MSc IB&M Master Thesis
Factors Influencing Product Innovation in
Chinese Automobile Industry
Cui Fang
First Supervisor Bram Neuijen
Second Supervisor Binnur Kibriscikli
Faculty of Management and Organization
University of Groningen
Preface
Studying in University of Groningen is totally a different life for me. It is busy, excited and sometimes hard to me, but I am enjoying all these feelings. As the last task for my study, the master thesis took me almost six months. In the beginning of the thesis writing, I want to do some research related with Chinese automobile industry, because the automobile industry is significantly important for a country’s development and also because the industry is growing so fast in China. Then under the help of my supervisor Bram Neuijen I made the research into a specific topic: factors influencing the product innovation of Chinese automobile industry.
I would like to thank Bram Neuijen for his supervision, kindness, patience and the
constructive suggestions during my research. I also want to thank Binnur Kibriscikli for her time, guidance and being my second supervisor.
Abstract
The object of this thesis is to investigate the way factors affect product innovation in Chinese automobile industry. Then the research question is To what extent, do the factors of culture, corporate governance, firm size, internationalization, FDI and market structure affect product innovation in Chinese automobile industry?
In order to answer the research question, I divide the factors into two categories: contextual factors and firm, industry level factors. Contextual factors includes culture and corporate governance. The result shows that Culture does sifnificantly affect product innovation. Although the development of product innovation in Chinese automobile industry is handicapped by Chinese national culture according to Hofstede’s culture theory, through build a suitable organization mechanism or system which can complement Chinese culture environment, China can also come back to the correct way of innovation improvement. In term of Corporate Governance, the government should focus on the way to improve the governance structure and the mechanism in Chinese automobile industry. Firm level factors are firm size and internationalization. Industry level factors consist by Foreign Direct Investment (FDI) and market structure. The result shows that internationalization is positively correlated with product innovation in Chinese automobile industry but no significant relationship between firm size, FDI, market structure and product innovation in Chinese automobile industry.
Table of Contents
Chapter 1 Introduction... 6
1.1 Background... 6
1.2 Problem indication and research gap ... 7
1.3 Literature review of innovation and factors of innovation ... 8
1.4 Outline of the thesis ... 13
Chapter 2 The history and current innovation situation of Chinese
automobile industry ... 15
2.1 Introduction of Automobile industry ... 15
2.2 The history of Chinese automobile industry development ... 16
Chapter 3 Research design ... 22
Chapter 4 Contextual factors of product innovation in Chinese
automobile industry: Culture and Corporate Governance ... 26
4.1 Introduction... 26
4.2 Culture ... 26
4.3 Corporate governance ... 30
Chapter 5 Firm and industry level factors of product innovation of
Chinese automobile industry... 33
5.1Introduction... 33
5.3 Internationalization ... 34
5.4 FDI... 35
5.5 Market structure... 37
5.5 Regression model... 40
5.6 Results and analysis ... 42
Chapter 6 Conclusion and Discussion... 45
Chapter 1 Introduction
1.1 Background
There are few industries as large, diverse and influential as the automotive industry (Orsato and Wells, 2007). It has a high linkage with other industries and provides an impetus to the development of related industries. Automotive industry remains one of the most important industries in the modern economy and contributes a prominent share of total GDP and employment (Liang, 2004). Therefore, to develop automobile industry is usually taken as a measure of technological and economic development by developing countries when their GDP per capita has reached a certain level. China is widely regarded as a developing country. In the paper of Dreaming with BRICs: The path to 2050, Dominic Wilson (2003) use the GDP and GDP per capita to predict and compare the future growth of BRICs, the four developing countries Brazil, Russia, India and China. He found although they were all developing countries, they had different growth rates and positions in the world economies. Because of less capital per worker, relative higher education levels and better infrastructure, China is considered ranking in the top of developing counties and is forecasted to become the world’s largest economy by 2041.
ranked fourth in the largest automotive manufacturing countries. Furthermore, by 2004, China, with domestic passenger car sales of 2.3 million units, rivaled Germany for the accolade of the third-largest market in the world, only superseded by the size of the US and Japanese markets (Luo, 2005).
1.2 Problem indication and research gap
There is a great development in Chinese automobile production. The development of Chinese auto industry began in 1953 and the first vehicle, a Jiefang truck named by Mao Zedong, rolled off FAW's assembly line in 1956. According to Chinese Association of Automobile Manufacturers (CAAM), China's auto production reached 7.28 million units with sales of 7.22 million units in 2006, an increase of 27% and 25% respectively.
thesis, I am going to investigate which kinds of factors can influence innovation capability of China’s automakers and automobile industry.
1.3 Literature review of innovation and factors of innovation
Jingjing Zhang (2006) researched the technological innovation of Chinese firms and her research explores the factors which are behind the recent development of industrial technology in China, the determinants of China’s technological innovation and the path of learning technology. Her thesis was written at an industry level and covered most industries in China. She uses the number of patents to measure innovation capability and the result shows firms’ investment in R&D and R&D expenditures by local universities and research institutes as the largest positive factors on firm patents; the relationship between FDI and patenting is insignificant or even negative in overall regression results while it is positive in specific cases; domestic firm patents are positively correlated with both domestic and foreign market demands.
