Multinational Hotel Group Development and Urbanization: A Study of
Market Entry Mode in the second and third tier Cities of China
ABSTRACT
Urbanization is a global ongoing trend which takes place the most in the second and third tier cities of China. The hotel industry is one of the main contributors to service industry GDP. Multinational hotel groups (MHG) seem to be attracted to the urbanizing areas. Surprisingly, government seems to allocate the location for a new hotel and the real estate owners involve MHG in their urban planning. This study has been set up to investigate whether MHG have learned from previous experiences in their market entry mode when moving to new locations within countries. Through in depth interviews with 10 experts in the field and 1 tourist perspective this study investigates the developments of MHG and their market entry mode in the second and third tier cities. The Chongqing-Chengdu area is the main area of research. In the eyes of Chinese government, this area appears to be the ‘gateway to the developing areas’. From a market entry mode perspective little could be contributed to the internationalization school of Johansson and Vahlne (1977). Nevertheless, this study seems to have exposed a dissemblance of what academicians recommend and practitioners deem best. With help of agency theory and reasoning of transaction cost economics, MHG behavior is analyzed. Due to the briefness of time no conclusive answers could be presented. The findings of this explorative study shape an extensive agenda for subsequent research.
Key words: Agency Theory, Multinational Hotel Group, China, Urbanization, Market Entry Mode, TCE
Course Master’s Thesis International Management
Assignment First Draft Master Thesis
Name Stein Bouwmans
Student No. 10980105
Supervisor Dhr. Drs. E. Dirksen
Due date None
2
STATEMENT OF ORIGINALITY
This document is written by Stein Bouwmans, who declares to take full responsibility for the contents of this document.
INDEX
Abstract ... 1 Statement of Originality ... 2 Introduction... 4 Literature Review ... 6The development of the hotel industry in China ... 6
12th Five Year Plan & Hotel Industry ... 8
Chinese Urbanization & MHG Market Potential ... 8
Market entry modes in the service industry ... 11
State Owned Hotels: Possible Franchisees? ... 18
Influence of MHG Experience on Market Entry Mode ... 20
Research Design ... 21
Findings and Discussions ... 23
Urbanization ... 23
I. Modernization/Ecological Theory ... 23
II. Dependency/World Systems Theory ... 25
III. Coalition / Urban Bias Theory ... 26
Government ... 29
The 12th five year plan of the People’s Republic of China ... 29
battle against inequality & Kuznets’ Curve ... 32
MHG Developments to Market Entry Mode ... 34
Franchising ... 35
3
Joint Venture ... 39
Wholly Owned Subsidiary ... 40
Opportunities and threats of SOH... 41
From a Market Entry Mode Perspective ... 41
From a hotelier perspective ... 43
Market Potential for MHG in the second and third tier cities ... 43
Intentions of MHG to expand to the second and third tier cities ... 44
Internationalization school of Johanson & Vahlne ... 45
Conclusions, Limitations & Future Research ... 46
References ... 49
Appendix 1. Interview JV (English) 10-30-2015 ... 55
Appendix 2. Interview AJ (English) 11-11-2015 ... 65
Appendix 3. Interview SY (English) 11-19-2015 ... 75
Appendix 4. Interview TO (Dutch) 11-24-2015 ... 84
Appendix 5. Interview TG (Dutch) 24-11-2015... 93
Appendix 6. Interview RS (Dutch) 11-25-2015 ... 102
Appendix 7. Interview EP (Dutch) 11-25-2015 ... 115
Appendix 8. Interview AP (English) 11-26-2015 ... 122
Appendix 9. Interview LM (Dutch) 11-26-2015 ... 130
Appendix 10. Interview GN (Dutch) 12-07-2015 ... 138
4
INTRODUCTION
Market entry mode is widely investigated. However, the majority of the research is done in the manufacturing industry (Brouthers & Hennart, 2007; Meyer et al., 2009; Pan & Tse, 2000). While the service industry also contributes a great deal to a nations’ gross domestic product (GDP), it could be dangerous to assume manufacturing industry findings could be generalized to the service industry. For its value creation is severely different (Léon-Darder et al., 2011). At the moment developing countries are urbanizing rapidly. Market entry mode has likely become an even more important topic as urbanization is expected to attract business (Zhang, 2012). McKinsey Global Institute labeled the global urbanization a mega trend that has direct impact on how business is done and how societies are shaped (Dobbs et al., 2012). China is one of the main players in global urbanization. According to the United Nations (2015), China contributed 30% of global urban population growth in the period of 2000-2010. In order to decrease inequality, Chinese government is proceeding their plans to develop their second and third tier cities. Most second and third tier cities in China are located in the Central and West provinces. Urbanization in West and Central China is actively promoted by the government in their 12th five year plan (Drury, 2010). Besides, it has been
forecasted China will become the number one tourist destination by 2020 (Pine, 2002) which will most likely attract hotel business. Multinational hotel groups (MHG) relatively contribute the most to hotel industry GDP in China (Zhang, 2012). Recent developments in China provide the opportunity to zoom in on the relational influence urbanization has on MHG developments.
First modern urbanization could be seen in 1978, an epoch changing year. The government of China, under reign of Deng Xiaoping, decided to open their borders and welcome foreign direct investment (FDI) in special economic zones, located at the Eastern shores. This boomed Chinese economy and caused a labor migration from the rural areas to the cities (Wang, 2011). Most first tier cities are located in the East economic zones. At the moment, China is in a transition of a communist towards a socio-economic society. Although communism has ended, the Chinese Communist Party (CCP) is the only political party and plays a central role in the majority of developments in China. Recent plans of the government and an overall global trend of urbanization seems to shift in the favor of the second and third tier cities in Central and West China.
5 What relation does urbanization have on MHG development? How does this MHG development take place? Is this in line with what is to be expected from existing literature in market entry mode? What is the role of the government? And, how different are the current market entry modes in the second and third tier cities in regard to their first market entry modes in China? Johanson & Vahlne’s (1977) school of internationalization expect multinational enterprises (MNE) to learn from previous experiences when moving abroad. Is this also the case for MNE expanding within the country? Leading towards the main question of this study:
How has market entry mode changed considering MHG developments in urbanizing, state-promoted second and third tier cities in comparison with previous market entry modes in the first tier cities?
