Foreign investors buffeted by China’s winds of change
Major global groups are struggling to retain market share as the ‘rules of the game’ shift
As a major emerging economy, China has long attracted foreign investors with its market opportunities and strategic location advantages. But rapid growth and the interplay of marketization and state coordination have created a complex investment environment.
As economic conditions, competition, and institutional factors evolve, foreign firms may need to reassess their strategies, which may see them scale back or exit the Chinese market.
A combination of resources, industry pressures, and institutional factors have driven international companies to reduce investment commitments in China. While some foreign firms initially held first-mover advantages, local competitors caught up rapidly.
This pattern is evident in industries where they have leveraged technological spillovers from foreign investments, especially through foreign-Chinese joint ventures.
Its automobile industry exemplifies this, having grown rapidly in the last two decades. Local carmakers have caught up with foreign firms on quality and brand recognition in the combustion engine sector and overtaken them in the electric vehicle and renewable sectors.
Declining market
Facing mounting competition, several major global brands, such as Volkswagen, Jaguar Land Rover and General Motors, have experienced declining market share. Ford’s sales in China dropped by 37% in 2018, forcing it to scale back its investments.
That same year, Japan’s Suzuki fully exited the Chinese auto sector.
The second pattern involves foreign investors reducing their commitments due to changes in the ‘rules of the game.’ The Chinese government tends to intervene in or replace market forces in sectors of national strategic or social importance. Foreign firms find it difficult to adjust.
One such sector is the pharmaceutical industry, where even global companies with a long-established market presence in China, have faced challenges due to increasingly stringent regulatory requirements imposed by Beijing.
The introduction of the National Centralized Drug Procurement scheme in 2018 forced firms to lower their product prices below market levels, significantly eroding their profit margins. After failing to adapt to the policy, which favored local brands, many quit China.
The third pattern arises when foreign firms scale back after failing to develop differentiated niche markets, often due to cultural barriers. Foreign consumer products have targeted China’s growing upper-middle class, aiming to cultivate demand in novel categories.
But these efforts are not always successful, particularly when domestic brands, although not directly competing in the same categories, offer culturally appealing substitutes.
In 2011, Diageo, a major global distributor of Scotch whisky, began opening product experience centers in Beijing, Shanghai and Chengdu to promote whisky culture. This experiment struggled against China’s food-centric drinking culture and local substitutes.
By 2017, Diageo had closed all three of its centers.
Multinational investors
The key factors contributing to the reduction in global investors’ commitments in China, such as the loss of first-mover advantages and liabilities faced by institutional outsiders due to regulatory changes, should be better understood by potential multinational investors.
There is a need for a comprehensive approach to understanding the dynamic factors that jointly influence the competitiveness of foreign firms, so that they can realign their investment commitments with the country’s evolving economic and institutional realities.
Better understanding these dynamics will enable them to make more informed decisions.
Managers should monitor resource allocation, address competition and adapt to institutional changes. Decision-makers should also embrace configurational thinking instead of linear reasoning when evaluating how different factors influence competitiveness.
This requires firms to continuously monitor the conditions and interplays of their own competitive resources, industry rivals and institutional changes.
For policymakers in China, tightening institutional conditions could have mixed effects. On one hand, this may filter out foreign investors who are no longer competitive or financially committed to developing local capacities.
Conversely, those remaining foreign investors may become more inward-looking. This could limit the positive spillover effects of foreign investment, which has historically contributed to the creation of internationally competitive Chinese firms.
Management of investment policy design is likely to impact the global connectivity of the Chinese economy, initially in an inward direction. But ultimately it would affect outward relations as well.
Investment incentives
To remedy this, policymakers should balance maintaining competition with investment incentives.
Qiuling Gao is an Associate Professor at the Business School of Beijing International Studies University.
Lin Cui is a Professor of Strategy and International Business at the College of Business and Economics at Australian National University.
Sihong Wu is a Lecturer at the University of Auckland Business School.
Yoona Choi is a Lecturer at the College of Asia & the Pacific at Australian National University.
Di Fan is a Professor of Management at the School of Management at RMIT University.
This article is republished from East Asia Forum under a Creative Commons license. Read the original here.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.