The Evolutionary Process of Multinational

Companies’ Entry Mode in Chinese Market – the

Case of Procter and Gamble in China
Xiumei Shi12
1. Business School, Central University of Finance and Economics, Beijing, 100081, China
2. University of California Irvine, Irvine, CA,92697,USA
Email: xiumeis@uci.edu

Abstract — This paper analyzes the evolutionary process of
Procter and Gamble (P&G)’s entry mode as a case study. It
analyzes the reasons of this process from five aspects:
marketing environment, government policies, changes in
investment structure, multinational companies’ (MNCs’)
cross-border accumulation of knowledge and experiences,
and the constraints of joint ventures as well. The positive and
negative influences towards Chinese market are also
described in the paper. The case study serves as an example
for the MNCs’ entry mode changes. The paper concludes
with recommendations for the Chinese government and
enterprises.
Key words— entry mode, MNCs, P&G
1. Introduction
A firm entering foreign markets faces an array of
choices to serve the market (J.Johnson and J.Tellis, 2008).
The entry mode is an essential decision a firm makes when it
enters a new market because the choice of entry automatically
constrains the marketing and production strategy of the firm.
The mode of entry also affects how a firm faces the
challenges of entering a new country and deploying new
skills to successfully market its product (K.Gillespie,
J.P.Jeannet and H.D.Hennessy, 2007).The entry mode
decision should be made according to environment variables
such as country risk, location familiarity, demand conditions
and competition, as well as according to international
variables such as the company’s know-how, advantages and
policy (W.Hill and P.Hwang, et al,1990). MNCs that select a
wholly-owned investment vehicle can create an internal
market to reduce transaction costs in such activities as
production coordination, market exploitation and technology
protection (A.T.Rugman, 1981).
When China first established its open door policy two
decades ago, the majority of foreign firms preferred joint
ventures to wholly-owned businesses (R. Peerenboom, L.
Lawyer and A. Kearney, 1997). However, these joint
ventures often make it difficult for firms to maintain their
ownership advantage (J.H.Dunning, 1981, 1993). In recent
years, however, more and more foreign investors have set up
wholly-owned and majority-owned firms in China (J.Li and
G.Qian, et al, 2000). When foreign countries invest in China,
they often have to make decisions on several strategic issues
such as technological intensity, investment location and
ownership arrangement (J.Li and G.Qian, et al, 2000). For
most early foreign investors, the main challenge in China was
to negotiate joint ventures and establish local manufacturing
facilities (Y.Luo, 2007). China has become major players in
the world economy (J.Johnson and J.Tellis,2008) and will be
the leading economy of the world followed by the US and
India (J.Hawksworth, 2006). In 2002, China attracted 8.09%
of the world total capital flows, and surpassed the United
States and became the world’s largest foreign investment
recipient. Meanwhile, China has become the world’s most
attractive destination for foreign direct investment. According
to the “Statistical Bulletin of PRC National Economic and
Social Development (2008)”, which was released by National
Bureau of Statistics on February 26, 2009, China actually
used 92.4 billion U.S. dollars foreign direct investment in
2008, with an increase of 23.6% than the previous year.
Meanwhile, dramatic changes have taken place for the
MNCs’ entering Chinese market in the past two decades,
mainly presented themselves as the outstanding tendency of
entry mode shift from joint ventures to sole proprietorship
within the past five years and the sole foreign investment has
become the mainstream approach to enter into China.
P&G is one of the world’s largest and most successful
consumer businesses. It operates in almost every country in
the world, with net sales over $40 billion and nearly 100,000
employees (Mark Dodgson, David Gann and Ammon Salter ,
2006). P&G is recognized as a leading global company and a
company committed to creating a diverse workplace. No
company in the world has invested more in consumer and
market research than P&G. It is recognized as one of the Top
50 Companies for Diversity and ranked No.3 among the Top
10 Companies for Global Diversity. Since 2005, P&G has
been a member of the Billion Dollar Roundtable, a forum of
16 corporations that spend more than $1 billion annually with
diverse suppliers and consistent No.1 ranking within industry
on “Most Admired” list for 24 of 25 total years and for 12
years in a row. 1
In this paper I will take P&G as an example and trace its
evolutionary process of entry mode into Chinese market.
