Chinese outward investments to emerging markets: evidence
from Latin America Gaston Fornes
Centre for East Asian Studies, University of Bristol, UK and ESIC Business and Marketing School, Madrid, Spain, and
Alan Butt-Philip School of Management, University of Bath, UK
Abstract Purpose – This paper aims to analyse the characteristics of Chinese multinational corporations in other emerging economies using evidence from Latin America (LA) vis-à-vis the features found in previous studies of Chinese companies operating in developed countries. Design – It does this by studying the fit of theoretical frameworks recently developed for Chinese firms, the support from the government and the strength of their capabilities in relation to those of local competitors. The analysis is based on case studies with data collected from a theoretical sample of Chinese companies operating in LA. Findings – The results show that these companies seem to be following a pattern similar to that described by Mathews’s (2006) Linkage–Leverage–Learning, that the support from the government does not seem to play an important role in their internationalisation process, that they appear to have developed a set of capabilities strong enough to compete in the host market (in particular how to combine their strengths with those of local partners) and that they are engaged in a positive cycle of development that helps them to overcome some of the challenges and barriers of operating in Latin American emerging markets by complementing/leveraging their strengths with those of local firms. Originality/value – The findings indicate that Chinese companies are following patterns in their internationalisation to Latin American emerging markets that seems to be a combination of conventional theories (including previous studies on emerging markets-based firms) with idiosyncratic elements.
Keywords China, Latin America, FDI, Emerging markets
Paper type Research paper
Introduction How are Chinese multinational corporations (MNCs) expanding to other emerging markets (EM)? Are they following the same patterns seen in investments in developed economies? Have they developed capabilities strong enough to compete in emerging economies? Answering these questions is relevant, as Latin America (LA) has been one of the main destinations for China’s Outward Foreign Direct Investment (ODI), receiving around 40 per cent of these investments since 2004 and reaching a stock of more than US$70 billion in 2012 which has positioned the country as the third largest foreign investor in the region (Barcena and Rosales, 2010; Fornes and Butt Philip, 2012)[1].
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European Business Review Vol. 26 No. 6, 2014 pp. 494-513 © Emerald Group Publishing Limited 0955-534X DOI 10.1108/EBR-03-2013-0059
In this context, on the one hand, several publications have argued that the pattern of internationalisation followed by Chinese firms can be framed within existing mainstream theories (Chen et al. (2012); Cui and Jiang (2009); Deng (2007, 2009); Narula and Nguyen (2011)). On the other hand, there are also several publications reporting that Chinese companies in their international expansion are following patterns different from those seen in Western firms (Bhagat et al. (2010); Boisot and Child (1996); Boisot and Meyer (2008); Child and Rodrigues (2005); Deng (2011); Rui and Yip (2008)). The few works on China’s firms in LA seem to follow the latter argument. For example, most investments are favouring Foreign Direct Investments (FDI) over exports (Dyer, 2010; Fernández Jilberto and Hogenboom, 2010; Fornes and Butt-Philip, 2011; Gonzalez-Vicente, 2012) when due to the nature of these investments (mainly multiple sources of value and multiple sources of authority; Sundaram and Black, 1992), mainstream theories would suggest the latter (Dunning, 2003). In any case, Deng (2011, p. 2) found, in a recently published review on Chinese MNCs, that the understanding of Chinese companies’ internationalisation is “far from complete and remains fragmented and disconnected”.
Focussing on the key questions presented above, the paper analyses, first, if the emerging conceptual frameworks developed as a result of the internationalisation of Chinese firms (like those proposed by Boisot and Meyer, 2008; Mathews, 2006; Rugman and Li, 2007; and Rui and Yip, 2008) could be applicable to ODI to Latin American emerging markets; second, if the support from the Chinese Government reported in previous works (as in Buckley et al. (2007); Child and Rodrigues (2005), among others) also applies to investment in emerging markets (in particular LA); third, if the capabilities of Chinese MNCs (as studied by Ge and Ding, 2008; Gonzalez-Vicente, 2012; Rugman and Li, 2007; Williamson and Yin, 2009, among others) are strong enough to successfully compete in emerging markets against local companies (as argued by Fornes and Butt-Philip, 2011).
Overall this article makes three contributions. The analysis of the three points listed above enriches the current debate on the need to develop a theory of Chinese management versus the need to develop a Chinese theory of management (Barney and Zhang, 2009; Child and Rodrigues, 2005; Deng, 2011; Mathews, 2006); this being the main contribution of the article. The paper also contributes by adding evidence on companies different from the ones widely known and studied (like Lenovo Group, Nanjing Automobile, Huawei Technology: Child and Rodrigues, 2005; Rui and Yip, 2008; Haier: Child and Rodrigues, 2005; Palepu et al., 2003, Galanz (Ge and Ding, 2008; Thomson; Shanghai Motors: Rugman and Li, 2007; etc). A third contribution is the study of the characteristics of Chinese companies in environments different from the ones also generally studied in the USA, the EU or Japan. The latter is of particular importance, as it has claimed that those companies that succeed in emerging markets will be in a better position to compete in the global economy (Williamson and Yin, 2009).
