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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Wei Huang 1 2006 Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. By Wei Huang 2006 A dissertation presented in part consideration for the degree of MA Finance and Investment

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

By

Wei Huang

2006

A dissertation presented in part consideration for the degree of MA Finance and Investment

Wei Huang

1

2006

Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

ACKNOWLEDGEMENTSI would like to express my appreciation to Bernard Leca from Nottingham University Business School, for his guidance, encouragement, support and feedback throughout the dissertation process. I would also like to thank my parents and my boyfriend Din, for their endless love and support.

ABSTRACTSince the 21st century Chinese firms have started at a grate pace of expanding their business abroad. This has aroused worldwide speculation and tension. By reporting on qualitative research conducted at Huawei Technologies Ltd., this paper analyses Huaweis corporate profile and its internationalisation strategies employed as a latecomer firm. The key issues examined in this paper are: to what extent does Huawei not follow the traditional internationalisation theory, its core competences and its challenges in operating in developed markets.

Wei Huang

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

CONTENT TABLEABSTRACT....................................................................................................................... 2 LIST OF FIGURES .......................................................................................................... 4 LIST OF TABLES ............................................................................................................ 5 1. INTRODUCTION ........................................................................................................ 6 2. LITERATURE REVIEW ............................................................................................ 8 2.1 Motivations that led companies to expand abroad.................................................... 8 2.2 Traditional internationalisation theory...................................................................... 9 2.3 The rationale for Chinese internationalisation ........................................................ 11 2.5 Forces behind internationalisation of Chinese firms .............................................. 19 2.6 Challenges for internalisation of Chinese firms...................................................... 26 2.7 Strategies employed by the latecomer firms........................................................... 30 3. RESEARCH QUESTIONS........................................................................................ 36 4. RESEARCH METHODOLOGIES........................................................................... 36 5. HUAWEI TECHNOLOGIES LTD. CASE STUDY ............................................... 37 5.1 Reasons of choosing telecommunication industry and Huawei ............................. 37 5.2 Huaweis corporate analysis ................................................................................... 42 5.3 Competitive strategy analysis ................................................................................. 50 5.3.1 Internationalisation of R&D for long-term success ......................................... 50 5.3.2 Customer focus ................................................................................................ 55 5.3.3 Cross-culture management and project management ...................................... 57 5.3.4 Price cutting strategy to JV/partnership selling ............................................... 59 6. POSSIBEL ANSWERS TO RESEARCH QUESTIONS........................................ 65 7. RESEARCH LIMITATIONS.................................................................................... 73 8. CONCLUSIONS ......................................................................................................... 73

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

LIST OF FIGURES Figure 1: Primary motivations for Chinese companies considering global expansion..... 13 Figure 2: Projected GDP (US$ billion, market exchange rates)20 Figure 3: China FDI flows (US$ million)..20 Figure 4: Chinese Yuan against US$.................................................................................21 Figure 5: Chinas currency basket: estimated weights*, % .............................................. 21 Figure 6: National savings rates........................................................................................ 24 Figure 7: The Development and Maintenance of Guanxi................................................. 30 Figure 8: Weighing the trade-offs of globalization market entry strategy........................ 31 Figure 9: R&D expenditure as a % of GDP...34 Figure 10: Proposed destinations for R&D expenditure among international companies 34 Figure 11: Determining Chinese industries and companies with globalization potential 37 Figure 12: Growth rates in the telecommunications sector compared to GDP 1981-2000 ........................................................................................................................................... 38 Figure 13: China-China-Foreign (CCF) joint venture model ........................................... 40 Figure 14: Huaweis customized network solutions......................................................... 43 Figure 15: Orders ($5.6bn) by Region, 2004.....44 Figure 16: Huaweis Human research structure.45 Figure 17: Huaweis Expansion Timeline ........................................................................ 45 Figure 18: Huaweis worldwide offices............................................................................ 46 Figure 19: Switching..47 Figure 20: NGN ................................................................................................................ 47 Figure 21: Integrated accessnetwork.....................................................................47 Figure 22: DSLAM ........................................................................................................... 47 Figure 23: Optical network ............................................................................................... 48 Figure 24: Contract sales (USD in billions)...................................................................... 49 Figure 25: Huawei - Revenue by Geography (FY 2002 - FY 2004) ................................ 49 Figure 26: Huawei Patents ................................................................................................ 51 Figure 27: Huaweis internationalisation of R&D: goals and strategies .......................... 52 Figure 28: Integrated R&D network of Huawei ............................................................... 55 Figure 29: Huawei teams up with world leading companies............................................ 58 Figure 30: Huaweis joint labs & partners and JV............................................................ 63 Figure 31: Marconi share price ......................................................................................... 64

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

LIST OF TABLES Table 1: Forces behind internationalisation by Chinese firms.......................................... 25 Table 2: Hofstedes Five Cultural Dimensions................................................................. 29 Table 3: Advantages and challenges for OEM/JV and Acquisition ................................. 33 Table 4: Chinese Tax Benefits.......................................................................................... 40 Table 5: Orders by Division, 2004.................................................................................... 44 Table 6: SWOT analysis of Huawei ................................................................................. 50 Table 7: Huaweis R&D location ..................................................................................... 51 Table 8: R&D Cost Profile by OEM, 2004....................................................................... 61

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

1. INTRODUCTION The 21st century has been described as Chinas century. Since Deng Xiaoping initiated a program of path-breaking economic reform in 1978, China has experienced the most phenomenal economic growth, primarily through a combination of exports, massive infrastructure spending and gradual market liberalisation, culminating in Chinas entry into the World Trade Organisation (WTO) in 2001. Chinese companies will undoubtedly accelerate their global presence in line with Chinas ascent as a major economic power. Lenovos recent purchase of the IBM Personal Computer Division; Shanghai Automotive Industry Corporation (SAIC) and its sister company Nanjing Automobiles acquisition of most of the assets of MG Rover in 2005; SAICs 50.6 percent acquisition of Koreas Ssangyong (SAIC, 2004); China National Petroleum Corporations (CNPC) US$4.2 billion acquisition of PetroKazakhstan; Haiers unsuccessful bid for Maytag in 2005 and Huawei Technologys unsuccessful bid to acquire Marconi highlight Chinese companies ambitions to expand globally by securing assets and capabilities that can enhance their competitiveness.

However, very limited research has been devoted to the internationalisation of Chinese firms (Child and Lu, 1996) and this compares unfavourably with the considerable amount of studies of multinational companies (MNCs) in the developed countries. This paper will review the previous work of internationalisation of Chinese firms then by using the case study of Huawei Technologies Ltd, the author attempts to analyse Huaweis corporate profile and its internationalisation strategies employed as a latecomer firm. The key questions that the author attempts to answer are: to what extent Huawei not follow the traditional internationalisation theory, its core competences and its challenges in operating in developed markets. The internationalizing of Huawei is of emerging interest not only for its potential to extend current theorizing but also for the strategy lessons it may offer to other developing countries. At the same time, foreign companies, whether active in China or not, will benefit from this study by factoring the insights into the formulation of their business strategies.

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

In the literature review section, after briefing discussing the motivations that led companies to expand abroad, this paper will start with presenting the traditional internationalisation theory, which has been employed to explain the international expansion patterns of Western firms. It will then discuss the rationale for Chinese internationalisation followed by the discussion of latecomer perspectives. Forces, challenges and most importantly strategies of internationalisation of Chinese firms will also be reviewed in this section. In section three and four, research questions and research methodologies will be presented respectively. In section five, the Huawei case study will be analyzed from aspects of reasons of choosing this industry and this company, its corporate profile and its internationalisation strategies employed as a latecomer firm. In chapter six, the possible answers to the research questions will be discussed followed by the limitations and conclusion in chapter seven and eight respectively.

