THE INFLUENCE OF INTERNATIONAL
POLITICS ON THE FOREIGN OPERATIONS
OF MNES: A MULTIPLE-CASE STUDY IN
EAST ASIA
Master Thesis
MSc. Business Studies – International Management Supervisor: Dr Johan Lindeque
Second reader: Francesca Ciulli Student: Martin Olifson Student ID: 11227605 Submission Date: 18/08/2017
3 Abstract
This research provides new insights about the complex relationship between international politics and foreign direct investments (FDI). The literature on this matter fails to provide explanations on how international firms are influenced by political tensions between the host and home country of the Multinational enterprise (MNE). The purpose of this study is to analyse the extent to which foreign firms can prevent the negative effects generated by the political tensions by observing their main strategies and entry mode choices. A multi-case study will be used to investigate the investments of six companies with headquarters in three different countries (Japan, South Korea, Singapore), who in recent years have experienced episodes of tensions with China. The findings suggest that one Japanese and one Korean companies were hit by boycotts of Chinese consumers following tensions between China and the two countries. This implies that the perception pf the consumers towards the conflict matters and companies who are able to promote themselves as local entities were less likely to incur in losses.
Keywords: political tension, foreign direct investments, Multinational enterprises, bilateral political relations
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Statement of Originality
This document is written by student Martin Olifson who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating
it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
5 Acknowledgements
First of all I would like to sincerely thank Dr Johan Lindeque for his supervision. He has always been eager to help me with precious advices and feedback and he has constantly indicated me the way forward even when I felt lost or with few ideas.
Second I would like to thank my family and friend for their unconditional support over the past months.
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1. Introduction
In the past few decades, foreign direct investment (FDI) has significantly changed the
geography of the world economy (Tao et.al 2010). Multinational enterprises (MNE) invest in foreign countries to satisfy multiple needs and to pursuit different goals (Dunning
1998), but they also are confronted with several challenges. Perhaps, the greatest number of challenges for MNEs comes from the external environment they work. Different actors like customers suppliers competitors are indeed different from the home country environment and MNEs adapt their strategies to best fit in the market on (Meyer & Mudambi 2011). Moreover, firms that invest in foreign operations must cope also with the set of laws, regulations, policies and political forces that define the business operations in a certain country, that is, the institutional environment (North 1990). The international business (IB) literature has long focused on describing the implications that the institutional environment of the host country might have for foreign investments of MNEs. The general stream among the scholars is that institutions matter for MNEs and they will invest differently in countries where institutions are perceived to be weak (Heinsz 2000). Institutions where, the quality of bureaucracy is ensured (Busse & Hefker 2004, Ursprung 2002), the democracy is respected (Jensen 2006) and corruption rate is low (Wei 2000), are proven to attract higher levels of FDIs.
Although, there seems to be great arguments for the effects that the political environment has on MNEs foreign operations, little has been provided on how these effects are magnified when the host country and MNE’s home country entertain certain political relations. The mainstream theory on this matter, is that foreign investors are quite sensitive to the state of the interstate political relations between home and host country (Desbordes & Vicard 2010, Nigh 1985), as their deterioration could entail an increasing risk for MNE’s return on investments on a given country (Desbordes & Vicard 2010).
Indeed, these studies provide significant evidence that intrastate political relations are able to shape international investments decisions of foreign firm on a macro level, but there seems to be poor investigation at a firm level, on how MNEs can prevent to be negatively affected by the increasing uncertainty caused by unstable political relations, and how they adapt or modify their strategies in the host country. Hence, this study seeks to provide a better understanding on MNEs´responses to the increased risk and uncertainty created by a deterioration of political relations. The following research question can be thus identified:
7 RQ: How does, uncertainty and risk generated by political tensions, affect firm’s operations,
in the hostile country?
To address the research question, the study will be conducted through an inductive approach. Induction is convenient when areas of study are identified, and the goal is to derive theories and new insights from the main findings (Saunders et. Al 2009), which is indeed, the main purpose. To better develop new insights and perspectives on the subject of firms relations with countries political tensions, a qualitative multi-case study with embedded unit of analysis, will be utilized as research design. A multiple case-study describes selected phenomena in its real life context (Yin 2009), and it enables to analyse complex events where multiple variables need to be considered (Yin 1998). As this study aims to better investigate certain type of relations between firms´ activities and the geopolitical context in which they are embedded, a multi-case study seems extremely suitable for this research.
The case study will be conducted by taking into consideration a specific world’s area that is East-Asia, with a specific focus on China. Two are the main reasons that justify this choice. First, China is the largest recipient of FDIs in the world with almost 190 countries in the world and 450 of the world fortune 500 companies, investing in its soil. (China political risk management 2009). Also, its business and institutional environment, exposed foreign firms to a high level of risks and uncertainty because of the great influence of the government on the economic activity of the country (China political risk and management 2009). Second, in the last decades, the outstanding growth of China has resulted in major implications for the political balance in Asia but also in the entire world. (Soss 2006). China has been the center of multiple international disputes, and its rise as political power in Asia, has caused multiple contrasts with other countries. (Nanto & Avery 2005). Hence, selecting China as landmark for describing the complex relation between political issues and foreign investments allows to take into account a complete set of variables and factors that reinforce the validity of this study.
More specifically the study, will be organized as follow. The investment decisions of six companies in China, will be analyzed with specific attention on the significant traits of their strategies and their entry mode decisions. The companies selected, have headquarters in three Asian countries (Japan, South Korea and Singapore), that entertain intense but very different political relations with China, and in the recent years they all experienced political tensions
8 with Beijing. The strategies and choices, of the focal MNEs will be observed in relations of these events, in order to fully capture the extent to which firms´ operations, are affected by the ongoing political relations between home and host countries.
The reminder of the research will be organized as follow. In the first chapter, a brief description of the main literature themes will be provided, with specific focus on the concept of risk, uncertainty and entry modes. In the following chapter, more insights on the research design adopted will be provided, including specific descriptions on how data were collected and analyzed. Next, the three case studies will be presented in detail followed by the cross case analysis that aims to find relevant patterns and similarities across cases. Finally, the study will be concluded by a discussion section where the main findings of the cross case analysis will be evaluated in relation of the main themes risen by the literature review.
2. Literature review
The relationship between economic interdependence and geopolitical conflicts has been the centre of many debates among economic and political scholars. On a country level, large studies have been conducted to determine the impact of the interstate bilateral relation on international trades (Hirschman 1980; Polacheck 1985). Many researchers have demonstrated that countries with conflicting political interests are likely to reduce the trade flows between each other (Gowa & Mansfield 1993; Heinsz et.al.2010). The sources of these political conflicts, which in turn can cause a reduction of trades might, be found in territorial disputes (Simmons 2005), controversial political interactions (Pollins 1989) and potential military conflict (Li, Sacko 2002). A growing body of the literature however seems to scale down these claims. Kastner (2007) argues that the effects of international political tensions on trades are less powerful in cases where economic interests are strong on both sides, while Gartzke et al. (2001), state that the relation between flourish trades and peace is valid but lacks on taking into account a wider array of economic indicators.
