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European multinational activity in telecommunications services in the People's Republic of China: firm strategy and government policy.

Introduction

This paper is a study of the emerging forms of market entry strategy used by foreign firms in the telecommunications sector in the Peoples' Republic of China. It highlights the adoption of novel relationship-building approaches to accessing the Chinese market and the evolution of coalitions between foreign and native interest groups, with a view to promoting economic liberalisation. Foreign multinational firms in China's telecommunications industry must contend with some formidable obstacles in formulating their market entry and investment strategies. One commentator (Carver 1996, p. 11) has characterised the situation as one of 'legal and practical dysfunctionalism' between the business strategies of foreign firms and the interests of the Chinese government. It is neither regulation nor law that forbids the foreign operation of public networks; rather it is the influence of an internal directive from the State Council in 1993 prohibiting this. While these internal instructions do not have the status of law or regulations, the power of directives in China is nevertheless considerable.(1) As far as foreign firms are concerned, they face a legal and regulatory vacuum, which is filled by internal directives. As a result, it is acutely difficult for firms to make long term foreign direct investment plans.

In the early 1990s the telecommunications industry was accorded priority status for development, but the environment in which foreign firms must conduct strategic decisions is one dominated by powerful Chinese interest groups. The official position is that the telecommunications services market remains open to no-one bar the two domestic operators. No other firms can operate a public network. In this crucial respect the experience of the telecommunications industry contrasts markedly with those of other industries now able to receive inward foreign direct investment. This notwithstanding, the overarching consideration for foreign firms is that the Chinese market cannot be ignored, on account of its size and potential for growth.

Since 1979 the Open Door Policy of the Chinese Communist Party has been held responsible for the rapid growth in China's GNP which has, in the recent period from 1991-1993 ranged between 8 and 14 per cent per annum (Table 1). During 1992 China had a double digit growth rate of 13 per cent, making it the world's fastest growing economy. The 1992 GDP of US $418 billion makes China the ninth largest economy in the world. If the current growth rate continues, it will be the fifth largest economy by the turn of the century and the world's largest economy by around 2015 (Wan 1993, p. 18).

The basic indicators on the development of the Chinese economy in Table 1 track the high rates of growth in the period 1979-1993. Apart from the exceptional conditions obtaining in 1989-1991(2), absolute and per capita growth rates have been spectacular. The data show one further aspect, namely the internationalisation [TABULAR DATA FOR TABLE 1 OMITTED] of the economy. In 1979 there was an effective identity between GNP and GDP, indicating the historically largely closed nature of the economy with respect to factor (principally capital) movements(3), which had clearly eased by the 1990s.

Nevertheless, there are many doubts as to whether China can continue to sustain such growth. As well as the standard economists' warnings of overheating, as China enters the 21st century, further economic growth is in danger of being hindered by the lack of adequate infrastructure. A major problem facing China is that its communications networks are inadequate and simply out of date. Without a modern and extensive telecommunications system, economic growth and modernisation will become increasingly difficult to achieve. From the point of view of global economic development, China's obsolete telecommunications system may act as a deterrent to inward investment and economic co-operation with other nations.

The History of Telecommunications Provision in China

It can be argued that the historical neglect of telecommunications has been due to two main reasons. Firstly, according to the central planners, telecommunications did not represent a force for production, in the same way as manufacturing industries did. Central planners decided what 'essentials' to produce to meet the needs of the workers. However, the decision as to what constituted an 'essential' was a subjective one made by party apparatchiks. Telecommunications as a service did not appeal to the planners as much as heavy industry. A second reason was that the idea of hyperactive telephone networks with universal access did not appear attractive to China's leaders, who saw the free flow of information as a threat. In their view, the restriction of information to party members and state bodies was a way of maintaining control. For these reasons, all aspects of telecommunications were controlled by the Ministry of Post and Telecommunications (MPT). The ministry combined three functions under its supervision: policy and regulation, service provision and equipment manufacturing. The MPT monopoly power will not be eased substantially in the foreseeable future.

As a result of economic liberalisation and the opening of the economy to the outside world, China's leaders came to realise that the telecommunications infrastructure would have to be dramatically improved for the benefit of other sectors of the economy. Manufacturing, banking and tourism, and communications-intensive activities in general clearly required better communications services in order to achieve their full potential growth rates. In short, a modern telecommunications system was essential to sustain the level of economic growth that would allow China to realise itself as the economic giant that it yearned to become.

