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Discuss the opportunities and

challenges faced by Chinese enterprises

going global.There is no specific definition to globalisation. To begin with, Flynn and Giraldez have defined it as

the permanent existence of global trade, when all major zones of the world exchange products

continuously and on a scale that generated deep and lasting impacts on all trading partners. The

deep lasting impact according to our understanding may refer to the economic integration that

countries seek when they go global. Why and how aspects of the globalisation will be discussed later

but to further emphasise on the meaning of globalization we would like to take help from some

other definitions. It is also referred to as the gradual integration and growing interdependence of

national economies (Cavusgil et al., 2008). Now globalisation can be explained as economies globally

integrating through technology, knowledge, people and values which ultimately leads to

interdependence of the countries on each other (Knight, 2004).

Globalisation has been occurring for the past several hundred years. Its increase over the past 20-30

years is largely accounted to the integration of large developed economies with less developed

economies through FDI (foreign direct investment) and the reduction of trade barriers. The firms and

enterprises which have entered into the global economy faced myriad obstacles and opportunities

along the way. In this essay, we will be discussing some of the opportunities Chinese enterprises are

seeking and the challenges they have faced for going global.

Why to Globalise?Globalisation is seen as an objective trend in economic development. In order to develop a country,

one cannot keep itself isolated from integrating to the global economy (Zhang, 2005). In case of

China, the increased productive capacity of firms and the highly competitive market led it to

globalisation as it was hard for them to survive in the local market due to low profitability and

immense competition. Another important reason for China to go global was to acquire raw material.

Over the past few years, the demand of natural resources in China and other countries has risen

swiftly. By acquiring natural resources, the firms can become captive suppliers of middle kingdom

(The Economist, 2010)


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The go out policy was launched by China in 2002. This policy was formulated to encourage the

enterprises to invest into the global markets (Liu, 2007). The policy entails the increased Chinese FDI

into the foreign market. China seeks diversification in production and production methods along

with brand recognition in EU and US market. Improvement in the quality of the projects was another

objective of this policy. The reason to introduce this policy were the huge foreign reserves China was

keeping and the increasing demand from the international community for China to float its money.

In turn, China invested its money by actively acquiring assets overseas.

China became a part of WTO (World Trade Organisation) in 2001. It has since then supported the

enterprises to invest in the foreign markets. Support for the M&A (mergers and acquisitions) has

been the main industrial policy to promote the globalisation of the Chinese firms (Schuller and

Turner, 2005).

How to Globalise?China has been a champion in exports but in order to grow further it should also find other business

avenues, (Bloomberg Businessweek, 2009). As discussed above, the Chinese government has

supported the firm to invest in mergers and acquisitions since their accession in WTO in 2001.. But

initially Joint ventures and Greenfield investments were the major forms of investments. China has

used various modes of entry into the global market. Joint ventures with Western and European

companies like Huawei and 3Com, Greenfield investment (subsidiaries/organic growth) in case of

Haier in US and M&A like Lenovo did by acquiring IBMs computer division are some of the examples

how Chinese companies entered into the global market (Lecture, 2011).

Chinas Outward FDI: A Look at the ProgressChinas outward FDI figures are underestimated due to the deficiencies in their statistical system. All

outward FDI figures are based on statistics established by MOFCOM. MOFCOM only captures the

data of approved and registered outward FDI which gives a limited understanding of Chinas

investment overseas (Zhou & Shuller, 2009). If the records of Chinas FDI in OECD countries are

considered, then the outward FDI could be 40% more than total established figures (Lecture, 2011).

Chinas outward FDI has grown massively over the past decade but it is not as fast as expected (Zhou

& Shuller, 2009). The investments in M&A have been impressive. Studies conducted by Zhou and

Shuller showed that Asia remains the most attractive place for China to invest but most of the

outward FDI has been made in M&A with Western countries. Chinese companies seek high level of


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equity participations in companies abroad. Most of the investments have been made in mining and

manufacturing (Zhou & Shuller, 2009).

China has been investing in other countries from past couple of decades. The investments made in

1980s were very negligible. They were as low as 0.45 billion USD per year. In 1990s, they rose to a

modest level of 2.3 billion USD on average per year but in 1994 there was a dramatic increase in

outward FDI and the total investments rose to 4 billion USD. In 2001 after Chinas accession in WTO

and the launch of Go Global policy gave it a big leap ahead and brought it in the race of high outward

FDI countries. According to the statistics provided by OECD and MOFCOM, Chinas outward FDI rose

to 6.9 billion USD. Statistics show that there was 20 times increase in Outward FDI between 2004 to

2008. By the end of 2009 the Chinas Outward FDI increased to 56.53 billion USD. A tremendous

increase has been shown in Outward FDI stocks from 29.9 billion USD in 2002 to 245.75 billion USD

in 2009 (OECD, MOFCOM)Based on the statistics a graphical representation is listed below.

