The Evolutionary Process of Multinational Companies’ Entry Mode in Chinese Market – the Case of Procter and Gamble in China Xiumei Shi12 1. Business School, Central University of Finance and Economics, Beijing, 100081, China 2. University of California Irvine, Irvine, CA,92697,USA Email:
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Abstract — This paper analyzes the evolutionary process of Procter and Gamble (P&G)’s entry mode as a case study. It analyzes the reasons of this process from five aspects: marketing environment, government policies, changes in investment structure, multinational companies’ (MNCs’) cross-border accumulation of knowledge and experiences, and the constraints of joint ventures as well. The positive and negative influences towards Chinese market are also described in the paper. The case study serves as an example for the MNCs’ entry mode changes. The paper concludes with recommendations for the Chinese government and enterprises. Key words— entry mode, MNCs, P&G
1. Introduction A firm entering foreign markets faces an array of choices to serve the market (J.Johnson and J.Tellis, 2008). The entry mode is an essential decision a firm makes when it enters a new market because the choice of entry automatically constrains the marketing and production strategy of the firm. The mode of entry also affects how a firm faces the challenges of entering a new country and deploying new skills to successfully market its product (K.Gillespie, J.P.Jeannet and H.D.Hennessy, 2007).The entry mode decision should be made according to environment variables such as country risk, location familiarity, demand conditions and competition, as well as according to international variables such as the company’s know-how, advantages and policy (W.Hill and P.Hwang, et al,1990). MNCs that select a wholly-owned investment vehicle can create an internal market to reduce transaction costs in such activities as production coordination, market exploitation and technology protection (A.T.Rugman, 1981). When China first established its open door policy two decades ago, the majority of foreign firms preferred joint ventures to wholly-owned businesses (R. Peerenboom, L. Lawyer and A. Kearney, 1997). However, these joint ventures often make it difficult for firms to maintain their ownership advantage (J.H.Dunning, 1981, 1993). In recent years, however, more and more foreign investors have set up wholly-owned and majority-owned firms in China (J.Li and G.Qian, et al, 2000). When foreign countries invest in China, they often have to make decisions on several strategic issues
such as technological intensity, investment location and ownership arrangement (J.Li and G.Qian, et al, 2000). For most early foreign investors, the main challenge in China was to negotiate joint ventures and establish local manufacturing facilities (Y.Luo, 2007). China has become major players in the world economy (J.Johnson and J.Tellis,2008) and will be the leading economy of the world followed by the US and India (J.Hawksworth, 2006). In 2002, China attracted 8.09% of the world total capital flows, and surpassed the United States and became the world’s largest foreign investment recipient. Meanwhile, China has become the world’s most attractive destination for foreign direct investment. According to the “Statistical Bulletin of PRC National Economic and Social Development (2008)”, which was released by National Bureau of Statistics on February 26, 2009, China actually used 92.4 billion U.S. dollars foreign direct investment in 2008, with an increase of 23.6% than the previous year. Meanwhile, dramatic changes have taken place for the MNCs’ entering Chinese market in the past two decades, mainly presented themselves as the outstanding tendency of entry mode shift from joint ventures to sole proprietorship within the past five years and the sole foreign investment has become the mainstream approach to enter into China. P&G is one of the world’s largest and most successful consumer businesses. It operates in almost every country in the world, with net sales over $40 billion and nearly 100,000 employees (Mark Dodgson, David Gann and Ammon Salter , 2006). P&G is recognized as a leading global company and a company committed to creating a diverse workplace. No company in the world has invested more in consumer and market research than P&G. It is recognized as one of the Top 50 Companies for Diversity and ranked No.3 among the Top 10 Companies for Global Diversity. Since 2005, P&G has been a member of the Billion Dollar Roundtable, a forum of 16 corporations that spend more than $1 billion annually with diverse suppliers and consistent No.1 ranking within industry on “Most Admired” list for 24 of 25 total years and for 12 years in a row. 1 In this paper I will take P&G as an example and trace its evolutionary process of entry mode into Chinese market. Then the impacts of this process are explored respectively 1
The data here is taken from P&G website, company information, http://www.pg.com/main.jhtml
from the following five aspects: marketing environment, government policies, changes in investment structure, MNCs’ cross-border accumulation of knowledge and experience, and the constraints of joint ventures as well. The entry mode changes of MNCs’ entering Chinese market will give Chinese companies, industries and market two-way effects. At last, suggestions are put forward for government and companies to take into consideration. This paper is organized as follows: In Section 2, the theoretical background is presented, focusing on the research theory towards entry mode study. In Section 3, the relative research method is described. In Section 4, the P&G’s entry mode change process is analyzed, and the reasons for this change together with positive and negative influences towards this process are discussed in details. In Section 5, the corresponding countermeasures of the government and the enterprises are proposed. In Section 6, the conclusions derived from this study are summarized.
