VOLUME No. 01 (2013), ISSUE No.

01 (SEPTEMBER)

A Monthly Double-Blind Peer Reviewed Refereed Open Access International e-Journal - Included in the International Serial Directories.

Samia S. I JRBM, Vol. 1 (2013), Issue 1

International Journal of Research in Business and Management

Full Length Research Paper

THE STRATEGIC TRENDS OF CHINESE COMPANIES GOING GLOBAL

Samia S. 1 * National University of Modern Languages, Pakistan

Received: August 03, 2013 / Accepted: August 13, 2013 / Published: September 09, 2013

Abstract During the global financial crises, the strategies of Chinese firms to expand internationally have caught the global attention. This research paper discusses the trends of Chinese companies to go global after the financial crises of 2007. The paper also discusses how the Chinese firms can get advantages through the global financial crises for the improvement of the international competition by acquiring the strategic assets of international markets. A case study of CITIC which is a major investment group in China has been presented in this study. The company took over CLSA Asia Pacific Market and uses their strategic assets at lower prices. Some theoretical perspectives are discussed in terms of the Chinese companys behaviors to expand in foreign markets. The expansion strategy of china is considered as an alternative to trade nation and to overcome the challenges subjected to the term go global. The weak managerial issues along with the financial aspects are discussed in detail to evaluate the capabilities of the Chinese firms to expand in international markets. Keywords: global financial crisis, expansion strategies, takeovers, acquisitions

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1. Introduction Economic globalization has become irreversible and continuously accelerating with the passage of time. Considering this trend, a remarkable growth has been observed in the economy of china in last two decades. This growth has been resulted due to the implementation of the open door policy and other economic reforms including encouragement of foreign direct investment and international trade. In 2002 china joined WTO that can be considered as a logical step for countrys economic development and has made the economy of china more integrated within the global economy. After the chinas access to WTO, opening up and economic reforms in china is continuously getting deeper and proved to be more fruitful. Considering the fact that the Chinese market is a saturated organic composition of the global market, the country is facing many management and financial issues. There are enormous changes observed within the business environment of the firms in china after the trends of getting global. The Chinese firms have faced many competitions at domestic level in their domestic markets (Guo, K. and NDiaye, P., 2009). However the competitive approaches have been completely changed after the increasing trends of going global in China. Now the competition is not just at the domestic level but also a direct foreign competition in foreign as well as domestic markets. The traditional business strategy of the Chinese firms it needed to be reconsidered to cope with the new development. With the internally oriented business strategy, it is difficult for the Chinese firms to lead the foreign markets at international level (Hamel, G. and Prahalad, C., 2005). The Chinese companies can compete with the foreign firms by positioning themselves in the international markets through the effective utilization of the resources in domestic and global markets. This effective positioning is found to be helpful
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for the firms to learn innovative technologies. To enter into the world economy, the development of the internalized strategies by adopting the outward direct foreign investment is important for all firms. The strategy of going global means, during economic information and globalization, firms take part in the systems of service division and world production. The firms develop strategies to move from domestic to global markets (Hamel, G., Doz, Y. and Prahalad, C., 1989). Considering the macro view, the strategy of internationalization development requires the firms to go global system innovations, national industrial policies, talent cultivation, and technical innovation and brand innovations. The developments in these terms are found to be helpful in raising the competitive strength of the firm at global level. Considering the micro view of going global, the development strategy of firms needed to follow routes of internationalization, motivations to go global, strategies to work in international markets, entry modes in foreign markets and management of the issues after being internationalized. 1. Literature Review When enterprises grow into their mature stage, going abroad into the international market is an inevitable strategic choice. Pursuing the efficiency of technology and distribution of the resources can drive the enterprises to carry out the international operation and management. The model presented by Michael Porter has indicated that the chance events and interventions of government have reshuffled the dominant industrial players significantly in the global market of business (Porter, 1998). For firms based in different countries the characters of Chinese firms for financial crises is considered as dialectic between the opportunities and danger. The crises have changed the strategies for foreign direct