To this end, the MPT pursued the introduction of national digital telecommunications and data communications networks. Local post and telecommunications bureaux (PTBs) were granted increased financial autonomy and were allowed to retain part of their revenue for reinvestment. The MPT also encouraged the PTBs to seek investment from local governments and other local interests. As a result, the percentages of total telecommunications investment raised by PTBs and local government increased rapidly. This trend has become even stronger in recent years as many provincial PTBs have invested huge sums in the modernisation of their switching and transmission facilities (Tan 1994, p. 178).

In the short term the MPT and PTBs have looked to cellular telephone technology to meet the demands of the business community. In comparison with fixed lines, it is possible for cellular telephone networks to be installed relatively quickly. Many businesses have been willing to pay the higher cellular prices where they require a telephone at almost any cost, i.e., their demand for telephony services has been highly price inelastic.

The State Council, China's parliament, in 1985 approved the seventh five year plan, which stated that telecommunications had become a national priority (Zita, cited in Ure 1994, p. 182(4)). As a result, the number of telephone lines grew at an annual average rate of 17 per cent between 1986 and 1990. In 1993, nearly 11 million office exchange lines were installed and almost 6 million new telephone subscribers were added (Zhu 1994, p. 19). By the end of 1993, the number of main lines totalled 17.33 million. However, this figure was equivalent to a line density of only 1.46 per cent. By contrast, the figure for the EC was over 40 lines per 100 population. China's leaders realise that there is still a long way to go. Official estimates claim that there will be 48 million telephone lines by the end of 1995 and 96 million by the year 2000 (Beijing Review 1993). This is equivalent to installing a national network the size of that owned by BT in the United Kingdom, every three years.

Modernisation, the Emerging Liberalised Environment and Foreign Participation

There has been an increase in the quality, as well as the quantity, of the telecommunications system. There are now only a handful of manual local exchanges remaining. By 1995, a digital trunk transmission network relying mainly on optical cable and linking large-and-medium sized cities across the country will have been installed (Zhu 1994, p. 19). Modernisation of the telecommunications system has enabled subscribers to be offered a number of services that many western customers take for granted, such as data communications, fax, radio paging, mobile phones as well as some value-added services, such as videophone, videotex and electronic mail that are not subject to any restriction on foreign provision.

The tremendous growth in Chinese telecommunications has opened up a huge market to foreign manufacturers of telecommunications equipment. According to William Warwick, chairman and chief executive of AT & T China:

China will, in 1994 or 1995, be the largest single market in the world for telecommunications infrastructure equipment . . . It's going to be the largest market for the next 30 years at least - maybe 40. (Clifford 1994, p. 48)

China decided on a programme of importing foreign technology for several reasons. Firstly, China's indigenous industry would be unable to meet the demand for equipment on its own. The second reason was one of speed. By importing technology 'off the shelf', coupled with the transfer of skills through training, Chinese industry might begin production and export much more quickly (Warwick 1994, p. 266). An additional consideration was that overseas investors would bring an influx of much-needed foreign capital.

Almost all the major international equipment suppliers (Alcatel, AT & T, Northern Telecom, Motorola, etc.) have representative offices in Beijing. They are involved in every aspect of telecommunication systems, from switching systems, transmission equipment and terminals, to components and materials. Some of these firms directly sell their products and transfer technology and know-how. Others set up joint ventures or wholly-owned manufacturing ventures, or indeed both. (Ure 1994, p. 180).

The rapid expansion in the domestic production of telecommunications equipment will save China foreign exchange, as currently most equipment has to be imported. China has vigorously pursued a policy of insisting that foreign equipment vendors also undertake local manufacturing of key components, on a joint venture basis. However, recently wholly owned subsidiaries have also been encouraged (Ure 1994, pp. 186 et seq.). The major equipment manufacturers are more than willing to transfer technology and skills to China in exchange for business. The foreign investors offer everything from network planning and training to after-sales support and financing (Clifford 1994, p. 48). Many of these firms have worldwide portfolios of business areas that encompass telecommunications operation. These multinationals would naturally be the first to be interested in providing this service in China.