Table 1: Overview of several researches on Factors of product innovation
Research Factors influencing on Product Innovation Findings Authors Notes on the Determinants of Innovation: A Multi-Perspective Analysis Intellectual Property Rights(1); Market Structure(2); Financial structure and corporate governance(3);
Geography(4);
Demand(5); Human capital(6); Technology policy and regulation(7)
1 are more positively effective on innovation in high-tech industries; there is a U-shaped relationship between 2 and innovation; 3 and innovation have relationship, but no general agreements; 5 and innovation are positively correlated to each other; the quality of human resource is positive related with innovation; because of more innovation at local level, regional technology policies need to be designed to spur innovation. Baldwin, John, Peter Hanel and David Sabourin (2002) The determinants of innovation in the Malaysian manufacturing sector
Firm size(1); Ownership structure(2); Share of exports(3);
ownership(foreign or local)(4); market structure(5)
Positive relationship between 1 and innovation; private limited and public limited firms are more likely to innovate than sole-proprietorship firms; negative relation between 3 and innovation; no evidence for 4; Market concentration and innovation are positively correlated.
Cassey Lee (2004)
Determinants of Innovation
Firm size(1); Market structure(2); profitability (3); growth(4)
Positive relationship between 1, 3, 4 and innovation; high market concentration encourages innovation. Mita Bhattacharya and Harry Bloch(2004) Technological innovation of Chinese firms: Indigenous R&D, Foreign Direct Investment, and markets
R&D performed by the universities and research institutes(1); FDI (2); demand(3); export(4)
1, 3, 4 have a positive relationship with innovation; 2 is negative related with innovation.
Jingjing Zhang (2006)
factors which can affect product innovation. What’s more, culture and corporate governance will also be used as the factors. Culture can affect work behavior and different cultural values can lead to different decisions on innovation. And corporate governance refers to the monitoring and control over the way firm’s resources are located and the way firm’s relations are structured and managed through which entrepreneurship and innovation can be facilitated (McCahery and Vermeulen, 2006). So culture, corporate governance, human capital, firm size, internationalization, FDI and market structure are considered as the determinants of innovation.
Then the main research question is:
To what extent do the factors culture, corporate governance, firm size, internationalization, FDI and market structure affect product innovation in China’s automobile industry?
In order to answer the main research question, several sub-questions are formed: What are the current general state and innovation situation of Chinese automobile industry?
What is the relationship between culture and product innovation in Chinese automobile industry?
What is the relationship between corporate governance and product innovation in Chinese automobile industry?
What is the relationship between internationalization and product innovation in Chinese automobile industry?
What is the relationship between FDI and product innovation in Chinese automobile industry?
What is the relationship between market structure and product innovation in Chinese automobile industry?
described. And then, in order to explore the influence of factors on product innovation, both description and regression analysis will be used. The relationship between culture, corporate governance and product innovation will be analyzed through literature review. And then regression analysis will be used to test the relationship between firm size, internationalization, FDI, market structure and product innovation.
1.4 Outline of the thesis
The first chapter introduces the background of this research, the problem indication, the research gap and the main research question. Chapter two gives an overview of the history and current situation of Chinese automobile industry, which will provide a first impression of this industry in China. Chapter three will explain the research design. The next chapter will be the analysis of the relationships between culture, corporate governance and product innovation. They will be analyzed through literature review. After that, literature review and hypotheses about the influence of the firm and industry level factors on product innovation will come up as well as the regression analysis. Last chapter will be the conclusion and discussion.
The bookmark anchor bellowed shows the structure of the thesis.
Figure 1 Structure of thesis
Chapter 1 Introduction
Chapter 2 Current innovation state in Chinese automobile
industry
Chapter 3 Research design
Chapter 4 Contextual factors and product innovation
Chapter 5 Firm and industry level factors and product innovation
Chapter 2 The history and current innovation
situation of Chinese automobile industry
2.1 Introduction of Automobile industry
2.2 The history of Chinese automobile industry development
Usually researchers divide the history of Chinese automobile industry development into four phases. In the paper the Past, Present and Future of China’s Automotive Industry: a Value Chain Perspective of Holweg, Luo and Oliver (2005), the history of the automotive industry is considered in terms of four key phases of development: the central control and planning era of 1949- 1979; the proliferation phase (1979-1994), the phase of concentration (1994-2004), and the most recent phase since 2004. In my thesis I will describe the history in a new way based on joint ventures’ role in China’s automobile industry. So the history of China’s automobile industry development can be regarded as three stages: under the help of Union of Soviet Socialist Republics (USSR) (1953-1960); independent development era (1960-1984); alliances with other Countries automobile companies (1984- now).