Due to the briefness of time and the lack of available resources this paper solely relies on qualitative data gathered from semi-structured in-depth interviews with 10 experts in the field and one tourist perspective. According to Leech (2002), semi structured interviews are the better strategy when the intentions of the study lie between getting insiders’ information and looking to compare answers across respondents. Through collecting insights from different perspectives, this explorative study contributes to international management (IM) literature as follows. First, with reasoning of agency theory and transaction cost theory, this study seeks to increase understanding of MHG development and their market entry mode when moving West in China. Second, urbanization is a global trend. Yet, the relationship between urbanization and MHG development is hardly investigated and might be generalizable towards other developing countries. Third, this paper seeks to contribute to the internationalization school of thought by Johanson & Vahlne (1977). Although, this study focuses on MNE expansion within countries instead of between. Have MHG changed their market entry mode due to the experience gained in their years of operating in the Chinese hotel industry? Finally, the main contribution of this paper is that it shines new light on existing perspectives and helps create an extensive agenda for further research. It seems there has been found a gap between researchers who write about market entry mode in China and the MHG who execute market entry mode in China.
6 The structure of this paper is as follows. First, this paper will start with a literature review which consists of a brief history of hotel development in China, market entry mode theories, urbanization theories and the internationalization school of thought. Second, five propositions will arise from the literature review and will be presented in a conceptualization chart (figure 4.) Third, the design of the research is discussed. Fourth, a general discussion is provided consisting a summary of all findings. Fifth, this paper will conclude with a comparison of what was expected and what has been found regarding the research topic. Finally, the limitations of this study and an extend list of future research suggestions will be presented.
LITERATURE REVIEW
The literature review will start with a small history of the hotel industry in China and the role government plays in it. Then, global urbanization and the current developments in West China will be discussed. The literature review ends with market entry mode theories, the internationalization school of thought and recommendations considering state owned hotels (SOH). From these topics propositions of this study will be presented in figure 4 (p. 18).
THE DEVELOPMENT OF THE HOTEL INDUSTRY IN CHINA
The hospitality industry was one of the first industries to respond to China’s Open Economy Policy. Ever since Deng Xiaoping opened China’s borders in 1978, China is in the midst of a transition from a planned economy to a socialist market economy (Gross et al., 2013). To present a clear picture of hotel industry development in China, a brief explanation will follow next illustrating what hotel business looked like before 1978. According to Mak (2008), ‘receiving-style hotels’ were built to receive visiting leaders of the CCP. This occurred in the 1950’s, just after the establishment of the People’s Republic of China. The receiving hotels were meant to house government officials of the CCP as well as for communist foreign government officials. In contrast to hotels nowadays, the receiving-style hotels were heavily guarded and the architecture aligned with military demands. Pine (2002) describes the amount of hotels at the time were insufficient to receive the sudden increase in demand. In 1982, the first international hotel joint venture occurred and a rapid expansion followed in the 1990’s and 2000’s (Gross et al., 2013; Mak, 2008; Law et al., 2014). This rapid expansion was subsidized with an estimated $1.25billion government
7 investment into its hotel industry. The open door policy, the restructuring of the hotel industry and government investments have led to major expansion of hotel presence. (Pine, 2002).
Zhang et al. (2012) have put the expansion of MHG in a graph. A decline after the year of 2000 shows that a lot of MHG have failed to sustain in the Chinese market (figure 1). They argue that at that point the hotel market began to saturate and occupancy rates were starting to decrease due to an oversupply of hotel rooms. The occupancy rate is measured by dividing the average sold rooms by the total rooms available (O’Fallen & Rutherford, 2011). A decrease in occupancy may lead to a decrease in profits or might even result in loss. This might be one of the causes of a decrease in MHG presence after the year 2000. Goh et al. (2013) do not agree with Zhang et al.’s findings. According to them there is plenty of room for growth. For example, the US has 20 available hotel rooms per 1.000 capita. Whereas, China only has 4. In their logic, Chinese hotel industry may quintuple. However, they still expect the MHG to decline. Unless, they change their business model. Due to an increase of domestic tourism (Pine, 2002; Dobbs et al., 2012), it is expected that the demand for mid-low segment hotels, e.g. two to three star hotels will increase. The majority of MHG hotels is four to five star quality. According to Goh et al. (2013), there will occur a consolidation on the high end scale (Goh et al, 2013). They expect the luxury segment to decline. Furthermore, Pine (2002) argues that the Chinese hotel industry is suffering an imbalanced distribution. Some areas are oversupplied while others are undersupplied. Zhang et al. (2012) findings of an increasing trend of MHG in West China
8 predict the latter. This could be due to government’s urban planning in these areas as they wrote of improvements in the Central and West provinces in the 12th five year plan (Drury, 2010).
12
THFIVE YEAR PLAN & HOTEL INDUSTRY
After the economic reformation in 1978, Deng Xiao Peng continued to govern through Mao Zedong’s initiated five year plans. These plans roughly draw government plans for the following semi decade. Regarding the present study, the focus of the government in the 12th five year plan is to increase
the sustainability of the developed first-tier cities and proceed with the development of the second-tier and third-tier cities land inwards (KPMG report, 2011). According to Zhang & Bao (2015), government focusses on this matter in order to suppress the rising inequality within China. In order to understand government’s actions they use the theory of Kruznets’ curve. According to Kruznets (1955), urbanization leads to inequality at first but later contributes to more equality when the pace of urbanization rises. Inequality within and between provinces is considered to be a threat to Chinese values of harmony and unity (Drury, 2010). Major urbanization investments like the Rise of Central China Plan and the Great Western Development Campaign has to provide opportunities for mainland habitants and raise equality. Goh et al. (2013) expect government to continue shaping the market. As government focuses on the development of Central and Western China, it is expected this attention attracts FDI. Therefore, it is expected that MHG presence will increase in these areas (Alon & Herbert, 2009).
Proposition 1: Government has direct positive influence on MHG development and urbanization in the
second and third tier cities of China.
CHINESE URBANIZATION & MHG MARKET POTENTIAL
China’s urban population increased from 170 million in 1978 to 670 million in 2010. The urban proportion rose from 18% to 50% within the same period (Quan et al., 2015). According to the United Nations’ department of economic and social affairs (2015), 56% of Chinese population lives in urban areas today. Over 30% of global urban population growth in the period of 2000-2010 was realized in China. Wang (2011) made a couple of predictions regarding China’s urbanization. He expects 59.7% urbanization in 2020 and after an average annual increase of 0.8% it should be 67.7% in 2030. Urban population in megacities
9 will double as potential megacities will grow rapidly. According to McKinsey Global Institute, a city becomes a megacity when a population of 10 million is exceeded (Dobbs et al., 2012). The first new megacities are expected to emerge in the West and Central parts of China (Wang, 2011; Dobbs et al. 2012). The twelfth five year plan and KPMG research both confirm the urban planning and realization of Wang’s prediction. Urbanization has been developing since the 19th century and is illustrated as a remarkable social
phenomenon. It is even expected to transform the spatial and social configurations of human societies (Brenner & Keil, 2011). However, this is hardly researched within the hotel industry.
