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Technological Capabilities and International Production Strategy of Firms: The Case of Foreign Direct Investment in China.

In this paper, the author highlights the differing motives behind direct foreign investment (FDI) made by (1) large transnational corporations (TNCs) from industrial countries, and (2) small manufacturing firms from newly industrializing economies (NIEs). The basic premise is that TNCs that command sophisticated technologies wish to produce in China to exploit their technological advantages by gaining access to potentially substantial Chinese domestic markets. However, small firms from NIEs such as Hong Kong use more mundane technologies. They are more interested in using low cost inputs, such as labor and land in China, so that they can continue to export manufactured goods to third countries, thus avoiding rising input costs in their own domestic economies. The discussion is supported by the results of a survey and interviews with executives from both large TNCs and small NIE firms active in PRC.

In an effort to attract and retain internationally mobile factors, namely capital and technology from abroad, the Chinese government has promulgated since 1979 a number of laws and regulations concerning foreign investment. It has also provided policy incentives, such as tax deductions and domestic market access, to encourage and direct foreign direct investment (FDI) to priority sectors and to special economic zones (SEZs). In particular, the Chinese government has formulated special preferential policies to attract foreign firms that are willing to transfer advanced technology or have the ability to manufacture in China and to export abroad (Liu, 1995). As a result, the record of foreign investment since the adoption of the open door policy in 1979 has been quite impressive. From 1979 to 1998, a total of 322,149 FDI contracts were signed with an agreed investment of U.S. $572.3 billion. During this period, the actual investment was U.S. $265.6 billion (SSB, 1999).

In the foreign invested enterprises (FIEs) in the manufacturing sector, two distinct groups with totally different technological characteristics can be identified. The first group of FDI ventures consists of numerous small firms from the newly industrializing economies (NIEs) of East Asia and from Hong Kong in particular (Huang & Shirai, 1994; Eng & Lin, 1996; Hsieh, 1994; SSB, 1995: 598). According to the statistics, investment from Hong Kong accounts for more than half of the inward investment in China since the adoption of the open door policy (SSB, 1999). The second group mainly consists of subsidiaries set up by large TNCs based in developed countries. This kind of FIEs, in terms of number of ventures, account for only a small proportion of foreign firms operating in China. Nevertheless, they have become increasingly important in recent years (Wang, 1996).

The purpose of this paper is to analyze the relationship between firm-specific technological advantages and the FDI strategies of firms with different technological capabilities. Specifically, the aims of this paper are: [1] to identify and discuss the advantages for firms with different technological characteristics investing in China; and [2] to analyze how the technological characteristics of firms affect their FDI strategies enabling them to better exploit local resources, market potential and government policies in developing countries such as China. Because China has signed agreement with her major trading partners in the world including U.S. and EU, she will join the World Trade Organization in near future. This means China will further open to inter national investors. Therefore, the findings of this paper will throw light on the investment strategy of foreign firms trying to enter the China market.

A THEORETICAL FRAMEWORK FOR FOREIGN DIRECT INVESTMENT IN DEVELOPING COUNTRIES

In the literature, the analysis of FDI and international technology transfer into developing countries has been strongly influenced by theories developed to explain the activities of large transnational corporations (TNCs) based in developed countries (Chen, E., 1994). This is mainly because the TNCs of developed countries have played a dominant role in world foreign direct investment (Graham, 1995). The TNCs of developed countries produce and possess nearly all of the modern technology that is the most important advantage of TNCs in expanding their operations overseas (Dunning, 1988a; Casson, 1991; Chen, E., 1994). Because of the different nature of technology from conventional commodities, the behavior of TNCs in their international operations is normally analyzed on the basis of imperfect market competition and transaction costs economics (Caves, 1982; Dunning, 1988a; 1995).

In international production theory, the analysis of FDI focuses on the factors that represent incentive for TNCs to invest in developing countries (Caves, 1982; Dunning, 1988a; 1998). In Dunning's eclectic theory, for example, local factors that have a positive impact on the costs and market potentials of FDI ventures are identified and labeled as location-specific advantages (LSAs). These factors include natural resources, low labor costs, similarity in culture, preferential government policies, and market potential of host countries. When investing overseas, TNCs also have particular advantages that offset any disadvantages (such as the costs associated with distance in international production). As pointed by Dunning (1988b; 1995), these advantages can be classified into two categories. The first group of advantages (Oa) derives from proprietary advanced technologies, such as patented technology and know-how. The second group of advantages (Ot) derives from synergies such as vertical and horizontal integration, economies of scale and an internal financial market. Synergistic advantages result mainly from the large size of TNCs (Caves, 1982; Dunning, 1988; 1995; Table 1). According to this theory, TNCs internalize the process of technology transfer across borders through FDI, thus reducing the risk of leaking their Oa of proprietary technology to potential competitors and fully exploiting their Ot of synergistic advantages (Brouthers et al., 1996).

There are many researches that have investigated the reasons why TNCs from developed countries invest directly in developing countries focusing on Oa and Ot of multinationals (Kumar, 1994; Pan, 1997). Nevertheless, this kind of reasoning may not be appropriate to explain why small firms from NIEs, and firms from Hong Kong in particular, make such direct investments. First, these small firms normally do not own the advanced technology they use, if indeed they use any. In contrast to large TNCs, small firms tend to use standardized technology and general-purpose equipment (Yu, 1997; Amsden, 1997; Enright et al., 1997). Second, they are small in size as com pared with large TNCs and, therefore, have fewer and weaker synergistic ad vantages (Yu, 1997; Berger & Lester, 1997: 14). Third, because they are generally less technologically advanced, they do not enjoy the preferential policies formulated by the Chinese government to attract large TNCs from developed countries (UNCTC, 1988).

