Innovation and Internationalisation

Successful SMEs' Ventures into China

Stuart Orr, Jane Menzies, Connie Zheng, Sajeewa 'Pat' Maddumage

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9781138638952
• eBook ISBN: 9781317247432
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book provides a comprehensive examination of the many factors that influence the internationalisation of SMEs into China. SMEs represent more than 50 percent of the economic activity and employment in China. This book explores the experiences of SMEs that have internationalised to China from Australia. Australian SMEs are at the forefront of foreign SMEs in China with over 5000 Australian SMEs currently operating in China and a long history of association. The book is unique in that it presents a multidisciplinary perspective of the subject, considering seven different discipline perspectives (internationalisation, innovation, entrepreneurship, networks, resources, human resource management and barriers and liabilities). This makes the book one of the most comprehensive treatments of internationalisation to China so far. Each chapter in the book deals with a different perspective and includes own separate analysis. The chapters commence with a consideration of the current knowledge on internationalising to China for each perspective, analyse the interviews of representatives of 35 SMEs operating in China and then draw conclusions which are relevant to students, scholars and professionals. Each chapter includes extensive examples from the interviews. This integrated book is particularly useful for small business owners, international business management consultants, instructors and students.

1 Introduction

Introduction

China’s strong economic growth over the past decade has provided the motivation for tens of thousands of foreign businesses to establish successful Chinese operations. The opportunities in China have attracted both large and innovative small to medium foreign enterprises (SMEs). Understanding the unique challenges experienced by these foreign SMEs as they internationalise to China is important for their survival and success. They have not, however, received the same attention as large organisations internationalising to China. Identifying the mechanisms behind foreign SME’s experiences in China will improve not only our understanding of the way they internationalise, it could also identify concepts of importance for the internationalisation of large organisations as well. Developing a theory and understanding of ‘how’ foreign SMEs utilise innovation to internationalise to emerging economies, such as China, is an important contribution to the Chinese research literature. It is particularly important to identify how such organisations respond to both the rate of change in the Chinese business environment and the current convergence of Western and Eastern management styles in China. This book examines these issues from a range of management perspectives. It has practical relevance for managers considering internationalising China, as it describes the practices of successful SME Chinese market entrants and the issues that they experienced.

China offers opportunities in many industries, particularly for innovators, entrepreneurs and companies seeking rapid rates of growth (Boyd, 2016). Operating a foreign business in China also has a much higher level of attendant risk than operating a business in a developed economy. Factors such as sudden regulatory changes or theft of intellectual property are constant challenges. Boyd (2016) argues that SMEs are generally less risk adverse than large organisations, however, and better able to respond to the risks experienced in China. It is important to understand how foreign SMEs can utilise this capability to improve internationalisation success rates in emerging economies such as China.

China’s growth and economic development has cooled off somewhat between 2010 and 2017, relative to its double-digit economic growth between 2000 and 2010 (except for the GFC period). In the last three years, China’s growth has settled down to around 7% per annum (Department of Foreign Affairs and Trade, 2017). Subsequently, the context for SMEs in China in today is markedly different to the way it was ten years earlier. According to a 2017 McKinsey report, the four key characteristics of the business context in China are a slower economic growth, competitive challenges for foreign enterprises, demographic challenges resulting from the aging population and unequal economic growth across regions and trade disputes between China and the US, due to Trumpism effects (Orr, 2017).¹ The ageing population is due to the long term effect of China’s one child policy on birth rates.

Trumpism offers advantages for non-US foreign companies in China as the trade relationship tensions between the US and China create opportunities for companies from other countries. An anticipated flattening of wages growth in China may also provide further benefits for foreign businesses, however, this will be balanced out by a reduction in economic growth and the housing market, which are likely to reduce opportunities for foreign businesses in China (International Monetary Fund, 2017). Orr (2017) predicts that economic growth will drop below even 6% in the future. In addition, difficulties with maintaining adequate raw material supplies due to trade restrictions and tensions between China and other sovereign governments could also restrict foreign business opportunities in China (Orr, 2017). The ageing populations in key cities such as Shanghai and tougher commercial laws in China will also introduce some of the issues to the business environment in China that many companies from developed countries experience in their home market. These factors will create a slow-down and increased complexity in the Chinese economy and increase the challenges for foreign business, especially SMEs, in China.

