Sleeping giants or global competitors? Assessing the possibilities of the largest Chinese firms to evolve from state-nurtured national champions into global competitors

A key factor in the sustainability of China's economic growth is the potential of Chinese firms to develop innovative capabilities autonomously and international management know-how thus enabling them to move up the technological ladder of the production process and to globalise their operations. If successful, some Chinese firms will eventually develop their own brands and open up subsidiaries abroad like their Japanese and South Korean counterparts a few decades ago. If this is not achieved, then China’s future growth could remain overly dependent on overseas markets and foreign technology. Chinese firms could remain highly competitive in traditional labour-intensive exports (such as the textile, lighters and toys industries of the Zhejiang province) or in relatively simple electric products (such as household appliance) but would not possess the capacity to become innovators of high tech products. The Chinese firms could only operate internationally in highly competitive industries characterised by low barriers to entry and with moderate margins while firms from the most advanced economies could continue to extract rents in industries characterised by high tech and/or differentiated products thanks to their technological innovation capacities and management know-how. The purpose of this paper will be to assess the capacity of China's largest firms to transform themselves into global competitors possessing ownership-specific advantages or intangible assets like some of their East Asian counterparts and to determine to what extent could the Chinese state pursue a strategic industrial policy to help them do so. The fact that a firm establishes a subsidiary abroad does not make it a global competitor, not even a Multinational Enterprise (MNE) or a Trans-National Corporation (TNC). According to United Nations’ (UN) classification, to be considered as TNC or MNE, a firm must have subsidiaries in at least six different countries. Many Chinese firms satisfy these criteria and can be considered as MNEs. Nevertheless, there is a significant gap in terms of possession of intangible assets between being a multinational enterprise and a top global competitor. According to UN estimates, in 2004, there were 70,000 MNE which controlled 690,000 subsidiaries across the globe (El Mouhoub, 2006: 17). Obviously all of those firms cannot be considered as truly global competitors. To delineate more clearly the prerequisites necessary for a firm to evolve into a global competitor, this section will refer to Dunning’s eclectic paradigm and OLI configuration. For Dunning, in order for a firm to transform itself into a MNE, it must possess “ownership-specific advantages”. That is, intangible assets which constitute substantial barriers to entry for other potential competitors. Dunning lists the following assets: “product innovations, product management, organizational and marketing systems, innovatory capacity, organization of work, non-codifiable knowledge (bank of human capital experience), ability to reduce the cost of intra and/or inter-firm transactions” (Dunning, 1993: 81). Dunning also includes absolute cost advantages coming from a privileged access to inputs, learning by doing, “knowledge of international markets and operations”, “capacity to learn from societal difference in organisational and managerial processes and systems” (Dunning, 1993: 81). In this paper, the term “global competitors” refers to incumbents of their industries which are protected by natural and strategic barriers to entry and which operate across the different regions of the world economy. These global competitors enjoy most and often all of the ownership-specific Expert PDF Evaluation 2 advantages listed above. Many of them are the “prime movers” from America and Europe whose emergence in the late 19th century has been analysed by Chandler (Chandler, 1990). They were joined by the Japanese keiretsu in the 1960’s and the South Korean chaebol in the 1980’s. This paper will attempt to determine whether emerging Chinese champions are effectively acquiring sufficient ownership-specific advantages to have a hope of joining this group of global competitors. The analysis of China’s greatest MNEs and outward FDI flows will show that both the type of ownership-specific advantages and the motivations of Chinese firms investing overseas differ radically from the global competitors of the developed economy. It will also show that, in that respect, Chinese firms are not following the internationalisation path of the Japanese keiretsu in the 1960’s or the South Korean chaebol in the 1980’s. The first part of the paper will provide an analysis of Chinese outward FDI outflows in an attempt to determine the importance of Chinese MNEs and their performance compared to other developing economies. It will also highlight the limitations of working with such an aggregate when it comes to the official Chinese data of foreign direct investment. The second part of this contribution will provide a qualitative analysis of the overseas projects made by Chinese MNEs. An attempt will be made to determine the technological level and the capital- intensity of their overseas operations. The extent of government protection and support extended to these largest firms and the sector in which they operate will be examined. It will be demonstrated that the largest Chinese firms are located in sectors which are heavily protected and aided by the Chinese central government. Finally, it will be made clear that that Chinese FDI outflows are predominantly motivated by the Chinese government's geopolitical objectives rather than by business profit maximisation. The third part of the paper will provide a comparative analysis of the performance of China's largest firms’ with that of their global competitors. Aspects to be looked at include capital-intensity, profits and assets. This comparison has two purposes: to clearly delineate the existing gap between these two groups; and to compare the current relative situation of the largest Chinese firms with that of East Asian MNEs at the time of their overseas expansion. This will reveal that Chinese firms have a much lower degree of profitability and capital intensity than the largest Japanese and Korean firms had in the early stages of internationalising their business operations. The three first parts of this paper will highlight the weaknesses of the largest Chinese firms and the gap with their global competitors in terms of profitability, capital and technology intensity. It will be demonstrated that they are unlikely to transform themselves into global competitors without being sheltered by a strong Chinese state industrial policy, as was the case also for their South Korean and Japanese counterparts at a similar stage of their expansion. The fourth and fifth part of the paper will follow up on this by focusing on the capacity of the Chinese state to pursue a strategic trade and industrial policy necessary to transform its national champions into global competitors