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investments at global level. The period of continuous growth is 2003 to 2007, after which the foreign direct investment of world has reached the record of as high as $4,125bn in 2007, but the figure fell to $3,555bn in 2008. The flows of foreign direct investment of developing economies was continuously declining however their global share of foreign direct investment was increased continuously and surged to 16% at the end of 2008. From developing countries the outward foreign direct investment was increased from $215bn to $292bn during 2006 to 2008 that accounts about 15 percent of the worlds total economy (UNCTAD, 2009). The economic integration has been increased at global level due to the liberalization and dramatic change in capital markets with international trade. The investment agreements with regional trades have restricted the foreign entry which has also been eased by regional and bilateral trade (He, W. and Lyles, M, 2008). There are several issues addressed by making the general agreements for trade and services in respect of international investment. The openness with a higher degree can be called upon to foreign markets through addressing the members of world trade organization. The internationalization of emerged markets has now became a natural trend and contributed to the development of the overall world. The overseas investment has taken the position of universal drive for the economic integration throughout the world. The global expansion has offered the ways of efficient investment in global markets by the transformation of best practices at international level. The transmission of shocks has also been facilitated through financial integration throughout the world (Herrmann P. and Datta D. K., 2002). A general consensus has been presented in the literature for the development of economic links between the international activities and the real local sector. The emerging markets need to
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follow the non financial customers in multinational markets through the development of natural incentives. Chinese management needs to develop strategies to ensure the business growth sustainably. Taking example of Haier which is biggest maker of white goods in China, it is being sold in WalMart without any need of brand recognition in the global markets with loyalty (Li, 2007). On the other hand Lenovo has adopted the strategy to acquire the name of IBM computer business by purchasing the company and used its name for five years by licensing the brand name. Lenovo has used the trusted name of the IBM to reach the global markets. These developments have been found to be occurred during 2000s when the first outward investment was made by the Chinese company at commercial level. The company was an electronic firm named TCL which was permitted to invest in global market by purchasing Frances Thomson in 2004. Most of the outward Foreign Direct Investment (FDI) has been made in the energy and other commodities through state led investments. The trend of going global is changing as the Chinese firms have seek to improve the value chain processes for the development of the multinational companies by following the strategies of the other successful firms of other countries including South Korea and Japan. Unlike most developing countries, china has managed to follow the footsteps of the rich economies through the processing and development of the technologically advanced and innovative firms that has enabled China beyond its boundaries (Ministry, 2005; Luo, 2007). An era of multinational corporations of china can be herald by considering the going global policy of its firms. The explosive growth of outward foreign direct investment has been observed during mid 2000s (Macartney and Duncan 2006). During this era the

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investments were made not only to the SOE in the commodity sectors but also the private companies prefer to make acquisitions and mergers at commercial level. Lenovo is an example of such companies which purchased IBM in 2005 by investing $1.75 billion in 2005; Geelys is another company which made acquisition with Volvo in 2010 by spending $1.8 billion in 2010. Industrial development of China can also be viewed through the increasing net exporter image of the country. The firms are capable to compete and operate in global markets. By the end of 2000s, the accelerating outward foreign direct investment and overtaking inward foreign direct investment has enabled china to increase its industrial capacity through demonstrating the foreign investment strategies of its enterprises and producing the exports. An impetus behind re balancing the economy of China have been increased after the global financial crises of 2008 when the damage occurred to the GDP of China and more than 20 million workers loosing the jobs in the export sector of China. The five year plan of the country has focused on the transformation of the countrys economy into a model which is more sustainable than the previous strategy. The 12th five year plan has ensured the countrys growth for next 30 years. The economy of the china has been evolved to become more akin to the economy off the Japan and United States. These two economies are one of the largest economies and largest traders of the world whose domestic demand are the primary driver to grow in global markets. Considering the export of 1990, China has the economy closer that of Japan and United States which accounts for 12.9% of GDP within China and 7% in the Japan and United States. The open door policy of China has been succeeded and made the economic balance of the country resemble to the economy of Germany. Considering the exports in 2007 the value accounted for 56% of the GDP
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of china and 76% of the GDP of German. However it is important to note that the three quarter of the German trade is responsible for the intra-European trade within the single market. After the world war two, the global contraction in trade occurred in 2009 which was about 12.2% according to the data presented by WTO. The recessions were experienced by both Japan and Germany which was observed to be deeper more than the recession in United States including the epi-centre of the financial crises. Despite the large scale redundancies within the export industries, China has implied the swift implementation of monetary and fiscal stimulus to avoid the technical recession that has been increased through the domestic demand significantly (Mathews, 2006; Marchick and Slaughter, 2008). The generic theories of international business are found to be developed largely through the observation of emerging firms in china through triad economies. After the financial crisis of 2007many researchers have suggested the amendment theories for the provision of alternative frameworks of businesses (Buckley, et al., 2007; Child and Rodrigues, 2005; Lall, 1983; Mathews, 2006; Reuters, 2009). There are many alternative perspectives offered in recent literature for the understanding the outward foreign direct investments of the emerging economies especially china. China used their own volatile environment to invest according to the ownership perspective theories. Many institutional voids have been managed through ownership perspectives in emerging economies like in china (Prasad, 2009; Pettis, 2009). In the financial analysis of the business operations, a decision making process in any international business require three preconditions including maximization of the profit, availability of