This paper attempts to extend the eclectic paradigm to explain foreign direct investment to developing countries made by small firms based in NIEs. The proposed framework is different from the original eclectic paradigm in two aspects. First, it explicitly differentiates the ownership advantages, especially technological capabilities of large TNCs from developed countries and small firms from NIEs. Second, it stresses the importance of host country government policies towards foreign direct investment. It argues that different technological capabilities will allow in vesting firms to exploit different location-specific advantages. Consequently, the differences in technology will lead to different foreign investment strategies of investing firms. Further, the role of host country government becomes increasingly important to foreign investors in recent years (Dunning, 1998). This is important for foreign direct investment since host country government policies are critical constraints only within which foreign investing firms can exploit their own technological capabilities.

According to resource-based theory (e.g., Penrose, 1959; Barney, 1991; Tsang 1997), a firm's capabilities are based on its resources and these resources can be categorized into three types: physical resources, human resources and organizational resources. Physical resources include tangible assets, such as equipment, plant, and inventories, as well as codified technology and brand name. Human resources include uncodified experience, skills, know-how, and personal relationships. Lastly, organizational resources include operational routine, the firm's culture, organizational structure, and firm's connections with other institutions.

For large TNCs, their technological assets are state of the art technology that is produced purposefully through heavy investment in R&D and is often embodied in capital goods and patented technology. As we have noted, this type of technology provides large TNCs with competitive advantages over their rivals. In sharp contrast to large TNCs, small firms from NIEs do not own 'strategic assets' in terms of physical resources (Kay, 1993: 64). They normally use standardized equipment and unskilled labor that can be readily acquired in the market. In other words, they tend to follow a low to medium technology strategy (Berger & Lester, 1997; Enright et al., 1997').

Nevertheless, small firms from NIEs do possess the other two types of re sources, that is, human resources and organizational resources. Their strategic assets are their skills in using standardized technology and experience in organizing labor intensive production. As argued by several scholars (Nelson, 1987; Pavitt, 1985; Reed & DeFillippi, 1990; and Lei, 1997), an important part of technology is differentiated, tacit, ever-changing and often location specific knowledge accumulated in practice that is as important. The small firms from NIEs and Hong Kong in particular have generally gained their skills and experience of using standardized and labor intensive technology through export-oriented production in the take-off period of NIEs (Eng, 1996; Yu, 1997). This kind of context-specific and flexible technological capability is deeply embedded in the routines and practice of small NIE firms and be comes the foundations of FDI strategy when they invest in China to prolong their export oriented business.

In the literature, a number of location-specific advantages (LSAs) have been identified (Dunning, 1988a; 1995; Coyne, 1995; UNCTC, 1992). These advantages include natural re sources, cheap land and labor costs and potential local markets, as well as the government policies of host countries. Because China is a very large developing country, it has abundant and cheap labor and land that are attractive to potential foreign investors (Wei, 1997). Like other developing countries, China uses various policy measures to attract foreign investment. The policy measures include tariffs on imported capital goods and inputs, tax incentives, foreign currency balance requirements, access to local market, technology transfer requirements, and access to local bank loans and local resources.

Talking about the government policy towards FDI in China, we should not treat the Chinese government as a monolith. Different economic agencies and governments at different levels have their own objectives. Within the general outline of preferential policies set up by the central government, local governments to a certain extent are given autonomy to formulate their own preferential treatment towards foreign investors. Generally speaking, governments at local levels focus more on economic growth and revenue increase in their jurisdictions when attracting foreign investment, while central government agencies, especially industrial ministries at central level pay much more attention on transferring technology and managerial skills from foreign investing firms.

Specifically, in addition to the general policy towards foreign direct investment the Chinese government has formulated measures to attract two types of FDI: FDI ventures using advanced technology and FDI ventures exporting most of their products (UNCTC, 1988; Wang, 1996). For the first type of FDI, the government uses the so-called market-for-technology policy to lure foreign firms to transfer advanced technology into China. Foreign firms using advanced technology are allowed to sell their products to local users through an import substitution scheme in addition to other preferential treatment. Export oriented FIEs, that is firms exporting more than 75% of their output, are given further taxation concessions plus other incentives such as priority to obtain bank loans and tariff exemption on imported materials (Wang, 1996). Such host government policies towards foreign investment are important to foreign investors, because they change the cost structure of investing firms (Guisinger, 1986).

The differing technological capabilities of these two groups of foreign in vesting firms mean that their investment strategies in developing countries will be different and the location-specific advantages (such as cheap local production inputs, local market access, and government policy measures) they are able to exploit will also be different. To achieve their specific FDI goals, they will choose those strategies that allow their technological capabilities to best fit the local conditions.

Technological capabilities as strategic assets of investing firms have considerable impacts on strategic considerations of firms' selection of entry mode (Hill et al., 1990). In China, the three common FDI entry modes are equity joint ventures (EJVs), co-operative joint ventures (CJVs) and wholly foreign owned subsidiaries (WFOs) (Pan, 1999). In terms of managerial control and of protection against infringement of property rights, WFOs may be the best choice of foreign investing firms, especially for TNCs that use advanced proprietary technological know-how as one of their most important ownership advantages. Nevertheless, in the transitional economy of China, especially in the early years of the open door policy, local partners are valuable and sometimes necessary for both TNCs and small firms. This is because foreign firms need local partners to help overcome business barriers and access local business networks and government supports.

Based on the above discussion, a general hypothesis can be stated as follows: Firms with different technological capabilities will aim at different location-specific advantages through different investment strategies. Specifically, it can be hypothesized that large TNCs from developed nations tend to be seeking market potentials in China and their investment is more likely to be capital intensive. Comparatively, it also can be hypothesized that small NIE firms tend to seek cheap production inputs of labor and land and their investment is more likely to be labor intensive when they establish their FDI ventures in China.

