Chinese Companies Going

Abroad
(II)

Prof.Taotao Chen
SEM, Tsinghua University
201608
Part II:
Understanding
the Capabilities of Chinese
Companies
 Agenda
Understanding the Capability of Chinese
companies
Basic theories and analysis Frame works
Home based advantages of Chinese
companies
Firm level Capabilities of Chinese
companies
CAGE differences & capability building of
Chinese companies
 Basic theories and
analysis Frame works
 Theories and Analysis Frame Works
• OLI ---Dunning 1980

• National Competitiveness – Porter 1990

• CSA (country specific advantages) vs FSA(firm specific

advantages)

• RAT& CAT tests – Lessard 2012

• CAGE ( and plus ) --

 OLI Model
John Dunning, Reading, UK
OLI Theory

• Key question: why firm invest abroad?

• Three kinds of advantages
• Ownership advantages
• Location advantages
• Internalization advantages

2013/3/7 Prof.CHEN Taotao 7

 • Ownership advantages
• In context of FDI, ownership refers to MNCs’
possession and leveraging of certain valuable,
rare, hard-to –imitate, and organizationally
embedded assets overseas.
• Example of “O”: owning propriety of
• Technology (patent, know- how, …)
• Management skill
• Scale of economy
• Certain experiences
• ….

2013/3/7 Prof.CHEN Taotao 8

• Location advantages

• Refers to the advantages enjoyed by firms operating in certain

location or nation / country.
• Example:
• Big market;
• Rich resources;
• Convenient logistics;
• ….

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 • Internalization advantages
• Refers to the replacement of cross-border
market (such as importing & exporting) with one
firm (the MNC) locating in two or more countries.
In other words, external market is replaced by
internalization.
• Internalization is to response to market
imperfections or market failure, pointing to
imperfect rules governing international
transactions.

2013/3/7 Prof.CHEN Taotao 10

Porter’s Diamond of
National Advantage

Tsinghua SEM Prof.Taotao CHEN 11

• Porter’s diamond model - Competitive advantage of
nations

• No single nation could provide international

competitive advantages to all industries. Only the
industries with certain characteristics would have,
in a certain extent, such competitive advantages.

Tsinghua SEM Prof.Taotao CHEN 12

Tsinghua SEM Prof.Taotao CHEN 13
DEMAND CONDITIONS （I）
• General Conditions :
• Home market is large enough, even with fast
growth, for an industry’s products and
services.
• Factors:
• Nation with large population, dimensions and fast
economic growth.
• Nation’s particular industries have a solid and long-
term trade status in the region.
e.g. ：Chinese textile export/Mobile phone
industry in Shenzhen
• Nation is a member of a regional economic integration
e.g. ： ASEAN countries、 NAFTA、EU.
e.g. ： bilateral trade agreement or
multilateral trade agreement
Tsinghua SEM Prof.Taotao CHEN 14
DEMAND CONDITIONS （I）

• Special conditions :
• Nation has a competitive advantage in a particular industry
sector to serve buyers with the most captious and highest
purchasing power
• Buyers with the most captious and highest purchasing power would
exhibit strong demand. Thus, in order to meet the captious demand,
firms are forced to continuously make innovation, as a result, the firms
might be able to develop the best products and services before the similar
firms in the same sector in other countries.
e.g. Japanese brand of diaper and Japanese electric
products

Tsinghua SEM Prof.Taotao CHEN 15

FACTOR CONDITIONS
• General conditions :
• “natural endowment" : Large amount of supply
and relatively inexpensive of a certain
resources.
e.g. : Oil industry in Russia
• Within a particular regional economic
integration, the combination of factor and
market distribution matters
e.g. : Within EU， manufacture in low-cost country then
export to developed country
• Under certain geographical circumstance, the
nation’s relative position in mobilize
industrial production factors are important
determinants of national competiveness.
e.g. ：Singapore’s distribution of Malaysian labor
Tsinghua SEM Prof.Taotao CHEN 16
FACTOR CONDITIONS
• Special conditions ：

• Highly specialized resources: Deployment of a

product or services depends on
• sustain、 large-scale of certain inputs, and
specialization of production factors.
e.g. : computer engineers in India、Hi-fashion in Italy

Tsinghua SEM Prof.Taotao CHEN 17

 RELATED AND SUPPORTING INDUSTRIES

• General conditions :