2. Theoretical Background In the current decade most of the relevant research is focused on examining the impact of specific factors on the entry mode decision. There are several theories nowadays concerning entry mode decisions while among these theories the following three are introduced here as a theoretical basis. 2.1 TC Model (Transaction Cost Theory) The term “transaction cost” is first put forward by Ronald Coase, who used it to develop a theoretical framework for predicting when certain economic tasks would be performed by firms, and when they would be performed on the market. Ronald Coase discussed “costs of using the price mechanism” in his paper The Nature of the Firm(1937), where he first discussed the concept of transaction costs, and refered to the “Costs of Market Transactions” in his seminal work, The Problem of Social Cost (1960). Transaction cost theory concerns the question of how a firm should organize its boundary activities with other firms. Firms should base their decisions on minimizing total transaction and production costs (J.F.Hennart, 1991). Most researchers such as S.Makino and K.E.Neupert (2000), C.R.Taylor, S.Zou and G.E.Osland (1998) believed that the international entry mode selection have tended to concentrate on transaction cost explanations. K.D.Brouthers (2002) examined foreign market entry mode choices and firm performance for a sample of European Union firms from financial and non-financial performance measures and found that entry mode choice based on transaction cost, institutional context and cultural context variables did matter a lot in the performance of enterprises. K.D.Brouthers and L.E.Brouthers(2003) extended this model into institutional, cultural and transaction cost theory, and examined the performance implications of including “transaction cost” theory in international entry mode selection. They found that according to transaction cost theory, firms select the international mode of entry that provides the most efficient form of governance. However, previous scholarship largely neglects the impact of transaction cost variables on entry mode choice and firm performance. They found that “enhanced transaction cost theory appears to be normative as well as descriptive with respect to international entry mode
decisions. But still there are limitations in this study such as the responses were not an accurate reflection of the managerial attitudes that shaped the decisions at the time the decision was made (K.D.Brouthers and L.E.Brouthers, 2003). Even though economics’ treatment of entry mode concentrates on long-term or structural efficiency at the individual entrant or subsidiary level as the criterion for an appropriate foreign entry mode choice, and assumes imperfect competition (A.T.H.Sels, 2006), still Transaction Cost analysis has been widely used by researchers to examine determinants of entry mode choices(H.Chen and M.Y.Hu, 2002). 2.2 RBV Model (Resource Based View) The fundamental principle of the Resource Based View is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm’s disposal (B.Wernerfelt,1984). To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile (J.Barney,1991; M.A.Peteraf,1993). If these conditions hold, the firm’s bundle of resources can assist the firm sustaining above average returns. The choice of entry mode in the Resource Based View reflects a need to devise supporting organizational structures and complementary organizational capabilities that enable the efficient exploitation and exploration of competitive advantages at home and abroad (S.J.Chang and P.M.Rosenzweig, 2001; A.T.H.Sels,2006) 2.3 OLI Model (The Ownership, Location and Internalization) The OLI Model (The Ownership, Location and Internalization) was introduced by J.H.Dunning in 1977 when he presented his “The International Allocation of Economic Activity” on a Nobel Symposium in Stockholm. He attempted to identify and evaluate the factors influencing both the initial act and the growth of foreign production. The OLI theory stated that the entry mode decisions are determined by the three sets of advantages as perceived by enterprises. J.H.Dunning(1977,1980,1988) proposes a comprehensive framework, which stipulated that the choice of an entry mode for a target market is influenced by three types of determinant factors: Ownership advantages, which are specific to the nature and the nationality of the owner; Location advantages which arise from the fact that different resources, institutions and regulations affecting the revenue and the cost of production; Internalization advantages which refer to advantages arising from transferring ownership advantages across national boundaries within the organization. The more OLI advantages a firm possesses the greater the propensity of adopting an entry mode with a high control level. These sets of variables take into account firm-specific and market-specific factors that influence perceptions of risk and the related potential return on investment, as well as influencing firm level resource commitment and desire for venture control undertaken by a firm when it makes an entry mode decision. This theory has been widely applied to explain the entry mode decisions. A number of scholars have found empirical support for the OLI framework for large
MNCs, such as S.Agarwal and S.Ramaswami(1992) supported this idea by examining several American service firms.