The paper is structured as follows. A review of the literature containing the main conceptual framework comes after this section. The Methodology and Sample sections then describe the sample used and the research method followed for the analysis of data. Third, the Theoretical Insights section presents the development of the Research Propositions. Fourth is a Discussion section analysing the results vis-à-vis current literature. The paper concludes with a Summary and Conclusions.
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Review of the literature Theoretical frameworks After China joined the World Trade Organization (WTO) in 2001, and especially when the first evidence of the internationalisation of its companies appeared, a debate began in the literature on the fit of the Chinese case with existing theories. After all:
China is different from other less developed countries in terms of market size as well as cultural connections and may not fall into a regular LDC [less developed country] category (Makino et al., 2002, p. 412), also it is a much more open economy than most emerging markets.
Within this debate, Deng (2011) found that the mainstream resource-based view (RBV) is increasingly being used to understand Chinese firms’ resources and capabilities. But it is this focus on the RBV which, at the same time, heightens the specific characteristics of Chinese firms (Deng, 2011). In fact, the works based on this framework agree that most of the ownership advantages of Chinese firms are home country specific and network-based (Boisot and Meyer (2008); Rugman and Li (2007); Zhou (2007)), advantages/capabilities that, in general, are different from the firm-specific ones found in incumbent MNCs (Buckley and Casson, 1976; Dunning, 2003).
It is in this context where Child and Rodrigues (2005) proposed the need for a theoretical extension for Chinese companies based on four main differences with the context where mainstream theories have been developed (the companies’ need to catch up, the active role of the Chinese Government, a possible institutional dependence and the Chinese culture with its subsequent relatively higher psychic distance). Others, like Rui and Yip (2008, p. 214), have argued that Chinese ODI may have a strategic intent to achieve specific goals “to offset their competitive weaknesses and leveraging their unit ownership advantages, while making use of institutional incentives and minimizing institutional constraints” In a similar line, Boisot and Meyer (2008, p. 356) said that Chinese firms are going abroad looking for more efficient institutions and, as a result, developed the concept of Institutional Arbitrage, the “exploitation of the differences between different institutional arrangements operating in different jurisdictions”. Buckley et al. (2007, pp. 513-514) added that “for the present, Chinese outward investors clearly present marked contrasts from the conventional model in key aspects”; in other words, these investments have “both a conventional and an idiosyncratic dimension”.
In addition, Mathews (2006) proposed Linkage–Leverage–Learning (LLL), an extension of the OLI paradigm (Dunning, 2003), based on the idea that the “internationalisation from the Asia–Pacific region needs to be reconceived as a “pull” process, as well as involving a push”, and that the internationalisation of these firms is based on a search for new resources to strengthen their competitive position rather than on “the possession of overwhelming domestic assets which can be exploited abroad” (Mathews, 2006, pp. 16-17).
In any case, the relevant question in the context of this research is which one can be applied to the case of LA? The context in LA and China is different from that of mainstream theories. Also, it seems unlikely that Chinese firms would be pursuing institutional arbitrage in a region that is infamous for its institutional frailty (Del Sol and Kogan, 2007; Fornes, 2009; Khanna and Palepu, 2000). Similarly, it is also unlikely that they would have a strategic intent for their investments in LA to become global leaders (unless they are using these markets as a stepping stone, still unlikely). Nevertheless, due to its characteristics, Mathews’s LLL seems to be the most suitable for ODI to LA.
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Support from the government On the other hand, one of the main reported differences in the internationalisation of Chinese MNCs with their Western counterparts has been the support from the Chinese Government. Child and Rodrigues (2005) said that many firms have received financial support and protection from the authorities to reduce their late-coming disadvantage. This support was also visible in the case studies analysed by Rui and Yip (2008) and Rugman and Li (2007). Shoham and Rosenboim (2009) found that the Chinese Government is supporting resource-seeking ODI in Africa as well. Zeng and Williamson (2003) also reported that some companies have access to state-supported research. Buckley et al. (2007) added that the government supports some state-owned enterprises (SOEs) by having capital available at below-market rates and in subsidised or soft loans from banks influenced or owned by the government. Fornes and Butt-Philip (2011) argued that the support from the government could also be seen outside China in the signing of treaties and trade and investment agreements with emerging countries with the aim of improving access to their products (in recent years, China had signed agreements with 32 countries or groups of countries in Africa, Asia, LA, and the southern Pacific, ECLAC, 2011).