Under the help of Union of Soviet Socialist Republics (USSR) (1953-1960)
In this phase, the state government acted as the main promoter and investor. During this period, the state government invested about 1.1 billion Yuan and automakers produced about 60,000 vehicles per year. With the assistant of USSR, China built many large automakers in this period, for example, the First Automobile Works (FAW), which was set up in Changchun City of Northeast China's Jilin Province as the symbol of the foundation of China’s auto industry. Jiefang began to product automobiles in 1956, when 1,600 units were assembled. By 1960, 16 automakers and 28 assembly companies were established. In this period, automobile production at the regional level also became feasible and profitable, driven by profit-making initiatives of provincial governments. From 1953 to 1960, Chinese automobiles developed well. But later, because of the historical reasons, the development of Chinese automobile industry was lagged.
Independent development era (1960-1984)
Union deteriorated and in August of 1960. So in this period, China had to develop automobile industry relying on its own resources. Partly because of the Vietnam war in this time, China set up a set of heavy and medium truck plants including the Second Automobile Works (Dongfeng), the Sichuan Auto Works and the Shanxi Auto Works. Till the early 1970s, demand for passenger cars started rising, but production could no longer meet the demand. The government decentralized automobile industry, which leads to a peak in capacity development in different regions. From 1978, China began to open up to the rest of the world, and transited from a planned economy to the market economy. By 1980, there were 58 automakers, 192 assembly companies, and about 2,000 spare parts suppliers.
Alliances with other Countries automobile companies (1984- now)
Figure 2 Main automobile plays in China
2.2 The current situation of China’s automobile industry innovation
capability and policies
Automobile industry has been playing an important role in Chinese economic growth
and new-type industrialization. Since 1979, with its market open to the world, the automobile industry has improved greatly especially in production and technology. Especially, since the participation in the WTO, the gap has been getting smaller between technologies of passenger cars produced by China itself and the international standard level. However, compared with developed countries, it is still at a low level of the innovation capability of Chinese auto companies, and introduced technology still plays an important role.
Chinese Open Door policy started to implement in 1979. The Open Door policy includes two types of policy change: the opening up of geographic regions to foreign investment, and the opening of specific institutions nationwide (Galbraith and Lu, 2000). Firstly, Special Enterprise Zones (SEZ) were created in the selected coast cities. Then foreign enterprises were invited to SEZs with a set of preferential treatment but also a restriction on the transfer of profits to home (Toshihiko Hayashi, 2003). In the second stage of the open door policy, the government regulated the participation of foreign capital in the domestic enterprises and the ban on profit transfer. In fact, open door policy is not to open the market and industries to foreign investment at once. The government made a classification of industries into three groups: foreign capital encouraged industries, foreign capital limited industries and foreign capital prohibited industries (Toshihiko Hayashi, 2003). Automobile industry is belonged to the first category (Introduction of Foreign Direct Investment in China, 2004). However, government has intervented Chinese automobile industry in a long time. Because automobile industry is an infant industry to China, it was protected despite the extensive trade and economic liberalization implemented in the late 1990s. This will be introduced in the next two paragraphs.
China and developed countries. Secondly, for car, China’s auto companies still lack mature and high level innovation ability in car producing, and the environment for independent intellectual property. Because of that, the main auto producers rely on MNCs in product innovation, and do not have rights in new product exploit and choices. Moreover, there is a larger gap in innovation capability of car components with international advanced level. What is worse, many key components are just imitations of foreign products. Finally, the electronics and information of the product of China automobile industry are far away from that in developed countries. Further more, application degree of electronic components is still limited in Chinese automobile products.
Auto industry is proclaimed as a pillar industry in China in supporting other critical industries. And through reviewing the history of Chinese automobile industry development, we know that innovation in China’s auto industry has largely dependent on the acquisition of foreign technology (Huang, 2003). However, in order to develop an indigenous auto industry, the government set strict requirements for establishing an auto manufacturing joint venture in China. And there are five principles included: 40% local content at start up, 60% by the second year and 80% by the third year for passenger cars. Similar local content requirements exist for auto components, and the levels for trucks are even higher; a department responsible for technological research and development must be set up within the enterprise. The department will have the capacity to update products; The enterprise must have the capacity for manufacturing products that attain the international technological levels of the 1990s; The enterprise will obtain the foreign exchange it needs mainly through exporting its products; The joint venture must give priority to locally-made spare or component parts when they need them(Huang, 2003).
growth in automobile production and sales, and the level of manufacturing technology of China is close to that in leading automakers in the world, China’s auto industry still lags behind that of developed countries in R&D innovation.
Currently, the investment in R&D is still low. In 2002, the entire R&D investment of the whole auto industry only accounts for 1.45% of the whole sales income. Generally speaking, there are two main issues in R&D: one is vehicle upgrade and development, and the other is the whole-vehicle development. The former one takes a long time and huge amount of money. It is difficult for any of the auto company to afford this. On the other hand, the latter one takes a relatively short time and low cost. Some of the Chinese auto corporations start to get involved.
