The 21st century has marked rapid Chinese investment on a global platform. Expanding its worldwide reach to developing countries and developed countries, China is making an extensive effort to create a global market for itself. The billions of dollars that the country is investing worldwide can be seen below on the map. There are still some questions that many are asking themselves when looking at this reality. I am going to try to answer three of the most pressing ones with the help of Joel Backaler’s book “China Goes West.” It is a great read and I highly suggest it, if you are interesting in learning more about this phenomenon.
1) Why are Chinese Companies going global?
Economic and political motivations are driving Chinese business outside of China. Here are some of the primary reasons for this growing trend.
- New Markets — China’s domestic markets have changed dramatically in the last decade. An example of this is construction-related industries. Once booming, this business is now experiencing extreme overcapacity and therefore a wave of bankruptcies. This trend is forcing many companies to diversify in business areas or enter overseas markets.
- Advanced Technology — Let us not be fooled, however, by thinking that Chinese companies are only going global because of fear of going bankrupt. There are many firms that would be doing very well in China but want to gain even more by expanding. New and advanced technology in places like the US or Europe is urging them to enter the overseas markets. The Chinese company Goldwind, for instance, won over its competitors by buying up the German wind energy firm Vensys for $53 million. By using such high-tech resources, Goldwind was able to obtain a competitive advantage over firms in China and abroad.
- Established Brands — Gaining access to globally recognized brands is another motivation behind global expansion. By acquiring a widely known brand name, a Chinese company is able to bridge, what Joel Backaler calls the “Trust Gap”. People, who have never heard of a Chinese company might be scared of buying or investing; however, a well-known brand name eliminates that and allows a Chinese company to expand quickly and efficiently.
- Government Reasons — The aforementioned motivations of China going global are all commercial ones; however, there are government reasons behind Chinese global presence. The Chinese government policy supports companies investing overseas both financially and politically because the country wants to maintain their “going out” policy. With the government backing up these Chinese firms and pushing them to expand, it only seems natural that they would comply and go global.
2) Are Chinese Companies ready to go global? We know that China is entering overseas markets. In 2013, Chinese outward investment reached $85 billion (in 2005 it was only $10 billion). But even though it is happening, do we know if this is the right decision for China? According to Joel Backaler, there are five key relationships that a Chinese business needs to understand and master in order to succeed in overseas markets.
- Company to Government — In China, businesses work closely with government agencies like the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) to function. When the firms expand globally, they expect similar support and guidelines from overseas governments, but this is not given to them. Instead, they need to be looking for professionals, who provide these services (help with work permits, labor laws, and tax regulations).
- Company to Employee — China and the West are different in managing a company. For this reason, hiring and retaining staff overseas poses a serious challenge to Chinese companies. Bridging the gap between the differences in culture and business ethics is difficult, but needs to be done in order for a company to expand effectively.
- Company to Customers — There tends to be a negative perception when thinking about the phrase “Made in China.” Chinese businesses need to take this into account and strive to go against the preconceived ideas of a good not being up to standards because it was manufactured in China. Huge strides, however, have already been with this problem. When US millennials were asked from which country they would buy manufactured goods, China was in 4th place after the US, German, and Japan (before France, Mexico, and Korea).
- Company to Community — These negative perceptions are not only present in individual buyers. Investment for Chinese businesses is seriously harmed because of these feelings as well. Winning over an entire local community for investment will take time, but through job creation, tax revenues, and improved infrastructure, the businesses have a chance to turn these perceptions into positive ones.
- Company to Capital — Money is one of the deciding factors about how a company does globally. Without investing in marketing and increasing its distribution network, a business in unlikely to succeed. Firms need to know if they have enough capital to transition from domestic to international markets.
Most Chinese firms have not mastered these five relationships yet. Some have managed to be successful with the hands-off approach of buying up a company, but this is definitely an undesirable and short-term model. It will take time for businesses to transform from traditional companies to multinational corporations, but it is definitely possible. China needs to learn from successful international businesses like Lenovo to improve on their mistakes and go global effectively.
3) How are Chinese Companies entering the global markets? Chinese companies are investing in two different way. They either participate in foreign financial investment (FFI) or foreign direct investment (FDI). If the investor is not directly involved in the allocation, operation, and management of the invested funds, the investment is a financial one (FFI). Huawei, the largest telecommunications equipment maker in the world, can be used as an example for FFI since it took the off-hands approach to investment and only supplied financial support. FDI is the opposite of FFI since it is directly involved with the company. As a result, it bears the outcome of the investment. This on-hand approach is a much more effective and long-term decision made by corporations going global. Ownership, Location, and Internalization advantages are the main reasons for FDI.
China is expanding and heading west. This expansion into the west in increasing each year and becoming more important day by day. Improvements in investment are seen and, while only time can tell, the future is looking bright for this country. One thing is certain: these coming years will decide whether China’s growth is a short burst of energy or a long-term existence. Is this a good trend that the rest of the world wants to see continuing? As the revolutionary Deng Xiaoping once said, “when you open a window, fresh air will come in, but so will some flies.”