The role of the Belt and Road Initiative on Chinese multinational enterprise strategy: a multiple case study
A
Master Thesis
Presented to the
Faculty of Economics and Business
by
Justin Brandsma
S2734818
Supervisor: H.U. Haq Co-assessor: J.R. de Wit
WC: 16484
June 2020
Groningen, The Netherlands The role of the BRI on Chinese MNE strategy
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The role of the BRI on Chinese MNE strategy
Foreword
In front of you lies my master thesis on: “the Role of the Belt and Road Initiative on Chinese multinational strategy: a multiple case study“, written as part of the master’s degree in International Business and Management at the University of Groningen. I consider this thesis to be the culmination of 6 beautiful student years in the even more beautiful city of Groningen, a wonderful period of my life!
My choice for this thesis topic dates back to my late middle-school and early high-school years where I developed a big interest in the ancient Greek history and mythology. Especially the tales of Alexander the Great who managed to expand the Macedonian empire all the way to northeast India were intriguing to me. This Greek venture East in 334BC led to the establishment of the earliest version of a trade route between Constantinople (Turkey) and Xi’an (China), known as the Silkroad. 1600 years later Marco Polo would travel this route from Venice to China and work as the personal advisor of the Mongolian ruler: Kublai Khan. The accumulation of his experiences and adventures in the East came together in the brilliant travel memoire written by Rusticello da Pisa named ‘il Milione’ or commonly known as the ‘the travels of Marco Polo’. This book would have great impact on Europe’s vision of China and the East in the following centuries as well as trigger my own personal interest in the continent of Asia. It motivated me to spend a semester in Beijing as part of my exchange program where I visited many locations that were mentioned in the book, making me even more aware of its historic significance. Now, more than 400 years later China has great plans to revive, upgrade and activate this millennia old trade route again under the Belt and Road Initiative. This master thesis presented me with the ideal opportunity to mix my personal curiosity towards this grand project with my professional interests in international business strategy, culminating in a final product that I proudly present to you.
The writing process of this thesis has been both a difficult as well as a fun experience. Due to the enormous scale and different research fields involved in the Belt and Road Initiative I was able to learn a lot about China’s foreign economic policies, geopolitics, international business implications and the overall timeline of China’s development into an economic superpower. This process of continuously gathering information on the Chinese economic development has persuaded me to apply for a second master in Chinese Economics at Fudan University in Shanghai, for which I recently got accepted. The difficult part in writing about the Belt and Road Initiative came primarily due to the fact that the whole concept was so ambiguous and overarching that it was easy to get distracted and lose focus. Luckily, I have had great help from my supervisor Hammad Haq who kept reminding me to stay within the right research focus and keep integrating my theories into the research topic, for which I am very grateful.
I would hereby like to pronounce my gratitude towards my friends and family who have made the thesis writing process, despite the COVID-19 pandemic, an entertaining but productive period of my life. The biggest acknowledgement, however, goes out to my parents who have always supported me throughout my life and have had a great impact on the person that I am today. Thank you very much!
Enjoy the reading,
Sincerely,
Justin Brandsma
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The role of the BRI on Chinese MNE strategy
Abstract
Key words: Going Global; Belt and Road Initiative; MNE strategy; exploration; exploitation
Since October 2013, the Belt and Road Initiative (BRI) has received an increasing amount of attention and scholarly efforts. It comprises many different ambitious plans for the stimulation of integration and connectivity between China, the Middle-East, Africa and Europe as part of China’s “Going Global 2.0”. However, the sheer size of these multifaceted ambitions and lack of clear guidelines make the BRI a difficult topic for scholars to define or interpret. A predeterminant of the BRI is that its future is entirely dependent on the stimulation of business exchange and trade between the participating countries. At the center of this business exchange and trade are China’s multinational enterprises (MNEs), whose international strategy and willingness to commit to the BRI play a crucial role in the BRI’s potential success. In this thesis, I provide insights into the firm-level strategy developments of four Chinese case MNEs in the household electronics industry and their commitment to the BRI. Using an exploratory content analysis methodology to measure the relative strategic focus on exploration or exploitation, I observed a shift in strategic preference from exploitation toward exploration in the years following the BRI announcement. What the findings also show is that none of the four Chinese case MNEs displayed any apparent interest or commitment to the exploration of opportunities in BRI-countries and instead largely focused their attention and resources towards non BRI-countries. This finding is confirmed by an additional analysis of the industry preference for Chinese investments towards BRI-countries, as these, both before and after 2013, were almost exclusively limited to natural resource-based or low-tech industries. It seems like the medium- and high-tech industries in China have yet to see the opportunities that the BRI can bring in the future, which makes the BRI, in its current state, solely a solution to China’s resource security issues.
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The role of the BRI on Chinese MNE strategy
Table of Contents
1. Introduction ...... 6 2. Theoretical background ...... 9 2.1 China’s Going Global ...... 9 2.2 The Belt and Road Initiative ...... 10 2.3 MNE Strategy: Exploration and Exploitation ...... 12 2.4 Going Global and Chinese MNE strategy ...... 14 2.5 The BRI and Chinese MNE strategy ...... 16 3. Research method ...... 19 3.1 Qualitative research ...... 19 3.2 Case selection and size...... 19 3.3 Data collection ...... 22 3.4 Research analysis ...... 22 3.5 Additional data collection ...... 25 4. Results ...... 27 4.1 Within-case strategy analysis ...... 28 4.1.1 Hisense Kelon ...... 28 4.1.2 Haier Electronics ...... 30 4.1.3 TCL ...... 32 4.1.4 Lenovo ...... 34 4.2 Cross-case strategy analysis ...... 35 4.2.1 The role of the BRI in China’s Going Global ...... 35 4.2.2 The BRI and firm-level findings ...... 40 5. Conclusion and Discussion ...... 45 5.1 Conclusion ...... 45 5.2 Theoretical contributions ...... 46 5.3 Limitations and future directions ...... 48 7. List of Abbreviations ...... 49 8. Bibliography ...... 50 9. Appendix ...... 55
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The role of the BRI on Chinese MNE strategy
1. Introduction
After the reform and opening-up in 1978, China’s economic development has been unprecedented. Since 1978, China’s GDP increased from $293 billion USD to $10.8 trillion USD in 2018, an increase of 3800% in 40 years, averaging 9.5% annually (World bank, 2020), which has significantly contributed to a shift in the world’s economic center of gravity. Since the announcement of the ‘opening up and reform’ ambitions in 1978, China has largely followed the famous dictum of, then vice-president of the People’s Republic of China as well as the Chinese Communist Party (CCP), Deng Xiaoping to “hide its capabilities and lay low”. This meant that China would focus almost entirely on the development of their domestic economy and minimize their involvement in conflicts at the global political stage as well as the display of absolute power. This passive foreign policy strategy seems to have been substituted for a more assertive and muscular version after the 2012 initiation of China’s new political leader: Xi Jinping. In a state visit to France in 2014, Xi referred to a statement that was made two centuries earlier by Napoleon Bonaparte: “China is a sleeping lion, let her sleep, for when she wakes she will shake the world”. He then continued with the following statement: “Today, the lion has woken up. But it is peaceful, pleasant and civilized” (South China Morning Post, 2014). This announcement of China’s change in attitude at the world stage was embodied in a grand plan that aims to connect China to Europe, the Middle-East and Africa, via routes that could cover 55% of the world’s GNP, 70% of the global population, and 75% of its known energy reserves (Yang, Pan & Wang, 2018). The so-called BRI is split into a land-based Belt and a maritime-based Road. The New Silk Road Economic Belt proposes to link China to Europe via trade, investment and transport corridors across Central Asia and Russia (See Appendix 1 for visualization). The 21st Century Maritime Silk Road includes maritime links that pass through the Straits of Malacca to the Indian Ocean, Middle East, and Africa (Ge, Dollar & Yu, 2020)
The interest in the BRI is clearly not confined to ‘China watchers’ in academic or policy circles. The large and growing interest in the BRI is also motivated by the fact that the economic and political power of China is on the ascent and many people think that the 21st century will be a ‘Chinese century’ (Brakman, Frankopan, Garretsen & van Marrewijk, 2019). Despite BRI being an important an intriguing matter to policymakers, industry experts and academics, existing literature on the BRI topic is surprisingly limited. Most papers on Chinese MNE strategy are not concerned with the systematic effect of the BRI on China’s outward foreign direct investment and only a few papers actually discuss the BRI (Kang, Peng, Zhu & Pan, 2018). Hillman (2018, p. 2) characterizes the BRI as “one of the best-known, least-
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The role of the BRI on Chinese MNE strategy understood foreign policy efforts underway. But for all the attention the BRI receives, there is little reliable information about how it is unfolding in aggregate. A major challenge is that the BRI label evades classification. There is no agreed-upon definition for what qualifies as a BRI project”. This lack of an authoritative official map and the absence of clarity has prompted some commentators to conclude that the BRI is nothing more than an ‘ill-defined mirage,’ or a hollow shell, that has generated much noise but will yield few concrete results (Shapiro, 2017). This conclusion is supported by Zhu (2018) who notes that the Chinese government formulated few specific guidelines or rules when it came to the BRI and the effort has to come directly from Chinese businesses and individuals themselves. Hence, he states that “More official and scholarly efforts are needed to analyze both successful and failed cases, collect data, and produce high quality research to provide guidance for Chinese businesses” (Zhu, 2018, p. 165).
Besides the promising and slightly vague ambitions for the BRI, one would like to have solid theoretical and empirical research that shows what the possible drivers and results of BRI are or will be (Brakman et al., 2019). To understand the effect of BRI in real term, it is necessary to investigate firms’ behavioral responses towards BRI, as it is firms who engage in trade rather than countries (Görg & Mao, 2020). The limited research that has been conducted on the impact of the BRI on Chinese MNE strategy used aggregated firm-level data (Du & Zhang, 2018; Görg & Mao, 2020), which delivered interesting country- level findings. These findings, however, fail to provide in-depth insights into the drivers behind the firm- level strategy and the role of the BRI in Chinese MNE strategy formulation. Being entirely unexplored, the firm-level attitude towards- and strategy adjustments to the BRI are perhaps the most conditional determinant of the BRI’s future success.
The strategic focus and investment motivations of Chinese MNEs has been a widely documented research category for International Business researchers. At the time, Buckley (2007) suggested that Chinese MNEs lack firm-specific-advantages (FSA’s) and venture abroad to gain new FSA’s rather than exploit pre-existing ones. This suggestion for lack of FSA’s in Chinese MNE’s paired with the pressure of foreign entrants into the China in the mid-2000s means that Chinese firms were under great time pressure to catch up on the capabilities of their foreign competitors. Now, over a decade later, many Chinese MNEs have caught up with these capabilities and are becoming market leaders and innovators in their respective industries. To grow and become more competitive at the global stage, Chinese MNEs have to make challenging decisions on their balance between exploration of new knowledge and
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The role of the BRI on Chinese MNE strategy exploitation of their pre-existing capabilities. The BRI could prove to be a great opportunity for these Chinese MNEs to gain access to new markets, resources, and knowledge domains. Hence, it would be interesting to see if these Chinese MNEs have adjusted their strategy to seize the opportunities created by the BRI or if there are circumstances that led to hesitations, a spectrum that is explored in this thesis.
Using the March (1991) and Koza and Lewin (1998) operationalizations of exploration and exploitation, this thesis will help to visualize the strategic focus developments of four Chinese MNEs between 2008 and 2018, providing the field with insights 5 years prior to the BRI announcement as well as 5 years after. This timeframe allows me to make before-and-after BRI announcement comparisons of the strategic focus on exploration and exploitation. By addressing the changes in strategic focus and augment these findings with in-depth firm-specific strategy quotes from annual reports (ARs), this thesis can provide an insight into the firm-level strategy formulations and the potential role of the BRI in this process. Given the unexplored state of the existing BRI literature at firm-level, I formulate the exploratory research question:
How has the Belt and Road Initiative changed the strategic focus of Chinese Multinational Enterprises?