At the same time, the Chinese auto industry is short of researchers. What is worse, a few researchers work in different companies, which makes it more difficult to integrate their research. The auto industry is investment-intensive. The R&D costs take a large part in the whole investment. Hence, if the auto companies want to have a leading position, they are supposed to reduce the cost by scale production.
Chapter 3 Research design
In this section, the research design will be illustrated. There are a number of factors, which can affect the product innovation in Chinese automobile industry. This thesis focuses on culture, corporate governance, firm size, internationalization, FDI and market structure.
Firstly, culture and corporate governance will be analyzed as the contexual factors which can affect innovation. Through presenting theory argument and reviewing the situation in China, the way that these factors affecting innovation in Chinese automobile industry will be illustrated. For culture, the thesis shed light on the influence of culture dimensions of Hofstede on innovation. These dimensions include power distance, power distance, individualism, masculinity, uncertainty avoidance, and long-term orientation. The part of corporate governance is mainly about the way the relationship between managers in automobile industry and Chinese officials influencing innovation capability. After that, four hypotheses will be built on the relationship between firm size, internationalization, FDI, market structure and innovation, and then regression models will be made to test the hypotheses.
The following is the conceptual model.
Figure 3 Conceptual model
Because of the different sample sizes, I build two regression equations. One is for firm size and internationalization, and the other one is for FDI and market structure. In terms of firm size and internationalization, there are 23 samples which are firm-level data from 2003 to 2005. I use the product sales to measure firm size, and the percentage of export compared to product sales to measure internationalization. And the data is from the website of China Automotive Information. China Automotive Information Net (CAIN) is the unique governmental and professional website in China automotive industry which is leaded and supported by National Development and Reform Commission, State-owned Assets Supervision and Administration Commission of the State Council and China Association of Automobile Manufacturers and established by China Automotive Technology and Research Centre. Therefore, the data is reliable.
Product innovation in China’s automobile
industry
Culture Corporate governance
FDI in this thesis refers to FDI inflow in Chinese automobile industry. There are eight samples to measure the last two dimensions. The data of FDI and market structure is from China’s automobile industry yearbooks from 1991 to 2006. Market
concentration is a primary indicator of market structure and it refers to the market shares of a number of firms in a market or industry. Usually the concentration ratio (CRn) and the Herfindahl index (HHIn) are used to measure market concentration.
And in this thesis, I will use CR4 which means the production of the biggest four
firms in Chinese automobile market compared with the total production of the whole Chinese automobile industry.In order to test whether the relationships are significant, I decided to use the value for a level of significance 0.1 instead of the normal value 0.05 because the sample sizes are not big enough.
Chapter 4 Contextual factors of product innovation
in Chinese automobile industry: Culture and
Corporate Governance
4.1 Introduction
In this chapter, firstly, the theory about the influence of Culture and Corporate Governance will be presented. Then the thesis combines the theory and the specific situation of Chinese automobile industry to explore the way that Culture and Corporate Governance as contextual factors affect on product innovation in Chinese automobile industry.
4.2 Culture
creative endeavors; the propensity of organizations within a given nation to encourage, validate and support innovation; the facility of teamwork and collective action in a given society and the propensity of individuals, teams and organizations within a society to carry ideas through to their fruition as new products, processes, services, technologies or business enterprises (Hofstede). Hofstede identified five dimensions of cultural variation: power distance, individualism, masculinity, uncertainty avoidance, and long-term orientation. Some researchers studied the relationship between the cultural dimensions and innovation activities (Kedia et al., 1992; Morris et al., 1994; Nakata and Sivakumar, 1996). The studies present that innovation is negatively related to power distance and uncertainty avoidance and positively related to masculinity and individualism, which also confirms Hofstede’s statement about the correlation between innovation and power distance and uncertainty avoidance. Following is the specific illustration of the relationship between each cultural dimension and innovativeness.
Power distance index
Individulism vs. Collectivism
Individualism refers to the importance of the individual when compared with collective goals and efforts. During the process of innovation, there is a need of cooperation among different departments (Marquis, 1969). Cooperation is including the open communication and a feeling of interdependence; the capacity of managing conflicts (Henke, 1993). Obviously the lower score of individualism, the better cooperation there is. So the country with lower individualism is better during the process of innovation. Moreover, firms or groups in the country characterized as collectivism seek group goals instead of personal goal; therefore, they are more cooperative. Asch (1956) demonstrated that people often conform to the majority view, although they know it is wrong. Conformity may limit the expression of different viewpoints, which would stifle the creativity of collectivist. Because harmony and interdependence are the characteristics of collectivistic groups, we would propose there is a higher level of conformity in such cultues (Bond & Smith, 1996). By contrast, individualism leads to experimentation and more open than collectivism (Herbig and Miller, 1989). Various personal ideas and contributions are very useful for radical innovation. What’s more, individualism would not only decrease conformity pressures but also encourage individuals to insist their views in front of opposite ones (Nemeth, 1985). Therefore, individualistic countries and groups are more innovative than collectivistic ones.