• Better infrastructure（Hardware and software）

• A good amount of highly-trained and supplemental suppliers

Tsinghua SEM Prof.Taotao CHEN 18

RELATED AND SUPPORTING INDUSTRIES

• Special conditions ：
• The presence in the nation of internationally
competitive supplier and related industries is a
key factor.
• Spatial proximity of upstream or downstream
industries facilitates for the exchange of
information and promotes a continuous exchange
of ideas and innovations
• focus center：existence and development of
CLUSTER
e.g. ：Silicon Valley、fashion and textile cluster in
Zhejiang province, home electric production and
accessories cluster in Guangdong

Tsinghua SEM Prof.Taotao CHEN 19

FIRM STRATEGY, STRUCTURE, AND
RIVALRY
• General conditions ：

• The national conditions that determine how

companies are created, organized and managed, as
well as the nature and extent of domestic
rivalry.
• Fair market competition / Effective
and equalized market condition
• Less government influences

Tsinghua SEM Prof.Taotao CHEN 20

FIRM STRATEGY, STRUCTURE, AND
RIVALRY

• Special conditions ：

• Extent of Openness in a certain industry;

• The fairness of industry competition, especially
within clusters.

Tsinghua SEM Prof.Taotao CHEN 21

The interaction among four ends
• The most important thing is the interaction
among the four ends, as the four ends
together construct a system, in which the
interaction among them can form real
drivers to the improvement of
competitiveness for firms in the system.
• On the contrary, there will be no
improvement of competitiveness of firms, if
these aspects do not interact to each other.

• The followings are the examples of how they

interact to each
Tsinghuaother.
SEM Prof.Taotao CHEN 22
 The impacts of others on related and
supporting industries

Fierce rivalry
encourages more
professional
related and
supporting
industries

Large-
Factor flow
scale and
boosts the related
growing
and
demand
supporting industr
stimulate
ies
the growth
Tsinghua SEM Prof.Taotao CHEN
of the 23
suppliers
 The impacts of others on demand
conditions
Fierce rivalry
leads to more and
higher demands

Specialized factors
attract foreign
students and firms,
promoting the
international image of
produsts.

Successful related
industries enhance
national reputation
and demands
Tsinghua SEM Prof.Taotao CHEN 24
RAT & CAT Testing Model

Prof.Donald Lessard, MIT Sloan

 Prof.Donald Lessard’s RAT & CAT
Model
• According to Prof.Donald Lessard, the motivations of a
firm investing abroad has been divided into two main
kinds

• Competency Exploiting Outward Investment

(traditional way)
• Competency Enhancing Outward Investment

2013/3/7 Prof.CHEN Taotao 26

 Prof.Donald Lessard’s RAT &
CAT Model

• Motivation I: Competency Exploiting

Outward Investment (traditional way)
exploit

Target country
value proposition
Existing (Location
Capability advantages)

• RAT test is needed

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 Competency Analysis
--Competency Exploiting Outward Investment
• RAT tests：
• Aims：
• To test whether the home-based
capabilities are appropriate and
transferable when the firm invest
abroad
• Test Points：
• R：relevant
• T：transferable
• A：appropriate
28
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 Competency Analysis
--Competency Exploiting Outward Investment
• Test Point：
• R：relevant
• Whether the capabilities developed at
home (making products or providing
services etc) are relevant to the
target customers of host country?
• Similar customers, tastes, appeal?
• Similar channels? Etc.

• E.g.
The cars of GM (when they initially
entered China) v.s. Santana of
Volkswagen
2013/3/7 Prof.CHEN Taotao 29
 Competency Analysis
--Competency Exploiting Outward Investment
• Test point：
• T：transferrable
• Whether the “o” of the firm can be
transferred to the overseas operations?
Such as technical advantage? brand
advantage? channel advantage? Cost
advantage? Organization advantage? …

• E.g. The transferability of Japanese

auto enterprises’ home-based
capabilities when they invest in US.
2013/3/7 Prof.CHEN Taotao 30
 • Test point
• A：appropriate
• Whether the international move
appropriate to the firm?
• For example, E.g.: intellectual
proprietary right issue? Raising
international competitors?
• Whether the international move
appropriate to target host country?
• E.g. security issue, employment,
fair competition, etc?

