Motivations of Chinese Textile &Clothing enterprises’
Foreign Direct Investment in Cambodia, Vietnam, and
Bangladesh
Master Thesis Yanfen Li 10361006
MSC Business Studies – International Management Thesis Supervisor: René Bohnsack
Abstract
This research investigates the motivations of Chinese Textile & Clothing (T&C) enterprises’ to transfer their production base towards Cambodia, Vietnam, and Bangladesh. The objective is to examine to what extend this phenomenon is induced by firm specific resources and capabilities and by the home (China) and host country’s institutional environment. The conceptual framework synthesizes Resource-Based View (RBV) and Institution-Base View (IBV) perspectives. Seven working propositions are developed in line with the framework and empirically tested using qualitative data from individual enterprises’ perspective and from the entire T&C industry’s perspective. Three Chinese textile and clothing firms located in the Yangtze River Delta region are selected to analyse their enterprises’ motivations for their production base transfer. Three Chinese T&C institutions are selected to get archive data about the motivation for production base transfer from T&C industry’s perspective. Semi-structured interviews are conducted with T&C associations and secondary data from various sources are collected. The result suggests that Chinese T&C enterprises transferring their production base is mainly motivated by host countries’ labour and raw material resources, their low tax and tariff burden, and the springboard role of host countries to avoid trade barriers imposed by developed countries and to enter developed market and the ASEAN markets. The role of home institution support and escapism and host country institutional similarity is partially supported as the motivation for the transfer phenomenon, which is contradicted with existing literature. Strategic assets such as organizational learning and business network mentioned are part of the rationale of this transfer phenomenon.
Table of Content
1. Introduction ... 1
2. Case Background ... 5
2.1. The T&C industry ... 5
2.1.1 Evolution of the global T&C trade regime ... 5
2.1.2 Development of Chinese T&C industry in the post-ATC era ... 7
2.2. Textile and clothing clusters in China ... 10
3. Literature Review... 14
3.1. Resource-Based View ... 14
3.2. Institution-Based View ... 16
3.3.1. Home country institution ... 17
3.3.2. Host country institution ... 18
4. Conceptual framework and working propositions ... 19
4.1. Natural resource seeking OFDI ... 19
4.2. Efficiency seeking OFDI ... 20
4.3. Market-seeking OFDI ... 20
4.4. Strategic-asset seeking OFDI ... 20
4.5. Home country institution ... 21
4.6. Host country institution... 22
5. Research Design and Methodology ... 23
5.1. Research Setting... 23
5.2. Data Collection ... 25
5.3. Data Coding and Analysis ... 29
5.4. Strengths and limitation of research design ... 31
6. Results ... 32
6.1. OFDI behaviour of selected cases ... 32
2.1.1 Shenzhou International Group Holdings Limited ... 32
2.1.2 Bros Eastern Co., Ltd ... 33
2.1.3 Ningbo Jingyong Imp. & Exp. Co., Ltd ... 33
6.2. Within-case results ... 34
6.2.1. Company perspective ... 34
6.2.2. Industry perspective ... 44
6.3. Cross-case results ... 66
6.3.1. Natural Resource Seeking OFDI ... 66
6.3.2. Efficiency Seeking OFDI ... 67
6.3.3. Market Seeking OFDI ... 67
6.3.4. Strategic Asset Seeking OFDI ... 67
6.3.5. Home Institution Support ... 68
6.3.6. Home Institution Escapism ... 68
6.3.7. Host Institution Similarity ... 68
6.4. Rationale of research findings ... 70
6.5. New perspective from data ... 73
6.6. Host country factors ... 74
7. Discussion ... 75
8. Conclusion ... 78
8.1. Managerial implication ... 79
8.2. Future research ... 80
Appendix 1: Code List ... 86
Appendix 2: Overview of secondary data sources ... 87
Appendix 3: Semi-structured interviews transcript and translation ... 92
Index of Tables and Figures
Table 1 The formation and development mode of China’s T&C cluster (source: (L. P. Wang,
2009) ... 11
Table 2 YRD Profile (Source: Hong Kong Trade Development Council) ... 12
Table 3 Description of selected cases ... 25
Table 4 Description of Chinese Institutions that related to Chinese T&C firms foreign investment ... 29
Table 5 Company's perspective on motivations of Chinese T&C enterprises production base transfer ... 37
Table 6 Number of references (source: Nvivo) ... 44
Table 7 Industry’s perspective on motivations of Chinese T&C enterprises production base transfer ... 47
Table 8 Number of reference (source: Nvivo) ... 66
Table 9 Cross-case analyses ... 69
Table 10 Results on working propositions... 69
Figure 1 2005-2012 number of Chinese T&C firms in the YRD engaged in OFDI (Source: MOFCOM) ... 9
Figure 2 Regional distribution of production-based OFDI by Chinese T&C firms in the YRD (Source: MOFCOM) ... 9
Figure 3 List of Asian countries for Chinese T&C production-based OFDI (Source: MOFCOM) ... 9
Figure 4 Location of YRD (Source: Y. Liu, 2009) ... 13
Figure 5 China's extant OFDI policy Regime (Source: Luo et al., 2010) ... 17
Figure 6 Female Participation in Labor Force (Source: WEF, 2013) ... 108
Figure 7 Production Process Sophistication (Source: WEF, 2013) ... 108
Figure 8 Foreign Market Size Index (Source: WEF, 2013) ... 109
Figure 9 Burden of Governmental Regulation (Source: WEF, 2013) ... 109
1. Introduction
The textile and clothing (T&C) industry is a worldwide industry with its global trade flow constantly increasing. The Chinese T&C industry has a major stake in the global T&C market. According to Eurostat, China accounts for 32.5% of the global export and 8% of the markets in textile and for 42.7% of the global export and 3.7% of the markets in clothing in 2012 (EC, 2013). However, internal and external threats are challenging the production powerhouse position of the Chinese T&C industry.
Within the Chinese domestic market, manufacturing costs are increasing. This includes not only labor wages and cost for raw materials and fabric/yarns, but also the rising value of China's currency, and the cost of shipping goods from China to points around the world (LeBeau Philip, 2013). In the foreign markets, demand for clothing is shrinking due to the continuing uncertain economic conditions in the EU region and recession-induced drops in consumer spending (Sina, 2013). In addition, Chinese T&C exporters face strong competition from other countries such as Vietnam, India and Cambodia, Bangladesh. For example, Guess, an American textile brand, has cut its source from China by half to one-third in 2011 (The Ecomonist, 2011). H&M, a Swedish textile company, although continuing their strong manufacturing base in China, is not placing more order to its Chinese supplier but looking to build manufacturing sources in Africa in support of their need to expand their business across the global textile market (Telegraaf, 2013). The competing countries possess not only lower wages, but also strong production capacity, adequate infrastructure and favorable regulatory policies (Wang Fangqing, 2013). Chinese T&C firms experienced orders reduced, revenues declined, and gross profit decreased.
The increasing domestic cost, decreasing foreign demand, and strong competition from other countries represent great pressure for Chinese T&C firms to adjust their business model. On one hand, Chinese T&C industry is in the transition process from Original Equipment Manufacturing (OEM) to Original Design Manufacturing (ODM) in which it will provide more value-added service than before in the global value chain (Chang & Ha-Brookshire, 2011). Examples includes Youngor Group design, manufacture, and sell clothing products with its "Youngor" Brand for gentleman clothing; Bosideng International Holdings Limited acquire UK apparel chain to sell own branded down jackets. On the other hand, some Chinese T&C firms transfer production bases to other countries to reduce manufacturing cost
such as Shenzhou International Group Holdings Limited set up subsidiary in Cambodia to undertake cutting and sewing operations, Bros Eastern Co., Ltd established Vietnam subsidiary to engage in produce, process, and sell all types of yarn and its by-products, and dyeing etc.