Sources: Ministry of Commerce, China (Website)

By end of the year 2009, Chinas share reached 5.14% of 1.1 trillion USD of worlds total Outward

FDI. It acquired China 5th rank in all economies on the basis of total money spent in Outward FDI

(UNCTAD, World investment report, 2009). Up until 2009 most of the Outward FDI has been made

on leasing industry followed by mining, manufacturing, retailing etc. Another graph showing

percentage distribution of China outward FDI in different sectors is listed below.


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Source: China National Bureau of Statistics, China Statistical Yearbooks, 20032009

Most of the Outward FDI has been made in Asia since it remained the most lucrative and desired

place for Chinese investors. The graph below shows Chinas investment in different continents as of

2009.

Source: National Statistic; Heritage Foundation

The above graphical representations give us an idea about the progress of Chinas outward FDI in

world and more specifically on sector level. The Chinas overall Outward FDI stocks in 2010 crossed


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300 billion USD (Heritage foundation). China has a great potential which led to its emergence as a

great economy but just like European and Western enterprises, Chinese firms have also faced a lot

of opportunities as well as challenges in entering global market. Some of the major opportunities

and challenges will be discussed in depth in the following paragraphs.

OpportunitiesChina has transformed from isolated economy to globalised reflecting the governments planning for

long-term economic prosperity (Zhang, 2005). China still has many hurdles in its way but there are

opportunities promising rewards for those with ability to succeed. Some of the opportunities are

explained below.

1-Support of GovernmentMost of the emerging economy governments encourage the globalisation of their firms (WIR, 2008).

It is very important how the government stimulates the process of Outward FDI (Luo et al, 2010).

The current government policy is believed to provide support to the Outward FDI enterprises. The

policy has two aspects to it: Promotional measures and monitoring policies.

The promotional measure encompasses financial and taxation policy, risk safeguard mechanism,

information service network and direction guidance of Outward FDI. The Chinese government gives

support to Outward FDI enterprises. To prevent double taxation they have one corporate income tax

principle which they have also signed with 89 nations (Luo et al, 2010). EXIM Bank of China provides

credit funds which are processed fast and have low lending rates. Long and short term credit

insurance and credit facilities are also provided by the EXIM Bank of China. These banks also provide

discounted bank loans to firms investing abroad.

Chinese government in 2004 also promoted the investment in natural resources, the export of the

local technology, labour and production methods abroad, R&D development centres which used

internationally advanced technologies and managerial skills and M&A which increased the

competitiveness of Chinese firms. International development funds were also given to all those firms

which wanted to go global (Luo et al, 2010).

China has played an influential role in reducing the risk of Outward FDI firms through mutual

protection agreement. Currently China has signed this agreement with 115 countries and locally it

provides accident insurance to the expatriates working in subsidiaries (Luo et al, 2010). The

government also keeps record of all the difficulties a firm faces when entering into the market. They


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publish Obstacle rule report when investing in different countries. This sophisticated system allows

firms to get the reasonable information about the risks and obstacles they might have to face when

going global (Luo et al, 2010). The government also publishes a catalogue with guidance about

investment overseas. Companies which follow those guidelines get financial benefits as well and

favourable treatment abroad.

Chinese government have tried to simplify the monitoring policies as much as possible. The approval

process has been shortened to 20 days. Government does not require a feasibility report because all

they are concerned about is the investor and the direction of the investment. There are some post

investment guidelines as well for the firms listing rules for accessing corporate FDI overseas (Luo et

al, 2010).

2-Accquisition of Strategic AssetsCompanies these days use resource based view which help them seek strategic assets or resources

to be more competitive in the market. Many Chinese companies are establishing cross-border M&A

to eliminate their competitive disadvantages. Few of the companies including Lenovo and TCL have

took over patents, brands to be more competitive (Deng, 2008). The importance of acquiring

strategic assets should be understood in order to validate its advantages for the Chinese firms.

Chinese companies are striving hard to list themselves in Fortunes global 500 but to acquire a

position in the list Chinese firms need to fill significant resource gaps (Zeng & Williamson, 2003).

Chinese firms do possess competitive advantage gained from access to home country resources or

production capabilities, but still see themselves as having an average level of competitiveness and

have a powerful motive for asset-seeking especially in industries in which they face rigorous

competitive pressures (UNCTAD, 2006).