Certain problems remain for foreign investors and equipment vendors looking to profit from China's plans to develop its infrastructure rapidly. Among these are bureaucratic turf wars, industrial protectionism, funding constraints, and political uncertainty in the run-up to the post-Deng era. What is more, much of the current infrastructure boom still goes on in a legal and regulatory vacuum. Contrary to industry expectation, for instance, the government has lately let it be known that the long-awaited telecommunications law will not after all be published in the foreseeable future (Far Eastern Economic Review 1994, p. 48).

While the situation in the telecommunications equipment market is complicated, the telecommunications services environment exceeds even this. In terms of market dominance, the MPT still operates as a monopoly in the provision of services. However, a coalition of interests has developed to challenge the current monopoly, by pushing for a more competitive environment in telecommunications. This coalition includes:

* Other state bodies who wish to share in the lucrative telecommunications and information technology markets currently monopolised by MPT. These include ministries with private networks, and state organisation at the central and provincial levels, and the interests of enterprising managers lower down the ladder.

* Large customers such as state enterprises and private commercial organisations who believe that more choice will lead to better services.

* Foreign companies which are looking for investment opportunities

In 1993, the government finally gave in to political pressure and granted permission for a second national telecommunications network operated by Lian Tong (or Unicom), a joint venture between the Ministry of Power, the Ministry of Railways and the Ministry of Electronic Industries.(5) Lian Tong announced that it would offer voice and fax services along the private networks of its joint venture ministries. In addition, by interconnecting to the local networks of PTBs, Lian Tong's second network will offer additional capacity at that level as well (Economist Intelligence Unit 1993, pp. 1-2).

In addition, the increased power of the local PTBs and the distance, both physical and financial, between the MPT in Beijing and the provincial PTBs is making it difficult for the MPT to maintain its exclusive hold on the sector (Economist Intelligence Unit 1993, pp. 1-2). The growing financial autonomy of the PTBs since the late 1980s has led to closer cooperation with provincial governments and provincial-level interest groups, at the expense of their relationship with the MPT. This growing gap has led the PTBs to make their own arrangements with local private networks. PTBs have been prepared to enter joint ventures with non-PTB bodies (which increasingly included Hong Kong companies). In effect, local PTBs and provincial governments have allowed foreign direct investment into China's mobile telecommunications networks.

Despite this, officially, foreign investors are still barred from the telecommunications services sector. The MPT has continuously reiterated its position that 'China will not allow any individuals, organisations or companies outside the mainland to manage its public and private networks' wire or wireless communications services (China Daily 1993). This is driven by the reluctance of the MPT to share the lucrative domestic telecommunications market, as well as by China's leaders' concerns over sovereignty and security. However, it remains a grey area in Chinese administrative law whether the provincial PTBs and provincial governments do or do not have the authority to authorise foreign direct investment (Ure 1994, pp. 188-199).

What cannot be refuted is that the involvement of local government and interest groups has increased the power of local PTBs. Increased financial and technical cooperation between the PTBs and local groups has led to the joint operation of new services. According to Tan (1994), PTBs will become independent local companies striving for maximum profits within their territories. Such a development may well speed up moves to split the MPT in two. In common with reforms in other countries, it would be expected that one part will regulate the industry, the other will provide services.

The Theory of International Business Decision-making Strategy and the Telecommunications Industry

Implications for international business strategy flow from the information-intensive and service sector nature of telecommunications operations. In telecommunications services, multiplant economies arise from two leading sources:

(i) The existence of knowledge-based scale economies. These generate an incentive to spread the fixed costs incurred in the creation of firm-specific absolute advantages, e.g., the outcome of research and development expenditure.

(ii) The creation of internal markets to remove externalities between plants in different locations, e.g., firm economies in the exploitation of the mutual dependence of sales between different markets.

The first point is that the public good nature of knowledge enables it to be transferred internationally at low marginal cost and its joint input characteristics allow it to be used in a number of locations simultaneously. The implications of this for international business strategy have been understood since the work of Hymer (1960): that firms in knowledge-intensive industries will tend to be internationally oriented and, where the costs of employing external markets exceed the costs of internal markets, multinational operations will emerge in preference to international contractual activity (Buckley and Casson 1976).

Theory would suggest that the cultural differences between foreign firms and the host economy, and the regulatory and legal uncertainty in China, should strongly favour internalised forms of operation, in order to attenuate uncertainty. However, because direct services provision is not currently an option for incoming firms, a relationship-building form of entry mode is appropriate. Establishing such a local presence is not by any means a radical form of market entry, yet its importance, particularly in emerging markets, is understated in the mainstream international business literature.