As a global production powerhouse, Chinese T&C industry possesses advanced production equipment and technology for production and has many production lines to enjoy economies of scale (Chang & Ha-Brookshire, 2011; Xinmin Peng, Na Li, Changjuan Zheng, Lijuan Wu, & Ruiqing Huang, 2010). There is no single country that can challenge China’s position as the ultimate manufacturing destination (Birnbaum, 2013). This thesis will investigate the motivations of these advantageous Chinese T&C firms to transfer production base into other comparatively disadvantageous countries. In particular, research questions are: What are the motives for Chinese T&C firms to transfer production base overseas? What is the role of Chinese government in the internationalization of these T&C firms? What host country institutional conditions are attracting Chinese T&C Outward FDI (OFDI)?
Since the most competitive Chinese T&C firms are clustered in the Eastern coast, my thesis will focus on one of these clusters, namely Yangtze River Delta (YRD). According to MOFCOM database on Foreign Investment Enterprises (Institutions) List, the top three production-based OFDI by T&C firms in the YRD are Cambodia, Vietnam, and Bangladesh. This thesis will focus on these three countries as host countries (please refer to section 2. 2 for more information).
Many researches have been devoted to Chinese OFDI. Mainstream researches in the international business literature identify that the motivation of Chinese OFDI to expand into developed countries is to gain strategic assets such as advanced technology, management and marketing skills, and brand image (Luo & Tung, 2007; Deng, 2007; Deng, 2009; Lu, Liu, & Wang, 2011) and to get access to local markets (Lu et al., 2011). The argument is that as latecomers, Chinese MNEs lack of competitive resources and capabilities to compete on the global scale. Research has also been conducted on the motives of Chinese OFDI into developing and least developed countries, and the conclusion is that such Chinese OFDI are looking for resources in host countries to guarantee continuous domestic production and to fuel the double digit economic growth in China (Ramasamy, Yeung, & Laforet, 2012; Taylor, 2002). Most of these researches are done on an aggregate basis, which treated Chinese OFDI as a single variable. There are few researches investigate the motives of internationalization
of Chinese T&C firms. This thesis will close this gap and explore the motives behind Chinese T&C firms’ production base transfer.
There are three ‘strategy tripods’ to explain the internationalization of MNEs: the institution-based view (IBV) (Peng, Wang, & Jiang, 2008) the industry-institution-based view (Michael E. Porter, 1985), and the resources-based view (RBV) (Barney, 1991). When applying these views into the internationalization patterns of Chinese firms, some authors (Alon, Child, Li, & McIntyre, 2011; Cui & Jiang, 2010; Lu et al., 2011) argue that existing theories cannot describe the unique characteristics of the internationalization of Chinese firms while others (Schüler-Zhou & Schüller, 2009; J. Zhang & Ebbers, 2010)conclude that the internationalization patterns of Chinese firms are similar to those of Western firms. It is still a question whether traditional theories can explain the internationalization of Chinese firms. This thesis is trying to contribute to the existing literature by combine RBV and IBV to explore whether existing theories can explain the characteristics of internationalization of Chinese firms in the context of the Chinese T&C industry. The T&C industry is a pillar industry in China and plays an important role for the development of domestic economy, which is strongly impacted by home country institution. Besides, the Chinese T&C industry has build strong production capabilities embedded within Chinese institutional environment, which provide them a competitive advantage at the global stage. Hence, it adds value to examine the interaction of IBV and RBV.
Further, while the role of host country institution attracted a lot of attention, the role of home country governments is mostly ignored and is taken for granted in the recent literature of MNEs undertaking OFDI (Peng et al., 2008). Unlike market economies of many Western countries, Chinese government still functions as a visible hand on the development of the country’s economy, which will have a great influence on the growth of OFDI. This thesis will integrate home country institution and host country institution and investigate the push effect of the home country institution and the pull effect of the host country institution on the expansion of Chinese T&C firms.
The remainder of this thesis is structured as follows. First, some case background information about the international T&C trade regime and the development of Chinese T&C industry will be presented. Second, the theoretical background will be reviewed, namely, the resource-based view (RBV) and institution-resource-based view (IBV), to set the foundation for the conceptual model. Third, a conceptual framework and seven working propositions will be discussed to
lay theoretical motivations of Chinese T&C production base transfer. Fourth, research methodology will follow multiple case study design to collect qualitative data through semi-structured interview with Chinese T&C associations and secondary sources. Data will be analyzed with deductive approach to justify the validity of the seven working propositions. Five, this thesis will conclude with key findings, implications for managers and for host countries that try to attract Chinese T&C FDI flow, and recommendations for future research.
2. Case Background
2.1.
The T&C industry
The T&C industry is one industry with two sectors that have similar economic characteristics. The textile sector and clothing sector are different in terms of technology and factor intensity. They are connected through a vertical production and distribution network, where the textile sector provides the major input to the clothing sector (Fukunishi Takahiro, Goto Kenta, Yamagata Tatsufumi, 2013). The textile sector is in general much more capital intensive than the clothing sector. The clothing sector is a labour-intensive, low wage industry and a dynamic, innovative sector. On one hand, the clothing sector is labour-intensive and it offers entry-level jobs for unskilled labour in both developed and developing countries. In this sector, the relative modern technology can be adopted even in poor countries at relatively low investment costs. On the other hand, the high-end fashion segment of the clothing sector has high-value added segments where design and research and development (R&D) are important competitive factors (Nordås Hildegunn Kyvik, 2004).
Changes in trade policy and market access conditions will have great impact on the development of the global T&C industry.
2.1.1 Evolution of the global T&C trade regime 1. Multi-fibre Arrangement, 1974-1994
Quotas against T&C exports from developing countries were introduced on a large scale in the 1960s focusing on only T&C made from cotton and from a relatively limited set of countries. The restrictions on cotton textiles stimulate suppliers to use synthetics and other fibres to reduce the impact of quota. As a result, a complex web of quotas covering a wide range of textile fibres was introduced under the Multi-Fibre Arrangement (MFA) in the 1970s by the major importing countries (Martin, 2009). The MFA was subsequently used between developed countries such as USA, EU and major textile producers to negotiate numerous bilateral agreements (Hudson, Ethridge, & Mutuc, 2010). The MFA not only protected producers from developed countries to compete against lower cost producers from developing countries, but also created unintended trade distorting effects such as quota-hopping foreign investment (T&C industries in poorer, least developed countries restricted as quota-constrained economies invest in countries with low levels of quota utilization) (Hudson et al., 2010) and diverse internal quota allocation schemes (the schemes included various eligibility criteria and categorizations of quota) (Trela & Whalley, 1995). However, the MFA
deviated from the basic GATT rules, especially the principle of non-discrimination (J. Wang, Wu, & Yao, 2008).