In 2001, the Chinese firms acquired strategic assets worth 450 million USD which exceeded 5 billion

USD in 2005, half of Chinese total Outward FDI (UNCTAD, 2006). All these strategic assets were

acquired mostly by M&A. In 2004, Lenovo over took IBMs PC unit which made Lenovo the third

largest PC manufacturer immediately after the acquisition investment worth 1.7 billion USD. Along

with other things Lenovo got IBMs brand, managerial control, R&D centres and distribution network

(Deng, 2008). TCL and BOE technology group implemented same strategy for getting hold of

strategic assets including brand name in the companies they have invested.


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3-Natural resourcesNatural resources are vital to the economic growth of any country. The surge in the economic

growth in the past two decades has seen a prominent shortage in the natural resources of the world.

Backed by the Chinese government, Chinese firms have been acquiring equity stakes in natural

resources all over the world. Massive investments were made in mining and petroleum and longterm procurement contracts were made in oil and minerals (Moran, 2010).

In 2010 alone 55% of oil was imported from overseas including Africa where Chinese firms have

invested (China daily, 2010). The globalisation of the firms can lead them to take control of natural

resources directly. This could help the frequent supply of natural resources to China and also on

stabilised prices. CNPC and SINOPEC, two of the largest companies in China have invested in

Kazakhstan, Russia, Canada and Switzerland. These investments have been supported by the Chinese

government for the stable flow of natural resources to meet the demand of the Chinese economy.

Due to increased labour costs in China, firms have shifted their production units to other places in

the world to deal with costs effectively and to reap more profits. The go out policy established in

2002 has played a great role in taking Chinese companies abroad which has brought China in the

race of some of the top Outward FDI companies.

ChallengesChina has faced a host of challenges in establishing their firms abroad. Most common challenges

faced include human resource management, technological backwardness, and cultural differences.

All these challenges will be explained one by one in later paragraphs.

1-Human Resource ManagementAs more and more Chinese indigenous companies invested abroad it created a need for people with

competencies to compete successfully in the global economy (Tung, 2007). If Chinese firms fail to

produce human talent pool with first class managerial skill then they might not be able to compete

successfully with the multinational giants and its outward FDI aspirations will be thwarted (Tung,

2007). China needs skilled people to take informed decisions and the evaluation of acquisitions

abroad. Managing processes and international staff is also the most important task for which

experienced managers are required. As for financial skills, Chinese corporate leaders are still at the

fundamental stage (Gupta and Wang, 2009).


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The torrential flow of FDI in China coupled with the desire of indigenous Chinese companies to

invest abroad (Accenture, 2005) has created a need for people referred as shortage among plenty

by Farrell and Grant (2005). This explains the fact that despite of Chinas biggest population in world

there is still a critical shortage of skilled people to serve its objective of being prosperous locally and

successful abroad (Tung, 2007). Chinas management pool number 5000 when it needs 75000

mangers to run Chinese firms (Farrell &Grant, 2005). The surge in shortage of human resource is not

only restricted to China but its a world phenomenon. Companies strive to get hold of the best

employees with the greater technical knowledge about the job (Tung, 2007).

In 2005, a survey of 25 Chinese international firms where respondents were asked to identify

barriers, both internal and external, to OFDI, suitable human resources emerged as the most

significant challenge (Tung, 2007). Many students from China fly abroad to get foreign education

who will replenish people at managerial posts. Many western executives when interviewed said thatthe next generation of Chinese executives, in their 30s and 40s today, with more international

education and experience, would prove far more effective than the present cohort of chiefs. Over

the past two decades the old guard has taken a rusting industrial base and from it made gleaming

corporate giants. Yet if those firms are to achieve their full potential abroad their creators may have

to relax their grip (The Economist, 2010).

2-Technological backwardnessExcept for few companies which have technologies comparable to US and Japan, most of the sectors

still lag behind as far as advanced technology is concerned. Chinas regulations for FDI and Outward

FDI encompass the introduction of advance technology within China along with many other things.

According to Nolan and Zhang (2005), only oil and petrochemical industrial technology in china

meets the standard of technology used in US and Japan. Regardless of the advancement in economy

as a whole, increased FDI and Outward FDI, china still is still backward technologically.

3-Cultural difference and business modelChina follows a whole different set of norms and culture when dealing in business which creates

hindrance when Chinese firms deal with other firms from across the world. The Economist in one of

its article published that the sense of mission, opacity and the high esteem in Chinese corporations

can raise difficulties in dealing with the western firms. It also mentioned interviews from western

executives who appreciated their Chinese counterparts but show express their concern about lack of

openness and discussion which leads to resistance among employees (The Economist, 2010).


