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Dancing with the Dragon

One of the most important events in modern economic history is the rapid economic growth of China and the country’s quick rise to a global economic power. During this course of transformation, quite a few large Chinese multinationals have emerged. The trend is clear that these Chinese MNCs are making their presence felt all over the world. Whether they will follow the trajectory of MNCs from other countries remains, however, to be seen. Another observable trend is that China has shifted from mostly receiving inbound foreign investment to making significant outbound foreign investment. More and more Chinese companies have gone beyond the border, investing and operating in a global environment.

 

What does this mean for the rest of the globe?
The first significant issue facing the global business community is that never before one has witnessed so many State Owned Enterprises (SOEs) coming to play in the global scene. Will they adopt the operating models of MNCs from Japan, South Korea or India? Or will they duplicate their own way of doing business in China and pursue a uniquely Chinese model? Is it possible that as they integrate into the outside world, business logic will win and they will be transformed into market driven entities? Bearing these points in mind, companies outside China should understand Chinese MNCs with government ties, and try to find a common ground for doing business. However, in any circumstance, overreacting to the government connection may not be the right approach. Chinese MNCs, after all, are here to do business.

Secondly, the fact that Chinese companies are big, rich in financial resources, but lacking in global operating experience creates opportunities for overseas companies in cooperation and partnership with Chinese MNCs. To some extent, whether Chinese MNCs will eventually succeed depends on how other companies perceive, receive and interact with them. While the dragon’s initial steps may be clumsy and out of sync with the music, outside partners can coach it and make its steps more elegant, natural, and efficient. As Chinese MNCs grow and transform themselves, they will create opportunities for businesses associating with them.

Thirdly, while they bring opportunities, Chinese MNCs are creating greater competition for overseas companies not only in China, but also in these companies’ home and global markets. Overseas companies operating in China have found that their advantages are gradually disappearing as Chinese companies acquire skills and expertise, and can achieve the same results at lower cost. Now, as Chinese MNCs begin to operate in the global markets and are likely to duplicate their model used in the domestic market, companies should respond to this change in competitive situation by reassessing and adjusting their China strategy, treating China as a link in the global chain. It is no longer ‘China’ vs. ‘the world’. It is China within the world. On a different front, given the appetite of Chinese MNCs for natural resources, competition for resources will become more intense. This tends to stimulate exploration for new types of energy, and will have consequent geopolitical implications.

Last but not least, the outpouring of Chinese overseas investment involves massive numbers of companies, multiple industries and many geographies. The wave has just begun, and it will take a while to settle. What will come out of it when things have settled down? Who will be the winners and in which areas? To address these questions, we here propose a hypothesis: in the long run, strong and established Chinese MNCs are likely to emerge from Private Owned Enterprises (POEs) in the manufacturing, technology and service industries. When thinking about Chinese MNCs, one has to bear in mind that there are two distinct categories. Although SOEs are strong and make more headlines today, POEs begin to play a more active role. They are market driven, flexible, efficient and fast in decision making, and have clear ownership and incentive structures. This will make them the Global MNC’s of the future.

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