When considering the consequences of political conflicts and disputes on a firm level, and how outward and inward investments´ flows might be affected, the literature on the subject, seems to lack on significant investigation.
9 Several studies have indeed described how FDI might be affected by unfavourable political events. Nigh (1985) states that for less developed countries interstate and intrastate political events have higher impacts on FDI, while Vicard and Desbordes (2005) observe that intrastate political events are likely to affect the location choice of multinational companies. These findings were also supported by Busse & Hefeker (2006) and Buthe & Milner (2008) who extended the study on a global scale. However, previous studies seems to fail on describing an important concept, that is, the extent to which conflictual governments are able to drive and to influence MNEs investment’s decisions. On this matter two assumptions can be draw.
On the one hand it is reasonable to assume that governments are not able to fully control outward and inward investments flows. As argued by Davis & Meunier (2010), while it is true that governments still retain autonomy on how to respond to market pressures, the rise of a global economy with low trade barriers and large multinational firms has weakened the ability of states to influence foreign investments to meet national goals. On the other hand, firms are likely to modify their investment behaviours even in the absence of any direct policy changes induced by governments after interstate conflicts (Li 2006,2008). This second assumption implies that the tension created by the two countries creates a mechanism for which MNEs are likely to operate in an environment that is more unpredictable and, uneasy to fully understand. This mechanism, can be explained by an increase level of uncertainty and risk for the foreign firms.
These two concepts have been widely examined in the literature, as it has been, their implications in relation of FDI, and lot has been said also in the conceptual difference between them. Uncertainty as defined by Mullner (2016 p. 801) is unmeasurable random and unpredictable, while risk is to some degree measurable and manageable and can be often traced back to a specific source. By describing how uncertainty and risk might increase as the tension fires up between two countries it is possible to better understand MNEs investments decision and strategic operation choices, in such context.
2.1 Risk and uncertainty
2.1.1 Conceptual difference
As previously mentioned, concepts of risk and uncertainty substantially differ for the degree of measurability. Uncertainty, arise from the instability and volatility of a certain environment
10 (Anderson & Gatignon 1988) while risk is in most of the cases known and its sources can be easily tracked. Not only on the different sources but also in the possible consequences it can be observed a fundamental difference: decisions taken in uncertain situations are most likely knowable, but hard to calculate while, risky actions entail future consequences which probability is well known (Knight 1921). This conceptual difference, translates important implications on internationalization theory, as dealing with manageable sources of risks allows to better develop international strategies (Mullner 2016).
As for the general concept of uncertainty and risk, the same distinction can be applied on a political level. Firms who enter a foreign market and face an uncertain environment caused by instability and high volatility are not always aware of the consequences that this could have on their investments. On the other hand, there are several risks that the political environment of a host country might present, that can be addressed in advance by a foreign firm, which in turn should also be able to assess the likelihood of such risky events to happen. To better conceptualize this difference in terms of bilateral political relations, it might be argued that for its unpredictable nature uncertainty can be associated to episodic political tensions that can in the short term negatively shape the external environment for foreign MNEs. On the other hand, the status of political relation between two countries as it easier to identify, can be related with political risk that firms who operates or desires to invest in the hostile country, should be able to assess and partly manage (Luo 2009). In fact, whereas the negative consequences of negative political relations can be reduced through international learning or endogenous adjustments, uncertainty rising from political tensions is strictly exogenous to the investments (Rivoli & Solorio 1996), and firm have to change their change their investments strategies after the conflicts between the two countries flares up (Li 2006).
2.1.2 Political risk
Political risk encompasses political events and processes that can negatively affect doing business (Alon & Herbert 2000). It involves governmental or societal actions, which might be originated within or outside the host country (Luo 2009). From a micro-perspective these events or processes which refers to factors that can influence only particular industries, firms or projects. (Alon & Herbert 2009). From a macro perspective, the focus shifts on a country level. Country specific risks, are likely to affect all the firms investing in a foreign country. This categorization enables to have a better understanding of the multitude of situations that foreign
11 firms may experience in an hostile environment, but is equally important to address how MNEs can cope with the variety of political risks.
Literature on the relation between political risk and FDIs has mostly focused on investigating the political determinants that most likely increases risk for foreign companies. Busse & Heffker (2005), analyze a sample of 83 countries between 1984 and 2003, aiming to identify those indicators that are more significant for MNEs activities: of the 12 indicators they employed in their empirical analysis, government stability, absence of internal conflict, and quality of bureaucracy, were proven to be the ones with the highest impact for foreign investments. In line with this argument, Dutta & Roi (2011) argue that political instability is highly correlated with expropriation risks, and it prevents government from creating a strong financial market, able to attract new foreign capitals. Other authors bring evidence that factors such as corruption (Wei 2000) and lack of property intellectual protection (Lee & Mansfield 1996) act as a strong deterrent for foreign investments. Additional researches have been conducted to determine how foreign subsidiaries can best cope with risks coming from the political environment. A strategy that finds a large consensus among IB scholars, refers to the ability of firms in engaging in proactive political activities to influence decision makers (Boddewyin 1988, Hilman & Kelm 2005 Rodriguez et al 1990) and to reduce exogenous political hazard (Feinberg & Gupta 2009). This approach however, is limited as it would most likely fail in presence of changing political conditions (Feinberg & Gupta 2009), as could be in the case of a sudden political tension, and as it can be only applied for an MNE with long experience in the host country and who has developed the ability to manage institutional processes (Heinsz 2003). Another valuable approach used by MNEs is that of making the subsidiary of the host country, dependent on the home country parent for technology, knowledge and management skills and intermediate products (Fagre & Wells, 1982; Lecraw, 1984).
2.1.3 Environmental uncertainty
Uncertainty is defined as the unpredictability and volatility of the external environments. (Gatignon & Andrersen 1988) As the formal and informal institutional environment of the host country, is perceived as weak by the investing company, the unpredictability of the environment rise. In the IB literature the conceptualization of uncertainty has been a major area of interest. In one of his earliest contributions Duncan (1972) addresses the possible causes of uncertainty to the internal or external environment. The former includes the relevant physical and social
12 factors that affect the organization’s decision process from within, while he latter encompasses the significant physical and social factors outside the boundaries of the organization that are taken directly into consideration. Milken (1987) gives an important contribution to the subject by introducing a conceptualization of uncertainty on both a environmental and individual level. The authors also identifies three types of uncertainty that firms are likely to face when they seek to understand and to react to the external environment: state uncertainty, which refers to the unpredictability of the external environment, effect uncertainty which is associated with the inability to understand the impact of environmental changes, and response uncertainty which is related with the incapacity of organizations to find adequate solutions to the environmental changes.