Over the past decade, however, China has offered a range of opportunities to foreign enterprises that they do not have at home. These include opportunities for increased rates of growth, much larger markets than most SMEs would experience in their home country, including large numbers of consumers who wish to buy healthy and safe agricultural products, as well as innovative new and branded products (Orr, Menzies and Donnelly, 2017). The appearance of health problems more common in the West, such as obesity, has also created a range of new business opportunities for foreign enterprises in China. These opportunities have driven foreign companies to pursue the Chinese market since Deng Xiao Ping’s “Open Door” policy was introduced in 1978 (Tian, 1986). The results, however, have been inconsistent, and both successes and failures are common. Evidence regarding the experiences of SMEs in China, however, is much less limited, and experiences may be quite different to that of larger companies. This book and the research which has been conducted for it has been driven by the need to identify the factors that affect small-business internationalisation in a rapidly changing foreign market context.

The research findings in this book address a range of different perspectives on the process of SME internationalisation to China. The data was collected from Australian SMEs because large numbers of SMEs from this country have been taking advantage of the opportunities in China since China first opened its doors to foreign operations and, particularly over the last 10 years as China’s growth has created a large and attractive domestic market. In 2014, approximately 5400 Australian SMEs had operations in China (Keating, 2014), making it the country with the largest number of foreign SMEs operating in China since the Cultural Revolution. The length of history and number of Australian SMEs in China suggests that these organisations will possess the most comprehensive and detailed body of knowledge regarding foreign SME experiences in China. In addition to the ability to provide a more longitudinal perspective, these organisations are also more likely to have developed a greater understanding of the issues, more sophisticated responses and more developed communication with other SMEs through local dedicated associations. In a complex and rapidly changing environment such as China’s, it is important to collect data from the most informed sources.

Participants representing 35 Australian SMEs with current business operations in China (exporting, importing, wholly owned foreign entities (WOFEs) and entrepreneurial start-ups by Australian firms in China) participated in the research. A range of individuals from these SMEs were interviewed, which included owners, managing directors, senior managers, executives, managers and consultants familiar with the company’s business activities in China. Each chapter in the book analyses this data to identify constructs in a different theory domain that relates to internationalisation. The findings are then compared with the extant literature to extend the SME internationalisation literature. The individual chapters analyse the data from the perspective of internationalisation, innovation, entrepreneurship, human resource management, liabilities theory, network theory and resources theory. The conclusion chapter integrates these findings into a typology of SME internationalisation, for which the constructs are based on a multidisciplinary perspective comprising the above theory domains. The book also considers the practical aspects of SME internationalisation and each chapter describes the implications of these findings for the management and development of foreign SMEs in China. The conclusion chapter also includes recommendations for approaches that SMEs should take to develop their operations in China.

SMEs in China

SMEs are now a very significant segment of the economy in China, as they are in the US and the EU. Although they had been a smaller portion of the economy in China in the past, by 2007, China had over 4.3 million registered SMEs, of which 95 percent were privately owned and which constituted 60 percent of GDP at the time (Asia Pulse, 2007). Today SMEs make up 98 percent of all registered companies in China, contribute 60 percent of China’s industrial output and create 80 percent of China’s jobs, own 54 percent of total assets, generate 68 percent of total revenue and 64 percent of total profits (China statistical Yearbook, 2016; Urbach Hacker Young, 2017). Over the period 2011 to 2015, China’s 12th five-year plan specifically focused on support for SMEs with the objective of their numbers growing over that period at an annual rate of 8 percent (China Economic Review, 2011). This initiative generated massive investment in an already burgeoning SME sector in China. For example, in the relatively small city of Shenzhen in southern China, just the publicly listed SMEs now have a combined market value of over 600 billion USD (China Business News, 2014).

By inference, this suggests that the most representative area of the Chinese economy on which to focus when investigating international business establishment in China is the SME sector as it is the most representative sector by sales volume, number of organisations and economic effect. Findings drawn from research examining the behaviours of foreign SMEs investing in China will not only be important for the development of the international SME literature, it also reflects on internationalisation into the most important sector of the Chinese economy. This factor, combined with the apparent capability of SMEs to utilise their innovative capabilities to enter new markets is the reason for the focus on SMEs in this book.