Due to CCP’s focus on promoting urbanization and industrial developments, the business environment shifted in favor of Central and West China. The business environment, consisting of the political, economic, legal, social and cultural environment of the host country, has been shown to be an important driver in MHG location choice. Other main indicators are market demand, market size, economic factors and mega events (Zhang et al., 2012). It appears, business attracts business as Zhang et al. (2012) relate an increase of economic activities to an increase of MHG presence and hotel industry in general. One could say urbanization’s positive effect on economic activities fuels MHG development. Since urbanization is actively promoted by the government, one could relate these political influences on MHG development are in line with parts of an early urbanization theory of Kasarda & Crenshaw (1991). In their research considering urbanization in developing countries they separate three theories in urbanization. The first is modernization/ecological theory which links current urbanization directly towards current state of modernization. Due to technological breakthrough and innovation a society is capable of becoming urban. In line with this theory application of technology is the prime engine to social change. In western countries this change emerged gradually during the Industrial Age. Technological innovations were limited in China due to communist restrictions during the reign of Mao Zedong. Only after 1978, when foreign FDI brought modernizing technology, urbanization began to sprout. Its exponential growth lead to a rapid urbanization pace of unknown size and speed (Chen et al., 2010). The second theory in urbanization is the dependency/ world systems theory which lies its emphasis on the capitalist world system. According to this theory, the capital world system is the prime driver of social change. Capital-intensive foreign manufacturing and the economic boom brought forth by MNE boosts the attractiveness and development of cities. The third
10 theory of Kasarda & Crenshaw (1991) is the distributive coalitions/urban bias theory. This theory recognized the power that social and economic elites wield. Although, it matters most to what degree these elites capture and hold political machinery. Chinese government contributes greatly to its urban planning. In their most recent five year plan they want to maintain and increase the developments in West China (Drury, 2010). Kasarda & Crenshaw’s theories are useful to this research as it provides tools to dissect urbanization. It gives insights towards the potential drivers of urbanization, which provides a certain understanding. This could be useful in order to understand what particular aspect MHG might react to. Wang (2011) recognized 3 distinct phases in Chinese urbanization after the earlier mentioned revolution in 1949. It was in the second phase that urbanization started to blossom. This was due to the open door policy in 1978 which welcomed the capital-intensive foreign manufacturing through opening its borders. The open door policy was a direct invitation towards MNE to enter China’s large potential market.
Zhang et al. (2013) are one of the few who studied the relationship between urbanization and the hotel business in China. There is a consensus that urbanization has a positive effect on service industry growth (Zhang et al., 2013; Kasarda & Crenshaw, 1991). Also, they found a positive relationship between city development and GDP per capita. McKinsey Global Institute expects the emerging 440, to contribute 47% of global GDP growth between 2010 and 2025. 242, of all cities in the Emerging 440, are located in mainland China. They discuss this most likely will have direct effect on the rising middle class (Dobbs et al., 2012). In addition, this highly contributes to the market potential of the area. Furthermore, urbanization is associated with higher wages and leads to an increase of domestic tourism expenditure. This calls for an increase of service industry development due to increased demand from leisure guests. On the other hand, urbanization invites more business which leads to an increase of business guests as well. Both should have a positive relationship with hotel development (Zhang et al., 2012). It is expected that the second and third tier cities witness MHG expansion because of the rapid urbanization and city developments.
11
MARKET ENTRY MODES IN THE SERVICE INDUSTRY
So, the CCP has major plans for industrial development of the second and third tier cities in Central and West China. And it is expected that MHG see potential market in these areas (Zhang, 2012). What leaves the question: How do MHG tap in to these markets? What is their mode of entry? In order to find the answer to the question: ‘What organizational mode is best?’ market entry mode literature uses agency theory and transactional mode theory to explain their reasoning. First, In order to secure a better understanding of MNE behavior, this section will start with a brief explanation of why MNE might move in the first place.
Firm Specific Advantages (FSA) – Country Specific Advantages (CSA)
According to Rugman & Verbeke (2003) MNE move abroad in order to exploit the market potential of the area they are wanting to enter. Every MNE has certain characteristics that contribute towards the value creation of the firm. They are either tangible, e.g. production, logistics, assets, or intangible, e.g. knowledge, talent, skills. These characteristics are defined as firm specific advantages (FSA). The area a MNE starts its business will be exploited when value is created through using the FSA. It might be the case the domestic market saturates while the MNE still intends to grow. The MNE will be driven to locate other areas to operate its business. A thorough market study analyzing the country specific advantages (CSA) of the potential areas should provide a set of options for the MNE to expand its business. Chen & Dimou (2005) rather use the term location specific advantages (LSA) as they believe true MNE do not have a home country and therefore using the word ‘country’ is inappropriate. In this study the term LSA will also be used as the focus lies on a particular area in China, rather than the whole country. Depending on the MNE goals a location will be chosen. It could be the area has high market potential for product sales or other strategic reasons, like logistic infrastructure improvement (Cantwell et al., 2010) relationship building (Leung et al., 1995), learn from other MNE that are already present (Mariotti et al., 2010 or for the reason to arrive first (Lieberman & Montgomery, 1988). Although moving in first could get risky. First mover advantages might be of great value for MNE . For they are the first to exploit the market, they are able to dominate the market early. In addition, the consumer can get used to their product and brand before late movers arrive.
12
Agency Theory
Eisenhardt (1989) suggests agency theory could be used to describe the relationship between a delegating party and a contracted performing party. In addition, Shane (1996) considers agency theory to explain how opportunism is dealt with in companies. Agency theory depicts how owners develop mechanisms to make sure employees act in accordance to their goals. Since ownership and management have gotten separated the relevance of this theory has grown. As organizations need to take care of a growing amount of stakeholders it has become a growing challenge to make sure all interests are more or less aligned. If this is not the case, their might grow room for opportunism. Opportunism takes place when managers put more effort in satisfying personal interests rather than the interests of the owners, shareholder or common good of the firm. In pursuit of personal interest it might be the case owners and managers have a different perspective of risk taking. In general, managers have zero to few personal assets in the firm and therefore are more willing to take risk. According to Brickley & Dark (1987) this could be both an advantage and a disadvantage depending on the context. According to Jensen & Meckling (1976), entrepreneurs face two problems when dealing with uncertainties: moral hazard and adverse selection. Moral hazard exists when an entrepreneur is not able to evaluate whether an employee is working with maximum efficiency or is shirking. For employees are paid with a fixed amount a month, it might be that they work just enough to get paid. Such incentive system does not encourage employees to make an extra effort (Brickley & Dark, 1987). Adverse selection exists when employees misrepresent their true abilities. Therefore, it might be employees say they are capable of the required competences. Yet, they have no idea how to operate efficiently. As a result, a person might receive the responsibilities while not being capable of handling them. This is a disadvantage for the owner. According to (Lu & Baemish, 2004) profitability and growth of a firm have an S-curve. At first, it grows exponentially. Then growth diminishes and ultimately profitability will decline. For the monitoring costs of the firm outweigh the benefits of becoming bigger. When a MNE expands its business abroad it needs to consider how it does so. There are numerous variables to deal with, like assessing the abilities of foreign employees (adverse selection), and monitoring their performance (moral hazards). To summarize, the main concept of agency theory is addressing relationships
13 that mirror the basic agency structure of a principal and an agent who are engaged in cooperative behavior, but have differing goals and differing attitudes towards risk.