2. Agreement on Textile and Clothing (ATC), 1995-2004
The MFA was incorporated during the Uruguay Round of negotiations in the Agreement on Textiles and Clothing (ATC) that took effect in 1995. The ATC is a four stage over 10-year transitional trade arrangement allowing for selective application of tariffs and quotas, aiming at the creation of a more open trading environment for T&C (Amann, Lau, & Nixson, 2009). On one hand, ATC was supposed to increase developing countries’ access to the previously protected markets of advanced countries. On the other hand, ATC’s phase in all T&C products will allow importing countries to set restriction on products which was not included in the MFA. In addition, The ATC also allowed developed country producers to use special safeguard measures under certain conditions permitting developed countries to introduce new trade restrictions if they believed liberalized imports posed a significant threat to their domestic industry (Dayaratna-Banda & Whalley, 2009).
3. Post-Agreement on Textile and Clothing era, 2005-present
On 1 January 2005, with the termination of the ATC, all T&C products were no longer subject to quantitative restriction but subject to multilateral disciplines under the rules of the World Trade Organization (WTO) for WTO member countries. However, other “market distortions” remain in the form of tariff escalation, tariff peaks, export competition measures, and non-tariff barriers (Fukunishi Takahiro, Goto Kenta, Yamagata Tatsufumi, 2013). Jörg Mayer (2004) state that the multilateral trading system, namely transparency and non-discrimination, will induce more efficient resource allocation and a decline in consumer prices and hence lead to significant increases in global welfare. He also point out “the benefits of quota removal will be distributed unequally across individual countries because quotas are bilateral and the extent of their restrictiveness varies across countries”. In 2011, global T&C exports were reached USD 294 billion and USD 412 billion respectively, while China’s global market share in export is 37% and 32% correspondingly (WTO, 2012).
The evolution of the global T&C trade regime creates market access for countries that were restricted under the quota system and brings in new dynamics in the global clothing market.
Firstly, Fukunishi et al (2013) state that the new market demands for ‘fast fashion’ reconfigure the supply chains, which is marked by rapid shipments, higher quality
cycles, improvements in factory skills and supply chain management, including fabric production, material sourcing and finishing process. According to Brismar (2013), there are two expansion trends in the global fashion/clothing market. One is the internationalization trend, which is dominating the international fashion industry for the last decades. Large fashion chains, such as H&M, create production sites far away from headquarters. The other is a local production trend. A growing number of smaller fashion brands in Sweden, such as Gul&Blå, Lind, and Matilda Wendelboe are placing production units closer to headquarters to get better control over production cycles, to be able to more quickly adjust production to customer demands, and also to reduce transportation costs and environmental impacts.
Secondly, with the continuous revelation of “sweatshop” scandals to the public, more and more fashion brands such as Nike, H&M, Mango and GAP, pay attention to the social responsibilities practices of their sourcing suppliers. Such move will inspire the whole industry to evolve towards sustainability. Magnus Senke, co-manager of a Swedish company Gul&Blå, expressed that low price and fast fashion will be replaced by more sustainable fashion (Brismar Anna, 2013).
2.1.2 Development of Chinese T&C industry in the post-ATC era
Since the Chinese economic reform and opening-up policy, the eastern region in China has become the target destination for T&C industrial transfer from Hong Kong, Taiwan and developed countries such as America and the European, owing to cheap labour cost and location advantage. The development of T&C industry not only drives local economic development but also becomes an important pillar for China’s economic growth. Incrementally, Chinese T&C industry has built up strategic capabilities in the field of manufacturing, international logistics and mass marketing & sales in the OEM order processing business with foreign brands.
After years of fast development, Chinese T&C industry in the eastern region has been upgraded from the initial industrial (textile industrialization) stage into the advanced industrial (heavy industrialization) stage (H. Liu & Yan, 2009). The quota system, central to the MFA and ATC, constrains the growth of China’s exports of T&C products. Under the new multilateral trading system, Chinese T&C firms can satisfy the needs of capital increment by increase exports globally. China has become the leading exporter in the T&C industry. It accounts for 32.5% of the global export and 8% of the markets in textile and for 42.7% of the global export and 3.7% of the markets in clothing in 2012 (EC, 2013).
Changes occur not just in the global level, but also in the domestic level. In the home country boundary, due to high commercial costs and the environmental issues, the Chinese T&C industry in the eastern region have to complete the transformation from scale expansion to structural improvement and there is a wave that processing industry and labour-intensive industry move toward the middle and western regions of China (H. Liu & Yan, 2009). Since 2001, the first year of the Chinese government’s’ 10th Five-Year Plan and the year that China joined WTO, the Chinese T&C industry has reported to achieve progress in industry restructuring, technology and equipment upgrade, and innovation improvement (NDRC, 2006). The 12th Five-Year-Plan, which aims at industrial transformation and upgrading, put forward eight key tasks for T&C industrial transformation and upgrading: “The first is to enhance the capability of independent innovation. The second is to strengthen the technological transformation of enterprises. The third is to improve the level of industrial information. The fourth is the promotion of industrial green low-carbon development. The fifth is implementation of quality and brand strategies. The sixth is the development of a core group of competitive large enterprises and groups, the promotion of SMEs to be developed as new and special enterprises, improve enterprises management level of modernization, encourage the big companies and SMEs coordinated development. The seventh is to promote regional industrial co-ordination and development. The eighth is to enhance the level and depth of opening up.” (CTEI, 2012).
However, the low labour productivity, weak industrial base, low industrial equipment, low marketization, high transaction cost and high logistics cost in the middle and west region of China make it problematic to shift industry from east to west (H. Liu & Yan, 2009). Chinese T&C firms proactively focus on foreign destination for transferring processing industry and labour-intensive industry.
According to MOFCOM database Foreign Investment Enterprises (Institutions) List, during the period of 2005 to 2012, 160 Chinese T&C firms in the YRD are approved by MOFCOM to engage in OFDI, of which 84 engaged in production-based OFDI (see Figure 1). 57 out of 84 (67.86%) Chinese T&C firms chose Asian countries as their OFDI destination (see Figure 2). Within these Asian countries, Cambodia, Vietnam, and Bangladesh are the top 3 destinations (see Figure 3).
Figure 1 2005-2012 number of Chinese T&C firms in the YRD engaged in OFDI (Source: MOFCOM)
Figure 2 Regional distribution of production-based OFDI by Chinese T&C firms in the YRD (Source: MOFCOM)
Figure 3 List of Asian countries for Chinese T&C production-based OFDI (Source: MOFCOM)
12 23 12 16 14 21 32 30 8 13 3 8 6 11 16 19 0 5 10 15 20 25 30 35 2005 2006 2007 2008 2009 2010 2011 2012 OFDI Production-based OFDI
23,81%
67,86% 4,76% 3,57%
africa Asia Europe（including Russia&Turkey) South America
20 13 12 3 2 2 1 1 1 1 1 0 5 10 15 20 25
2.2.
Textile and clothing clusters in China
Clusters are “geographic concentrations of interconnected companies, specialized suppliers, service providers, and associated institutions in a particular field that are present in a nation or region” (ISC, 2013). Porter introduces the cluster concept and links industrial clustering to firms’ competitive advantage (Z. Zhang, To, & Cao, 2004). He (1998) claims that “a cluster allows each member to benefit as if it had greater scale or as if it had joined with others without sacrificing its flexibility”, and that clusters can provide companies within it with such sources of competitive advantage as knowledge, relationship and motivation that distant rivals cannot match; and that clusters can foster productivity and innovation and enhance competitive advantage.