Given the loss of in-depth information that the two firm-level BRI-related research papers (Du & Zhang, 2018; Görg & Mao, 2020) addressed due to their use of an aggregated and highly heterogeneous dataset, this research will include firms from a single industry: household electronics. Within this industry, I select the four firms based on two criteria: the first criteria concerns ownership structure and is used to see if there is a difference in strategic focus development between State-Owned-Enterprises (SOE) and Publicly-Owned Enterprises (POE). Secondly Lall’s (2000) technological categorization will help explore the difference between firms that produce medium-tech and high-tech products.
The rest of the paper is structured as follows. Section 2 addresses the literature on China’s going global strategy, the BRI, MNE strategic focus and integrates these to provide the context of this thesis. Section 3 explains the research method. Section 4 elaborates the research results of the within case analysis as well as the cross-case analysis. Section 5 starts with the conclusion, explains the literature contributions of the findings, and finishes with the limitations and future research direction.
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The role of the BRI on Chinese MNE strategy
2. Theoretical background
2.1 China’s Going Global December 1978 marked the month where China first announced its ‘reform and opening up’ ambitions at the third plenary session of the eleventh CCP national congress. These reform announcements were made by Deng Xiaoping and contained two important phrasings: yin jin lai (bringing in) and zou chu qu (going out). Bringing in foreign capital through inward direct investments became the highest priority to solve China’s lack of national funds and a weak global competitive position. Special Economic Zones (SEZs) with favorable investment climates were assigned to, mostly, cities in the coastal regions between 1978 and 1990. These inward investments enabled certain ‘Champion’ enterprises to develop their industries and turn the China’s coastal region into the World’s factory.
In a response to two years of marginal economic growth in 1989 and 1990, 1991 marked the year where China started to engage outward and look overseas for additional growth opportunities, which set in motion the ‘Going Global 1.0’ (GG 1.0) phase. During this phase, Zhu (2018) finds that China concentrated its investment in the developing world with tremendous amounts of trade, energy deals, and infrastructure projects . It seemed like China’s appetite for natural resources became insatiable, forcing them to reach out to resource-rich countries. Countries in Africa, Latin America, and the Middle East started to become essential suppliers of raw materials and energy to sustain China’s enormous economic growth. However, as China became the biggest manufacturing country in the world, they were also required to search for new export markets. With the admission into the World Trade Organization in 2001, China became an economic force to be reckoned with as it kept accumulating international trade experience and grow exponentially. This accumulated experience and increased market capital allowed Chinese firms to internationalize and prepare themselves for the more sophisticated markets of Europe and the US. As ‘GG 1.0’ gained momentum in the mid-2000s, its limitations quickly became apparent with Chinese MNEs struggling to break-even, projects being plagued by economic and governance issues, high corruption levels rooted in state-enterprises and the devastating effect of the 2008 global financial crisis (China Policy, 2017). It became clear that Chinese MNEs had been too focused on acquiring resources and entering new markets rather than assuring return-on-investments, risk spreading and considering the political impact of their actions.
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The role of the BRI on Chinese MNE strategy
To address the failings of GG 1.0 and ensure Table 1. Key points of ‘Going Global’ phases Chinese firms invested abroad more wisely with greater concern for local sensibilities and China’s image, ‘Going Global 2.0’ (GG 2.0) emerged (China Policy, 2017) shortly after the inauguration of Xi Jinping in late 2012. The rationale for Chinese investments became different from the previous phase as it focuses more on conventional economic and political considerations (Zhu, 2018), such as calculated portfolio investments, diplomatic collaboration, and integration with local operators (See Table 1). This change of strategy also came as a source: China Policy (2017) response to a maturing Chinese economy, which could no longer upgrade solely by doing business with other developing economies. The Chinese government began to encourage businesses to look for opportunities in the Western Economies to explore new markets and upgrade the technology grade of their products. Zhu (2018) pointed out that in the third plenary session of the eighteenth Central Committee of the CCP in November 2013, the CCP called upon enterprises and individuals to directly invest abroad and actively encouraged the development of engineering and labor cooperation projects with foreign partners. The announcement was solidified by a number of favorable outward investment policies that would change China from a net capital recipient (1990-2014) into a capital exporter (2014- onwards). This push for cross-border investments aimed to increase China’s legitimacy in the global political economy and introduce the world to the new ‘GG 2.0’ phase. ‘GG 2.0’ announced its presence through an enormously ambitious multilateral project that would become the flagship of China’s economic diplomacy in Eurasia and Africa: The Belt and Road Initiative.
2.2 The Belt and Road Initiative On the 7th of September 2013, President Xi Jinping announced the ‘One Belt One Road’ project as part of China’s new ‘GG 2.0’ foreign policy at a state visit in Kazakhstan. The ‘Belt’ consists of vibrant networks of roads and railways that will connect the Western part of China to Western Europe via Central Asia, Iran, Turkey, Russia, the Caucasus, and the Balkans. Besides linking Eurasia by land, the ‘21st Century Maritime Silk Road’ is proposed to connect China with South Asia, Southeast Asia, the
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The role of the BRI on Chinese MNE strategy
Middle East, Africa, and Europe through a strip of seaports in the South China Sea, the Indian Ocean, and the Mediterranean Sea (Jia, 2017; Pencea, 2017; Rolland, 2017). The later rebranded BRI includes more than 65 national economies that account for over 4 billion people in terms of population. The economic aggregate of the BRI-countries is roughly $21 trillion USD, nearly 65% of the land-based global production values and 30% maritime-based values (Swaine, 2015). Since its inception in late 2013, the BRI has become a Chinese national strategy to integrate China’s economy with those of countries and regions in Asia, Europe, and Africa. As a means of enhancing China’s global influence, a range of new government policies following the BRI have been strongly supporting China’s outward foreign direct investment (Kang et al., 2018). Commercial banks like the Asian Infrastructure Investment Bank, amongst others, have been specifically founded to get involved in financing infrastructure along the BRI- route. The Import and Export Bank of China reported that from 2013 to 2017, 1200 projects in more than 50 BRI-countries had been financed, with total loans exceeding $100 billion USD (Liu, Jiang, Zhang & Chen, 2018). At $1.4 trillion USD in 2017 and still growing, China’s stated financial commitment to these projects is eleven times the size of the Marshall Plan, restated in current dollars; it is the largest and potentially the most transformative engineering effort in human history (Freeman, 2017).
The BRI, in its origin, aims to serve five main goals: policy coordination, facilitate connectivity, stimulate unimpeded trade, financial integration and people-to-people bounding. These five goals allow the research fields of Politics, International Relations, Construction, Economics, Business, Finance, Psychology, Culture, and many other research fields an opportunity to portray their view on the BRI, making it a highly complex matter. Up until the end of 2017, the most cited non-Chinese papers on the BRI almost solely consisted of exploratory research in the fields of Policy and Economics that aimed to provide the research field with insights into the general concept of the BRI as well as its main drivers, benefits and potential challenges (Swaine 2015; Cheng, 2016; Huang 2016; Liu & Dunford, 2016; Cai 2017). These papers have helped researchers to understand the meaning behind the BRI at a country- level as well as its implications for national economies and governments along the BRI-route. However, it was not until 2018 that the level of research on BRI-related topics started to shift its focus from aggregated exploratory country-level research towards more topic focused country-level research. The main reason for this change is that researchers started to compartmentalize the wide variety of elements that ‘presumably’ are part of the BRI and formulated clear boundaries within their research framework. To do valuable research on the ambiguous concept of the BRI, it is important to specify which aspect is researched specifically. These are, for example, foreign direct investments modes
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The role of the BRI on Chinese MNE strategy towards BRI-countries (Du & Zhang, 2018), energy investment risk assessments per BRI-country (Duan, Ji, Liu & Fan, 2018), the impact of the BRI on import logistics (Lau et al., 2018) or the network improvements for shipping lines under BRI (Yang et al., 2018) instead of the more overarching papers like Cai’s (2017) ‘Understanding China’s Belt and Road Initiative’.
With President Xi Jinping putting the BRI at the top of his political priorities, it is in the best interest of many participating countries as well as non-participating countries to develop an in-depth understanding of the BRI and to map out its progress and motivational drivers. Hence, the most rigorous literature survey on BRI-related publications (Shahriar, 2019) acknowledges an increasing interest in BRI research across the world over the previous years. The most interesting finding in this literature survey was that “several mainland universities in China, such as the Peking University, East China Normal University, Fudan University and Wuhan university were the leading institutions in BRI-related publications” (Shahriar, 2019, p. 96). Through the founding of several BRI research institutes, centers, and think-tanks at Chinese universities together with the organization of several international BRI events and forums, BRI-related research is growing exponentially amongst Chinese scholars. In 2015, according to the China Academic Journals Full-text Database, more than 8,400 BRI-related articles were published by Chinese scholars compared to 492 in 2014 (Rolland, 2017). This tremendous growth in effort, resources and talent allocated towards BRI-research in China, however, has yet to be paralleled by research institutes located outside of China. The development of this imbalance in research effort is not only affecting the deeper understanding of the BRI in countries outside of China, it is also portraying a version of the BRI that is largely based on economic data and findings instead of deeper strategic motives. Rolland (2017, p. 130) finds that “the great bulk of non-Chinese commentary on the BRI has focused on its economic aspects and failed to pay sufficient attention to its strategic purpose”, which serves as a direct call for more non-Chinese research on the strategic purpose of the BRI.
2.3 MNE Strategy: Exploration and Exploitation Up until this date, the strategic purpose of the BRI is a highly debated topic amongst scholars worldwide as the general concept of the BRI is thought to be an overarching term for a wide variety of activities and initiatives and can therefore serve many different purposes. To ensure a focused research framework, this thesis will stay within the field of International Business and Strategy and limit itself to two of the five main BRI goals: to stimulate ‘unimpeded trade’ and facilitate ‘financial integration’. To understand the real-life impact of these two main goals, it is necessary to investigate firm-level strategic responses
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The role of the BRI on Chinese MNE strategy before and after the BRI announcement, as “it is firms who engage in trade rather than countries” (Görg & Mao, 2020, p. 6). After all, the enormous hard-infrastructure projects (train-tracks, harbors, airports, highways) are there to facilitate business and people-to-people exchange and are not going to create industrial activity by themselves. Before investigating the effect that BRI has on the strategic behavior of Chinese MNEs, a central concern of corporate strategy is identified, which entails making choices about how much to invest in different types of activities. These activities require the division of a firm’s attention and resources, for which literature proposes two options: exploration and exploitation (He & Wong, 2004). The two terms find their origin in the context of organizational learning (March, 1991) and has since expanded into a wide variety of managerial contexts, including strategic management (He & Wong, 2004; Uotila, Maula, Keil & Zahra, 2009) and organizational theory (Holmqvist, 2004). As interest in organizational learning and competitive dynamics grew in the 1990s, ‘exploration and exploitation’ became a popular phrase capturing a fundamental tension in organizational adaptation (Miller, 2006).
Exploration March (1991, p. 71) defines an exploration strategy as “things captured by terms such as search, variation, risk taking, experimentation, play, flexibility, discovery, innovation”. A strategic focus on exploration means that a firm allocates its attention and resources towards the introduction of new product generations, the extension of its product range, the opening of new markets as well as entering new technology fields (Benner & Tushman, 2003). To be successful in exploring new technologies and knowledge, a firm must be able to get access and exposure to a variety of new and alternate knowledge domains (Subramaniam & Youndt, 2005). Complementing March’s (1991) definition of exploration, Koza & Lewin (1998, p. 265) add the involvement of “innovation, basic research, invention, risk taking, building new capabilities, entering new lines of business and investment into the firm’s absorptive capacity”. The downside of focusing too much on exploration is that (compared to exploitation) the returns from exploration are systematically less certain, more remote in time, and organizationally more distant from the locus of action and adaption (March, 1991). The fact that a strategic focus on exploration will work well in the long-term does not mean it is a feasible option when you look at its short-term impact on a firm’s performance.
Exploitation At the other end of the spectrum is a strategy focused on exploitation activities, defined as “such things as refinement, choice, production, efficiency, selection, implementation, execution” (March, 1991, p.