Effects of risk and uncertainty over MNE’s performances and operations can be mitigated by two important and opposed factors. From an exogenous side the quality of institutions and from and endogenous perspective the entry mode strategy. Both concepts will be developed in the next paragraphs.
2.2 Institutions
MNEs who rely on stable and credible institutions are more likely to add value to their activities abroad (Jensen 2006). On the other hand, if the institutional environment is not able to guarantee adequate stability to the economic system, the MNEs will be more likely to face difficulties on collecting and organizing information necessary for a successful entry by FDI and, the relative costs of FDI, might increase (Delios & Heinsz 2003).
The literature regarding the role and importance of institution is extensive and provide many different theories. One of the most prominent contributions to the development of an institutional framework was provided by North (1990). According to North (1990 p. 3), institutions are “the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction.” then defines the institutional framework as “the set of fundamental political, social, and legal ground rules that establishes the basis for production, exchange, and distribution.”. The institutional framework helps MNEs to reduce uncertainty in a local environment by indicating which choices are applicable or acceptable (Peng 2002). Furthermore, Scott (1995) suggests that institutions can be divided in formal constraints (political rules, judicial decisions, and economic contracts) and informal constraints, which include socially norms of behavior embedded in the society. In an uncertain environment where
13 formal constraints fail, informal institutions play an important role, by providing consistency and solidity to organizations.
More recently, proponents of the New Institutional Theory (NIT) (Di Maggio and Powell 1991, Scott 1995) have provided a new perspective on the role of institutions which focus more on legitimacy rather than efficiency. Scott (1995) argues that a country regulatory environment is build upon a set of three dimensions: regulatory, cognitive and normative. These three dimensions vary in every country and have a substantial influence on strategic decisions conducted by MNEs in a specific country. Since these influences are fairly uniform in a given country, MNEs will be more likely to conform to these institutional norms in order not to loose legitimacy and hence, not to being left out from the marketplace (Brothers Hennhart 2014).
2.3 Entry modes
The entry mode choice is a fundamental decision in international strategy as it is closely related with the survival and performance of an MNE’s subsidiary (Stopford &Wells 1972: Beamish & Makino 1998). The choice MNEs face when they invest abroad, concerns the degree of ownership they want to assume in the foreign country (Li, 1995; Duarte & Suarez 2010). That means, foreign firms can decide to share the ownership with local firms, by forming joint venture or through acquisition of a local firm, or either to set up wholly owned subsidiary, retaining the full ownership (Brothers & Hennhart, 2007). The transactional cost (TC) theory has provided relevant arguments to understand the main factors that influence entry strategies. According to Anderson & Gatignon (1986), the amount of ownership is related with the amount of control firms want to retain on their foreign business operations. With higher levels of control firms are indeed more capable to influence systems and decisions (Gatignon & Andersen 1986) and to reduce disputes and controversies that might arise in the joint management of a subsidiary (Davidson 1982).
One counter argument however, contests that for higher levels of control, the commitment in terms of resources is indeed higher, and thus, in presence of uncertain and risky environments, an entry with higher levels of ownership could backfire (Delios & Beamish 2002). Previous studies have in fact, provided strong evidence that in presence of higher level of external uncertainty, MNEs will be likely to reduce their ownership stake in foreign subsidiaries (Gatignon & Anderson 1998, Luo 2001;Shenkar 2002; Brothers 1995; Delios & Heinsz 2000). Two are the main arguments behind these findings: First, as previously mentioned, with lower
14 levels of control or ownership, firms can reduce the amount of resources to invest that is at risk in the host country (Feinberg & Gupta 2009) and as a consequence, the dissolution of the investment becomes more manageable. (Duarte & Suarez 2010). Secondly, by leaving part of the ownership stake to the local partner, MNEs can also reduce the likelihood of expropriation risk as the local partner is likely to have better connections with local institutions (Feinberg & Gupta 2009). This circumstance is further supported in the case that MNEs perceive the local political institutions to be likely to change or to assume hostile policies toward foreign companies (Agrawal & Ramawasami 1992, Delios Beamish 1999).This second point raises another central topic in the entry mode conceptualization, that is, the access to complementary assets or capabilities. When a firm expands internationally, the need to acquire new assets is vital to survive and compete with domestic firms (Stopford & Wells 1972). New assets and capabilities are likely to be subject of market inefficiencies (Delios and Beamish 2000), and thus, difficult to ensure for foreign MNEs. Therefore, by sharing the ownership with local partners, and entering through joint ventures, enable foreign firm to gain access to host country assets. (Hennhart 1988, Beamish and Banks 1987).
In state of uncertainty, or political risk one of the most critical assets for foreign MNEs is the knowledge of the host country environment. (Delios & Beamish 2000). Without a great understanding of the political and legal rules and social norms that define the business environment (North 1990), of the host country, MNEs elevate the risk for their operations and reduce the probability of profitable returns (Wiliamnson 1986).
2.4 Focal research themes
The upcoming section will identify the main areas of interest raised by the literature review, that will be deeply investigated in the case-study analysis.
The main assumption upon which this research is based, is that there is not a clear understanding on how foreign MNEs responds to political disputes or more in general to the complex bilateral relations, between the home and host country. MNEs are informal representative of their home country (Desbordes & Vicard 2009) and as such, it is reasonable to assume that their operations will be negatively affected in state of cold diplomatic relations, and thy the will be run more smoothly in presence of positive political relations (Nigh 1985). This assumption however, lacks in considering a multitude of other factors both from a country and firm level perspective, that this research aims to consider.
15 To better illustrate the possible interactions between firms and political issues, some considerations from the country perspective, need to be portrayed . As previously indicated, although governments still have the ability to respond to market pressures, economic actors have increasingly more power on influencing national and international governments in order to promote and facilitate trade and investments (Devis & Meunier 2010). Even in a situation of political tension business actors will be likely to continue exploiting market possibilities, no matter the country recipient, while governments, from their side, will have to carefully balance political and national interests with the country’s economic interest. Even though some countries still raise protectionist barriers to trade and investments to defend their national economic interests (Kastner 2007), it is rational to suppose that most governments will be influenced by market pressures, to promote investments. However, the extent to which this is likely to happen it is still unclear. Hence a first area of investigation of this research can be identified, and, in this way formulated.
1. The extent to which political tensions can harm economic interactions, in the form of foreign investments, between two countries.
In the previous sections the concepts of risk and uncertainty have been discussed, and the major implications for foreign firms to operate in an uncertain and risky environment were developed.
