China Goes Global Comparative Presence in Global Fortune

12/29/2010

THE GLOBAL STRATEGY OF EMERGING China goes MULTINATIONALS FROM CHINA global The significant outward Mike W. Peng foreign direct investment Provost’s Distinguished Professor of Global Strategy (OFDI) made by Chinese University of Texas at Dallas multinati onal ent erpri ses www.mikepeng.com [email protected] (MNEs)

MANAGEMENT RESEARCH FORUM Chinese University of Hong Kong (keynote @ Harvard December 2010 conference in Oct 2009)

Comparative presence in Global Fortune 500: Chinese firms Which of the following two cities has a larger are clearly growing number of Fortune Global 500 company 2005 2006 2007 2008 2009 headquarters (in 2009)? Brazil 4 5 5 6 7 Russia 5 4 5 8 6 India 6 6 7 7 8 • BijiBeijing China 20 24 29 37 46 • New York BRIC 35 39 46 58 67 USA 170 162 153 140 139 EU 165 165 170 163 161 Japan 70 67 64 68 71

“Is China Inc. intent on buying the world? It sure looks that way”

ANSWER (in 2009) But, REALLY? In the same BW • Beijing (30) article (07/27/2009): • New Yor k (19 in NYC + 3 more i n sub urb s) Total Chinese OFDI stock @ $170 B is only 1/30th of US OFDI (1% of world total)

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The Beijing Media sensation Consensus continues (Ramo, 2004) (11/11-19/2010) versus The math simply doesn’t add up The Washington if 1% of global Consensus OFDI (allegedly broken can “buy up” thanks to the 2008 the world crisis)

The “China on steroids” literature (a term coined by David Lampton— Jacques, 2009) Foreign Policy paper by Robert Fogel ($123 trillion—2010) . But, 10 yrs ago . . .

The “China on the As recently as in verge of collapse” 2007, China was literature viewed as “so broken” (Chang, 2001) (thanks to toy recalls, Despite the endemic corruption, provocative title, this and spreading eco- book is not alone crisis)

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My advice: Here is a better way to view the What happened to the complex relationship: “Japan on steroids” The ODD COUPLE literature (Japan as (the G2) who have to No. 1—1979)? work (sleep!) together Did Japan “take over” The most important America (circa 1989)? relationship today and tomorrow

OUTLINE: A series of unique impact (1) Positive role of on research and practice the Chinese government • The previously underappreciated role played by • Home country government: A neglected topic: • Most research focuses on host country governments the domestic governments of MNEs • Positive role of the Chinese government • The challenge of going abroad in the absence of • “Go outside” / “go global ” policy significantly superior managerial and technological • Supporting Chinese MNEs with real cash/loans resources • Interesting links between inbound FDI-friendly • The rapid adoption of (often high-profile) policies and outbound FDI acquisitions as a mode of entry • Guangdong generates 20% of Chinese OFDI

Negative role of the Chinese government How does China research contribute to the global literature? • China invests more in British Virgin Islands ($6.6B in FDI stock) than in the UK ($0.95B)—7 times (!) • An emphasis on institutions as rules of the game • BVI, in turn, invests more in China than the UK • In this case, an emphasis on the role of domestic • BVI also beats the US as a recipient of Chinese governments at various (central and provincial) OFDI and an originator of Chinese IFDI levels • Why? An escape from harsh home country institutional environments

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(2) Going abroad without superior Theoretical contribution: managerial and tech resources an institution-based view

A strategy tripod (Peng et al., 2008 JIBS, 2009 AMP) • A puzzle under the current theory (derived from MNEs from developed economies) • Dragon multinationals: Mathews (2006, APJM) • An LLL framework (as opposed to OLI) • Linkage • Leverage • Learning