With state of the art technology, TNCs have the ability to produce differentiated products which host developing countries cannot make themselves. Therefore, it is likely that market entry is the main objective of TNCs when investing in developing countries, especially those countries, such as China, with a huge domestic market and entry barriers that prevent direct exports by TNCs. By producing in host developing countries, investing TNCs not only enjoy all the benefits of producing locally, but also have a better position than their rival TNCs that have not established local production facilities. Indeed, large TNCs do produce in developing countries for exports as well. Nevertheless, in a developing country with a vast but protected domestic market like China, the primary objective of large TNCs is market access. In this case, cheap production inputs of unskilled labor and land are not the most important considerations in their inter national production strategy, since the technology large TNCs use is normally both capital-intensive and high-skill labor intensive.

Because of their low to medium technology strategy, firms from NIEs and from Hong Kong in particular tend to be seeking cost reduction when they invest in China. The major advantage of these small firms lies in using standardized, labor intensive, and sometime second hand production facilities to efficiently produce goods for export (Eng, 1996). Establishing production units in China and maintaining marketing and designing functions at parent companies allow them to internalize and better utilize these special skills. Therefore, exploitation of cheap labor and land to reduce their production costs is the main motive of small firms from NIEs when they establish production facilities in their neighboring regions. By doing this, they are able to maintain their competitiveness in the world market, which has been gradually eroded because of the increase of labor and land costs at home in the past two decades. Their technology is not very advanced and their products are not very sophisticated. There fore, they are unable to enjoy the benefits of market-for-technology policy. If they aim at the local market, they will face intensive competition from local producers since their products are not very difficult to be imitated. On the other hand, they have accumulated substantial experience in servicing the markets of developed countries. As a result, entering the local markets of developing countries is not the priority in their foreign investment strategy.

Among FIEs from NIEs, a very large proportion are set up by Hong Kong firms that are different in two major aspects from firms from other East Asian NIEs, such as Taiwan, Singapore and Thailand. First, Hong Kong firms enjoy a unique advantage of being very close to China. In fact, Hong Kong is adjacent to Guangdong Province of China, where most Hong Kong manufacturing firms have relocated their production facilities. Geographical proximity provides Hong Kong firms with benefits of low transportation costs and short delivery time when producing in China for exports via Hong Kong. Second, more than 95% of Hong Kong population are ethnic Chinese mainly migrating from Guangdong Province. Similarity in culture and dialect means that it is easier for Hong Kong investors to manage local labor force and to establish local connections. Many FIEs are established by firms from other NIEs that are also controlled by ethnic Chinese, such as Taiwanese and Singaporean firms. Nevertheless, because of historical reasons, they are less familiar with Mainland China than Hong Kong firms. Because of these differences, firms from other NIEs may behave differently from Hong Kong firms, although they are similar in technological capabilities and firm size.

RESEARCH METHOD

We now discuss an empirical study designed to explore how firms with different technological and synergistic advantages try to better exploit location-specific advantages using their firm-specific capabilities. A questionnaire survey followed by a number of interviews is used to gather data relevant to the theory advanced above. The questionnaire consists of three parts. The first part elicits background information on the foreign invested enterprise (FIE), such as investment, turn over, exports, profitability, number of employees, and its parent firm(s). The second part deals with its technological activities, such as technology transfer from its parent firm(s) to the FIE. The third part aims to identify the important factors affecting investment decision and performance of foreign invested firms (FIEs).

In the third part of the questionnaire, there are two groups of questions. The first group of questions is about the technological and synergistic advantages of sample firms and the second group of questions is about the location specific advantages sample firms were seeking when they invested in China. Respondents are asked to indicate the importance of these items on a 5 point Likert scale with 5 representing the most important factor and 1 the least important one.

Because most information in the first part of the questionnaire can be found in the relevant databases, the questionnaire sent to the sample firms focuses mainly on the last two parts. The questionnaire is written in both Chinese and English by the author. To minimize the possible misunderstanding of the respondents, both versions of questionnaire were tested through personal interviews with top managers of several FIEs before the survey was mailed. When mailing the survey, both English and Chinese versions of the questionnaire were sent to the sample firms. (Many managers representing foreign parties are local Chinese because of the localization of managerial personnel in FIEs in recent years.)

The purpose of this research is to compare FDI by large TNCs and by small firms of NIEs. As discussed earlier, Hong Kong firms may behave differently from firms from other East Asian NIEs. Therefore, the survey consisted of three groups of FIEs: subsidiaries of large TNCs; FIEs established by Hong Kong firms and that by firms from other East Asian NIEs. The aim of dealing with the last two groups of firms separately was to gauge the impacts of the differences between Hong Kong firms and firms from other East Asian NIEs on their FDI strategies. For large TNCs, the sample firms were selected from the data bank established by the Institute of Foreign Trade and Economic Relations under the Ministry of Foreign Trade and Economic Cooperation of China (MOFTEC). The Institute has already conducted a series of research projects on large TNCs operating in China (Wang, 1996). There were several criteria for those sample firms. First, they were subsidiaries of large TNCs that are among the 500 largest firms on the list of Fortune magazine. According to the Institute, there are more than three hundred firms among the largest 500 companies in the world which have set up FIEs in China. Altogether, more than 2,000 FIEs have been set up in this way. Second, the sample FIEs were chosen from the manufacturing sector. Finally, their parent firms were from developed countries, specifically from OECD countries. With the help of the Institute, 220 for eign invested firms (FIEs) throughout the country were chosen to receive the questionnaires. A total of 41 usable questionnaires were received, representing a response rate of 18.6%.