The second source of economies of multiplant operation arises when there is strong system interdependency, i. e., of network operation. This is to be expected when reputation for quality is expected by the customer (Casson 1982). The upshot for telecommunications services is a pressure in favour of the emergency of multinational service providers with strong reputations for the supply of a range of reliable, high-quality services that are offered in horizontally and vertically differentiated forms. The recent generation of such firms internationally, either by organic growth or through acquisition or alliances, has been a notable feature of the industry. The effect of this for a country such as China is that, in the absence of adequate laws and regulations to prevent it, much of the most profitable activity within the economy might well be accounted for by foreign entrants. The position of the Chinese government can be understood partly in terms of this perceived threat.

The service-sector aspects of telecommunications services also bears strongly on internationalisation strategy. Research on the contrasts between manufacturing and service sector industries that suggests that services are more prone to multinational production, principally because of the need for supply and demand to be in greater proximity in order to reduce costs. In the case of China's market, even for manufacturing firms the absolute size of the domestic market is such that production within China is likely to be efficient relatively early in the process of internationalisation.

In manufacturing industry, exporting is typically a practical method of foreign market servicing especially in the early stages of market development, while in many services the exporting phase is often very short and of high cost. This results especially from the need for the temporary movement of factors of production, or customers between countries.

However, in capital-intensive services such as telecommunications, there is a further layer of special considerations. The infrastructural nature of the industry means that exporting as a phase of international market servicing, to all intents and purposes, does not exist. To use the terminology of Boddewyn, Halbrich and Perry (1986) telecommunications services exemplify a 'location bound service', at least within the geographical area being served. For this same reason, Enderwick (1986) points out that service industries display a higher degree of geographical concentration than many other activities. This is largely because services, especially business services, naturally follow the location of client manufacturing activities. Equally, the demand for final services will also be strongly linked to household income. In the context of trade and location theory, the comparative advantage in production of most of the value-added in such activities lies within the market to be served. Internationalisation in the telecommunications industry therefore necessarily implies full-bodied local production, which-will be concentrated in the centres of economic activity.

The Implications for Telecommunications Firms' Strategy in China

The standard international business literature suggests that firms have to take the foreign market environment as given, and therefore adjust their foreign market servicing strategy in the light of the conditions they face. In contrast, the political science literature places emphasis on the interplay between firms and local interest groups, and on the importance of firms' presence in target markets for the successful lobbying of government and government bodies to influence favourable outcomes. This aspect of the presence effect is an especially important consideration in markets where regulations or foreign investment laws are either absent, not implemented, or are in the process of being worked out. Indeed, it would otherwise be very difficult to explain the presence of multinational firms in a market where the existing official government position on foreign investment is prohibitive.

In practice, firms must enter such environments when the potential rewards are substantial enough.(6) In this sense, uncertainty is not a given. The management of the foreign environment and the mitigation of uncertainty and risk is an integral part of international strategy. Its role becomes all the more critical in the presence of potential market liberalisation and regulatory voids, as uncertainty over competitors' actions add substantially to the firm's risk. It behoves any foreign investor at least to cultivate a close relationship with government and its representatives, in order to gain information on policy changes at first hand, and preferably prior to wider public announcement. The management of uncertainty by the firm can further extend to the level of seeking to influence the evolution of official positions, regulations and laws, either collectively or individually - in the hope of greater liberalisation.

Worldwide, telecommunications services have customarily been subject to high degrees of state control (Kamall 1996). The effect of intervention and regulation in services has generally been an increased recourse to alternatives to FDI, such as international non-equity arrangements. The provisions for the handling of international telephone traffic that have traditionally existed between state telecommunications suppliers have reflected the historically high level of domestic protection. It is only relatively recently that it has become possible to entertain the existence of truly multinational, equity-based, supply in telecommunications which is integrated between countries and within firms.

The arguments for intervention and the regulation of both domestic and international services in general are founded on the notion of some form of alleged market imperfection or failure, often in respect of imperfect information over the quality and standard of supply. In the case of China the issue is also a political one, deriving from the strong preferences of the government, as noted earlier. In a climate of actual or potential economic liberalisation, the incentives to enter telecommunications markets for relationship-building are especially acute.

