Chapter 6: Corporate and functional strategies – Multinational Corporation Subsidiaries in China

6

Corporate and functional strategies

Abstract:

In this chapter, we investigate corporate and functional strategies of MNC subsidiaries in China, including relationships with the parent company and with other subsidiaries, integration and localisation, M&A and alliance strategy, financial strategy, marketing strategy, knowledge transfer strategy, human resources strategy, R&D strategy and strategic blunders. The findings and analysis are summarised in a table.

Key words

Corporate

functional

strategy

relationship

parent company

subsidiaries

integration

localisation

M&A

alliance

financial strategy

marketing strategy

knowledge transfer strategy

human resources strategy

R&D strategy

strategic blunders

Hypotheses

Hypothesis 1: relationships with the parent company and with other subsidiaries

 1.1: Strength of ties of MNC subsidiaries in China with the parent company varies significantly depending on the time of their entry in China.

 1.2: Strength of ties of MNC subsidiaries in China with the MNC network vary significantly depending on the national origin of the parent company.

 1.3: Strength of ties of MNC subsidiaries in China with the parent company varies significantly depending on the location of the headquarters.

Strength of ties of MNC subsidiaries in China with their parent company was measured on a five-point scale (5 = very loose, 1 = very close) on the items given in Table 6.1.

Table 6.1

Items to measure strength of ties

Finished product export ratio

Relationship quality between the parent firm and subsidiaries in organisational cultural management

Dependence on the parent company for technology

Dependence on the parent company for raw materials and spare parts supply

Dependence on the parent company for machinery and equipment import

Dependence on the parent company for sales channels

Implementation goodness of the parent company’s decision in organisation designs and business processes

Dependence on the parent company for financing

Deployment of staff

Frequency of reporting to the parent company

Location of the headquarters is measured using a categorical variable with ascending degree of localisation, with categories as global HQ, Asia-Pacific HQ, Greater China HQ and mainland China HQ.

Hypothesis 2: integration and localisation

Respondents were asked about integration versus localisation pressures, and localisation in various functional strategies.

 2.1: Integration and localisation pressures for MNC subsidiaries in China vary depending on their time of entry into China.

Integration and localisation pressures are measured on a five-point scale (1 = very low; 5 = very high), using the following items taken from the work of Doz and Prahalad (Table 6.2).

Table 6.2

Measuring integration and localisation pressures

Integration pressures Localisation pressures
Emergence of transnational competitors Raw material and energy access
Need for centralised investment Customer demand preferences
Need for centralised technology Distribution channel differences
Pressure for lowering costs Replacement requirements and need for change
Need for universal use Market structure adjustments
Requests of the host government

Functional strategy localisation is a single item measured on a five-point scale, for each of the functional areas separately (1 = very low; 5 = very high).

Hypothesis 3: M&A and alliance strategy

Respondents were asked about the motives for M&As and for alliances by MNC subsidiaries in China. No specific hypothesis was advanced.

Motives for M&As and alliances were measured using multiple items on a five-point scale (1 = very insignificant; 5 = very significant).

Hypothesis 4: financial strategy

 4.1: Funding channels for MNC subsidiaries in China are significantly different, depending on if they are wholly versus majority foreign-owned.

 4.2: Funding channels for MNC subsidiaries in China are significantly different, depending on the country of origin of their parent company.

 4.3: Funding channels for MNC subsidiaries in China are significantly different, depending on their age.

Funding channels were measured using items given in Table 6.3 on a five-point scale (1 = very insignificant; 5 = very significant).

Table 6.3

Items to measure funding channels

Parent funding

Local direct fundraising

Overseas direct fundraising

Overseas indirect fundraising

China funding

Local indirect fundraising

Hypothesis 5: marketing strategy

 5.1: The export-sales ratio of MNC subsidiaries in China varies significantly depending on the national origin of the parent companies.

 5.2: The marketing decision-making autonomy varies significantly depending on the export ratio of MNC subsidiaries in China.

The marketing decision-making autonomy of MNC subsidiaries in China was measured using items on a five-point scale (1 = very insignificant; 5 = very significant).

Hypothesis 6: knowledge transfer strategy

Respondents were asked about the importance of different methods of knowledge transfer between the parent company and MNC subsidiaries in China, and the factors influencing this knowledge transfer.

 6.1: The avenues for knowledge flow from the parent MNC to the subsidiaries in China vary depending on their industry of operation.

The methods of knowledge transfer between the parent company and the Chinese subsidiaries, and the factors influencing this knowledge transfer, were each measured using multiple items measured on a five-point scale (1 = very insignificant; 5 = very significant).

Hypothesis 7: human resources strategy

 7.1: The autonomy in human resource management function varies across MNC subsidiaries in China depending on their country of origin.

 7.2: The degree of labour confrontation faced by MNC subsidiaries in China varies significantly depending on their SWOT perception.

The degree of labour confrontation was measured using a single item on a five-point scale (1 = very low; 5 = very high).

Hypothesis 8: R&D strategy

 8.1: The innovation initiatives by MNC subsidiaries in China vary depending on their country of origin.