As argued by Chen (2016), the uncertainty generated by short term events, as could be those caused by political tensions, can have an important impact on long term economic operations such as foreign investments. For this reason, it is of critical importance for MNEs to reduce that uncertainty that Milken (1987) refers as response uncertainty. This entails, that MNEs should be ready to assess quickly the causes of environmental changes and proactively respond to the same changes. Companies that are not able to react and to overcome environmental changes and shifting political scenarios, are likely to incur in poor performances, and theirs abroad operations will be likely to suffer. This assumptions, provide another interesting area of investigation, namely:
2. To what extent, MNEs can prevent the negative effects of risk and uncertainty, generated
16 In the last section of the literature review, the concept of entry modes and its implications for international operations, were developed. As previously indicated, the quality of diplomatic relations can be understood in a dynamic conceptualization that includes short term tensions that are able to influence long term political relations. This for MNEs that operates in the hostile country, translates in short term uncertainty, difficult to assess, and in long term risks partly manageable. This conceptualization, highlights the great dynamism that characterize the business environment in a rival country for MNEs. As well explained, by Dunning et. al (2010), firms are deeply embedded in this dynamic context, they co-evolve with their environment, and they need to constantly adapt to the external environment in order to maintain or enhance their viability in a competitive context. Hence, in relation with the entry mode choice, which represent a great factor of success for foreign MNEs (Stopford & Wells 1972), it would be misleading to consider it only as a choice in relation of a static point of time and space. Therefore, the level of ownership, needs to be evaluated in regard of the dynamic flows of events and conditions that affect the particular business environment where firms operate. A third area of investigation can be thus identified.
3. To what degree the entry mode choice mitigate or enhance the effects of risk and uncertainty for MNEs, over time.
Now that the main areas of investigation have been identified, the focus will turn on the research design, which will describe how to inductively examine this subjects.
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3. Methodology
In the following section the methodology adopted in the research is going to be discussed. First, an extensive explanation of the choice of multiple-case study as a type of research is going to be provided. Subsequently, a discussion on how quality criteria are faced and met will be presented and motivations for the selected case samples will be analysed. Lastly, this chapter will be concluded with an overview of how data was collected and analysed.
3.1 Research approach
The research approach selected for this study, is an inductive type of study. Inductive approaches, opposed to deductive studies (Saunders et.al. 2009), is a “systematic procedure for analysing qualitative data in which the analysis is likely to be guided by specific evaluation objectives” (Thomas 2006 p.238). By using an inductive approach the researcher is able to identify an area of study and derive the theory from the data analysed (Strauss & Kobrin 1998), to condense large raw text data, in a more simplified and brief format (Thomas 2006), and is also able to provide better explanation of the research context and the human behaviour (Saunders et.al 2009). As the field of international political relations, associated with international business lacks on relevant theories, the inductive study approach seems, fairly suitable for the purpose of this research, as it aims to provide new insights and new perspectives for future elaborations. Given the purpose of this research, it can be argued that this research, is exploratory in nature. As stated by (Saunders et al. 2009) in fact exploratory researches, aims to provide new insights of events or phenomena, and to portray the analysed phenomena under new lights and perspectives.
3.1 Multiple case study design
This research will be conducted using a multiple-case study with embedded unit of analysis (Yin 1989) based on qualitative research methods. Whereas quantitative research provides useful information when the aim is to find casual links between multiple variables, qualitative research is more suitable when little is known about a particular phenomenon (Strauss & Corbin 1990) and there is, therefore the need to determine motivations, perceptions, or beliefs associated with this specific phenomena (Van der Velde et al., 2004; Eisenhardt, 1989). Multiple case-studies might be defined as the description of a selected phenomenon in its real-life context (Yin, 2009). This method enables to analyse complex phenomena where multiple variables have to be considered and where there is not a clear distinction between the
18 phenomena and its context (Yin 1998). Moreover multiple-case studies are more suitable when the research question is in the form of “how” and “why” question. (Yin 1998).
Since the aim of this study is to describe the impact of political tension and diplomatic relations on foreign firms strategies in China, a case study design seems to be extremely suitable as it allows to examine and explain patterns on how firms conduct foreign operations, and how they manage risk and uncertainty caused by political tensions.
3.2 Quality criteria
Advantages of multiple case studies can be related to their ability to provide extensive and detailed information about certain phenomena or events. However, case studies have been long criticized for their alleged lack of rigor and generalizability as sometimes, the reproduction of a solid chain of evidence, fails to be implemented (Yin 2009). Moreover, the use of a large amount of empirical evidence enhance the complexity of the study, and the theory might in turn, be too narrowly defined as there is a lack of supportive relation between the observations (Eisenhardt 1989). Thus, a multiple case study approach, needs to follow and respect a certain number of criteria which are able to increase the rigor of the study. These criteria that need to be considered are: construct validity, internal validity, external validity and reliability (Yin, 2009).
Construct validity refers to the extent to which a study investigates what it claims to investigate,
and it thus can be related to the effective measurement of the study objects. (Yin 2009) In this study construct validity is achieved by using multiple source of data ( Yin 2009), such as company report, newspaper and databases for listing MNE’s investments, and by implementing the same chain of evidence and a replication logic to each case. (Gibbert et al. 2008). A clearly defined chain of evidence enables the reader to have a precise understanding of how the author has been able to draw his/her conclusions, starting from the initial research question. (Yin 2009; Gibbert 2010)
Internal validity, is a construct that allows to describe the casual relationship between variables
and results (Saunders et al., 2011). In this study, internal validity is ensured by identifying relevant pattern matches, through a careful analysis of the cross-case study, (Yin 2009) and through comparison of the results with previous studies (Eisenhardt 1989).
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External validity, refers to the application of findings of a study to other settings
(Gibbert&Ruigrok 2010). The respect of this criteria is ensured by using multiple case studies. Eisendhart (1989) states that to guarantee a wide generalizability of the findings, a multiple case study should be formed by 4 to 10 cases, while Gibbert and Ruigrok (2010) stress the importance of a clear selection of cases. This study in turn, consists of three with two embedded unit of analysis cases ( two companies for each country pairing) , and for each cases selected a large set o motivations is provided. Furthermore, the external validity is enhanced theoretical generalization of findings, which is ensured by replication of the findings across cases (Yin 2009). Replication is applicable when a solid cross-case analysis is implemented in the study (Gibbert & Ruigrok, 2010).
Reliability refers to the minimization of errors and biases that enable future researchers to arrive
at the same conclusions if they replicate the same study (Yin 2009). This study can be considered reliable as it makes use of a large use of sources of data, and a rigorous data collection process is implemented in which every step is accurately mentioned and documented (Yin 2009).