The Chinese T&C clusters have a two-fold significance. At the micro industrial level, companies within these clusters benefit from knowledge externalities, specialization, the existence of local public goods, and reduced transaction costs within industries, which will increase companies’ productivity (Lin, Li, & Yang, 2011). At the macro economic level, they have had significant impacts on the economic development of the localities and on the economic geography of the country (Wu & Wu, 2010) and strengthened the position of China in the international market as the leading producer and exporter of T&C products in the world (Z. Zhang et al., 2004).
According to Mirhosseini et al (2011), the Chinese T&C industries were historically located in the three coastal cities of Shanghai, Guangdong and Taian and then expanded into most large cities under China’s planned economy system. Wang (2009) summarize a few patterns of the formation and development of T&C clusters in China (see Table 1) and claim that the formation and development of T&C clusters in Eastern and South-Eastern coastal areas of China conformed to the trends of international shift of textile industry and of China’s open up and reform policies. There are three big T&C clusters in China, namely, the Yangtze River Delta (YRD) Region, the Pearl River Delta (PRD) Region, and the Beijing-Tianjin-Hebei (BTH) Region. Over 70 percent of China’s T&C production is concentrated in three costal provinces (Guangdong, Zheijang, Jiangsu) and two river deltas (Pearl River and Yangtze River) (ElSayed, Kulich, Lake, & Megahed, 2006). This thesis will focus on the Yangtze River Delta (YRD) for thesis research.
Types Main Characters Typical Places Processing and
compensation trades
Eastern and south-eastern coastal areas of China seized the historic opportunities of the transfer of textile industry production centre, used local advantages in places and low-costs, and positively developed clusters formed by foreign trade processing textile enterprises. In this type, foreign companies provide raw materials and production technology, taking charge in product sales, while the local enterprises are engaged in production and processing.
Clusters around the Pearl River Delta in Guangdong
Spontaneous In the early stage of reform, some rural entrepreneurs in reforming pilots in coastal areas gradually
developed the clusters by their industrious and
entrepreneurial spirits and the combination of national policy and local reality during the process of
urbanization of China. Shoe-making and clothing industries in Wenzhou, and other rural township clusters in Zhejiang Province Foreign-inspired The entry of foreign enterprises has driven such a large
number of local enterprises to create a cluster town, especially the use of overseas Chinese and Hong Kong and Taiwan capital for developing the industrial clusters. Yanbu underwear cluster town in Guangdong, Footwear in Jinjiang Endogenous Industrial clusters formed with the link of the local
prosperity of commercial activity, a long history and culture, the traditional manual process, in addition to the blood, relatives, and geopolitics.
Women clothing in Hangzhou
Large enterprises derivative network
The innovation and development of large enterprises not only produced a number of outstanding industrial technology workers but also produced many ancillary services creating favourable conditions for the growth of small enterprises and finally the medium and small enterprises formed industrial clusters with a developed radiate structure.
Ties in Shengzhou
Concentration of raw materials in origin
It is mainly due to the abundant local textile raw materials that attract a large number of textile
enterprises to invest and then formed a material cluster.
Cashmere city in Bayannaoer, in Mongolia Non-concentration of raw material in origin
Although it is not a production base, it can gradually evolve into a certain technology and knowledge intensive industries and clusters relying on
technological innovation, professional division of labor and cooperation.
Cashmere city in Qinghe in Hebei
Metropolis-gathering The clusters developed by making full use of the economy, culture, services, consumption and transportation in surrounding metropolitan areas.
Garment cities in Beijing,
Shanghai, Dalian and other places Table 1 The formation and development mode of China’s T&C cluster (source: (L. P. Wang, 2009)
Chinese T&C clusters demonstrate three characteristics (Li & Fung Research Centre, 2007): first, they are geographically concentrated along coastal regions of Zhejiang, Guangdong, Jiangsu, Fujian, Shandong, and Hebei. Second, they demonstrate high degree of specialization. Examples include leisurewear cluster in Shajiabing Town in Changshu in Jiangsu, Men’s wear cluster in Wenzhou in Zhejiang, warp-knitting cluster in Yangxunqiao Town in Shaoxing, Zhejiang, etc. With the development of information system and supply chain management, it is observed that companies from different clusters cooperate with each other, which helped to stimulate the growth of the clusters. Third, there are commodity markets located in or near the clusters. For example, wholesale markets locate in major apparel clusters and act as major distribution channels.
The YRD covers 16 cities in 3 provinces: Shanghai Municipality (Shanghai), 8 cities in Jiangsu Province (Changzhou, Nanjing, Nantong, Suzhou, Taizhou, Wuxi, Yangzhou, Zhenjiang), and 7 cities in Zhejiang Province (Hangzhou, Huzhou, Jiaxing, Ningbo, Shaoxing, Taizhou, and Zhoushan) (see Figure 4). It is “an important economic powerhouse of the Chinese mainland, with Shanghai being China’s financial and logistics center, and Zhejiang and Jiangsu an important manufacturing base”(Wang Billy, 2013). In 2007, the YRD has 22% of the country’s total manufacturing sector (by industrial added value), 30% of the total exports of manufactured goods and 31% of the total exports of foreign-funded enterprises (Stats-Shanghai, 2007). In 2011, the YRD occupies 1.1% of China’s total land area (110,915 sq.km), inhabits 8.1% of China’s total population (108.6 million), represents 17.4% of GDP of the whole China economy (RMB8,214 billion) (Wang Billy, 2013) (see Table 2 for more information).
2007 2011 Percentage Change Land Area (sq. km) 110,115 110,915 0.73% Population (mn) 93.9 108.59 15.64% GDP (RMB bn) 4,686.3 8,213.9 75.27% GDP Growth (%) 15.3 11.1 -27.45% Per Capita GDP (RMB) 47,513 75,644 59.21% Industrial Output (RMB bn) 9,836.7 16,542 68.17% Retail Sales (RMB bn) 1,442.6 2,790 93.40% Exports (US$ bn) 450,7 687.4 52.52%
Actual FDI (US$ bn) 36.9 50.5 36.86%
Figure 4 Location of YRD (Source: Y. Liu, 2009)
T&C industry in the YRD region can date back to the early 1980s and has formed specializations in which Jiangsu and Zhejiang are the major producers of garment, textile, chemical fiber, and machinery while Shanghai produces a relatively large share of chemicals, machinery and motor vehicles. The development of YRD T&C clusters contributes to the economic take off of the region and establishes itself in the Chinese T&C economy. Reasons for the YRD clusters development includes: firstly, technical and investment barriers for enter to T&C industry was low; secondly, the coastal areas possess the best information and communication infrastructures; thirdly, T&C clusters located along highways and near the ports in major cities (Mirhosseini et al., 2011).
3. Literature Review
The internationalization behaviour of Chinese firms has attracted extensive attention in the IB field since the 1990s and that the motivation of internationalization in this period is to “pursue certain national and provincial economic goals and policy objectives, in particular to (1) support the export function of state-owned manufactures; (2) help stabilize the supply of domestically-scarce natural resources; and (3) acquire information and learning about operating abroad for the benefit of other domestic enterprises” (Buckley et al., 2008). With China joined WTO in 2001 and the development of the country, the motivation of Chinese OFDI has been re-examined and more dimensions of motivation were discovered: “(4) achieve improved access to foreign proprietary technology, immobile strategic assets and capabilities; (5) exploit new markets for products and services; and (6) enhance competitiveness through the diversification of business activity” (Buckley et al., 2008). While the first batch of motivations is more align with Institution-Based View and the second batch with Resource-Based View, this thesis will combine the RBV and IBV to investigate the motivation of production-based OFDI of Chinese T&C firms from the YRD cluster.