 8.2: The innovation initiatives by MNC subsidiaries in China vary depending on their industry of operation.

Several variables related to R&D strategy were measured.

Hypothesis 9: strategic blunders

Sources of strategic blunders were measured using multiple items measured on a five-point scale (1 = very unimportant; 5 = very important).

Findings and analysis

Hypothesis 1: subsidiaries’ relationships

Context

MNC subsidiaries in China reported their ties with the parent company to be the strongest in the area of frequent reporting to the parent company, followed by dependence for technology and for financing (Table 6.4).

Table 6.4

Strength of ties with parent, statistics

Note: 1 = very loose; 5 = very close.

Test of hypotheses

Hypothesis 1.1: strength of ties of MNC subsidiaries in China with the parent company vary significantly depending on the time of their entry in China.

Strength of ties with the parent company does not vary with the time of entry into China (Table 6.5).

Table 6.5

Strength of ties with parent by time of entry, Kruskal-Wallis test

Hypothesis 1.2: strength of ties of MNC subsidiaries in China with the MNC network vary significantly depending on the national origin of the parent company.

The relationship of MNC subsidiaries with parent companies varies depending on the parent’s national origin because of cultural and strategic factors. We conducted a chi square test on the strength of the tie with the parent company, across subsidiaries with different country origins (Table 6.6). The tie strength varies significantly across different national origins for two items – finished product export ratio and dependence on the parent company for sales channels.

Table 6.6

Strength of ties with parent by country, chi square test

We also conducted a chi square test on how the strength of ties with other subsidiaries varies across MNC subsidiaries of different national origins (Table 6.7). Different national subsidiaries vary in their relationship with other subsidiaries in terms of knowledge-sharing and flow.

Table 6.7

Strength of ties with other subsidiaries, chi square test

Japanese parent companies have highly centralised control over their subsidiaries in China and knowledge exchange between subsidiaries is very low. EU MNC parent companies have highly decentralised control on coordination mechanism over their subsidiaries in China and knowledge exchanges between subsidiaries are very high. US MNC parent companies stay in between the two regions on both counts.

Hypothesis 1.3: strength of ties of MNC subsidiaries in China with the parent company vary significantly depending on the location of the headquarters.

The mean scores for the strength of ties with the parent company are greatest under the global HQ model, implying that MNC subsidiaries in China are most dependent on their HQ when the MNC does not have a regional or local HQ (Table 6.8).

Table 6.8

Strength of ties with parent by HQ location, statistics

Note: 1 = very loose; 5 = very close.

We also found that the overall index mean for the strength of ties between the parent and MNC subsidiaries in China was greater than the overall index mean for the strength of ties between MNC subsidiaries in China and other subsidiaries in the MNC network (Table 6.9). Thus, MNC subsidiaries in China tend to have stronger links with the headquarters than with the other subsidiaries around the world.

Table 6.9

Strength of ties with parent and other subsidiaries, statistics

The relationship between the parent company and with other subsidiaries reflects the control and coordination mechanisms of the MNCs. For effective demarcation of responsibilities and powers between the parent company and its subsidiaries, MNCs need to have a good control and coordination mechanism in place. For different strategic needs, MNCs adopt different organisational structures. MNC subsidiaries maintain their relationship with the parent company in frequency of reporting, technology and financing dependence, while keeping their relationship with other subsidiaries via sharing of knowledge and mutual communications.

Hypothesis 2: integration and localisation

Context

A series of appropriate strategic actions for integration–localisation balance determine firms’ final competitive advantages. Many MNCs have the economic capabilities and technical know-how to implement their global integration strategies to reduce costs, but owing to the economic constraints (the market structure and consumer demand), political constraints (legal policy and government regulations) and intense competition in the Chinese market, they have to enhance their investments and efforts for localisation in production, talent, market channels and brand image. Findings suggested that the overall indices for integration pressures and for localisation pressures faced by MNC subsidiaries in China are about the same (Table 6.10).

Table 6.10

Integration and localisation, statistics

Note: 1 = very insignificant; 5 = very significant.

Integration–localisation by function

Localisation in the human resource function and marketing functions had a mean of more than 3.50, and more than 50 per cent of the respondents deemed it significant (Table 6.11). On the other hand, localisation in R&D and investment management strategy was relatively low. Thus, in important strategic functions of research and development strategies and investment strategy, there exists a strong centralised trend, where the power of subsidiaries is limited. These subsidiaries are expected to be consistent with the requirements and expectations of the parent company.

Table 6.11

Localisation of various functional strategies, statistics

Note: 1 = very low; 5 = very high for localisation.

Overall localisation pressures faced by MNC subsidiaries in China were significantly correlated with the localisation of each of their functional strategies – HR, marketing, R&D and investment management (Table 6.12).

Table 6.12

Localisation of various functional strategies by overall localisation pressure, correlation

Test of hypothesis

Hypothesis 2.1: integration and localisation pressures for MNC subsidiaries in China vary depending on the time of entry into China.

