Which Way Through the Open Door? Chinese Firms Abroad Max Boisot INSEAD Marshall Meyer Wharton

Facts At the end of 2000, 2859 Chinese firms were operating in 160 countries, 2/3 of them were in Asia-Pacific. 310 of them operated in the US, 285 in the Russian Federation, 236 in Hong Kong, 145 in Thailand, 112 in Australia, 89 in Japan, 81 in South Africa, and 80 in Malaysia Official figures understate the volume of outward investment – many of them don’t have official approval.

The West’s Experience of Japanese Firms A tolerant West – The cold war Technology transfer rather than investment Japanese protectionism The role of MITI and the Ministry of Finance The Japanese savings system – a low profitability requirement Competition for market share rather than profits Institutional competitive advantage Fear and incomprehension by outsiders

The Open Door: The Initial Assumption China

The Initial Assumption China has fallen behind The problem is technological Technology Transfer paid for by Oil receipts China can control what comes through the door – and through the window. China can also control whatever goes on in its domestic space Foreigners will therefore accept whatever deal China offers them.

The Open Door: The New Development China

The New Assumption An open door operates in both direction Chinese firms can go out through the door as easily as foreign firms can come in There are extensive Chinese networks abroad that can facilitate the process An open door significantly weakens a state’s control of what goes on in the domestic space An open door challenges traditional concepts of state sovereignty

The Traditional Theory of Internationalization Operating abroad incurs higher transaction costs than operating at home This makes foreign firms abroad more expensive than local firms abroad Foreign firms therefore need to develop some competitive advantage to compensate for these extra transaction costs This competitive advantage is first grown over time in the domestic market This is why only large firms tend to move abroad

The Internationalization of Chinese Firms Transaction costs inside China are higher than they are in most Western Countries Chinese firms will go abroad to escape a competitive disadvantage that they confront at home They will therefore internationalize at a smaller size than Western or Japanese firms This will pose new challenges for them.

Are Transaction Costs Higher in China? Arbitrary regulations A weak legal system Local protectionism Weak infrastructure These are changing, but are they changing fast enough?

Institutional Arbitrage “Round Tripping” – come back in as a foreigner Seeking listings abroad Seeking foreign jurisdictions Overseas Chinese networks of family businesses

Price

New Developments Open doors allow for two-way traffic Round-tripping through Hong Kong The Role of the Overseas Chinese Technology as a driver of globalization Globalization dissolves national boundaries How, then, to control the mobility of Chinese firms?

How Do Information and Communication Technologies Change the Picture? Mobility and reactivity is a source of competitive advantage for firms Information and communication technologies (ICTs) have long shaped the internationalization process – they facilitate coordination at a distance Where might the new ICTs take the internationalization process of Chinese firms?

Propositions With modern ICTs, it is now no more expensive for small Chinese firms to move abroad than it is for large Chinese firms These firms escape the control of national authorities – they operate through trusted networks. But these firms, on their own, enjoy little competitive advantage in advanced Western economies Therefore, competitive advantage here can only be constructed within trusted networks

Conclusion German firms threaten to move out of Germany if taxes are not brought down French firms move to Silicon Valley because its industrial culture is more entrepreneurial than France’s China will soon have to compete for its own firms as well as foreign firms.