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

2. LITERATURE REVIEW 2.1 Motivations that led companies to expand abroad Bartlett and Ghoshal (1992) summarised three main traditional driving forces behind the overseas expansion of a vast majority of MNCs: (1) to secure key supplies, (2) market seeking, and (3) access low-cost factors. Bartlett and Ghoshal (1992) emphasised that the motivation of market seeking was particularly strong in companies that had some intrinsic advantage, typically related to their technology or their brand recognition that gave them some competitive advantage in offshore markets.

The well-known product cycle theory developed by Vernon (1966) suggests that the starting point for the internationalisation process is typically an innovation that a company creates in its home country. The company goes overseas only when its products had matured and to some extent lost local appeal. Exporting normally happened before this overseas production. Although the product cycle theory provided a useful way to describe much of the internationalisation of the post war decades, by the 1980s its explanatory power was beginning to wane. As the international business environment became increasingly complex and sophisticated, companies developed a much richer rationale for their worldwide operations (Bartlett and Ghoshal, 1992).

The emerging motivations, discussed by Bartlett and Ghoshal (1992), were driven by a set of economic, technological, and social developments that made internationalisation essential of technological change. They conclude that those forces of increasing scale economies, ballooning R&D investments, and shortening product life cycles transformed many industries into global rather than national structures and made worldwide scope of activities not a matter of choice but indeed an essential prerequisite for companies to survive in those businesses. Furthermore, a company whose international strategy was triggered by a technological or marketing advantage could enhance that advantage through the scanning and learning potential inherent in this world wide network of operations (Bartlett and Ghoshal, 1992).

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

Motivation alone, however, is not enough for a company to become a multinational. Bartlett and Ghoshal (1992) summarised three conditions must be met for the existence of an MNC. First, some foreign countries must offer certain location specific advantages so as to provide requisite motivation for the company to invest there. Second, the company must have some strategic competencies to counteract the disadvantages of its relative unfamiliarity of foreign markets. Third, it must also have some organizational capabilities so as to get better returns from leveraging its strategic strengths internally rather than through external market mechanisms such as contracts or licenses.

2.2 Traditional internationalisation theory The traditional internationalisation theory assumes that firms will internationalize on the basis of a definable competitive advantage that allows them to secure enough return to cover the additional costs and risks associated with operating abroad (Buckley and Ghauri, 1999; Caves, 1971). Dunnings (2001) eclectic model remains the most valid explanation on producing overseas. The eclectic paradigm draws together elements of previous theories to identify ownership, location and internalization (OLI) advantages that motivate internationalisation, in other words, a firm will engage in international production when three inter-related conditions (or OLI factors) are present: First, a firm possesses certain ownership-specific advantages not possessed by competing firms of other nationalities ownership advantages are firm-specific factors such as superior proprietary resources or managerial capabilities that can be applied competitively in a foreign country (Barney, 1991). Second, there must be location-specific factors that make it more profitable for the firm to exploit its assets in overseas, rather than in domestic locations; location advantages can account for decisions to invest in foreign countries that offer superior market or production opportunities to those available elsewhere and/or opportunities to secure valued inputs. Third, such advantages are most suitably exploited by the firm itself rather than by selling or leasing them to other firms. In other words, the firm internalizes the use of its ownership-specific advantages. Internalization advantages accrue to firms that can reduce transaction costs by investing abroad so as to undertake transformation or supporting processes more effectively than can be achieved through market transactions (Buckley and Casson, 1976; Safarian, 2003). Internalization may

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offer clear efficiency advantages in the management of interdependencies concerning know-how, reputation, the value chain, and marketing, and these advantages offer a powerful explanation for the rise of the MNCs (Hennert, 2001).

However, the traditional motivations and internationalisation theory reviewed above has derived primarily from research on large western enterprises, which can be presumed to enjoy considerable domestic strengths before they internationalize. Similarly, the traditional motivations that led companies to expand abroad were particularly strong for some of the Western multinationals for example European MNCs as their relatively small market is insufficient to support the volume intensive manufacturing processes (market seeking), and US MNCs (Product Cycle Theory). Furthermore, the predominant assumption in the traditional internationalisation theory has been that internationalisation is motivated by a firms wish to exploit its existing ownership advantages. The conventional view therefore focuses on the overseas possibilities for asset-exploitation.

Relevant studies on the internationalisation process include Hill et al. (1990), Norwell et al. (1995), Kutscher and Baumile (1997) and Melin (1997). The best-known model in the academic literature is Johanson and Vahlne (1977), which developed a theory about the continuous incremental process that takes place in firms that enter foreign markets. However, the internationalisation process for successful companies seems to have changed over the last two decades, with interesting implications for theory. Companies now can make larger steps and still be successful (Barkema and Rian, 2005). Huawei is one of the successful stories to this point, which will be demonstrated in the later section of this paper. Therefore, it has been argued that, compared to the initial competitive advantage, the classical incremental internationalisation process is probably less important now (Yip et al., 2000). The established theory above would argue that Chinese firms should start with gradual organic expansion into contiguous markets (Barkema and Rian, 2005). However, as in the later section of the paper, research has shown evidence that this is not exactly the case for Chinese companies.

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

2.3 The rationale for Chinese internationalisation The Chinese companies, although possessing ownership-specific advantages in aspects such as lower cost, seem not to have advantages of original invention, higher productivity, market power, technology and brand (Child and Rodrigues, 2005). Therefore, internationalisation among Chinese companies seem to have the primary purpose of obtaining these missing advantages in order to quickly access foreign market or reinforce home market positions. It also seems that the Chinese companies apparently recognize the need of knowledge seeking as the recent global R&D activities aim for, and the need of upgrading their knowledge creating capabilities abroad. Nolan (2001) has argued that the competitive capability of Chinas large firms after two decades of reform is still painfully weak in relation to the global giants. He points to factors such as their weakness in R&D, their limited marketing capability, their lack of brand development, and the administrative constraints that government agencies continue to impose on them. Nolan (2001) also argues that the international expansion, which an increasing number of Chinese enterprises are now undertaking, may signify a determined attempt to escape the limitations of their domestic situation and, in order to achieve this, to remedy their main competitive weaknesses.

Similarly, Boisot (2004) has argued that, in contrast to the assumptions of traditional internationalisation theory, many Chinese firms will not be moving abroad to exploit a competitive advantage that was developed in the domestic market, but to avoid a number of competitive disadvantages incurred by operating exclusively in the domestic market. He lists a range of disadvantageous domestic conditions: regional protectionism that limits the opportunities otherwise offered by a large domestic market to exploit economies of scale; limited access to capital that prevents investment in plants of optimal scale; lack of developed intellectual property rights that limits access to state-of-the-art technologies; under provision of training and education that limits access to skilled human resources; poor local infrastructure that increases transport costs; and regional markets that are fragmented by provincial and municipal protectionism (see also Zhang, 2005).

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

Moreover, in industries such as mobile phones, electronics and white goods, Chinese firms now face fierce competition from leading international brands. This competition together with over capacity is driving profit margins down to wafer thin proportions (Fang, 2002). Government interference also continues in various forms and at different levels (Huang, 2003; Meyer and Lu, 2004; Nolan, 2001). Transaction costs are also raised by the continuing complexity and uncertainties in the way the Chinese legal system operates (Peerenboom, 2001). The presence of these domestic constraints and pressures adds to the attractiveness of producing for foreign markets. In order to do this, however, Chinese firms need to build up new capabilities through investment or partnership abroad.

Building up Chinese companies strength abroad offers the prospect of providing needed assets much faster and also of increasing the firms bargaining power against local stakeholders who are constantly acting to reduce their profitability (Boisot, 2004). Having developed an international presence, Chinese companies would be in a stronger position to compete against multinationals in their domestic market as well. It has been seen that the motives for the foreign investment undertaken by some of Chinas most dynamic firms are consistent with the view that they regard internationalisation as the means to better equip themselves to gain competitive strength (Child and Rodrigues, 2005). It has also be noted how they benefit from government support in this aspiration. Many Chinese firms already enjoy a cost advantage due to their low wages and to the production improvements achieved in recent years, often by learning from partnerships with multinationals (Guthrie, 2005). The high levels of competition in many of Chinas domestic markets have also fostered cost effectiveness (Child and Rodrigues, 2005).