3. Research Method Research methodology is key issue to affect the result of the research (D.Silverman, 2000). Case study has been a common research method in psychology, sociology, political science, anthropology, social work, business, education, and even found in economics (R.K.Yin, 2009). Case studies assist in raising and sharpening research questions (M.Dodgson and D.Gann,et al. 2006).There are overall six sources could support case study, they are internet, documents, direct observations, participant-observation, interviews, archival records (R.K.Yin,2009). And in this paper, the data are mainly collected from documents, internet, academic books and journals. Every research method can be used for three purposes: exploratory, descriptive, and explanatory. There may be exploratory case studies, descriptive case studies or explanatory case studies. According to R.K.Yin (2009), when the form of research question is “how” and “why” and also focuses on contemporary events, case study may be used. Since this paper focuses on the evolutionary process of entry mode of P&G and also analyzes the reasons of this phenomenon, case study is sure to be the suitable research method.
4. Case Study of P&G 4.1 P&G from Joint Ventures to Sole Proprietorship 4.1.1. P&G’s Process in Entering Chinese Market P&G was founded in April 1837, with the merging of the candle-making business of William Procter and the soap-making business of James Gamble and now is the world’s largest consumer products companies. Every day, around the world, consumers in more than 160 countries and regions used the P&G products 30 billion times. P&G was the first foreign company to enter the Chinese market and also one of the most successful foreign companies in China. In the early 1980s, Special Economic Zones were introduced by the authorities to promote free trade and these Zones were mostly located along the coastal cities where the transportation was very convenient, such as Guangdong and Shanghai. P&G conducted its first market research in the Chinese market in Beijing and Shanghai in 1985. During that time, foreign trade was still restricted and was channeled through “friendship stores” where consumers with access to foreign currency could buy a limited range of imported goods. Access to Chinese local market was not implemented until October 1986 when the policy concerning the encouragement of foreign investment was promulgated by the Chinese State Council in which foreign investment would be given special privilege. In 1985, P&G began conducting market research in China but found that foreign trade was strictly restricted. Thus this became the best opportunity for P&G to enter Chinese market and they believed that China was “the last piece of a huge market yet to be developed.” In March 1987, P&G soap factory did survey in Guangzhou Soap factory, hoping to enter the Mainland market. Facing a market totally
alien but full of temptation, P&G realized that they needed a strong partner to work together. After careful consideration, Li Ka-shing was chosen to be the partner. At that time, Li Ka-shing was well known as the patriotic entrepreneur in China and had a profound political and business circle. Working with the world’s largest consumer goods company together to explore the great potential of the mainland market was also considered to be quite valuable long-term investment by Li Ka-shing. The two sides reached consensus in a very short period of time. An investment company, P&G-Hutchison Ltd was founded in Hong Kong with 69.25% equity ratio from the United States P&G and 30.75% equity ratio from Hong Kong Hutchison Whampoa Ltd. In 1988, Guangzhou Soap Factory was chosen by P&G-Hutchison Ltd because of its shampoo business and also the working experience with the U.S. joint ventures. At that time one of the Chinese government policies was that all import and export businesses needed to be implemented by the mainland’s foreign trade agents, and also those joint ventures which entered the designated Technological Development Zones had the privilege to enjoy the benefits of tax return. In this case, Guangzhou Economic Development Zone Construction Import and Export Trading Corporation (hereinafter referred to Construction Import & Export Trading Corporation) was chosen by P&G-Hutchison Ltd as another partner. On August 18, 1988, the joint venture – Guangzhou P&G Co., Ltd (hereinafter referred to Guangzhou P&G), which had a tremendous impact afterwards, was first established. The initial equity ratio of Guangzhou P&G was 65% for P&G-Hutchison Ltd, 30% for Guangzhou Soap Factory and 5% for Construction Import & Export Trading Corporation. The first phase investment of this joint venture was 10 million U.S. dollars, which was, at that time, the largest investment among P&G’s Global business ever since. Chinese market did surprise P&G. Such a huge investment rewarded P&G fruitful return. On October 27, 1988, the first “Head &Shoulder” P&G shampoo products came down the production line in Guangzhou. Only four months later, 99% of the Guangzhou consumers got to know this international brand ---“Head & Shoulders”. Thereafter, more and more Guangzhou P&G miracles appeared such as P&G’s “Rejoice”, “Safeguard”, “Olay”, “Pampers”, “Tide”, “Gillette” and other brand products. They had a leading market position in their respective fields. All these miracles were from that joint venture which was founded 20 years ago. Guangzhou P&G (now the P&G China) has become a sole proprietorship with a total investment of 10 billion U.S. dollars and annual sales of 30 billion dollars and ranked the second in sales among the P&G global business. Chinese market becomes one of the fastest regional markets for P&G’s global business. 