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the physical guarantee for the implementation of the technological processes through feasibility approaches and continuous availability of a cash flow at surplus value for the international business at any given time period (Erramilli and Rao 1993). The three preconditions for the financial analysis are presented in figure 2 for the effective evaluation of the international expansion strategy of the Chinese firms.

financial and management issues after the global crises of 2007. The following research objectives are required to be assessed in this dissertation. To examine the trends of Chinese firms to expand in the international markets To explore the theoretical perspectives required by the firms to get benefit from the opportunities of the financial crises of 2007 To examine the strategies that the firms in china adopt to lead the foreign markets The evaluate the advantages and challenges subjected to the internationalized firms of china by presenting a case study 3. Methodology The research problems are addressed and solved by presenting a systematic research methodology. In case of CITIC the researchers are required to develop nag for research problems by implementing the basic steps i.e. identification, selection and definition of the research problems in more precise, clear and accurate way. The information that is critical to determine the research problems of this study are researched through selective library research. The collected information is then analyzed more creatively and objectively, the solutions to the research problems are identified. 4.1. Research design CITIC has been taken as a case study to conduct a comprehensive research in this study. The research will follow a qualitative approach since in this case study the data to be generated/ obtained is mostly qualitative by nature. Moreover, the intended research is going to be exploratory and will cover actual real life situations in China. The research would be direct and analytically organized, which
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Figure 1 The relationship between the three preconditions of Financial analysis on international expansion strategies

The indexes for the evaluation of the feasibility to invest in the international projects after exploring the new foreign markets are average ratio for the investment returns, return periods for investments, NPI (net present indexes), NPV (net present value), IRR (internal return ratio) and many more (Ekeledo and Sivakumar, 2004; Erramilli, 1990).

2. Aims and objectives The overall aim of this research study is to present the going global strategy of Chinese firms with the context of the

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will be built from factual to conclusions/ finding drawn in a logical sequence by dividing the study into various parts. Each part will be addressed completely before moving on to the next part using qualitative approach. 4.2. Sampling Technique and Data Collection Primary data has been collected from the CITIC Company. Sources of information related to the statement of problem are their annual reports which have answered various questions directly. The sources in this section include articles, books, online information, journals and pamphlets. The analysis and conclusion of the study are presented through secondary sources which are also used to answer the problem statement. The process starts with random sampling of clusters of the population and is done in an orderly fashion as one of the procedures of data collection. There are various respondents used in the technique of sampling that has helped to choose the samples randomly and targeting the potential population of China. 4.3. Research Questions The research intends to answer of the following eight questions. 1. What is the rationale of Chinese firms to go global especially after the financial crises of 2007? The examination of this research question will help to investigate and explain the motives f Chinese firms behind the rising wave of going global. 2. How the Chinese government is helping the firms to get internationalized? The analysis of this question will enable us to investigate the determinants and motivations of the Chinese firms for being internationalized. 3. What are the financial aspects of the firms after internationalization?
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4.

5.

6.

7.

8.