Masculinity vs. Feminity
The definition of masculinity is the level of assertiveness that is promoted in the national culture by either gender. Societies characterized by masculinity focus on individual achievement and rewards, and studies show that innovative managers are motivated by financial rewards, prestige, and a sense of accomplishment (Gee and Tyler 1976). Therefore, masculine countries are more innovative.
events that people from a specific national culture are willing to accept. In high uncertainty avoidance countries, people are usually resistant to change from existing patterns but choose risk avoidance. By contrast, people in low uncertainty avoidance countries are more curious about different things and would like to explore unknown thing (Hofstede, 1991). Therefore, countries which are high uncertainty avoidance provide an environment that is less conducive to innovativeness than countries which are low uncertainty avoidance.
Long term orientation
This dimension is also known as Confucian dynamic. This dimension has a significant influence on the innovation of the Chinese automobile industry. Confucianism teaches six central virtues that all people should strive to improve and practice: Ritual (respect for custom), Righteousness (respect for religion), Family (respect for elders and relations), Loyalty (respect for law), Honesty (respect for truth), and Benevolence (respect for life and humanity), from which we know Confucianism asserts conservation and satisfaction with current situation. Therefore, automakers do not pull money in innovation activity because they are satisfied with current situation and do not want to take risks.
We can conclude that innovativeness is negatively correlated with power distance and uncertainty avoidance, but positive related with individualism and masculinity. With the note and analysis of the PDI score in Hofstede’s culture dimensions website about China1, we know that China has a much higher power distance compared with East Asian countries and the world average level, and China is a Collectivist society with the Communist rule. Moreover, China ranks significantly high. Therefore, China’s innovation capability is much harder to get improved.
By Xie (2007), although organization culture is affected by national culture,
1
organization can build their own unique culture which has the major national cultural characteristics. Chinese culture has some disadvantages to innovation, but firms can implement a set of formal or informal rules to guide their organization culture to facilitate innovation. Through material and spiritual guidance, the members of organizations may change their behavior, thus the negative effects of national culture on innovation can be reduced. In fact, the national culture is not changeable. When the organization attempts to establish the different organization culture from national culture, it is also changing the national culture. When most organizations build the innovation culture, the national culture may also change to propel innovation.
4.3 Corporate governance
Corporate governance refers to monitoring and controlling over how the firm’s resources are allocated, and how relations within the firm are structured and managed (McCahery and Vermeulen, 2006). Corporate governance can facilitate business parties to move toward the development of new business practices which can stimulate innovation (McCahery and Vermeulen, 2006).
The core governance problem of the firm may be agency problem. By Jensen and Meckling (1976), the principal-agent relationship is defined as a contract under which principals engage the agent to perform on their behalf, which involves delegating some decision making authority to the agent. Because of information asymmetry, opportunism and bounded rationality, the agent will not always act in the best interest of the principal. Principal-agent problem is particularly profound in state enterprises in China (Tylecote and Cai, 2004; Liu and Tylecote, 2007):
Managers’ career paths as officials. In Chinese industrial structure, the positions of SOE managers are matching the different levels of government officials. Usually the managers are appointed by officials or may be officials themselves. In the end, managers are often improved as higher positions of officials. Since the work is easily to be achieved and managers are often guaranteed of promotion, managers will not always act for shareholders’ best or long-term interests.
According to Tylecote and Conesa (1999), there are three challenges for corporate governance system to cope with for developing a firm’s technological capability. The visibility of innovation: technological activities within firms may be low visible to outsiders, therefore, they can not be monitored without close engagement; the notability of innovation: to the extent that innovation needs radically new means of development and production, and markets, they can not be monitored without industrial expertise; the spill-over of innovation: firms try to minimize the spillovers. When technological activities involve employees or related firms, these stakeholders need to be included.
Chapter 5 Firm and industry level factors of product
innovation of Chinese automobile industry
5.1Introduction
Through analyzing in a descriptive way, the thesis presents the influence of contextual factors on product innovation in Chinese automobile industry. Culture and corporate governance play a crucial role in product innovation of Chinese automobile industry, however, there are many problems and disadvantages of culture and corporate governance to product innovation. Now, the analysis will deal with firm and industry level factors. Firstly, through literature review, hypotheses are coming out, and then regression analysis is used to test the hypothesis.