Four hundred FIEs set up by Hong Kong firms and two hundred FDI ventures established by firms from other East Asian NIEs were randomly selected from the database CD-ROM of 1996 Official Census of PRC Industrial Establishments. This database is published by China Statistics Consultants (BJ) Limited under the State Statistic Bureau of China (SSB). In this survey, other NIEs included Taiwan, Singapore, South Korea, and Thailand. Fifty-eight usable questionnaires from Hong Kong FIEs and thirty-four from FIEs of other NIE firms were received, representing response rates of 14.5% and 17%, respectively. The sample FIEs of Hong Kong were mainly located in Guangdong province that was the first area opened to foreign investors. More than 70% of Hong Kong firms in the manufacturing sector has relocated their production facilities there. As a result, more than 4 million people in Guangdong province are now working for Hong Kong FIEs and 90% of Hong Kong's imports from China are re-exported to the international market(Cheung, 1997; Wu, 1995; Thoburn et al., 1990; Zhang, 1996). The sample FIEs of other NIE firms were located throughout the east coastal area of China, mainly in the 14 open cities and Guangdong province.

The information about the three groups of FIEs will be analyzed in a way to figure out the differences in FDI considerations of the sample firms. Specifically, the data obtained in the first two parts of the questionnaire will be tabulated to compare the differences of the three groups of firms in their industry, firm size, entry mode and technological activities. The data of the third part of the questionnaire will be analyzed statistically with the technique of one way ANOVA plus multiple range tests to see if there are significant differences in technological capabilities and synergistic advantages of the sample firms and in location-specific advantages they were seeking when investing in China.

RESULTS AND DISCUSSION

Profile of the Sample Firms

The major sectors in which Hong Kong firms invest include textile and garments, toys, electronics and electrical goods, and watches (see Table 1). These sectors are labor intensive industries that produce Hong Kong's traditional export goods. The bias of Hong Kong FDI towards these industries is also reported by other studies (Thoburn et al., 1990; Cheung, 1997). Comparatively, FIEs of other NIEs are also mainly in labor intensive sectors. The noticeable difference is that relatively more FIEs of other NIEs are in food and beverage, and leather and footwear sectors and fewer in textile and garment sector. In contrast with small firms from NIEs, FIEs set up by large TNCs concentrate on sectors like chemical, pharmaceutical, machinery, telecommunication equipment and electronic and electrical products. Further, it is notice able that none of the sample FIEs of TNCs is in toys, textile and garment, watches and leather goods sectors, while there are no FDI ventures of small NIE firms in telecommunication, pharmaceutical and automobile sectors.

Table 2 shows the basic information of sample firms. On average, the sample FIEs of TNCs are larger than that established by firms from NIEs, in terms of investment, employee number, and annual revenue. Further, the subsidiaries of TNCs tend to be more capital intensive and to export much less. Their average capital to labor ratio is nearly 5 times higher than that of East Asian FIEs and on average they export only a little bit more than 10% of their output. In general, Hong Kong FIEs are not different very much compared with FDI ventures of other NIEs, except Hong Kong firms export relatively more than firms of other East Asian NIEs.

Table 3 shows the types of enterprise control structure of the sample FIEs that is also called entry mode of FDI (Bell, 1996; Pan, 1997), and their local partners if they are joint ventures. FIEs of TNCs tend to be joint ventures (JVs). The possible explanation is that to gain access to local market that is very different from markets in other countries, TNCs need to utilize business network of local partners especially before the mid 1990s when the constraints of Chinese government on the operations of TNCs were still not relaxed. Towards the end of the 1990s, more TNCs began to establish wholly foreign owned holding companies to co-ordinate the operations of their subsidiary manufacturing firms most of that still remain joint venture status. More noticeably, TNCs are more likely to co-operate with state owned enterprises (SOEs), especially with large SOEs under the control of central industrial ministries. As far as entry mode is concerned, firms from other NIEs tend to be similar with large TNCs. By contrast, Hong Kong firms tend to set up relatively more wholly foreign owned (WFO) firms. There are three possible reasons. First, the cultural distance for Hong Kong firms operating in their neighboring regions is not as large as that for both FIEs from other East Asian NIEs and TNCs from developed countries. Second, Hong Kong firms entered China earlier and as a result they have gained substantial local experiences. Finally, because the operations of Hong Kong firms are export oriented, the need for local business networks is not as strong as that of TNCs. When they invest in JVs, Hong Kong firms are more likely to co operate with small and sometimes non state owned firms, such as township and village enterprises (TVEs). Typically, small local firms belong to the local community and are under the control of local governments at county and town ship levels. These local firms are usually small in size in terms of employment and turnover. They are also much less technologically advanced than large SOEs. Nevertheless, they are important revenue sources for local governments (Byrd & Lin, 1990; Xu, 1995). In the follow up interviews, the author also found that local governments in Guangdong province were more flexible than in other areas where local governments were reluctant to approve the establishment of wholly foreign owned companies if the requirements set up by the central government were not met.