3.1.
Resource-Based View
The Resource-Based View (RBV) model (Barney, 1991) specifies the nature of internal resources and capabilities and holds that resources and capabilities that are valuable, rare, imperfectly imitable and non-substitutable (VRIN) are sources of sustainable competitive advantage for a firm. Rooted in the strategic management research, the RBV of the firm has become an influential theoretical perspective in international business (IB) research (Rui & Yip, 2008; C. Wang, Hong, Kafouros, & Boateng, 2012).
A key assumption of RBV is that managerial decisions are motivated by efficiency and competitiveness (C. Wang, Hong, Kafouros, & Wright, 2012). According to RBV, a firm will engage in foreign expansion when (1) “Firms can appropriate rents in overseas markets by exploring and exploiting valuable resources, such as technological capabilities, brand names and scientific knowledge” (C. Wang et al., 2012); (2) They can get access to the strategic resources to enhance their critical competencies to overcome late-mover disadvantage and catch up with developed market competitors on the global competition (Deng, 2009; Luo & Tung, 2007; Mathews, 2006; Rui & Yip, 2008; Yang, Jiang, Kang, & Ke, 2009). Compared with MNEs from developed countries, EM MNEs enjoy fewer firm specific advantage or advantage embedded in the home country. They cannot survive just by exploiting existing
assets in a dynamic environment, but by injecting new resources and capabilities from external strategic factor markets (Maritan & Peteraf, 2011; Meyer & Thaijongrak, 2013). The firm’s success in the internationalization depends on its ability to “configure its resources to create globally relevant competencies” (Graves & Thomas, 2006).
The RBV is compatible with the OLI model by Dunning, which can be summarized as when a firm process ownership advantage (O) over certain assets, especially intangible assets, it would be more advantageous for the firm to use them rather than to sell them in the oversea markets (L), which would induce this firm to engage in OFDI rather than offer rights under license or franchise (I) (Denisia, 2010). First, the competitive advantages possess by a firm cohere with the ownership advantage. Second, they have the same motivations to expand abroad: to exploit sets of location specific advantages of host countries (Barney, 1991; Lu et al., 2011; Kang & Jiang, 2012; Passakonjaras, 2012). While the ownership and internalization advantages are studied by the firm’s specific factors, the location advantage is studied by the host country specific variables (Kang & Jiang, 2012).
To understand the locational determinants of FDI, the four types of motivation of FDI by Dunning will be applied, which are natural resource seeking, efficiency seeking, market seeking, and strategic asset seeking (Dunning, 2001; Dunning & Lundan, 2008).
Natural resource-seeking OFDI is to exploit the immobile natural resources endowment abroad (e.g. oil, minerals and other raw material) that is not available at home or available at home but at higher cost (e.g. unskilled cheap labour) (Franco, Rentocchini, & Vittucci Marzetti, 2010). Raw material resource seeking by Chinese firms is to “provide inputs to downstream operations of the investing firms” (Kang & Jiang, 2012). Labour resource seeking is also very important for firms to minimize cost and maximize profit. Labour resource seeking motives is often related to manufacturing companies with high real labour costs (Hansson & Hedin, 2007). The location of natural resource seeking FDI depends on the availability of resources.
Efficiency-seeking OFDI is to “take advantage of different factor endowments, cultures, institutional arrangements, economic systems and policies, and market structures by concentrating production in a limited number of locations to supply multiple markets” (Kudina & Jakubiak, 2011). The purpose of efficiency seeking OFDI is to gain from the governance of geographically dispersed activities (Kudina & Jakubiak, 2011). Hence, capital, technological or informational intensive activities are often located in developed countries
while labor or resources intensive activities in developing countries (Hansson & Hedin, 2007). New resources of competitiveness, economies of scale and scope, low cost of production(Wadhwa, 2011) and lower tax burden (Hansson & Hedin, 2007) are some forms of efficiency seeking. Researches conclude that this type of motivation is not expected to be associated with Chinese MNEs investing in developed countries (Buckley et al., 2007; Buckley et al., 2008; Child & Rodrigues, 2005) but in developing countries or least developed countries (Wadhwa, 2011).
Market-seeking OFDI aims at penetrating local markets of host countries (Nunnenkamp, 2002). Both home and host country market conditions can induce firms to initiate market-seeking OFDI. From home country perspective, “domestic market saturation, reduction of domestic demand, and defensive strategies against the entry of foreign competitors in the domestic market” (da Silva, da Rocha, & Carneiro, 2009) will induce domestic firms to search for other markets. From host country perspective, host country market size will attract OFDI. Evidence shows that there is a strong positive relationship between market size of host country and FDI inflows (Kang & Jiang, 2012). The bigger the market size, the bigger the opportunity for investors to realize economies of scale and reach cost effectiveness.
Strategic-asset seeking OFDI refers to such strategic assets as ‘R&D capability, proprietary technology, design facilities, brands and reputation and management know-how’ (Sutherland & Ning, 2011). Mainstream research shows that the internationalization of Chinese firms are motivated by strategic assets seeking in developed markets (Boateng, Qian, & Tianle, 2008; Cui & Jiang, 2010; Deng, 2007; Luo & Tung, 2007). The underlying rationale is to compensate the competitive weakness of Chinese firms to catch up with developed market competitors on the global competition (Buckley, Tan, & Xin, 2008; Deng, 2009; Luo & Tung, 2007; Mathews, 2006) and to enhance its critical competencies (Deng, 2009). Strategic asset OFDI differs from other three motivations in that it does not exploit existing competitive advantage but to build up competitive advantage for future success.
3.2.
Institution-Based View
In contrast to the RBV, which examine the internationalization decision of firms from a firm’s resources perspective, the Institution-Based View (IBV) focuses on “the dynamic interaction between institutions and organizations, and considers strategic choices as the outcome of such an interaction” (Peng, 2002). The primary criterion of IBV applied to OFDI is institutional legitimacy (Cui & Jiang, 2010). Firms are embedded in institutional
environment and will adopt acceptable and legitimate practice within this environment (Kang & Jiang, 2012; Li & Ding, 2013). A firm’s Internationalization decision reflects the formal and informal constraints of a specific institutional framework and is affected by institutional forces includes political, legal and social rules and the broader political context (Peng et al., 2008). Both home country and host country’s institution will shape the internationalization behavior of a firm (X. Zhang & Daly, 2011).
3.3.1. Home country institution
Since the competitive/ownership advantages are embedded in a firms’ home country (Stoian, 2012), it is necessary to take into account the role of home country government in the OFDI decision of firms (Peng, 2012). Many of the developing country governments act as “potent force and serves both as a constraint on and as an enabling mechanism of the internationalization of its national firms” (M. Y. Wang, 2002).
IB scholars try to investigate the role of Chinese government in promoting OFDI. Buckley et al (2008) state that the Chinese authorities liberalizing OFDI policies stimulate OFDI. Child & Rodrigues (2005) argue that Chinese government provides strong incentives to firms’ foreign expansion. Luo et al (2010) summarize Chinese policies in promoting OFDI into two categories: promotional measures, which include financial and taxation policy, risk-safeguard mechanism, information service network, and direction guidance of OFDI; and monitoring policies, which include simplify the process of approval, and interim measures for joint annual inspection of overseas investment (see Figure 5).