5.2 Firm size
Firm size is claimed to be a crucial firm-level determinant of innovation (Liang, 2004). Large firms can provide better condition to invest in new technologies because they have the large scale of production, capacity, infrastructure in marketing, finance and R&D to exploit new technology (Schumpeter, 1950). Furthermore, because information and the innovation based on firm size have increasing return to scale (Caves, 1996), the marginal benefit of R&D investment increases as scale expends and the same R&D expenditure is more valuable to a bigger firm (Liang, 2004). However, on the other hand, there are some arguments that small firms have flexibility in adjusting employees, investment and management structure in innovation related projects. Therefore, in this thesis we will see how alliances affect innovation through firm size.
number of all the auto factories in China is bigger than that of the total companies in Japan, America and Western Europe. However, the annual output of the whole Chinese auto industry is less than that of Toyota, Japan. Therefore, China’s auto outputs are much smaller compared with other developed markets. In this situation, firms do not have the ability to invest in R&D project or stand the risk in R&D projects, so innovation capability is hard to be improved.
In 2000, the number of total automobile production in China is two million, and it is 4.44 million in 2003, which increases 83.25% than that in 2000, however, the two more million is produced by around ten auto producers. Now, there are 130 formal automobile firms and this number of formal automobile firms is the biggest in the world. However, the states should not be overlooked that there are many overlapped projects, small firm size and lack of competitive advantage. Economic scale is one of the most characteristics of automobile industry. Although the expansion of China’s automobile firms’ size grows fast, it is still small compared with international leading firms.
H1a The larger the automobile firms of China are, the more product innovation they have.
H1b The smaller the automobile firms of China are, the more product innovation they have.
5.3 Internationalization
Furthermore, internationalization is a way to improve technology. The impacts of internationalization on technology gaining are including the access to external knowledge, moderating effect of access mode. Firms can cross country boundaries and gain technological knowledge through internationalization of technology sourcing (Hemmert, 2004). Empirical research presents internationalization of technology sourcing can increase the amount and quality of technological knowledge by better access to external technological knowledge abroad (Pearce and Papanastassiou, 1996; Folrida, 1997; Kuemmerle, 1999; Forst, 2001; Hemmert, 2004). Internationalization discourages firms to invest in R&D input in the case of the external sourcing of foreign technology (Hemmert, 2004). Therefore, my second hypothesis is like this: H2: The more international China’s automobile firms are, more innovative capability they can have.
5.4 FDI
innovating in similar area is lower for local firms, because products and technologies which are brought by foreign partners have already been tested in foreign markets. And last, vertical spillovers may also exist which can take place from foreign firms to their local suppliers through technological know-how transfer, staff training and so on.
FDI has been one of the most striking issues currently discussed in the scientific journals on innovation. FDI and internationalization is a common characteristic to global automobile industry (Liang, 2004). For developing countries, they may face many restrictions in their initial period of automotive industry development, such as shortage of manufacturing and design technology, underdeveloped related industries and limited capital investment, marketing, R&D activities (Jan and Hsiao, 2004).
been innovative, transferred technologies to local firms, and have made commitments to quality control and adapting technologies to suit the needs of Chinese consumers (Luo, 1999).
But there are some problems existing in Chinese-foreign companies. China’s firms usually rely much on the brands and technology ability of foreign partners, which makes China’s auto firms are lack of the initiatives of product development and R&D ability. In the beginning of the automobile industry development in Japan and South Korea, FDI also played an important role. They did much research on knowledge transfer from foreign partners and tried to develop their own brand and innovation capability. And now they have their own famous car brands and excellent innovation capacity. So when cooperating with foreign partner, China’s automobile firms should not only concentrate on producing ability but also pay attention to innovation capacity improvement.
China’s automobile industry has been getting new technology and innovation
capability improvement through introducing FDI. Before China’s market open to the world, the level of China’s automobile industry is 30 to 40 years behind that of
developed countries. At present, China is still 10 to 15 years later generally. However, within a bit more than twenty years, China introduced around 1000 set of technology of whole car and components, and built a nearly complete auto industry system as well as gaining the innovation capability in bus, minicar, truck and common cars. Some firms now can invent new products based on introducing technology. (Luo Fei, 2005).
H5a The more FDI China’s automobile industry can get, the more innovative it is. H5b The less FDI China’s automobile industry can get, the more innovative it is.
5.5 Market structure
Following part is the reasons. Monopolists have better conditions, so they can attract more qualified scientist and technicians, what is more, they have less financial constrains(Shumpeter, 1950). Furthermore, investment in R&D usually has a risk because of lower possibility to success than investment in physical capital, while the potential repayment is high (Sherer et al. 2000). So monopolistic companies have the capability to finance and protect investment in R&D. Market concentration is primarily used as a measurement of market structure. In the empirical work of Nickell (1996), there is a positive correlation between market competition and innovative output.
The researchers holding the opposite opinion argue that although monopoly can provide firms with the cash to finance innovation, however, it can also hamper firms’ incentive to innovation (Liang, 2004), because they are already in the monopolistic position of a market. A competitive market would activate firms to cut costs, to eliminate organizational inefficiencies and to reduce slack (Liang, 2004). Here they predict that there is a negative relationship between market concentration and innovation. Firms in monopolistic positions may reduce the aggregate level of R&D expenditures and the probability of innovation because their have the majority market shares. But competitive industries can generate a higher number of innovations (Blundell et al, 1993). Furthermore, the effects depend on a series of factors: the scale of foreign investment and growth capability; performance of MNCs as well as their impact to advantage competitiveness of the local companies in host countries; the imports of other MNCs or products; the response of local companies to MNCs and their R&D and learning ability; the amount and scale of competitors in host countries. Following is the analysis of China’s situation.