Then the impacts of this process are explored respectively
1
The data here is taken from P&G website, company
information, http://www.pg.com/main.jhtml
from the following five aspects: marketing environment,
government policies, changes in investment structure, MNCs’
cross-border accumulation of knowledge and experience, and
the constraints of joint ventures as well. The entry mode
changes of MNCs’ entering Chinese market will give Chinese
companies, industries and market two-way effects. At last,
suggestions are put forward for government and companies to
take into consideration.
This paper is organized as follows: In Section 2, the
theoretical background is presented, focusing on the research
theory towards entry mode study. In Section 3, the relative
research method is described. In Section 4, the P&G’s entry
mode change process is analyzed, and the reasons for this
change together with positive and negative influences
towards this process are discussed in details. In Section 5, the
corresponding countermeasures of the government and the
enterprises are proposed. In Section 6, the conclusions
derived from this study are summarized.
2. Theoretical Background
In the current decade most of the relevant research is
focused on examining the impact of specific factors on the
entry mode decision. There are several theories nowadays
concerning entry mode decisions while among these theories
the following three are introduced here as a theoretical basis.
2.1 TC Model (Transaction Cost Theory)
The term “transaction cost” is first put forward by Ronald
Coase, who used it to develop a theoretical framework for
predicting when certain economic tasks would be performed
by firms, and when they would be performed on the market.
Ronald Coase discussed “costs of using the price mechanism”
in his paper The Nature of the Firm(1937), where he first
discussed the concept of transaction costs, and refered to the
“Costs of Market Transactions” in his seminal work, The
Problem of Social Cost (1960). Transaction cost theory
concerns the question of how a firm should organize its
boundary activities with other firms. Firms should base their
decisions on minimizing total transaction and production
costs (J.F.Hennart, 1991). Most researchers such as S.Makino
and K.E.Neupert (2000), C.R.Taylor, S.Zou and G.E.Osland
(1998) believed that the international entry mode selection
have tended to concentrate on transaction cost explanations.
K.D.Brouthers (2002) examined foreign market entry mode
choices and firm performance for a sample of European
Union firms from financial and non-financial performance
measures and found that entry mode choice based on
transaction cost, institutional context and cultural context
variables did matter a lot in the performance of enterprises.
K.D.Brouthers and L.E.Brouthers(2003) extended this model
into institutional, cultural and transaction cost theory, and
examined the performance implications of including
“transaction cost” theory in international entry mode selection.
They found that according to transaction cost theory, firms
select the international mode of entry that provides the most
efficient form of governance. However, previous scholarship
largely neglects the impact of transaction cost variables on
entry mode choice and firm performance. They found that
“enhanced transaction cost theory appears to be normative as
well as descriptive with respect to international entry mode
decisions. But still there are limitations in this study such as
the responses were not an accurate reflection of the
managerial attitudes that shaped the decisions at the time the
decision was made (K.D.Brouthers and L.E.Brouthers, 2003).
Even though economics’ treatment of entry mode
concentrates on long-term or structural efficiency at the
individual entrant or subsidiary level as the criterion for an
appropriate foreign entry mode choice, and assumes
imperfect competition (A.T.H.Sels, 2006), still Transaction
Cost analysis has been widely used by researchers to examine
determinants of entry mode choices(H.Chen and M.Y.Hu,
2002).