The answer to this question will help to investigate the financial issues subjected to the Chinese firms working in the foreign markets. What are the management trends of the Chinese firms which are intended to go global? The investigation of this question will enable to find the management strategies to cope up with the emerging technologies in international markets. How the financial and management issues can be presented by discussing a case of CITIC? The research of this question will help to investigate the trends of mergers and acquisitions to go global. The financial and management issues will be listed in detail. The success and challenges subjected to the case company will be discussed in detail. What are the important factors affect the Chinese firms to go global? The answer to this question will help to illustrate various internal and external factors that might affect the trends of Chinese firms to go global. What methods and modes the Chinese firms are using to enter unto the international markets? The answer to this question will enable to analyze the comparative advantages while dealing with the fiercely high international competition. What strategic option Chinese firms are using for the conduction of foreign investment? The position and function of the government of china will be assessed during the process of internationalization. Analysis and research findings

4.4.

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The survey showed that the target price for CITIC has been expected to be increased toHK$16.05 from HK$13.77. Considering the potential deregulation, the leverage is expected to improve gradually after this take over. The near term delivery could stay low for some time. The earnings forecast have been revised up to 16 percent and 19 percent in 2012 and 2013 respectively. The forecast has been devised by considering the sticky costs, lower market rates and unexpected CLSA market performance. Taking over CLSA markets is found to be key strength for CITIC with expected equity rates are expected to be equal to 2.5 to 3 percent. A good momentum has been shown by the brokerage and domestic market share is expected to be increased by 10.8 percent from 6.3 percent in coming year. The cross border issuance has also been demonstrated to be increased through taking over CLSA. The CITIC seem to be more positive in regaining the global leadership in brokerage, underwriting and management of assets. CITIC is facing a narrow gap between its peers while considering the competitive terms. The resolution of the company to expand beyond the borders of China has many upsides and downs. The acquisition deal of CLSA with CITIC has found to worry the investors on merger and acquisition potential of CITIC. The reduction for the risk capital reserves is estimated about 46 percent that is based on the actual records of 2011. Thus associated risks after over take are 40 percent more than the industrys average value of 40 percent. The prop trading might be the basic reason of the increase in associated risks in management and investment businesses.

Figure 2 Risk reserve capital can be reduced

Two regulatory bars related to the capital management are found including net capital over risk reserves and requirement of the net capital assets. The reduction of risk capital reserves are found to be affected by the leverage of brokers after this acquisition. The merger is also found to affect the mechanism of capital calculations and theoretically the value has been expected to release the extra leverage for the net capital to reduce its value. The skewing capital allocation has been found to produce high risks for assets bearings thus results in higher risk adjustments. Higher leverage is expected as a result of CLSA and CITIC acquisition.

Figure 3 Max. Risk weighted assets can be lifted to about

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Figure 4 Leverage (asset to equity) can be lift to 2.6 x from 1.7x today at CITIC Sec. Figure 5 Wealth management market assets breakdown A sector conference is reported to be held by the CITIC for the promotion of the mergers and acquisitions of Chinese firms for global expansion and adoption of innovative technologies. The innovative products of this merger results in the management of the cash and asset services and causes the management issues of the competition for the bigger pie of the wealth markets. Investments of funds, stocks, indexing future, products and warrants requires the application of the neutral strategy of the CLSA market. The neutral strategy would help the system to remove the expected financial risks and help in the quantification of the investments through effective stock portfolios and shortened future indexes simultaneously. The historical data of the company has been researched to find the relevance statistically and to forecast the movement of capital market after taking over CLSA markets.

Figure 6 Wealth management market assets breakdown The business challenges subjected to CITIC due to the structural shift through the market of equity issuance of CLSA include both financial and management issues. The deal has filled the regulator through which CITIC has shown some pick up in the economy momentum especially in main board.