Transaction cost theory
Transaction cost theory is often used to explain market entry mode choice (Chen & Dimou, 2005; León-Darder et al. 2011). The transaction cost theory analyses the mode that comes with the least cost associated with tapping in to a new market, the transaction. Contractor & Kundu (1998) refer to this aspect when they explain the choice of organizational mode is the outcome which minimizes transaction cost for the particular company. The cost could be both actual as expected, tangible and intangible.
The reason why MNE expand abroad is because they expect their firm specific assets (FSA) to exploit the country specific assets (CSA) of the unknown market (Rugman & Verbeke, 1992). Next to the financial costs that come with moving abroad there could be other costs involved as well. When MNE operate in distant markets, the domestic enterprise learns from them by observing and experiencing their product. Some FSA could be copied by their competitors and that is a risk. Risk is also taken in to account in the cost benefit consideration. When MNE learn from one another, knowledge spillovers take place (Mariotti et al., 2010). Especially, in franchising and joint ventures there is a high possibility of knowledge spillover. This could be either intentionally or unintentionally. In exchange for this knowledge spillover domestic firms provide quick access to resources and other country specific assets MNE are looking to exploit. However, when knowledge spillovers are unequally distributed, this may contribute to perceptions of “free riding” (Contractor & Kundu, 1998). This adds towards the negative transactional costs. When choosing a market entry mode the transaction cost theory sums all the possible costs of the transaction and outweighs them with the expected gains. The expected gains can be measured in financial gains, as in expected revenue or market potential. Also, intangibles are to gain, like knowledge of the industrial environment, both economic and legal in sense. The costs are high when the environmental uncertainty is high. Léon-Darder et al. (2011) define environmental uncertainty as the inability of an organization to predict future events. It often comes forth from the dynamic nature of economic and political conditions in the host country and the lack of knowledge of the foreign norms and values. Also known as the liabilities of
14 foreignness (Goshal & Bartlett, 1990; Lu & Baemish, 2004). In order to measure such uncertainty market potential, country risk and cultural distance are often used. In the eyes of Ghemawat (2001), differences in religion, language, social norms and values are all capable of creating distance between two countries. Léon-Darder et al. (2011), found that the higher the cultural distance the more likely hotel chains would choose for full control modes of entry in order to protect brand quality. This is contradicting towards the results of Pan & Tse (2000). They associate a high cultural distance with an increased risk. As full control modes of entry are usually accompanied with high asset investments, e.g. real estate, Pan & Tse (2000) have found MNE to avoid this high risk when entering the Chinese market. Furthermore, Léon-Darder et al. (2011) hypothesized that the higher the market potential, the more likely MHG engage in non-equity modes of entry. As a high market potential comes with a fierce competition in the industry, it is expected that MHG choose less expensive modes of entry to increase their presence and flexibility. Yet, non-equity modes of entry are partly dependent on the qualities and performance of the indigenous firms. Non-equity modes of entry also make the MHG vulnerable to mutual knowledge spillovers (Mariotti et al. 2010). Still, Kivela & Leung (2005) argue this knowledge spillover is necessary for MHG to successfully exploit the Chinese market. This knowledge spillover contributes to the positive gains in the transaction cost consideration. Other researchers recommend non-equity modes in China as well (Heung et al., 2008; Mak, 2008). They expect indigenous hotels, especially SOH, might benefit from collaborating with MHG, suggesting a mutual dependency. This will be further elaborated in a later section.
Market Entry Mode Theories
In international business market entry mode is widely investigated (Kogut, 1991; Gubbi et al., 2010; Brouthers & Hennart, 2007). Yet, the main focus in international business lies on the manufacturing industries and there are still many opportunities to investigate within the service industry. Pan & Tse (2000) presented a hierarchical model of choice of entry modes. They created this model by analyzing over 10,000 market entries in China.
15
Figure 2: Pan & Tse (2000), The hierarchical model of market entry mode, Journal of International Business Studies, vol. 31,
no.4, p. 538
They argue that managers follow a certain path in order to come up with a market entry mode strategy. First they decide whether they want to enter with equity or non-equity mode. According to Pan & Tse (2000), managers have a hierarchical pattern in their decision making. For they have limited analytical capacity due to several constraints. Eisenhardt & Zbaracki (1992) explain this limited analytical capacity with bounded rationality. There is either a constraint in time or constraint in knowledge present. In their paper they address that decision making is circular and rational. Actors enter decision situations with known objectives from previous experiences. By adding new information and analysis they formulate their decisions. Along the way they might find additional variables that could alter the previous steps. Therefore, decision making is circular. However, it is impossible to analyze all available variables that influence the possible outcome. So, it is expected managers face bounded rationality. This follows the logic of Pan & Tse (2000). To optimally use the time available, they follow a hierarchical process, which is drawn in figure 2. In this matter they do not have to consider all possible market entry modes but they choose whether they want to enter with equity or without. Their model might be useful in order to explain MNE behavior.
16 Market entry mode is one of the most critical decisions for international strategy success (Brouthers & Hennart, 2007). Depending on the market entry mode it could be negative consequences, due to a bad strategic decision making, are hard to manage. León-Darder et al. (2011) acknowledge a wide range of possible modes of market entry each of them consists of different degrees of ownership and control. Control is defined as the ability of the firm to influence the various management systems of the organization in order to create competitive advantage and increase the return of FSA. The level of control is highest in the case of wholly owned subsidiary (WOS) and lowest in the case of franchising. When considering the control span in a joint venture it depends on how control is distributed among the various partners and how many are involved. So, one could say the level of control will fall somewhere between franchising and WOS (Sánchez & Pla Barber, 2006; León-Darder et al., 2011). In the hotel industry this control can be exercised in the following four aspects. First, the daily operation of the hotel. Second, the physical assets, like China ware, cutlery, glassware, the building, interior and so forth. Third, the organizational routines and the tacit elements of the company, tactical management. Fourth, the codified assets, like the brand or the reservation system. How the responsibility of the assets above is distributed depends on the market entry mode. According to Contractor and Kundu (1998), the options above can be categorized in three groups. The first are forms that entail direct investment with a degree of total control, acquisitions, mergers and other WOS. The second are forms that entail direct investment with a degree of shared control through joint ventures. The third are forms that do not involve capital contribution, like franchising and management contracts. As the hotel industry has no export, this is one of the few non-equity modes of entry there exist in the service industry. Management contract are characterizing market entry mode of the hotel industry in particular. As the capital intensive ownership, like real estate can be separated from the knowledge based ownership, or managerial expertise elements (Contractor & Kundu, 1998). WOS keep control on all the aspects of the hotel. A joint venture shares and distributes its control amongst its stakeholders. In management contracts, chains are responsible for all hotel operations.