But progress is fast: Patents in 2008 • Which company filed the largest number of CASE: Huawei patents in the world? •US headquarters on • Not your usual suspects! Independence Pkwy, • It is Huawei (defendant of the Cisco vs Huawei case for Richardson, Texas alleggppy)ed intellectual property violation) • Cisco vs. Huawei Table 11.3. Top Ten Patent Applicant Companies Patent applicant Number of Patent applicant Number of (2003-2004) companies applications companies applications 1 Huawei (China) 1,737 6 Siemens (Germany) 1,089 2 Panasonic (Japan) 1,729 7 Nokia (Finland) 1,005 • If you lost a job @ 3 Philips (Netherlands) 1,551 8 LG Electronics (South Korea) 992 4 Toyota (Japan) 1,364 9 Ericsson (Sweden) 984 Nortel, find a new job 5 Robert Bosch (Germany) 1,273 10 Fujitsu (Japan) 983 [Source] Data extracted from World Intellectual Property Organization, 2009, Top 50 PCT applicants in 2008, Geneva: WIPO (www.wipo.int). The number of applications refers to international patent filings under WIPO’s Patent Cooperation @ Huawei! Treaty (PCT) during 2008.

Tech resources are on the rise Managerial resources are still clearly lacking • In 2008, China filed the 6th largest number of • Not your average manager: China has plenty patents in the world (US/China difference in #: 9 • Internationally experienced, confident, and times) capable managers comfortable interacting with • In 2004, China the 14th (US/China difference: 27 locals: How many does China have? ti)imes) • They are all busy studying my books ☺ • In 2008, China had the highest annual growth in • A question from my Chinese EMBAs: What? We patent filing—tied with Korea—@ 12% (US can’t talk to our competitors? Why?! growth rate: -1%) • Regional distribution shows signs of weakness

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Chinese OFDI Hong Kong (50%) My field research @ BVI (population 21,000) •Despite Asia (excluding Hong headlines about Kong) (13%) Africa, 50% Latin America & the goes to HK and Caribbean (19%) the rest of Asia Europe (6%) gets 13% • Africa only 6% Africa (6%) • Latin America gets 19% North America (4%)

• But BVI + CI Oceania (2%) get 18% (!)

(3) Rapid adoption of (often high- Acquisition profile) acquisitions as entry mode targets

• Typical evolution of entry modes: Exports • Tech and financial JVs/alliances greenfields and/or acquisitions services firms in the • Most non-Chinese MNE s i n Chi na h ave f oll owed UiUnited dS States this progression (they are the souces of learning and • Brands in Europe observation of Chinese MNEs) • Resources in Australia, • But, emerging Chinese MNEs: Buy, buy, buy Africa, and Latin America

How the world sees China • Historical racism, modern prejudice • Chinese arrogance (+ ignorance) does not help • Chinese fi rms eyei ng Playing hardball? US banking and oil Tires (2009) assets: No way! Google (2010) • Chinese bid for Rio Tinto: No, thanks! Currency (2010)

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A challenge in post-acquisition integration Will Chinese OFDI-based M&As do better than global average? Unlikely! • Preacquisition: Overpayment in bidding • National pride: “Takeover nationalism” (Hope et al., 2009) • Managerial hubris and poor corporate governance • Pos tacqui siti on: I nt egrati on • Case study: TCL/Thomson • Large sample study: Chinese investors have very little confidence in listed companies’ OFDI/M&As (Chen & Young, 2010 APJM)

The danger of protectionism between the G-2: Destroying global confidence How to play the cards?

The Economist editor Trade and investment are more than added the word “mad” at the last minute economic, they serve to preserve world peace Trade wars are lose- • Buyers and sellers are not likely to kill each other lose (the mutual self- • When the US cut off oil sales to Japan (in protest of Japanese interest of the world ’ s aggression in China) , Japan attacked Pearl Harbor largest importer and • The Dell theory of world peace (Thomas Friedman) exporter lies in • Chinese SOEs are not so scary after all, America harmonious trade now has plenty of GSEs (government-sponsored relationships) enterprises led by Government Motors [GM])