Table 2: Market concentration of Chinese automobile industry
Year 1990 1991 1992 1993 1994 1995 1996 1997 CR4 0.37 0.4 0.41 0.46 0.54 0.52 0.57 0.52 Year 1998 1999 2000 2001 2002 2003 2004
CR4 0.51 0.54 0.51 0.57 0.56 0.56 0.58 Source: Chinese Automotive Industry Yearbook 1991- 2005.
Table 3: Classification of competition structure %
Competition structure
OligopolyⅤ OligopolyⅣ OligopolyⅢ OligopolyⅡ OligopolyⅠ Competition
CR4 75≤CR4 65≤CR4<75 50≤CR4<65 35≤CR4<50 30≤CR4<35 CR4<30 Source: Industry Organization, Joe S. Bain.
According to table 2, CR4 of automobile industry is lower than 0.6, which means that
the Chinese market is dominated by small cars (Chinese Automotive Yearbook, 2006). Chinese market were comprised by 41% small cars, 27% basic cars, 21% mid-sizes sedans, and only 6% MPVs(Multi Purpose Vehicles) and 5% SUVs(Sports Utility Vehicles) (Fourin, 2005).
Economy of scale is a primary characteristic of automobile industry, which turns to be more important with the enforcement of R&D activity and faster pace of new products application. So usually, firms with larger scales and high market shares have more competitive advantages, which can facilitate innovation improvement. The number of Chinese auto firms is large, but the size is small and firms are diffused in different districts of China. According to Chinese yearbook, the automobile production of all the firms in China was 15.6 billion which was one sixth of GE and one third of Toyota in the same year.
After the reviewing the situation of Chinese automobile market structure, here comes the hypothesis:
H6a The more the market of China’s automobile industry is concentrated, the more innovative China’s automobile industry will be.
H6b The less the market of China’s automobile industry is concentrated, the more innovative China’s automobile industry will be.
5.5 Regression model
In order to test the hypotheses, I will use regression analysis. As mentioned in Chapter 3, firms’ product sales are uesed as the measurement of firm size, and the percentage of export compared to product sales is used to measure the internationalization of each firm. And the sample size for these two factors is 23. FDI is measured by FDI inflow in Chinese automobile industry. Market concentration is an import measurement for market concentration, and I use CR4 which means the concentration
Firstly two regression models for four hypotheses are built to test the relationships between the independent variables and dependent variables. The regression models are as follows.
Regression models: Y0=a1 +b1* X1+ b2* X2+ε1 Y=a2 +b3* X3+ b4* X4+ε2
In these two models, both of Y0 and Y are used to measure our dependent variable
product innovation of China’s automobile industry, and they are R&D expenditure of the automobile firms compared with total sales and R&D expenditure of the whole automobile industry compared with the total sales of the industry. Then X1, X2, X3, X4
refer to firms’ total sales, export sales compared with the total sales, FDI in Chinese automobile industry, CR4 of Chinese automobile industry. ε1, ε2 represent the error
terms. a1, a2 are regression coefficients. If the values are positive, it means there is a
positive relationship between the dependent variable and the independent variables, and vice versa.
Table 4 Coefficients Unstandard ized Coefficients Standardized Coefficients t Sig.
Model B Std. Error Beta
1 (Constant) 1.209 .373 3.242 .005
EXPORT 2.171E-02 .011 .458 1.954 .070
SIZE 1.632E-08 .000 .037 .158 .877
a Dependent Variable: INNOV1
Table 4, coefficients table shows that the first two regression model can change into:
Y0= 1.209 +2.171E-02* X1+ 1.632E-08* X2+ε1, which means that both
significant; while the relationship between firm size and the dependent variable is not significant because the significance value is larger than 0.1.
Table 5 Coefficients Unstandardized Coefficients Standardized Coefficients t Sig.
Model B Std. Error Beta
1 (Constant) 3.167 2.898 1.093 .324
FDI 4.664E-04 .006 .058 .076 .942
MARKET -2.978 5.701 -.399 -.522 .624
a Dependent Variable: INNOV2
Table 5, coefficients table shows that the first two regression models can change into: Y=3.167+4.664E-04* X1-2.978E-08*X2+ε1, which means that FDI in Chinese
automobile industry is positive related with the dependent variable, while there is a negative correlation between market structure and the dependent variable. However, both of the relationships are not significant according to Table 4.
5.6 Results and analysis
Through table 2, we know that there is a significant relationship between export and innovation in Chinese automobile industry and it is positive. According to Liang (2004), the share of export can be used to measure internationalization. Therefore, the more international China’s automobile firms are more innovative capability they can have. However, the relationships between firm size, FDI, and market structure are not significant.
location. Then there is no significant relationship between firm size and product innovation in Chinese automobile industry.