However, recent empirical studies have started to question the role and format of this support from the government. For example, Ge and Ding (2008, p. 680) reported that, “as a private enterprise, Galanz still finds it difficult to obtain loans from state-owned banks”. Also, studies on Chinese small and mid-sized enterprises (SMEs) (Cardoza and Fornes, 2011) found that the support from the state in the form of funding seems to be instrumental only in the first stages (local and regional) of Chinese SMEs’ international expansion and that ownership by the state does not seem to play a role in their internationalisation process.
After this analysis of what seems contradictory findings, the need to understand the role of the government in the expansion of Chinese firms to LA becomes evident. The evidence from the first studies in developed economies showed that the government has been pivotal in the internationalisation of its companies; however, studies in recent years (including FDI to emerging economies) have shown that the importance of the government in the process seems to be fading. In the context of this research, a key question is the implications of this support (whether strong or weak) in the strategies of China’s firms in LA.
Chinese firms’ capabilities Finally, a debate has been developing on the strengths of Chinese firms’ capabilities in relation to their international competitors. A decade ago Nolan (2001, p. 187) argued that “the competitive capability of China’s large firms after two decades of reform is still painfully weak in relation to the global giants” mainly in the areas of R&D, marketing ability, development of brands and the restrictions from the authorities. Zeng and Williamson (2003, p. 3) responded to this by pointing out that there is a “new breed of Chinese companies that have already succeeded in capturing some foreign markets” based on domestic strengths, export-orientation, competitive networks and exploitation of technology from government-owned research institutes. Boisot (2004) and Guthrie (2005) added that Chinese companies need to go abroad to acquire competitive advantages and complement their current strengths in the domestic market, and to avoid the disadvantage of operating exclusively in the domestic market. In addition,
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Rugman and Li’s (2007, p. 71) study of three acquisitions by Chinese MNCs added that they “mainly reflect China’s country-specific advantages (CSAs) rather than FSAs”.
However, recent works (like Bhagat et al., 2010; Boisot and Meyer, 2008; Cardoza and Fornes, 2011; Deng, 2011; Fornes and Butt Philip, 2012; Ge and Ding, 2008; Shoham and Rosenboim, 2009; Williamson and Yin, 2009; Yamakawa et al. (2008); etc.) have started to identify some strong capabilities of Chinese international firms, although most of them are still linked somehow to the domestic environment in which they operate. This may be the result of firms garnering “international experience and improving stock of ownership advantages (both transaction – and asset-type)” which has allowed them “to move towards market-seeking FDI in developed countries” and eventually “become indistinguishable from conventional or mature MNEs” (Narula and Nguyen, 2011, p. 23).
In the context of this research, the question seems to be about the strengths of Chinese firms’ capabilities in relation to those of their counterparts in Latin American emerging markets. It has been suggested that:
[…] although not yet completely developed and consolidated to compete against companies in developed countries, [Chinese firms] have achieved a certain level that allows them to successfully compete in Latin American markets (Fornes and Butt-Philip, 2011).
This is relevant in the context of this work, as “the capabilities to succeed in emerging markets will be decisive in the next round of global competition” (Williamson and Yin, 2009, p. 78).
Methodology and sample The research is based on case studies (Yin, 1994). This methodology was chosen to get a better understanding of the characteristics of Chinese international firms operating in developing contexts and their fit with existing theories (Eisenhardt, 1989; Eisenhardt and Graebner, 2007), the main objectives of this study; this methodology is also better suited to examining subjective features (like vision and reasons to go abroad, reasons to choose an entry mode, perceived strengths and weaknesses, perception of international experience, etc) (Creswell, 2003).
The theoretical sampling (Eisenhardt, 1989; Eisenhardt and Graebner, 2007; Pettigrew, 1990) was built with two SOEs, two private companies, two public companies (no visible state stake, listed in Hong Kong) and a Chamber of Commerce (ChC). To be in the sample, Chinese companies should have invested in LA before 2008 and have an income of at least 5 per cent of total sales from the region (being around 5 per cent the weight of LA in the world economy); around 55 companies fulfil these requirements (Barcena and Rosales, 2010; Dyer and Lapper, 2007; Fornes and Butt Philip, 2012; Santiso, 2007). More details of the companies in the sample can be seen in Table I. The ChC gathers a large group of companies operating in both China and the most important countries in South America and was included to have an outsider’s view of the internationalisation process. Although a relatively small sample, it was designed to offer the option of analytical generalisation (Eisenhardt, 1989).
As can be seen in Table I, two companies are owned by the state, two are public (listed in Hong Kong), and the remaining two are private. All of these firms have total sales of over US$100 million, and the share of sales coming from LA goes from 5 to 20 per cent. They started selling abroad around 14 years ago, on average, and in LA around ten
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Table I. Selected details of the
companies in the sample