The Kruskal-Wallis test shows only one significant coefficient: the localisation pressure for market structure adjustment (Table 6.13). In the formative stages of market entry in China, MNCs had few international competitors and experienced low industry concentration and low entry barriers. Using their brand products, technology, capital and other advantages, they rapidly beat domestic competitors and became market leaders. They created monopolist control by expanding market share and erecting entry barriers in their industries. For the later entrants, the market structure changed to a high degree of market concentration. Their competitors were no longer Chinese local firms but powerful MNC subsidiaries from the US or Europe. Because the market access barriers were now much higher, the late entrants could not gain competitive edge using the same strategy since the competitive advantages turned into competitive minimum requirements to stay in the game. Therefore many late entrants took the balanced approach of integration and localisation for more effective competition.

Table 6.13

Integration and localisation pressures by time of entry

Note: 1 = very low; 5 = very high for localisation.

Hypothesis 3: M&A and alliance strategy

Context

The question in the questionnaire is, ‘In recent years, your subsidiary has merged with or acquired what types of enterprises in China?’ There were 90 usable samples, among which 59 firms have not taken any actions in mergers and acquisition; two firms have acquired collective firms (stateowned in nature) and eight have acquired private firms; ten firms have acquired foreign-owned enterprises and three firms have acquired listed companies.

Figure 6.1 Integration and localisation indices by time of entry

Thus, MNCs did not favour merger with or acquisition of local firms for their expansion. The reasons behind this were: (1) the Chinese government policy concerning foreign acquisition remained unclear and not transparent; (2) local protectionism is serious with complicated procedures and documentation; (3) there were government restrictions on some industries and on the proportion of equity holding; and (4) the overall quality and capabilities of domestic firms was relatively weak and M&A activities were not able to complement the MNC growth strategy and add value to MNC subsidiary core competences.

Motives for M&As

Local productivity enhancement and shortening time to enter the Chinese market are the two most important motives for M&As by MNC subsidiaries in China, with more than 50 per cent of the respondents identifying these two to be significant, and means of more than 3.0. Knowledge access, management personnel access or funding access are not identified as significant by any of the respondents (Table 6.14).

Table 6.14

Motives for mergers and acquisitions

Note: Each measured on a 5-point scale: 1 = very unimportant; 5 = very important.

Motives for strategic alliances

Procurement cost reduction is the most significant motive for alliances by MNC subsidiaries in China, with more than 75 per cent of respondents rating that as significant, and with a mean of more than 3.50. Risk dispersion and joint R&D efforts or knowledge-sharing are the least significant motives (Table 6.15).

Table 6.15

Motives for strategic alliances

Note: Each measured on a 5-point scale: 1 = very unimportant; 5 = very important.

In the era of global competition, reliance on firms’ own resources and capability is not sufficient to overcome all competitive challenges. Strategic alliances help MNC subsidiaries in China to enhance their market position with the help of coalition partners’ resources and services to increase the value of the company and to increase shareholders’ value. However, at the current stage, MNC subsidiaries in China have not given their priority to strategic alliances in spreading business risks, engaging in R&D and intellectual contributions. MNC subsidiaries in China strategic alliances are still at an early stage in their life cycle, focusing mainly on product and market expansion strategic alliances. Their major strategic assets and resources have been employed for product and market development and for establishing a corporate image. In the early years, domestic Chinese firms lacked core competencies and resources to form complementary strategic partners with MNC subsidiaries. They rely primarily on their parent company network for key knowledge. The future trend will shift to knowledge-based alliances, risk diversification alliances and R&D alliances in their development stage.

Hypothesis 4: financing strategy

Context

Parent funding is the most significant funding channel, with two-thirds of respondents identifying it as significant and a mean of more than 3.50 (Table 6.16). MNCs as foreign investors have difficulty securing indirect funding (loans) from the local government and local banks. Funding from the parent company is more accessible for MNC subsidiaries.

Table 6.16

Avenues for financing, statistics

Test of hypotheses

Hypothesis 4.1: funding channels for MNC subsidiaries in China are significantly different, depending on if they are wholly versus majority foreign-owned.

ANOVA analysis showed significant differences in the funding channels, depending on if the MNC subsidiaries are wholly versus majority foreign-owned (Table 6.17).

Table 6.17

Avenues for financing by ownership status, ANOVA

**statistically significant at α = 0.05.

The majority of foreign-owned MNC subsidiaries (including joint ventures) report China and other local funding sources to be more significant than do the wholly owned subsidiaries. Compared to the wholly-owned foreign enterprises, the majority foreign-owned MNC subsidiaries have more limited access to the funds from the parent company, but can rely on the Chinese partners to access the Chinese capital resources (Table 6.18).

Table 6.18

Avenues for financing by ownership status, statistics

Hypothesis 4.2: funding channels for MNC subsidiaries in China are significantly different, depending on the country origin of their parent company.

Parent funding and local direct fundraising channels vary significantly across MNC subsidiaries with different national origins (Table 6.19).

Table 6.19

Avenues for financing by country, Kruskal-Wallis

**significant at α = 0.05;

*significant at α = 0.1.