4.1.2. Strategy Adjustment--“Brands Conspiracy” Two years after P&G’s entering the mainland market, P&G-Hutchison Ltd decided to increase 9 million U.S. dollars to Guangzhou P&G. Guangzhou Soap Factory could not gather the capital increase of 2.7 million U.S. dollars, hence the decrease of equity ration from 30% to 20%.
In 1994, in order to increase the market share, P&G-Hutchison Ltd had another two joint ventures experiences: The first was with Guangzhou Lonkey Co.,Ltd which had the detergent brands of “Lonkey” and “high R&F”. The joint venture, Guangzhou Lonkey P&G Co., Ltd, was set up with 30 million U.S. dollars. P&G-Hutchison Ltd then set up another joint venture with Beijing Daily Chemical Plant--Beijing Panda P&G Co., Ltd, with 65% of equity ration from P&G-Hutchison Ltd and 35% from Beijing Daily Chemical Plant (the equity ration of Beijing Daily Chemical Plant was mainly from brands and plants). Both the two above-mentioned cleaning products plants were quite famous and once were all-powerful national brands in the Chinese consumer goods market. But after the joint ventures were founded, those brands became “frozen”. For example, the brand “Panda”, which had a very good reputation in the early 1990s, almost lost its sound to consumers’ ears. The “Panda” washing powder production and sales dropped from 60,000 tons to only 4,000 tons 6 years after the joint venture was founded. The market share of Guangzhou Lonkey washing powder once was the second highest in the domestic market. But after the joint venture with P&G-Hutchison Ltd, the joint venture had an exclusive use of this brand, and ultimately the original market share of this brand gradually shrank. Feeling no threat from the original brands, P&G-Hutchison Ltd furthered its way towards sole proprietorship. In 1999, Guangzhou Lonkey Co.,Ltd signed an agreement with Guangzhou Lonkey P&G Co.,Ltd and purchased back full ownership of Shaoguan Lonkey P&G with 47.49 million RMB and continued production of washing powder. At the beginning of 2001, P&G-Hutchison Ltd transfered its 60% of stock equity of Guangzhou Lonkey P&G Co.,Ltd to Hong Kong High Power Company, which announced the end of cooperation between P&G-Hutchison Ltd and Lonkey. On September 10, 2000, Beijing Daily Chemical Plant made a formal announcement that they had reached the agreement with P&G China that they would come to an early termination of the contract of the “Panda” and take back this brand after its being used for 6 years. During this period, the rapid development of Guangzhou P&G has made itself the No. 1 taxpayer in the national light for 6 years since 1993. 4.1.3. Final Focus – “Equity Ownership Concentration” In 1997, P&G spent 5.07 billion Hong Kong dollars on acquisition of 10.75% of the equity from the 30.75% held by Hutchison Whampoa Ltd. and this was the first step for equity ownership concentration of P&G. In 1999, P&G-Hutchison Ltd expressed their firm attitude of a one-time buyout of all shares in China. Several rounds of negotiations on acquisition of equity among P&G-Hutchison Ltd, Guangzhou Soap Factory and Construction Import & Export Trading Corporation had been organized by the Guangzhou Municipal Government. In 2000, P&G-Hutchison Ltd spent 2 billion RMB on the 20% of Guangzhou P&G shares held by Guangzhou Soap Factory. Construction Import & Export Trading Corporation sold their 4% of the
Guangzhou P&G shares with the same price and at the same time promised that the remaining 1% would be the same price if a one-time transfer was done within one year. In 2001, Construction Import & Export Trading Corporation sold the remaining 1% of the shares to P&G-Hutchison Ltd. So far, Guangzhou P&G became completely foreign investment wholly-owned company. P&G accounted 80% of Guangzhou P&G shares and Hutchison Whampoa Ltd 20%. On May 12, 2004, P&G United States announced that they would spend 1.8 billion US dollars for the acquisition of remaining 20% shares which Hutchison Whampoa Ltd had, which would allow 100% equity of P&G. So far, P&G and China’s last joint venture partner parted and became a completely foreign sole proprietorship. P&G finished its last step for equity ownership concentration in Chinese market. 