The incidence of regulation in the context of the liberalising Chinese economy is a special case of the antagonism between the needs of the business community and economic development, and the preferences of the government. The government desires economic development, and therefore the inflow of foreign capital and technology. While the natural tendency of the telecommunications industry might be towards multinational production, this is clearly not entertainable in the normal way in China, both because of the desire to avoid excessive economic dependence and for political motives. Political and other non-economic arguments are invoked in justification of measures to limit foreign participation, in order that effective control remains within the grasp of the government, although hopefully without compromising the economic benefits of foreign participation. The vast size of the Chinese economy means that the bargaining power in this game is very much in the favour of the Chinese government. A smaller host country would not enjoy such strategic advantages.

Because in the service sector there is a close correlation between the standard of the service and the underlying acceptability and reputation of the supplier, and because services are experience goods, the quality of supply can best be maintained through regulating the entry of firms into the industry. Acknowledging the importance of acceptability to the government, this argument applies with particular force to telecommunications services. In the absence of a coherent regulatory framework, the track record of firms as self-regulators assumes an overwhelming importance.

A corollary of this argument is that service providers operating under these conditions will experience extensive economies of scope. These are a function of the spread of a firm's activities rather than their scale, and derive from interdependency between assets in different activities and are coupled with economies of the firm. There classic sources of such economies in the service sector: those associated with large size, advantages of risk spreading and arbitrage; where information about buyers and their wants can be reused to sell a number of products; where assets have multiple uses in different activities. The reputation of the firm itself is generates scope economies employed in the sale of a wide range of differentiated service products. In telecommunications provision this applies with particular force.

In the western economies where liberalisation has progressed the furthest, the growth of multinational telecommunications service firms has been dramatic. The advantages conferred by the experience and reputation of the firm as a differentiated service provider at competitive rates has generated multinationals, partly as a solution to the problem of imperfect buyer information. Often this has been through joint ventures and strategic alliances, which speed up market entry when competitiveness is a function of an early presence. It is in service industries that the potential for the growth of multinational enterprise is the greatest.

Telecommunications firms seeking to enter the Chinese market must therefore put a premium on establishing a clear commitment. This commitment at the very least should be in the form of a representative office, but is best signalled by investment in some local production facilities. It is crucial to fix a reputation as a good citizen with the Chinese authorities, and to initiate the cultivation of guanxi - close personal connections or relations (see, e.g., Child and Lu 1996, p. 4). As has been argued, service sector industries tend to be among the most protected because, by their nature, they are most likely to satisfy candidacy for regulation. However, early entrants tend naturally to enjoy local market dominance and a key role in shaping future developments, which can work very much to their strategic advantage. Regulation in services is especially susceptible to lobbying by producers' interest groups. It is well known that the erection of non tariff barriers to trade and investment can be disguised as the maintenance of standards.

Often, even in the West, there is a natural tendency for standards to be policed by existing suppliers, on the argument that they possess the necessary qualifications to judge and advise on the competence of potential entrants. However, even where the domestic suppliers' role is formally limited to the giving advice, the evolution of regulations is always susceptible to lobbying. While telecommunications services firms may be entering the Chinese market via what might be described as alternative routes to FDI, there is every reason to believe that this strategy could lead to multinational operation in the longer term. Firms have every reason to play a long game, and to nurture mutually beneficial relations with Chinese government interests.

Regional Development of the Chinese Economy

The foregoing discussion suggests that the growth of demand for telecommunications in China should exhibit a regional pattern, linked to the pattern of business and economic growth. In pursuit of this, it is possible to identify the regions of most rapid development. Table 2 presents a breakdown of the rate of growth of national income per capita by location, for recent years.(7) The apparent economic impact of the aftermath of the events of 1989 is a compelling feature of the data, accounting for a substantial deviation below trend for 1989-1990 and, to a certain extent, 1991. Certainly, the high rates of growth attest to rapid development, but at the same time the range of growth rates is quite wide, from 26 per cent in Jiangsu down to one per cent in Tibet, in 1991. The rates of growth are nevertheless generally high, although variable.

Table 3 sets out some basic information on the development of telecommunications service facilities in the form of telephones, at the national and rural levels. These data show both how impressive growth rates have been but, at the same time, how far there is yet to go. Improving the telecommunications infrastructure a quarter of the way to Western standards would require vast capital sums which could not possibly be financed from within the Chinese economy. Foreign capital, one way or another is essential for the raising of telecommunications provision.