Importance of China in international business

China is a critical trading partner for the US, Europe and most developed countries, including Australia. China established a free trade agreement with Australia (2015) and also has free trade agreements with Korea, Switzerland, Singapore, Pakistan and several other smaller countries (China FTA Network, 2017). The EU is seriously considering a free trade agreement with China (European Commission, 2017). Whilst the literature has investigated the trade between China and most developed countries, the research investigating internationalisation to China from developed countries is much less extensive and conclusive. SME internationalisation in China has potential to represent a significant level of Foreign Direct Investment (FDI), particularly from smaller developed countries, such as Australia. Understanding the patterns of FDI in China, especially in light of the rapid increase in China’s economy and the opportunities for investment in China is important for both economic and international business theory development.

China’s growing middle class

China’s middle class has been growing for more than 20 years and now includes 300–400 million of China’s 1.35 billion in population (Fukyama, 2013). By 2020, the Chinese middle class will constitute over 75 percent of the total population (McKinsey, 2013). This is a very dramatic increase from representing only 4 percent of the population in 2000 (Iskyan, 2016).

Chinese middle-class income has also increased significantly. In 2013, the income of 75 percent of China’s urban communities was around 8000–30,000 USD per year (McKinsey, 2013). The Chinese middle class now has approximately the same purchasing power (corrected for the price of goods in China) as the middle class in most developed countries. Unsurprisingly, the increased buying power of the Chinese middle class has not only created new business opportunities for both foreign and local SMEs, it has also increased both the sophistication of customers and the demand for innovative products. The creation of new business opportunities has been particularly significant. For example, it has led to an increased demand for non-traditional Chinese foods such as wine, red meat and dairy products, and demand for supply from foreign sources offering high quality food and food safety, such as Australia (DFAT, 2014).

China’s increased urbanisation

China’s population is also becoming more urbanised as the Chinese move from agricultural to commercial employment (China Development Research, 2013). In 2015, 56 percent of the Chinese population lived in urban locations (China Statistical Yearbook, 2016), compared to 80 percent in developed countries (Anderlini, 2014). This urban growth is an important development for SMEs and particularly for foreign SMEs in China. The increasing concentration of markets simplifies the logistics associated with getting goods and services to the market. Logistics is a significant barrier in China where rural infrastructure including road and rail transportation are limited and difficult to manage. Operating in an urban environment with more developed infrastructure and in close proximity to markets is particularly important for foreign SMEs which lack the local knowledge and contacts that local companies would use to larger scale distribution networks.

Urbanisation will continue to increase in China over the foreseeable future. Currently, China’s government plans for the transfer of a further 100 million people from rural to urban locations, which will increase the percentage of urban population to 60 percent by 2020 (Anderlini, 2014). This plan includes the development of transportation networks, urban infrastructure and residential real estate. By 2030, it is projected that the urban population will be 70 percent of the total population, or approximately 1 billion people (World Bank Group, 2014). The increased urban concentration is also likely to generate demand for further new and innovative products and services making it a logical focus for foreign innovative SMEs.

Increased demand for innovation in China

The Chinese government has planned for the economy to shift from a focus on manufacturing and export, to include innovation and services for the last 10 years (Macquarie Bank, 2017). The development of an innovation based economy (and society) was one of the key goals of the Government’s 2011 five-year plan. There is already evidence that innovative products and services are becoming increasingly attractive industries in China (Abrami, Kirby and McFarlan, 2014). Some of the measures which have been put in place by the government to increase innovation include the establishment of high-technology business zones, the attraction of foreign investment in the wind turbine industry (which has made China one of the global centres of wi...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Foreword
• Acknowledgements
• 1 Introduction
• 2 Internationalisation of innovative SMEs to China
• 3 Making innovation work in China for foreign SMEs
• 4 Building networks in a foreign environment
• 5 Being a foreign entrepreneur in China
• 6 How resources and capabilities can assist foreign SMEs in China
• 7 The barriers, liabilities and costs of operating in China
• 8 How HRM contributes to innovation in China
• 9 Conclusion
• Index