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The role of the BRI on Chinese MNE strategy
71). The central thesis of exploitation is that it is possible to secure a comfortable position in the marketplace by committing the bulk of the organization’s resources to ensure the current viability of the firm against its competitors. Thus, the emphasis is on the organization refining and fine-tuning existing competencies and resources (Auh & Menguc, 2005). Koza and Lewin (1998, p. 256) associate exploitation with: “increasing the productivity of employed capital and assets- improving and refining existing capabilities and technologies, standardization, routinization and systematic cost reductions”. This strategic focus ensures the optimization of short-term operations, which increases the present-day competitive position of a firm. For the long term, however, it puts the organization in a position where its resources and attention were allocated towards soon-to-be outdated capabilities or products, jeopardizing the firm’s future survival.
Balancing exploration and exploitation Levinthal and March (1993, p. 105) argue that the survival of the firm is dependent upon the firm’s ability to “engage in enough exploitation to ensure the organizations’ current viability and engage in enough exploration to insure its future viability”. This statement is backed by the majority of the researchers who have normatively assumed that firms should seek to balance exploration and exploitation because both short-term productivity and long-term innovation are essential for organizational success and survival (March, 1991). They have urged firms to pursue both effectiveness and efficiency and to integrate organizational renewal and control, which can be correspondingly enhanced via exploration and exploitation (Lavie and Rosenkopf, 2006).
2.4 Going Global and Chinese MNE strategy Since the ‘GG 1.0’ phase started, many Chinese MNEs have looked outward in an attempt to finetune their manufacturing operations and catch-up with their foreign competitors. A high focus on exploitation-related activities turned China into the ‘world’s factory’ that, in its early stages, mainly produced cheap, low-quality goods due to low labor costs and significant supply chain advantages. Quickly, however, towards the end of the 2000s, China established itself as the world leader in many medium and high-tech products. As China transitioned into the ‘GG 2.0’ phase at the end of 2013, the next year they produced 286.2 million personal computers (PCs, which was about 90% of the world total), 109 million air conditioners (ACs, accounting for 80% of the world total), and its mobile phone production counted for a little over 70% of the world total (China Daily, 2015). Along with many other products, these numbers prove that China had developed itself into the #1 manufacturing nation in the
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The role of the BRI on Chinese MNE strategy world over the course of the ‘GG 1.0’ phase. It had been their strategic focus on productivity, standardization, efficiency amongst other exploitation related activities that optimized China’s manufacturing facilities and capabilities. However, as previously mentioned, a strategic focus on exploitation could prove to be harming for the long-term development of China’s manufacturing firms. Despite the fact that 90% of the PC’s were manufactured and assembled in China in 2014, the most sophisticated and complex parts of the PC were often produced by non-Chinese firms. With the threat of China’s highly efficient assembly lines and manufacturing facilities becoming outdated and too reliable on the manufacturing orders from abroad, a new direction had to be taken that would ensure the long- term success of China’s firms.
The new favorable outward investment policies presented at the third plenary session of the eighteenth Central Committee of the CCP in November 2013 would give the green light for the ‘GG 2.0’ phase. This phase would be characterized by portfolio investments, an increased emphasis on return-on-investment and the development of foreign markets for Chinese products. This development triggered the announcement of the ‘Made-in-China 2025’ project in 2015. Its guiding principles are to “enhance industrial capability through innovation-driven manufacturing, optimize the structure of Chinese industries, emphasize quality over quantity, train and attract talent and achieve green manufacturing and environment” (Li, 2018, p. 66). All in all, it became one of China’s primary goals to upgrade its product mix, as the manufacturing and assembly of low-tech and medium-tech products struggled with overcapacity. As the efficiency and dominance of China’s manufacturing capabilities was no longer in question around 2014, many large Chinese MNEs had caught up with the capabilities of their established non-Chinese competitors, which meant that they started to compete and innovate instead of follow an imitate. To enable this transition, the BRI-related policies of 2013 and 2014 together with the ‘Made-in- China 2025’ upgrading ambitions created an increasingly favorable environment for Chinese MNEs to engage in exploratory and cross-border activities. The BRI’s main goals of stimulating ‘unimpeded trade’ and ‘financial integration’ could greatly benefit Chinese MNEs as well as local firms in BRI-countries by providing access to new knowledge domains, markets, resources and opportunities that could guarantee the firms long-term success.
Proposition 1: After the announcement of the BRI in 2013, Chinese MNEs will increasingly shift their strategic focus towards exploration compared to the period before the announcement.
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The role of the BRI on Chinese MNE strategy
2.5 The BRI and Chinese MNE strategy Despite having formulated the five main goals of the BRI together with ambitious investment plans towards BRI-countries, it is not the Chinese government that can guarantee the success of the BRI. The success of the BRI in the future depends almost entirely on the willingness of China’s firms to adjust their strategy towards the BRI-countries and seize its potential opportunities. Firms can engage in exploratory activities and investments along the BRI-route to gain access to new markets, knowledge domains and business contacts, which entails big opportunities but also carries a significant amount of risk. Alternatively, firms could limit their exploratory activities and focus on optimizing their domestic operations, whilst fully relying on the domestic market and export of their products. Research on the strategic focus of Chinese MNEs at firm-level can provide an in-depth understanding of their confidence in the future success of the BRI. Yet, previous research that links the strategy of Chinese MNEs with the BRI using firm-level data mainly consists of two influential research papers. Believed to be the first study on BRI that uses firm level data, Du & Zhang (2018) investigate the implication of BRI for outward direct investment by Chinese firms. They establish that the BRI has substantially boosted Chinese investment into BRI-countries based on 3,556 observations between 2005 and 2015 by using the unfiltered China Global Investment Tracker (2020) database. This paper, however, entails two important caveats. First, given the BRI announcement in October 2013, the investment data covers 9 years before (2005-2013) and only 2 years after (2014-2015). The asymmetry in observation period of this research paper makes it difficult to draw convincing conclusions about the MNE strategy before and after the BRI announcement, a limitation that will be addressed and solved in the result section of this paper. Second, given the unexplored state of the BRI at firm-level prior to the Du & Zhang (2018) paper, the aggregated dataset used for this research displayed a high level of heterogeneity regarding: ownership-structure, industry, investment strategy and geographic focus. However, this heterogeneity allowed the research paper to explore a wide variety of potential relationships and provided scholars with various future research opportunities, two of which I will address in this paper: ownership structure and technological categorization.
Ownership structure The heterogeneity issue in Du & Zhang’s (2018) work was addressed by the second available paper from Görg & Mao (2020), who used Chinese export data between 2011 and 2015. They discover that SOEs have increased their exporting to BRI-countries significantly after the BRI announcement. The POEs of China, who account for more than 80% of the Chinese exports between 2011 and 2015, on the other
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The role of the BRI on Chinese MNE strategy hand did not react positively to the BRI (Görg & Mao, 2020). Paired with the finding of Du & Zhang (2018) that it is primarily SOEs that invest into BRI-countries, this is an interesting development. One should expect both China’s SOEs as well as POEs to seize the opportunities that the BRI is supposed to bring. The enormous investments in infrastructure projects along the BRI-route should provide both ownership structures with access to new markets, knowledge domains and boost the growth potential for both, but it appears that only the SOEs are increasing their investments and export towards BRI- countries. This difference could be explained by a disparity in strategic focus on exploration between SOEs and POEs towards the BRI-countries, a matter worth researching.
Proposition 2: When comparing State-Owned-Enterprises with Privately-Owned-Enterprises and their role in the BRI, there will be a difference in strategic focus
Technological categorization
When looking at the strategic focus of a firm in relation to the BRI, it is important to point out that organizational environments differ significantly in their degree of technological dynamism (Zahra, 1996). Frequent technological change might make an organization’s resources and competences obsolete in a relatively short period of time, forcing the firm to constantly explore new technologies. In environments with lower technological dynamism, a firm’s technology base could be used for a protracted period of time, making it possible to completely focus on exploitation (Uotila et al., 2009). This means that the ideal balance between strategic focus on exploration and exploitation differs based on the technological dynamism. Lall (2000) introduces four technological categories: resource-based, low-, medium-, and high-technology. These four categorizations all require a different strategic balance between exploration or exploitation to perform to the best of their abilities. Du & Zhang (2018, p. 190) find that towards BRI- countries “in terms of acquisition target industries, energy & power and industrials still remained as the top two in the post-BRI strategy years, but the importance of high technology and financials rose rather quickly, occupying the third and fourth position”. Despite the asymmetry in investment data of Du & Zhang (2018) that were mentioned before, these findings suggest a high emphasis on resource-based and low-tech industry investments towards BRI-countries in the early stages of the BRI. Seven years after the BRI announcement it would be interesting to see if medium- and high-tech firms have joined in on the investment train and are allocating attention and resources towards these BRI-countries. Has the importance of high technology continued to grow since 2015 or have other industries taken over third place? As Chinese MNEs from different industries experience different levels of technological dynamism,
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The role of the BRI on Chinese MNE strategy they categorize in different technology grades (Lall, 2000). Based on the theory from Zahra (1996) and Lall (2000), high-tech firms should increasingly focus their strategy on exploration to stay ahead of the innovation curve. However, the BRI provides access to new, less developed, markets that are characterized by lower levels of technological dynamism, which could impact a firm’s urgency for an exploration strategy. For this reason, it can be expected that the higher the technological category of the industry, the less likely it will be that they focus their strategy towards BRI-countries.
Proposition 3: The higher the technological categorization of the industry, the less likely it is that they adjust their strategy towards the BRI-countries.
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The role of the BRI on Chinese MNE strategy
3. Research method
3.1 Qualitative research Given the limited amount of knowledge that connects the BRI to Chinese MNE strategy, I shed light on the exploratory power of the proposed research design and employ a firm-level multiple case research method. Although Du & Zhang (2018) and Görg & Mao (2020) use firm-level data, the aggregation of this firm-level data leads to country-level results. The quantitative literature on BRI at a country-level is rapidly developing, which stimulates an increased understanding of the broader BRI concept for scholars. This improved understanding of the BRI at the country-level, however, lacks firm-level verification and exploration that provide a deeper understanding of its real-life implications. Firm-level exploratory research can complement the current BRI-related research field with a high degree of novelty and make the overarching term of ‘BRI’ more graspable for future research and understanding. Given the novelty grade and unexplored nature of this research at firm-level, an exploratory and qualitative research method is most suited. The most fitting qualitative research method to contribute firm-level in-depth insights into the strategic focus of Chinese MNEs and the BRI is the case study model. It is Yin (2003), who suggests the multiple case study approach to be especially appropriate for addressing ‘how’ and ‘why’ questions in new topic areas, which suits my research question well.
3.2 Case selection and size According to Eisenhardt (1989) there is no ideal number of cases for multiple case analysis, but a number between four and ten usually works well. With fewer than four cases, it is often difficult to generate theory with much complexity, and its empirical grounding is likely to be unconvincing. To ensure in-depth analysis of the individual cases and the comparative aspect between cases, I have chosen to select four Chinese MNE cases. The case selection was done using Patton’s (2002) purposeful sampling theory, which led me to opt for a mixture between theory-driven and criterion-based sampling. Theory-driven sampling involves selecting cases that represent important theoretical constructs about the phenomenon of interest, in this case relevance to the BRI. Criterion-based sampling involves reviewing and studying cases that meet a certain predetermined criterion of importance (Patton, 2002).
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The role of the BRI on Chinese MNE strategy
Based on the theoretical background and to ensure a certain level of homogeneity, I limited the options to the technology industry, specifically household electronics. Since 2016, the share of medium- and high-tech manufacturing products in China’s export basket has exceeded 70% (Hou, Chen & Xiao, 2018), with electronic machinery and computers accounting for roughly 44% of China’s total export mix in 2018 (World’s Top Exports, 2020). Also, Du & Zhang (2018) found the tech-industry to rank #3 on the list of industries that invest in BRI-countries in 2014 and 2015, behind energy & power and industrials. The household appliances and consumer electronics industry are one of the world’s largest consumer goods industries in the world (Bell, 2008). Since there is not a uniformed industry definition, for the purpose of this research, it includes large kitchen appliances and air-conditioners (synonym: white goods), TV & video (synonym: black goods), and personal computers (PCs). Using Lall’s (2000) fourfold technological categorization, I categorize white goods under medium-tech as it can be considered as simple household electronics. The black goods and PCs can be considered high-tech due to their complexity and required innovation efforts to ensure competitiveness.