17 Figure 3: Market Entry Modes visualized. Contractor & Kundu (1998), Modal Choice in a World of Alliances
China is a developing country. Therefore, it is expected MHG would use a non-equity market mode of entry in order to avoid the additional risk (Chen & Dimou, 2005). From a transaction cost perspective, the additional risk that comes along with cultural distance needs to be taken in to account. In line with the findings of Pan & Tse (2001), this study also expects MHG to avoid risk as such.
Proposition 3: In order to avoid risk, MHG choose non-equity mode of entry over equity mode of entry.
With the above proposition it is stated MHG are not expected to use equity mode of entry due to risk avoidance. MNE are not flexible when they enter a new market with a WOS (Pan & Tse, 2000). Although, one of the benefits is there might be less stakeholders to take in to account. The MNE cannot share the risk, but on the other hand it only has to pursue its own agenda. From this perspective, non-equity market entry mode might be risky for the success of its operation. For the MNE is forced to collaborate with culturally distant entities. Still, from a transaction cost point of view, this study expects to find results in favor of non-equity market entry mode as the expected costs of non-equity market entry mode do not outweigh the expected benefits. For being able to withdraw a volatile market, since no equity is involved, is expected to be of higher value for the MHG.
Mak (2008) adds another aspect towards the distribution of management and control, government. The majority of hotels in China are state-owned hotels (SOH) (Zhang, 2012; Mak, 2008). In addition, Pine (2002) mentions international hotels with a foreign general manager used to have a shadow general manager, who was one of the CCP members. Whether this is still the case might be an interesting
18 topic for future research. Nonetheless, these characteristics distinguish the Chinese hotel industry environment.
STATE OWNED HOTELS: POSSIBLE FRANCHISEES?
Although, China is no longer a communist country, government still has major influence on both macro and micro level (Mak, 2008; Heung et al., 2008). In the 2000’s SOH, in general, have poor economic performances and small increase of productivity in comparison to the non-state enterprises (Mak, 2008). He explains the malfunctioning of state-owned hotels is due to a range of intertwined elements rather than one specific reason. He explains the elements using two schools of thought: ownership focused and market focused. The ownership focused school of thought criticizes SOH to have an unclear government structure. The general manager is the center of power within the state-owned hotel. At the same time the CCP functions as the core. So, in a sense, the firm has two bosses. This gives issues within the firm governance and leads to inefficiencies in the decision making process. In addition, this structure adds monitoring and coordination costs. Surprisingly, Pine (2002) mentions a government official shadows foreign general managers. If this is the case, MHG should have suffered from this inefficient governing structure as well. According to Mak (2008), most of the time government supervision is insufficient. This leaves gaps for general managers to behave opportunistically. Insufficient monitoring could allow moral hazards, where managers pursue their own private interests at the expense of the owner (Shane, 1996).
The second school of thought is market focused. According to followers of the market school the faults do not lie within the separation of ownership and management. For they see these agency problems also occurring within private owned companies. Lack of a competitive market environment is causing state-owned enterprises inefficiency. Price distortion, soft budget constraints, high monitoring costs are generated by an immature market. Heung et al. (2008) discuss general managers of SOH are not free to change their jobs as they are appointed by the government. It is perceived as disrespectful and they might ‘lose face’. Losing face, or mingtze, is a serious threat to Chinese. It means you lose your social status in the community (Davies et al., 1995). In contrast to economic reason, this system does not support finding the best man for the job. In addition, it has been found the majority of managers still see the hotel as a reception
19 point for government related guests, rather than a commercial entity that needs to ensure return on investment (Heung et al., 2008). A combination of both schools of thought might explain the inefficiency of state-owned hotels best. In addition, Zhang et al. (2012) pictured the ratio of MHG revenue with total hotel revenue in China as follows.
Figure 4: The ratio of MHG hotels to total hotel numbers and revenues 1989-2008
Figure 4 shows that although the ratio of MHG properties to total hotel industry is diminishing, MHG performance is relatively far bigger. For example in 2005, total MHG presence was just 5% of the total hotel industry. Yet, they contributed more than 20% of hotel industry revenue. While one could observe the relative MHG decline, their revenue contribution counts for at least triple their presence. This means MHG hotels perform better than independent and state-owned hotels (Zhang et al., 2012). As a possible solution for the less functioning SOH, existing literature provides recommendations to SOH to offer themselves as possible franchisees to the MHG (Pine, 2002; Heung et al., 2008; Mak, 2008, Xiao et al. 2008). SOH could learn from the training and guidance MHG offer in a franchise agreement and MHG are able to rapidly expand in the huge potential market with help from local partners. The fact that SOH have direct ties with the government might be a valuable asset towards the collaboration as it could reduce MHG risk (Alon & Herbert, 2009)
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Proposition 4: In order to learn from foreign expertise and avoid bad performance, state-owned hotels
offer their enterprises as possible franchisees.
INFLUENCE OF MHG EXPERIENCE ON MARKET ENTRY MODE
This study seeks to analyze MHG behavior in a relatively new business area emerging within the Chinese market. Urbanization is a global mega trend (Dobbs et al., 2012). Thus, on short term, one could expect other business areas to emerge within countries as well. Chen & Dimou (2005) speak of location specific advantages (LSA) rather than CSA as they discuss true MNE do not have a home country. Others use the term LSA as well as they discuss within country location can differ significantly from one another (Laamanen et al., 2012). This provides the opportunity to contribute towards the internationalization school of thought from a within country perspective, rather than a between country perspective. According to Johanson & Vahlne (1977) MNE are expected to learn from previous experiences and might change future actions due to experiences in the past. In line of their thought, this study expects to find similar behavior. An expected answer to the main question of this research is presented in the following proposition.
Proposition 5: MHG market entry mode in the second and third tier cities of China has changed due to
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Figure 5: Conceptualizing summary of this studies’ propositions.
