A critical review of the market entry mode decision of foreign investors in the People's Republic of China

Agenbag, Eben Haezer Gerhardus (2001-03)

Thesis (MComm)--Stellenbosch University, 2001.

Thesis

ENGLISH ABSTRACT: The signing of the US-China bilateral trade agreement in November 1999 paved the way for the People's Republic of China (hereafter China) to ascend to World Trade Organisation as a member. China's bid to become part of the World Trade Organisation (WTO) renewed foreign investor interest after a decade of growth in foreign direct investment (FDI) in China. An analysis of FDI to China confirms that foreign firms take an evolutionary approach to enter the Chinese market place. Since the opening of the economy to foreign investors in 1978, foreign enterprises shifted their utilisation of entry modes from contractual joint ventures (CJV), to equity joint ventures (EJV) and since 1994 many entered China without the help of a local partners through wholly foreign owned enterprises (WFOE's). Problems and frustration with joint venture partners gave rise to the growth in WFOE's. However EJV's are still superior in profitability and market share to the WFOE. Foreign investors need guidance in selecting the most appropriate entry mode. However, entry mode frameworks and models offered in literature are contradictory and fragmented. Entry mode alternatives in China can be represented on a continuum of control. CJV's and minority EJV's represent the lowest level of control or ownership while the WFOE, the highest level of control. This study proposes that the entry mode decision can evaluated in terms of the level of ownership that a foreign investor should adopt in a foreign invested enterprise (FIE). Turning to the theoretical foundations of entry mode choice, the transaction cost-, eclectic-. resource based -, strategic behaviour -, institutional- and evolutionary theories are integrated into a framework from which entry mode can be considered. From its theoretical foundations entry mode determinants are reviewed and propositions made regarding the impact of each determinant on the ownership level in a FIE. A review of and application of the framework to the Chinese business environment resulted in the market entry mode decision framework for foreign investors in China (MEMOFFIC). The MEMDFFIC suggest a phased external-, internal-, partner and project analysis when considering entry mode choice. China's high market potential, experience in attracting FDI as well as high level of opportunism and weak intellectual property protection are proposed to motivate foreign investors to adopt high ownership levels when entering into China.

AFRIKAANSE OPSOMMING: Die ondertekening van 'n bilaterale handelsooreenkoms deur die VSA en China in November 1999 het die weg gebaan vir die Volksrepubliek van China (hierna "China" genoem) om lidmaatskap van die Wêreldhandelsorganisasie (WHO) te verkry. China se pogings tot deelname aan die Wêreldhandelsorganisasie het die belangstelling van buitelandse beleggers laat opvlam na 'n dekade van groei in direkte buitelandse belegging in China. 'n Ontleding van direkte buitelandse belegging in China bevestig dat buitelandse firmas 'n evolusionêre benadering volg om tot die Chinese mark toe te tree. Sedert die oopstelling van die ekonomie vir buitelandse beleggers in 1978 het buitelandse ondernemings hul toetreemeganismes verskuif van kontraktuele gesamentlike ondernemings na ekwiteit gesamentlike ondernemings, en sedert 1994 het talle van hulle China binnegegaan sonder die hulp van plaaslike vennote deur middel van ondernemings ten volle in buitelandse besit. Dit was probleme en frustrasies met vennote in gesamentlike ondernemings wat tot die uitbreiding van laasgenoemde tipe ondernemings gelei het. Tog is billike gesamentlike ondernemings nog steeds winsgewender as ondernemings ten volle in buitelandse besit en geniet ook 'n groter markaandeel. Buitelandse beleggers het 'n behoefte aan praktiese leiding in die keuse van die geskikste toetreemeganisme, aangesien toetreeraamwerke en -modelle wat in die literatuur voorgehou word, mekaar dikwels weerspreek en ook gefragmenteer is. Daar is wel toetreevlakalternatiewe in China op 'n kontinuum van beheer. Kontraktuele gesamentlike ondernemings en kleiner ekwiteit gesamentlike ondernemings verteenwoordig die laagste vlak van beheer of eienaarskap, terwyl daar by die ondernemings ten volle in buitelandse besit die hoogste vlak van beheer bestaan. In hierdie studie word voorgestel dat die toetreevlak besluit geëvalueer kan word ingevolge die vlak van eienaarskap wat 'n buitelandse belegger behoort te aanvaar in 'n buitelandse beleggingsonderneming. Wat betref die teoretiese grondslag van keuse van toetreevlak, word die transaksiekoste-, eklektiese, bron-, strategiesegedrag-, institusionele en evolusionêre teorieë geïntegreer in 'n raamwerk vanwaar toetreevlak oorweeg kan word. Vanuit die teoretiese grondslag word toetreevlakdeterminante geëvalueer en voorstelle gemaak oor die impak van elkeen op die eienaarskapvlak in 'n buitelandse onderneming. 'n Oorsig en toepassing van die raamwerk op die Chinese sake-omgewing het gelei tot die marktoetreevlak-besluitnemingsraamwerk vir buitelandse belegg.ers in China. Volgens die raamwerk word voorgestel 'n gefaseerde eksterne, interne, vennoot- en projekanalise wanneer die manier van toetrede oorweeg word. China se hoë markpotensiaal, ervaring van die lok van direkte buitelandse belegging asook hoë vlak van opportunisme en swak beskerming van intellektuele eiendom moet gesien word as aansporing vir buitelandse beleggers om by toetrede tot China hoë vlakke van eienaarskap te aanvaar.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/52071
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