US MNC subsidiaries report least difference in significance for the different sources of funding, while Japanese and Korean MNC subsidiaries report greatest difference in significance and are most likely to use parent funding or overseas and local direct fundraising (Table 6.20).

Table 6.20

Avenues for financing by country, statistics

Hypothesis 4.3: funding channels for MNC subsidiaries in China are significantly different, depending on their age.

MNC subsidiaries in China with different development tenure or age (less than seven years or more than seven years) show differences in financing from the parent company, fund injection and local direct fundraising, while there were no significant differences in other financing avenues (Table 6.21).

Table 6.21

Avenues for financing by age, test

**statistically significant at α = 0.05 level.

The younger MNC subsidiaries rate parent funding as well as local direct fundraising to be more important than do the older MNC subsidiaries (Table 6.22).

Table 6.22

Avenues for financing by age, statistics

Hypothesis 5: marketing strategy

Sales context

Table 6.23 shows that MNC subsidiaries in China generate 47.4 per cent of revenues in China’s domestic market, and 52.6 per cent in markets outside of China. This indicates how the subsidiaries have become the MNCs’ global manufacturing bases, and how the Chinese domestic market has also become important. The results are consistent with the findings in Chapter 4 that the main motive of MNC investment in China was to open up the Chinese market and establish a production base (Zhao, 2002). For additional investments in later stages, their motives shifted to greater profits and expansion in China.

Table 6.23

Composition of sales channels, statistics

In the late 1980s and early 1990s, most MNCs were attracted by cheap labour and low-cost resources, with a goal of establishing a Chinese production base. MNC subsidiaries in China started to see a steady increase of internal trade with their parent companies and other subsidiaries in the MNC network. China became the production manufacturing base for the global supply chain of MNCs (Xiao, 2003). In 2003, China’s imports and exports attributable to foreign-owned enterprises were $472.2 billion, or 54.8 per cent of China’s imports and 56.2 per cent of China’s exports. Since then, as the examples in Table 6.24 show, MNC subsidiaries are focusing on becoming a market leader in China and East Asia.

Table 6.24

Strategic motives in China of selected MNCs

MNC Strategic goals and motives
Siemens Market leader in the key industries of electrical engineering and electronics industry in china, targeting East Asia
Volkswagen Early mover and market leader in China’s auto market, targeting East and southeast Asian markets to beat Japan and South Korean automobile manufacturers

Local decision-making autonomy

Since the 1960s, there has been controversy on localisation and integration in international marketing research and application. Levitt (1983) believed that the new techniques of communication and transportation and the development of media technologies created an increasing homogenisation of the world market. Therefore, MNCs should focus all their attention on meeting global demand and achieving economies of scale. All the overseas subsidiaries should adopt integrated globalisation marketing strategies. Douglas and Wind (1987) noted that using only integration was too simplistic and not an optimal solution. Prahalad and Doz (1987) proposed an integration–localisation framework and specified that the integration that MNCs confronted came from the pressure of MNC global strategy coordination, while the pressures of localisation came from differences of consumer demand, differences in the distribution channel, the requirements for substitutes and product improvement, market structure and government control.

As noted earlier, a majority of the executives (58.4 per cent) agreed that their firms have a localised marketing policy for firm operations. The immature Chinese market has presented some special features that are different from the relatively stable situation of the Western markets.1 The Chinese market varies significantly in its national psychology, value orientation, lifestyle and emotional awareness, which all shape special consumer demand and consumption trends. This reality requires MNC subsidiaries in China to draft and implement appropriate strategies according to the peculiarities of the Chinese market.

On all items of local decision-making autonomy in marketing, the ratings of autonomy (1 = very low, 5 = very high) exceeded the midpoint of 3.0, indicating freedom in marketing decision-making. The autonomy was perceived to be greatest in service guarantee, market research and forecasting, distribution channels control, and choice of target market, with means of more than 3.50 (Table 6.25). They had less freedom in key activities that influence the company’s long-term development or corporate image. Multinational companies delegated more autonomy to their subsidiaries in China for daily marketing operations, but gave them less authority for strategic decisions.

Table 6.25

Marketing local decision-making autonomy areas, statistics

Note: 1 = very low autonomy; 5 = very high autonomy.

The correlation between marketing strategy autonomy and marketing localisation was 0.27 (p < 0.01, N = 95). Thus, higher autonomy in marketing strategy is correlated positively with greater marketing localisation.

Key marketing endeavours

Executives were asked to evaluate the importance (1 = very unimportant; 5 = very important) of marketing endeavours in enhancing their marketing capacities (Table 6.26). Customer satisfaction, firm image, customer relationship management and service guarantee were rated as the most important, with means of more than 4.0 on each. Advertising was rated as the least important.

