The Rise of Asian Firms

Strengths and Strategies

T. Chan, G. Cui, T. Chan, G. Cui

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137407719
• Topic: Business
• Subtopic: Management
• Index: Business

Asian economies have become a driving force in the world economy, so are the Asian firms, especially those from emerging markets. This book presents a collection of articles that address the strengths and strategies of the rising Asian firms in the process of internationalization and the challenges they face.

1

Research on Asian Firms: A Review and Look Forward

Geng Cui, T. S. Chan and Hua Zhang

Asia has a population of approximately 3.5 billion people in over 30 nations spreading east from Europe and Africa, excluding the nations of the Middle East and the Caucasus, and substantive parts of Turkey and Russia (Bruton & Lau, 2008). The economic influence of this region is expanding and growing stronger. With China and Japan as two of the world’s largest economies, the Four Tigers (i.e., Singapore, South Korea, Hong Kong and Taiwan) as the newly industrialized economies, and India, another large emerging economy, the GDP of this region is predicted to exceed that of the United States by 2050 (Wilson & Purushothaman, 2003).

Asia’s multinational corporations (MNCs) play a significant role in the global market. The 2012 Fortune Global 500 list includes 172 companies from Asian countries, including 73 from China, 68 from Japan, 13 from South Korea, 8 from India, 6 from Taiwan, 2 from Singapore and 1 each from Malaysia and Thailand. Together, these firms account for an increasing proportion of the world’s trade and foreign direct investment, and thus have become a major driving force in the world economy. As a result, research on Asian firms has been on the rise, especially in recent years, as the centre of economic growth has shifted to this region of the world.

The objectives of this chapter are: (1) we provide a concise review of the research conducted on firms from the major Asian economies, including the relevant countries’ economic development and government policies for outward foreign direct investment, as well as the firms’ characteristics; (2) we delineate how research on Asian firms has contributed to the management and international business literature in terms of theoretical development and managerial implications; (3), we explore the opportunities and directions for future research and introduce the chapters contributed by the various authors to this book.

Internationalization of Asian economies and firms

Clearly, it is impractical to mount a comprehensive review of the studies on Asian firms. Instead, we focus on studies from leading academic journals and major publishers. These studies have focused on Japan, the Four Tigers, China and India, among others, largely due to their stage of economic development and internationalization of firms. For a more systematic treatment of these issues and other countries, readers may refer to other works (e.g., Ghymn, 1980; Young et al., 1996).

Japan

Japanese firms began the process of internationalization and started to expand overseas by the early 1960s (Lorriman & Kenjo, 1996). Thus, research on Asian firms began with studies of Japanese companies and focused on several areas, including the role of government, firms’ motives for overseas expansion and firm’s organizational strategies. The influence of government policy on the growth of Japanese firms has been widely noted (Callon, 1995). From1950 to 1978, the internationalization of Japanese firms was characterized by natural resource-seeking investment (Yang et al., 2009). The outward foreign direct investment (OFDI) of these firms effectively supplemented the country’s resource-poor economy (Park, 2003). During this period, the Japanese government and firms resisted the inflow of foreign capital through administrative mechanisms such as the Foreign Exchange and Foreign Trade Control Law and the Foreign Capital Law. Without permits to export to or directly invest in Japan, foreign firms had to invest through licensing their technology (Odagiri & Goto, 1993). These laws facilitated the transfer of technology and provided protection to the uncompetitive domestic firms, in addition to incentives such as subsidies, preferential tax measures and the supply of low-interest loans (Yang et al., 2009). In 1979, the Foreign Exchange and Foreign Trade Control Law was revised to “free” outward FDI (OFDI) for Japanese firms (Yoshida, 1987). Japanese OFDI began to surge in the late 1970s, and has increased tremendously since 1985 due to the rapid appreciation of the yen that followed the G-5 Plaza Accord.

The domestic market in Japan is much smaller than those of other countries with limited resources and market size. Japanese firms invested in other Asian countries mainly to reduce their costs, while looking to the developed economies in search of new markets and technologies (Fukuda, 1993; Yoshida, 1987). According to Yang et al. (2009), Japanese MNCs have two motives to internationalize. First, the competitive and sophisticated industry environment has driven firms to expand abroad. Although some MNCs expanded overseas to acquire critical capability and overcome the domestic market limitations, others reacted to the internationalization strategies of their competitors (Hanssens & Johansson, 1991). When large firms in a keiretsu (i.e., conglomeration) expanded abroad, their suppliers in Japan were compelled to follow them overseas (Banerji & Sambharya, 1996) in a move referred to as the “keiretsuization” of Japanese FDI (Peng et al., 2002). Second, resource-seeking motives are evident in Japanese firms’ internationalization. Li (1993) found that 94% of subsidiaries of Japanese firms were joint ventures and only 6% were wholly owned subsidiaries. Japanese firms started mergers and acquisitions (M&As) at a much later stage than their Western counterparts, many years after their initial international expansion. FDI is also viewed as providing networks that allow access to technology from different subsidiaries and sharing such technology within the organization (Bartlett & Ghoshal, 1989). It should be noted that the cluster or network model worked outstandingly for Japan. Global learning has been effective in close-knit Japanese keiretsus through their overseas subsidiaries. This keiretsu advantage comes from cooperative specialization among member firms (Peng et al., 2002).