However, as Zhang (2003) points out, while a cost advantage is a relatively important competitive factor for simple products and lower income markets, in order to compete in other higher value-adding markets, differentiation and brand advantages are also required. Differentiation is gained when the market perceives products to stand out from those of competitors in a way that customers approve. A brand advantage is gained when customers are willing to pay a higher price for a product even though it has the same

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qualities and functions performance as competing products. Differentiation may be sufficient to compete internationally in industrial markets such as automotive components where customers are able to judge the substantive quality and performance of a product through their professional knowledge. Brand recognition, with the reputation (and sometimes cachet) that it signifies, is particularly important in consumer markets, such as those for automobiles, beverages, clothing, consumer electronics, household goods, and mobile phones. As will become apparent from the case study in this paper to be considered, the strengthening of differentiation and/or brand advantage features is an important driver for Huawei going abroad. Often Chinese companies are going abroad to acquire advanced technology and R&D capabilities, which provide the means to develop a differentiation advantage. Some are acquiring or developing global brands as the basis for securing a brand advantage. Even before going abroad, some have used long-term contracts or partnerships with leading foreign companies as a means to learn about international production and quality standards as a preparation for internationalisation. According to IBMs 2005s survey (primarily among 25 companies that Chinas global leaders are likely to emerge), Chinese companies are motivated to expand globally for a range of reasons, the top three reasons including seeking new markets for growth, acquire advanced technology and management skills, and intense competition in domestic market (See Figure 1).Figure 1: Primary motivations for Chinese companies considering global expansion

Source: Beebe et al, 2005. IBM institute for business value and Fudan globalization survey, 2005 (n=25).

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

2.4 The latecomer perspective Peng (2005) and Mathews (2002) have argued that China does not require theories that are specific to itself and that would differ substantially from mainstream, primarily Western theories. Similarly, Child and Rodrigues (2005) suggest that China presents an opportunity to extend, rather than replace, existing theorizing on the internationalisation of firms including that applied to developing country MNCs. This following discussion will review Peng (2005), Mathews (2002) and Child and Rodriguess (2005) work of further extending the traditional internationalisation theory. Two primary areas in which this opportunity arises concern the latecomer perspective and catch-up strategies institutional analysis with reference to the role of government and the liability of foreignness.

First of all, it is necessary to define what meant by latecomer firm (LCF). According to Mathews (2002), the latecomer firm is one which meets the following four conditions: (1) Industry entry: The LCF is a late entrant to an industry, not by choice but by historical necessity; (2) Resources: The LCF is initially resource-poor, e.g. lacking technology and market access;(3) Strategic intent: The LCF is focused on catch-up as its primary goal; (4) Competitive position: The LCF has some initial competitive advantages, such as low costs, which it can utilize to leverage a position in the industry of choice. Mathews (2002) argues that the category is of greatest interest in the context of high-technology industries, which are knowledge-intensive, for these are the hardest to penetrate, where cost advantages are minimal, and where strategies of linkage and leverage are all important. According to Dore (1973), the late development thesis has classically been applied to nations, initially Japan and subsequently the emergent new economies of East Asia, notably Taiwan, South Korea, Hong Kong, and Singapore. Chinese company Huawei also qualifies to join this category and the above conditions are all met as follows: (1) Huawei entered the telecommunication industry in 1988, (2) initially lacking in technology and market access (3) Primary goal is to become the worlds leading telecommunication firm (4) Low cost is one of Huaweis competitive advantages.

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As many previous researchers (for example, Mathews, 2002, Child and Rodrigues, 2005) emphasised that while such LCFs had some initial competitive advantages, such as low labour costs, these became less crucial as the firms moved into more sophisticated markets with higher value products. The significance of the latecomer perspective lies in the way it directs attention to international investment as a means of addressing competitive disadvantages. Mathewss (2002) research indicated that these LCFs overcome competitive disadvantages through linkage, resource leverage, and learning. It is worth to note here that the internationalisation process of Chinese firms lends support to the view that their capacity for organizational learning should not be underestimated and that is one of the most important of all competitive advantages (Moingeon and Edmonson, 1996).

As Child and Rodrigues (2005) state that the latecomer to global business deserves to be granted greater theoretical attention, particularly with respect to the processes whereby firms in this category can develop international competitive strengths. This is not to deny the fundamental insight that firms have to possess competitive advantages, particularly ownership and internalization ones, in order to sustain a successful presence in international markets. It is, however, to argue that greater attention needs to be given to the ways in which initially disadvantaged firms from countries like China can acquire the necessary assets to offset these disadvantages through a close association with foreign MNCs or obtaining them abroad.

Institutional analysis and the role of government A common point of departure for most scholars (Scott, 1987; DiMaggio and Powell, 1991) is that organizations are under pressure to adapt to and be consistent with their institutional environment. Organizations attempt to acquire legitimacy and recognition by adopting structures and practices viewed as appropriate in their environment. Child and Rodrigues (2005) argue that the process of internationalisation by Chinese firms appears to be significantly impacted by institutional factors. Developing and transition economies like China are typically characterized by an active governmental involvement in business, both through ownership and through regulation (Peng, 2000). The close relational

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framework (Meyer and Scott, 1983) enables Chinese firms to enjoy the supporting governmental agencies confidentially.

The Chinese government has played an important role in setting the trajectory for the countrys journey toward globalization. Recognizing the over-dependence on export-led development, the Chinese government initiated a go-out policy in 2002 a plan to create between 30 and 50 national champions from the most promising or strategic state-owned enterprises in China by 2010. These national champions enjoy a range of benefits from the government including information sharing networks, domestic tax breaks, cheap land, low interest funding from state-owned banks and protection from the Chinese authorities (The Economist, 2005b). If a late-coming disadvantaged firm is to acquire assets that enable it to compete in the world market, it may indeed require direct or indirect governmental funding to make the purchases. Indeed, the governments sponsorship and funding support are a key factor that may make possible the frequent acquisitions initiated by the China-based enterprises as a normal mode of entering and penetrating a host economy (Warner et al, 2004). For example, Huawei, Haier and Lenovo, have benefited significantly from government support at critical stages in their development. The case of China strongly suggests that international business theory needs to take fuller account of the potential relevance of domestic institutional factors in developing and transitional countries (Child and Rodrigues, 2005). On the other hand, the very firms that might be expected to internationalize with the advantage of support from national governments could be weakened by the way they remain beholden to administrative approval and bear a legacy of institutional dependence. This legacy can inhibit strategic action either through promoting a conservative attitude or through more direct constraints (Lewin et al, 1999). Thus there have been instances in which Chinese governmental authorities have removed leaders of state-owned enterprises who demonstrated the kind of entrepreneurial initiative on which internationalisation depends (Nolan, 2001). This paradox suggests that, in order to internationalize successfully, firms coming from a heavily institutionalized environment must negotiate

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ways of combining the material support it may offer with a sufficient degree of strategic freedom.

Liability of foreignness Zaheer (1995) defines the liability of foreignness is the costs of doing business abroad that result in a competitive disadvantage for a MNC subunit. It also often related to the concept of psychic distance, which concerns the cultural, linguistic, institutional, developmental level and other dimensions of difference between a firms country of origin and other countries to which it may internationalize (Johanson and Vahlne, 1977; Johanson and Wiedersheim-Paul, 1975). Chinas distinctive cultural and institutional legacy, including the tendency to rely on close personal relationships in business transacting (Chen and Chen, 2004), may be expected to increase the liability of foreignness faced by its firms as they seek to internationalize. This implies that even if the lack of tangible assets such as technology and branded products can be met through their purchase abroad, a liability of foreignness may still jeopardize the effectiveness of how they are put to use. Distinctive Chinese styles of management (Chen, 2004) could thus prove a handicap for the management of overseas affiliates.