On the order hand, the institution escapism view implies that poor home country institution environment, such as lack of legal protection for property rights, inefficient market intermediaries, and corruption in public service and government sectors will negatively push the firms to go abroad for a more favorable institutional environment (Luo & Tung, 2007; Luo et al., 2010).
3.3.2. Host country institution
Investing firms will encounter different degree of institutional barriers when they enter into another country and market (Cui & Jiang, 2010) and they need to comply with host country institutions requirement, both formal and informal, to earn institutional isomorphism. Mainstream researches conclude that firms will invest into host country with favourable conditions to reduce risk and cost of doing business and to increase profitability (Kolstad & Wiig, 2012). Zhang et al (2011) argue that host country factors such as economy growth, the degree of openness, and market size will attract Chinese OFDI. Yet the destination of Chinese OFDI shows that Chinese MNEs are more intended to invest in unfavourable host country institutions, or other emerging countries and least developed countries (Cuervo-Cazurra & Genc, 2008; Kolstad & Wiig, 2012; Ramasamy et al., 2012). Two arguments justify this phenomenon. Firstly, Chinese MNEs have experience in dealing with difficult institutional environment, which may enable them success in other countries with difficult institutional conditions (Kolstad & Wiig, 2012; Morck, Yeung, & Zhao, 2008). Secondly, IFDI can play an important role in the economic development of the emerging countries or least developed countries and host country governments will create some favourable location advantage to attract IFDI (Cuervo-Cazurra & Genc, 2008).
4. Conceptual framework and working propositions
Building on the RBV and IBV of internationalization of firms, this section will articulates seven working propositions on the expansion of Chinese T&C firms to establish production base in Cambodia, Vietnam, and Bangladesh.
4.1.
Natural resource seeking OFDI
Natural resourcing seeking FDI is to exploit the immobile nature resources endowment abroad or unskilled cheap labour to minimize cost and maximize profit (Hansson & Hedin, 2007). Researches show that to support the double-digit economic development at home, Chinese firms need to have access to scare resources (Buckley et al., 2007; Morck et al., 2008) although Kavies (2009) finds that more than half of Chinese OFDI is in the service industry, which make this statement less significant.
The development of Chinese T&C industry contributes mostly to its low manufacturing cost advantage. With the development of the country’s economy, manufacturing costs such as labour cost, raw material cost and hydropower cost in domestic market are increasing. It is reasonable for Chinese T&C firms to enhance profitability by reducing cost of production and transfer the labour-intensive processing of T&C industry value chain overseas. Hence, locations that demonstrate lower production cost is expected to attract Chinese OFDI flows.
WP1: Chinese production-based OFDI in Cambodia, Vietnam and Bangladesh is expected to be associated with resource seeking motivation.
Resource-Based View:
• Resource seeking motivation (WP1) • Efficiency seeking motivation (WP2) • Market seeking motivation (WP3) • Strategic-asset seeking motivation
(WP4)
Institution-Based View: • Home country institution
• Governmental support (WP5) • Institution escapism (WP6) • Host country institution
• Institutional similarity (WP7)
4.2.
Efficiency seeking OFDI
Efficiency seeking has long been the reason for firms to invest in other countries (Kang & Jiang, 2012) to reduce production cost. As an example, investors from developed countries such as the US transferred labour-intensive manufacturing activities into developing country in the 1990s. China’s comparative advantage lies in that domestic market has cheap production cost and economic of scale and scope and hence Buckley et al (2008) conclude that efficiency seeking may not be the case for Chinese investors.
However, it may not hold any more with the changing environment in China as Chinese firms do feeling higher production cost pressure at home. In addition, the non-quota restrictions against Chinese T&C exports from developed countries such as the EU and US (Dayaratna-Banda & Whalley, 2009) will add non-production cost such as higher tax or tariff expense to Chinese T&C exporters. Hence, variations in factor endowments and lower non-production costs in foreign markets are expected to attract Chinese OFDI into these locations.
WP2: Chinese production-based OFDI in Cambodia, Vietnam and Bangladesh is expected to be associated with efficiency seeking motivation.
4.3.
Market-seeking OFDI
With China’s accession into WTO in the 2001, Chinese T&C firms expected increased order from developed countries, which previously set quota on their exports. However, the fact that developed countries such as the USA, Latin America and Europe countries impose product-specific safeguards mechanism against China’s export (Dayaratna-Banda & Whalley, 2009) still constrain the rapid development and profit growth of Chinese exports. A springboard countries with which the industrialized nations set few, if any trading constraints (Buckley et al., 2008; Taylor, 2002) will attract Chinese T&C firms to move production into these countries to serve markets such as the EU and US. The more open these ‘springboard’ markets to OFDI, the more likely that investors will invest in these markets (Kang & Jiang, 2012).
WP3: Chinese production-based OFDI in Cambodia, Vietnam and Bangladesh is expected to be associated with market seeking motivation.
4.4.
Strategic-asset seeking OFDI
Strategic assets refer to critical resources or capabilities, such as R&D capability, proprietary technology, design facilities, brands and reputation and management know-how (Sutherland & Ning, 2011). The underlying rationale for this motivation of Chinese MNEs is to acquire
local assets to compensate for their competitive advantages on the global scale (Buckley et al., 2008; Mathews, 2006; Sutherland & Ning, 2011). However, for firms moving from emerging economy to other emerging economies maybe more likely to exploit own resources and capabilities rather than acquire strategic asset (Wright, Filatotchev, Hoskisson, & Peng, 2005). Hence, strategic-asset seeking motivation is not expected to be associated with Chinese production-based OFDI by the T&C firms.
WP4: Chinese production-based OFDI in Cambodia, Vietnam and Bangladesh is not expected to be associated with strategic-asset seeking motivation.
4.5.
Home country institution
“A failure to consider the influence of China’s unique institutions will undermine the robustness of any meaningful attempt in seeking to understand the FDI behaviour of Chinese MNEs” (Kang & Jiang, 2012). Cui & Jiang (2010) address that Chinese government influence OFDI through the financial policies and approval system that all Chinese OFDI projects are subject to government approval and annual reporting of overseas operational matters is mandatory. In such way, Chinese government may “favour or discourage certain types of outward FDI based on its short- and long-term economic development agenda” (Cui & Jiang, 2010).
In 2000, the Chinese government announced its ‘Go Global’ policy to support and encourage Chinese firms with competitive advantage to expand abroad. The purpose of this strategy was to “create a comparative advantage for Chinese firms by promoting multinational operations and actively develop and utilize overseas resources” (Chou, Chen, & Mai, 2011). Chinese “going global” strategy is the second most important drivers for Chinese OFDI (WIR, 2006). It removed most of the previous restrictions and gives positive support to outward investment (Freeman, 2008). According to Freeman (2008) there are two main forms of support: subsidies and the supporting activities offered by government departments. Subsidiaries covers costs incurred in carrying out investment projects and interest payments on loans. Government departments include the Ministry of Commerce and Ministry of Foreign Affairs, and financial institutions such as Import- Export Bank of China, the China Development Bank and China Export and Credit Insurance Corporation.
With these supports from home country government, it is to be expected that Chinese T&C firms would set up production-base abroad.
WP5: Chinese production-based OFDI in Cambodia, Vietnam and Bangladesh is expected to be associated with the support from home country government.