Table 6.26

Marketing endeavour areas, statistics

MNC subsidiaries in China have high awareness of the need and procedures to enhance customer satisfaction, improve corporate image, implement customer relationship management and service assurance so that firms can get closer to their customer and improve the company’s image in the marketing strategy. This customer service orientation provided a much greater competitive edge and was very much favoured over the rigid approach to product manufacturing and sales used by the state-owned enterprises. Implementation of customer service-oriented marketing strategy helped MNC subsidiaries in China to redesign marketing strategies and cut down costs according to the service characteristics while ensuring service quality remains the same or is improved. MNC subsidiaries in China showed good examples of how to shift from product-centred firms to service-centred enterprises. The motive was to enhance the overall firm image rather than simply focusing on the branding image of the individual product.

We further investigated marketing endeavours across MNC subsidiaries from different country origins. Due to differences in social and cultural characteristics, and firm values and objectives, the priorities of marketing initiatives and activities vary. For example, American culture is rationalistic, focusing on doing the right things. In decision-making, US executives pay more attention to procedures and efficiency, and are more process-oriented and systematic. For this reason, when they develop marketing strategies, they emphasise the scientific, systematic and standardised aspects. Japanese culture has a strong sense of belonging to society and thus Japanese enterprises have pursued dual objectives in economic efficiency and in serving their country. Their marketing value orientation is often not profit maximisation, but to promote long-term development. In developing a marketing strategy, they put more emphasis on factors such as corporate image that influence corporate long-term development (Zhao, 1999b). Consistent with this, Table 6.27 shows that the US MNC subsidiaries pay more attention to market research and forecasting; EU subsidiaries care more about product branding; Japanese and South Korean subsidiaries are more concerned about their corporate image.

Table 6.27

Top three marketing endeavour areas by country

Test of hypotheses

Hypothesis 5.1: there are significant differences in the export sales ratio of MNC subsidiaries in China with different country origins.

The export–sales ratio was significantly related with the country of the parent company (chi square = 16.901, df = 3, p < 0.001).

As Table 6.28 shows, US MNC subsidiaries have much higher local sales, accounting for three-quarters of their total sales. Japanese MNC subsidiaries are most dependent on sales to parent firm countries, with their sales in Japan being slightly greater than their sales in China. Korean MNC subsidiaries are more focused on sales to third countries.

Table 6.28

Export and domestic sales by country

The investment of US MNCs was primarily for developing the Chinese market and sales in China were the focus of their strategic move. EU multinational companies came to China with a similar timeline as those from the United States, but with much less internationalisation. Japan and South Korea had different situational needs. In addition to the Asian economic crisis in 1997 and low production costs in China, domestic industrial policy and persistent high domestic labour costs forced many of their firms to move a large part of the cost centres (manufacturing centres) to China. Their MNC subsidiaries in China not only shouldered the burden of occupying the Chinese market, but also fulfilled tasks of supplying products for the MNC global sales – either directly, as in the case of South Korea, or after further processing in the parent country, as in the case of Japan. Lower transportation costs to Japan further supported this strategy. Therefore, MNC subsidiaries from these two countries had much higher export levels.

Hypothesis 5.2: there are significant differences in marketing decision-making autonomy, depending on the export sales ratio of MNC subsidiaries in China.

MNC subsidiaries in China were divided into two groups depending on their export sales ratio (< 50 per cent and ≥ 50 per cent). On three of the variables, the firms with lower export sales ratio had significantly greater marketing decision-making autonomy – market research and forecasting, choice of target markets and advertising (Table 6.29).

Table 6.29

Selected marketing decision-making autonomy areas by export ratio, mean differences

Because MNC subsidiaries have to adapt their sales moves for products sold in China to satisfy the special needs of users and react to the competitive environment, they need sufficient autonomy to decide how to proceed with market research and forecasting, how to choose the target market and how to advertise and use other resources. In terms of export, because subsidiaries in China play the role of production base, there is no need for a lot of marketing decision-making freedom.

Hypothesis 6: knowledge transfer strategy

Context

MNC subsidiaries in China communicate with the parent company mainly through explicit knowledge transfer. Training, information technology and formal conferences were identified as the most important avenues for transmission of knowledge with mean scores of more than 3.50. In contrast, the implicit knowledge transmission avenues of informal personal links, job rotation and cross-functional teams had mean scores of less than 3.50 (Table 6.30).

Table 6.30

Areas of knowledge flow with parent, statistics

Note: 1 = very unimportant; 5 = very important.

The KSFs that have the most impact on the knowledge transfer from the parent company to MNC subsidiaries in China are: knowledge resources of the parent company, knowledge and ability of the expatriates from the parent company and training measures. Employee job rotation, implicit knowledge transfer from the parent company and cultural differences – between the parent MNC and the subsidiary organisations, and between the parent MNC country and China – were identified as having least impact (see Table 6.31).

Table 6.31

KSF impacting knowledge flow with parent, statistics

Note: 1 = no impact; 5 = significant impact.

Test of hypothesis

Hypothesis 6.1: the avenues for knowledge flow from the parent MNC to the subsidiaries in China vary depending on their industry of operation.