We can not deny the significant influence FDI has taken to Chinese automobile industry and FDI has given an enormous impetus to its development, however, in term of product innovation, the test does not show any significant relationship between them. This can be explained by following reasons. Firstly, the attitudes to FDI are different among China and Japan, South Korea. Chinese automobile industry imports technology from developed countries, which is just as Japan and South Korea did in the beginning stage, but this stage lasts longer in China and it relies on imported technology. By contrast, Japan and South Korea set restrictions to FDI inflow and they imported technology but kept FDI away. Then gradually they built their innovation mechanism and system, oppositely, although China imported a huge amount of FDI to its automobile industry, innovation ability did not grow with the amount of FDI. Secondly, after China’s WTO entry, it should accept the agreement that China should abandon the contingent investment of knowledge transferred to Chinese automobile industry. Therefore, the gap of innovation capability between China and developed countries will be larger and larger. Therefore, growing FDI inflow does not mean innovation capability improving.
Another reason for no relationship between firm size, FDI, market structure and product innovation is limited data collection. Because of the difficulty of data collection, I just got a small sample size. Therefore, the results are not satisfying, which is also a big limitation of this thesis. If the data is big enough, the results may be different.
Chapter 6 Conclusion and Discussion
In this thesis, I try to investigate the current situation of product innovation in Chinese automobile industry and illustrate the influence of a set of factors on product innovation in Chinese automobile industry. They are Culture, Corporate Governance, firm size, internationalization, FDI and market structure. Since China’s open door policy, automobile industry as a pillar industry has got a quick development, as well as the innovation ability. However, the innovation ability is still far behind other developed countries. After literature review, I propose that Culture, Corporate Governance, firm size, internationalization, FDI and market structure may influence the product innovation of Chinese automobile industry.
Then description analysis is used to investigate the way that Culture and Corporate Governance affect product innovation. Through reviewing and analyzing the literature about the correlation between five Hofstede’s culture dimensions and product innovation, we get the results that innovation is negative related with power distance and uncertainty avoidance and positive related with masculinity and individualism. Although the findings show that individualism is more helpful in new product explore, the Jananese excellent innovation capability in electronic and automotive areas suggests in some environment collectivism can also promote innovation. In Japan, because of the system of lifetime employment and seniority system for pay, there is little competition between employees, and this can keep knowledge inside the company. Therefore, through build a suitable mechanism or system which can complement Chinese culture environment, China can also come back to correct way of innovation improvement.
positive role in improving the innovation capability. There are many problems in the governance system of Chinese automobile industry. Firstly, State Owned Enterprises accounted for a large share in this industry. In SOEs, due to the single investor, the close and subtle relationship of officials and management, the unclear target and inefficient, production innovation is hardly to get be improved. Further more, there are also some flaws in joint venture companies. Usually, parent companies make the decisions instead of joint ventures companies themselves. Senior managers are assigned by each parent company. This leads to the diffusion of management. Therefore, the government should focus on the way to improve the governance structure and the mechanism in Chinese automobile industry.
After that, I use regression model to test the relation between dependent variable and firm and industry level factors. The result shows that internationalization is positively correlated with product innovation in Chinese automobile industry but no significant relationship between firm size, FDI, market structure and product innovation in Chinese automobile industry. FDI has positively affected Chinese automobile industry in several ways, such as job opportunity, capital and development in parts and components sector through spillovers. However, through this thesis, FDI does not play a positive role in product innovation. According to Amsden (2001), FDI rarely facilitate new technology explore because FDI are prone to follow, not breed success. Therefore, high FDI in developing countries are not associated with high levels of domestic skill formation (Gallagher). And then, market structure of Chinese automobile industry to large extent is formed by government intervention. Firstly, high market concentration is due to high political entry barriers instead of market competition. What’s more, automobile industry gets protection in local markets from the local governments. Therefore, there is no significant relationship between market structure and product innovation in Chinese automobile industry.
technological change is driven by the existence of demand for a particular invention. Market demand expansion is one of the real incentives to innovation. What’s more, in 1975, Gilpin also argued that market demand can be regarded as the primary determinant of successful innovation. Chinese automotive domestic market has expanded very quickly and it has played a significantly important role for the development of Chinese automobile industry. Therefore, the impacts of demand on product innovation of Chinese automobile industry can be studied in the future research. Secondly, it is not very scientific to use R&D expenditure instead of patents to measure innovation. The reason is that the amount of R&D expenditure is not always positively correlated with the number of patents. According to Cloodt (2006), companies with relatively low levels of R&D expenditures, increase in R&D expenditure will lead to the increase in the number of their patents. But the companies which already have a relatively high level of R&D expenditures, a further increase of R&D expenditures will not lead to a significant growth of patents. Therefore, the measurement of innovation need to be reconsidered in the future research.
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