Strategic intent: investment and competitive factors
In this chapter, we investigate investment and competitive factors for strategic intent, including investment mode, shareholding ratio, growth and development factors, competitive mandate, competitive advantages and competitive advantage initiatives. We present findings and analysis on strategic intent, and summarise them in a table.
Three investment modes were studied: (1) wholly owned (95 per cent or more foreign equity shareholding); (2) joint ventures (50–94 per cent foreign ownership); and (3) minority controlling ownership in joint ventures (less than 50 per cent foreign ownership). Coding was done for the investment mode at the time of first entry of the MNC subsidiary in China and at the time of the study.
Respondents were asked about the important growth and development factors, key growth indicators and significance of various investment motives for MNC subsidiaries in China. No specific hypothesis was advanced.
Growth and development factors were measured using the items in Table 5.1 on a five-point scale (1 = very insignificant; 5 = very significant).
Growth indicators were measured using the items in Table 5.2 on a five-point scale (1 = very insignificant; 5 = very significant).
Return on investment
Investment expansion motives were measured using the items in Table 5.3 on a five-point scale (1 = very insignificant; 5 = very significant).
Respondents were asked about the perception of other MNC subsidiaries in China versus the local Chinese enterprises as competitors, the areas along the value chain the subsidiary is engaged in, significance of alternative performance measures and the significance of various factors in the strategic position the subsidiary held in the MNC network. No specific hypothesis was advanced.
Performance measures expected by the parent company from MNC subsidiaries in China were measured on a fivepoint scale (1 = very insignificant; 5 = very significant) using items in Table 5.4.
Product quality indicators
Return on investment
Safety of employees
Completion of planned budget
Shareholders’ rate of return
Relations with local government and the public Staff training
Productivity indicators Service target
Social responsibility Worker turnover
Relation with parent company
5.3: Competitive advantages of MNC subsidiaries in China differ depending on their relative market share.1
The competitive advantages were identified using responses on a five-point scale (1 = very insignificant; 5 = very significant), showing the perceived advantage of the MNC subsidiary over its competitors on the items in Table 5.5.
Quality of management team
Competitive advantages within MNC network
Function and price ratio for products
Firm information capacity
Customer relationship management
Customer demand satisfaction
Relationship with local government
Raw materials/parts procurement
Capital operation capabilities
Control of distribution channels
The choice of entry mode is an important decision of the global expansion of MNCs. The decision involves not only entry barriers and cost, but also overall business and development strategy of an MNC. MNCs of different country origins may therefore choose different entry modes. Further, the MNC capabilities and the host business environment and legal policy can change over time. Accordingly, MNCs’ entry modes may differ at different time periods even within the same region.
In the early 1980s, China began presenting huge potential for many MNCs in the world. China started to implement reforms and an open-door policy that shaped its market economy. After an exploratory phase of investment, MNCs began large-scale direct investments in China. The MNC entry modes of the 123 sampled subsidiaries were divided into five major categories: new joint ventures (39), new wholly foreign-owned firms (73), wholly foreign-owned firms through acquisition (3), joint ventures through acquisition (4), and agency and liaison offices (4).
Newly established subsidiaries, foreign-owned and joint ventures account for 98 per cent of the sample. The number of new subsidiaries is significantly greater than that of subsidiaries through mergers or acquisitions for two major reasons: China’s industry policy restrictions and a lack of suitable targets for acquisition or merger. As a result, acquiring existing firms is not the first choice for most MNCs seeking to establish their subsidiaries in China.
The first investment entry method and years of operation are correlated, χ2 (4, N = 119) = 29.922, p = 0 < 0.05 (see Table 5.6).
The first investment entry method and national origin of the parent company are correlated, χ2 (3, N = 114) = 10.594, p < 0.05. Table 5.7 presents cross-tabs of entry modes across different countries of origin.
The entry forms for MNCs from Japan and South Korea were significantly different from those for MNCs from the US and the European Union. The former showed a significantly stronger preference for new wholly foreign-owned firms, relative to new joint ventures. MNCs from Europe and the United States experienced greater cultural differences, which resulted in their greater willingness to use joint ventures when first entering China. Chinese partners offered help in lowering entry barriers and effectively understanding Chinese culture. On the other hand, Japan and South Korea share cultural commonalities with China. MNCs from these two nations had a lower need for local partners’ help with cultural issues. Thus, they showed a marked preference for the new wholly foreign-owned firms.