The liability associated with foreign operations, and the extent to which it affects the performance of MNCs in foreign countries has attracted much research attention (Lou and Mezias 2002). This stream of research finds its theoretical foundations in Hymers pioneering observation (Hymer 1976). Liabilities arise from their unfamiliarity with the foreign environment in which they operate, from discriminatory attitudes of customers, suppliers and national governments and from the additional costs associated with running international operations. Hence, other things being equal, foreign firms would underperform their domestic counterparts. Furthermore, it has been argued that the Chinese have a cultural preference for transacting in less codified regimes typified by beliefs and clan networks rather than by the codified formality and impersonality of bureaucracies or markets (Boisot and Child, 1996). A similar preference may also characterize other societies that continue to rely heavily upon traditional foundations of trust, based on who you know, rather than on legal and other formalized supports.

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

Previous research on developing country MNCs indicates a preference for expanding to foreign territories where it is possible to access ethnically-based social networks, and this appears to be very characteristic of overseas Chinese firms. In earlier phases of internationalisation from the Chinese Mainland, firms evidenced a preference to go to countries where Chinese social networks are present (Cai, 1999; Deng, 2004).

At the same time, however, there is a large body of research that shows that foreign firms tend to perform better than domestic firms (e.g., Shaked 1986, Michel and Shaked 1986, Li and Guisinger 1991, Oulton 2001, Nachum 2003). Such findings are explained by the superior competitive advantages of foreign firms investing overseas (Hymer, 1976). These superior advantages are transferred internally within the MNE and are used to compensate for the disadvantages of foreignness. There are also the suggestions that under certain circumstances foreign firms may enjoy some advantages of foreignness, stemming from their access to resources not available in the host country in which they invest, or from some superior perception of foreignness by local customers and suppliers, and even in some cases local governments (Hymer, 1976). However, such advantages are particularly notable when firms of a more advanced country invest in a less advanced one as the case of US firms investing overseas, to which Hymer (1976) referred. Furthermore, the earlier phases of internationalisation from the Chinese Mainland, firms evidenced a preference to go to countries where Chinese social networks are present (Cai, 1999; Deng, 2004) seems to have been less evident among the larger recent internationalizing firms, though the extent to which they tap overseas Chinese communities in developed countries such as the USA needs to be clarified. Thus while embedded Chinese culture could be a factor limiting the willingness of firms to internationalize to countries where they cannot plug into ethnic and other familiar social networks, the aspiring global player Huawei considered in this paper appear to be finding ways of overcoming any such limitations.

These contradicting findings are both in line with theory. However, Professor Nachum (2003) argues that neither of them is complete, as they each rely on only part of the factors determining the performance of foreign firms relative to their indigenous

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.

counterparts. The actual competitive position of foreign firms vis--vis domestic ones is a balance between the additional costs associated with international activity and the disadvantages resulting from operating in a foreign country, and the superior advantages of MNE. Similarly, Zaheer and Mosakowski (1997) suggest that foreign firms might be able to partially compensate for their lack of local information networks through factors such as the scale, the capital availability from its parent, or its managerial and organisational skills, as well as by being part of a multinational network that enables it to connect to worldwide information flows. It is argued that an adequate view of the performance of MNCs in foreign countries has to consider both the additional costs and the superior advantages, and regard the outcome as the balance between them.

2.5 Forces behind internationalisation of Chinese firms The macroeconomic imperative Since Deng Xiaoping initiated a program of path-breaking economic reform in 1978, China has largely integrated into the global economy. China is the fifth-largest economy in the world at market exchange rates (Global insight, 2004) and second-largest at purchasing power parity (CIA, 2004); In 2004, Chinas share of world gross domestic product (GDP) stood at 3.9 percent at market exchange rates and 13.8 percent at purchasing power parity (Economist Intelligence, 2004); Average annual GDP growth was 9.4 percent between 1970 and 2004 (Zha, 2005) and is forecast to be 8 percent (see Figure 2) from 2005 to 20101. China has become the world's preferred destination for foreign direct investment (FDI). The Organization for Economic Cooperation and Development (OECD) recently announced that China has overtaken the United States as the biggest recipient of FDI, attracting US$53 billion in 2003, while the United States has joined Hong Kong, Taiwan, Japan and South Korea in the top five sources of FDI into China2 (see Figure 3) (Accenture, 2005a).

1 2

Development Research Centre of Chinas State Council Based on the Chinese Government's official FDI figures, www.fdi.gov.cn

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.Figure 2: Projected GDP (US$ billion, market exchange rates) Figure 3: China FDI flows (US$ million)

Source: Goldman Sachs, 2003

Source: China Economic Quarterly (CEQ), 2005

Furthermore, the Chinese currency has been revaluated (2.1 percent increased against the dollar, see Figure 4) in July, 2005 and it is no longer pegged against the dollar, but announced it would have a different policy called managed floating exchange-rate regime which is to manage Yuan against a basket of 11 currencies as shown in Figure 5 (The Economist, 2005a). A Yuan revaluation is the most cost-effective way to maintain a stable macro environment conducive to growth. The reason is simple: the business cycle in China is not synchronized with that of the US, and the previous fixed exchange rate management system limits the Chinese authorities ability to conduct independent monetary policy (Liang, 2003). An increasing number of Chinese companies are undertaking international acquisitions. While some have cash resources through achieving reasonable profits for example, the revaluation of the Chinese yuan against the US dollar, by reducing the price of foreign assets, may accelerate the process of acquiring foreign assets, just as the strength of the yen encouraged a wave of Japanese foreign acquisitions in the 1980s (Rui and Yip, 2006).

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd.Figure 4: Chinese Yuan against US$. Figure 5: Chinas currency basket: estimated weights*, %

Source: Thomson DataStream

Source: Morgan Stanley *Weighted average of trade and FDI

Strong governmental supports Chinas global political and economic aspirations are an important factor driving expansion abroad. In addition to building economic relations with more countries, Chinas outward investment has a dual purpose of building Chinas political capital and influence around the world. Chinas chosen route to economic expansion has therefore been closely aligned with its strategy to strengthen its global political presence. In particular, for some time, business and political leaders have worked together to build strong relationships with developing countries (Accenture, 2005b). Importantly, Chinese companies often face fewer political constraints compared with their western counterparts when it comes to investment destinations. China has been one of the few countries investing in what are widely seen in the west as less reliable economies such as Sudan, Iran and Zimbabwe (Accenture, 2005b).

The Chinese government also has played an important role in setting the trajectory for the countrys journey toward globalization. As mentioned previously, the go-out policy reinforces the governments efforts to support the rapid development of technological skills and know-how, as well as building new markets and global brands that will underpin further economic growth at home. The quest has begun to create Chinese companies on a par with global giants such as Coca-Cola, Microsoft and Wal-Mart. Companies like Huawei and ZTE have used their experience in building Chinas ownWei Huang 21 2006

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markets to develop new ones in other emerging economies, before tackling developed economies. Their better understanding of emerging markets provides a stronger guarantee of success in their initial overseas expansion plans, improving chances of a smoother entry into more developed western markets later on. Meanwhile, China has been building alliances with other developing economies in political forums and multinational negotiations (Accenture, 2005b). With foreign currency reserves amounting to roughly US$700 billion, state-supported Chinese companies can draw on a pool of ready capital for strategic acquisitions. In December 2004, for example, the China Development Bank (one of the most active banks in financing companies investing abroad) issued a low-cost US$10 billion loan to Huawei to promote its international operations (China Daily, 2005).