4.2 Reasons Analysis P&G is not the only company to abandon the original partners and become a foreign investment wholly-owned company. After entering the WTO, along with gradual realization of China’s open policy, it has become a common strategic transformation for the MNCs in China. In mid-March 2004, the American cosmetics company Avon announced that they had agreed to pay 50 million U.S. dollars for 20% of the shares held in two Chinese joint venture companies. Prior to this, a number of foreign-funded enterprises such as Panasonic, Nokia, Ericsson, Alcatel and Lucent, etc. had performed the strategic adjustment and became sole proprietorship. In fact, from the second half of 1997, foreign-funded enterprises had significant changes. Foreign funded enterprises in China had exceeded the number of joint ventures. From joint venture to sole proprietorship, multinational activities in China continued to show new trends, new developments and new changes. It has become very urgent to transform the way of using foreign investment from the viewpoint of sole propriety development trend of MNCs in China. On the other hand, the further increase of the China’s opening-up degree and the faster pace of China’s participation in international market provides wider development space for MNCs. Therefore, the entry mode for MNCs’ entering Chinese market has become not only a significant problem, but also a new problem. The influences of MNCs’ entering the Chinese market are multifaceted. Among these influences the China’s particular market environment and its special trend are most influential. Specifically, the factors that have an influential affect on the MNCs’ entering Chinese market are mainly embodied in the following aspects: 4.2.1 Marketing Environment After 30 years of reform and opening up, the Chinese market has experienced rapid and steady economic growth, and has become a huge potential consumer market. It has played a vital position in its global strategy of MNCs. Chinese market, which contains a huge growth potential, reflected rapid and stable trends and it is due to such characteristics that when the MNCs enter the Chinese market, they will be in pursuit of sole propriety mode. 4.2.2 Government Policies
In 1979, the “The PRC Joint Ventures Law” was promulgated and this law restricted the entry mode of foreign direct investment. Foreign joint ventures became the most common way for foreign investment to enter the Chinese market. In the process of long-term cooperation with foreign investors, a more attractive investment environment has been formed. In the past 30 years, China’s dozens of laws and regulations had been promulgated by Chinese authority to encourage and regulate foreign investment in China, which greatly reduced the equity investment risks and uncertainties for MNCs in China, and foreign investors also increased their confidence greatly. Especially during the period 2000 to 2001, “The PRC Foreign Enterprises Law”, “The PRC Sino-Foreign Cooperative Enterprises Law” and “The PRC Sino-Foreign Joint Ventures Law” were promulgated by Chinese Government. The promulgation and implementation of these laws not only regulated the behavior of foreign investors, but also protected their legitimate rights and interests. The introduction of these policies and regulations, to some extent, affected the entry mode choice of MNCs’ entering the Chinese market greatly. 4.2.3 Changes in Investment Structure China’s investment environment changes constantly, so does the structure of foreign direct investment. Firstly, the structure of investment sources changes, from smaller companies mainly from such regions as Hong Kong and Taiwan to world-renowned MNCs mainly from Europe and the United States. Secondly, the investment industrial structure changes, from labor-intensive industries to capital-intensive and technology-intensive industries. Early foreign direct investment was mainly concentrated in food, textiles, construction materials, electronics, toys and other light industry while currently, the investment and business scope of foreign companies expanded to China’s pillar industry including infrastructure, telecommunications, automotive, and energy, etc. These industries not only require significant capital investment, but also the introduction of property rights, technology and other issues. In this case, MNCs are more willing to adopt a higher control degree of access. In other words, the upgrade of foreign direct investment structure in China is one of the important reasons why the number of sole propriety enterprises increased. 4.2.4 MNCs’ Cross-border Accumulation of Knowledge and Experiences Lack of business experience and understanding of the environment in specific countries often lead to restrictions of multinationals into the markets of other countries. In such cases, the companies tend to overestimate the risk and underestimate the benefits, which inevitably will promote foreign investors to choose the entry mode with less resources input and relatively low risk, such as non-equity mode or joint venture mode. However, once the company has acquired the cross-border accumulation of this knowledge and experience, they will turn into the company’s unique advantages. Those companies with the accumulation of knowledge and experience can assess the business risks and benefits more accurately so as to control the foreign
