Internationalization of Chinese Firms
It is true that in the recent past Chinese multinationals have been on the forefront making huge amounts of direct foreign investment overseas thus making her one of the largest outward investors among the emerging economies. Despite the extensive globalization forces, Chinese firms have achieved remarkable growth both nationally and internationally; this is attributed to the implementation of economy reforms and open-door policy that encourage international trade and foreign direct investment (FDI) (Moosa, 2002). Internationalization is a gradual process through which firms integrate themselves into global business system mainly through outward direct investment. Internationalization of Chinese firms is driven by the urge to expand local markets, protective policy of the prospective host country, and use of local resources, enjoy favorable competitive advantage, and accumulate experience and knowledge. This paper seeks to justify that Chinese firms are proactive in internationalization, and discussing the best theory that applies to Chinese firms engaged in internationalization (Hooley et al, 1998).
Joining WTO in 2002 and the diverse economic reforms within the country opened up the Chinese economy into a global economy. WTO changed firm’s competitive landscape; Chinese firms not only faced domestic competition but also direct competition from foreign firms operating both in the domestic and foreign market. Due to this, Chinese firms had to re-strategize and reconsider their traditional business strategy (Moosa, 2002). With regard to this, Chinese firms had to integrate themselves to operate internationally. These firms adopted internationalization strategy through outward direct foreign investment where they actively participate in world production and division system making strategic options that range from domestic to global operation and development (Robinson, 1982).
Internationalization has helped Chinese firms and her economy to grow rapidly for the last two decades deriving huge sums of money from both domestic and foreign markets. There are various theories that have been put forward to explain the process of firm Internationalization. Key internationalization theories include Stages Theory, Uppsala model, Dunning’s electic paradigm, industrial network approach, business strategy approach, and born global firms approach (Robinson, 1982). All these theories have a common feature which assumes that internationalization is a progressive process occurring in completely distinct phases that fairly take a long period of time. After an extensive study and review, the Uppsala Model theory best describes internationalization process for Chinese firms. Therefore, the following is the description of the Uppsala model (Hooley et al, 1998).
With regard to research on firm internationalization, it is true that the process is highly influenced by conceptualization of the whole process. It is believed that firm internationalization was derived from the internationalization process theory of Uppsala School of 1970s. In Uppsala Internationalization model, firms export through agencies, set up sales department in the host country, and lastly it conducts direct production in the host country. According to Uppsala Model, the firm enters into international markets successively by entering into markets with short psychic distance and later expanding into greater psychic distances. Psychic distance is defined in terms of factors like differences in culture, language, and political systems that affect the penetration of a firm into international markets.
In this process it is believed that as firms gain knowledge of foreign markets and businesses, their actual investment in these markets constantly and gradually increases. With this regard, internationalization process involves the relationship between market knowledge accumulation and market commitment (Robinson, 1982). In Uppsala model, internationalization process will continue after initiation despite of any other strategic decisions. The process is considered to be a cyclic process.
Knowledge is obtained through education and experience through personal activities. Market knowledge primarily indicates the experiences and exposures obtained form the business activities on the market (Piercy, 1981). This knowledge opens up new business opportunities which eventually propel the firm internationalization process. Experience on the other hand is taken as a primary factor that reduces uncertainty in a particular international market. As the firms’ international operation activity experiences build up, will constantly strengthen the firms’ desire to invest more.
In Uppsala mode, increase in firm’s investment in foreign markets is a progressive process. The model is regarded to be essential during the initial stages of internationalization especially when the market knowledge and market resources are limited. The model also states that when the firm conducts businesses in various countries, the cited limits are no longer a problem. For instance, the company will allocate resources for internationalization process depending on the real market conditions (Piercy, 1981).
Chinese firms embrace the Uppsala model because Chinese language and culture are not a globally known and understood, and therefore, they need to diversely do research and development extensively to acquire market knowledge (Piercy, 1981). However, in some instances firm internationalization has not consistently followed the Uppsala model. This is because; shortage of market knowledge is no longer a restraining factor to the process and modes of internationalization. In addition, due to advancement in technology, the world has become homogenous and the psychic distance has been greatly shortened. As the mutual alliances of different markets of different countries strengthen, the validity of internationalization model will actually decrease in the long run (Moosa, 2002)
Chinese firms have made big strides in internationalization pushing the country forward to become the second largest economy in the world. After joining WTO in 2002 the firm’s competitive landscape changed; Chinese firms not only faced domestic competition but also direct competition from foreign firms operating both in the domestic and foreign market. Chinese firms have achieved remarkable growth both nationally and internationally; this is attributed to the implementation of economy reforms and open-door policy that encourage international trade and foreign direct investment (FDI). Using the Uppsala Model Chinese companies have managed to penetrate foreign markets, investing heavily and now they are reaping the fruits of their hard work and determination.
Hooley, G., Loveridge, R. & Wilson, D. 1998. Internationalisation: Process, Context and Markets. London: Macmillan Publishers.
Moosa, I. A. 2002. Foreign Direct Investment: Theory, Evidence and Practice. London: Palgrave.
Piercy, N. 1981. “Company internationalisation: active and reactive exporting”, Journal of Marketing, Vol. 15, No. 3, pp. 26-40.
Robinson, R. D. 1983. Internationalization of Business: An Introduction. Hinsdale: Dryden Press.