2.2 RBV Model (Resource Based View)
The fundamental principle of the Resource Based View
is that the basis for a competitive advantage of a firm lies
primarily in the application of the bundle of valuable
resources at the firm’s disposal (B.Wernerfelt,1984). To
transform a short-run competitive advantage into a sustained
competitive advantage requires that these resources are
heterogeneous in nature and not perfectly mobile
(J.Barney,1991; M.A.Peteraf,1993). If these conditions hold,
the firm’s bundle of resources can assist the firm sustaining
above average returns. The choice of entry mode in the
Resource Based View reflects a need to devise supporting
organizational structures and complementary organizational
capabilities that enable the efficient exploitation and
exploration of competitive advantages at home and abroad
(S.J.Chang and P.M.Rosenzweig, 2001; A.T.H.Sels,2006)
2.3 OLI Model (The Ownership, Location and
Internalization)
The OLI Model (The Ownership, Location and
Internalization) was introduced by J.H.Dunning in 1977 when
he presented his “The International Allocation of Economic
Activity” on a Nobel Symposium in Stockholm. He
attempted to identify and evaluate the factors influencing
both the initial act and the growth of foreign production. The
OLI theory stated that the entry mode decisions are
determined by the three sets of advantages as perceived by
enterprises. J.H.Dunning(1977,1980,1988) proposes a
comprehensive framework, which stipulated that the choice
of an entry mode for a target market is influenced by three
types of determinant factors: Ownership advantages, which
are specific to the nature and the nationality of the owner;
Location advantages which arise from the fact that different
resources, institutions and regulations affecting the revenue
and the cost of production; Internalization advantages which
refer to advantages arising from transferring ownership
advantages across national boundaries within the organization.
The more OLI advantages a firm possesses the greater the
propensity of adopting an entry mode with a high control
level. These sets of variables take into account firm-specific
and market-specific factors that influence perceptions of risk
and the related potential return on investment, as well as
influencing firm level resource commitment and desire for
venture control undertaken by a firm when it makes an entry
mode decision. This theory has been widely applied to
explain the entry mode decisions. A number of scholars have
found empirical support for the OLI framework for large
MNCs, such as S.Agarwal and S.Ramaswami(1992)
supported this idea by examining several American service
firms.
3. Research Method
Research methodology is key issue to affect the result of
the research (D.Silverman, 2000). Case study has been a
common research method in psychology, sociology, political
science, anthropology, social work, business, education, and
even found in economics (R.K.Yin, 2009). Case studies assist
in raising and sharpening research questions (M.Dodgson and
D.Gann,et al. 2006).There are overall six sources could
support case study, they are internet, documents, direct
observations, participant-observation, interviews, archival
records (R.K.Yin,2009). And in this paper, the data are
mainly collected from documents, internet, academic books
and journals.
Every research method can be used for three purposes:
exploratory, descriptive, and explanatory. There may be
exploratory case studies, descriptive case studies or
explanatory case studies. According to R.K.Yin (2009), when
the form of research question is “how” and “why” and also
focuses on contemporary events, case study may be used.
Since this paper focuses on the evolutionary process of entry
mode of P&G and also analyzes the reasons of this
phenomenon, case study is sure to be the suitable research
method.
4. Case Study of P&G
4.1 P&G from Joint Ventures to Sole Proprietorship
4.1.1. P&G’s Process in Entering Chinese Market
P&G was founded in April 1837, with the merging of
the candle-making business of William Procter and the
soap-making business of James Gamble and now is the
world’s largest consumer products companies. Every day,
around the world, consumers in more than 160 countries and
regions used the P&G products 30 billion times. P&G was
the first foreign company to enter the Chinese market and
also one of the most successful foreign companies in China.
In the early 1980s, Special Economic Zones were
introduced by the authorities to promote free trade and these
Zones were mostly located along the coastal cities where the
transportation was very convenient, such as Guangdong and
Shanghai. P&G conducted its first market research in the
Chinese market in Beijing and Shanghai in 1985. During that
time, foreign trade was still restricted and was channeled
through “friendship stores” where consumers with access to
foreign currency could buy a limited range of imported goods.
Access to Chinese local market was not implemented until
October 1986 when the policy concerning the encouragement
of foreign investment was promulgated by the Chinese State
Council in which foreign investment would be given special
privilege. In 1985, P&G began conducting market research in
China but found that foreign trade was strictly restricted.
Thus this became the best opportunity for P&G to enter
Chinese market and they believed that China was “the last
piece of a huge market yet to be developed.” In March 1987,
P&G soap factory did survey in Guangzhou Soap factory,
hoping to enter the Mainland market. Facing a market totally
alien but full of temptation, P&G realized that they needed a
strong partner to work together.