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Figure 7 Net equity increase breakdown at CITIC

Figure 8 forecast net equity movement at CITIC

After getting rid of AMC, IPO and H-share capital base has become stronger. From the capital allocation point of view, the efficiency remained low until the year 2011 end and the net borrowing of the total equity remained as high as Rmb31.9 bn. We are reviewing our forecast for profit making of the CITIC Securities by 16% for the year 2012 and 19% for 2013. This review is because of expected low trading turnover, less underwriting fees and less interest income. This less interest rate is because of falling rates of market. The cost challenges are always there, some of them are due to overseas expansion plan of the brokers from the cost of staffing for coming three years, cost for management, IT infrastructure and cost of marketing. During the year
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2011oreaseas operation of CITIC posted total loss of Rmb202mn. The revenue of this company has been reported to be dropped by 47%. CITIC Securities is still rated as neutral. We would say the potential deregulation will cause structural positive to broker sector as well as the development of the capital market, for a long time. We expected that the re- leverage would be a continuous process with the introduction of new products and the education of the investors. The blowout of 2001-05 can also be a driving force and can cause the reforms. The delivery of low ROE at brokers can have effect for sometime on the brokers, which can be important to cap share price performance. Besides that, we also like the Chinese brokers balance sheet, which can be more positive on the CITIC Securities if there would be regaining in the areas of management of assets, brokerage and the leadership position in underwriting. The competition between the CITIC Securities and its peers has been narrowed. The implementation of the plan of international expansion and final resolution would be able to surprise on the upside. Now the investors are worried for the awaited discussion on CLSA acquisition deal, on mis-steps in M&A. 5. Discussion and Conclusion The institutional or market perspective has been analyzed for the creation of the opportunities for the Chinese enterprises to acquire the foreign markets which are financially distressed after the financial crises of 2007. The Chinese corporations have found ways to buy the under priced assets of the developed economies in foreign markets which are famous for their abundant strategic assets i.e. CITIC overtook the CLSA pacific Asia markets. The outwards foreign direct investment has also been promoted by the Chinese government through facilitating regulatory procedures

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and continuous provision of the financial backups. The media coverage in china has exaggerated the Chinese impression to go global as the country is buying the world. The strategy has also been promoted by the observations of the ex post and some academic work which has largely been derived from the perspectives of the strategic intents and springboard (Davies, 2009; Deng, 2004; Deng, 2009). The internationalization of the Chinese firms is found to b closely related to the capability developments at firm level. The strategy has helped the latecomers to catch the growing process in international markets. Without exception the case study of CITIC over taking CLSA Pacific Asia has explained the going global strategy of china comprehensively. The findings presented have suggested the subscription to numerous views of Chinese firms for being global. In short term the situation has not been expected to be changed dramatically (China daily, 2009). By using the pre established experiences of the developed economies, Chinese business executives and policy makers to boost the Chinese firms capabilities to develop in the foreign markets. The firms are subjected to the numerous challenges of going global including rising protectionism, intellectual property rights, trade imbalance, and controversies over exchange rates, national security concerns, cultural misperceptions, foreign employment disputes, incompetent management practices, acquisitions of US and European high-tech companies, threats posed by Chinese state-led capitalism to the Western neo-liberal form, a public perception of buying up America and the world and politicized debates over the possible outcomes (Milhaupt 2009; Ning, 2008; China daily, 2009; Chittoor and Ray 2007). No political or media controversy has been has been found to be subjected to the Chinese firms and they are generously welcomed in host developed economies. To overcome the foreign obstacles china
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has devised strategies and made efforts significantly (Child, 2005). The great progress of the worlds biggest country is a major political and economic issue. The commercial achievements of china imply important success in many other sectors, directly or indirectly. The access of Chinese companies to the technologies, resources, markets and the powerful people transform into the sources of power and influence. Naturally, China and its economic position would turn into a greater political power and affects all the other countries and its relations at the international and regional level (Cheng and Ma 2007). Adaption of the environment of the host countries and overcoming the constraints of the domestic markets to engage with the long term planning of china to go global and gradual approaches of internationalization The temptations to embark on the symbolic projects of outward foreign direct investments require the interests of sensitive firms that can exacerbate the opposite public response in the host countries. The development of the soft capability of the specific firms with acquirement of the knowledge for effective identification of the strategic assets of foreign markets, the improvement of the ownership practices and government strategies by giving attention to the local conditions more flexibly. Devotion of continuous attention to the corporate social responsibility along with targeting the profit strategies is required for successful integration in the foreign markets. Dispassionately, no conclusive evidence can be found to state China a country which is nothing but a center of legitimate development and global