We ran a test of mean differences on four major sectors of chemical/pharmaceutical, iron and steel/machinery/ engineering, electronic/electrical equipment and light/textile industries (Table 6.32). Only two sectors – iron and steel/ machinery/engineering and light/textile – had significantly different scores for the knowledge flow avenues. MNC subsidiaries in the iron and steel/machinery/engineering sector rate all the avenues significantly higher, while those in the light/textile sector rate all the avenues significantly lower. The iron and steel/machinery/engineering sector is more technology-intensive, so the attention to knowledge flow from the parent to the subsidiaries is much greater. Conversely, the technology-intensity in the light/textile sector is low, and so is the demand for knowledge flow.

Table 6.32

Areas of knowledge flow with parent by industry

Note: 1 = no impact; 5 = significant impact.

Hypothesis 7: human resources strategy

HR decision-making autonomy

International HR strategy is an integral part of multinational companies’ global strategy. Because of their unified strategy, Technical security and management performance requirements, MNCs usually send technical and management executives to their subsidiaries for HR integration strategy. However, we find a high level of HR localisation to deal with the high expatriation cost and rising nationalism in China. MNC subsidiaries have high control of their human resources functions such as staff recruitment, staff training, and job allocation and performance evaluation. They have trained and prepared a lot of high-quality managerial talents for efficient local management duties.

Executives were asked to rate the area of responsibility in four HR areas (1 = subsidiary fully responsible; 5 = parent fully responsible). The mean scores in each area were less than the midpoint of 3.0, indicating that subsidiaries in China have more responsibility or higher autonomy in decision-making for human resource issues (Table 6.33).

Table 6.33

Areas of HR autonomy, statistics

An HR decision-making autonomy was constructed by aggregating the four items in Table 6.33 (reverse-scored). This autonomy measure had a significant negative correlation (r = -0.24, p < 0.05) with the perceived degree of labour confrontation (1 = very small; 5 = very high) faced by MNC subsidiaries in China. If the subsidiaries can make timely adjustments and change issues in human resource management or other labour-related problems, labour confrontation intensity is relatively low. MNC subsidiaries with more freedom can change improper regulation and rules before negative results occur. They could also make quick changes to adapt to local competitors’ moves such as better HR measures and improvement of incentive policies to overcome any sense of inequity for consistent employee working efficiency and commitment. They also find it easier to cultivate psychological recognition in their employees. Once the employees recognise and accept their firms, they have higher efficiency and loyalty, which prevent labour conflicts. In contrast, MNC subsidiaries with weak autonomy have to report labour conflicts and wait for instructions. The whole process has far too many layers of command, thereby contributing to more complicated labour–management conflicts.

Appointment of key personnel

Table 6.34 shows that more than 90 per cent of both the surveyed chairmen and general managers had been appointed by the parent company. Nearly half of the personnel in these two positions were from the HQ country. In contrast, nearly half of the personnel in the vice general manager and the department manager positions were recruited from mainland China.

Table 6.34

Origins of senior leadership, statistics

The huge market potential in China offers leverage to MNC subsidiaries in supporting the whole MNC network in global deployment. However, many scandals and crises in MNC subsidiaries have made MNCs cognisant of the need to strengthen control of their subsidiaries in China. Thus, MNC headquarters control the key positions and the power of appointment and removal for board chairman and CEO for the subsidiaries in China. Further, MNC parent companies usually appoint or employ top-level executives from those who they know and trust from the native country, and who can communicate well with the parent companies. Top executives from the native country share the same cultural values with the parent company and can get easy acceptance from officials of the parent company for support. They also understand the parent company’s strategic intentions. However, given the high costs of expatriates, and since many local executives have gained experience in middle-level positions, MNCs are also open to select non-home senior managers for top management teams.

Nearly half of the personnel in the senior management positions such as vice general manager and the department heads were recruited from the parent country or third other countries.

The surveyed MNC subsidiaries reported to have a total of 396 expatriate department heads. The largest percentage distribution of expatriates was in the accounting, manufacturing and R&D functions (Table 6.35).

Table 6.35

Percentage of expatriate department heads by function

Test of hypotheses

Hypothesis 7.1: the autonomy in human resource management function varies across MNC subsidiaries in China depending on their country of origin.

MNCs from different countries are subject to impact of different cultural values and their macro and micro environment factors. We ran a test on four HR practices, taking country origin as grouping variables, to see if there are significant differences in human resource practices for MNC subsidiaries in China from different country origins (Table 6.36).

Table 6.36

HR decision-making autonomy by country, Kruskal-Wallis test

Note: With α = 0.05.

There was no perceptible difference among subsidiaries of different country origin of their parent company. We found three reasons: (1) Social and cultural factors of the host country have a strong impact on HR management in MNC subsidiaries. To inspire enthusiasm in employees and to improve working efficiency, adjustment of policy and procedures are often needed according to the dominant values of local people. This requires all MNCs in China to have flexibility in making their HR rules according to the local staff characteristics and cultural orientation. (2) MNC parent companies provide principles and guidelines to their overseas subsidiaries in MNC manuals in the area of human resources management and allow flexibility and freedom for their subsidiaries in China to decide on specific actions and measures for implementation. (3) MNCs have increasingly paid more attention to human resources management in interactions and take corresponding measures to integrate different cultural orientations to reduce cultural conflicts.