After careful consideration, Li Ka-shing was chosen to
be the partner. At that time, Li Ka-shing was well known as
the patriotic entrepreneur in China and had a profound
political and business circle. Working with the world’s largest
consumer goods company together to explore the great
potential of the mainland market was also considered to be
quite valuable long-term investment by Li Ka-shing. The two
sides reached consensus in a very short period of time. An
investment company, P&G-Hutchison Ltd was founded in
Hong Kong with 69.25% equity ratio from the United States
P&G and 30.75% equity ratio from Hong Kong Hutchison
Whampoa Ltd.
In 1988, Guangzhou Soap Factory was chosen by
P&G-Hutchison Ltd because of its shampoo business and
also the working experience with the U.S. joint ventures. At
that time one of the Chinese government policies was that all
import and export businesses needed to be implemented by
the mainland’s foreign trade agents, and also those joint
ventures which entered the designated Technological
Development Zones had the privilege to enjoy the benefits of
tax return. In this case, Guangzhou Economic Development
Zone Construction Import and Export Trading Corporation
(hereinafter referred to Construction Import & Export
Trading Corporation) was chosen by P&G-Hutchison Ltd as
another partner. On August 18, 1988, the joint venture –
Guangzhou P&G Co., Ltd (hereinafter referred to Guangzhou
P&G), which had a tremendous impact afterwards, was first
established.
The initial equity ratio of Guangzhou P&G was 65% for
P&G-Hutchison Ltd, 30% for Guangzhou Soap Factory and
5% for Construction Import & Export Trading Corporation.
The first phase investment of this joint venture was 10
million U.S. dollars, which was, at that time, the largest
investment among P&G’s Global business ever since.
Chinese market did surprise P&G. Such a huge
investment rewarded P&G fruitful return. On October 27,
1988, the first “Head &Shoulder” P&G shampoo products
came down the production line in Guangzhou. Only four
months later, 99% of the Guangzhou consumers got to know
this international brand ---“Head & Shoulders”. Thereafter,
more and more Guangzhou P&G miracles appeared such as
P&G’s “Rejoice”, “Safeguard”, “Olay”, “Pampers”, “Tide”,
“Gillette” and other brand products. They had a leading
market position in their respective fields. All these miracles
were from that joint venture which was founded 20 years ago.
Guangzhou P&G (now the P&G China) has become a sole
proprietorship with a total investment of 10 billion U.S.
dollars and annual sales of 30 billion dollars and ranked the
second in sales among the P&G global business. Chinese
market becomes one of the fastest regional markets for
P&G’s global business.
4.1.2. Strategy Adjustment--“Brands Conspiracy”
Two years after P&G’s entering the mainland market,
P&G-Hutchison Ltd decided to increase 9 million U.S.
dollars to Guangzhou P&G. Guangzhou Soap Factory could
not gather the capital increase of 2.7 million U.S. dollars,
hence the decrease of equity ration from 30% to 20%.
 In 1994, in order to increase the market share,
P&G-Hutchison Ltd had another two joint ventures
experiences: The first was with Guangzhou Lonkey Co.,Ltd
which had the detergent brands of “Lonkey” and “high R&F”.
The joint venture, Guangzhou Lonkey P&G Co., Ltd, was set
up with 30 million U.S. dollars. P&G-Hutchison Ltd then set
up another joint venture with Beijing Daily Chemical
Plant--Beijing Panda P&G Co., Ltd, with 65% of equity
ration from P&G-Hutchison Ltd and 35% from Beijing Daily
Chemical Plant (the equity ration of Beijing Daily Chemical
Plant was mainly from brands and plants).
Both the two above-mentioned cleaning products plants
were quite famous and once were all-powerful national
brands in the Chinese consumer goods market. But after the
joint ventures were founded, those brands became “frozen”.
For example, the brand “Panda”, which had a very good
reputation in the early 1990s, almost lost its sound to
consumers’ ears. The “Panda” washing powder production
and sales dropped from 60,000 tons to only 4,000 tons 6
years after the joint venture was founded. The market share of
Guangzhou Lonkey washing powder once was the second
highest in the domestic market. But after the joint venture
with P&G-Hutchison Ltd, the joint venture had an exclusive
use of this brand, and ultimately the original market share of
this brand gradually shrank.