Competitive flexibility In the face of increasing foreign competition, Chinas strategy is to build its presence overseas. Going global enables Chinese companies to gain access to technology and bring their operations in line with international standards. In particular, global operating models allow Chinese companies the flexibility to place business units wherever they afford the greatest comparative advantage. Nanjing Automotives recent purchase of Rover is an example in which the company plans to move the bulk of its production to China while keeping R&D facilities in the United Kingdom (Accenture, 2005b). Nanjing Automotive also has gained the use of the Rover brands access to brands has been a crucial factor in many recent deals involving Chinese companies. Because of the complexity of the Chinese market, there are many regional Chinese brands, but few national ones able to compete in international markets. Building a brand from scratch is a challenging task and China is only beginning to develop the skills required to do so. Some observers suggest that China may need another 5 to 10 years to nurture globallyrecognized brand names (Beijing Review, 2004a). With the rapid pace of globalization, Chinese companies are finding they do not have the time cushions once enjoyed by their Japanese and Korean counterparts as they pursued a more gradual organic development 10 to 20 years ago. As a result, brand-buying is seen by many as a logical short cut (Accenture, 2005b). By associating themselves with a top brand name or product,

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Chinese companies can quickly raise their international profile as well as gaining instant access to new markets. Lenovos purchase of IBMs personal computer operations in December 2004 is the most often cited example of this strategy. With this US$1.75 billion deal Lenovo, a company hardly known outside China, suddenly became the worlds third-largest PC manufacturer after Dell and HP, gaining significant international coverage (Accenture, 2005b).

Unique consumer dynamics Chinas annual savings rate has averaged 40 percent over the past few decades compared to the world average of 22 percent (The Economist, 2002). With the worlds highest savings rate (see Figure 6), accumulated Chinese household wealth over the past two decades has equated to approximately 140 percent of GDP (The Economist, 2004). As consumerism grows in China, retailers are now hoping that households will soon loosen their purse strings. However, recent reforms have broken the iron rice bowl3 and have left the population needing to make provisions for services and benefits that were once guaranteed to them by the state. Figures from richer countries suggest that populations do not stop saving until accumulated wealth reaches 300 to 400 percent of GDP, indicating that Chinas high saving tendency is unlikely to abate anytime soon. While this will be a challenge for retailers and consumer-goods companies, it is a significant opportunity for financial services providers. As the relatively undeveloped financial services market matures, Chinese savers are beginning to diversify their savings across more sophisticated financial products, such as securities, bonds, funds and property (Beijing Review, 2004b).

The Iron Rice Bowl is a Chinese idiom referring to the system of guaranteed lifetime employment in state enterprises where the allocation of housing, jobs and education was the exclusive responsibility of the state.

3

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Figure 6: National savings rates

Source: World Economic Forum, Global Competitiveness Report 2004-2005

Price and quality are the two main priorities that influence Chinese consumer choice. With the majority of the population in China still restricted by limited income and low exposure to products, emphasis continues to be placed on value for money. But attitudes are evolving as advertising and improving living standards foster greater brand awareness. This trend is reinforced by the emergence of Chinese multinationals who, through overseas expansion and greater focus on branding, are re-importing their global brands back into the Chinese market (Accenture, 2005c). Table 1 summarized the forces behind the internationalisation by Chinese firms.

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Table 1: Forces behind internationalisation by Chinese firms

The macroeconomic imperative Strong GDP growth From inward FDI to outward internationalisation Recent revaluation of Chinese currency

Strong governmental supportsStrong governmental support for globalization, especially financial backing and tolerance of domestic moves (such as M&A) that build corporate strength Face fewer political constraints compared with their western counterparts Access to state-supported scientific and technical research Willingness of foreign firms to sell or share international-standard technology, knowhow, and brands

Competitive flexibility Hazard of relying on highly competitive domestic market, with low margins Opportunities to export based on domestic cost advantages Associate with top brand name or product to raise companys international profile Potential to complement domestic cost advantages with differentiation advantages acquired abroad Need to secure and develop advanced technology and internationally recognized brands

Unique consumer dynamicsThe worlds highest annual savings rate Recent reforms have broken the iron rice bowl Attitudes are evolving as advertising and improving living standards foster greater brand awareness. Emergence of Chinese MNCs, who through overseas expansion and greater focus on branding, re-importing their global brands back into the Chinese market.

Source: authors own research with reference to Child and Rodrigues, 2005

Comparing with Japan and Korea It is worth to mention here that in many respects, Chinas globalization drive is similar to that of Japan in the 1980s and Korea in the 1990s. IBM research (2005) summarised the key similarities and differences. On one hand, all of them are making efforts to transition from low-cost manufacturers to providers of higher value-added products and services. By doing this, they are gradually acquiring the necessary technology and skills, and in some cases, experimenting with their own branded products in foreign markets. They are primarily focusing on nearby Asian countries, but also investing in the United States and European Union to globalize their operations and, in some cases, avoid trade barriers. On the other hand, there are major differences that make Chinas globalization efforts unique. As discussed earlier China has the distinct advantage of sheer size and rapid growth in its early stages of economic development. Furthermore, when Japan and Korean opened its

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market to foreign competition, which is much later than China, they both adopted protectionist policies to allow their companies to develop scale and experience before competing head-on with foreign companies in their home markets. While Chinas WTO entry has meant not only increased foreign competition in many industries in China but also it has helped Chinese companies gain access to global management concepts, overseas talent, technologies and best practices provided by thousands of large foreign companies investing in China. Finally, unlike Japan and Koreas carefully orchestrated industrial policies that nurtured global champions such as Samsung, Sony and Toyota, China does not have a centralized government body driving Chinas globalization efforts. Although the government is encouraging national champions to globalize, much greater emphasis has been given to industry restructuring as part of Chinas gradual transition to a socialist market economy. (Beebe et al, 2005). These and other differences suggest that Chinese companies will face a much more challenging environment than their Japanese and Korean peers did during their early stages of development and some of the major challenges are discussed below.

2.6 Challenges for internalisation of Chinese firms The World Bank recently reported that one-third of Chinese enterprises had lost money on their foreign investments and that 65 percent of their joint-ventures had failed (Beijing Review, 2005). Chinas course may be set, but the journey to high performance will be long. Economy and Politics Businesses have identified economic and financial risk areas in the Chinese business environment. The banking system needs serious reform and the opening of financial markets to foreign banks brings wide-reaching risks. At the same time, legal institutions and often impoverished local government bodies lack the means to enforce the law or provide adequate protection and governance, resulting in many problems in areas such as intellectual property rights (Accenture, 2005d), this is particular the case for Huawei technologies, which will be discussed in detail in the later section.

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Despite the Chinese government's apparent success in avoiding an economic hard landing in the short term, businesses are still concerned that unstable elements in the country's economy may precipitate a hard-landing in the medium term. This situation will demand extraordinary skill from the government to continue the reform process whilst navigating between foreign interests, domestic social and political change, and massive institutional reform (Accenture, 2005d).

Human Capital Achieving high performance for Chinese companies going global will depend critically on building a local talent multiplier system human resource processes that identify talent develop leaders and motivate the workforce. Chinese companies often lack managerial expertise and experience. China will need 75,000 executives with international experience in the next five years, currently there are 5,000 (BusinessWeek, 2005). Meanwhile, Chinese companies still face obstacles in the war for talent. NonChinese multinationals still enjoy advantages in terms of pay and prestige. On the other hand, there is a strategic push to nurture new talent in science and technology in China (Accenture, 2005b).

Attracting and retaining high-calibre employees remains a crucial and challenging task for sustaining long-term success for Chinese MNCs. Retaining the best talent requires a long-term perspective. Employers need to build clear career paths including opportunities for overseas training and subsidized advanced degrees. This will address the natural inclination of Chinese workers to work in an environment where there is a strong sense of belonging, as well as helping to avoid wage escalation and high attrition rates (Accenture, 2005c).

Chinese MNCs remain significantly poor in one crucial area: management. With limited attention paid to communication, teamwork and leadership skills at university, graduates are often ill-equipped to tackle workplace issues. Government investment is growing in this area China has launched a program targeted at building managerial skills with 500,000 high-tech workers to be trained between 2004 and 2006 and companies

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increasingly recognize that the development and retention of Chinese managerial talent will be critical to success (Accenture, 2005c). Furthermore, a valuable source of Chinese talent is the Chinese returnees (those who have either gone abroad to work or study, or were born overseas) looking to work in China. Western-trained and educated on the one hand, familiar with Chinese culture and values on the other, this group has become greatly sought-after (Accenture, 2005c).