Table 5.8 presents average tenure of MNC subsidiaries across different country origins.
MNCs from the US and the European Union entered China, on average, earlier than MNCs from Japan and South Korea. Since China has gradually opened its markets to the outside world, MNCs entering later enjoyed a more favourable regulatory environment and fewer policy constraints. This also contributed to the choice of wholly foreign-owned subsidiaries by Japan and South Korea. MNCs from Europe and the United States entered China earlier and experienced a less supportive policy environment that required greater use of joint ventures.
The present investment mode and the relative market share of MNC subsidiaries in China are not related, χ2 (28, N = 128) = 29.922, p > 0.10 (Table 5.9).
The shareholding ratio of MNC subsidiaries in China is an important decision involving risk-sharing, allocation of resources, knowledge commitment and organisational control. Respondents were asked about the direction of the foreign equity change. We found that more MNC subsidiaries in China have increased share of foreign equity since their entry, as opposed to decreasing. MNCs want to have better control over their subsidiaries in China. Of n = 64, 42 (65.6 per cent) did not change foreign shareholding ratio. Four reduced their ratio and another four became wholly foreign-owned. A total of 18 (28.2 per cent) increased their ratio (see Table 5.10).
No change in the ownership structure of the 65.6 per cent of the subsidiaries is due to one of two major reasons: (1) the parent company has no plan to invest more or divest because the joint venture is in the probation period or in the norming stage; or (2) although MNCs have the intention to invest more to get better control, China’s policy and related legal restrictions in many sectors prohibit MNCs from having more than 50 per cent of the shares in their joint ventures. In the latter case, MNCs usually use subtle ways to achieve effective control.
Consider the case of the vehicle industry, where we investigated three enterprises: Jinan China Hugh Ltd, Changchun Bombardier Railway Vehicle Co. Ltd and FAW-Volkswagen Automotive Co. In the vehicle industry, the legal policy restricted foreign ownership to no more than 50 per cent. However, MNCs in the investigated enterprises achieved substantial control by way of their branding and technology. We can predict that when the policy restrictions are removed, foreign investment will increase considerably towards greater or even total equity control. Therefore, these subsidiaries will join the MNC global system for more tax savings and global strategic services for MNCs.
Reduction of shareholding by MNCs in 6.3 per cent is due to one of two major reasons: (1) the joint venture not operating properly and not meeting the performance requirements of the MNC; or (2) the joint venture having very good operating performance with promising industry prospects. The MNC wants to increase equity to strengthen control or increase profits from the joint venture, but is restricted by some policy or regulation reason. Therefore, the MNCs decide to reduce their investment to withdraw funds and set up a new wholly owned subsidiary to achieve their strategic intent.
The parent company’s global strategy is the most significant factor in changes in the shareholding ratio of MNC subsidiaries in China: 62.5 per cent of executives believed MNCs need to adjust their global strategy, and thus control over subsidiaries’ management and operations, in accordance with the global environmental changes. From Table 5.11, two related factors – adjustment of the parent company’s global strategy and change of subsidiary importance in the parent network system – have means greater than 3.50, and at least 50 per cent of the respondents identify them as significant or very significant (see Table 5.11).
We investigated the motives for changing shareholding ratio for two categories of MNC subsidiaries: those where ratio was increased and those where it was decreased (Table 5.12). For the MNC subsidiaries that experienced increase in their shareholding ratio, the key factors were parent company’s global strategy adjustment and change in the performance of the subsidiaries. For the MNC subsidiaries that experienced decrease in their shareholding ratio, the key factors were change in the regulatory environment in China and in the control over core technology and resources.
We found that the respondents identified the parent company’s strategic requirements as the most significant growth and development factor; more than 70 per cent of the respondents identified this as significant. Subsidiaries serve as an implementation vehicle for an MNC seeking to achieve its global strategic goals. Thus any adjustment in MNC strategy change affects the growth and development strategy of these subsidiaries.
