Resources, Capability and Outbound FDI from Chinese

Companiesby

Ping Deng, Ph.D.Maryville University of St. Louis, USA

December 1st, 2006

At the focused conference: The Globalization of Chinese Enterprises organized and sponsored by Rollins

College and GeorgiaTech

IntroductionA number of scholars have recently studied the strategic asset-seeking motivation of MNCs when they invest in developed counties (DCs)However, there is no systematically conceptual and empirical investigation on Chinese firms’ investment motives in DCsThis paper focuses on why Chinese MNCs increasingly invest in DCs for strategic assets and the rationale behind such motivation. Our arguments are built by applying the dynamic resource-based view (RBV) of the firm to three leading Chinese firms (Haier, TCL and Lenovo)

An RBV Approach & Hypotheses

Based on a critical review of the RBV literature, we have developed an dynamic RBV approach which argues latecomers like Chinese firms invest for strategic assets to overcome their initial disadvantages. Three hypotheses are particularly developed:

H1: When investing in DCs, Chinese firms are motivated primarily by seeking strategic assets because strategic resources are largely unavailable domestically but can be accessed to or acquired via FDI in advanced host countries

HypothesesH2: For Chinese firms, asset-seeking FDI is made necessary because of strategic needs; strategic resources are imperative for Chinese companies to overcome their competitive weakness and enhance their global competitive edgeH3: The Chinese firms that invest in DCs for strategic asset-seeking purpose tend to be those companies that possess strong absorptive capability so as to integrate and build new resources that FDI brings

An Asset-seeking Model for Outward Chinese FDI

Outward FDI from leading Chinese firms

in DCs

Asset-seeking motives (strategic resources such as

technology, marketing expertise, managerial know-

how, reputation, and brandname)

Strategic Needs (vulnerable strategic

positions and strategic aspiration)

Absorptive Capability

(Competitive position & related int’l

experience)

To become globally competitive firms by

addressing competitive weakness and enhancing competitive advantage

Research methodology

To validate the above hypotheses, we employed a qualitative, multiple-case study research method because a large scale of reliable data sets are unavailableThree well-known Chinese firms – Haier, TCL, and Lenovo have been chosen as target firms because of their leading outward investment status in their respective industriesThe time horizons chosen for the study is the last ten years (1996-2005) when their international expansions were materializedThe data are collected both primarily and through secondary sources

Haier GroupNo. 1 Chinese household appliance giant with a total business turnover of more than $12 billion (2004)

International sales of more than $1.2 billion15 technological research institutes, 48 development centers, 18 design institutes, 10 industrial complexes, and 22 overseas production factoriesInternationally recognized brand is valued at RMB61.6 billion, topping all Chinese trademarks

The driving forces underlying Haier’s overseas investment can be well illustrated by the dynamic RBV approach:

Haier’s legendary leader -- CEO Zhang ReminStrategic goal, consistent superior quality control, product innovation, and integrated global marketing chainsMore importantly, not only to exploit its existing advantages but also to expose itself to superior organizational and technological skills that it seeks to acquire and adapt to its own purposeStrategic assets are sought mainly through Greenfield investment, but increasingly showing the tendency of acquisition in DCs

TCL GroupChina’s largest TV producer, with corporate object: A world-class corporation with international competitivenessCompared with global giants, TCL still lags behind and its brand was limited only to Southeast Asia before a large scale of international initiativesMajor outward FDI activities are via M&As: $560 million “TCL-Thomson Electronics” (TTE) with 67% holding; acquisition of Germany’s Schneider Electronics; TCL & Alcatel Mobile Phones Limited (TAMP)Through a series of M&As, owned several brands worldwide: Schneider, Thomson, ROVA, RCA, and GoVideoUnique way to acquire strategic assets: from majority-owned JVs to fully owned enterprises

Lenovo GroupChinese biggest PC manufacturer, with state (minority)-owned enterpriseIn the initial stage of internationalization, it had tried the similar approach as Haier’s Greenfield investment, but failed to establish its brand awareness worldwideIn April 2003, changed its brandname to Lenovo from Legend to facilitate its international expansionIts key strategic asset seeking initiative is shown in that in December 2004, it acquired IBM’s PC unit for $1.75 billion, getting IBM’s brands such as ThinkPad notebook and ThinkCenter desktops, globally competitive managerial teams and innovative capabilities

Asset-seeking FDI: Strategic Needs and Absorptive Capability

All the case firms are the domestic leaders in highly competitive industries, with legendary leaders and aspiration of becoming world-class enterprises As strategic assets are largely unavailable domestically and cannot be assessed effectively via other channels, different forms of FDI are explored to acquire such assets for the purpose of building their global competitive positionExploration of strategic assets are more uncertain than exploitation, therefore, acquisition of strategic assets does not guarantee business success particularly in the short term

Conclusion and Implications

Based on both primary and secondary sources of data, we argue that the asset-seeking FDI from Chinese firms is driven by the logic of strategic resource needs and absorptive capability, thus putting the dynamic RBV approach to new and potentially far-reaching applicationsThe dynamic RBV approach can be a powerful framework in analyzing the strategic behaviors of investment decisions of leading Chinese firmsTo draw a comprehensive picture of outbound FDI from Chinese firms particularly from the strategic perspective, future research may combine RBV approach with institutional theory due to the critical role of the Chinese government and unique Chinese institutional constraints at different levels

Resources, Capability and Outbound FDI from

Chinese Companies

by

Ping Deng, Ph.D.Maryville University of St. Louis, USA

Questions? Discussions? Thank You!