Marketing and Operation Chinese companies may well be hampered by a lack of adequate management skills, knowledge and experience in dealing with newly enlarged transactional companies and managing global brands. Chinese companies have so far struggled to establish international brands. For example, no Chinese company features in the Business Week Interbrand 100 Top Global Brands (Accenture, 2005b). Should they wish to use their own brands, Chinese companies will also have to win over skeptical consumers, in much the same way as western firms have had to spend large amounts of time first understanding and then selling to the Chinese. Julia Zhu, assistant vice president in the commercial marketing group of Citibank in Chicago, says US companies typically allocate spending in their budgets to research and marketing in China before they invest. Chinese companies do not have this as part of their operation when considering investments in the US. This is something they have to learn (Grant, 2005). They may have to align their firms with unfamiliar international standards, regulations and systems, as well as familiarizing themselves with western styles of corporate governance, all of which will take time and patience. Culture Chinas culture is unique. Table 2 illustrates some broad aspects of that culture: respect for hierarchy; a strong emphasis on a collectivist society with the family as the core unit; a long-term time perspective; and a tolerance for uncertainty. These differences will influence values and behaviour both in business and in the workplace, creating risks for the unwary (Accenture, 2005c). Chinese companies face the hurdles of getting to grips with very different management styles, culture, priorities and mindsets to other companies. Of the Chinese joint venture failures analyzed in a recent World Bank report,

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more than 85 percent of CEOs attributed their difficulties to differences in managerial styles and corporate culture (Beijing Review, 2005).

Chief among the problems they face is tackling a business culture based on contractual obligations in contrast to greater Chinese reliance on contacts, or guanxi which still remains important, especially in the face of a still undeveloped (though improving) legal system. When establishing guanxi, xinyong (trustworthiness) and the giving and saving of mianzi (face) are crucial (see Figure 7). They operate on relationships and trust, whereas the westerners operate on contract. Chinese have relied too much on verbal assurances during negotiations (Grant, 2005). Language difficulties also compound the problem. You have quite senior people on the Chinese side but they do not know English well enough to be able to negotiate an M&A agreement. What happens is they demand a Chinese version of the agreement. How many law firms have the capability of doing that? as a Preston Torbert, a lawyer in Baker & McKenzies Chicago office says (Grant, 2005).Table 2: Hofstedes Five Cultural Dimensions

Source: Professor Geert Hofstede: www.geert-hofstede.com.

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Figure 7: The Development and Maintenance of Guanxi

Source: Kahal El Sonia (2001), Business in the Asia Pacific Texts and Cases.

2.7 Strategies employed by the latecomer firms Dynamics of leverage and learning Literature suggested that the resource-based view of the firm provides a satisfactory account of how firms go about sustaining their existing competitive advantages, but it is less successful in explaining how firms create such advantages in the first place, or overcome incumbent advantages, when the firms start with few resources. Mathews (2002) utilizes the case of latecomer firms from the Asia-Pacific region breaking into knowledge-intensive industries to illustrate the issues involved and the resource-targeting strategies utilized. His research results suggest that LCFs overcome the competitive disadvantages through linkage, resource leverage, and learning. The dynamic capabilities of such firms are enhanced through repeated applications of linkage and leverage. Enterprise can accelerate its acquisition of technological capabilities by linking up with other firms or institutions, locally or abroad, through formal or informal ties to obtain information, purchase machinery, acquire bits of new technology, or new knowledge from consultants. Strategically it makes a lot of difference what linking choice is made, as entry into different technologies involves different innovation and learning processes, but this is also heavily constrained by enterprise competence and the options available. Therefore, LCF builds its industrial capabilities through pursuing linking, leveraging and learning, starting with an in-depth analysis of key factors of competitiveness, and the various options for linking a developing firm to sources of technology and knowledge.

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Mathews (2002) further suggests that the LCF is not concerned to generate new knowledge but to adapt existing technologies as fast as possible for its own catch-up endeavours. These technologies are unlikely to be presented to the LCF in a discrete chunk; rather, they will have to be assembled from a variety of existing sources.

Market entry strategy There is no single right market entry strategy for Chinese companies pursuing global expansion. As illustrated in Figure 8, there is continuum of investment options, ranging from simple exports to M&A that companies should consider when choosing the appropriate market entry strategy to globalize. Most Chinese companies adopt a combination of investment options in certain countries and strategic alliances in others, depending on the companys tolerance for risk, ability to manage complexities, financial resources and management capabilities (Beebe et al, 2005). Child and Rodrigues (2005) suggest that Chinese firms generally in favour of the entry strategy mode of M&A route (or termed as outward internationalisation) and/or partnership/joint venturing (or termed as inward internationalisation).Figure 8: Weighing the trade-offs of globalization market entry strategy

Source: Beebe et al, 2005, IBM Institute for Business Value analysis, 2005

M&A is a popular but difficult option. Only a small proportion of M&A deals succeed in creating value and there is little reason to believe that Chinese companies will do any

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better. In fact, on closer inspection, there may be reason to think that the prospects for Chinese companies are less favourable than most, given some of the unique challenges they face when expanding beyond their borders (Accenture, 2005b). Trying to buy, rather than build, them is hardly a novel strategy: many western companies do the same but the big questions are whether Chinese companies are paying too much and whether they can manage their acquisitions effectively. The answer to the first is probably yes and to the second that nobody can know until they try. Moreover, institutional problems, such as state intervention and state ownership, are possible causes leading to failure of foreign acquisitions (Rui and Yip, 2006). But nevertheless, their rush overseas is risky but no necessarily misconceived. And if all else fails, they will have learnt useful lessons from the experience (Jonquieres, 2005).

Forming international joint ventures (IJVs) with foreign enterprises, entering into a partnership with them through original equipment manufacturing (OEM) or licensing their technology, is a route chosen by many Chinese Mainland enterprises. Evidence suggests that the Chinese authorities have consistently favoured IJVs as a means of transferring technology and expertise to Chinese firms (Peng, 2000). It is very much related to the concept of learning discussed previously. As in mainstream literatures IJVs have been suggested as a vehicle to provide opportunities for each partner to gain access to existing knowledge and develop new knowledge (e.g. Anand & Khanna, 2000; Grant, 1996; Hamel, 1991; and Kogut, 1988). However, a dedicated study (Beamish and Iris, 2003) to explore whether IJVs are motivated by a learning imperative suggests that production-based IJVs are not typically motivated by learning outcomes, because learning takes time, increase cost, and do not improve efficiency in short term. Indeed, the hand of government policy can be seen here in that a willingness to provide Chinese firms with access to technology has often been a condition of permitting foreign firms to establish in China. Huawei provides an example of how the joint venture route strengthened a Chinese companys international competitive capabilities, and this will be discussed in detail in the later section of the dissertation. Child and Rodrigues (2005) summarised the advantages and challenges for M&A and JV (See Table 3).

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Table 3: Advantages and challenges for OEM/JV and Acquisition

Route IJV

AdvantagesCapitalizes on low cost production in China Requires less and lower-risk investment Opportunity to learn international technology, practices and standards, so reducing the liability of foreignness Opportunity to build sound reputation as basis for international branding. Fast route to securing technology and/or international brand Denies access to competitors Prospect of effecting a turnaround of a poorly performing acquired company

Challenges Danger of dominance by foreign partner, especially if it retains rights over brands and technology. Hostile reaction by foreign partner when launching own brand and turning into a competitor

M&A

Risk of over over-paying Need to acquire strong rather than failing assets Faces high liability of foreignness: problem of managing acquired

Source: Child and Rodrigues, 2005

Internationalisation of Research & Development (R&D) Nowadays, R&D internationalisation has been an effective method for Chinese firms to enhance their competitive status and improve their technological capabilities. In addition, with the development of internationalisation of R&D, MNCs take internationalisation of R&D not only as the way to improve their competitiveness based on local market conditions, but also establish technology centres based on local technology and resource advantages to improve technological capabilities, and take them as complementary source of special technology (Zander, 1997; Breschi et al, 1998; Cantwell and Piscitello, 1999). Patel and Vega (1999) summarized three kinds of incentive to international technology innovation: 1) improving products, process and materials for foreign market(s), providing technical assistance for manufacturing department abroad; 2) tracking and monitoring dynamic development of foreign technology; 3) To innovate core products and key technologies outside home country.