Meanwhile, to fit in with the cultural and social demands of the Chinese local markets, the subsidiaries must cultivate and nurture relations with the local government and the public. Relations with local government and the public, quality of local staff and host country tax policy are also all rated more than 3.50 and reported to be significant by at least 50 per cent of the respondents. Interestingly, financing constraints are identified as the least significant factor, with a mean of less than 3.0, and deemed a significant factor by less than a third of the respondents (see Table 5.13). However, most executives hold factors such as cultural differences, financing constraints and local protectionism as not significant for their operations in China. The average age of sampled MNC subsidiaries is 8.22 years and many of them have gone beyond the emerging and survival period. They have accumulated rich experiences in dealing with cultural conflict issues and financing difficulties and thus these issues are no longer considered important obstacles for their operations.
When MNC subsidiaries design and implement their growth and development strategy, they are influenced by the cultural and other characteristics of the parent company. Subsidiaries of the MNCs from different national origins have different perceptions of the significant factors in strategy formulation process. We also ran a frequency analysis and compared the mean scores from the respondents from four different national origins (Table 5.14). T-test of difference showed several significant differences. Specifically:
2. US and EU subsidiaries are significantly more influenced by competition in local market, intellectual property protection and attraction of international senior talent factors than the subsidiaries from Japan or Korea.
Further, the means on all factors are generally higher for US subsidiaries. US MNCs have paid special attention to various strategic factors affecting their subsidiaries in China because of the length of investment and strategic uniqueness. The average age of the sampled US subsidiaries is 9.00 years, which is higher than those from Japan (8.1 years) and South Korea (6.88 years). US subsidiaries have integrated to a larger degree into the Chinese system and markets. In addition, many US MNCs entering China have used a complementary investment approach, in which spare parts, facilities and management practices have been localised. This has allowed US subsidiaries to be very flexible in responding to both internal and external environmental challenges. They have thus become more sensitive to environment changes than subsidiaries from other countries.
Conversely, the means on all factors are generally lower for subsidiaries from Japan and South Korea. These subsidiaries have had a shorter time operating in China, yet experience less vulnerability to external environmental changes because of the cultural and geographical proximity. Japan and South Korea have a long history of cultural interactions with China because they are neighbours and their subsidiaries in China can adapt to the changes more quickly than subsidiaries whose parent company is located in Western countries.
MNCs carried out their second and subsequent rounds of investment for their subsidiaries in China after completion of the initial investment. The motives for additional direct investment reflect MNC strategic intentions in China. Table 5.15 shows that profit-seeking is the most significant motive for further investments by MNC subsidiaries in China, with a mean of more than 4.0, and nearly 75 per cent of the respondents identifying as significant. Other significant factors include expansion of production base in China and securing more market share in China. Maintaining cost advantage and competing with other MNCs are also significant factors. On the other hand, enhancing R&D capability in China and following existing clients in China are not that significant (see Table 5.15).
We conducted a factor analysis of the microeconomic motives, using the orthogonal Varimax rotation of principal component method (Table 5.16). Two factors emerged: scale-oriented investment factor (seeking profits, production base expansion, market share expansion, low cost advantages) and competition-oriented investment factor (global competitors, R&D capability enhancement and following existing clients). These two factors explain 64.07 per cent of the total variance with the first explaining 47.08 per cent and the second 16.99 per cent.
The average scores for the scale-oriented factor exceed those for the competition-oriented factor. Thus, the overriding driving force for MNCs to make extra direct investments in China is to use low cost advantages for their rapid expansion and lay a solid foundation for future development. Because of its low cost of raw materials, labour, land and other factors of production, MNCs make China their global manufacturing base. They take advantage of China’s low cost for rapid expansion and to reduce global production costs. MNCs enjoy better product quality and brand image, which helps snatch market share from the domestic enterprises. Earning profits is a necessary condition to support sustained development in these situations. If the payback period is too long, the cost of opportunities for further development is huge. Therefore, MNCs invest additional funds in those activities (production and sales) that yield highest return rate, shifting from more strategic priorities in their early entry decision where they are willing to forego profits to a focus on return on investment in their later investment decisions.