RESEARCH DESIGN
In this case quantitative Chinese data is near impossible to reach nor read for an Amsterdam student. Therefore, this study solely relies on qualitative research methods. This research is a multiple case study where 11 respondents have been reached, representing at least 8 MHG operating in the Chongqing-Chengdu area. The Chongqing-Chongqing-Chengdu area is located in the mid-west of China and is said to be the doorway to further developments in the West (Drury, 2010). In this line of thought, it is expected that different West Chinese cities will follow the development process which this area experienced. Using a holistic case as the unit of analysis there has been paid attention to the market entry mode of the MHG, involving all their brands. The cases do not consist of multiple levels or components and therefore cannot be labeled as embedded (Yin, 1989). The sampling rationale is critical as there has been selected a small number of cases. Due to time constraints, it was not possible to reach all decision makers and influencers
22 in the field to reflect strategic management of all MHG exploiting the Chinese market. Nor, was it possible to reach sufficient researchers and experts in order to provide conclusive arguments which could reflect a thorough examination of the field. Yet, by selecting all different kind of respondents representing different MHG, a broad overview of all possible market entry modes with their pros and cons will be a contribution for IM literature. Furthermore, this varied sample contributes to provide different kinds of inputs from both private as public listen companies. To visualize, these pieces of inputs might be considered as puzzle pieces which ultimately, at the end of this study, form an incomplete picture of MHG development in West China. This incompleteness provides an extend agenda for further research suggestions. Thus, this explorative study cleared the road to direct future research. Secondary data from existing literature and open databases in China will structure this paper. Primary data will be gathered from in depth semi-structured interviews with practitioners, decision-makers and experts in the field working at in total 8 different MHG. To leave some room for flexibility, it is requested to use a semi-structured interview (Saunders & Lewis, 2012). In addition, Leech et al. (2002) recommend semi-structured when the intentions of the study lie between getting insiders’ information and looking to compare answers across respondents. The results from these interviews should shine more light on the motives of market entry choice. The interviewees have been reached through snowball sampling from contacts at the Maastricht Hotel Management School. Baarda (2010) expects a higher willingness to participate, due to a social obligation or urge that stems from a shared history, mutual contacts or a combination of both. Although, snowball sampling is highly time consuming and might generate one sided information, it has been found effective when needing to select people from an exclusive group or niche (Biernacki & Waldorf, 1981). Due to the briefness of time a large sample of the population could not have been reached. Yet, the ones that did contribute to this study provided valuable insight information presenting most information necessary to picture the relational MHG model drawn from the propositions. Most respondents are senior experts representing different departments, who contribute or have contributed to MHG strategic management. No conclusive results shall be presented in this study, for the sample is too small. Increasing the current sample would increase the reliability of the results. Considering the current sample this study will solely provide an indication of current and future developments and will provide an extensive agenda for further research.
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FINDINGS AND DISCUSSIONS
Based on the answers given during the interviews an image will be drawn from the collected puzzle pieces, hoping it will provide a clearer image of MHG developments moving West in China. The findings are organized with help of the conceptualization model (figure 4). The relations from left to right will provide the structure on which this section is based leading to the following topics: urbanization, government, MHG developments to market entry mode, SOH and market potential of second and third tier cities. Within topics, existing literature will guide the interview results in an attempt to answer the research questions.
Urbanization
As shown in the conceptualization of the research question, the first relation is urbanization and MHG development. Urbanization is a global ongoing trend. Thus, what is happening in West-China at the moment may not be unique. This makes it the more interesting to investigate, as it might point a direction towards a systematic approach. And therefore may be generalizable towards future developments in less urbanized areas. To structure the results the urbanization theories of Kasarda & Crenshaw (1991) will be used. According to them, there are three theories regarding urbanization and they all contribute towards Chinese urbanization in its own way. Although, only one respondent was familiar with the theories, all responses could be easily linked towards one or more of the theories. The theories of Kasarda & Crenshaw help explain certain drivers of urbanization. This could make it easier to understand MHG behavior.
I. MODERNIZATION/ECOLOGICAL THEORY
First, modernization/ecological theory. This theory is explaining urbanization as a cause of industrial revolution. The revolutionary way of producing lead to a certain demand for labor as it requires a centralized way of working. As before, small production were scattered throughout the region, manufacturers and factories nowadays increasingly require to work from a more central point. As can be seen in the early 80’s, when economic zones were created in East China. Other innovational breakthroughs increase urban pull factors as well (Kasarda & Crenshaw, 1991). All respondents on strategic managerial level emphasized infrastructure to be an important requirement before considering to enter the market.
24 This confirms Dobbs et al.’s (2013) statement about possible growth barriers due to a lack of infrastructure investments. Infrastructure plays a big part in urban planning and has been found important for numerous reasons. According to the interviewees, reachability is of high importance in the tourism industry. This goes for both leisure as business guests. As a tourist in China there is lots you can see and a limited time to spend. So, if it takes too much time to reach a certain area, they might skip it. Same goes for business. If an area is hard to reach it either must be a specialized industrial area, e.g. the mines in Inner Mongolia, or there is, relatively speaking, hardly any business. Not surprisingly, this is in line with the transaction cost economics, if the expected costs of an action do not outweigh the expected benefits, the action shall not be performed and alternatives will be chosen (Rugman et al., 2011). In an interview not only the guest perspective was shown, but also the perspective of the MHG. Although, the MHG he works for is present in West China. The majority of future openings in the pipeline is on the east coast. ‘How much resources can we allocate towards a certain area? he questions. How are we able to monitor our West-Chinese hotels when the majority of our projects is in the East?’ The less reachable the area, the higher the monitoring cost. Similarly, the more scattered the different hotels in a MHG portfolio, the higher the monitoring costs. This rational decision making is not in favor to the second and third tier cities in China. From an agency theory perspective, HQ might have the desire to monitor its subsidiaries in order to decrease moral hazard. They might intend to keep them all aligned and in compliance with the MHG terms and conditions. Whenever the monitoring costs outweigh the market potential, this market shall not be entered (Chen & Dimou, 2005). So, infrastructure could be one of the drivers for urbanization and a pull factor for MHG development as long as it increases the reachability and reduces the monitoring cost. In developed countries it is hard to upgrade existing infrastructure to the level of knowledge there is today. For example, where in several Western Europe countries the train rails exist for many years. The quality is less compared to many Asian rail infrastructure. For they blossomed later in time. A respondent mentioned the Second World War had the same impact on the German economy. Germany today has one of the strongest economies of Europe due to its high efficiency. According to a respondent, this efficiency was gained through the opportunity of ‘starting over’. Thanks to the total destruction of most parts in Germany, the infrastructure could be rebuild to modern standards instead of having to upgrade existing infrastructure.
25 According to this theory, developing countries have the opportunity to outrun the developed countries as they can install the top efficient infrastructure without the struggle of innovation most Western countries went through (Wang, 2011).