Some authors contend that R&D activities has been centralized in the triagonal area Europe, America, and Eastern Asia-Pacific region (Ohmae, 1995; Freeman and Soete, 1997). China is right in this area, which creates a very suitable environment for R&D internationalisation. Chinese firms start international R&D very recently, which is an

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effective way to leverage technological level and corporate competences. With the Chinese entry into WTO, the domestic and international markets are getting more and more integration. How to meet the requirements of international competition by effective technological innovation is a very urgent challenge facing Chinese enterprises. Large Chinese firms have tried to enhance their technical capabilities by internationalized R&D activities. However, because of the limited capabilities and the situation of the country, Chinese enterprises have not begun to expand R&D abroad until 1990s.Figure 9: R&D expenditure as a % of GDP among international companies Figure 10: Proposed destinations for R&D expenditure

Source: Intelligent report, 2005

Chinas R&D expenditure currently stands at 1.4 percent of GDP, compared with 3.2 percent for Japan (2004), 2.7 percent for the United States and 1.4 percent for India (see Figure 9). Figure 10 shows the proposed destinations for R&D expenditure among international companies and China is on top of it. The State Councils aim is to raise R&D spending to US$113 billion per year within 15 years, up from approximately US$25 billion now. Most of the recent increases in Chinas R&D spending have come from larger firms, which are starting to compete with national brands on the international stage. Huawei spends 10 percent of sales revenue on R&D and, like many other China firms, has opened domestic R&D facilities. The amount of Chinas R&D expenditure coming from the private sector is growing. As of 2003, Chinas R&D spending was 60 percent financed by business, compared to 64 percent for the U.S. and 74 percent for Japan (Intelligent report, 2005).

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Chen

and

Tong

(2002)

summarised

four

reasons

for

the

Chinese

R&D

internationalisation: First, with Chinese entry WTO, the knowledge needed by Chinese enterprise becomes more and more globalized, and everlasting open-door policies create the prerequisites for the free flow of knowledge. Second, the concept of Made-in-China via advanced manufacturing base has been accepted by Chinese firms, which promotes the technology connections between Chinese companies and international MNCs. Third, transitions from acquisition & development to R&D based growth makes enterprises more technology-intensified, which need to absorb advanced technological knowledge abroad to enhance the corporate technological capabilities. Fourth, becoming MNC is the way which many Chinese enterprises want to take, and MNC will expand technological activities to other countries inevitably for many kinds of reasons.

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3. RESEARCH QUESTIONS Recent research are mainly based on developed countries companies entering into emerging market like China, however, less research on the other way round. The previous discussion has identified several key research questions for this case study:

Research question 1: To what extent does Huawei not follow internationalisation theories and why? Research question 2: What are Huaweis core competences? Research question 3: What are the challenges for Huawei operating in the developed markets?

4. RESEARCH METHODOLOGIES The analytical technique employed to examine these research questions is mainly secondary research or document research. This is due to the unavoidable difficulties of attaining primary data from Huawei, especially in highly confidential strategic issues. Additionally, for this case study, qualitative data and information are primarily employed. This is because limitations of time restriction cannot guarantee primary research covering every relevant issue of Chinese companies expansion strategies. Therefore, companys publications, company website, published journal articles, books, archival records and interviews are either analyzed or synthesized to help to answer those research questions. Apart from the data collection, library research for literature review is also an important part for attaining better understanding on strategic theories related to companies strategic expansion. Finally, the author has been working at Huawei HQ in EU, Basingstoke for three months so personal observations and experience will also be added wherever possible.

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5. HUAWEI TECHNOLOGIES LTD. CASE STUDY 5.1 Reasons of choosing telecommunication industry and Huawei This section will use Beebe et al (2005)s three filters approach, company size, industry characteristics and company characteristics, to explain why telecommunication industry and Huawei have been chosen for this particular paper (see Figure 11). Most Chinese companies remain small by global standards. Among chinas top 500 enterprises, only 290 companies met the first filter of annual revenues over US$1 billion. The second filter identified Chinese industries with strong globalization potential based on criteria such as industry size as a percentage of GDP, degree industry concentration, export intensity and government support. A total of 12 industries met the second filter criterion, including telecommunication industry and this narrowed the list to 124 companies (Beebe et al, 2005). The final filter identified among the 124 companies those that met additional criteria, such as a leading market position in China, over 15 percent of revenues from either exports of foreign operations or a strong global vision (Beebe et al, 2005). This narrowed the final list of 60 companies, relatively well known players such as Huawei, CNPC, CNOOC, Hairer, TCL, Lenovo, SAIC and Baostell.

Figure 11: Determining Chinese industries and companies with globalization potential

Source: Beebe et al, 2005. China top 500 enterprises, China enterprise confederation & China enterprise directors association, IBM institute for Business value China analysis, 2005

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When China began its reform process in 1978, the telecommunications sector was identified as one of the four major obstacles to modernisation. At that time, China had a telephony switching capacity of only 1.75 million sets, the telephone penetration rate was a mere 0.18 percent, and all long-distance and most inner city calls had to be manually connected. Furthermore, prior to 1978, the Chinese telecommunications industry was a government-controlled monopoly, with the construction of the basic telecommunication network, the production of telecommunications equipment and the provision of telecommunication services being centralised within the (then) Ministry of Posts and Telecommunications (OECD, 2003). However, since the beginning of the 1980s, the Chinese government has boosted the development of the telecommunications sectors through the use of an aggressive development policy. The industry has been able to expand at a staggering average annual growth rate of 44 percent, far above the GDP growth rate for the same period (Figure 12). One prominent government official once proudly announced that China now numbers among the worlds few telecommunication giants and ranks second world-wide in terms of telecommunication network size and number of subscribers. A recent report on the Chinese IT sector points to China as the next technology super-power (OECD, 2003). Huawei has grown in tandem with Chinas market since its founding in 1988.

Figure 12: Growth rates in the telecommunications sector compared to GDP 1981-2000

Source: Wang (2001)

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Chinese government policies also promote internationalisation. The OEM/Joint venture route has long enjoyed official support when directed toward genuine capability enhancement. Hitt et al. (2004) present evidence that the institutional context created by the Chinese government is conducive to Chinese firms seeking to improve their competitiveness through long-term alliances with foreign firms that possess unique capabilities. In 1999, the Chinese government launched its Go Global policy, encouraging strong Chinese enterprises to invest more overseas in order to improve their competitiveness and secure an international business presence. This policy signifies the determination of the government to promote outward FDI in the context of huge inflows of foreign exchange. One of the most important ways it sponsors overseas expansion is through the provision of low interest loans to fund the purchase of foreign companies from sources it controls such as Chinas state banks (The Economist, 2005c).

It has also been suspected that high-tech Chinese companies like Huawei pays little or no taxes in China, as local governments aim to foster local high-tech champions. Again, this is no different from EU or US regional assistance and grants. Shenzhen (Huawei's HQ), is well known for offering attractive tax credits for qualifying R&D projects (see Table 4). Last year, the Chinese government also increased tax rebates for high-tech exports (which Huawei qualifies for) from 13 percent to 17 percent. The combined effect of structurally lower R&D, and tax breaks or other subsidies gives Huawei the opportunity to enter developed markets with aggressive pricing; Western vendors aiming to match Huawei's prices must accept a hefty margin penalty (Arete research, 2005).