3.3 Case selection and sample
As it can be observed from the research question, this study focuses on a specific region which is East Asia. The reason behind this choice resides not only on the great economic development of the area, but mostly on the multitude of political and diplomatic relations that exist between different countries (Nanto & Avery 2005),and that are able to shape the landscape of foreign direct investments in the same area. To be able to extend the theory on the influence of international politics on MNEs international strategy, the case selection should be able to capture the great variety and complexity that surround the East-Asia geopolitical landscape. China can be arguably considered as the dominant power among all the states in the region (Soss 2006). The growth of Chinese economy has been so remarkable in the last decades, that it has been able to alter national interests of other countries in the region, affecting also the economic and political relations among the same countries (Nando & Avery 2005). For this reason, it makes sense to use China as a landmark of the bilateral relations existing in the region, and investigating how bilateral relations and specific episodes of tension with different countries affect the investment’s strategy of foreign MNEs, with headquarters in these countries, in China. Thus, three cases are going to be studied and those are companies with headquarters in three different Asian countries: Japan, South Korea, and Singapore. These
20 three countries all enjoy positive economic relation with Beijing but fairly different political relations , which allows for a sufficient and comprehensive variation in strategic behaviour. In addition, for each country two focal MNEs are selected which represent the embedded unit of analysis. The six companies are: Toyota motor Corporation, Hitachi Construction machinery (Japan), Samsung Electronics, Hyunday Motor (South Korea), Wilmar International, CITIC Envirotech (Singapore)
In the following section the bilateral relations between the countries selected and China are going to be briefly discussed.
3.3.1 China vs Japan
China and Japan relationship consist of frequent interaction from an economic standpoint while from a political perspective has been characterized by multiple tensions over the last decades (Nanto & Avery 2005). Major sources of tensions have regarded territorial disputes such as that over the Diaoyu/Senkaku Islands and over the East China Sea, an area rich of natural gas where the two countries have overlapping claims (Smith 2009). The U.S/Japan alliance has also strengthen the tensions between the two countries, as China considers it a way to increase Japanese military power. (Green & Twinning 2008). Lastly, the rising nationalism among young Chinese, is also enhancing the antipathy toward the Japanese neighbours ( Nanto & Avery 2005) which has been proved by the increasing number of riots and protest against the Japanese government. (Smith 2009).
3.3.2 China vs South Korea
China and South Korea economic relation, are extremely positive as South Korea is one of China’s larger trading partner (Ekman 2016). On the other hand, political relations between the two countries remain highly volatile and uncertain (Ekman 2016). Since the normalization of ties in 1992 the two countries have engaged in cordial relations (Nanto & Avery 2005). However, controversies regarding North Korea’s threat have lead to episodic tensions. Although, China has controlled the North Korean nuclear program advancement and has long advocate for a stronger cooperation between the two countries (Snyder Scott 2008), Seoul’s Government has lately accused China of scarce involvement on North Korea issue (Ekman 2016). Besides North Korea issue, other sources of frictions arise from South Korea close tie with U.S government. The last argument of discussion in fact, regards the deployment of anti ballistic missile system in South Korean coasts, (THAADS) which has increase China concern. (Ekman 2016)
21 3.3.2 China vs Singapore
China and Singapore have engaged in continuous and profitable economic relations for many years. (Shan 2016). Singapore is the first Asian country to have concluded a free trade agreement with China and from 2013 to 2015 it has been the larger investor in China (Shan 2016). Nevertheless, in the previous decade, the relation between the two country was slightly more problematic (Goh 2004). China has long being concerned of the tight relation between U.S.A and Singapore which culminated with the sign of a free trade agreement in 2004 (Vaughn 2006).
3.3 Data collection
The data collection procedure presents three main steps: First secondary data are used to identified the companies of the selected countries that have the great involvement in the Chinese market, and that have a significant number of investments in the country. These information are collected through newspapers, reports and official lists. Second, primary data regarding the investments in China of the selected company, are gathered through the Zephyr database. This database enables to identify all completed mergers and acquisitions conducted by a company in a specific period, while providing information also on the type of investment adopted. Since the database does not give information about greenfield investments, official company websites or other type of sources will be used to illustrate this type of entry mode.
The third step regards the collection of qualitative data on how MNE’s behaviour differs according to the different political relation that exist between China and MNE’s country of origin . Data will be gathered in the form of newspaper articles, company reports, and company annual account, through the “Lexis Nexis Academic” database. The name of the acquirer and of the target company will be used as a key search term in order to find relevant articles, that provide significant information on MNEs’” entry modes.In the next paragraph the coding procedure of the information collected, will be better illustrated.
3.4 Data analysis
The aim of the analysis of qualitative data is to find supportive arguments for the issues discussed in the research question, and more in depth in the conceptual framework. One possible way to analyse data is via thematic coding. To be successful the thematic coding should start with the definition of themes that are ranked by relevance. The themes chosen may arise both from the theoretical framework and from the data collection procedure. For each theme,
22 sub-codes are determined and these will be used to correlate the data to the themes described in the conceptual foundation part (Ryan & Bernard, 2003). By analysing data via thematic coding the researcher is able to identify and categorize relevant patterns that emerge from the theory and from the data collection (Yin 2009). After the determination of codes, articles and newspapers downloaded during the data collection process are going to be integrate in the program Nvivo. This software program enables to relate relevant contents to predefined categories (the codes), ensuring a methodical and structured analysis (Payne 2004). The table below provides an overview of the codes and sub-codes as related to the three area of investigation.
Area of investigation Code Sub-code
Area 1 Political relations China
Japan South Korea Singapore Political tensions Territorial dispute
Diaoyu/Senkaku THAAD South China sea
Area 2 Risk Risk
Uncertainty Uncertainty Strategy Operations Performances MNE Toyota Hitachi Hyundai Samsung Electronics Wilmar Citic Envirotech
Area 3 Entry modes Joint venture
Wholly owned subsidiary Environment
Ownership Control
Competitive advantage
23
4. Within-case analysis
4.1. Case 1: Japan
The first case-study will discuss the effects of the bilateral political relations between China and Japan on the strategies of Toyota and Hitachi, which represent the embedded units of analysis, on the Chinese market
The political relationship between China and Japan have always been characterized by frictions and historic tensions which have deeply influenced the development of both countries and, given their economic power and the strong connection with U.S, also the developments of the entire region (Smith 2009). Since the mid 90s, a high number of episodes such as naval clash, territorial disputes and controversies form the past history of the two countries, have marked the political scenario of the whole region. Especially from the Chinese side, the animosity and the anti-Japanese sentiments has grown steadily over the last two decades (Nanto 2005), and the threat of conflicts has always been high. In the recent past, a major source of tensions has been cause by the territorial dispute over the Diaoyu/Senkaku islands where the two countries have overlapping claims (Smith 2009). China and Japan have long been in discussion for these Islands, but tensions reach a peak on July 2012 when Japanese prime minister, Yoshihiko Noda, expressed his consideration for the Japanese government to buy the disputed islands, which triggered a number of anti-Japanese protests in several cities, that last for several months. The renewed tension had also important implications for the economic relations of the two countries. As can be observed from the appendix 1, FDI from Japan dropped by 22% in the third quarter of 2012. Other evidence (DW Asia 2014) shows how in recent years Japanese firms seems to move their operation from China towards, Asean countries, and survey conducted among Japanese companies, by Tikouku Databank, illustrates how one third of the firms involved, fear for their future operations in China. These results are considerably surprising, giving the fact that, since 1970 Japan has been one the most important players in Chinese economy (Smith 2006), and due to its proximity and the presence of cheap labor force among other reasons, China is the largest destination for foreign investmenst since early 2000 (Nando 2009).