operations more effectively, thus relatively more willingly to take wholly owned enterprises with large resources input and high degree of control. 4.2.5 Constraints of Joint Ventures Joint venture was once the major entry mode of MNCs’ entering Chinese market. In the past 10 years, the decline in the proportion of joint ventures and the reduction in the absolute number, excluding the impact of the policy environment and other factors, were mainly due to the disadvantages that joint ventures had embodied. First, joint ventures have the characteristics of instability. Joint ventures usually shared ownership and common management from at least two parent companies in China and foreign countries. Due to the differences of joint ventures in management goals, business experiences, and the expected future aspects, the two partners cannot achieve internal coordination and unity. It will be very difficult to sustain the health and win-win cooperation. The Second is about intellectual property protection. The main reason for MNCs to survive and develop and maintain long-term advantage is mainly due to the technical advantages, that is, the confidentiality of proprietary technology is rather critical. While for the host country enterprises, one of the purposes to invest in joint ventures is to be able to learn proprietary technology quickly. As China’s policies and regulations concerning Intellectual Property Rights protection are not sound enough and intellectual property protection environment is not perfect, foreign investors in joint venture enterprises in China are reluctant to transfer technologies, which will undoubtedly lead to the inefficient co-operation of the joint ventures and hence difficult to maintain the relationship between the two sides. The 30 years with the use of foreign capital after China’s opening up is also an important economic system reform and transition period. In this process, the foreign investment environment is relatively more liberal. corresponding with the process of reform and opening up, multinational direct investment in China has also gone through various stages of development: “opportunity feelers” in 1980s, “strategic investors” in 1990s and “local market leaders” in the 21st century. Most foreign investment in 1980s belonged to tentative investment. In China’s restrictive policies, foreign joint venture is the main way to enter the Chinese market. With the gradual knowledge of China’s investment environment and gradual accumulation of business experiences, foreign investors benefited a lot from the success of China’s economic transition and opening up policy in China and their strategic management gradually increases. Sole proprietorship has taken the place of joint venture and become a popular and dominant choice of multinationals in 1990s. After China’s accession to the WTO, economic institutions and policies had an increasingly obvious connection with international practice. MNCs obtained rich operating experiences in the Chinese market and investors had growing confidence. MNCs established the market position and its global investment strategic motives became increasingly clear. As to the entry mode, the wholly foreign-owned enterprise investment had a significant
increase and rapid growth. For those larger European and American MNCs who have a far “cultural distance” between the home country and China, and big socio-economic and political environment differences, the gradual accumulation of knowledge and experiences greatly reduced the risks in the investment and operation in China. This makes the European and American MNCs turned their entry mode from the original joint venture based approach to global strategy based sole proprietorship. 4.3. Impact of the Process from Joint Ventures to Sole Proprietorship 4.3.1 Positive Impact 4.3.1.1 Ease Employment Pressure, Cultivate Top Talents That MNCs adopt sole proprietorship to enter Chinese market will help ease employment pressure and cultivate top talents. On one hand, multinational investment in China mainly concentrated in the labor-intensive industries such as manufacturing industry, which played a positive role in promoting the labor employment in China. While at the same time large-scale cross-border investment in wholly-owned enterprises usually will have greater demand for human resources, which, to some extent, eased the employment pressure in China. On the other hand, MNCs increasingly focus on localization trend of human resource management, which will help to cultivate and nurture a large number of modern management talents mastering advanced technology and good at international business and thus accelerate the new foreign concept, update the new management model into a new corporate mechanism. 