Feeling no threat from the original brands,
P&G-Hutchison Ltd furthered its way towards sole
proprietorship. In 1999, Guangzhou Lonkey Co.,Ltd signed
an agreement with Guangzhou Lonkey P&G Co.,Ltd and
purchased back full ownership of Shaoguan Lonkey P&G
with 47.49 million RMB and continued production of
washing powder. At the beginning of 2001, P&G-Hutchison
Ltd transfered its 60% of stock equity of Guangzhou Lonkey
P&G Co.,Ltd to Hong Kong High Power Company, which
announced the end of cooperation between P&G-Hutchison
Ltd and Lonkey. On September 10, 2000, Beijing Daily
Chemical Plant made a formal announcement that they had
reached the agreement with P&G China that they would come
to an early termination of the contract of the “Panda” and take
back this brand after its being used for 6 years. During this
period, the rapid development of Guangzhou P&G has made
itself the No. 1 taxpayer in the national light for 6 years since
1993.
4.1.3. Final Focus – “Equity Ownership
Concentration”
In 1997, P&G spent 5.07 billion Hong Kong dollars on
acquisition of 10.75% of the equity from the 30.75% held by
Hutchison Whampoa Ltd. and this was the first step for
equity ownership concentration of P&G.
In 1999, P&G-Hutchison Ltd expressed their firm attitude
of a one-time buyout of all shares in China. Several rounds of
negotiations on acquisition of equity among P&G-Hutchison
Ltd, Guangzhou Soap Factory and Construction Import &
Export Trading Corporation had been organized by the
Guangzhou Municipal Government. In 2000, P&G-Hutchison
Ltd spent 2 billion RMB on the 20% of Guangzhou P&G
shares held by Guangzhou Soap Factory. Construction Import
& Export Trading Corporation sold their 4% of the
Guangzhou P&G shares with the same price and at the same
time promised that the remaining 1% would be the same price
if a one-time transfer was done within one year. In 2001,
Construction Import & Export Trading Corporation sold the
remaining 1% of the shares to P&G-Hutchison Ltd. So far,
Guangzhou P&G became completely foreign investment
wholly-owned company. P&G accounted 80% of Guangzhou
P&G shares and Hutchison Whampoa Ltd 20%. On May 12,
2004, P&G United States announced that they would spend
1.8 billion US dollars for the acquisition of remaining 20%
shares which Hutchison Whampoa Ltd had, which would
allow 100% equity of P&G. So far, P&G and China’s last
joint venture partner parted and became a completely foreign
sole proprietorship. P&G finished its last step for equity
ownership concentration in Chinese market.
4.2 Reasons Analysis
P&G is not the only company to abandon the original
partners and become a foreign investment wholly-owned
company. After entering the WTO, along with gradual
realization of China’s open policy, it has become a common
strategic transformation for the MNCs in China. In
mid-March 2004, the American cosmetics company Avon
announced that they had agreed to pay 50 million U.S. dollars
for 20% of the shares held in two Chinese joint venture
companies. Prior to this, a number of foreign-funded
enterprises such as Panasonic, Nokia, Ericsson, Alcatel and
Lucent, etc. had performed the strategic adjustment and
became sole proprietorship. In fact, from the second half of
1997, foreign-funded enterprises had significant changes.
Foreign funded enterprises in China had exceeded the number
of joint ventures.
From joint venture to sole proprietorship, multinational
activities in China continued to show new trends, new
developments and new changes. It has become very urgent to
transform the way of using foreign investment from the
viewpoint of sole propriety development trend of MNCs in
China. On the other hand, the further increase of the China’s
opening-up degree and the faster pace of China’s
participation in international market provides wider
development space for MNCs. Therefore, the entry mode for
MNCs’ entering Chinese market has become not only a
significant problem, but also a new problem.
The influences of MNCs’ entering the Chinese market
are multifaceted. Among these influences the China’s
particular market environment and its special trend are most
influential. Specifically, the factors that have an influential
affect on the MNCs’ entering Chinese market are mainly
embodied in the following aspects:
4.2.1 Marketing Environment
After 30 years of reform and opening up, the Chinese
market has experienced rapid and steady economic growth,
and has become a huge potential consumer market. It has
played a vital position in its global strategy of MNCs.