Since the MNC subsidiaries in China operate in the same host country environment, they share the same management perspectives for running successful firms. These three reasons explain well why there are no significant differences in human resource practices for MNC subsidiaries in China from different country origins.

Hypothesis 7.2: the degree of labour confrontation faced by MNC subsidiaries in China varies significantly depending on their perceived SWOT.

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. The degree of labour confrontation differed significantly across these clusters (chi square = 6.62, df = 2, p < 0.05). Table 6.37 and Figure 6.2 show that the subsidiaries that were perceived to have internal strengths but external threats faced the least labour confrontation, while those who were perceived to have internal weaknesses but external opportunities faced the greatest labour confrontation.

Table 6.37

Labour confrontation by perceived SWOT postures, statistics

Note: 1 = very small; 5 = very high.

Figure 6.2 Labour confrontations by perceived SWOT postures

From the internal environment perspective, labour confrontation intensity is related to the strengths and capabilities of MNC subsidiaries in China. On the one hand, with less labour confrontation, the leaders and the followers can unite in pursuit of their missions and vision. Employees have better recognition and buy-in with their enterprises psychologically, which results in high efficiency and productivity. All of this gives rise to competitive advantage in the marketplace. On the other hand, if the company has an advantageous competitive position, employees have better psychological stability and sense of pride, which cultivates their loyalty and commitment.

From the external environment perspective, labour confrontation often represents a firm’s lack or delay of responses and actions to satisfy employees’ expectations. Under greater market opportunity (SO), employees have higher psychological expectations. If such expectations are not met or are delayed, the labour relations can become vulnerable. When subsidiaries face threats, employees’ expectations are lower and people have a sense of responsibility to work with the management team in confronting the difficulties. That is why subsidiaries in ST situations have fewer labour conflicts.

The subsidiaries with a WO position have the greatest labour confrontation because firms have good external opportunities but no internal capabilities to make the best use of them. In addition, they have fewer resources to meet the employees’ expectations.

Hypothesis 8: R&D strategy

Types of innovations

Respondents rated the importance (1 = very unimportant; 5 = very important) of various types of innovations for MNC subsidiaries in China for enhancing their competitive advantages. Technology and product innovations were rated as the most important with mean scores of more than 4.20 on each, while structural innovation was rated as the least important with a mean of less than 4.0 (Table 6.38).

Table 6.38

Significance of various types of innovations, statistics

Note: 1 = unimportant; 5 = very important.

With the diversification of customer demand and rapid change in customer tastes in China, MNCs need to offer a variety of products in order to quickly deliver the required choice. To achieve new product innovation, technological innovation is a must. In recent years, MNC subsidiaries in China are beginning to serve as the foothold for MNCs’ expansion in China and function as technical innovation transferee, while making contributions to enhancing MNC technology capabilities. From 1985 to 2003, eight MNCs – Pfizer, Volkswagen, Nokia, Motorola, IBM, Thomson, Philips and Sony – registered a total of 20,350 patents in China. Since the 1990s, the number of patent applications from MNC subsidiaries in China has been growing annually by around 30 per cent. The growth is particularly strong in emerging areas such as communications, computers and medicine (Mao, 2005).

Sources of R&D funding

Respondents were asked to rate the importance (1 = very unimportant, 5 = very important) of various sources of R&D funding. A large proportion (48.4 per cent) of the sample executives believed that it is very important that MNC subsidiaries obtain R&D capital with their own efforts, with a mean score of 3.35 (Table 6.39).

Table 6.39

Significance of various R&D funding sources, statistics

Note: 1 = very unimportant; 5 = very important.

Locus of R&D decision-making

Table 6.40 shows that 31.4 per cent of the R&D projects are decided completely by the MNC subsidiaries in China, while the parent company plays a role of varying importance in the other 68.6 per cent of projects. Further analysis suggested that the degree of autonomy in R&D decision-making waspositively correlated (Kendall’s tau-b = 0.24, p < 0.01; N = 46) with R&D investment rate (R&D as a proportion of sales revenues).

Table 6.40

Decision modes for R&D projects, statistics

Procedures to enhance R&D capabilities

Executives were asked to evaluate the importance (1 = very unimportant; 5 = very important) of various procedures to enhance R&D capabilities. The most important procedures were identified as increasing R&D investments, improving R&D personnel quality and setting up specialised R&D institutions, with mean scores of more than 3.50 on each, and more than 50 per cent of the respondents identifying these as important or very important. In contrast, providing funds for internal technological projects was deemed least important (Table 6.41).

Table 6.41

Significance of procedures to enhance R&D capabilities, statistics

Importance of intellectual property rights

We found that a measure of perceived protection of intellectual property rights in China was positively correlated (p < 0.001) with the importance rating on all the procedures to improve the research and development conditions. Therefore, the better the perceived protection of intellectual property in China, the better the environmental conditions to improve research and development capabilities by MNC subsidiaries (Table 6.42).

