Internationalization, Corporate Governance, and Global Competitiveness: A Study of

Entrepreneurial Firms in the Pearl River Delta

Joseph L. C. Cheng Visiting Professor, Stanford APARC

Professor and Director The CIC Center for Advanced Study in

International Competitiveness University of Illinois at Urbana-Champaign

_______________________________________ Contemporary Asia Seminar Series

Asia-Pacific Research Center (APARC) Stanford University

April 26, 2012

Agenda

n  The Pearl River Delta (PRD) Project - Background - Motivation and research objectives

n  Context, Scope, and Analysis - The PRD region - Focus of current investigation - Preliminary findings - Implications for research and public policy - Next steps

n  Discussion and Q&A

The Pearl River Delta (PRD) Project n  Part of a larger study of the international competitiveness of five

Asia-Pacific countries -- Japan, Australia, China, Korea, and Singapore (JACKS) -- and their indigenous MNCs.

n  Recognition that the Asia-Pacific will be the key battle-field for

global competition among MNCs over the next 10-15 years. n  A main objective is to identify the key competitive advantages of

the JACKS countries as a place for investment/business expansion and also as a global platform for MNC operation.

n  Another objective is to investigate how indigenous firms from

the JACKS countries internationalize and leverage home-based advantages to enhance their competitiveness in world markets.

n  Within China, the PRD region provides an excellent research

setting for investigating these research issues.

About the PRD Economic Zone n  Covers 13 cities & districts: 56 million residents (over 25 million

migrants); 42,000 sq km; 4.3% of China’s pop. & 10% of GDP. n  Selected in 1979 as the country’s forefront of economic reform;

role re-affirmed in 2008-20 PRD Development Plan to seek “key breakthroughs” in economic, social, cultural & political reforms.

n  41,441 registered industrial enterprises in 2010: 84% small OEM

firms (less than 500 workers); about 30% (over 11,500 firms) owned by entrepreneurs from HK/Macau/Taiwan.

n  In 2008, resident firms directed to upgrade toward high-tech and to invest & compete in overseas markets, including public listing.

n  In 2009, Beijing set the goal for PRD’s economy (GDP=$600B)

to surpass that of South Korea (GDP=$1.1T) in the next decade.

Focus of Current Investigation

n  How effective has the government been in up-grading PRD’s industrial base and getting its resident firms to internationalize?

n  What has been the economic and social impact of this

development effort?

n  How did the resident enterprises respond to the government’s directives, particularly among the small entrepreneurial firms?

n  What can be learned from the PRD for research and practice on entrepreneurship, economic reform, & enterprise development?

Macro Economic & Social Indicators (PRD data: China & Guangdong Statistical Yearbooks)

2001 2007 2010 n  GDP-yuan 956T 2,576T 3,767T (294%+) n  FDI-US$ 11.5B 15.2B 20.3B (77%+) n  Import-US$ 77.6B 256B 320B (312%+) n  Export-US$ 90.8B 354B 432B (375%+) n  % China's total export 34.1% 29.1% 27.4% (19.6%-) n  % China's gross industrial output (GIO) 12.6% 11.8% 10.3% (18.3%-) n  Population 43.8M 49.3M 56.2M (28%+) n  Migrant workers 17.8M 20.6M 26.0M (46%+) n  Persons employed 19.5M 31.0M 33.8M (73%+) n  Primary industry (% Guangdong’s GIO) 25.8% 2.4% 2.1% (91.9%-) n  Secondary industry (% Guangdong’s GIO) 45.3% 51% 48.6% (7.3%+) n  Service industry (% Guangdong’s GIO) 28.9% 46.6% 49.2% (70%+)

PRD’s Nine Pillar Industries (% Guangdong’s gross industrial output; from HKTDC)

2001 2007 2010

Traditional Industries - 13.8% 15.1% n  Textile & garments - 5.5% 6.0% n  Food & beverage - 4.3% 4.6% n  Building materials - 4.0% 4.5% Fresh Industries - 48.7% 45.8% n  Computers, electronics, & communication - 24.2% 22.4% n  Electrical & special purpose equipment - 15.4% 14.2% n  Chemical products & petroleum refining - 9.1% 9.2% Potential/Emerging Industries - 7.8% 8.7% n  Logging & paper-making - 2.4% 2.6% n  Medicine - 0.8% 0.9% n  Motor vehicles - 4.7% 5.2%

Micro Economic & Social Indicators (Guangdong Data: Guangdong Statistical Yearbook)

2001 2007 2010

Livelihood n  Average wage (yuan) 15682 29443 40358 (158%+) n  Savings deposit (100M yuan) 9930 22212 36318 (266%+) n  Disposable income (indexed 1978: yuan) 2657 707 838 (68.5%-)* Health Care n  Hospitals 2444 2436 2444 (same) n  Beds in hospital (10,000 units) 16.22 21.70 27.71 (71%+) n  Doctors (per 10,000 persons) 15 17 21 (40%+) Education n  Teachers: Primary school (1000) 37.13 41.45 43.07 (16%+) n  Teachers: Secondary school (1000) 1.31 3.86 4.12 (215%+) n  Teachers: Higher education (1000) 2.35 6.71 7.86 (234%+)

Changes in PRD Enterprises (Source: China & Guangdong Statistical Yearbooks)