Institutional factors such as “regional protectionism, quota allocations, high tax rates, corruption, regulatory uncertainty, insufficient protection of intellectual property rights and government interference” may push firms to search for and invest in more institutional efficient countries (C. Wang et al., 2012). Researches show that China’s OFDI into developed countries is attracted to local sounded institutional environment (Rui & Yip, 2008; X. Zhang & Daly, 2011). Yet, China, Cambodia, Vietnam, and Bangladesh are all labeled as emerging countries under IMF’s definition (IMF, 2013), and the economic development and institutional environment in China is better than all of the other three countries (WEF, 2013). Chinese production-based OFDI by T&C firms may not be inspired by institutional environment in all these three host countries.
WP6: Chinese production-based OFDI in Cambodia, Vietnam and Bangladesh is not expected to be associated with the institution escapism from home country.
4.6.
Host country institution
Wright, Filatotchev, Hoskisson, & Peng (2005) assert that institutional similarities enable firms from emerging countries entering into other emerging countries more easier to realize economies of scale and scope than their global competitors from developed countries. This is because firms from developed countries need to adapt their business model during their operation in host emerging countries (Wright et al., 2005), while firms from emerging countries face lesser “liability of foreignness” and hence less costly for them to operate (Kolstad & Wiig, 2012). This argument may hold when Chinese T&C firms set up production base in Cambodia, Vietnam and Bangladesh.
WP7: Chinese production-based OFDI in Cambodia, Vietnam and Bangladesh is expected to be associated with the institutional similarity in host countries.
5. Research Design and Methodology
China is the production powerhouse for T&C industry for decades. However, China’s dominant position is challenged by the internal and external threats. The research question is “What are the motivations for Chinese T&C firms to transfer production base to Cambodia, Vietnam, and Bangladesh?” Not only companies themselves, but also Chinese government are involved in the transformation of the Chinese T&C industry to meet the challenges. My thesis will combine the Resource-Based View (RBV) and Institution-Based View (IBV) and investigate three topics: 1) OFDI motivations from the company’s perspective; 2) the Chinese government's role in stimulating Chinese T&C firm’s OFDI; 3) the effect of host country institution similarity on attracting Chinese T&C firms’ OFDI.
This section will describe the structure of research in answering these research questions.
5.1.
Research Setting
The research purpose is to explain and explore the phenomenon of Chinese T&C firms transferring production base to Cambodia, Vietnam, and Bangladesh. To meet this purpose, qualitative research method would be adopted. While quantitative research method would be appropriate for research trying to discover the causal links between variables, qualitative research is useful to understand the motivations, processes and outcomes of certain phenomenon (Eisenhardt, 1989). Hence, qualitative research method would better fit the research question.
Case study explores a research topic or phenomenon within its context or within a number of real-life contexts (Saunders, Lewis, & Thornhill, 2012). It can be used to provide description, test theory or generate theory (Eisenhardt, 1989) in exploratory and explanatory research (Saunders et al., 2012). This thesis will follow case study research strategy and use a multiple-case approach. Multiple-cases support wider exploration of research questions (Eisenhardt & Graebner, 2007) and focus on whether findings can be replicated across cases (Saunders et al., 2012).
Theoretical sampling, rather than random sampling, will be adopted as it can provide more insights into the phenomena (Eisenhardt, 1989) for replication, extension of theory, contrary replication, and elimination of alternative explanations purpose (Eisenhardt & Graebner, 2007). For companies to be chosen as a case, they need to meet the following criteria: (1) they are rooted in the Yangtze River delta. The Yangtze River delta, includes Shanghai City, Zhejiang Province and Jiangsu Province, is the biggest cluster for textile and clothing firms.
After decades of development, T&C industry in YRD is mature and ready to transfer production base when facing domestic challenges; (2) they have already transferred production base to Cambodia, Vietnam, or Bangladesh; (3) they are preferably listed at the stock exchange to ensure the success of this foreign transfer, otherwise, they should be a successful case in investing production base overseas.
Companies were primarily selected from the list of “2009-2010 China Textile and Clothing industry competitiveness top 500” launched by CNTAC. As mentioned, Chinese T&C industry developed base on the cheap resources embedded in the country. However, as these resources becomes scare and short, local T&C firms need to enhance their competitiveness by adding more value to their products (CTEI, 2013). To do this, they need to upgrade themselves from the low-added value activities of OEM to high-added value activities such as textile R&D at the downstream or clothing branding at the upstream of the value chain, which was named the two end of the U-curve (CTEI, 2013). Companies in this list are successful and of big size, which will turn them to be the first movers to upgrade to the two end of the U-curve and transfer production base. However, they are not necessarily rooted in YRD or transfer production base overseas. Another list of successful cases launched during China Textile Industry “Going Out” Strategy Implementation Exchange Conference organized by CNTAC will be combined to select cases that meet all criteria.
Three cases will be investigated: Shenzhou International Group Holdings Limited (set up production base in Cambodia, announced on May 28, 2013 to set up factory in Vietnam) and Bros Eastern Co., Ltd (set up production base in Vietnam), and Ningbo Jingyong Imp. & Exp. Co., Ltd (set up production base in Bangladesh). Please refer to Table 3 for descriptions. All these three cases are replicated cases, which “enable comparisons that clarify whether an emergent finding is simply idiosyncratic to a single case or consistently replicated by several cases” (Eisenhardt & Graebner, 2007). By comparing the motivations of all these three companies to transfer production base in Cambodia, Vietnam, and Bangladesh, this thesis aims at drawing recommendations for host countries that try to develop country economy by undertake Chinese T&C industry.
Company Shenzhou International Group Holdings Limited
Bros Eastern Co., Ltd Ningbo Jingyong Imp. & Exp. Co., Ltd
Listed or not Yes (Hong Kong: code 2313)
Yes (Shanghai: code 601339) No Company size Registered capital: 30,000,000 USD Registered capital: 123,764,418 USD Registered capital: 3,300,384 USD
Employee: 50,000 (750Million RMB, exchange rate on February 1, 2014 at 6.0599 RMB/USD) Employee: 12,000 (in China) (20 Million RMB,
exchange rate on February 1, 2014 at 6.0599
RMB/USD)
Employee: 500 (in China) Company
Description
Shenzhou International Group Holdings Limited,
established in 1990, is one of the largest vertically integrated knitwear manufacturers in China. It specializes in manufacturing high-quality knitwear on an OEM basis.
The Group was also the largest exporter of knitwear and the largest PRC textile supplier to Japan according to the 2004 report on the development of China’s textile industry and the 2004 annual report on China’s international trade in textiles and clothing.
Bros Eastern Co., Ltd,
established in 1989, is a large-scale group
corporation specialized in research & development, manufacturing and marketing of top-dyed mélange yarn. Bros has a number of cotton ginning factories in Xinjiang, and several dyeing factories in Zhejiang, spinning factories in Zhejiang, Shandong, Jiangsu, and Hebei, which turn out nearly 150,000 tons (330.69 millions pounds) of melange yarn annually.
Ningbo Jingyong Imp. & Exp. Co., Ltd established in
1990, specialized in cashmere purchase, carding, dyeing, spinning, designing, weaving to garment finishing.