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expansions for attaining a prospering and growing economy. A subscription of China to the proposition of rise is the demonstration of the countrys attribute to be more akin to a renaissance while considering the Chinese largest economy that prevailed world for about 18- 20 centuries (Buckley, et.al, 2007). Being the first step the strategy didnt go unnoticed in the global press and in numerous foreign markets. The military implications can be carried abroad by the commercial activities of Chinese firms (Chen, 2005). The credit allocation would be improved through the liberalization of the interest rates. The credit allocation would be encouraged to the non state sector firms that will result in the reduction of the saving incentives of the firms. In 2004, after the lending rates of the inter banks lifted up; the partial liberalization in the interest rates was investigated. However the limits were defined in terms of the floors of the lending rates. The internal rate of return can be reflected through the interest rates for the investment in foreign markets which may affect the lending decisions and other investment procedures. The restrictions can preserve the margins of the CITIC in a same manner as the capital can be preserved through the deposit base, however a high rate of the corporate saving can be observed. The allocation of the capital can be more efficient by these reforms even in the circumstances when the investment rate is not increasing without the liberalization of the interest rates and financial system reforms, the extent and allocation of distort of credit of the financial repressions through induction of savings by the private firms. The labor acquiring the wages below the marginal product values in the host countries generate profits. The reforms of the capital markets will results in the reduction of the credit distortions to the saving behavior of the firms especially when the reforms are associated with the capital accounts. China
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can be considered as fast growing, open and large economy that is developing domestic markets and upgrading them to compete with global firms in international markets (Buckley and Casson, 2003). The country has strived to grow strongly in international markets since 30 years but the income level was not exceeded more than the $4,200. However to catch up the international growth, there are many opportunities and scopes to attract the investments in foreign markets through going global strategy and to encourage west invest in through open door policy (Barkema, 1998). The contours of the Chinese corporate sector have been affected by the global investments internationally. The economical imbalances have been existed for many decades and the exacerbation of these financial crises during 2000s develops the backdrop to the financial crises of the century which are considered to be worst of their time. In other words, the world has already been reformed with the deficit falling of US current account from 6% to about 3% of GDP during 2010 which has promoted the rise of savings in recessionary countries. This conclusion has implied that China is needed to rebalance its economy for sustaining the growth rate during 2000s which was being driven by the strong imports of US (Anderson, 2010; APFC, 2009; Buckley et.al, 2008). 5.1. Recommendations The monetary policy of surplus countries like china should deploy the fixed exchange rates that made the capital to move from low to high economies of interest rates. The china should develop strategies to stop the bubbles of domestic assets through gradual reforming of its exchange rates with foreign countries. Domestic assets bubbles include those terms that occurred in the real estate sector which is highly non-tradable. The exchange rate of the renminbi should be

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highly flexible before monetary policies are being tightened which are important to ensure the increase in the interest rate of Chinese firms working in the global markets. However the commitment of authorities to provide a net zero interest rate has worsen the inflow of capital and thus eroded the measures of the tightening of the monetary policies (Alccer, 2007). The higher output growth can be induced by reforming the interest rate and exchange rates. The higher consumption should be managed and trade surplus should be kept smaller. The continuous imbalances of the global economies have implied that destabilization of the capital flows can be avoided by careful regulation of the liberalization. However the global liquidity will still be an issue. The global imbalances cannot be corrected by only rebalancing the Chinese finances. The trade surplus can be managed acutely through the recognition procedures which will influence the rebalancing phenomenon of global economies which will in turn ensure the growth of Chinese firms more sustainably in global markets. Chinese firms should develop the strategies for rebalancing the after effects of the financial crises of 2007 and has taken steps for the transformation of its economy within a prosperous and stable environment that also ensures the positive effects on the rest of the world. In order to move in the global markets, the Chinese firms are required to decide the Chinese economy to be open, broad and decisive to move away from the excessive reliance of the growth which is export led. The strategy is seemed to be most feasible at any stage of the going global policies of the Chinese firms. Thus the decisions made by the Chinese firms to go global will be responsible to shape the destiny of the countrys economy in coming decades.

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