2001 2008 2009 2010 State-owned n  # firms 703 313 294 273 (13%-) n  # persons employed 22.52 12.55 17.62 18.44 (46%+) Domestic share-holding n  # firms 2649 18462 18388 18845 (2%+) n  # persons employed 64.56 339.7 344.6 392.4 (16%+) Foreign-owned n  # firms 1311 5585 5364 5240 (6.2%-) n  # persons employed 62.9 303.7 282.9 302.8 (V) HK/Macao/Taiwan-owned n  # firms 6642 12531 11720 11546 (7.9%-) n  # persons employed 245.1 526.5 480.1 513.2 (V)

Tentative Findings & Observations

n  Successful in re-configuring PRD’s industry mix toward more capital-intensive & high value-added operations.

n  Successful in building a powerful economic engine to generate wealth and also to support social development.

n  Wages and savings have been on the rise, but real disposable income has declined greatly. (Inflation? What other factors?)

n  # hospital beds & doctors have increased to (adequately?) support population growth, but no increase in # hospitals.

n  # teachers have increased, particularly in higher-education. n  # workers’ protests & social unrest have increased. n  Controlling pollution and corruption: Still a work-in-progress.

Tentative Findings & Observations … n  Resident firms in the PRD responded to government directives

(and/or the 2008 financial crisis?) differently depending on their ownership structure.

n  # firms decreased for state-, foreign- and HK.M.T-owned, but increased for domestic share-holding.

n  Among the three declining groups, HK.M.T-owned showed the largest # of firm exits (closures) during 2008-2010 but also the largest increase in hiring from 2009 to 2010. (*most adaptive*)

n  The domestic share-holding group showed a sharp increase in # firms and employment from 2001-2010. (*most committed*)

n  Small firms were 7 times more likely to exit during 2008-2010.

Why Did the HK.M.T-owned Firms Have the Highest Exit Rate?

n  Multiple contributing factors: n  Many of these firms were small low-tech, low value-added

factories that the government wanted to get rid of. n  They also had cash-flow problems resulting from reduced

business and increased difficulty in getting financing. n  Most HK.M.T entrepreneurs are very business savvy, but

short-term oriented and money-driven. (the “SM” type) n  Entrepreneurs in general are more interested in new market

and firm creation than running an existing business. n  Learning new knowledge and building new firm capabilities

take time and resources; not an attractive option.

New Capabilities Needed for PRD Firms’ International Expansion

n  Internationalization knowledge and capability: foreign market assessment; entry mode and transition (EXPORT/FDI/JV/M&A); incremental vs. leap-frog (strategic) expansion path; multi-domestic vs. global vs. transnational form of MNC operation.

n  New organizational practice and capability (for international markets):

corporate governance; social responsibility; public relations; branding; R&D/HRM; legal compliance vs. guanxi maneuvering.

n  Competitive performance in overseas markets: input (hiring, suppliers,

financing); output (market-share, access to distribution channels, custom loyalty); overall performance (profit, reputation, growth).

Conceptions of Corporate Governance (CG)

n  CG as protection of resource providers & stakeholders n  CG as organization and management control n  CG as transparent funds allocation/financial reporting n  CG as compliance to legal and ethical requirements n  CG as signaling for high quality n  CG as social responsibility n  CG as firm reputation and character n  CG as an intangible firm-specific asset n  CG as a statement of company values n  CG as a frame of mind

Propositions about Entrepreneurial Firms (EFs) in the PRD

n  Definition: EFs are firms founded and run by entrepreneurs who see a market opportunity and form a business to realize it.

n  P1: Compared to the other firms, EFs in PRD will be less engaged in acquiring new internationalization and corporate governance practices in response to changing external demands.

n  P2: Instead, these EFs will choose closure/liquidation/exit and

then re-constitute and re-enter the same or a different field with externally-acquired new capability (e.g., new business partners).

n  P3: EFs that adopt and learn about new internationalization and

corporate governance practices will have higher competitive performance in overseas markets (input, output, & overall).

Implications for Research & Public Policy n  Existing literature on organizational adaptation/learning might

not be applicable to the study of EFs because it is premised on firms’ desire for long-term presence and availability of resources.

n  Existing literature also characterizes most EFs as agile and

adaptive in responding to external demands. This is more true of the founders/owners (entrepreneurs) than their firms.

n  Investing in absorptive capacity, platform technology, and

personnel training, etc. works well for established firms but not for many EFs which have different goals and limited resources.

n  More research on EFs is needed to advance knowledge and

inform economic reform and enterprise development for both advanced and emerging economies.

Next Steps n  A combination of case studies, survey, and archival research will

be conducted with help from local academic collaborators. n  A sample of 500 firms will be tracked over 7-10 years, selected

from multiple industries with different ownership structures. n  A number of overseas markets in Asia, Europe, North and South

America will be selected for observation and assessment of these firms’ competitive performance (input, output, overall).

n  Objective is to build a multi-industry, cross-market, longitudinal

data-base for large-sample, comparative quantitative analysis. n  Upcoming research conference on “China Business and International

Competitiveness: Economics, Politics, and Technology,” June 18-19, 2012, in Hong Kong (see www.cic.net/casic/hkconference).

Discussion and Q&A

n  Questions and comments about any aspect of the PRD Project are most welcome.

n  Meet and discuss if interested in getting involved with the study,

either as a faculty collaborator or research assistant.

n  Thank You! Acknowledgement: Thanks to University of Illinois doctoral students Wenxin Guo, Brad Skousen, and Ishva Minefee for their excellent research support work for the Pearl River Delta Project.