By the end of 1993 telephone penetration was just over 2 per cent of population (Table 3). In contrast, the average penetration in the OECD economies stood at 43 per hundred persons, while that in Eastern Europe was 14.3 per cent. China aims to secure an outlay of Yuan 450 billion by the end of the twentieth century in the drive to reach penetration levels of 8 to 10 per cent. Some US $ 7 billion of foreign capital is sought in order to achieve this. This would involve an absolute increase in the total number of lines from the current 40 million to 110 million by the year 2000 (Financial Times 1995). The figures therefore testify to the enormous importance of foreign participation for the Chinese economy, and therefore of the market opportunities facing European firms and their competitors.

At the regional level, the annual percentage growth rates in telephone provision have accelerated in the case of almost every region (Table 4). Naturally, these often spectacular rates are not infrequently the result of starting from a very low base indeed. Nevertheless, the picture emerges of a widespread takeoff and, because of the nature of the industry, it is essentially a matter of network growth which encompasses most of the economy.

[TABULAR DATA FOR TABLE 2 OMITTED]

Foreign Direct Investment into China

While there are no detailed published statistics on the inward FDI telecommunications activities per se, the growth of inward investment can be employed as a good indicator of the likely concentrations of demand for telecommunications services. Accordingly, the entry of telecommunications firms into China should also exhibit a regional pattern, linked to the pattern of business and economic growth.

[TABULAR DATA FOR TABLE 3 OMITTED]

[TABULAR DATA FOR TABLE 4 OMITTED]

[TABULAR DATA FOR TABLE 5 OMITTED]

[TABULAR DATA FOR TABLE 6 OMITTED]

International business theory suggests that initial entry by foreign firms into liberalising markets is most strongly related market size, rather than to market growth (Clegg 1996). The initial choice of mode in terms of the foreign market servicing strategy (FMSS) is most influenced by the size of market, while the switching from one mode to another is governed by the growth of the market.(8) As argued above, in the case of the Chinese economy, the size and strategic importance of the internal economy indicates a FMSS based on local production; if not foreign direct investment then some alternative, collaborative, mode of participation.

From an overview of Tables 5 and 6 it is evident that the distribution of aggregate inward FDI flows is concentrated in key regions, and that the rate of growth of FDI is also geographically focused. The clear leader in the annual influx of aggregate FDI has been Guangdong, which has acted as a magnet for foreign activity, with almost half of inflows in 1985, and just over a quarter in 1993. Other significant growth poles have included Beijing and Fujian. The annual changes in flows assumes a negative sign from time to time for particular regions. This in itself is not that significant, as inward investments are naturally lumpy, and it is common for large increases in inward FDI to be followed by falls. As higher equilibrium levels of inward FDI are attained, smoother growth rates tend to become the norm. The importance of such inward FDI growth for the development of telecoms in China is clearly the impact on the demand for communications by businesses. With rising household incomes, the demand for residential lines will inexorably rise.

The Key European Entrants into the Chinese Telecommunications Industry and Their Leading Foreign Rivals

Table 7 identifies the leading European entrants into the Chinese telecommunications market, and their rivals. For reasons already noted, the majority of foreign entrants are equipment manufacturers. The European manufacturers, Alcatel, Ericsson and Siemens have been as successful as their non-European rivals in entering the Chinese market. All the manufacturing companies have opted for joint ventures as the preferred mode of entry, but one non-European firm, Northern Telecom, has also chosen to supply additional services through formal contracts. An overview of the participants reveals that the activities in which the most intense activity is underway are mobile and cellular telephony, fibre optic construction and switching. The low cost of erecting cellular towers relative to fixed lines is recognised to be a crucial reason for the choice of this form of network in developing countries. This brings telephony to users who might otherwise not be covered so quickly, or at all. Despite the establishment of local manufacturing facilities, a great deal of telecommunications equipment is still imported. However, on the evidence of foreign firms' participation, the tendency must clearly be towards import substitution. This will meet the Chinese government's priority of the inward transfer of technology and the need to reduce the demands on scarce foreign exchange.

