The Allure of Greener Pastures

Some ventures choose to go international without first going national. What prompts their success? Should everyone jump on the bandwagon and copy their model?

By Louisa Wah Hansen

To Go Go Abroad or Not

Unlike the traditional path that companies in developed economies take, which is expanding nationally before going abroad, many small and medium-sized privately owned Chinese firms have the tendency of “going out” of the domestic battle field to compete in the international market directly.

Many small and medium-sized privately owned Chinese firms have the tendency of “going out” of the domestic battle field to compete in the international market directly. The decision whether to go abroad or not at the early stage of a company’s development is an interesting subject in the context of China. There are both push and pull factors.

Observers and China experts such as the late professor of strategic management Max Boisot have singled out a few push factors. One of them is the administrative decentralization policy, which caused the domestic economy to be highly competitive and fragmented. Relentless capacity growth as a result of local governments trying to maximize on fixed-asset investments from the central government has led to overcapacity and profit squeezes. Another problem is high administrative, logistics and domestic transportation costs stipulated by official policies.

Other negative push factors include high tax rates, unfriendly business environment and competitive threats coming from powerful foreign companies in China, says Prof. Xufei Ma at the Department of Management of the Chinese University of Hong Kong (CUHK) Business School.

There are also positive push factors, which include Central or local government encouragement to set up business or sell products abroad, according to Prof. Ma. An example is the solar photovoltaic industry, which obtained substantial government support and subsidies a few years ago to compete overseas using low prices.

The pull factors come from a relatively more business-friendly environment abroad. Prof. Ma explains: “There is this concept of ‘escape’— escape from government intervention, government policies like heavy tax, and from the very primitive, highly intensive competition in China that is based on only one strategy: low price. When people go abroad, they find that the investment environments are much better than at home. So why not escape there?”

All of these factors explain why numerous Chinese firms decide to go abroad early in the game (i.e. 2-3 years within their establishments) to seek more efficient institutions and markets.

Making up for Being New

To compensate for their “newness” and lack of resources while establishing a full-fledged international business, these early-stage internationalizing enterprises are proactive in seeking overseas contacts, exploring and acquiring market knowledge and taking extra risks.

According to Lu Yuan, professor of management at the Chinese University of Hong Kong Business School, “adaptive capability” plays a significant role in giving these young ventures competitive advantages when they internationalize their business. “Adaptive capability” means the ability to coordinate, recombine and allocate resources to meet the changes in the demands of foreign customers and tailoring products to their needs.

“Adaptive capability is vital to creating sustainable competitive advantages, and thus leads to superior performance,” concludes Prof. Lu and fellow academics after a study of 775 small internationalizing entrepreneurial firms in China founded after 1990, which are privately owned and involved in manufacturing businesses with export or other forms of cross-border activities.

The study finds that as young entrepreneurial firms are in a disadvantageous position when it comes to key resources like information on foreign markets and financial capital, they have to seek such resources from external organizations. As such, government programs become an important “institutional capital”—and more so in emerging economies, where the government usually controls substantial resources.

Prof. Lu said that in China, foreign trade affairs and industrial organizations are very important for entrepreneurial firms, who typically cannot afford to hire professional managers and assign them overseas to for market research. Local governments also provide export programs to help these firms build up their skills for acquiring useful information.

When it comes to managerial ties, it is crucial for young international new ventures to build networks with foreign partners, buyers or suppliers in a proactive way so they can garner the resources they need to increase their competitiveness. “The closer the relations that an entrepreneurial firm can build with its foreign business partners, such as suppliers and customers, the more likely it is that the firm will have table suppliers, better-quality inputs or services, and orders for goods,” wrote Prof. Lu and his co-authors.

The Personal Touch

While social capital and managerial ties are important, there is another dimension that makes them actually work for internationalizing firms. According to Prof. Ma, it is the personal attributes of entrepreneurs that determine whether an SME would succeed in internationalization or not.

A study he conducted in collaboration with Prof. Xiao Zhang at Nanjing University and Dr. Yue Wang at the Australian School of Business, University of New South Wales, found that even though an entrepreneur may have obtained market information from an overseas friend, he would not have succeeded in internationalizing his company if he had not recognized this as an opportunity in the first place.

The study also reveals that besides social networks and entrepreneurs’ ability to recognize opportunities, two other personal characteristics, namely risk taking and proactiveness, are factors contributing to the international expansion of small- and medium-sized Chinese firms.

Contrary to the earlier study conducted Prof. Lu, this one found that the Chinese government does not play a strong role in the international expansion of SMEs. “This may seem surprising given the Chinese government’s policy efforts in promoting small-firm internationalization,” wrote the authors. “The problem may lie in the implementation of government policies, a persistent issue hampering the progress of China’s economic reform.”

Prof. Lu says a possible reason that this research presents contradictory results to his research is that each region has different local government policies. His earlier research focused on Guangdong—a traditionally export-oriented region, which naturally gets local government support.

Two other factors that were considered important contributors to a firm’s successful internationalization — innovativeness and political ties — were found to play a minor role compared with the above factors. The general lack of “innovativeness” is particularly worrisome for Chinese SMEs’ overseas expansion, according to Prof. Ma and his colleagues. “We argue that the absence of innovation will become a major impediment to the further expansion of Chinese SMEs from the preliminary mode of exporting to more sophisticated modes of internationalization.”

Not All Fields Are Greener Abroad

Despite the generally friendlier business environments abroad, Prof. Ma cautions that Chinese companies eyeing to internationalize must consider several risks factors before making the plunge.

“When going abroad, all companies have to pay additional costs and risks than their domestic peers. But for Chinese companies, there is a higher ‘liability of foreignness’ plus the ‘liability of lateness.’ This means coming in late in terms of market share, managerial skill, reputation, brand name, customer experience and so on. The third is the ‘liability of Chineseness’ — customers associating products that are ‘Made in China’ with low quality. This is a big challenge for all Chinese firms. It takes time to reverse this kind of image and to turn this liability into an asset.”

Prof. Ma says Chinese entrepreneurs should be patient and work harder to gain trust from foreign customers regarding their product quality. He cited Japan as a good example of how the country turned around its “cheap image” in the eyes of American consumers several decades ago, and has established itself as a country that consistently produces top-quality products.

In addition to the above considerations when a company makes cost-and-benefit analysis or whether to go abroad or not, Prof. Ma also suggests closely following the development of the new government’s policy focus. Domestic consumption and urbanization are two key themes under the direction of Premier Li Keqiang.

“Nowadays, company managers and entrepreneurs need to be more rational. They shouldn’t just decide to go abroad because their friends, peers or competitors are doing it, or because the local government policy is supportive. They need to do their own calculations and find out whether the support is strong enough to offset all the risks and costs of going abroad,” says Prof. Ma.

“Another thing is, after the global financial crisis, people are seeing reports that show the real performance of Chinese companies abroad has not been so good. So forget about government policy support! Do your own calculation. Go back to domestic expansion, and do your cost-and-benefit analysis,” he says.