Chinese market, which contains a huge growth potential,
reflected rapid and stable trends and it is due to such
characteristics that when the MNCs enter the Chinese market,
they will be in pursuit of sole propriety mode.
4.2.2 Government Policies
 In 1979, the “The PRC Joint Ventures Law” was
promulgated and this law restricted the entry mode of foreign
direct investment. Foreign joint ventures became the most
common way for foreign investment to enter the Chinese
market. In the process of long-term cooperation with foreign
investors, a more attractive investment environment has been
formed. In the past 30 years, China’s dozens of laws and
regulations had been promulgated by Chinese authority to
encourage and regulate foreign investment in China, which
greatly reduced the equity investment risks and uncertainties
for MNCs in China, and foreign investors also increased their
confidence greatly.
Especially during the period 2000 to 2001, “The PRC
Foreign Enterprises Law”, “The PRC Sino-Foreign
Cooperative Enterprises Law” and “The PRC Sino-Foreign
Joint Ventures Law” were promulgated by Chinese
Government. The promulgation and implementation of these
laws not only regulated the behavior of foreign investors, but
also protected their legitimate rights and interests. The
introduction of these policies and regulations, to some extent,
affected the entry mode choice of MNCs’ entering the
Chinese market greatly.
4.2.3 Changes in Investment Structure
China’s investment environment changes constantly, so
does the structure of foreign direct investment. Firstly, the
structure of investment sources changes, from smaller
companies mainly from such regions as Hong Kong and
Taiwan to world-renowned MNCs mainly from Europe and
the United States. Secondly, the investment industrial
structure changes, from labor-intensive industries to
capital-intensive and technology-intensive industries. Early
foreign direct investment was mainly concentrated in food,
textiles, construction materials, electronics, toys and other
light industry while currently, the investment and business
scope of foreign companies expanded to China’s pillar
industry including infrastructure, telecommunications,
automotive, and energy, etc. These industries not only require
significant capital investment, but also the introduction of
property rights, technology and other issues. In this case,
MNCs are more willing to adopt a higher control degree of
access. In other words, the upgrade of foreign direct
investment structure in China is one of the important reasons
why the number of sole propriety enterprises increased.
4.2.4 MNCs’ Cross-border Accumulation of
Knowledge and Experiences
Lack of business experience and understanding of the
environment in specific countries often lead to restrictions of
multinationals into the markets of other countries. In such
cases, the companies tend to overestimate the risk and
underestimate the benefits, which inevitably will promote
foreign investors to choose the entry mode with less resources
input and relatively low risk, such as non-equity mode or
joint venture mode. However, once the company has acquired
the cross-border accumulation of this knowledge and
experience, they will turn into the company’s unique
advantages. Those companies with the accumulation of
knowledge and experience can assess the business risks and
benefits more accurately so as to control the foreign
operations more effectively, thus relatively more willingly to
take wholly owned enterprises with large resources input and
high degree of control.
4.2.5 Constraints of Joint Ventures
Joint venture was once the major entry mode of MNCs’
entering Chinese market. In the past 10 years, the decline in
the proportion of joint ventures and the reduction in the
absolute number, excluding the impact of the policy
environment and other factors, were mainly due to the
disadvantages that joint ventures had embodied.
First, joint ventures have the characteristics of instability.
Joint ventures usually shared ownership and common
management from at least two parent companies in China and
foreign countries. Due to the differences of joint ventures in
management goals, business experiences, and the expected
future aspects, the two partners cannot achieve internal
coordination and unity. It will be very difficult to sustain the
health and win-win cooperation.
The Second is about intellectual property protection. The
main reason for MNCs to survive and develop and maintain
long-term advantage is mainly due to the technical
advantages, that is, the confidentiality of proprietary
technology is rather critical. While for the host country
enterprises, one of the purposes to invest in joint ventures is
to be able to learn proprietary technology quickly. As China’s
policies and regulations concerning Intellectual Property
Rights protection are not sound enough and intellectual
property protection environment is not perfect, foreign
investors in joint venture enterprises in China are reluctant to
transfer technologies, which will undoubtedly lead to the
inefficient co-operation of the joint ventures and hence
difficult to maintain the relationship between the two sides.