Table 6.42

Procedures to enhance R&D capabilities by strength of IPR protection, Kendall’s Tau correlation

***statistically significant with α = 0.01 (two-tail test).

Test of hypotheses

Hypothesis 8.1: the innovation initiatives by MNC subsidiaries in China vary depending on their country of origin.

MNC subsidiaries from Japan put stronger emphasis on three types of innovations – product, management and market – than do those from the US and South Korea. The degree of emphasis for EU subsidiaries is not significantly different from those of the Japanese subsidiaries (Table 6.43).

Table 6.43

Selected innovation types by country, mean difference test

Hypothesis 8.2: the innovation initiatives by MNC subsidiaries in China vary depending on their industry of operation.

There were no overall significant differences in innovation initiatives across different industries. Only one exception was found in the pair-wise comparisons. Management innovation for the chemical/pharmaceutical sector is perceived to be more significant than in the electronics/ electrical equipment sector (p < 0.05; df = 38). Historically, the chemical/pharma-ceutical sector put greater emphasis on product and technological innovations. In recent years, to meet intensifying competition, there is a growing recognition of the role and significance of management of innovation. On the other hand, the electronic/electrical equipment industry has been in a highly competitive condition for a long time and thus management and structural innovation mechanisms are more mature (Table 6.44).

Table 6.44

Innovation types by industry, statistics

Many scholars have noted that MNCs historically have focused their attention only on ways of establishing R&D centres in China and to core technology transfer from the parent companies. They have overlooked R&D capabilities needed for development and adaptation of MNC subsidiaries in the local market. MNC subsidiaries in China are facing fierce competition from foreign multinationals and local enterprises. China’s domestic enterprises have upgraded their R&D capabilities through access to advanced technology and equipment and purchase of patents. This in turn has increased the speed of technology transfer from the parent companies to sustain subsidiaries’ competitive position. Although MNC subsidiaries in China rely on the parent company for patent technology transfer to enhance R&D, they also function as MNC explorers and executors in the Chinese market. They are responsible for R&D localisation and transformation of technology for local use and application. Localisation has a positive impact on the development and the success rate in R&D of MNC subsidiaries in China.

Hypothesis 9: strategy blunders

Types of strategic blunders

Executives were asked to identify their most significant area of strategic blunder: 21.5 per cent identified the most significant strategic blunder to be in HR management and 16.8 per cent identified it to be in marketing. Lack of good understanding of Chinese local personnel idiosyncrasies and Chinese market consumer demand are thus the major factors impeding appropriate strategic planning and actions by MNC subsidiaries in China (Table 6.45).

Table 6.45

Percentage distribution of most significant strategic blunder

Reasons for strategic blunders

Respondents rated their agreement (1 = strongly disagree; 5 = strongly agree) with the various reasons for their strategic blunders. The top two reasons were: cross-cultural management conflict and lack of resources and support from the parent company, with mean scores of more than 3.25 on each. Global strategy adjustment is another key factor (Table 6.46).

Table 6.46

Reasons for strategic blunders, statistics

Note: 1 = strongly disagree; 5 = strongly agree.

These reasons are explained below.

Each culture has its specific social environment and its own system of values and codes of conduct, which impact people’s behaviours, beliefs, habits and social structures. MNCs are often unable to understand the distinctive Chinese culture and promptly adjust management styles and methods, which leads to strategic mistakes.

In a multinational network, subsidiaries can seek support and resources from the parent company and other subsidiaries based on their strategic needs, but the parent company has final decision-making power for the internal allocation of resources. Whether the parent company provides such support and how much support will be provided depends on the parent company’s global strategy and the bargaining power of the subsidiaries. In the early stages, many MNCs regarded China as a production base and investment in China was mainly concentrated in the assembly of low value-added processing sectors. Most did not provide advanced technology and other resources such as management experiences and skills to their subsidiaries in China. With expansion of the Chinese market and intensification of scale-based competition, the existing resources and inputs became increasingly insufficient for additional growth to satisfy the global strategy adjustment need of the parent company. It has been very difficult for MNC subsidiaries to obtain R&D and technology capabilities and improve their management skills in a short period of time; this has contributed to strategic mistakes.

Finally, when the parent company plans to make global strategic adjustment, it needs its subsidiaries’ cooperation. If the subsidiaries continue to seek their own development and strategy implementation, inconsistent with the parent company’s strategic global demand, the parent company will interfere with the subsidiaries’ strategic decisions. This results in strategic mistakes. Strategic blunders will also occur if the parent company’s global strategy adjustment is not in line with the world economic development trend, or if the strategy of subsidiaries in China does not fit in with the Chinese reality. In addition, underestimating Chinese market competition, market capacity, and market potential and instability, bureaucracy and the slow response to the crisis caused by big enterprise disease are other factors contributing to strategic blunders of MNC subsidiaries in China.

Summary

Table 6.47 summarises various corporate and functional strategies hypotheses.

Table 6.47

Hypotheses testing results summary


1Jiaxun He, Hua Zhang (2004). China on international marketing and localisation progress of the study. Beijing University Business Journal (Social Science Edition). 19(2): 29–33.