth trade between

nations


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Why did China enter the WTO?

To show it is a serious player on the global stage

To encourage foreign investment through opening up its markets

To allow Chinese firms to compete in other international markets


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China’s commitments - examples

China will provide non-discriminatory treatment to all WTO members

China will eliminate dual pricing practices

The WTO Agreement will be implemented by China in an effective and uniform manner by revising its existing domestic laws and enacting new legislation fully in compliance with the WTO Agreement


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Main market entry methods

Equity joint venture Cooperative joint venture Representative office Wholly Owned Foreign Enterprise

(WOFE) Foreign company limited by shares Cooperative development


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Advantages of joint ventures

Ability to use a partner who is honest, entrepreneurial, straightforward in its dealings

Committed to the protection of the joint venture company’s IPR with good market access and local contacts and bringing with them a first-class workforce and facilities

Both partners share the risk

Can tap into local contacts – guanxi and guanxiwangSource: Adapted from www.cbbc.org


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Advantages of a WFOE

The advantages of establishing a WFOE include: (1) Independence and freedom to implement the worldwide strategies of its parent company without having to consider the involvement of the Chinese partner; (2) Ability to formally carry out business rather than just a representative office function and capable of issuing invoices to their customers in RMB (Chinese Currency) and receive revenues in RMB; (3) Capable of converting RMB profits to US dollars or other foreign currency for remittance to their parent company outside China; (4) Greater protection of intellectual property rights, know-how and technology since no partner required and therefore more control of IP; (5) Greater efficiency in its operations, management and future development.

Source: www.cbbc.org


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Disadvantages of joint ventures

Lack of information about Chinese partner

Lack of trust

Someone else shares in the profits of the business

Lack of control over China production

Communication can be a problem, particularly with a large number of JV partners

Decision-making, who makes the ‘final’ decision?


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Changes in mode of entry

Since 2001 WFOE has overtaken the number of IJVs

Why? – Relaxation of regulations, Foreign firms more experienced –

particularly in relation to cultural understanding

Easier decision-making, e.g. BP


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Joint venture success factors

Share the same strategic objectives Regular communication Foreign firm – always send ‘big boss’ Understand / adapt to cultural differences 50/50 EJV problems with decision-making Above all – persistence, hard work and

maintaining successful relationships


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Model for market entry decision-making and operational change

* Evidence suggests change principles can be anything that means the Chinese partner is no longer perceived as adding value to the joint venture relationship, together with relaxation to regulations governing operational modes as a result of WTO entry (Wilson and Brennan, 2003). Source: Wilson, J. and Brennan, R. (2003) ‘Market entry methods for Western firms in China’, Asia Pacific Journal of Marketing and Logistics, 15 (4), pp. 3-18.


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Western company

EJV / CJVChange principles*

WOFE

Strategic objectives: access to markets, growth, local knowledge, pressure from competition,

and saturation of domestic market

Reasons for market entry

“Our objectives were obviously to try and create a business market share and hopefully to develop a profitable company”

(Director, UK Engineering Company)


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Possible threats to foreign firms investing in China

• IPR infringement

• Protectionism e.g. Cherry Valley (Beijing Duck)

• Government ‘moving goalposts’ e.g. McDonalds

• Corruption

• Local / foreign competitors

• Lack of cultural understanding


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15 6C hexagon of IJV success factors

IJV performance

Consensus

Control Co-operation

CommunicationCommitment

Cultural understanding

Source: Wilson, J. (2006) Inter-Partner Relationships and Performance in Western-Chinese Joint Ventures: An Interaction Approach

Implications for Chinese firms

Need to compete with foreign organisations

Learning can be achieved through a joint venture

Able to compete outside domestic market


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17Case examples: Western firms in China


18Case examples: Western firms in China (cont)

Next week

Read: Read: Xiaowen Tian ‘Managing International Business in China’ pp.72-93.

Li, Huaning and Clarke-Hill, C.M. (2004) ‘Sino-British joint ventures in China: Investment patterns and host country conditions’, European Business Review; Vol.16, No.1.


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Lecture 2 Foreign direct investment in China 2014