Table 4 shows the technology transfer activities of sample FIEs. Among the 58 Hong Kong FIEs, there are only 21 firms that have conducted formal technology transfer transactions with their foreign parent companies. Of the 21 FIEs, only 7 firms have obtained patented technology. Technology transfer activities of other 14 FIEs involve technological know-how and brand name licensing, and technical services from their parent companies. For sample FIEs of other NIEs, the proportion of sample firms that have conducted formal technology transfer activities is higher than Hong Kong FIEs. In particular, more of them received patented technology, brand name licensing and technological services from their foreign parent companies. This is probably because of the fact that FIEs from other East Asian NIEs are late comers and the restrictions of Chinese government on local market entry are less strict than before. The follow up interviews also show that many Taiwanese FIEs in food industry target on the China market. Brand name licensing and technological services allow them to build a strong position in the local market. As far as the sample FIEs of TNCs are concerned, all of them have formal technology transfer arrangements with their parent companies. All of the sample firms have received technological know-how and technological services and ninety percentage of them have obtained patented technology from their parent companies. In addition, a very large proportion of them has brand name licensing agreement with foreign investors. Although the entry mode of TNCs is mainly joint ventures, they still transferred advanced technology to their subsidiaries in China. The follow up inter views with managers of FIEs and with managers from Chinese partner firms show that there are several reasons for TNCs to do so. First, the market-for technology policy of the central government is a strong incentive for TNCs to transfer technology to their FIEs. Second, the technology they transferred to China consists of mainly product technology and processing technology, rather than their core technology in R&D. Third, the transferred technology is not the most updated. In other words, there are many similar technologies in international market. If the TNC concerned had not transferred the technology, it would have lost the opportunity to enter the China market, while Chinese government could be easily find other suppliers.

Advantages and Motivations of Foreign Investing Firms

To find the differences in the respective technological and synergistic advantages of Hong Kong firms, firms from other NIEs and large TNCs from developed countries, a series of questions about how important the advantages of foreign parent firms to the success of FIEs in China was included in the questionnaire. The importance of these advantages is measured on a 5-point Likert scale that ranges from extremely important (5) to not important at all (1). The data for the three groups of respondents are statistically analyzed with the technique of one way ANOVA plus multiple range tests. The results shown in Table 5 indicate a significant difference in the opinion of the sample firms on how important their advantages are. Generally speaking, FIEs of TNCs give more weight on R&D capabilities, patented advanced technology, highly differentiated products, globally famous brand names, and large firm size than FIEs from both Hong Kong and other NIEs do. Firms from Hong Kong and other NIEs tend to believe that flexible management and quick response to market changes, experience in operating in China, local connection and familiarity with-local environment are more important.

Although Hong Kong firms and firms from other East Asian NIEs are similar in their opinion on the importance of their firm specific advantages, the latter give more marks on R&D capabilities and famous brand names. The follow up interviews revealed that the difference between them was because of the fact that Taiwanese firms in the sample believed that their brand names helped them to successfully enter the China market and Korean firms thought that their advanced technology played an important role in their China operations.

According to the Dunning's theory (Dunning, 1988a), firms will invest abroad if the host country offers certain LSAs for the investing firms to exploit with their ownership advantages. To find whether there is a difference in LSAs of FDI made by large TNCs and small firms from NIEs, a number of questions were included in the questionnaire. Respondents were asked to indicate the importance of various LSAs they were seeking on a 5-point Likert scale with 1 denoting not important at all and 5 extremely important. The results are shown in Table 6.

Table 6 shows differences among these three groups of FIEs on what are the most important location-specific advantages they are trying to exploit when investing in China. All respondents rated cheap labor and land highly. Nevertheless, Hong Kong firms and firms from other NIEs gave these two LSAs higher rankings than the large TNCs did. Cultural similarity and geographic proximity were also more important to firms from NIEs than to large TNCs, although the scores given by Hong Kong firms to these two items were much higher than by firms from other NIEs. For firms from other NIEs as well as large TNCs, local market demand and market potentials for their products were major LSAs. This means that both large TNCs from developed countries and firms from other NIEs were to penetrate China market with their products through FDI. The difference between these two groups of firms was that with capital intensive technology large TNCs tended to rate the factors of cheap labor and land costs lower than firms from other NIEs did because the latter normally used mature and labor intensive technology. Related to this, the avail ability of raw materials supply was also ranked higher by these two groups of respondents. All sample firms thought that the government policy towards FDI in general was important. Nevertheless, TNCs gave higher scores to incentives for FDI with advanced technology and to co-operation from central ministries, while Hong Kong firms believed that incentives to encourage exports and co operation of governments at local levels were important. As far as the specific government policies towards advanced and export oriented FDI are concerned, the scores given by firms from other East Asian NIEs are between that given by large TNCs and Hong Kong firms with a difference significant statistically. Firms from other NIEs thought that the supports from governments at local level were more important.

As will be discussed in the following section, the substantial differences between firms of NIEs (Hong Kong and other NIEs) and large TNCs lead to different FDI strategies for them investing in China. For large TNCs, codified advanced technology and highly differentiated and sophisticated products are their major technological advantages. They use their proprietary advanced technology as the key to fully exploit the preferential treatments of the Chinese government for technologically advanced FDI and open the otherwise protected local market (UNCTC, 1988; Wang, 1996). Patented technology is also an important advantage for TNCs. It allows them to co-operate with large SOEs under the control of central industrial ministries that are eager to obtain sophisticated modern technology through formal technology transfer (Shi, 1998). Comparatively, the capabilities of small firms from NIEs and Hong King firm in particular are embedded in their experiences in organizing labor intensive production. Relocating the production function into Mainland China allows them to cut production costs so that they can continue their export-oriented business. Through the channel of WFO or majority foreign ownership FIEs, they can retain control over the important functions of marketing and designing to better exploit their skills in imitating new products and their experience in serving the export markets of developed countries (Wu, 1995; Cheung, 1997). The research has also found that there are some differences between Hong Kong firms and firms from other NIEs, mainly in the location-specific advantages they are seeking. The factors of lime to enter China, different business distance (such as geographic proximity and cultural similarity) between foreign investors and their investment location, and sectors in which they operate all contribute to the differences. Nevertheless, it can been seen from the results that the differences especially the differences in technological and synergistic advantages between Hong Kong firms and firms from other NIEs are less striking than that between small firms from NIEs as a whole and large TNCs.