A successful implementation of the BRI and a well-connected infrastructure network throughout Europe, Asia and Africa could reduce transport and communication costs. This will make the relocation of electronic products towards developing countries, along the BRI-route, an increasingly economical option for Chinese MNEs. It will also allow them to expand their operations to new and growing markets where demand for medium- and high-tech products are expected to increase parallel to the national economic development. It is for these reasons that I think that the household electronics industry is a highly relevant industry for the BRI due to its size, growth potential and governmental ambitions for development in terms of the ‘Made-in-China 2025’ goals. To make sure that the industry is represented accurately, the samples will be compartmentalized into two groups: medium- and high-tech manufacturing firms. I opted to include 2 Chinese MNEs that focus their manufacturing efforts towards medium-tech (large kitchen appliances and ACs) and 2 that focus on high-tech products (TV, video, and PCs).
When it comes to an MNE’s strategic focus on exploration or exploitation, ownership could prove to play an important role. For example, according to Ren, Manning and Vavilov (2019) prior studies suggest that Chinese state-owned MNEs rely a lot on their access to home country-specific assets, e.g. institutional support (Meyer & Estrin, 2014; Rugman, 2016). Whereas non-state-owned MNE’s rely much more on firm-specific assets (FSAs), e.g. resource-seeking skills abroad (Liang, Lu & Wang, 2012). This is a
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The role of the BRI on Chinese MNE strategy relevant difference when looking for an MNE’s strategic focus, as there is a distinct difference in the exploitation of capabilities. In a highly competitive household electronics industry, the ownership structure of a Chinese MNE could prove to be an interesting approach angle, as both Görg & Mao (2020) and Du & Zhang (2018) have confirmed disparity in this matter. By including both state-owned as well as publicly owned MNEs in the research, a comparison of strategic focus can be made. For the case selection, this means that one state-owned or partially-state owned MNE will be selected that focusses on medium-tech manufacturing, and one that focusses on high-tech products. The same counts for publicly owned Chinese MNEs, giving the research two dimensions of comparison: ownership structure and technological categorization (see Table 2).
Finally, I apply criterion-based sampling to assure a certain level of importance and consistency. A list of the largest Chinese white goods, black goods, and PC manufacturers was made based on their annual sales in 2018 and global market shares. The reason for selecting the largest MNEs in their respective industries is to look at their strategic focus from a market leader perspective. It is of great importance that China’s biggest and most well-known brands display confidence in the BRI as the rest will follow. Only the MNEs were selected that had ARs available in similar formats. Also, these ARs had to be available over the time period 2008-2018 to allow for symmetrical ex-post and ex-ante analysis with regards to the BRI. This time frame was elected as a response to the limitation of Du & Zhang’s (2018) research (2005-2013, 2014-2015). Firms that have a mixture between ARs and 20-F SEC filings were not considered due to lack of consistency.
In the white goods category (medium-tech), this omitted the Midea-Group (#2) and Guangdong Galanz Group (#3). This leaves Haier Electronics Group (#1) and Hisense Kelon Electrical Holdings Company Limited (#4) as the top two manufacturers of large kitchen and household appliances in China, with the first being a POE and the second a SOE. For the black goods and PC categories (high-tech), China’s two largest manufacturers both had their ARs readily available, which allowed me to select TCL Electronics Holdings Limited (China’s largest smart-TV manufacturer) and Lenovo Group Limited (the world’s largest PC manufacturer). The first one is a subsidiary of the larger TCL Corporation, a partially-state-owned (PSOE) enterprise, and the latter being a POE.
For the purpose of readability, the selected MNEs are hereafter referred to as Hisense Kelon, Haier Electronics, TCL, and Lenovo. These four MNEs are ideal for this research as they are domestic and
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The role of the BRI on Chinese MNE strategy international leaders in their respective industries and are a good representation of the ‘Made-in-China 2025’ ambition to ‘upgrade’ its manufacturing industry towards more medium- and high-tech products.
Table 2. Case selections based on ownership structure and technological categorization
Medium-Technology High-Technology State-ownership Hisense TCL Public-ownership Haier Lenovo
3.3 Data collection I collected the data for this study from ARs, posted on the companies’ website or AR database websites. According to Bowman (1984, p. 63), “CEOs see ARs as major communication devices to many constituencies, both internal and external concerning their and their companies’ performances”, which makes it a good source to study strategic focus. Hence, I have selected 11 ARs of the four selected case MNEs that span between 2008 and 2018. This provides me with roughly 1500-2000 pages of information per selected MNE, both ex-post as well as ex-ante the announcement of the BRI in October 2013. These ARs were slimmed down by removing the independent auditing reports, financial statements, and notes to the financial statements, as these sections do not add value to the validity of the content analysis. These documents were uploaded onto Atlas.ti, which is an automated qualitative data analysis software program, freely available from the workspace of University of Groningen.
3.4 Research analysis This study’s main research focus is the relative balance between exploration and exploitation of Chinese MNEs’ business activities and their development over an 11-year time period, a time period which marks the announcement of the BRI in the exact middle. Due to the lack of pre-existing knowledge on the topic of firm-level strategy with regard to the BRI, the goal of this research study is to explore the field at firm-level. When the research goal is to explore unknown knowledge, it is best to opt for a qualitative content analysis. Through the application of AR content analysis, the selected case MNEs are tested for their emphasis on ‘exploration’ and ‘exploitation’ using the associated ‘word count’ method. “AR content analysis is used to explore firm-level strategy and elements of risk and return because it offers a comparative picture at a distance, a gestalt not readily available through other methods “(Bowman, 1984, p. 62). Content analysis allows the researcher to interpret different definitions of exploration and exploitation as well as assign codes to alternative definitions. As opposed to
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The role of the BRI on Chinese MNE strategy quantitative content analysis, in qualitative content analysis, counting & tables lead to the interpretation of the patterns found in the data (Morgan, 1993), not the testing of pre-existing hypothesis. Based on the need to look for patterns in exploratory or exploitative strategic focus and its potential relationship with the BRI, qualitative content analysis is used in this thesis. More specifically, I opt for a summative approach to qualitative content analysis as it offers the possibility of mixing latent- and manifest content analysis (Hsieh & Shannon, 2005). Manifest content analysis is considered to be a more objective approach that allows researchers to examine the word count data more systematically and quantitatively. Latent content analysis, on the other hand, allows the researcher to interpret the quantitative outcomes of the content analysis and discover the underlying meaning of the words or content. To ensure the credibility of this summative approach to qualitative content analysis, it is important to show textual evidence that proof the consistence of the interpretation. Hence, the quantitative outcomes of the content analysis are augmented with textual evidence from the ARs.
The data is coded into Atlas.ti according to the typical content analysis procedures from Yin (1994). Using the March’s definitions of exploration “things captured by terms such as search, variation, risk taking, experimentation, play, flexibility, discovery, innovation” (1991, p. 71) and exploitation: “such things as refinement, choice, production, efficiency, selection, implementation, execution” (1991, p. 71), a string of words was formulated for word count analysis (see Table 3). However, even though the words and word roots derived directly from March’s definition, its explanatory power has yet to receive more testing as it has not received research attention prior to Uotila et al. (2009). For this reason, it is important to strengthen the research design with alternative operationalizations of exploration and exploitation, a measure that will make the results significantly more rigorous.
To improve the validity of the findings I included the previously mentioned alternative definition for exploration as “Exploration involves innovation, basic research, invention, risk taking, building new capabilities, entering new lines of business, and investments in the firm’s absorptive capacity” (Koza & Lewin, 1998, p. 256), with regard to exploitation, this “ is associated with increasing the productivity of employed capital and assets improving and refining existing capabilities and technologies, standardization, routinization, and systematic cost reduction” (Koza & Lewin, 1998, p. 256) (see Table 3). These alternative operationalizations assessed different key words and word roots related to exploration and exploitation, resulting in different word counts. However, the word counts were largely similar and displayed a highly significant relationship with each other. The word count variance between
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The role of the BRI on Chinese MNE strategy
March’s (1991) and Koza and Lewin’s (1998) exploration operationalization differed on average 11% (μΔ=0.11) and had a strong significant positive relationship (.96, p=0.000). The word count variance between March’s (1991) and Koza and Lewin’s (1998) exploitation operationalization differed on average 21% (μΔ=0.21) and also had a strong significant positive relationship (.63, p=0.000). The different operationalization of exploration displayed little variance and a strong significant relationship due to the fact that three word roots were similar (innovate*, search*, and risk*). For the two operationalization of exploitation only one word string was similar (producti*), which explains the higher variance and lower significant relationship (compared to exploration). Based on the similarity and complementarity of these two definitions per strategic focus both are included into the research design, thereby strengthening the validity of the results.
Table 3. Words and word roots used in Content Analysis (“*” can represent any character). ______March (1991) Exploration: explor*, search*, variation*, risk*, experiment*, play*, flexib*, discover*, innovat*. ‘things captured by terms such as search, variation, risk taking, experimentation, play, flexibility, discovery, innovation’
Exploitation: exploit*, refine*, choice*, producti*, efficien*, select*, implement*, execut*. ‘such things as refinement, choice, production, efficiency, selection, implementation, execution’
Koza & Lewin (1998) Exploitation: producti*, improv*, refine, existi*, capab*, standard*, routin*, systema*, reduct*. “Exploitation is associated with increasing the productivity of employed capital and assets—improving and refining existing capabilities and technologies, standardization, routinization, and systematic cost reduction”
Exploration: innovat*, search*, invent*, risk*, absor*, capacity* “Exploration involves innovation, basic research, invention, risk taking, building new capabilities, entering new lines of business, and investments in the firm’s absorptive capacity” ______
The four definitions of exploration and exploitation, formulated into word count code-strings, were subjected to the Key Word-In Context (KWIC) analysis from Krippendorff (1980). Its aim is to check the relevance of the coded words and its explanatory power about exploration or exploitation. 204 different words were recognized based on the proposed word roots. Of each word ten random occurrences were selected to check the relevance to the topic. Words and word combinations that were clearly irrelevant were identified, for instance, the word root ‘play’ coded two company names (Playsearch and
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The role of the BRI on Chinese MNE strategy
Playmates), as well as the words: ‘display’ and ‘disc-player’. A second example is that the word root ‘execut*’ coded ‘executives’. Any irrelevant coding was omitted from the word counts.
The word roots attributed to each of the definitions of exploration and exploitation, as can be seen in Table 3, will result in a table of numbers that explains its mentioning frequency within each AR of the four selected case MNEs. The exact word frequency will be of secondary importance for this thesis. Instead, the relative difference between the operationalizations of exploration and exploitation will be the main focus. The output table will be able to display the relative focus on exploration or exploitation from the four Chinese MNEs in a given year ex-ante or ex-post the BRI announcement. Yet, a few things have to be mentioned, for instance, there is a common assumption that certain words that are mentioned most often are the ones that reflect the highest relevance. This assumption needs to be adhered with caution, as synonyms may be used for stylistic reasons throughout a document and thus may lead the researchers to underestimate the importance of a concept (Weber, 1990). Additionally, it should be stated that not every word represents a category equally well (Stemler, 2000). Finally, due to the small case sample size (4), the word frequency analysis in itself is very limited in its explanatory or exploratory power. It is with these limitations of the analysis method in mind that knowledge exploration and theory-building cannot be drawn solely from analyzing the frequency counts. Therefore, the statistical results that are created through this coding process will be complemented with a thorough content analysis by hand of all 44 ARs, where I find within-case statements from the MNE in question that contribute to the explanation of the output tables (see Appendix 2 for examples). Due to the time-consuming nature of this analysis method, an increased emphasis was made on the chairman’s statements, and management discussion & analysis sections. By combining the hand-made content analysis with the word count frequency, an in-depth analysis of the individual MNE cases can be made. This provides the cross-case analysis with validity to make between-case comparisons whilst laying a good foundation for the exploration of new theories and knowledge on the topic.