Though scale-oriented factors are important, neglect of competition-oriented factors can cause MNC subsidiaries in China to lose their competitive advantages. The overall capacity of Chinese markets is very large, but some local markets have been divided among a few winners after a fierce competitive war. In such a situation, if MNCs want to expand sales or increase market share, they need to increase research and development efforts and accelerate new lines of products while reducing the cost of production for old products. They need to get ready for more brutal competition for survival. Therefore, in future, we expect that the focus of MNC investments will shift to competition-oriented factors such as R&D and customer relationship management.
We found that MNC subsidiaries in China perceive other MNC subsidiaries in China to be stronger competitors than are the local Chinese enterprises. To the question ‘who are the biggest competitors?’ 69 of the 97 valid respondents identified other MNC subsidiaries in China and only 28 identified local Chinese enterprises.
MNC subsidiaries in China are engaged in activities along the primary value chain: manufacturing (20.8 per cent), sales (14.5 per cent), service (7.8 per cent), R&D (13.3 per cent) and procurement (12.9 per cent), as opposed to supporting value chain – finance (6.3 per cent), investment management (6.3 per cent) or training (8.2 per cent) (see Table 5.17).
We also investigated what performance indicators the parent company cares most about for MNC subsidiaries in China, using a five-point scale (1 = not concerned; 5 = very concerned). Revenue and profit are the most important performance measures from the perspective of MNC parents, with a mean of more than 4.0, and at least 80 per cent of the respondents reporting them as significant. Market share, product quality, return on investment and customer satisfaction are other important measures.
Conversely, human resources, R&D, relation with parent company and social responsibility are of limited importance. The parent companies have shown less concern to the R&D of their subsidiaries, as that requires huge funding and does not yield any short-term results. Also, R&D indicators are not easily measured and evaluated. Moreover, China was relatively weak in scientific research at the time when most MNCs started to invest and did not have the necessary conditions to become a regional research and development centre for the MNCs. Thus, R&D was housed by most MNCs outside of China. This greatly hindered the technological progress for local development and hurt the subsidiaries’ long-term growth. Now many MNCs are putting priorities on local R&D with increasing investment.
MNC subsidiaries in China can only maximise their interests after meeting the strategic requirements of the parent company for its global manoeuvre. Initially, when MNCs entered China’s market, the priority for the subsidiaries was market expansion and brand products promotion, as opposed to sales revenues and profits. However, the parent company performance indicators for MNC subsidiaries in China have now shifted to sales, profits, return on investment, market share and product quality. This suggests that MNC subsidiaries in China have entered a new stage of development.
Further, sales revenues, investment scale and market share are the three most significant performance measures of MNC subsidiaries in China from the perspective of the subsidiaries, with means of more than 3.50, and with at least 50 per cent of the respondents identifying them as significant. In contrast, profitability, return on investment and R&D investment are less significant (see Table 5.19).
Sales, investment scale and market shares have driven the growth momentum for MNC subsidiaries in China. There are three reasons for a focus on these indicators: (1) MNC subsidiaries in China are either in the growth stage or just getting started. They need a lot of talent and a large amount of capital investment to establish corporate image, strengthen branding and expand sales channels. (2) China has huge market potential. MNC subsidiaries in China are engaging in expanding their production base and sales to acquire more market share. Their strategic priority is not the pursuit of profit or rate of return on investments at this time. (3) The parent companies of MNCs assess the performance of subsidiaries using such indicators as sales volumes, investment scale and market share. These performance indicators are easy to measure, quantify and implement. These appraisal indicators affect the management decision choices and operation activities of subsidiaries in China. To survive, grow and meet parent company expectations, subsidiaries have invested tremendously in these areas, both in money and human capital.
The subsidiaries poor in sales volumes and market shares face serious consequences of less support from the parent company and risk being merged, acquired or even sold off. A typical withdrawal case is that of Whirlpool. Though Whirlpool acquired Snowflakes Appliances with investment of more than $30 million, when the sales and market performance expectations were not met, the latter was sold for only $2 million as Whirlpool withdrew from China. Another withdrawal case is that of Dutch dairy giant Friesland Kraft Parmalat. At the time of its entry into the Chinese market, this Dutch MNC projected to make profit from the sixth year, but its subsidiary suffered losses for nine consecutive years with stagnated sales and unsatisfactory market share. The Dutch MNC finally decided to divest and withdraw from the Chinese market at a huge loss – allowing the competitors to enjoy substantial gains in their own market share and leadership positions.