24 4.1.1 Toyota
The company was a late entrant in the Chinese market with the first plant only built in 1993, When, Toyota Motor (China) Ltd. (TMCL) was established jointly with Toyota Tsusho as the first distributor in China to develop existing trading company routes. (Toyota global website) In 2001 Toyota motor Corp Investments was established in Beijing to coordinate sales and operations in China, and it assumed marketing function for the products manufactured in the other plants (TOTOTA MOTOR GLOBAL 2015). As emerged, from the quotes, the company first objective was to establish a solid sales network and to promote its brand images. The reason for this strategy reflected a natural trend in the Chinese market in the early 2000 when China was growing very fast (Peng & Luo 2010) Foreign firms had much more resources than Chinese domestic firms to build a unique brand and much more experience on promoting themselves and build their brand equity (Brothers and Xu 2002). The third stage of the plan was to establish multiple Joint Ventures, to boost production and to increase market share which was far lower than in other big markets such as U.S.A
As a relatively newcomer in the Chinese market the choice of entering through joint ventures, can be explained by the necessity to access capabilities and knowledge of the Chinese market (Delios Beamish 2010)
In 2012, when the territorial dispute over the East China Sea suffer important losses. As emerged from multiple sources, in the months following the explosion of antijapanese protests the automaker was hit by boycott of the Chinese people . Boycott of foreign products as a consequence of intrastate conflicts is a natural consequence and the more the nationalistic sentiments run higher, the higher is the likelihood of boycotts to happen (Li & Varshalicko 2010. The company decided not to build any new plants, nut no one of the existing manufacturing plants was close a spokesman of the company commented with this words the decision.
‘’Because every Toyota factory in China is a joint venture, any decision regarding their operation is the result of negotiations between all partners”
(China.org 2012) This evidence, provide arguments for the additional cost that can rise from joint venture projects due to the shared decision making and the higher need for coordination among partners (Killing 1983).
Country level
Nature of tension 2012: territorial dispute over islands in south china sea
Macro effects on Japanese firm
“FDI flows from Japan in China’s total manufacturing FDI inflows plummeted from 22% (the third quarter of 2012) to 9%
’Major Japanese firms have temporarily shut factories and offices in China in response to the series of violent anti-Japan protests across China’’
‘’Hundreds of Japanese firms closed their businesses, as demonstrators took to the streets to mark the anniversary of the start of Japan's 14-year occupation of northern China in 1931.’’
Firm level
“
Firm overall strategy
Considering China is an immature auto market, the company has adopted a three-stage development plan -- first to establish a local sales network and launch brand promotions, then to build auto parts manufacturing bases, and, finally, to establish joint ventures (JVs) with local players and produce automobiles
2010 GlobalVision”. This aim is to achieve 15% market share of the global automobile market by 2010, focus on two components, one is the further improving the information and production system, and another is research and development motorization based on a global sale”
Toyota’s product developers, who are based in Japan, ignored the advice of sales executives in China to use an affordable car that was under development and had been designed for emerging markets.
We should be localising our business here, promoting Chinese managers, and listening more attentively to Chinese consumers. But we don't
Effects of political events in China’s operations
Toyota said yesterday that the company and its joint ventures in China sold 75,900 vehicles in the country in March, down 11.7 percent from a year earlier.
Toyota has been hit by a resurgence of anti-Japanese sentiment in China because of a territorial dispute over tiny islands, and some Chinese are worried about being seen driving a Japanese car.
Territorial dispute over some islands, which has resulted in a de facto boycott of Japanese cars in China
Toyota hasn’t built a single plant in China since 2012 and decided to avoid using its cash reserves for that purpose in 2014”
Table 3: Toyota’s strategy and political dispute’s effects ( Source: Author)
1 Table 4: Toyota investments
FDI distribution WOS JV WOS JV WOS JV WOS JV WOS JV WOS JV WOS JV WOS JV
1 6 1 1
Subsidiary Year Entry mode Relevant quotes
Toyota or (China investment Co Ltd 2001 Wholly own Marketing subsidiary Marketing Sales CAMRY SEDAN MANUFACTURING JOINT VENTURE 2003 Joint venture 100%
Manufacturing The 50-50 percent joint venture, called FAW Toyota Changchun Engine Co. Ltd., will spend 16 billion yen ($152 million) to build the plant with an annual capacity of 130,000 engines.. The new plant will manufacture engines for the Crown luxury sedan, which is to be made at their Tianjin FAW Toyota Motor Co Ltd venture from next year.
FAW TOYOTA motor sales 2003 Joint Sales
company
Manufacturing
FAW TOYOTA CHANGCHUN ENGINE CO LTD
2004 Joint venture Manufacturing Production started in 2005, and cumulative production reached 1 million engines in 2009. In line with TMC's principle of producing where products will be used or sold, the decision was made to produce AR engines in China to meet the anticipated strong demand for vehicles that comply with increasingly strict fuel efficiency and emissions regulations.
GAG TOYOTA MOTOR CO., LTD 2004 Joint venture Manufacturing
GUANGZHOU TOYOTA ENGINE CO LTD, THE
2004 Joint venture Manufacturing
TONG FANG GLOBAL LOGISTICS CO., LTD
2007 Joint venture Manufacturing
Toyota motor Engeneering and manufacturing
2010 Wholly owned
R&D
R&D center
4.1.2 Hitachi Construction Machinery
Hitachi group is multinational conglomerate company, active in eleven different segments. The group has a strong presence in China with 141 companies, and approximately 60.000 employees (Hitachi group business strategy 2015). The company made clear his intention to assume a stronger position in the Chinese marketplace and to make it one of the most profitable markets. To achieve this goal the group wanted to be recognized as a Chinese company and to be trusted by the Chinese people. In doing so the company not only was focused on promoting local managers and create vast partnerships, but was also eager to make an impact on the society by fostering social activities. Hitachi has entered the Chinese markets mostly by setting up wholly owned subsidiaries (Hitachi Global). In table 16 are highlighted the investments made by one of the most profitable company of the group, namely Hitachi construction machinery. The company entered the Chinese market in 1995 by setting up a Joint venture called Hefei Hitachi Excavating Equipment Co., Ltd. The JV suffered of poor results because the local partner Hefei Mining could not ensure high performances and it was quickly replaced by a wholly owned subsidiary (Motoashi 2015). The CEO of HCMC Hirota commented with these words the decision to dissolve the Joint Venture:
“We thought a joint venture was a good idea because of the Chinese government’s policies for
foreign capital introduction at the time, and to secure employees and sales channels, but in reality we faced many troubles with our joint venture partner. Also, because companies do not generally know the inside details of our joint venture partners in China”.