The Four Tigers

South Korea

South Korea underwent rapid industrialization from the 1960s onward. In comparison with Japanese multinationals, Korean firms’ expansion into international markets was relatively late. The evolution of Korea’s OFDI policy began in 1968, with the passing of the Act of Foreign Exchange Management, although the laws governing OFDI remained restrictive until much later (Gill, 2013). In 1978, the Korean government established the Guiding Principles of FDI and Post-Investment Management under the authority of the Bank of Korea, and passed the rules for the Approval of Foreign Investments, which required prior approval for invest abroad (Pattnaik, 2006). However, until the late 1980s, Korean firms’ international investments were minuscule, relying mainly on exporting locally manufactured products.

In the late 1980s, as domestic labour disputes intensified and competition from low-wage countries such as China and Indonesia increased, Korean firms began investing abroad (Chang & Rhee, 2011). The Korean government simplified foreign investment regulations, eliminated the prior approval of investment plans and relaxed the approval processes and prerequisites for foreign investment between 1986 and 1990 (Gill, 2013). From early 1991, the Korean government passed a series of laws to support OFDI by Korean firms. For example, the Law of Foreign Exchange Management was revised in 1991, and the Korea Development Bank and the Industrial Bank of Korea were also authorized to approve foreign investment. In 1997, Korea became a member of the Organisation for Economic Co-operation and Development. While changes have been made to promote Korean OFDI, smaller firms from the private sector has also joined the move for foreign investment (Kim & Rhe, 2009; Pattnaik, 2006).

Recent empirical studies on South Korea point mainly towards the search for new markets and cheap labour as the prime motives for internationalization, especially in cases of FDI in other developing and emerging economies. According to Moon (2007), Korean OFDI has experienced a saturated home market, cost disadvantages and intense competition. Rising wages, interest and exchange rates, a limited domestic market and regulations were the domestic push factors, while the need for natural resources, export markets, technology and improved efficiency were identified as the global pull factors (Kwak, 2007). Low labour and transport costs were the main reasons behind the concentration of Korea’s OFDI in Asia (Yoon, 2007). However, Korean FDI appears to be both capital-intensive and labour-intensive in China, the most popular destination for Korean FDI, accounting for one-tenth of its total FDI (Park & Lee, 2003).

Singapore

Singapore has successfully developed into a newly industrialized country, mainly because of its inbound and outbound FDI. Inbound FDI brings foreign capital and technology, whereas outbound FDI allows Singapore to gain access to cheap labour and natural resources (Moon et al., 1998). In the 1960s and 1970s, Singapore followed export-orientated economic policies and integrated itself with the international order (Zutshi & Gibbons, 1998). The government made tremendous efforts to build scale-efficient capacities and modernize its infrastructure to attract foreign capital. Both private firms and state enterprises flourished in the process, through industrialization and import substitution. From the late 1970s to the mid-1980s, the economy diversified from traditional entrepôt trade to manufacturing, construction, tourism and financial services (Boey & Tyabji, 1980). A decade of high growth resulted in the almost doubling of per capita income, with constant prices and falling unemployment rates (Zutshi & Gibbons, 1998). Singaporean firms began to engage in significant FDI activities in the early 1980s, focusing on replacing labour-intensive operations with knowledge-based industries and services connected with manufacturing, tourism and finance, because of the tight labour market and increasing wages (Tsang & Yip, 2007; Zutshi & Gibbons, 1998).

During the late 1980s and 1990s, in response to the recession of 1985, the government found that MNC-led growth was insufficient and encouraged domestic entrepreneurship, technological development and internationalization (Zutshi & Gibbons, 1998). Therefore, the emphasis shifted to building an external wing for the Singaporean economy in the region. In the 1990s, Singaporean investment abroad increased substantially, mostly in neighbouring low-wage countries such as China. Developing countries currently host more than 80% of Singapore’s OFDI stock (Ellingsen et al., 2006). In Singapore, government-linked corporations (GLCs) are the key players in internationalization. After the Public Sector Divestment Committee recommended privatization of some of the GLCs in 1987, many of them became market listed. GLCs are now major economic players in marine and technology-intensive sectors.