THE STRATEGIES OF FOREIGN INVESTING FIRMS

In Table 7, the different FDI strategies of TNCs from industrial countries and of small firms from NIEs are summarized. The different kinds of technology possessed by these two groups of firms lead to different FDI strategies when they invest in China. In contrast with large TNCs from industrial countries, small firms from NIEs especially Hong Kong firms normally use mature and standardized technology and general purpose equipment. Their core capabilities are their experience in imitating promptly and their ability to produce cost effectively new products by organizing labor intensive production with unskilled workers. Their advantages also include the flexibility and adjust ability of their operations, and their cultural and social similarities with the local society.

To fully utilize their technological capabilities, most of Hong Kong manufacturing firms normally relocate their production facilities to China to exploit the local resources of cheap labor and land (Thoburn et al., 1990; Wu, 1995; Cheung, 1997). This kind of investment strategy enables them to keep the key functions of designing, marketing and input sourcing at home. This practice prevents the competitiveness of labor intensive products of Hong Kong firms from being eroded by the fast rising wages and rents at home, and also in creases their production capacity.

Firms from other NIEs seek different location-specific advantages when entering China. In general, they all try to exploit cheap labor and land costs since the technology they use is normally not very sophisticated and capital intensive. Nevertheless, not all of them are export oriented. Indeed, the FDI strategy of some firms from other NIEs is similar with that of the majority of Hong Kong manufacturing firms, that is they set up subsidiaries in China for producing goods for exports. It is especially the case if they are subcontractors engaging in OEM operations. Some firms try to penetrate local markets with their firm specific capabilities and brand names if their brand names are established. For example, a number of Taiwanese firms in food industry are very successful selling product in China. Their success is mainly because of the cultural similarity in cuisine between Taiwan and Mainland China and the experience of Taiwanese firms in marketing and producing Chinese food products at home. Although the technology they use is not sophisticated, with such experience, they are able to compete with local Chinese firms that are still inefficient in production and have less experience in marketing goods in a competitive market. In recent years, some Hong Kong firms especially garment manufacturers begin to sell their clothing products in China market since their brand names become famous.

Manufacturing firms from both Hong Kong and other East Asian NIEs normally seek supports from local governments at the lower end of the bureaucratic hierarchy (Table 6), because they are small is size and the central government agencies are not interested in the technology they use. As a result of the economic reforms, local governments have much more authority in economic activities than before. They also control the supply of key resources such as land, bank loans, raw materials and electricity. In addition, the possible local partners of manufacturing firms from NIEs in most cases are small local firms that are supervised by the local governments (Table 3).

From the viewpoint of local governments, foreign investment will bring in to their jurisdictions badly needed capital, management skills and access to foreign markets that will enhance the economic growth through increases in employment and exports. In this sense, local governments compete with each other in attracting foreign investment no matter they are export oriented or not. And they all are able to enjoy further preferential policy measures and the cooperation of governments at local levels (Table 6).

Findings of this research show the firm-specific advantages of large TNCs and the location-specific advantages they are seeking when investing to China (Table 7). Large TNCs normally use their well-known brand name and differentiated products as their main technological advantages. Therefore, they can take advantage of the preferential government policy that aims to attract 'technologically advanced' FDI. Because of state of the art technology they own, TNCs are in a strong position to negotiate for better conditions for their FDI projects in China. Normally, they are permitted to enter the China market through the import substitution scheme. Moreover, many large TNCs co-operate with those Chinese enterprises that imported their technology in the 1980s. These domestic enterprises usually have certain technological capabilities and are supported by the central ministries. From the viewpoint of TNCs, these local firms possess all the production capacity except the technology for key components, which naturally becomes the advantage of foreign technology suppliers in the joint ventures (Wang, 1996: 31). Finally, large TNCs usually have a good relationship with central industrial ministries that are eager to obtain advanced technology from TNCs to fulfil their technological development goals (Table 4). There fore, many large TNCs have the chance to participate in the key technological projects in the industrial plan of the state. Consequently, TNCs are normally the big winner from the market-for technology policy (Table 6).

This study attempts to compare FDI strategies of large transnational corporations that own state of the art technology and of small NIE firms using standardized technology. The empirical findings support the arguments that both of these two types of firms possess their own firm-specific capabilities that pro vide them advantages when they invest in China as a developing country. The fact that these two groups of foreign investors are operating in different segments of the Chinese economy shows that advanced proprietary technology based on expensive R&D is not the only source of advantage for firms engaging in international production through FDI. The tacit aspect of technology, that is, experience and skills of applying standard technology in specific circumstances is also of great importance.

Yizheng Shi, School of Business, Hong Kong Baptist University, Wing Lung Bank Bldg. for Business Studies, 34 Renfrew Road, Kowloon Tong, Hong Kong.