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Spencer and Chao (2008) mentioned in their article about Lenovos executive and the difficulties

they had faced when dealing with IBM. The Chinese members of delegation kept quiet when they

disagreed with some point, the silence was taken a sign of agreement by the western counterparts

(The Economist, 2010). Chinese business models on the other hand are not efficient to operate at

home as well as globally. The global governance and the management system should be aligned to

manage operations in offshore as well as in China. The gaps in business models need to run

companies overseas keep Chinese firms from taking full advantage of globalisation.

China has also faced some political challenges within the country. Embargos and sanctions by EU and

US on Chinas trade and human rights violation have been in talks for long. China needs to address

all these issues in order to fully benefit from the globalisation for which they have tried really had

and in fact have been successful for past many years.

ConclusionAccording to the figures of 2009 China ranks 5

thwith 56.52 billion USD in the race of countries with

higher Outward FDI. Chinese firms have a lot potential to win this race by negotiating all the

challenges they face in going global. The immense support from government gives them an

advantage to flourish in the global economy. At the same time Chinese firms also face some political

problem within the state like we have seen in case of China National Offshore Oil Corporation. China

has shown an aggressive integration into the world economy. China Outward FDI has grown faster

than Japan which shows its steep acceleration toward globalisation and potential for more growth.

Chinas Outward FDI growth seems quite sustainable. The government support for the promotion of

firms in global market, the appreciation of Chinese currency and the acquisition of natural resources

proves its sustainability. The firms in China are becoming more open towards international trading

and therefore have the tendency to become global players. The challenges have always been there

but a good approach and strategies can easily tackle them. Chinese firms have innumerable

opportunities which if channelled in the right direction can lead China to become the number one

global player.


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ReferencesBloomberg Businessweek (2009). Globalization Challenges Facing China Inc. [Online]

Available at: http://www.businessweek.com/globalbiz/content/jul2009/gb20090710_479130.htm [Accessed

May 15, 2010]

Cavusgil et al., (2008). International business: Strategy, management, and the new realities .

New Jersey: Pearson Education.

Deng, P. (2009). Why do Chinese firms tend to acquire strategic assets in international expansion?. Journal

of World Business 44, pp7484

Economist, (2010). Being eaten by the dragon: What it feels like to be bought by a Chinese firm. Economist,

[online] 11 November. Available at: http://www.timesonline.co.uk/tol/news/uk/scotland/article1138006.ece

[Accessed 15 April 2011]

Flynn, D. O. & Giraldez, A. (2004) Path dependence, time lags, and the birth of globalization: A critique of

ORourke and Williamson. European Review of Economic History, pp. 81-108.

Knight, J. (2004). Internationalization Remodeled: Definition, Approaches, and Rationales.

Journal of Studies in International Education.Vol. 8 No. 1, P 5-31

Liu, C Z. (2007). Lenovo: an example of globalization of Chinese enterprises. Journal of International

Business Studies

Luo et al. (2010). How emerging market governments promote outward FDI: Experience from China. Journal

of World Business 45, pp 6879

Moran, T H. (2010). China's Strategy to Secure Natural Resources: Risks, Dangers, and Opportunities. Policy

Analyses in International Economics 92.

Nolan, P. & Zhang, J. (2002). The Challenge of Globalization for Large Chinese Firms .

World Development.Vol. 30, No. 12, pp. 20892107

Schu ller, M. and Turner, A. (2005), Global ambitions: Chinese companies spread their wings,

China Aktuell, No. 4, pp. 3-12.

Spencer, J. and Chao, L., (2008). Lenovo Goes Global, But Not Without Strife. Wall Street Journal

Tung, R L. (2007). The human resource challenge to outward foreign direct investment aspirations from

emerging economies: the case of China. Int. Journal ofHuman Resource Management, 868889

UNCTAD. (2006). World investment report 2006: FDI from Developing and Transition Economies. New York

and Geneva: UNCTAD

World Investment Report (WIR). (2008). Transnational corporations and infrastructure

Challenge. New York and Geneva: UnitedNations Conference on Trade and Development

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Zeng, M., & Williamson, P. J. (2003). The hidden dragons .Harvard Business Review, 81(10): 9299.

Zhang, Y. (2005). China goes global. Foreign policy centre.


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Zhou, Y S., Shuller, M. (2009). The internationalization of Chinese companies: What do official statistics tell us

about Chinese outward foreign direct investment?. Chinese Management Studies, Vol. 3 No. 1, 2009 pp. 25-

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Other Sources: OECD, MOFCOM, Chinese Ministry of Commerce, Heritage foundation, China Daily, Lecture

Handouts (2011). (All cited in various paragraphs).

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