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Advice to policymakers Fortune (05/24/2010): • Nationalistic sentiments are understandable “In states like TX, SC, • Losing Chrysler and Anheuser-Busch hurts and NV, China is • But the Chinese are not going to take over the building factories “world,” much less to take over America and—lo and • Chinese OFDI is only 1% of the global total behold!—creating • Of which 4% comes to North America and 19% comes to South American jobs” America (but, remember, 18% goes to BVI and CI) • US MNEs have been doing their own M&As When Chinese deal • Chinese outbound FDI necessitates no additional, failed, HUMMER had specific legislation (Globerman & Shapiro, 2009 APJM) to be liquidated

China’s real-assets OFDI is healthy What if Congress has its wish, the and mutually beneficial yuan appreciates? • All of us in the US will face high consumer prices • If China doesn’t export capital, too much money • Wal-Mart is China’s 8th largest trading partner stays at home inflation • On which side will America’s largest company be lobbying? • If China exports capital but only buys US T-bills • Not likely to add a million US manufacturing jobs Even higher US national debt (and dependence • Why Amazon Kin dle cannot be ma de in t he US? on China) • Both China and Hong Kong engage in fixed • If China exports capital and acquires US exchange rate policy—known as currency companies (real assets) US corporate asset prices management (or “manipulation” per Congress) go up and jobs are created • But HK is the world’s “most liberal” economy

Advice to managers Advice to managers • Master the rules of the game • Strengthen your own resources and capabilities • Learn from Japanese MNEs, which had a rocky • Skipping the usual, progressive steps of FDI and start in the US in the 1980s jumping into (especially high-profile) acquisitions • Understand the difference between the Federal level are like gambling—good luck! and the state/local level • How about have some US private equity groups as • Avoid high-profile acquisitions your alliance/acquisition partners? • Have THICK skin (endurance), stick around • Help reduce liability of foreignness • Attention span in Washington and in the media is short • Nobody is concerned about Japanese FDI in the US • In M&As, do not overpay, avoid a bidding war, now, which supports 600,000 jobs (#1 automaker) focus on integration

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Advice to researchers Advice to researchers • The rise of China will provoke/renew interest in • The new (or final?) frontier for the growth of the antidumping and antitrust—major institution-based (Chinese) firm (Peng & Heath, 1996 AMR) issues that have been ignored by researchers • Generic growth • Journal of International Business Studies (1970- • Interorganizational alliances (such as JVs) 2005): Only 1 paper has “dumping” in title and abstract • Mergers and acquisitions (my 1996 article said not • Strategic Management Journal (1980-2008): Only 1 feasible—was I wrong or what?) paper has “antitrust” in its title and 1 more in abstract • We do not even have a sufficient understanding of • Just like China-based IJV research has greatly Chinese domestic M&As, much less about enriched the global literature, OFDI research will international M&As undertaken by Chinese MNEs significantly contribute to the institution-based view

• The first Institutions behind M&As: comparative study on M&As in China and Comparing China and the US the United States (Lin, (Lin, Peng, Yang, & Sun, 2009, SMJ) Peng, Yang, & Sun, • Same theoretical framework, same industry, same period 2009 SMJ) • Different institution-based predictions and findings • In the US, centrally located firms in an alliance network • Chinese (domestic) can enjoy the benefits of high centrality and do not need to M&As indeed are acquire alliance partners (consistent with Burt) different from US • In China, centrally located firms, to derive benefits from (domestic) M&As their high centrality, need to more aggressively acquire alliance partners (contrary to the predictions from Burt)

China is a member of CONCLUSION: Is China unique or the global is it a member of the global family? family Western countries • The raging debate on Chinese exceptionalism India Scholars • Do we need a Chinese theory of management? need to act Russia • If so,,gg, China being so big, do we need a Shanghainese local, think China theory of management? (A Scottish theory too?) global • Why do we use the word guanxi in English now? #1 Chinese business word penetrating the English (Peng, 2005 • APJM; Li & Emerging Transition language—What are the top 3 non-business words? Peng, 2008 economies economies APJM)