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Industrial Distribution of Sample FIEs
                             FIES from          FIEs from other
                             Hong Kong                     NIEs
                                No. of                   No. of
Industries                        FIEs       %             FIEs       %
Automobile                           0    0.00                0    0.00
Chemical                             1    1.72                1    2.94
Computer                             1    1.72                0    0.00
Construction materials               4    6.90                3    8.82
Electronics                          9   15.52                3    8.82
Electrical products                  6   10.34                4   11.76
Food and beverage                    5    8.62                7   20.59
Machinery                            3    5.17                2    5.88
Pharmaceutical                       0    0.00                0    0.00
Telecommunication equipment          0    0.00                0    0.00
Textile & garments                  10   17.24                3    8.82
Toys                                 7   12.07                0    0.00
Watches                              4    6.90                0    0.00
Leather goods and footwear           2    3.45                7   20.59
Others                               6   10.34                4   11.76
Total                               58  100.00               34  100.00
                             FIEs of Large
                                      TNCs
                                    No. of
Industries                            FIEs       %
Automobile                               2    4.88
Chemical                                 6   14.63
Computer                                 3    7.32
Construction materials                   2    4.88
Electronics                              4    9.76
Electrical products                      6   14.63
Food and beverage                        3    7.32
Machinery                                5   12.20
Pharmaceutical                           4    9.76
Telecommunication equipment              4    9.76
Textile & garments                       0    0.00
Toys                                     0    0.00
Watches                                  0    0.00
Leather goods and footwear               0    0.00
Others                                   2    4.88
Total                                   41  100.00
Source: Own investigation.
General Information of Sample FIEs
                                FIEs from  FIEs from other
                                    HK          NIEs
Average number of employee
 per firm                           54         57
Total investment per firm
 (U.S. $1,000)                     712.8      588.3
Total investment per employee
 (U.S. $1,000)                      13.2       10.3
Annual sales per firm
 (1,000 Yuan)                   22,847.4   35,960.6
Labor productivity (1,000 Yuan
 per employee)                     423.1      630.9
Ratio of exports to total
 sales (%)                          64.4       40.7
                                FIEs of Large
                                     TNCs
Average number of employee
 per firm                           127
Total investment per firm
 (U.S. $1,000)                    8,178.8
Total investment per employee
 (U.S. $1,000)                       64.4
Annual sales per firm
 (1,000 Yuan)                   336,842.1
Labor productivity (1,000 Yuan
 per employee)                    2,652.3
Ratio of exports to total
 sales (%)                           11.2
Source: Own investigation.
Types of FIEs and Their Local Partners
                           FIEs from               FIEs from other
                           Hong Kong                     NIEs
                            No. of                      No. of
                             FIEs            %           FIEs
WFO                           18           31.0            8
JVs                           30           51.7           26
Others                        10           17.2            0
Total                         58          100.0           34
Local Partners of JVs [*]
Large SOEs                     7           23.3           10
Medium & small SOEs           14           46.7           16
Non state owned firms          9           30.0            0
                                             FIEs of TNCs
                                                No. of
                                    %            FIEs               %
WFO                                23.5           10               24.4
JVs                                76.5           31               75.6
Others                              0.0            0                0.0
Total                             100.0           41              100.0
Local Partners of JVs [*]
Large SOEs                         38.5           25               80.6
Medium & small SOEs                61.5            6               19.4
Non state owned firms               0.0            0                0.0
(*.)Some FIEs have more than one local partner.
Only the largest local partner is counted here.
Technology Transfer of Foreign Invested Firms in China
                           FIEs from        FIEs from          FIEs of
                           Hong Kong        other NIEs        Large TNCs
                            No. of            No. of            No. of
                             FIEs      %       FIEs      %       FIEs
FIEs that have formally       21      36.2      19      55.9      41
  transferred
  technology from foreign
  investing firms
Types of formal
 technology transfer:
  Patented technology          7      12.1       8      23.5      37
  Technological know-how      12      20.7       6      17.6      41
  Brand names                  9      15.5      14      41.2      32
  Technological services      15      25.9      16      47.1      41
                             %
FIEs that have formally    100.0
  transferred
  technology from foreign
  investing firms
Types of formal
 technology transfer:
  Patented technology      90.2
  Technological know-how   100.0
  Brand names              75.6
  Technological services   100.0
Source: Own investigation.
Technological and Synergistic Advantages of Sample Firms
                                     FIEs from Hong    FIEs from
                                          Kong         other NIEs
 1. R&D ability
    mean                                  2.33          2.98 [^]
    standard deviation                    0.55          0.54
 2. Patented technology
    mean                                  2.12          2.53 [^]
    standard deviation                    0.78          0.72
 3. Highly differentiated products
    mean                                  3.12          3.04
    standard deviation                    0.92          0.88
 4. Advanced processing technology
    mean                                  3.86          3.75
    standard deviation                    1.08          0.93
 5. Famous brand name
    mean                                  3.11          3.7 [^^]
    standard deviation                    1.03          0.92
 6. Experience in global operations
    mean                                  3.24          3.3
    standard deviation                    0.67          0.83
 7. Size of parental firms
    mean                                  1.56          1.63
    standard deviation                    0.67          0.83
 8. Flexible management
    mean                                  3.45 [*]      3.52 [+]
    standard deviation                    0.84          0.77
 9. Experience in operating in
    China
    mean                                  3.89 [*]      3.86 [+]
    standard deviation                    0.46          0.52
10. Local connections
    mean                                  3.96 [**]     3.89 [++]
    standard deviation                    0.66          0.75
11. Familiar with local environment
    mean                                  3.23 [*]      3.18 [+]
    standard deviation                    0.65          0.66
12. World market network
    mean                                  3.27          3.31
    standard deviation                    0.47          0.51
                                     FIEs of large
                                         TNCs
 1. R&D ability
    mean                              3.68 [**] [++]
    standard deviation                0.43
 2. Patented technology
    mean                              4.24 [**] [++]
    standard deviation                0.53
 3. Highly differentiated products
    mean                              3.46 [*] [+]
    standard deviation                0.87
 4. Advanced processing technology
    mean                              4.21 [*] [+]
    standard deviation                0.66
 5. Famous brand name
    mean                              3.84 [**]
    standard deviation                0.57
 6. Experience in global operations
    mean                              3.56 [*] [+]
    standard deviation                0.66
 7. Size of parental firms
    mean                              3.13 [**] [++]
    standard deviation                1.01
 8. Flexible management
    mean                              3.17
    standard deviation                0.76
 9. Experience in operating in
    China
    mean                              3.57
    standard deviation                1.1
10. Local connections
    mean                              3.12
    standard deviation                0.97
11. Familiar with local environment
    mean                              2.55
    standard deviation                0.72
12. World market network
    mean                              3.12
    standard deviation                0.54


Source: Own investigation.