There are, however, substantial differences in the importance given by the MNC parent companies versus the subsidiaries to rate of return. While parent companies put a stronger priority on rate of return, the subsidiaries show a lower concern for profitability and their rate of return performance is not as good as expected by the parent companies.
Based on the perception of SWOT of the respondents, we conducted a cluster analysis to identify three types of strategic postures for MNC subsidiaries in China: strength–threat cluster, strength–opportunity cluster and weakness–opportunity cluster. SWOT analysis showed 24 sampled firms to be in the weakness–threat quadrant (21.8 per cent), 62 in the strength–opportunity quadrant (53.4 per cent) and 24 in the weakness–opportunity quadrant (21.8 per cent) (Figure 5.2).
A majority of the MNC subsidiaries remain in the original favourable strength–opportunity position. They share similar competitive advantages of fit between overall external environmental factors and internal organisational core competences. However, because of changes in external environmental factors and competition status over the years, many firms have shifted into weakness–opportunity and strength–threat positions (43.6 per cent total) from their original strength–opportunity status. This is the result of interactions of internal capabilities and external situation changes, and the long-term fitness test.
Table 5.20 shows that a majority of the US and EU subsidiaries are in the strength–opportunity quadrant. They are more optimistic about their external environment and internal strengths. South Korean firms have a comparatively greater tendency to be in the weakness–opportunity quadrant, while the Japanese firms have a comparatively greater tendency to be in the strength–threat quadrant. South Korean firms are less confident about their internal capability to capitalise on the external opportunities, while the Japanese firms are concerned about the threats in the Chinese market that might inhibit optimal exploitation of their internal capability.
Firm-specific factors are more important than the parent company and host environment factors in the strategic position a Chinese subsidiary is able to secure in the MNC network. As seen from Table 5.21, accumulation of firm competitive advantages is the most significant factor in the MNC network strategic position of MNC subsidiaries in China.
The significance of the MNC subsidiaries in the MNC network depends on their own experiences and the accumulation of core competences. Most of the respondents believe that subsidiaries’ solid performance and growth and development goals are the most important factors that impact their positions within the network, while the parent company and the host country are less significant in this aspect.
Quality control, firm image and quality of management team were perceived as the most significant factors for the competitive advantage of MNC subsidiaries in China (Table 5.22).
The top three competitive advantage factors for MNC subsidiaries in China from different country origins are in Table 5.23. Quality control is among the top three for each of the nations.
Overall, there were no significant differences in competitive advantages for subsidiaries across different country origins (Table 5.24).
More specific analysis in Table 5.25 indicated that the MNC subsidiaries from the US and Japan have more advantages than South Korea subsidiaries in control over distribution channels. The parent network of US subsidiaries has stronger internal advantages than that of South Korean subsidiaries. South Korean subsidiaries in China are comparatively younger, with an average age of 6.88 years. Most are situated only in the Bohai Economic Zone and have much weaker distribution channels.
The top three competitive advantage factors for MNC subsidiaries in China from different industries are in Table 5.26. Quality control, followed by R&D capability and core technology appear as significant factors.
The Kruskal-Wallis test shows that none of the competitive advantage factors vary across industries (Table 5.27).
**statistically significant with α = 0.05 (two-tail test).
Service, distribution channel control, customer demand satisfaction, logistics, R&D capabilities and information capacity variables show significant differences across MNC subsidiaries in China with varying relative market shares – i.e. ratio of the firm’s market share and the market share of a dominant competitor (Table 5.28).
All the competitive advantage factors are rated higher for the MNC subsidiaries whose relative market share from a dominant competitor is more than 1.5 times (Table 5.28).
We also conducted comparison tests on subsidiaries with relative market shares of more than 1 versus less than 1 (Table 5.29). Subsidiaries with a stronger competitive position report stronger competitive advantages in product, service, customer relation, quality, logistics, core technology and R&D capability.