Despite the official ban on the foreign operation of a public telecommunication network, there are a number of manufacturing and service-sector firms with a presence in China. Table 7 suggests that non-European firms have been more successful than European firms in exploiting the loopholes in the vague regulatory framework. For example, Singapore Telecom has signed a memorandum to form a joint venture with a local partner to finance the construction of a network in Shanghai. The network will be operated by Lian Tong under a cooperative agreement with Singapore Telecom's local partner. In return Lian Tong will repay the joint venture's investment over a fixed period, and subsequently share a portion of future income with the joint venture (Ingelbrecht 1995). In effect, Singapore Telecom earns revenue from the operation of a Chinese telecommunications network without owing a formal stake in the venture.

[TABULAR DATA FOR TABLE 7 OMITTED]

Of the European telecommunications services frim, BT would appear to have been the most active in providing value-added services to business customers. However, it has been suggested to the authors that other European telecommunications services firms have established a presence in China, but only in the form of representative offices.

The immediate impression given by Table 7 is that US firms have been more successful in entering the Chinese market than firms of other nationalities. However, before success can be judged, it is necessary to have some grasp of the objectives of the firms concerned and of their strength of commitment to the market. In the years 1992 and 1993 many US telecommunications firms invested in China. Poor investment prospects in the US home market, contributed to by domestic regulation and anti-trust law, provided an incentive to venture into foreign markets that appeared to promise greater growth. Furthermore, many US firms may have entered the Chinese market in order to boast a company presence there, with a view to bolstering company image, and not primarily for reasons of intrinsic interest in China. Indeed, in a number of cases the amounts invested were actually small, but were just sufficient to benefit the international reputation of the investing firms.

Despite the size and potential of the Chinese market, multinationals' investment in China is part of a global decision, and is evaluated on a comparative basis. After some two to three years there is some evidence that certain US firms felt disappointed by the Chinese market. A case in point is Nynex, which withdrew senior management to redeploy them in more productive areas in the same region. Subsequent to further deregulation in the US market, it would appear that the relative attractiveness of China has waned, and US firms have actually expanded investment plans in their domestic market at the expense of investment plans outside the US. Not surprisingly, reductions in commitment to China tend to go unannounced, on account of rivalry between international competitors. Bureaucratic barriers and restrictions on foreign investment have lead some firms to reorientate towards the more mature economies or developing economies which do not pose these difficulties (Ingelbrecht 1995, p. 24).

Even so, in the midst of this, it is possible to identify instances of unequivocal commitment to the Chinese market. For instance, AT & T opened its first corporate representative office in Beijing in October 1985, and now has a China Business Unit (AT & T China) - a fact which distinguishes it from other telecommunications firms, and which points to the importance of firm-specific advantages of size.

While US competition has tended to retreat from China, European firms, in particular Deutsche Telekom and France Telecom and BT can be seen to occupy a stronger position. These firms benefit from domestic monopoly or dominant market positions and have substantial funds to invest abroad. However, it is possible that European firms, like US firms before them, may invest only token amounts in China, and may withdraw when full liberalisation in the European Union telecommunications market occurs, scheduled for 1st January 1998.

Conclusions

The inadequacy of the current legal and regulatory environment in China is largely the product of Chinese history and of the pace of economic change. Within a centrally-planned system, control via internal directives is clearly sufficient. However, any departure from this economic model immediately means confusion. The presence of firms and interest groups with declining allegiance, or no allegiance whatsoever, to central planning demands a well-constructed regulatory framework. As there is currently no such framework, nor the prospect of one, a coalition of interested parties has emerged, including incoming firms, profit-seeking state bodies, and large customers. Foreign firms' entry strategies have adapted to encompass the placing of pressure on the authorities, in concert with those other groups who stand to gain from market liberalisation.

The political uncertainty in the run up to the post-Deng era is compounded with the uncertainty caused by the non-publication of a telecommunications law. Additionally, there are uncertainties over issues of authority, such as whether the provincial PTBs and provincial governments have the power to authorise inward FDI in telecommunications. Worldwide, the telecommunications industry is no stranger to uncertainty, because liberalised and competitive structures are by no means complete, even in the developed economies. At the same time, the industry is one of great opportunity because of the secular growth in the demand for communications. In China, strategic company decisions have to be made that position the firm appropriately both for the present closed market and for the potential of a liberalised market in the future.