3.5 Additional data collection As previously mentioned, Du & Zhang’s (2018) exploratory work has served as a pioneer in the use of firm-level data on BRI-related research. It has given scholars an insight into a number of BRI developments, the most relevant of which for this paper is the industry-level involvement of Chinese industries in BRI-countries. In the first two years after the BRI announcement the largest investments towards BRI-countries were made in the following industries: #1 energy & power, #2 industrials, #3 high-
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The role of the BRI on Chinese MNE strategy technology. The biggest limitation of this work, however, is its lack of symmetry in the data collection before (9 years) and after (2 years) the BRI announcement, an issue that limits comparability. Now, four more years of Chinese investment data is available, allowing me to replicate this research and provide a more updated and symmetrical version of Du & Zhang’s (2018) prior work.
Using the China Global Investment Tracker database (2020), all outward Chinese investments made after January 2008 that exceed $100 million USD are categorized into two groups: group 1 consists of all investments made to countries that are not participating in the BRI, while group 2 consists of all investments that were made towards countries that do participate in the BRI. All investments made to Group 1 or Group 2 countries are then split into a period before (2008-September 2013) and after (October 2013-2019) the BRI announcement. The outcome of this additional research can help to provide more clarity on the current progress of the BRI and its most relevant industries as well as map out China’s ‘GG 1.0 and 2.0’ investments strategies.
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The role of the BRI on Chinese MNE strategy
4. Results
After conducting the multiple case content analysis to visualize the relative relationship between exploration and exploitation word-frequencies, Table 5 was constructed. With regard to the small variance between the two different operationalizations of each strategic focus in the validity check, the March (1991) definitions were used to create the ratio between exploration and exploitation. The graphically illustrated results per MNE over an 11-year timespan appear in Tables 6 where the Y-axis displays the quantity of words mentioned in the AR of the respective year paired with both definitions of exploration and exploitation. To minimize loss of information and avoid confirmation bias, a structured result analysis is applied. First, the individual MNE cases are analyzed, which is done by looking at the strategic focus trendlines of Tables 5 and 6. The development of this trendline is augmented and explained using passages and content from the AR of that respective year. Using the KWIC method, key passages are identified that formulate essential strategic directions that are or are not related to the BRI-agenda. After this thorough analysis of the four individual MNE cases, the replication of Du & Zhang’s (2018) industry analysis are presented, providing insights into the context for a cross-case analysis. The cross-case analysis assesses the three propositions that were made earlier in the theoretical background section and analyzes the validity of these premade expectations.
Table 5. Relative ratio of exploration and exploitation word count exploration vs. exploitation ratio using March (1991) 3.5
3
2.5
2
1.5
1
0.5
0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Ratio Haier Ratio Hisense Ratio Lenovo Ratio TCL
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The role of the BRI on Chinese MNE strategy
4.1 Within-case strategy analysis
4.1.1 Hisense Kelon Table 6.1 Strategic focus Hisense Kelon Hisense Kelon Electronical Holdings Co. Ltd is the Hisense second largest daughter firm of Highsense medium-tech/SOE Infotech, a Chinese state-owned enterprise 150 founded in 1984. In this daughter firm, 91% of the 100 36 billion RMB annual operating revenue is drawn from medium-tech home appliances, like air- 50 conditioners (41%) refrigerators and washing 0 machines (45%).
Exploration Koza & Lewin In terms of the graph in Table 6.1, the strategic Exploration March focus on exploitation rather than exploration Exploitation Koza & Lewin Exploitation March between 2008 and 2011 can be attributed to the global economic downturn of 2008. As a response to the economic uncertainty, Hisense Kelon strived to enhance its operational efficiency and implement the operational strategy of “reshaping quality advantages, focusing on market-orientation, strictly controlling operational risks, improving the efficiency per capita and reinforcing project management” (AR Hisense Kelon, 2008, p. 2). This strategy was altered in 2011 as the chairman’s statement mentions restraints on the demand in China’s domestic market, which displayed lack of growth drivers, export difficulties due to increased pressure on exchange rates as well as increased raw material- and manpower costs. These factors intensified the operating pressure of the entire home electrical appliance industry which resulted in a change of operating strategy into “improving talent structure, reinforcing technological innovations, reforming marketing model, increasing per capita efficiency and accelerating the progress of internationalization” (AR Hisense Kelon, 2011, p. 4). This revised and more balanced operating strategy emphasizes both exploration and exploitation strategy, as it mentions innovation and exploring new markets through internationalization as well as reforming current models and improve efficiency. After 2013, the year in which the BRI was announced, Hisense Kelon’s balanced strategy shifted towards a higher focus on exploration. The reason behind this transition is the expected increase of RMB exchange rate risks as well as excess domestic inventory levels that serve as a burden for operational development. This increased perception of risk can be seen in the word frequency of the ‘risk’ word root: for 2015, it was
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The role of the BRI on Chinese MNE strategy
34%, and for 2016, it was 56% of all word root mentions. Simultaneously, Hisense Kelon hopes for quick economic recovery in the developed countries to help offload their excess inventory of large-sized refrigerator and ACs (AR Hisense Kelon, 2015). Hisense Kelon serves as a prime example of China’s issues with overcapacity as they repeatedly refer to their ‘excess domestic inventory levels’, one of the main driving reasons behind the BRI. This overcapacity problem for many Chinese firms has kept economic growth rates down, which makes it urgent for these firms to find alternative oversea markets (Wang, 2014). Due to the relatively large size of their products (refrigerators and ACs), Hisense Kelon should have a big interest in the improvement of infrastructure connectivity that the BRI delivers. Increased connectivity would lead to a reduction of transportation costs and would gain them access to new markets but there is no mention of the BRI in their ARs. Their aim to enhance the market scale in third and fourth tier markets of China largely complies with one of the primary goals of the BRI but the strategic focus lies more in “improving the sales proportion of mid- and high-end products” (AR Hisense Kelon, 2018, p. 17). This continuous improvement requires them to have a more active attitude towards innovation, (and thus exploration) which they call: “intelligentization” (AR Hisense Kelon, 2018, p. 15). In 2017 and 2018, Hisense Kelon implemented a more balanced strategic focus by increasing their competitiveness through technological innovation and improvement of quality, whilst continuously enhancing market scale, growth in scale, efficiency, and market share (AR Hisense Kelon, 2018).
The interesting finding of this Hisense Kelon case study is the fact that they have a lot to gain from the BRI, given their overcapacity issues and high transportation cost of products. At the same time, however, they do not seem to have adjusted their strategy towards BRI-countries. Despite an increased emphasis on an exploratory strategic focus, their primary goal is to attract the high-end customers that are generally located elsewhere, a finding that seems worrying for the future success of the BRI.
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The role of the BRI on Chinese MNE strategy
4.1.2 Haier Electronics Table 6.2 Strategic focus Haier Electronics Haier Electronics Group, founded in 1981, is a Haier Electronics subsidiary of the publicly owned Haier Group medium-tech/POE Corporation. It is one of the world's leading 140 company in white goods home appliance 120 100 manufacturing and sales of a wide variety of 80 60 household appliances, amongst other medium- 40 20 tech household electronic goods. Specialized in 0 washing machines and water heaters, Haier
Electronics’ products account for 14.9% of the Exploration Koza & Lewin global market share (22 billion RMB) in washing Exploration March machines, and 9.6% in water heaters (7 billion Exploitation Koza & Lewin RMB) (AR Haier Electronics, 2018). Exploitation March
Throughout the timespan of this research, Haier Electronics has displayed a relatively balanced focus on exploration and exploitation, with a slight preference for exploration developing in 2013 (see Table 6.2). Up until 2013, Haier Electronics’ main focus was the Chinese domestic market, as it faced the exact same challenges as Hisense Kelon in the global financial crisis aftermath. Instead of looking for established markets abroad, Haier Electronics decided to exploit the ‘rural area subsidized electrical appliances purchase policy’ of the Chinese government, formulated in 2009, to create a new market themselves. These Home Appliance going to Countryside (HAGC) policies focused on developing third and fourth tier cities located in inland China. Haier Electronics aimed to establish new sales, logistics and service networks in towns and cities as well as further expand into the countryside (AR Haier Electronics, 2008). After realizing the limitations of distribution to the more remote places in China, Haier Electronics introduced a distribution business as well as a logistics business in 2010: “We have developed from being solely a manufacturer of washing machines and water heaters to an influential integrated channel service provider towards the third and fourth tier markets” (AR Haier Electronics, 2010, p. 9). Since then, Haier Electronics would largely improve the efficiency of their logistics network in China, whilst innovating in its refrigerator and water-heater business worldwide. Following the BRI announcement in October, Haier Electronics engaged in a strategic cooperation with the Alibaba group in December 2013. Together they would “build on the capabilities in retailing and nation-wide distribution network, especially in the vast third and fourth tier markets, to accelerate the expansion of service platform of
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The role of the BRI on Chinese MNE strategy large-sized goods, such as home appliances, furniture and bathroom products….as well as create more business opportunities for the franchise network of the company through the country” (AR Haier Electronics, 2013, p. 43). This collaboration marks a big step in Haier Electronics’ strategy for the future as they would become more involved in developing China’s domestic logistical and distribution network. With the financial resources that became available after the BRI announcement, Haier Electronics was able to serve one of the BRI’s main goals to stimulate ‘facilitate connectivity’. Their efforts to develop inland China through economic growth would help to narrow the economic gap with the coastal region. The regional economic gap came as a result of the aforementioned favorable investment climates of the SEZ’s over the previous decades along the Chinese coastline. With China’s infrastructure construction boom, inland and coastal China became increasingly connected. Haier Electronics and the Alibaba Group are seizing this opportunity to expand their logistics and distribution network to the outskirts of China and develop new markets within the borders of their home country.
Whilst developing this distribution and logistics section, the consumer demands for refrigerators and ACs changed as they identified that: “the consumer market in China continues to upgrade, and consumers have increasingly higher expectations in terms of product quality and product customization, particularly the population born after the 1980s” (AR Haier Electronics, 2017, p. 9). They recognize that: “the home appliance industry in the Chinese market is fiercely competitive, and we can only survive through persistent innovation” (AR Haier Electronics, 2017, p. 10). These recognitions largely explain the increased strategic focus on exploratory activities since 2017, similar to the developments at Hisense Kelon and their ‘intelligentization’ attitude. After the introduction of the 2009 HAGC policies, Haier Electronics has been allocating effort and resources into connecting China, meaning they should be largely aligned and benefitting from the developments around the BRI. Yet, in their ARs there is no reference to the BRI and the way that Haier Electronics would integrate this into their corporate strategy, a finding that is similar to that of Hisense Kelon.
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The role of the BRI on Chinese MNE strategy
4.1.3 TCL Table 6.3 Strategic focus TCL TCL Electronics Holdings Limited is a subsidiary of the partially state-owned TCL Corporation, TCL high-tech/PSOE founded in 1985. In 2018, TCL became the 140 second largest TV-manufacturer in the world at 120 100 52 billion RMB in annual operating revenue, 80 60 solely from its TV business. The majority of these 40 20 manufactured TV's were exported to overseas 0 destinations (58%), with the remainders headed towards China's domestic market. Exploration Koza & Lewin Exploration March After the 2008 financial crisis, TCL expected their Exploitation Koza & Lewin overseas operations to come under tremendous Exploitation March pressure. Yet, they identified an interesting external factor that would drive their sales growth: the implementation of a ‘stimulus plan for electronics, information industry’ by the Chinese government that would artificially enhance customer demand in China through subsidized discounts on consumer electronics (AR TCL, 2008). The plan for 2009 would be to “enhance competitiveness through standardization and improvement of business processes and systems” (AR TCL, 2008, p. 10) and exploit this new government policy to “closely monitor business risks as well as control labor cost efficiently” (AR TCL, 2008, p. 11). This balanced strategy is reaffirmed in the 2012 AR (p. 9), as TCL adheres to a strategy of “vertical integration, innovation and internationalization”. This vertical integration refers to their efforts to improve sales channels and cut production costs as they were the only Chinese manufacturer in the industry that had a full industry chain under its control (production of LCD panels, modules and TV assembly). When mentioning opportunities, again, they argue that “the Chinese government will stimulate consumption to kick-start the domestic demand” (AR TCL, 2012, p. 9), displaying their strong reliance on government support packages. They also acknowledge that the future of the TV market lies in its integration with IT as internet firms were entering the TV industry (AR TCL, 2012). This acknowledgement resulted in an increased focus on exploration from 2013 onwards, as the word roots of innovation, risk and exploration become more apparent since that year. 2014, however, is the exception to this new focus on exploration as “the group’s operating results of the year substantially fell short of preset targets, the board of the company made significant adjustments in terms of business strategies and organizational structures” (AR TCL, 2014, p. 12) (see Table 5). The new strategy would:
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The role of the BRI on Chinese MNE strategy
“focus on structural improvement and efficiency enhancement to recover the business growth in the Chinese and overseas markets” (AR TCL, 2014, p. 14). 2015, once again ended on a positive note with 16.4% gross profit, which allowed TCL to refer to the year as the year of structure and efficiency. This profitable year gave shareholders the confidence to explore new opportunities and allocate funds towards innovation and experimentation. Confidence was high as their plans for 2016 included the following statement: “The government’s ‘Belt and Road’ international strategy has provided better opportunities and conditions for us to accelerate the implementation of our internationalization strategy” (AR TCL, 2015, p. 11). One year later they claimed to “leverage the ‘Belt and Road’ initiative to accelerate the business development in the emerging markets, further enhancing the layout for internationalization” (AR TCL, 2016, p. 14). Being the second largest TV manufacturer in the world with 58 % of the products being exported to foreign markets in 2018, TCL bets heavily on their internationalization strategy: “While strengthening the market position in the European and American markets, we are vigorously expanding the emerging markets. Our core strategy is to export the advanced manufacturing technologies and industrial capabilities and to firmly establish overseas market development and deepen our internationalization, of which the emerging markets including Brazil, India and Argentina are our key markets for development” (AR TCL, 2016, p. 14). This statement clearly illustrates the fact the TCL has no short-term plans to allocate effort and resources into gaining access to BRI countries.