Taiwan

As late movers in internationalization, Taiwanese MNCs have grown rapidly to capitalize on overseas manufacturing and enhance their competitiveness since the late 1980s. Sim and Pandian (2003) found that Taiwanese firms expanded overseas for cost-based competencies and other location-based advantages, which were brought together by an extensive web of ethnic networks and assisted by government encouragement and the institutional framework. While cheap labour is the main motivator for moving into Asian countries, market-seeking and strategic asset-seeking are the prevailing motives for moving into developed countries. Makino et al. (2002) found that Taiwanese MNCs with resource exploration motives often locate FDIs in countries that are better developed than those in Taiwan, while those with resource exploitation motives tend to invest in countries that are less developed than Taiwan.

In Taiwan, small and medium sized firms play a key role in internationalization. The size of Taiwanese MNCs generally has a constraining effect on the geographical spread of their internationalization. With limited resources, such firms tend to extend their current products and technologies to nearby countries with similar economic and cultural environments. Government policy has targeted strategic industries (e.g., computer information industry) for internationalization. For political reasons, however, the government imposed constraints on Taiwanese FDI to China. Restrictions on travel to and direct investments (particularly by stock market listed companies) in China led many Taiwanese firms to invest in China via third countries. The government even initiated a “Go South” policy in 1993 to encourage Taiwanese firms to diversify their investments away from China towards South East Asia.

Hong Kong

As an entrepôt between China, East Asia and the world, Hong Kong has experienced rapid industrialization since the 1960s, led by small and medium enterprises (SMEs) in labour-intensive, export-oriented manufacturing. For a long time, Hong Kong has been the largest foreign investor in mainland China, having transferred its manufacturing operations to neighbouring Guangdong province. Many multinationals from other countries have also entered China via Hong Kong. Thus, the processes underlying the internationalization of Hong Kong firms are very different from those in the advanced economies where market expansion is the major motivation. Multinational firms from Hong Kong emerged as a result of production relocation from advanced countries. Therefore, many of these firms started exporting at their inception, as opposed to the general internationalization process described by the Uppsala and innovation models, which assume that strength in a firm’s domestic market leads to a gradual process of internationalization (Andersen, 1993). The internationalization process of these firms shifted as Hong Kong developed and then lost its cost competitiveness. Firms were motivated to relocate their production to other lower-cost countries. Their managerial experiences and marketing skills have provided them with a competitive edge compared with local firms in the less developed countries (LDCs). However, a major weakness of Hong Kong firms is that they undertake FDI mainly in overseas production rather than in marketing or brand building (Lau, 2003).

China

Over the past three decades, Chinese firms have undergone significant internationalization in terms of greater participation in international trade, growing outflows of FDI and a recent surge in cross-border M&A activities. In the 1980s and 1990s, the Chinese government devised foreign investment laws to enable state-owned enterprises (SOEs) to receive foreign capital, technology and management systems through joint ventures, licensing agreements and other forms of strategic alliances (Yang et al., 2009). The first wave of Chinese firms began to internationalize from 1991 to 2000, after the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) formalized administrative measures granting permits to large SOEs for outbound FDI projects. Since 1996, the number of overseas Chinese subsidiaries has reached 5,356, dispersed across more than 140 countries (Warner et al., 2004). During the early period, the internationalization of Chinese firms was driven by the need to access natural resources, overcome the low brand image of Chinese products and obtain advanced distribution networks and research and development (R&D) operations in developed countries as quickly as possible (Hong & Sun, 2006). In 2001, China began to accelerate its overseas expansion activities in the form of M&As, partially due to the perceived onslaught of foreign competition after China’s entry to the World Trade Organization (WTO) in 2001 (Yang et al., 2009). Chinese overseas acquisitions are more commonly carried out by SOEs, and Chinese overseas investments are more likely to be in primary sectors, notably minerals and energy. Chinese firms increasingly prefer to engage in their OFDI activities alone, rather than seeking joint ventures with local firms in host countries (Buckley et al., 2008). Since 2003, the Chinese government has allowed private firms to invest overseas, triggering another wave of OFDI from China. Today, China has transformed itself from the largest recipient of FDI to the lar...

Table of contents

• Cover
• Title
• 1  Research on Asian Firms: A Review and Look Forward
• Part I  Asian Firms: Environment, Institutions and Management
• Part II  Internationalization of Asian Firms: Perspectives and Strategies
• Index