Unlike telecommunications liberalisation in most developed and developing countries, reform in China is being driven from the grass roots and from outside the MPT, not by central government decisions. Actors within China, such as other state bodies, large customers, as well as foreign firms, are challenging the current monopoly position of MPT. Instead of being transfixed by the current obstacles in China, foreign telecommunications firms have adapted their entry strategies. These firms' strategies have tended to be individualistic in nature rather than collective, in order to foster individual preferment. This is in good measure imposed by the need for close relations with those in authority in China. Only a limited number of firms can enjoy such close relationships, so collective representations are less appropriate and less effective.

The importance of proximity between supplier and customer is a distinctive feature of service sector activity. It is a standard consideration in the foreign market entry decision process, but becomes critical when government interests assume a crucial importance in local market preferences. Foreign firms that are potential service providers therefore pursue the maintenance of a good relationship with the MPT and local PTBs by offering advice or participating in joint ventures where possible.

Because the development goals of the Chinese government can only be realised with the participation of foreign capital, ultimately some route must emerge through which foreign firms can enter the market in a substantial fashion which affords them the requisite control over the assets they allocate to the Chinese market. Those firms which see the importance of relationship building and are able to demonstrate commitment, most probably those with access to substantial finance, are in the best position to adopt the required long-term strategy.

Notes

1 An internal directive does not have any status within the legal system of China. However, the legal and political system contrasts markedly from those of western countries, and such a directive is generally regarded as a provisional regulation or law.

2 The after effects of the Tian An Men Massacre of 4th June 1989 would appear to have impacted severely on the economy.

3 The difference between GNP and GDP, being the net property income from abroad reckoned into GNP, indicates the net status of the economy with respect to income-generated by assets owned abroad, and under foreign ownership, although in the case of China the accounting of this item is rather speculative.

4 Zita, K., Modernising China's Telecommunications.

5 There are some seventeen partners in total in the joint venture. However, the three named ministries are by far the dominant actors.

6 This is the concept of the compensating risk premium, familiar from the country risk analysis literature.

7 Data on national income are chosen here because these are considerably more complete than those on GDP broken down by region.

8 The underlying rationale for this is set out by Buckley and Casson (1981).

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Buckley, P. J., Casson, M. C., The Future of the Multinational Enterprise, London: Macmillan 1976.

Buckley, P. J., Casson, M. C., The Optimal Timing of a Foreign Direct Investment, Economic Journal, 91, 1981, pp. 75-87, reprinted in Buckley, P. J., Casson, M. C., The Economic Theory of the Multinational Enterprise, London: Macmillan 1985, pp. 98-112.

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Clegg, J., Investigating the Determinants of Service Sector Foreign Direct Investment, in Cox, H., Clegg, J., Ietto-Gillies, G. (eds.), The Growth of Global Business, London: Routledge 1993, pp. 85-104.

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Financial Times, Telecommunications in Business, 15 June, 1995.

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Kamall, S.S., Spicer's European Union Policy Briefings: Telecommunications, London: Longman 1996 (forthcoming).

Kaye, L., Long march from Chaos, Far Eastern Economic Review, 4 June, 1992, p. 54.

Statistical Yearbook of China, various years.

Tan, Z., Challenges to the MPT's Monopoly, Telecommunications Policy, 18, 3, April 1994, pp. 174-181.

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Wan, S., An overview of Telecommunications Planning in China, IEEE Communications Magazine, 31, 7, July 1993, pp. 18-19.

Warwick, W., A Review of AT & T's Business History in China: The Memorandum of Understanding in Context, Telecommunications Policy, 18, 3, April 1994, pp. 265-274.

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Zita, K., Modernizing Telecommunications in China, TE & M, 15 October, 1987, pp. 81-83.

Authors

Jeremy Clegg, Senior Lecturer in International Business, Centre for International Business, School of Business and Economic Studies, The University of Leeds, Leeds, U.K.

Syed Kamall, Economic and Social Research Council Management Teaching Fellow in European Business Management, Centre for International Business Research, School of Management, University of Bath, Bath, U.K.

Mary Leung, Postgraduate Research Student, Centre for International Business Research, School of Management, University of Bath, Bath, U.K.
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Title Annotation:International Business Theory: The Nature of the Firm and the Role of Management
Author:Clegg, Jeremy; Kamall, Syed; Leung, Mary
Publication:Management International Review
Date:Jan 1, 1996
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