II. DEPENDENCY/WORLD SYSTEMS THEORY
The second theory of Kasarda & Crenshaw (1991) is the dependency/world systems theory. This theory states capitalism is the main driver of urbanization. To reduce costs enterprises tend to allocate near one another. This goes for both co-operating companies as competing companies. This phenomenon is called ‘clustering’ (Mariotti et al., 2010). Wang (2011) calls the urbanization process a cause of an increasing population concentration due to ‘agglomeration effects’. Capitalism is an economical ideology that is driven by supply and demand, efficiency, cost reduction and profit maximization. According to this urbanization theory of Kasarda & Crenshaw (1991), the decision to urbanize is made when one of the above motives is realized. This is in line with the expectations of Rugman & Verbeke (2011). As they state that a MNE is willing to allocate its transferable FSA towards a certain country, to exploit its CSA. As mentioned earlier, this country could also indicate a certain location, city or area. In this case motives for entering the Chengdu-Chongqing area were asked in order to picture the possible MHG movement from east to west. So whenever MNE decide to enter a certain area they contribute to its urbanization. Zhang et al. (2012) confirm this theory as they expect service industries to grow along with developing business areas. As the first respondent explained: ‘developing business areas need business people. These business people need to have a place to stay. They need to do their groceries, go to the dentist, visit a restaurant, exercise in a gym, and so forth. Business attracts business’. The most surprising fact presented in the first interview is that MHG do not respond to urbanization in the matter that one could expect it would. As expected in proposition 2, MHG respond to urbanization. As a city grows, business areas evolve, they need a hotel and therefore the MHG exploits this CSA. Before a brick has been placed in the chosen areas of developments, already has been decided where a hospital will be build. As well as where a business area will be founded, and also where the hotels will be allocated. To attract real estate companies the government offers the scheduled development areas relatively cheap if the real estate owners are willing to contribute towards the urban planning. A specific brand or MHG has not been chosen, but contact will be made sometimes as
26 soon as the blueprints are known. Some respondents mentioned real estate owners prefer a well-known brand as it is expected to add value and Chinese are very brand-oriented. In an indirect way, one could say MHG are part of the urban planning rather than responding towards it. This finding has been confirmed by the majority of the respondents. Also, it shines different light on the theory of Rugman & Verbeke (2003) in which they depict MNE exploiting CSA, rather than MNE becoming a part of the CSA and deliberately being put in the planning of a CSA, in this case urban planning. From a perspective of capitalism, it is likely that money drives decision making. As apparently might be the case for urban developments. For the government more or less knows where to allocate certain facilities, real estate owners often offer to contribute towards multiple buildings. In urban planning mixed developments often occur. Some respondents mentioned that whenever a hotel is included in a mixed development, the building permit could arrive sooner. It seems the government recognizes the positive externalities that tag along with a MHG property. It appears the Chinese a very brand conscious. One could say MHG presence is a pull factor for other business. For it might provide a certain ‘allure’ to the area.
III. COALITION / URBAN BIAS THEORY
The majority of the interviewees claim government to be the most important driver towards urban planning. The third theory of Kasarda & Crenshaw (1991) indicate the power, that political and economic elites wield, are the main drivers of urbanization. Political elites in China are government representatives. In former communist China, these representatives managed every aspect of the country. From producers’ production and distribution to consumers’ consumption and spending power (Naughton, 2007). Today, China has become a social economic country where capitalism is allowed. Yet, it is still heavily monitored and controlled by government representatives, on both local and national scale. For example, several respondents apologized for the bad internet connectivity during the skype interviews. According to one of the respondents, connection was lost frequently due to interruptions of the state. Some had to switch VPN which guided their internet to a server abroad, misleading the government’s inspection. Nationwide, the CCP is the one and only party in the government. The CCP plans country growth in strategic five year plans. The perks of being a one party government is that decision making and follow up goes relatively fast. The majority of the respondents referred to the tremendous developments in China at least once. A Chinese
27 woman even refused to answer a question. Because she has left China 2 years ago, she was afraid it was not accurate anymore. Another referred to government’s urban planning as ‘sprouting cities’, where 30K towns evolve in 1M cities in a short period of time. Thus, in line with Kasarda & Crenshaw (1991), the majority of the respondents agree with the urbanizing power the political elites wield. Yet again, proposition 2 seems to be accepted.
In Chinese urban planning it could be that the stakeholders involved withhold mixed motives. ‘A commercial MHG has obvious motives’, one respondent explains, ‘yet, a government related project might have many’. According to some respondents, it could be possible that a MHG gets involved in a mixed motives project where the primary goal is not commercial success or GDP growth but to create an important pull factor for the new developing business area. A potential risk for both parties is that the expected attractiveness does not blossom. One respondent mentioned that a certain urban planning for the city of Tianjin, a secondary city West of Beijing, did not go according to plan. In some areas this has led to an oversupply of luxury hotels in the area. This confirms the findings of Goh et al. (2013). They mentioned there is a scattered development of hotels in a rapid changing environment leading to oversupply in the one while having undersupply in the other. This is also confirmed by the mixed results from the interviews. One respondent mentioned that the government is not only investing between cities, but also within. New business areas erupt from cities, which are considered to be developed already. Some MHG withdraw hotels in certain areas due to oversupply while others invest heavily in order to take advantage of a market suffering from undersupply. These changes in the business environment can thus occur within the city as well. Strategic decisions made in the past might become disadvantageous when the business area changes. The volatile market environment of China can be considered a risk. Risk is defined as the multiplication of consequences of the event times the probability of the event (Alon & Herbert, 2009). Potential risk is an important driver in decision making and will be addressed in the market entry mode section of this paper. In a KPMG report of Fung & Peng (2012) they address ‘real estate bubbles’ to be one of the main pressures China faces in its future economic growth. Which is confirmed by one of the respondents as he says: ‘real estate developers rush in to cheap land offerings from the government, a rat race emerges for opening mixed developments as soon as possible. These could include hotels, apartments, shopping malls and
28 offices.’ When this growth in supply is not controlled or equal to actual demand growth this could lead to an inefficient market, as one could witness in Tianjin.
Within the third theory of Kasarda & Crenshaw (1991) the political elites are mentioned on the one hand. On the other hand, the economic elites are expected to contribute towards urbanization as well. Private investors contribute to the urbanization in the form of, e.g., real estate developers or infrastructure manufacturers. Due to Chinese regulation, many MHG enter the market with no equity. Therefore, they have to collaborate with real estate owners. In a later section will be thorough description of market entry mode in West China. When operating with a non-equity market entry mode a MHG needs to cooperate with others (Contractor & Kundu, 1998). Interviewees gave insights in the real estate companies they work with. Within the organization of some of these companies, some CEO’s have been or are part of the CCP. This leads to an intersection of political and economic elites. Some respondents confirm that in China this might be often the case. As one explained: ‘It is hard to spot the difference between a state owned enterprise (SOE) and a private owned company. It is not as easy as one could tell the difference in Western countries. Sometimes, they might present themselves as a private owned company but (former) government officials still have significant influence’. There is a thin line between economic and political stakeholders as both get intertwined easily. In a later section will be elaborated further on SOE.