The 30 years with the use of foreign capital after China’s
opening up is also an important economic system reform and
transition period. In this process, the foreign investment
environment is relatively more liberal. corresponding with
the process of reform and opening up, multinational direct
investment in China has also gone through various stages of
development: “opportunity feelers” in 1980s, “strategic
investors” in 1990s and “local market leaders” in the 21st
century.
Most foreign investment in 1980s belonged to tentative
investment. In China’s restrictive policies, foreign joint
venture is the main way to enter the Chinese market. With the
gradual knowledge of China’s investment environment and
gradual accumulation of business experiences, foreign
investors benefited a lot from the success of China’s
economic transition and opening up policy in China and their
strategic management gradually increases. Sole
proprietorship has taken the place of joint venture and
become a popular and dominant choice of multinationals in
1990s. After China’s accession to the WTO, economic
institutions and policies had an increasingly obvious
connection with international practice. MNCs obtained rich
operating experiences in the Chinese market and investors
had growing confidence. MNCs established the market
position and its global investment strategic motives became
increasingly clear. As to the entry mode, the wholly
foreign-owned enterprise investment had a significant
increase and rapid growth. For those larger European and With the strengthening trend of MNCs’ sole
American MNCs who have a far “cultural distance” between proprietorship and the protection of self-owned intellectual
the home country and China, and big socio-economic and property rights, technology diffusion could not be obtained as
political environment differences, the gradual accumulation often as it used to be in joint ventures. It would become more
of knowledge and experiences greatly reduced the risks in the and more difficult for domestic firms to learn and imitate
investment and operation in China. This makes the European their advanced technologies, which was bound to reduce the
and American MNCs turned their entry mode from the spillover effect and formed a barrier for China’s access to
original joint venture based approach to global strategy based advanced technology. Meanwhile, it further strengthened the
sole proprietorship. monopoly of MNCs on China’s technology and consolidated
4.3. Impact of the Process from Joint Ventures to and strengthened the monopoly due to the formation of
transnational technological advantages.
Sole Proprietorship
4.3.2.2. Occupy Domestic Market, Crowd out
4.3.1 Positive Impact Domestic Firms
MNCs have possessed such advantages as abundant
4.3.1.1 Ease Employment Pressure, Cultivate Top
capital, advanced technology and scientific management.
Talents
Before the trend of sole proprietorship, MNCs had occupied
That MNCs adopt sole proprietorship to enter Chinese
the Chinese market by virtue of these advantages. Sole
market will help ease employment pressure and cultivate top
proprietorship further enhanced MNCs’ strength. The
talents. On one hand, multinational investment in China
wholly-owned MNCs established good corporate image and
mainly concentrated in the labor-intensive industries such as
brand image, improved product technology content. In this
manufacturing industry, which played a positive role in
way, the sole proprietorship further widened the gap between
promoting the labor employment in China. While at the same
domestic products and their products in the domestic market
time large-scale cross-border investment in wholly-owned
and in some fields accounted for an absolutely dominant
enterprises usually will have greater demand for human
position. At present, Most of China’s basic industries such as
resources, which, to some extent, eased the employment
cosmetic industry, food and beverage industry and plastics
pressure in China. On the other hand, MNCs increasingly
industry are foreign-owned or occupied by foreign
focus on localization trend of human resource management,
multinational products. On the contrary, due to the slow
which will help to cultivate and nurture a large number of
industrial development in China, products from domestic
modern management talents mastering advanced technology
firms lack of the competition with foreign companies in
and good at international business and thus accelerate the new
quality and brands, which will lead to gradual shrinking
foreign concept, update the new management model into a
market share of the products from domestic firms and will not
new corporate mechanism.
be conducive to the development of China’s enterprises and
4.3.1.2 Optimize Market Competition, Enhance
the improvement of industrial structure.
