Foreign market entry in China

The author’s interest in strategic marketing issues originates from previous work experience, as well as the nature of his responsibilities while in his most recent employment with the Balloch Group in China. The Ballock Group1 was founded in the year 2001 by Howard Balloch, Canada’s Ambassador to China from 1996 to 2001. The company is headquartered in Beijing and currently employs around 900 staff.

The business applies its vast knowledge of the Chinese market, its extensive private and public sector relationships as well as its international business expertise towards the delivery of investment and comprehensive business strategy advice to international clients. The team at the Balloch Group has so far worked with many Chinese and foreign firms on strategic business issues and has acted on their behalf in business arrangements and negotiations. Before commencing his Masters Degree in 2003, the author of this report was employed as a marketing researcher with the Balloch Group.

His primary specialisation was in providing foreign companies with the necessary marketing information on how to best enter the Chinese market. Before travelling to the UK for his studies, the author was part of a team, which with local government support, successfully researched and built a factory in a medium sized harbour city in China. Furthermore, he has participated in many other projects, which have helped foreign companies establish sales networks in China. Hence so far the author has had the possibility to gain access to the outstanding marketing knowledge of his current employer.

This is how the interest towards the topic of market entry modes in an international environment, and specifically joint ventures and wholly owned foreign enterprise strategies, arose and developed. The author also expects that, on his return to China, he will continue to work within the same department of the Balloch Group. Consequently, he has decided to use his practical experience and combine it with the theoretical knowledge gained through the last year, to produce a piece of research which will attempt to explore the feasibility of employing the above two methods of market entry by foreign companies in China presently and in the future.

This topic is viewed as being current, widely discussed and subject to much debate in China at the moment. Upon completion the author will present the research to his current employer and it is likely to be shared between departments as a part of the company’s knowledge base. 3. FDI in China – a historical overview The concept of investing in China is relatively new to the Western world due to the many years during which the country was isolated from the international trading community.

Before 1979 the use of foreign capital to set up operations was prohibited due to the political environment in the country. In 1979, however, the enactment of the Joint Venture Law permitted the cautious opening up of a number of Chinese sectors to FDI. In this manner the local government intended to allow domestic enterprises access to foreign management know-how, technology and practices which were not available at the time. The first industries to permit foreign participation were those where local enterprises or expertise did not exist.

Within the next 10 years a large number of foreign participation projects were set up. The interest towards the Chinese market continued to grow strong in the 1980s, and at the beginning of the 1990s a total of 34,000 companies had invested in China. Joint ventures were the preferred form of entry with $44 billion committed and $20. 5 billion actually invested2. Further to this in 1992 in an ambition to stimulate export industries, the Chinese government removed even more restrictions to foreign direct investment (FDI).

And while the effect of the 1979 opening was modest the policy change in 1992 led to a major rise in foreign investment not only towards the exporting industries but also towards serving the growing Chinese market3. By the end of the year 2002, the level of investment in the country had increased almost 1. 5 times compared to the 1979 levels as reported by UNCTAD (see Table 1). Then in April 2003 statistics declared that a total of 436 934 foreign invested enterprises had been set up in China with actually utilised foreign investment capital of $460 billion.

Investors came from more than 180 countries around the world and 400 of the top 500 global multinational enterprises had established operations in China4. Table 1. Total FDI to China (1979 – 2002) Other country observers5 also reported that in the last two decades Chinese FDI inflows have risen impressively from a very low base to exceed $50 billion annually. Today foreign holdings approach $500 billion, and are 34 percent of China’s GDP at market exchange rates (see Fig 1 below). In one year, 2002, China even topped the league table for inflows of FDI, briefly overtaking the United States.

Thus, in comparison to its economic size and despite its late start in opening up to accept inward investments, China’s FDI is already broadly in line with UNCTAD estimates of the developing country average and is higher than the global average of around 22 percent of GDP6. Fig 1. Historical growth of FDI in China (1982 – 2003) Source: Erskinomics In spite of the above, through the beginning of the 2000s FDI activities in China were still subject to some regulations, regarding local content, contractual forms and locations, etc.

all of which intended to shield domestic enterprises from competition7. Then in December 2001 the country joined the World Trade Organisation (WTO) and since has launched a new series of liberalisation measures to foreign trade and FDI. Full implementation of the WTO commitment is to be completed by 2007 which implies reductions and abolishment of sectoral and geographical restrictions of FDI. With China’s accession to the WTO it is expected that it will remain a very popular destination for foreign investment.

This is due to the fact that the Chinese government is gradually relaxing its regulatory environment, increasing its responsiveness to investor concerns and strengthening a number of market reforms in China. The challenge to the country now, as stated by an OECD Investment report8, is “to attract more long-term, capital intensive, high-tech intensive, high-value-added projects in more sectors of the economy”. Whether China is rightfully positioned to do that in terms of its macro setting will be at the centre of this report as it examines the recent changes in the environment and their effects on international investors.

4. Methodology Based on the above, the report presented below will attempt to examine to what extent the two market entry strategies – namely joint ventures and wholly owned foreign enterprises – are considered appropriate and suitable for multinational investors in the country. Because the choice of a market entry method in a foreign environment determines largely the difference between success or failure for an enterprise, the dilemma of “which one? ” is often one of the most important considerations for multinationals that are about to set up operations in China.

Presuming companies have established that their organisational skills, capabilities, products and services are in line with their foreign expansion marketing strategies, the remaining set of factors to be considered before a one-sided decision can be taken, are those that originate from the external environment. Therefore, it is the author’s belief that businesses entering, or wishing to enter, the Chinese national market would need in all cases to evaluate to what extent the various elements of the macro environment foster the application of one or another of the above mentioned methods.

The most important benefits of employing joint ventures or wholly owned foreign enterprises are that they provide a large degree of control over market representation and profits. For this reason they are generally preferred to other entry methods, provided that the environment permits set up and operationalisation, and the stated benefits can be explored freely. The investigation of the latter within the Chinese national market will be the main aim of this report.