Annual output of cashmere yarn, velvet yarn, wool yarn, and others blended yarn amount to 600 tons, various brands or styles of cashmere knitwear to 500,000 pieces. Products are mainly exported to the United States, Europe and Hong Kong Subsidiary Description Shenzhou (Cambodia) Co., Ltd., established in June 2005, specializes in the manufacture and sale of knitwear products and serves North American customers of the company. It engage in Overseas business, Import and Export agents,
Clothing and Accessories business activities
In November 2, 2012, the Board of the company announced to establish Brotex (Vietnam) Co., Ltd, which will engage in produce, process, and sell all types of yarn and its by-products, and dyeing. Total investment of Bros (Vietnam) Co., Ltd will be 98 Million.
In July 2003, the company established Yongtai Co., Ltd in Bangladesh. The subsidiary’s cumulative production is expected to be more than 600,000 pieces of sweaters, which will stimulate domestic yarn export of more than 150 tons, and promote the steady development of the parent’s business.
Table 3 Description of selected cases
5.2.
Data Collection
Following Yin’s (2009) case study strategy, data collection of this thesis will rely on the theoretical propositions to guide data collection process. This study collects primary data through semi-structured interviews with Chinese T&C entities (CNTAC, CNGA, and SSEZ) and secondary data from academic database (LexisNexis) and Chinese institutions (CNTAC, CNGA, MOFCOM OIEC) (Please refer to Table 4 for description) from 2005 till 2013, the period after the termination of quota system. Besides, the World Economic Forum report on
Global Competitiveness is consulted to support the rationale of production base transference of Chinese T&C firms. Using multiple level sources will enhance the reliability of data acquired (Eisenhardt, 1989).
During the second half of November, emails and follow up emails were sent to 15 Chinese T&C firms located in YRD who engaged in production base transference (email addresses was found through Google by searching for the website of the companies). Yet, none of these emails were replied.
During the first half of December, telephone calls were made to 84 companies in the YRD which engaged in production based OFDI. Although not all of them initiated OFDI in Cambodia, Vietnam, and Bangladesh, the purpose was to investigate whether different motivations of production based OFDI might exist between companies invest in these three countries and that out of these three countries. However, no company was willing to participate in my research with reasons: no time to spend with me at the end of the financial year; the topic is strategic sensitive to the company. Yet, access was gained to conduct interview with SSEZ (Sihanoukville Special Economic Zone) (Please refer to Table 4 for description). Telephone calls were also made to Chinese textile and clothing institutions, whose contact methods were found in the MOFCOM website. Two institutions, CNTAC and CNGA, are willing to participate in an interview. Semi-structured interviews were conducted with SSEZ, CNTAC, and CNGA to acquire in-depth and purposeful information and discover unique characteristics and patterns of Chinese T&C firms’ OFDI behaviour.
Since I had no access to Chinese T&C companies located in the YRD, I included industry-wide secondary data to ensure data sufficiency. Data are collected in two perspectives: the industry-wide rationale on production base transfer of Chinese T&C firms in Cambodia, Vietnam and Bangladesh; and the case specific rationale of the three selected cases in the YRD delta. Secondary data regarding industrial wide motivation are collected from CNTAC, CNGA, and the MOFCOM OIEC archive. Speeches are also discovered regarding this phenomenon. Secondary data regarding the three companies are collected from company websites, annual reports, speeches, announcements, and newspaper articles.
To better understand the rationale of production base transfer to foreign countries by Chinese T&C firms, World Economic Forum reports on Global Competitiveness are consulted to support the findings.
Institution Full Name Description and Function CNTAC (2013) China National Textile and Apparel Council
CNTAC is a national federation of all textile-related industries and a non profit organization formed on volunteer basis. Some of its functions are following:
Work out the guidelines & rules to supervise the performance of the industry, set up & improve the self-discipline working system, and protect the interests of the industry.
Study and research the development and growing trend of the domestic and international textile industries, and participate in or provide consulting services for the various work in aspects of developing strategy, industrial policy, technological progress & upgrading, market promotion & exploration, reform & opening up of the industry, and bridge the enterprises with the government, make recommendations & reports to the government, and provide information & consulting services for the enterprises.
Coordinate the economic & technical relations between various sectors of the textile industry to promote the industrial rationalization and re-consolidation, and strengthen the industrial value-chain integration and cooperation.
Carry out the international technical & economic cooperation and interchanges, conduct international visits, in-service education & training; and organize trade meetings, international conferences, seminars, and domestic and international exhibitions to expand the markets.
Participate in working out & amending the industrial standards and organize the relevant resources to implement these standards.
Carry out the various introduction & promotion activities in the various endeavours of trade, science & technology, investments, human resources and management for textile industry.
Edit and print out various textile publications, hold various courses for professional training, and organize activities & develop this great cause, and undertake the various tasks entrusted by government. CNGA (2013) China National Garment Association
CNGA a nationwide organization of China's garment industry and is among China's first 4A industry associations. With an aim of fostering a sustainable garment industry, CNGA strives to provide various services related to garment industry for the government, industry, enterprises and society.
MOFCOM OIEC (2013) Ministry OF Commerce People’s Republic of China Department of Outward Investment and
MOFCOM is an executive agency of the State Council of China. It is responsible for formulating policy on foreign trade, export and import regulations, foreign direct investments, consumer protection, market competition and negotiating bilateral and multilateral trade agreements. Department of Outward Investment and Economic Cooperation is responsible for:
1. To organize and coordinate the implementation of “going global” strategy, guide and manage the affairs of outward investment and
Economic Cooperation
economic cooperation such as outward investment, overseas processing trade and R&D, overseas resources cooperation, foreign engineering contracting and labour service cooperation (including citizens’ overseas employment);
2. To draft laws and regulations on outward investment and economic cooperation, formulate regulations on safeguarding and monitoring for relevant departments, take joint efforts with relevant departments to make policy suggestions conducive to finance, insurances, foreign exchange, entry and exit, formulate and implement the development strategies and programs on outward investment and economic cooperation;
3. To approve, monitor and manage enterprises engaged in outward investment (excluding financial services) in line with laws; formulate and implement the standards on the qualification of domestic
enterprises engaged in outward investment and economic cooperation (including employment overseas) and administrative measures, regulate the operation order of outward investment and economic cooperation; 4. To monitor and analyze the operation of outward investment and economic cooperation, establish, perfect and implement the statistical system on foreign direct investment, foreign contracted projects and labour service cooperation;
5. To take charge of studying and formulating key strategic projects’ planning and supportive policies, comprehensively coordinate the implementation of these projects.;
6. To formulate and implement measures on performance evaluation and annual inspection of outward investment and measures on
hierarchical classification of enterprises undertaking foreign contracted projects, guide the work of credit rating of enterprises engaged in foreign labour services cooperation;
7. To undertake multilateral and bilateral exchanges and cooperation involving outward investment and economic cooperation, establish relevant mechanisms, negotiate to fulfil inter-government cooperation projects, build up contact system for key industries and enterprises, guide the implementation of key outward investment and economic cooperation projects;
8. To take joint efforts with relevant departments to safeguard outward investment and economic cooperation and tackle emergencies, lead the work related to the protection of the rights and interests of dispatched workers (including overseas employees);
9. To guide, organize and coordinate the work related to the construction of overseas economic cooperation areas;
10. To lead the work related to preferential export buyer's credit according to relevant regulations;
11. To guide and manage the training on outward investment and economic cooperation, guide the promotion work of outward investment and economic cooperation;
12. To undertake other assignments given by the leaders of the Ministry.