Although the core strategy of TCL is to export their highly efficient manufacturing capabilities and exploit this FSA abroad, TCL is required to explore new emerging markets and partake in the innovation race that is demanded in the European and American markets. Due to these developments, the strategic focus of TCL has shifted towards exploration relative to exploitation since 2013 as can be seen in Table 5 and 6.3. Based on their ARs of 2015 and 2016, they show intent to benefit from the BRI developments, but do not provide any concrete actions plans to do this. In the two years after these BRI statements from TCL, they do not mention it again in their ARs and focus their efforts mainly towards non BRI countries. Being an SOE, TCL apparently had optimistic plans and interests in the progress of the BRI. However, based on the 2017 and 2018 ARs as well as their investment actions abroad in the years after 2013, this seems to have deteriorated significantly.
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The role of the BRI on Chinese MNE strategy
4.1.4 Lenovo Table 6.4 Strategic focus Lenovo Lenovo Group was founded in 2004 after its Lenovo parent firm, Legend Holdings, purchased IBM's PC high-tech/POE department. Since then it has become the world's 300 250 largest PC manufacturer with 63 million units sold 200 in 2019 and a global market share of 24%. The 150 100 main product mix can be divided into three 50 categories: PCs and Laptops (73%), Datacenters 0 and processing (10%), and Mobile business (16%), of its total 318 billion RMB operating revenue. Exploration Koza & Lewin Exploration March Exploitation Koza & Lewin Throughout the 2000s, Lenovo has been focusing Exploitation March on the development of the so called ‘first wave’ PC hardware business, which continued to deliver solid profitability and cash flow, allowing the ‘second wave’ of data processing and mobile computing to grow throughout the 2010s. Lenovo’s vision for the 2020s are focused on the ‘third wave’ of Device + Cloud strategy, which complements the established successes of the previous wave strategies. Table 6.4 displays that there is a clear distinction between the strategic focus on exploration and exploitation from 2013 onwards. Up until 2013, Lenovo was largely focused on this ‘first wave’ PC hardware business, a business that China was dominating at the time with 90% of all manufactured PCs in the world being assembled in China. In 2009, it was of great importance to “realign its resources and organizational structure to boost operational efficiency and reduce expenses” (AR Lenovo, 2009, p. 6). Also, Lenovo planned on leveraging the same government stimulus package as TCL to grow “its business, accelerate its expansion into other emerging markets and the consumer PC market and at the same time strengthen its leading position in the worldwide commercial market” (AR Lenovo, 2009, p. 6). Despite 90% of the PCs in the world being assembled and manufactured in China, Lenovo is still the only Chinese-based PC manufacturer amongst the top six in the world according to China Daily (2019). This phenomenon can be explained by the fact that the PC industry requires large standardized production facilities to create high quantities of PC-units, a requirement that fits well with Chinese manufacturing capabilities. However, the intellectual property of the software and programming side of the industry still resides largely in foreign hands. This industry development was one of the main reasons for the formulation of the ‘Made-in-China 2025’ project, whose primary aim was to ‘upgrade’ the state of intellectual property in Chinese firms. Yang Yuanqing,
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The role of the BRI on Chinese MNE strategy
CEO of Lenovo, mentions in the 2013 AR (p. 13) that the focus for future success lies in “differentiation through innovation. Lenovo has the gene of innovation. Our global Innovation Triangle- in the US, China and Japan – is capable of creating new markets with ground-breaking ideas”. This vision for the future has not changed since 2013 because you can clearly see in Table 5 that the mentioning of exploratory word roots has grown exponentially since then, whilst exploitation word roots have remained the same.
Lenovo’s continuous drive for improvement, complementarity, and differentiation through innovation since 2013 is displayed well in Table 6.4. They have allocated their resources and attention towards the research centers in Japan, the US and China and are now the world leader in a highly competitive PC industry. Hence, Lenovo should be considered as one of the prime examples of a successful ‘Made-in- China 2025’ implementation. When it comes to the BRI, Lenovo has not mentioned it once in their ARs, nor do they formulate substantial plans towards BRI-countries.
4.2 Cross-case strategy analysis The results of replicating Du & Zhang’s (2018) industry investment analysis provides an interesting insight into the development of Chinese outward investment behavior and are presented in Table 7. The findings of this replicatory research serve as an entry point in exploring the effect that the BRI has had on Chinese MNE strategy and helps to provide a context and manifestation of the Going Global transition period. The results indicate that little has changed on the industry-mix of Chinese investments towards BRI-countries in the period before and after the BRI announcement. The main industries that were involved in investments towards these countries were still: #1 energy, #2 metals and #3 transport, with no signs of an increase in interest by other industries. An entirely different result can be observed with regard to the transition of investments into non BRI-countries. Whereas the period before the BRI- announcement displayed a similar industry-mix as the BRI-countries, this composition changed entirely into a more balanced and diversified industry investment portfolio after October 2013.
4.2.1 The role of the BRI in China’s Going Global By integrating the replication of Du & Zhang’s (2018) work with the content analysis results of this thesis, insights into the country-level investment strategy of Chinese MNEs are augmented with an understanding of firm-level strategy considerations.
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The role of the BRI on Chinese MNE strategy
What the findings of Table 7 show is that up until the year 2013, China’s outward investment strategy was dominated by the energy, metals and transport industry. Energy sufficiency was a consistent worry for Chinese firms and for good reason; the number of privately owned vehicles, for example, shot up from 8 million in 1990 to 205 million in 2018. The household energy consumption, however, was dwarfed by the energy demand from China’s industrials accounting for more than 65% of China’s total energy consumption in 2017 (Statista, 2020). To provide the ‘world’s factory’ with a continuous inflow of natural resources, China was forced to look outward towards the resource-rich countries in Central Asia,
Table 7. Chinese investments towards (non) BRI-countries per industry since 2008 (>$100 million USD) Chinese investments towards BRI-countries per industry in Billion USD 160 140 120 109.7 100 80 60 41.71 37.97 40 13.12 13.5 13.09 18.89 20 6.73 2.27 4.11 1.51 9.11 4.92 2.25 0
January 2008 until September 2013 October 2013 until December 2019
Chinese investments towards non BRI-countries per industry in Billion USD 80 68.5 70 63.09 57.73 60 54.71 50 44.15 40 35.57 31.92 34.59 27.91 30 18.64 18.79 16.44 20 10 3.96 2.19 0
January 2008 until September 2013 October 2013 until December 2019
Source: used data from China Global Investment Tracker (2020)
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The role of the BRI on Chinese MNE strategy
Africa, Latin America, and the Middle east. Until 2013, China almost solely investing in foreign energy and metal sectors, whilst securing the infrastructure that allowed these resources to be transported back to China. During this ‘GG 1.0’ phase, China concentrated its investment in the developing world with tremendous amounts of trade, energy deals, and infrastructure projects (Zhu, 2018). With most of this ‘GG 1.0’ country-level knowledge already familiar to the research field, the findings of the content analysis give a new insight into the strategic preference of Chinese MNEs in this period.
The content analysis finds that there is an apparent observable shift in strategic focus from exploitation towards exploration for all four of the selected case MNEs. To observe this shift, you can look at Table 5 and see that up until 2013, the strategic focus has largely been on exploitation. This strategic focus on exploitation activities is in accordance with the characteristics of the ‘GG 1.0’ phase, a phase that gave shape to China’s enormous manufacturing capabilities. All four firms faced the backlash of the 2008 global financial crisis, which led them to look inward for improvements. In all four of their 2008 ARs, an adjustment of strategy can be seen as they look for standardization, the exploitation of current capabilities and a search for increased efficiency. As the global economy slowly rebounded, China started to struggle with the overcapacity of its highly efficient manufacturing industries. Simultaneously, many Chinese MNEs were able to catch up on the capabilities of their foreign competitors. This meant that they could no longer follow and imitate the frontrunners in their industry but, instead, had to start competing and upgrading their own capabilities. This great necessity to allocate manufacturing overcapacity, upgrade Chinese firm capabilities and compete globally served as a solid foundation to begin the exploration of more developed markets and transition into the new ‘GG 2.0’ phase.
Table 7 shows us that since the BRI announcement in October 2013, the investments towards BRI- countries remained limited to the energy, metals and transport industry. Towards non BRI-countries, however, the portfolio investment ambitions of the ‘GG 2.0’ phase are clearly apparent as it displays increased levels of diversification. This significant difference in development supports the idea that investments towards BRI-countries are not part of the ‘GG 2.0’ phase. Instead they were fueled by the motivations and characteristics of the ‘GG 1.0’ phase. Duan et al. (2018) theorize that one of the main purposes of the BRI is to provide a new platform for the development of China’s overseas energy investment and has had important implications for maintaining regional energy security and stability. They also refer to EIA statistics that show that the proven reserves of oil, natural gas, and coal in nations under the BRI make up 58.8%, 79.9%, and 54.0% of the world’s total. This notion that the BRI serves as a
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The role of the BRI on Chinese MNE strategy tool to gain energy security and stability is strengthened by the findings of the firm-level content analysis.
The technology industry was chosen for this content analysis based on Du & Zhang’s (2018) work, who identified it as the #3 industry involved in investing in BRI-countries after energy and industrials. Now, with 4 years of additional data, it can be concluded that this finding was only time-bound as the technology industry developed a clear preference to invest in non BRI-countries together with many other industries (agriculture, entertainment, finance, health, real estate, tourism and transport). For the four selected case MNEs of this thesis, based on the data collected from the China Global Investment Tracker (2020), a limited amount of big investments was made into BRI-countries since its announcement (see Table 8). For example, Lenovo invested $5,5 billion USD exclusively into the US and Japan between 2013 and 2019, which they consider along with China to be their ‘global innovation triangle’. According to Chaminade & Rabellotti (2015), gaining access to technology know-how and management experience by investing in mature market-based economies has been the greatest driving forces behind the internationalization of Chinese companies. From this perspective, when it comes to the ‘GG 2.0’ phase, it appears that there is no relative predilection among Chinese MNEs’ decision to invest in BRI economies except for firms in the energy, metal and transport industry. Gunessee & Liu (2020, p. 36) find that “China’s post BRI-foreign economic cooperation with BRI-countries has increased but without a systematic capital reallocation towards BRI economies, except for exports and contracted engineering projects (e.g. infrastructure investments)”, largely supporting the findings of Görg & Mao (2020) and Du & Zhang (2018). However, Görg & Mao (2020) actually confirm that in the years following the BRI announcement, public- and privately-owned enterprises, who account for 80% of China’s export volume, did not increase their export volumes towards BRI-countries. This development seems troubling for the vision of the BRI becoming more than a bandwagon for China’s natural resource security. Considering the uninvolved role of the technology industry in the current BRI progress, I can suggest that the reason for the significant shift towards an exploratory strategy for all four selected case MNEs lies elsewhere.