Note: A one way ANOVA with multiple range tests is used. (*.),(^.) and (+.) indicate that there is a difference significant at p[less than].05 in that item between Hong Kong firms and TNCs, Hong Kong firms and other NIE firms, and other NIE firms and TNCs, respectively. (**.), (^^.) and (++.) indicate that there is a difference significant at p[less than].005 in that item between Hong Kongfirms and TNCs, Hong Kong firms and other NIE firms, and other NIE firms and TNCs, respectively.
Location-Specific Advantages Sought by Sample Firms
                                      FIEs from         FIEs from other
                                      Hong Kong              NIEs
 1. Low labor costs
    mean                                4.07 [**]            4.12 [++]
    standard deviation                  0.55                 0.54
 2. Low land costs
    mean                                3.89 [**]            3.92 [++]
    standard deviation                  0.49                 0.66
 3. Cultural similarities
    mean                                3.22 [**] [^^]       2.23 [++]
    standard deviation                  0.47                 0.93
 4. Geographic proximity
    mean                                3.78 [**] [^^]       2.36 [++]
    standard deviation                  0.75                 0.64
 5. Stable raw material supply
    mean                                2.43                 2.92 [^^]
    standard deviation                  0.54                 0.59
 6. Availability of local
    technical personnel
    mean                                3.27                 3.01
    standard deviation                  0.54                 0.66
 7. Market demand at present
    mean                                3.19                 3.64 [^]
    standard deviation                  0.78                 0.63
 8. Market potential
    mean                                3.42                 3.9  [^^]
    standard deviation                  0.65                 0.72
 9. Policy incentives to
    FDI in general
    mean                                3.23                 3.46
    standard deviation                  0.65                 0.82
10. Incentives to export
    oriented FIEs
    mean                               3.46 [**] [^]         3.12 [++]
    standard deviation                 0.68                  0.81
11. Incentives to
    technological FIEs
    mean                               2.43                  2.88 [^]
    standard deviation                 0.45                  0.66
12. Cooperation from
    central ministries
    mean                               2.51                  2.72
    standard deviation                 0.78                  0.81
13. Cooperation from
    provincial governments
    mean                               2.98                  3.21
    standard deviation                 0.72                  0.78
                                       FIEs of
                                     large TNCs
 1. Low labor costs
    mean                                3.63
    standard deviation                  0.94
 2. Low land costs
    mean                                3.26
    standard deviation                  0.71
 3. Cultural similarities
    mean                                1.21
    standard deviation                  0.54
 4. Geographic proximity
    mean                                1.12
    standard deviation                  0.48
 5. Stable raw material supply
    mean                                2.81 [++]
    standard deviation                  0.67
 6. Availability of local
    technical personnel
    mean                                3.05
    standard deviation                  0.51
 7. Market demand at present
    mean                                3.59 [*]
    standard deviation                  0.62
 8. Market potential
    mean                                3.85 [**]
    standard deviation                  0.48
 9. Policy incentives to
    FDI in general
    mean                                3.44
    standard deviation                  0.77
10. Incentives to export
    oriented FIEs
    mean                                2.21
    standard deviation                  0.83
11. Incentives to
    technological FIEs
    mean                                3.58 [**] [++]
    standard deviation                  0.62
12. Cooperation from
    central ministries
    mean                                3.26 [**] [++]
    standard deviation                  0.42
13. Cooperation from
    provincial governments
    mean                                3.12
    standard deviation                  0.83
14.  Cooperation from local
      governments
     mean                    3.12 [**]  3.32 [++]  2.72
     standard deviation      0.56       0.82       0.66


Source: Own investigation.

Note: A one way ANOVA with multiple range tests is used. *, ^ and + indicate that there is a difference significant at p [less than] .05 in that item between Hong Kong firms and TNCs, Hong Kong firms and other NIE firms, and other NIE firms and TNCs, respectively. **, ^^ and ++ indicate that there is a difference significant at p [less than] .005 in that item between Hong Kong firms and TNCs, Hong Kong firms and other NIE firms, and other NIE firms and TNCs, respectively.
Ownership Advantages, Location-Specific
Advantages and FDI Strategies of Firms
                             Small firms from NIEs
Technological          labor intensive products;
 advantages          standardized technology; general
                         purpose and second-hand
                         equipment; flexible and
                          adjustable management;
Location-specific     cheap labor and land; local
 advantages             market entry in the 1990s;
                         short business distance;
Regulations and
     government
     policies
  a. incentives       preferential policy towards
                        FDI in general and towards
                          export oriented FDI in
                       particular; SEZs; FDI laws;
  b. constraints        foreign exchange balance
                               requirements
Local cooperation     local governments and local
                               small firms
                   TNCs from Industrial
                        Countries
Technological      patented products; mass
 advantages          production know-how; capital
                     intensive equipment; brand
                     name; formal management;
Location-specific  vast local market;
 advantages
Regulations and
     government
     policies
  a. incentives    preferential policy towards
                     FDI in general and towards
                     technologically advanced FDI
                     (import substitution and
                     market-for-technology) in
                     particular; FDI laws;
  b. constraints   localization and technology
                     transfer requirements;
Local cooperation  central industrial ministries
                     and large SOEs;
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Author:Yizheng Shi
Publication:Journal of World Business
Geographic Code:9CHIN
Date:Jun 22, 2001
Words:9389
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