(HCMC: becoming a Wholly owned Chinese entity p. 126).
This statement is in line with Luo (2002); Delios and Heinsz 2000, who argue that when entering with joint ventures, due to the incomplete nature of contracts, the entering company cannot completely safeguard the complementary assets from opportunist behaviour of the joint venture’s partner, and the risk of private expropriation hazards increases. Hitachi understood immediately that, when entering a dynamic and complex environment such as the Chinese one, the choice of the joint venture’s partner is fundamental, because the right partner is more capable of adapting the strategy to the environment, and it can indeed reduce the operational uncertainty
1 Another distinctive trait of HCM’ Chinese strategies that emerges from table 4 is the will to strengthen partnerships and create ties with Chinese government. The ability to engage in cordial relations with the institutions is widely diffused among local and foreign companies in China (Peng & Luo 2000). Guanxis (Chinese name for managerial and political ties) enable firms to partially protect themselves from hostile government policies, and in turn to reduce risk and uncertainty (Tsang 1998).
Table 4 also provide evidence that Hitachi has been eager to promote Chinese managers in their wholly owned subsidiaries. This strategy, not only provides the company with individuals that better know the dynamics of the market and that can better anticipate future risks and uncertainty (Tung & Worm 2001), but also following Di Maggio (2000) they help companies to build legitimacy among key constituencies.
As a consequence when tension between China and Japan flared up in 2012, Hitachi performances was only in part affected as stated by HCMC management. The presence of Chinese employees and mangers in the plant indeed prevented the escalation of boycotts that involved several Japanese companies. The causes of losses, that the company experienced at the end of 2012 was due to a scarcity of demand according to the company management (HCM Annual Report 2012).
4.1.3 Assessment of case
The two unit of analysis present a significant difference in their mode of operating in the Chinese market. They both aim at increasing their market share and at consolidating their revenues but following a different path. Toyota mostly invest through Joint Ventures without a significant commitment of resources. (Delios & Beamish 2010) The company have tried to strength partnership but maintaining its strong Japanese identity and methods as emerge from the quotes. As stated by a company insider in 2015 company losses were cause by a lack of localization of their activities:
“We should be localising our business here, promoting Chinese managers, and listening more
attentively to Chinese consumers. But we don't “
Hitachi on the other hand has decided to build its own plants and facilities but at the same time, the company tried to promote Chinese managers and employees.
Table 3: Hitachi’s strategy and political dispute’s effects ( Source: Author)
Country level
Source of tension 2012: Riots in China as a result of disputes over the East China sea
Macro effects on Japanese firms
’Major Japanese firms have temporarily shut factories and offices in China in response to the series of violent anti-Japan protests across China’’
‘’Hundreds of Japanese firms closed their businesses, as demonstrators took to the streets to mark the anniversary of the start of Japan's 14-year occupation of northern China in 1931.’’
FDI flows from Japan in China’s total manufacturing FDI inflows plummeted from 22% (the third quarter of 2012) to 9%
Firm level
Firm overall strategy
To broaden its understanding of Chinese society, Hitachi said it would promote local staff to management positions in line with a human resources development strategy for Hitachi (China) Ltd”
Hitachi's goal is to be recognized as a China company.Hitachi hopes to win an even higher level of trust in China and will advance initiatives toward its goal of being "The Most Trusted Partner in China".
Group has formulated the China Business Strategy 2015 based on further localization of operations and realization of Group synergies, strengthen partnerships Strengthen ties with governments and leading Chinese companies for cooperation in markets in and outside of China.
Promote business with a focus on regions experiencing strong economic growth, regions where the Hitachi Group has a strong presence, and regions with potential for developing alliances with prominent partners.
Effects of political eventrs Hitachi Executive Vice President Toyoaki Nakamura said tthat a recent wave of anti-Japanese protests in China stemming from a territorial dispute over a group of islets in the East China Sea has had little effect so far.
The Hitachi Construction and Machinery business in China is managed by Chinese employees in our Hefei plant. To a large extent they were able to prevent impact by the anti-Japanese demonstration. Therefore, within our Group companies there have been no serious problems because of the relations between Japan and China. China employees and executive officers and managers led the effort to protect our plant.
Table 6: Hitachi China’s investments (Source author)
1995-2009 2010 2011 2012 2013 2014 2015 2016
Revenues china 204,757 134,960 90,773 114,480 72,887 53,805 71,463
% Total 26,4 16,5 11,8 14,3 8,9 7,1 9,5
FDI distribution WOS JV WOS JV WOS JV WOS JV WOS JV WOS JV WOS JV WOS JV
2 2 1
Subsidiary Year Entry mode Purpose Relevant quotes
Hitachi Construction Machinery CO. LTD
1998 Wholly owned Sales and services ´´Hefei Mining’s operation suffered from poor performance, The solution was finally achieved in July 1998 wherein the board of directors dissolved the JV agreement´´ Hitachi construction machinery
(China) Co LTD
2004 Wholly owned Manufacturing &Sales Qingdao Chengri Construction
machinery CO., Ltd
2007 Joint venture Sales ´´In 2008, for the first time, HCMC invested in a Shandong reseller,
Qingdao Chengri Construction Machinery Co., Ltd., and is in the planning stages of creating a direct sales structure´´
Hefei Rijian Shearing Co LTD 2008 Joint venture Manufacturing Hefei Okubo Machinery CO.
LTD
This can partly explain why the two companies during the territorial disputes in 2012, had experienced different situations. Toyota suffered of important losses due to boycott of the Chinese people while Hitachi has suffered minor losses, mostly caused by a poor demand in the sector. This different behaviour is in line with Kim (2007) who argues that foreign firms that are driven by firms specific advantages rather than national economic interests, can be in conflict with the public goals favoured by the host country. This in turn, can result in a loss of legitimacy by the entrant firm, and a possible failure in the market (Brothers & Hennart 2007).