Whereas the trendlines in Table 5 were largely below the balanced ratio of 1.00 between 2008 and 2012, they started to climb upwards from 2013 onwards meaning an increase in exploratory strategy activities. Despite this development being quite significant, one should be careful to attribute it to a single cause. There appears to be, however, a consensus between all four selected case MNEs that a more exploratory strategy is required for their future survival. This manifests itself into, for example,
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The role of the BRI on Chinese MNE strategy
Hisense Kelon’s ‘intelligenization’ attitude, Haier Electronics’ statement that they can only survive through innovation, TCL having to part-take in the ‘innovation race’ and Lenovo’s continuous drive for improvement, complementarity, and differentiation through innovation. All four of these selected case MNEs operate in a fast-paced industry where it is required to continuously innovate and explore new markets as “the risks of falling behind or failing by waiting too long to break out of the home market exceed the hazards inherent in any process of globalization” (Guillen & Garcia-Canal, 2010, p 10). This recognition can be seen as the primary driver of the transition into the ‘GG 2.0’ phase, a phase that manifests itself in the ‘Made-in-China 2025’ ambitions, aiming to upgrade China’s technological and intellectual capabilities.
Table 8. Large scale investments made by case study firms since 2005 (>$100 million USD)
Year Month Investor Investment Sector Country Region BRI in millions 2011 July Haier $ 130 Consumer Japan East Asia No 2012 October Haier $ 680 Consumer New Zealand East Asia No 2016 January Haier $ 5,400 Consumer USA USA No 2018 October Haier $ 550 Consumer Italy Europe Yes 2019 March Haier $ 520 Consumer India West Asia No 2019 August Haier $ 340 Consumer Russia West Asia Yes 2011 January Lenovo $ 180 Technology Japan East Asia No 2011 June Lenovo $ 670 Technology Germany Europe No 2012 September Lenovo $ 150 Technology Brazil South America No 2014 January Lenovo $ 2,910 Technology USA USA No 2014 January Lenovo $ 2,140 Technology USA USA No 2016 July Lenovo $ 200 Technology Japan East Asia No 2017 November Lenovo $ 220 Technology Japan East Asia No 2019 September TCL $ 310 Entertainment India West Asia No 2017 November Hisense $ 110 Entertainment Japan East Asia No 2018 May Hisense $ 340 Consumer Slovenia Europe Yes Source: used data from China Global Investment Tracker (2020)
Based on Gunessee & Liu (2020), I can establish that, for now, the biggest impact that the BRI has had is the stimulation of economic policy cooperation and an increase of contracted engineering projects. The four selected case MNEs are not investing in BRI-countries, prioritize target markets other than the BRI- country markets and are not increasing their export towards BRI-countries. It looks like they are aware of the potential opportunities that a successful implementation of the BRI can bring, but are not convinced yet to allocate their valuable attention and resources towards these BRI-countries as they
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The role of the BRI on Chinese MNE strategy currently see more growth potential in the developed and the domestic markets. With this in mind, I can confirm proposition 1 as there is an observable shift in strategic focus from exploitation towards exploration after 2013, but this strategic shift cannot be attributed to the BRI. The BRI, based on my findings, can be considered to be the continuation of the ‘GG 1.0’ phase that aimed to secure the inflow of resources needed to supply China’s rapidly growing economy. A more likely reason for the increase in exploratory strategy of Chinese MNEs is the CCP’s call to ”take risks in all countries and regions….use innovative methods to undertake overseas expansion” (Zhu, 2018, p. 164 ) in November 2013. This announcement and the attached set of policies would provide China’s MNEs with more freedom in their exploration of cross-border opportunities. In the period that followed this announcement, Chinese MNEs started to invest heavily into developed economies and compete at the global stage. The global stage required them to take additional risks, facilitate fast-paced innovation and continuously explore new opportunities. This new role of Chinese MNEs at the global stage would become the real manifestation of the ‘GG 2.0’ phase, not the BRI.
4.2.2 The BRI and firm-level findings Ownership structure To address proposition 2, which argues that ownership structure is expected to have an impact on the strategic focus of the Chinese MNEs, it is important to note that this topic has received an abundance of research over the years. The BRI, however, was never considered in this mix. Keane (2018) mentions that China’s big new players are not state-owned, at least not in the way that media industries were in the previous decades. They have initial public offerings (IPOs), they engage in aggressively capitalist- style mergers and takeovers, and they push the boundaries of expression. In an industrial sense, going out is synonymous with going global, a path created by large SOEs, later followed by commercial businesses such as Lenovo (computing), Haier (white goods) and Huawei (mobile phones) (Keane, 2018). Although not state-owned, these ‘new’ and big commercial players have all benefitted greatly from favorable domestic business environments that shaped their success, as can be seen in the within-case analysis'.
The HAGC policies, for example, have had great impact on the success of Haier Electronics and Hisense Kelon. The HAGC began on a trial basis in 2008 in the three provinces of Shandong, Henan and Sichuan, as well as the city of Qingdao, as a way to increase the adoption of home appliances in farming villages. The subsidies were rolled out nationwide over a four-year period, beginning in 2009. According to this
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The role of the BRI on Chinese MNE strategy policy, part of the purchase price of home appliances was subsidized for those whose registered domicile was in a rural village. This subsidy was meant to positively impact the heretofore-feeble amount of home appliances in rural villages (Sate, 2013). Both Haier Electronics and Hisense Kelon find their origins in this trial city of Qingdao and have been targeting the developing third and fourth tier areas of the Chinese market ever since. The potential growth of this market actually became so attractive for Haier Electronics that, in 2009, they started to invest and collaborate with logistics and distribution firms to improve the connectivity with these areas, which has become one of their largest sources of income ten years later.
For Lenovo and TCL, a similar shaped policy package aided them in becoming a world leader in their respective product industry: the ‘stimulus plan for electronics, information industry’. This stimulus package would artificially enhance the demand for electronics products in China’s domestic market, helping firms in this industry grow and sideline their overcapacity issues. In fact, when you look at how the four selected case MNEs in this thesis came to be as big as they are today, you cannot help but point out the favoritism enjoyed from the Chinese government in the ‘GG 1.0’ phase. Therefore, despite the separation in ownership structures of the four selected case MNEs, it should be kept in mind that the Chinese government represents a big role in the economy through its SOEs as well as their supervision and indirect influence on POEs. However, the Chinese MNEs that became large due to the government’s stimulation of the domestic demand started to face overcapacity issues and a decelerating domestic demand growth. These issues forced Chinese firms to look outward and transition into the ‘GG 2.0’ phase where they would have to explore new markets and knowledge domains to stay competitive. One of the main goals of ‘GG 2.0’ was to stimulate global demand, a measure that, for obvious reasons, the Chinese government has less control over than their HAGC and electronics stimulus plan of the previous decade. China’s ‘new’ big commercial players would have to increasingly depend on their own capabilities to compete globally as they became significantly more vulnerable outside of their domestic borders.
Having established the finding that all four case selected MNEs have enjoyed preferential treatment in their path to the top of their industry, it is an interesting to see that none of the four have integrated the government’s BRI plans into their strategy. On the one hand, SOEs are often considered to play a pivotal role and be a reliable force in the government’s implementation of its ambitions. POEs, on the other hand, compose the majority of the production of national output and employment, despite being disadvantaged in gaining access to resources such as capital, land etc. (Du & Zhang, 2018). This often
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The role of the BRI on Chinese MNE strategy leads to POEs increased willingness to cooperate well with local or national bureaucrats abroad to circumvent their country-specific disadvantages. The difference in strategy between the selected case MNEs is visible in Table 5 & 8, which highlight the POEs’ significantly increased presence on the world stage as well as their higher focus on an exploration strategy. This difference in strategy, however, cannot be attributed to the BRI as the household electronics industry has shown little involvement in the BRI. Instead, I found something different.
The two POEs, Haier Electronics and Lenovo, proved to be significantly more active in their capital allocations towards developed economies as they adjusted their strategy to focus on the high-end product market. Haier Electronics would engulf itself in its biggest foreign risk to date by acquiring the home appliance division of General Electric for $5.4 billion USD in 2016, thereby gaining 14% of the US appliance market. This high-profile acquisition carried big risks for Haier Electronics as being recognized as a foreign firm is not always an asset (or advantage), but almost always a debt (or disadvantage). Since 2011, Lenovo has also invested hefty amounts of capital into the US, Japan, and Germany ($6.2 billion USD), as they consider the US, Japan, and China to be their ‘global innovation triangle’. The fact that Haier Electronics and Lenovo are both POEs listed on the Hong Kong stock exchange led to these acquisitions receiving relatively little public resistance in the developed economies of the US and Japan. Resistance to Chinese SOE foreign investments has been widely documented amidst the controversial exclusion of Huawei from the US market. According to Zhao (2019: p. 382) Chinese scholars are concerned that “the US, Europe, and Japan might forge a new economic bloc that adopts more coordinated measures to put pressure on China, especially towards its SOEs”.
Compared to the two POEs, the two SOEs of this thesis display a different approach in their strategies. As opposed to Haier Electronics’ push towards the developed markets, Hisense Kelon largely emphasizes the developing markets of Eastern-Europe, third and fourth tier markets in China, as well as other economies in Asia. TCL, on the other hand, made its first big foreign investment in 15 years at the end of 2019, as it built a big panel factory in Southern-India worth $310 million USD. This investment complies with their core strategy to “export their advanced manufacturing technologies and industrial capabilities as well as establish overseas market development” (AR TCL, 2016, p. 14). Similar to Hisense Kelon, it would be more difficult for TCL to successfully enter developed markets, especially due to the constraints and increased liability of foreignness that Chinese SOEs are experiencing in developed countries. Instead, TCL focusses its growth opportunities on developing markets such as India, Brazil and
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The role of the BRI on Chinese MNE strategy
Argentina as mentioned in their 2016 AR. Interestingly, TCL was the only MNE of the four that formulated an interest in leveraging the BRI to stimulate its internationalization strategy in 2015 and 2016. This strategic opportunism is similar to how they exploited the ‘domestic demand stimulus packages’ in the beginning of the 2010s, yet, they appear not to commit to the BRI fully, as it is not mentioned again in the 2017 and 2018 AR. Instead, in 2019, TCL decided to construct a large manufacturing plant in the South of India, a country that is not participating in the BRI. This attitude towards the BRI is a representation of many more Chinese MNEs that welcomed the idea of its future growth potential but are not seeing a short- to medium-term return on their investment, something that has become increasingly important during the ‘GG 2.0’ phase.
Although the two researched Chinese POEs display a marginal preference in strategic focus on exploration compared to the two SOEs after 2013, it is their geographical market focus that sets them apart. Together with many other industries, the tech-industry has yet to identify and act upon the opportunities that the BRI aims to bring in the future. What I find in this thesis is that both POEs and SOEs in the medium- and high-tech industry have not adjusted their strategic focus towards exploration due to the BRI, but as a response to the developments of the global market place that led to the ‘GG 2.0’ phase. For this reason, within the limits of this research framework, I did not fulfill the expectations made in proposition 2 but leave room for a discussion on other industries.