2013/3/7 Prof.CHEN Taotao 31

 Competency Analysis
--Competency Exploiting Outward Investment
• RAT tests：
• In general, if other conditions are the
same, the enterprises that passed the RAT
tests have relatively large probability
of success when they invest abroad;
• Or that the enterprises did not pass
the RAT tests, if the other
conditions are the same, need to pay
more and harder work to obtain the
2013/3/7 Prof.CHEN Taotao 32
success of investing abroad.
 • Motivation II : Competency Enhancing
Outward Investment

Augmented
capabilities Target host
at home country-derived capabilities

Enhance

• CAT test is needed

2013/3/7 Prof.CHEN Taotao 33
 Competency Analysis
--Competency Exploiting Outward Investment
• CAT tests：
• Aims：
• To test whether the ownership
capabilities of the firm are
capable of internalizing the
“assets” or host country location
advantages, so that to reach the
goal of enhancing firm level
capability.
• Test Points：
• C：complementary
• T：transferable
2013/3/7 • A：appropriate
Prof.CHEN Taotao
34
34
 • Test point
• C: complementary
• Are the new assets and capabilities
that the company will develop/acquire
in the new market complementary to
the existing capabilities of the firm?
• E.g. :
• TCL acquired Thomson
• Shanghai Electricity acquire Akayama
in Japan

2013/3/7 Prof.CHEN Taotao 35

• Test point
• T: transferrable
• Are they transferable ? Can the company
effectively bring them back from the source
location and integrate them into its capability set
without sacrificing their value?
• E.G.
• TCL acquired Thomson

2013/3/7 Prof.CHEN Taotao 36

• Test point
• A: appropriate
• Whether the international move appropriate to the
firm? Can the company appropriate enough of the
value of these new capabilities ,or will other
companies extract the value of the capabilities
that they supply?
• E.g. One of Chinese company acquire an US
automobile company for technology

2013/3/7 Prof.CHEN Taotao 37

• Test point

• A: appropriate
• Whether the international move appropriate to
target host country?
• E.g. Chinese companies acquiring US firms for
technology.

2013/3/7 Prof.CHEN Taotao 38

• Test point

• A: appropriate

• Whether the international move appropriate to

target host country?
• E.g. Chinese companies acquiring US firms for
technology.

2013/3/7 Prof.CHEN Taotao 39

 According to Prof. Lessard
Internationalization: The Full Cycle
RAT
Exploit

Home-based Target country

resources/ Market Position/
capabilities Customer Value
Augmented Target country-
capabilities derived
at home capabilities

Enhance

CAT
2013/3/7 Source: Lessard et al, 2012 Prof.CHEN Taotao 40
Home based advantages
of Chinese companies
（Case studies）
Case studies & comparison

Telecommunication sector in Finland

versus

Chinese TV manufacturing sector

Telecommunication sector in Finland
• Key questions

• Whether telecommunication sector in Finland had competitive

advantage at the very beginning?

• If yes, what factors were there that made it competitive?

• What about the competitiveness of the sector right now?

Chinese TV manufacturing sector
• Key questions

• How did China develop it TV manufacture sector in 1990s?

• Whether the TV manufacture sector in China had competitive

advantage at the end of 1990s?

• If yes, what factors were there that made it competitive?

• How it was compared with the characteristics of competitiveness

of the telecommunication sector in Finland?
 Firm level
Capabilities of Chinese
companies
（Case studies）
Case studies & comparison

TCL versus Shanghai Electricity

TCL
• Key questions

• Did TCL have certain competitiveness in China before it went

abroad? What were they?

• Whether the competitiveness mentioned above could support its

international expansion in Asia?

• Whether the competitiveness could support its M&A of Thomson?

• What are the situation right now?

Shanghai Electricity Group
• Key questions

• What was the motivation of Shanghai Electricity Group for

taking over 秋山 in Japan？

• Whether Shanghai Electricity Group had the capability to take

over 秋山 inJapan？If yes, what are they?
Case studies & comparison

Walmart in Germany
versus
China Construction in US
Walmart in Germany

• Key questions

• What were the strengths that Walmart accumulated in US?

• What were the problems that Walmart got into in Germany? And
why is that?
China Construction in US

• Key questions

• What were the motivation of China Construction investing in US?

• What were the capability that China Construction accumulated in

China? If yes, whether it could support its investment in US?

• How has China Construction developed itself in US market?

• And what is the situation right now?

What about the future?
 Discussions

• What are the new settings of the world?

• What are the capability of Chinese companies?

• What would be the future of Chinese companies investing

in the world?
Thanks for listening and
participation!