4.3.1.2 Optimize Market Competition, Enhance Enterprises’ Competitiveness The exclusive trend of MNCs’ sole proprietorship and the intensified market competition not only aggravated the competitive pressures of Chinese enterprises, but also to some degree provided the driving force of for the business development. On the other hand, multinational sole proprietorship companies in China continued to improve the technological level, promoted the development through the establishment of R & D coordination with local enterprises, which helped to improve the overall competitiveness of relevant industries in China. 4.3.1.3 Enhance Export Competitiveness, Optimize Export Structure Since 2001, exports of the subsidiaries of MNCs which set up in China accounted for more than half of China’s total exports. Generally speaking, export products from the MNCs were relatively more competitive than those in domestic firms, which can enhance the overall competitiveness level. Meanwhile, as to the export product structure, export proportion of high-tech products and technology-intensive products in MNCs had very rapid growth, which, to a large extent, optimized the structure of our export products in the international market. 4.3.2 Negative Impact 4.3.2.1. Reduce Technology Diffusion, Slow Technological Progress
With the strengthening trend of MNCs’ sole proprietorship and the protection of self-owned intellectual property rights, technology diffusion could not be obtained as often as it used to be in joint ventures. It would become more and more difficult for domestic firms to learn and imitate their advanced technologies, which was bound to reduce the spillover effect and formed a barrier for China’s access to advanced technology. Meanwhile, it further strengthened the monopoly of MNCs on China’s technology and consolidated and strengthened the monopoly due to the formation of transnational technological advantages. 4.3.2.2. Occupy Domestic Market, Crowd out Domestic Firms MNCs have possessed such advantages as abundant capital, advanced technology and scientific management. Before the trend of sole proprietorship, MNCs had occupied the Chinese market by virtue of these advantages. Sole proprietorship further enhanced MNCs’ strength. The wholly-owned MNCs established good corporate image and brand image, improved product technology content. In this way, the sole proprietorship further widened the gap between domestic products and their products in the domestic market and in some fields accounted for an absolutely dominant position. At present, Most of China’s basic industries such as cosmetic industry, food and beverage industry and plastics industry are foreign-owned or occupied by foreign multinational products. On the contrary, due to the slow industrial development in China, products from domestic firms lack of the competition with foreign companies in quality and brands, which will lead to gradual shrinking market share of the products from domestic firms and will not be conducive to the development of China’s enterprises and the improvement of industrial structure. 4.3.2.3. The Complex Internal Trade and The Difficult Supervision After the MNCs in China realized holding or wholly foreign-owned, they strengthened the application of internal trade means such as transfer pricing, etc. This internal trade of MNCs poses a challenge to supervision ability. One of the most important questions is: how to deal with the tax revenue reduction problem from internal trade within MNCs. Evidence from China’s State Taxation Administration data showed that in China, every year, foreign companies transfer profit for more than 300 million RMB in foreign enterprises. With this, the yearly compensation of MNCs in the year book reached 120 billion RMB, which caused huge amounts of revenue loss in China(Y.Xu and H.Chen,2007). This “transfer pricing” not only caused great revenue loss in China, but also became an effective way for MNCs to evade foreign exchange controls. 4.3.2.4. Not Conducive to Rational Distribution and Adjustment of China’s Industrial Structure MNCs always seek to maximize profits, which has often become the central objective of foreign investment in China. But this objective usually conflicts with the goal of upgrading China’s industrial structure. For example, MNCs tend to invest in projects with good investment conditions and high investment return. But these projects are not common in those projects which had urgent need in China’s economic
development such as agriculture, basic industry, basic raw material industry and other fields. In addition, among these projects, there are fewer research and development projects which will determine the future development and maintain sustainable competitiveness. The proportion of knowledge-intensive service industry is not conducive to the rational distribution and adjustment of industrial structure in China, and overall healthy development of China’s economy as well.