Technological categorizations The findings of this content analysis identify an observable difference between the strategic focus development of the medium-tech firms compared to the high-tech firms. Up until 2012, the balance between a strategic focus on exploration and exploitation was largely similar for all four of the selected case MNEs, as can be seen in Table 5. This balanced strategic focus can be attributed to the ‘GG 1.0’ phase, where efficiency, resource security and economies of scale were key. However, from 2013 onwards, a clear difference started to develop between the strategic focus of the two medium-tech firms compared to the two high-tech firms. Lenovo and TCL face a significantly higher level of technological dynamism compared to Hisense Kelon and Haier Electronics, which translates into an increased pressure to innovate. Under Moore’s law (1965), that proclaims a microchip to double in capacity every two years, High-tech products such as PCs and Smart TVs that heavily rely on microchip development and software updates become outdated significantly more quickly than ACs and refrigerators. This gives the high-tech manufacturer less time to sell their product at a prime rate before
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The role of the BRI on Chinese MNE strategy a competitor introduces an upgraded version of the product. The high-tech products from Lenovo and TCL are primarily targeting developed markets, where the urgency for innovation is high and customers are willing to pay premium-prices for ‘top of the line’ products. This clearly identified target market largely explains their lack of commitment towards the developing BRI-countries in their internationalization strategy, as the demand for premium products in these countries is simply lower. The same reason counts for the medium-tech firms: Haier Electronics and Hisense Kelon. Although they are also targeting the developing economies of China’s third and fourth tier cities and other developing countries, the BRI is not integrated in their strategy. This confirms the expectation made in proposition 3: that the industries in higher technology categorizations display less willingness to adjust their strategy to the developing BRI-country markets. This notion can be verified by looking at the three industries that are most involved in the BRI: energy, metals and transport. These industries should be considered, using Lall’s (2000) categorizations, as resource-grade and low-tech industries due their relatively low levels of technological dynamism.
Up until 2019, firms from advanced industries were hesitant to invest in the developing BRI-countries, as they saw more opportunities in the developed countries. However, often overlooked or underestimated in the BRI discussion are the massive digital infrastructures (e.g. fiber-optic cables and data centers) that have been laid alongside transport and energy projects (Brown 2017; Rolland, 2015). As noted by the World Economic Forum in 2014, citing a report by Deloitte and Facebook, “4.5 billion people were at the time not connected to the Internet despite living within range of 2G or 3G networks”. In 2016, the State Council published the ‘13th Five-Year Plan for National Informatization’, devoting a specific section to the construction of an ‘online Silk Road’ and encouraging the full participation of Chinese Internet companies. The establishment of this ‘online Silkroad’ could provide Lenovo and TCL, for example, with a big opportunity for market growth in the future as it opens up previously inaccessible markets and immediately introduces 5G networks.
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The role of the BRI on Chinese MNE strategy
5. Conclusion and Discussion
5.1 Conclusion The goal of this thesis was to explore the effect that the BRI announcement in 2013 had on the strategic focus from Chinese MNEs in an attempt to answer the research question: How has the Belt and Road Initiative changed the strategic focus of Chinese Multinational Enterprises? To answer this question, a content analysis approach was applied to the ARs of four Chinese MNEs between 2008 and 2020. Using the word count method, the development of strategic focus on exploration and exploitation was measured and augmented with passages from the ARs. It finds that in the period prior to 2013, the strategy of the selected case MNEs was mostly focused on activities related to exploitation. After 2013, there is an observable shift for all four MNEs towards a strategic focus on exploration. However, based on the in-depth analysis of the ARs, there is no evidence that relates this shift in strategic focus specifically to the BRI. Although mentioned only briefly by TCL in 2015 and 2016, the four selected firms did not address or refer to the BRI in their future plans or strategy section of the AR, which shows that the BRI is low on their priority list. This statement can be backed up by the foreign investment activities of the four firms between 2008-2018, as more than $12 billion USD was invested into developed markets of the US, Japan, Germany and New Zealand and only $1.3 billion USD into BRI- countries of Italy, Russia and Slovenia (see Table 8). In light of this, I also found that the ownership structure of the firm did not necessarily impact the strategic focus on exploration or exploitation; instead, it strongly impacted the internationalization strategy. POEs appear to be able to enter developed economies through investment more easily than SOEs that experience increased liabilities of foreignness. It seems that the POEs adopt a strategy that is slightly more focused on exploration, but the difference with SOEs is not convincing. The biggest difference in strategic focus development from 2008 till 2018 was observed between the two firms that produce medium-tech products (ACs and refrigerators) and the two that develop high-tech products (PCs and Smart TVs). The main reason for this difference in development is that the latter operate in environments with higher levels of technological dynamism. This high-pressure environment quickly makes products outdated, creating a constant necessity for innovation and the exploration of new opportunities, hence the increased strategic focus on exploration. I found that, in their current state, many BRI-countries are considered to be developing countries, which makes them less attractive markets for medium- and high-tech premium products. This finding is validated by a replication of Du & Zhang’s (2018) work, that shows the most
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The role of the BRI on Chinese MNE strategy involved industries in BRI-countries are energy, metal and transport, who are considered to be resource- based and low-tech according to Lall’s (2000) categorizations.
It must be mentioned that the findings on the influence of ownership structure and level of technological dynamism on firm strategy are not novel or surprising. However, the most interesting finding in this thesis is that none of the four selected firms appear to have included any plans to benefit from the BRI plans initiated by the Chinese government since 2013. The strategic adjustments that were made over the timespan of 11 years were all made based on global market developments of the ‘GG 2.0’ phase and opportunities that largely involved non BRI-countries. “Some scholars describe the BRI as containing boundless business opportunities, while others see it as an indication of general directions without specifics, and still others regard it as merely an empty slogan” (Cheng, 2016, p. 309). It seems that these boundless business opportunities are not yet recognized or acted upon by the medium- and high-tech MNEs of China. For them, the BRI economies represent a large market with opportunities and potential but with significant governance risks, administrative burden to trade and technological impediment to connectivity (Gunnesse & Liu, 2020). Over the last 7 years, the BRI-related research has become increasingly well documented, leaving no justification to discard it simply as an ‘empty slogan’. Instead, I believe that the research conducted in this thesis leads to the conclusion that, at least from the perspective of medium- and high-tech firms, the BRI is merely a ‘direction without specifics.’
5.2 Theoretical contributions The findings of this thesis provide three large contributions to the field of BRI-related research.
First, I want to clarify what the exact role of the BRI is in China’s global strategy. The BRI seems to be driven by the same motivations that characterized the ‘GG 1.0’ phase. During this phase, China has largely concentrated its outward investments towards the resource-rich developing world, focusing almost entirely on energy deals and infrastructure projects. This description of the ‘GG 1.0’ phase matches the current state of the BRI, which means that not much has changed since then. The BRI embodies a continuation of the ‘GG 1.0’ phase towards developing countries to achieve resource security and export value chains in a search for cost-efficiencies, resources, and new markets. O’Brien, Chan and Chan (2020) acknowledge that the BRI is simply an extension of the original ‘GG 1.0’ policy, but reoriented and targeted. The ‘GG 2.0’ phase, on the other hand, is more focused on the developed world as Chinese MNEs make portfolio investments and acquire strategic assets to upgrade the
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The role of the BRI on Chinese MNE strategy technology grade of their products. This means that for the future understanding of scholars, the BRI should be considered as a continuation of ‘GG 1.0’ towards developing countries, whereas ‘GG 2.0’ can be considered as China’s strategy towards the developed countries in an attempt to avoid the Middle- Income-Trap.
Second, the research results of this paper confirm that the medium-and high-tech firms of China focus their strategy largely on the characteristics of ‘GG 2.0’ and the developed markets around the world. These findings help to address the heterogeneity issues of the used dataset that were mentioned in the country-level research of Görg & Mao (2020) and Du & Zhang (2018). The heterogeneity issues largely referred to their used dataset, which comprised over many different industries and ownership structures. In this thesis, I focused my efforts on one highly influential industry with regards to China’s export mix. As mentioned before, since 2016, the share of medium- and high-tech manufacturing products in China’s export basket has exceeded 70% (Hou et al., 2018), which makes the findings in this thesis alarming for the BRI’s future success. This thesis proves that an important group of China’s MNEs are not including the BRI in their strategic goals or directions, at least not during the first 6 years after its announcement. It emphasizes the most essential condition for the successful implementation of the BRI, which is that the investments in infrastructure become obsolete if trade or people exchange does not follow. Two of the main BRI goals are to stimulate ‘unimpeded trade’ and ‘financial integration’; however, for the largest part of China’s export basket there is yet to develop a significant market in the majority of the BRI-countries. Moreover, it is clear that the Chinese investments in BRI-countries are almost entirely focused on natural resources and energy, begging the important question: how can these countries benefit most from this ‘unimpeded trade’ and ‘financial integration’? This consideration is especially relevant for the BRI-countries that are considering large-scale infrastructure investments with money loaned from Chinese Infrastructure banks.
Third, despite the finding that the BRI has had little influence on the strategic focus of the selected Chinese MNEs, I provide scholars with evidence that although receiving overwhelming recognition (Gibson & Birkinshaw, 2004: O’reilly & Tushman, 2013), a balanced strategic focus between exploration and exploitation is not always the best. Instead, I can partly agree with Barney (1991) and Porter (1985), that in an increasingly globalizing world where competition is becoming fiercer, an increased strategic focus on exploration or exploitation can be a requirement to stay competitive, especially in industries with very high or very low levels of technological dynamism.
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All in all, this thesis has contributed an in-depth understanding of Chinese MNE strategy development in the household electronics industry over a period of time where many Chinese firms transitioned from being imitating market challengers into innovating market leaders. It provided a valuable insight into the limited impact that the BRI had on their strategic development and puts the BRI in perspective. Yet, its biggest contribution to the research field of BRI is to provide firm-level insights that can help researchers understand the considerations made by Chinese tech-MNEs in their strategy.
5.3 Limitations and future directions As the results of this thesis have been based on four MNEs in the household electronics industry, the findings should not be assumed to be a representation of all Chinese MNEs. Whereas the previous aggregated firm-level findings from Görg & Mao (2020) and Du & Zhang (2018) were exploratory at the macro-level, this thesis is exploratory at the micro-level or firm-level. The issue with both research papers is that they lack in-depth analysis but contribute a lot of knowledge at macro-level, whereas this thesis provides the exact opposite. Together, however, they complement each other, allowing the research field to progress in their understanding of the BRI. With the passage of time, however, the field can obtain more evidence on various aspects of this grand project on international economic integration (Du & Zhang, 2018). For now, based on the findings that the medium- and high-tech firms are not committing to the BRI, further research could focus more on the firms that manufacture or trade in the other two Lall (2000) technological categorizations: low-tech and resources. Based on the China Global Investments Tracker (2020) data, metals, power and transport are the industries that receive the most Chinese investments in BRI-countries (see Table 7). For future research it would be interesting to see if these firms have adjusted their strategic focus since the 2013 BRI announcement or if their internationalization strategy has changed. If this strategy did not change compared to the period before 2013, that would mean that the BRI, to this date, simply is a rebranded version of the ‘GG 1.0’ phase but with deeper pockets.
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7. List of Abbreviations
AC = Airconditioner AR= Annual Report BRI = Belt and Road Initiative CCP = Chinese Communist Party FSA= Firm Specific Advantages HAGC = Household Appliances Going to Countryside IT = Information Technology KWIC = Key Word In Context LCD = Liquid Crystal Display MNE = Multinational Enterprise PC = Personal Computer POE = Publicly Owned Enterprise PSOE = Partially State Owned Enterprise RMB= Renminbi SEZ = Special Economic Zone SOE = State Owned Enterprise USD = United States Dollar
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9. Appendix
Appendix 1. A visualization of the Belt and Road Initiative
Source: Asia Green Real Estate (2018)
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Appendix 2. Examples of KWIC analysis for most used words
Word root______Example______Risk* “At Lenovo, risk is defined as a potential action, event or circumstance that could impact the company’s ability, favorably or unfavorably, to meet its strategic goals. Risk is an inherent part of the company and needs to be understood and managed properly to provide a foundation for the company’s sustained growth”.
Search* “In order to enhance long-term competitiveness, the Group committed more efforts to the research and development of high value-added products and the products catering for the rural market, resulting in an increase in research and development expenses”.
Innovat* “As innovation is the central pillar of TCL, the Group will remain dedicated to the development of 3D TVs and smart “cloud” TVs in order to enhance the product mix of high-end products to increase profit margins”.
Efficien* “the company organized two analyst roundtables during the year, in which Lenovo’s senior executives discussed the company’s efforts on product development and improving efficiencies in its global supply chain”.
Producti* “Hisense Electric and/or their respective subsidiaries can help to lower the production costs of the group as a result of the increase in production level, which in turn enhance the market competitiveness of the group’s products”.
Improv* “During the year, the percentage of total costs to revenue ratio declined as compared to 2008 after the group had taken various measures such as optimization of business ______process, improvement of organizational efficiency and cost control”. ______
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