Means on the competitive advantage factors for the three SWOT clusters are given in Table 5.30. The SO subsidiaries enjoy the strongest competitive advantages in all categories, followed by ST subsidiaries, while WO subsidiaries have the weakest competitive advantages. When subsidiaries have strong internal resources and capabilities, they will have better positions even when faced with market environment threats. Conversely, WO subsidiaries cannot make the best use of possible market opportunities because they lack core competencies to establish strong competitive advantages. Overall, all three types of subsidiaries have mean scores of more than 3 in branding, corporate image, product portfolio, services, distribution channels control and parenting advantage. All of these subsidiaries have established a very strong competitive base through years of operations in China.
Table 5.31 shows that all the competitive advantage factors vary significantly across the three SWOT clusters.
Table 5.32 shows that MNC subsidiaries in China perceive firm image, quality control, brand, service and cost control as the most significant initiatives for enhancing their competitive advantage, with means of more than 4.0, and at least 70 per cent respondents identifying as significant.
The Kruskal-Wallis test showed that none of the competitive advantage initiatives of the MNC subsidiaries in China vary by country origins (p > 0.05). The top three initiatives for each country origin are given in Table 5.33. Business image, customer relations management and quality control all appeared twice among four origins.
More specific analysis in Table 5.34 shows that US MNC subsidiaries are more inclined to build their competitive advantages through management team quality and relationship with local government.
The Kruskal-Wallis test showed that none of the competitive advantage initiatives vary by industry. The top three means for major industries are given in Table 5.35. Firm image and customer relationship management are the two leading competitive advantage initiatives in these industries.
To dig deeper, we selected three industries with larger sample sizes (Table 5.36). Subsidiaries in the chemical/ pharmaceutical industry report significantly greater competitive advantage in product portfolio, quality management, R&D capability and local government relations, compared with those in the electronic/electrical and light industries. In the chemical/pharmaceutical industry, the emphasis is on innovative high-tech products driven by R&D, economies of scale and strict quality control. These subsidiaries are usually situated near the production facilities of raw materials, and because of this geographical orientation, they have a closer relationship with the local governments.
The Kruskal-Wallis test showed that none of the competitive advantage initiatives vary in their significance across firms with different relative market shares (Table 5.37). Yet, each of the competitive advantage initiatives is rated to be more significant by the firms with positive relative market shares, as can be seen below. The different is especially large for relationship management with customers and with local government.
Table 5.38 gives mean scores on competitive advantage initiatives across the perceived SWOT clusters. ANOVA revealed that the three types of MNC subsidiaries in China differ significantly in corporate image and product portfolio initiatives (Table 5.39). Other factors were not significant.
MNC subsidiaries in the SO cluster put higher priority on corporate image and product portfolio initiatives than do the subsidiaries, while those in the WO cluster put least priority. Subsidiaries with internal strengths and capabilities plan to invest more on corporate image and product portfolio initiatives, both to capitalise on the favourable market environment as well as to respond to external threats. Conversely, the WO subsidiaries do not have the internal capabilities to utilise the opportunities. Overall, the mean scores for each of the three clusters of subsidiaries exceed 3, indicating that all are aware of the significance of corporate image and product portfolio initiatives.
*p < 0.01.
**p < 0.05.
Table 5.41 and Figure 5.3 compare competitive advantage initiatives for the current stage and for the future phase based on the findings for Hypotheses 5.4 and 6.4. ST subsidiaries currently have a greater advantage in quality management and will shift their strategic focus in future to firm image and customer relations. These new priorities are in response to the threats arising from the changing market environment and will help attract new customers and strategic partners and increase business development opportunities. SO subsidiaries currently have a greater advantage in firm image and quality management and plan to focus on firm image and branding in future. The shift from quality to branding will help SO subsidiaries take pre-emptive actions to maintain their leadership position for the future. WO subsidiaries currently have a greater advantage in raw materials and parts procurement and management team quality, but plan to shift attention to quality management, branding and distribution channels control. The strategic priority for these firms is to create and cultivate their unique core competences to better seize market opportunities. That requires catching up with industry benchmarks in strengthening quality management, branding management and control of distribution channels.
Table 5.42 summarises the support for the strategic intent hypotheses in this study.
1Relative market share is the ratio between market share of the focal company and that of the major competitor.