5. Suggestions From what has been discussed and analyzed above, some suggestions for Chinese government and enterprises are presented as follows: 5. 1 For Government 5. 1.1. Optimize Policies China has committed that after the accession to the WTO, the foreign capital may enter the service industry and high technology industry. Therefore, the guidance and regulation of Chinese macro-industrial policies should be effectively optimized so as to lead the foreign capitals enter the service industry and high technology industry with the form of joint venture, cooperation, etc. Specific policies and measures can be made so as to encourage foreign capital enter the service industry and high technology industries and broaden foreign investment fields in China, hence to some extent, mitigate the trend of sole proprietorship. 5. 1.2. Strengthen Supervision Excessive sole proprietorship may cause industry monopoly and industry control and such trend already existed in some areas in China, thus it is necessary for Chinese government to carry out necessary limitations in some key and special fields, such as establishing and improving the relevant policies and regulations of foreign investment and formulating anti-monopoly law. The constraints and restrictions of the monopoly in some specific industries may help to maintain a legal and fair competition environment between foreign capital and national capital and also help the domestic enterprises to grow so that domestic enterprises may have fair and equal development opportunities (C.Xu and H.Xia, 2005). Government should guide foreign capital flow appropriately. For example, for those enterprises which are hard to introduce high technology into and also have a great demand of foreign capital, it is of great difficulty to achieve development only depending on domestic capital. Under such circumstances, wholly foreign-owned or joint ventures should be encouraged. But for some industries which involve state security, government policies and relative laws are to be strongly recommended and applied in order to control the risk of a foreign-capital enterprise monopoly while attracting foreign investment. As to the serious damage caused by MNCs through the internal trade on China’s economic interests, government should strengthen supervision. Meanwhile, market economic system should be further perfected and more standardized and transparent legal systems should be formed soon. This is the key to restrain the impact caused by the foreign-invested
enterprises of China, especially the wholly foreign-owned enterprises to China’s economic benefits and security. 5.2 For Enterprises 5. 2.1. Increase Innovation and Cultivate the Core Competitive Power For a long time, Chinese enterprises depended excessively on foreign investors, and did not have their own core technology and marketing channels. The management level was still very poor and backward. Therefore, with the gradual trend of sole proprietorship and technology diffusion effect, Chinese enterprises should further enhance the ability of independent innovation and development and cultivate the core competitive power. The R&D of an enterprise is one of the key factors to determine the success. Therefore, the government should regulate relevant policies and capital supports, encourage enterprises to increase awareness of R&D independence and improve the R&D capacity. In the meantime, the R&D cost should be increased. It can be achieved through the following two ways: First, technical personnel’s wages and welfare should be improved. Major scientific and technological achievements shall be greatly rewarded. Second, technology strategic alliance can be established so as to improve technology level. Many developed countries in the world in this regard have provided us very good cases. For example, IBM now has established about 400 computer development technology strategic alliances in the world. These alliances have made outstanding achievement in developing new products, penetrating mutual techniques, sharing market shares and improving competitive power. Chinese enterprises should adopt such advanced method and actively join the strategic alliance of MNCs. This will help a lot for Chinese enterprises to expand the international markets. 5.2.2 Cultivate Talents, Promote Enterprise Development Talent is the core factor for the development of any enterprises. That large quantities of outstanding talented people in China were attracted to MNCs caused great loss for Chinese enterprises. Chinese enterprises must strengthen human capital cultivation and build a kind of excellent internal growing environment for talents through breaking the old and rigid system and building a new, more creative talent incentive system so as to form a set of internal incentives with scientific, standardized and fair competition and promotion. 5. 2.3 Brands Protection Consumers trust the brand they are purchasing. P&G, along with other leading global consumer goods companies, fiercely protects its brands. In any one year it issues hundreds of lawsuits worldwide, but is particularly active in the US market, where infringement laws are most fiercely protected. On the contrary, Chinese enterprises used to lack a sense of brands protection or misuse of the brands; hence some well-known brands became less powerful to consumers’ ears and gradually disappeared from their lives. It is quite
necessary that the Chinese enterprises pay more attention to the brands protection and maintenance.
6. Conclusion This study provides a valuable addition to both the entry mode decision and P&G literature. It extends what we know about P&G entry mode choices. MNCs should concentrate not only on the entry mode decision but also on adapting the proper strategies for winning the game. The strategic transformation from joint ventures to sole proprietorship of MNCs in Chinese market satisfied their own needs to adapt to the Chinese market development and policy development, and their own development interests as well. This transformation will exert far-reaching influence on Chinese market and enterprises. We hope that through the analysis of this phenomenon, Chinese enterprises will gain some experiences when facing the competition from the wholly foreign-owned enterprises and survive themselves in the fast-developing market, both home and abroad.
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