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Table 4: Chinese Tax Benefits Tax Rate Normal Tax Rate Economic & Tech. Dev. Zones (ETDZs) Shanghai Pudong New Area Special Economic Zones (ex. Pudong) Hi-Tech Parks/Zones New Enterprises, First Two Years Profit New Enterprises, Years Three to Five Others Qualifying High-Tech Enterprises New Enterprises, First Five Years Profit New Enterprises, Years Five to TenSource: Arete research, 2005

33% 15% 15% 15%

Nil 7.5% 15%

Nil Half Normal Rate

Figure 13: China-China-Foreign (CCF) joint venture modelChinese enterprise Foreign investor

Joint investment agreement Joint venture Construction and service agreement Chinese firms

Technology Cooperation Agreement Project task group

Customers

Source: adopted from OECD 2003.

At the time of early establishment in the 1990s, Chinese telecommunication companies found it very difficult to raise the funds required to build its telecommunications network. The lack of availability of domestic funding forced some of them to turn to foreign capital. However, foreign direct investment in the Chinese telecommunications service sector was prohibited according to Article 4 of the Enforcement Ordinance of the Foreign

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Capital Enterprise Law. However, in searching for ways to circumvent the regulations prohibiting foreign direct investment and attract foreign capital, firms like China Unicom formulated the China-China-Foreign (CCF) joint venture model (see Figure 13). This method involves establishing joint ventures between foreign companies and Chinese enterprises and making investment contracts with China Unicom. Joint ventures with foreign companies are prohibited from owning and operating telecommunications networks, and participation in business management was possible only through indirect methods such as separate agreements on technology co-operation. By 1998, over 40 foreign companies such as France Telecom had established joint ventures with Chinese companies under the CCF model (OECD, 2003). Furthermore, Chinas membership in the WTO has profound and far-reaching effects for the Chinese economy. The major impacts of Chinas accession to the WTO on the Chinese telecommunication industry will change the structure of foreign investment. Upon joining the WTO, China allowed contracts equity joint ventures to grant up to 25 percent of foreign ownership in Chinese mobile telecommunication companies upon its joining the WTO and will permit up to 49 percent ownership by 2004 in this sector (OECD, 2003). Huaweis success in global markets starts at home. More than other Chinese companies with international ambitions, Huweis success as a global company hinges on its performance at home. China, with its huge and rapidly growing economy and more than 320m mobile phone subscribers, has become an important battleground for the worlds telecommunications infrastructure suppliers. According to Gartner, the research group, Chinas telecoms equipment markets should grow at a compound annual rate of 10.9 percent between 2004 and 2008, from $29.8bn to $45bn (Harney, 2005). At the heart of this battle is the launch of third generation (3G) mobile phone services. The construction of 3G networks has triggered demand for sophisticated telecoms equipment, both infrastructure and handsets (Harney, 2005). Huawei has invested heavily in 3G, earmarking more than a third of its R&D spending for the technology over the last couple of years, according to BDA China, a Beijing based telecoms consultancy. It ranked among the top five vendors in Chinas Ministry of information industrys phase two tests

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for 3G technology. Graham Finnie, senior analyst from Heavy Reading said: There are twice mobile phone users in China than there are in the US. If you look at the matrix broadband, in broadband there are 42 million homes in China that have broadband connections that are more than any other countries in the world and it grows over 20 percent to 2004. So if you add to that the fact as well China is also the world trade organization. It is the single biggest opportunity that any vendor has potentials in global provider has to be in China (Light reading, 2005).

A more advanced primary research (both qualitative and quantitative) on multiple companies within various industries would offer more insight evidence and results of Chinese companies expansion strategies, core competencies, challenges etc. However, time restriction cannot guarantee primary research covering every relevant issue of Chinese companies expansion strategies. Having considered these limitations, plus authors own interest in the company, therefore, Huawei in the telecommunication industry has been chosen for this case study.

5.2 Huaweis corporate analysis Product portfolio Huawei (pronounced hua-way) Technologies Co., Ltd. is one of the largest and fastest growing telecommunications equipment manufacturers in China. The company was established in Shenzhen, Guangdong, China in 1988 by Ren Zhenfei, a former Peoples Liberation Army Officer, as a private company. Huawei's product portfolio comprises wireless products; network products (e.g. NGN, xDSL, optical network and data communications products); value-added services (e.g. intelligent network, CDN/ SAN and wireless data) as well as mobile and fixed terminals (see Figure 14). Huawei has risen to become one of the most competitive companies in the domestic and global market.

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Figure 14: Huaweis customized network solutions

Source: Huawei corporate presentation

Huawei is determined to grab orders and it clear focuses on a few end markets, notably wireless infrastructure (see Table 5). While Huawei's orders reached $5.6bn in 2004, net sales were $3.9bn. Unlike Western vendors where nearly all the order book is turns business, Huawei's sales typically lag orders by a year. The company does not break down net sales, nor can these figures be verified in any published accounts. All Huawei's forecasts are referred to as "sales" but are in fact orders. Figure 15 shows Huawei's regional breakdown. International sales are rising in the mix (42 percent of 2004 orders), but stripping out wireless infrastructure (the leading export product) leaves domestic orders at 70 percent of the total. The obvious conclusion is that Huawei's wireline divisions still depend heavily on China, while wireless infrastructure has a weak domestic position.

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Table 5: Orders by Division, 2004

Source: Arete research, 2005

* Software & Services

Figure 15: Orders ($5.6bn) by Region, 2004

7% 8%

3% 2% 1%

China Asian Pacific S. Africa M.E./N.Africa CIS

9% 12%

58%

Latin America E.Europe W.Europe

Source: Arete Research, 2005

Human resource structure For human resource structure, proportion of Huawei human resource is: R&D 48 percent; Marketing, sales and customer services 38 percent; supply chain 8 percent and administration 6 percent in 30000 employees by the end of 2004 year, which shows a typical dumbbell-shape enterprise (see Figure 16).

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Figure 16: Huaweis Human research structure

8%

6% 48%

R&D Marketing, Sales & Customer Serv ice Supply Chain

38%

Administration

Source: Huawei website

International expansion Huawei began to consider international expansion in 1996 and initially expanded in the developing countries like Russia and Africa. It then further expands its business in the developed countries, like the USA and the UK (See Figure 17) After many years of expansion, Huawei's technology is being used by 300 operators across 90 countries, including the US, Portugal, Germany, France, UK, Spain, Russia, Brazil, Thailand, Singapore and Egypt. Figure 18 shows the location of Huaweis worldwide offices. As stated in Huaweis 2004 annual report Everyday, nearly 1 billion people all over the world are communicating through Huaweis products and solutions.Figure 17: Huaweis Expansion TimelineHuawei started expanding abroad since 1996, initially was in developing countries like Russia and Africa Huawei further enters into European market in 2000 and expanded quickly. It also entered into N. America and Asian Pacific market in 2001

Huawei established in 1998, Shenzhen, China and expanded quickly domestically.

1988

1996

2000

0Source: Authors own research

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Figure 18: Huaweis worldwide offices

Source: Huaweis website

Market shares Huawei has continuously elevated its brand positioning in the industry across the globe. The shipment quantity of Huaweis switches ranked No.1 in global market in three consecutive years, accounting for 32 percent of the total shipment in global market (by dittberner, Figure 19); Huaweis NGN ranked No.1 in global market, 24.5 percent of port shipment (by Dittberner, Figure 20); The integrated access products ranked No.3 in global market (14 percent 3Q2004, by Infonetics, Figure 21). The DSLAM ranked No. 2 in global market (18.9 percent 3Q2004, by Dittberner, Figure 22); the optical network ranked No.3 in global market (9 percent, by RHK, Figure 23). Furthermore, Huaweis 3G products have entered the front line of the global market, and have been put into commercial application in UAE, Hong Kong, Mauritius, and Malaysia. More than 20 precommercial exchanges have been set up globally for Huaweis 3G products.

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Internationalisation of Chinese firms: A case study of Huawei Technologies Ltd. Figure 19: Switching Figure 20: NGN

Figure 21: Integrated access network

Figure 22: DSLAM

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Internationalisation of Chinese firms: A case stu