The theories helped structure the findings regarding urbanization. According to the majority of the interviewees urbanization contributes to the market potential of the area and therefore either attract developments. In the hotel industry some respondents mention that MHG are part of the urban planning, as they are popular for the many pull factors. Although, one respondent did not want to be so ‘arrogant’ to claim such statement. Others, mentioned the necessity of hotels in creating business environments. Thus, attractive business areas are in call for MHG development. Yet, Zhang et al (2012; 2013) mention attractive business environments are a cause of MHG developments. In favor of proposition 2, the findings suggest hotel development will follow as the area urbanizes. Further research should indicate whether it is true that MHG development both is a call for and a cause of urbanization.
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Government
In the previous section are mentioned the political elite, as a potential driver of China’s tremendous urbanization, and the relation it has with MHG development. One step to the right in the conceptualization, is the relation how government influences urbanization and MHG development. In the literature review the five year plans of the CCP are mentioned. These contain the planning of the present semi-decade. In short, CCP want to stabilize the growth in the Eastern shores to achieve sustainable growth, in order to make it less volatile. In the contrary, they intend to boost the economy in the West and create attractive business areas. As such they intend to create a movement from East to West. These plans are the main reason this explorative study has started and will be used to structure this part of the conceptualization. In combination with the findings of the interviews this should point direction towards interesting future research topics. Another important source of information has been provided by one of the respondents and will be used to provide insights in CCP’s motives. Zhang & Bao’s findings have been recently published. Building upon the hypothesis of Kuznets’ curve (1955) they provide interesting results regarding the urban planning of the government (Zhang & Bao, 2015).
THE 12
THFIVE YEAR PLAN OF THE PEOPLE’S REPUBLIC OF CHINA
As is written in the present five year plan, the reason for the developments in the Central and West regions is to increase ‘harmony’ and ‘unity’ within China. For they are of high and important value in the Confucianism beliefs (Drury, 2010). Confucianism is an important pillar in the foundation of Chinese culture. Some interviewees also referred to cultural related topics like Confucianism, the aspect of ‘losing face’ and Guanxi in order to explain Chinese government behavior. To understand drives and motives of another it is widely accepted knowledge in cultural background is important. For they function as the roots in managerial decision making (Drogendijk & Slangen, 2006, Hofstede & Bond, 1988). According to Hofstede & Bond (1988) it contributes towards Chinese success when comparing to other East-Asian countries. The majority of the interviewees finds the one party decision making to be the main reason of China’s quick growth. To structure this growth every lustrum the planning is presented in the five year plan. In practice, this plan is used as a guideline for future projects. Both private owned and state owned companies use these guidelines
30 in their own planning and forecasts. To structure this section the following topics of the 12th five year plan
will be discussed: urbanization, pushing forward a new round in Western developments and improvements of the tourism industry.
Urbanization
A quotation from the 12th five year plan goes as follows. ‘To put forward the urbanization,
accelerating the construction of socialist new villages and achieving the coordinated and interactive development among areas (Drury, 2010).’ Three topics related to one another. Firstly, the urbanization which is mentioned in the previous section as the proactive urban planning the government retains. According to the majority of the interviewees, MHG development is part of this urban planning. Second, the construction of socialist new villages which relates to the construction of the secondary and tertiary cities. One of the respondents, a PhD student of the Macau University, is currently studying hotel developments in China and also briefly confirms these current developments. He expects that the market entry mode of MHG will slide towards the franchise model as he compares current urban developments with previous ones in the United States of America. This is in line with the expectations of existing literature about MHG market entry mode in China and proposition 4. This will be explained in the market entry mode section of this paper. Third, achieving the coordinated and interactive development among areas refers to the connectivity of all areas. The idea is that rural areas support the tertiary and secondary cities, which in turn support the primary megacities. According to the PhD student, these developments encourage small hotel development, which is not included in the present study as MHG are not likely to enter these small markets. Connecting the cities should lead to an improvement of the overall reachability (Drury, 2010). Which in turn is expected to contribute to the West Chinese market potential (Zhang, 2012). Yet, not necessarily for MHG but more for the hotel industry in general. This partially contributes to proposition 1 as it only seems to influence the urbanization and not the MHG development.
Pushing forward a new round in Western developments
The planned developments of the 11th five year plan are being proceeded until at least 2020 (Drury,
31 of the governments, the interviewees were not as excited to go West as to expand in the East. Few confirm they are operating in the West. Although, movements to the West have been made. For most have established in the Central West region of Chongqing-Chengdu which is said to function as ‘the gateway to the West’. This is also the case for other Central-West cities like Xi’an, west of Beijing. In the 12th five year
plan these areas explicitly are mentioned multiple times. Their function is to connect the Eastern shores with the West inland areas. It seems little progress has been made since government investments in the west. A reason that MHG are less excited to go west is probably due to the increase in monitoring costs. ‘The majority of current and future MHG establishments are in the East, and not West’, according to a respondent. Another, more common mentioned argument, is that it does not make sense to position oneself in the West area, because the market has not matured enough. The demand for luxury hotel brands is not high enough to operate profitable. If a MHG decides to enter the West-Chinese market, they would do so with a lesser brand. ‘It is important to always analyze the market and conduct profound research. Then you look at your current portfolio and decide which brand suits which area best.’ It has been said, that during a market analysis they look at figures like GDP growth, population growth, local spending power, city visitors, tourism growth, and average occupancy of the existing hotels. This is partly confirmed by Alon et al. (2012) and Zhang et al. (2012). For they have used the majority of the above proxies in order to determine hotel location choice. A respondent mentioned the importance of these proxies as they indicate market potential. ‘If your brand portfolio does not match with the area demand, it is not wise to enter the market when profitability is your main purpose. When you wish to increase brand awareness or reap potential first mover advantage, it is a different story.’ One could say the expected hotel development in the West, which is addressed in the existing literature, excludes the top luxury segment. Therefore, it excludes the majority of the MHG brand portfolio. This contrary to the expectations of proposition 1. Pine (2002) made predictions for China’s future hotel industry where he also made suggestions for fitting market entry modes. In a follow up paper of Chan & Yeung (2010) the growing opportunities for budget hotels are confirmed. It is due to this trend the PhD student at the University of Macau expects a shift in the current dominant market entry mode, in favor of proposition 4. In addition, it has been found several MHG consider to expand their current brand portfolio in order to fit in. One already serves this market and is in the midst