4.2 Case 2: South Korea
China and South Korea established formal diplomatic relations in 1992. Ever since, the political relations between the two countries have remained warm, but different sources of tension have threatened the formal peace between the two countries. In recent years the most delicate issue has regarded the situation of North Korea, with Seoul wishing for a more constructive help by China (Ekmann 2016). The North Korea controversy has leaded to a major source of issue between China and South Korea last year, namely the deployment of the US Terminal High Altitude Area Defense (THAAD), an anti ballistic missile system strongly desired by South Korea. Seoul, has accelerated the procedure for the construction of the system, which has been on the agenda for several years, following North Korea’s missile tests. While the US strongly support South Korea’s decision, Beijing has firmly opposed, fearing that the system will be used mostly to monitor Chinese missile deployments. The issue is leading to cold diplomatic relations, which however, should not affect the strong economic relation between the two country, at least for trade levels (Ekman 2016).
4.2.1 Samsung Electronics
The company has approached the Chinese market in the early 90s, by establishing several manufacturing plants mostly to take advantage of China’s low labour cost and to produce lower-priced products (Chang & Hee 2003). In the following years, the company adopted a strategy more oriented towards higher quality product, focusing more on differentiation and concentration (Chang & Hee 2003) in order to provide products, specifically tailored for the target market (Porter 1985) with the goal of creating superior image for their market offers and of achieving higher levels of customer loyalty (Miller 1998). To remark the importance of the Chinese market, the company decided to establish a second headquarter in China to strength its operations there (Chang & Hee 2003),
1 As emerged by the supporting quotes, in order to compete with the growing Chinese competitors, the company has recently decided to further localize its operation and to give a even stronger Chinese identity to the company. Given the rapid expansion of the Chinese economy, and the consequent growing of their disposable income, Chinese consumers are becoming more and more demanding and their desire to possess quality products increase day by day (Brouthers & Xu 2002). This provides a valid explanation for Samsung’s localization strategy, which aims at getting closer to the Chinese consumers, in order to fully capture their preferences, and the different expectations among different areas. In emerging markets like, China firms often lack on reliable market information and tend to rely mostly on low-cost production factors such as cheap labour force (Porter 1998). Hence, by differentiating and localizing its products Samsung is able to strengthen its image which in turn can facilitate the attraction of new consumers and it makes the company less vulnerable to environmental changes (Anderson, Fornell & Rust 1997). Moreover, by extending its plants in the whole Chinese soil, the company show its desire to meet the growing demand of underdeveloped regions. As pointed out by (Suchman 1995) this can be consider as a tentative of the company to establish its legitimacy by selecting a specific environment and operating in a way that could be beneficial for the area, for example by bringing new technology or by providing new employment.
To achieve its goal of becoming s leader company in the Chinese market, the company has built since its first plant’s construction in 1992, thirty-two subsidiaries. For almost the totality of the plants, which are mostly manufacturing or R&D centers, the company retains the full ownership, as can be observed in the table below. The choice to adopt full ownership, might be understood from the perspective that Samsung, given its superior technology in resources and knowledge, is not willing to abandon shares to local partners, in order to avoid leakages or spillovers of knowledge (Delios & Beamish 2010).
Although the THAAD dispute between China and South Korea has had negative impacts for many Korean companies (Asian Nikkei review 2017), Samsung electronics has continued to increase its profits as well as its stock prices.
Table 7: Samsung’s strategy and political dispute’s effects ( Source: Author)
Samsung Eletronics Aggregation of quotes Country level Source of tension
Dispute over deployment of anti-missilististic system (THAAD)
Macro effects on Korean companies
The challenging business environment is expected to persist in the second half because of negative external factors such as a slowdown in US demand and China’s THAAD issue
South Korean companies are growing more frustrated as the situation drags on. The longer these tensions persist, the harder it will be to win Chinese customers back if and when the question is resolved
“Industry insiders highlighted the escalating diplomatic conflict between South Korea and China as a major factor, saying that the nationwide boycott among Chinese consumers against Korean products is intensifying”
Firm level
Firm overall strategy
By having its own stores, Samsung was able to get more direct feedback from customers, allowing it to become more attuned to the differences that exist not just between Chinese and Western consumers, but also between different regions in China
Finding Chinese talent, product planning, research and development (R&D) and manufacturing are all done in China to offer customized products and services to the Chinese.
Mr Kim’s road trip is part of his efforts, since becoming chief executive two years ago, to localise Samsung’s operations in China and to extend the South Korean company’s sales and distribution networks far into the Chinese countryside
.
Samsung plans to expand in China not only to establish itself in the Chinese market but also to create a manufacturing base for its increased production of touch-screen devices this year
Effects of political events
Even as Chinese authorities shut down Korean supermarkets and cut off tourism to Korea, Samsung investors seem to believe that technology will be spared Samsung Electronics shares have climbed 6.25%, according to Factset, In contrast, other global Korean conglomerates have taken a beating on the market in recent weeks. That’s because of China’s opposition to THAAD, a missile defense system that South Korea has started to deploy with the help of the United States
1
Samsung 1995-2009 2010 2011 2012 2013 2014 2015 2016
Revenues China 234,000 231,000 288,033 292,487 283,946 316,044 320,497
FDI distribution WOS JV WOS JV WOS JV WOS JV WOS JV WOS JV WOS JV WOS JV
22 2 2 1 2 3
Subsidiary Year Entry mode Purpose Relevant quotes
Samsung Electronics Huizhou Co., Ltd. 1992 Wholly Owned Manufacturing The company has adopted a globalised manufacturing policy in China, in the same way it expanded into other emerging markets (…) Tianjin Samsung Electronics Produces Video cassette recorders, and Huizhou Samsung Electronics is involved in the manufacture of audio products
Tianjin Samsung Electronics Co., Ltd. 1993 Wholly Owned Manufacturing Samsung Electronics (Shandong) Digital Printing Co., Ltd. 1993 Wholly Owned Manufacturing Tianjin Samsung Opto Electronics Co., Ltd. 1994 Wholly Owned Manufacturing Samsung Electronics Suzhou Semiconductor Co., Ltd. 1994 Wholly Owned Manufacturing Samsung Suzhou
Electronics Export Co
1995 Wholly Owned Manufacturing
Suzhou Samsung Electronics Co., Ltd. 1995 Joint venture Manufacturing The joint venture, Suzhou Samsung Electronics Company, was 80 per cent held by the group and 20 per cent by Suzhou Xiangxuehai Electronics Corp. The group's move being made in the face of fierce competition in China's household appliance market.
Samsung (CHINA) Investment Co., Ltd. 1996
Wholly Owned Manufacturing Beijing Samsung Telecom
R&D Center
2000
Wholly Owned R&D Samsung Display DongGuan Co., Ltd 2001
Wholly Owned Manufacturing Tianjin Samsung Telecom
Technology Co., Ltd.
2001