Enterprises’ Competitiveness
4.3.2.3. The Complex Internal Trade and The
The exclusive trend of MNCs’ sole proprietorship and
Difficult Supervision
the intensified market competition not only aggravated the
After the MNCs in China realized holding or wholly
competitive pressures of Chinese enterprises, but also to
foreign-owned, they strengthened the application of internal
some degree provided the driving force of for the business
trade means such as transfer pricing, etc. This internal trade
development. On the other hand, multinational sole
of MNCs poses a challenge to supervision ability. One of the
proprietorship companies in China continued to improve the
most important questions is: how to deal with the tax revenue
technological level, promoted the development through the
reduction problem from internal trade within MNCs.
establishment of R & D coordination with local enterprises,
Evidence from China’s State Taxation Administration data
which helped to improve the overall competitiveness of
showed that in China, every year, foreign companies transfer
relevant industries in China.
profit for more than 300 million RMB in foreign enterprises.
4.3.1.3 Enhance Export Competitiveness, Optimize
With this, the yearly compensation of MNCs in the year book
Export Structure
reached 120 billion RMB, which caused huge amounts of
Since 2001, exports of the subsidiaries of MNCs which
revenue loss in China(Y.Xu and H.Chen,2007). This “transfer
set up in China accounted for more than half of China’s total
pricing” not only caused great revenue loss in China, but also
exports. Generally speaking, export products from the MNCs
became an effective way for MNCs to evade foreign
were relatively more competitive than those in domestic firms,
exchange controls.
which can enhance the overall competitiveness level.
4.3.2.4. Not Conducive to Rational Distribution and
Meanwhile, as to the export product structure, export
Adjustment of China’s Industrial Structure
proportion of high-tech products and technology-intensive
MNCs always seek to maximize profits, which has often
products in MNCs had very rapid growth, which, to a large
become the central objective of foreign investment in China.
extent, optimized the structure of our export products in the
But this objective usually conflicts with the goal of upgrading
international market.
China’s industrial structure. For example, MNCs tend to
4.3.2 Negative Impact
invest in projects with good investment conditions and high
4.3.2.1. Reduce Technology Diffusion, Slow investment return. But these projects are not common in those
Technological Progress projects which had urgent need in China’s economic
development such as agriculture, basic industry, basic raw
material industry and other fields. In addition, among these
projects, there are fewer research and development projects
which will determine the future development and maintain
sustainable competitiveness. The proportion of
knowledge-intensive service industry is not conducive to the
rational distribution and adjustment of industrial structure in
China, and overall healthy development of China’s economy
as well.
5. Suggestions
From what has been discussed and analyzed above, some
suggestions for Chinese government and enterprises are
presented as follows:
5. 1 For Government
5. 1.1. Optimize Policies
China has committed that after the accession to the
WTO, the foreign capital may enter the service industry and
high technology industry. Therefore, the guidance and
regulation of Chinese macro-industrial policies should be
effectively optimized so as to lead the foreign capitals enter
the service industry and high technology industry with the
form of joint venture, cooperation, etc. Specific policies and
measures can be made so as to encourage foreign capital
enter the service industry and high technology industries and
broaden foreign investment fields in China, hence to some
extent, mitigate the trend of sole proprietorship.
5. 1.2. Strengthen Supervision
Excessive sole proprietorship may cause industry
monopoly and industry control and such trend already existed
in some areas in China, thus it is necessary for Chinese
government to carry out necessary limitations in some key
and special fields, such as establishing and improving the
relevant policies and regulations of foreign investment and
formulating anti-monopoly law. The constraints and
restrictions of the monopoly in some specific industries may
help to maintain a legal and fair competition environment
between foreign capital and national capital and also help the
domestic enterprises to grow so that domestic enterprises may
have fair and equal development opportunities (C.Xu and
H.Xia, 2005).
Government should guide foreign capital flow
appropriately. For example, for those enterprises which are
hard to introduce high technology into and also have a great
demand of foreign capital, it is of great difficulty to achieve
development only depending on domestic capital. Under such
circumstances, wholly foreign-owned or joint ventures should
be encouraged. But for some industries which involve state
security, government policies and relative laws are to be
strongly recommended and applied in order to control the risk
of a foreign-capital enterprise monopoly while attracting
foreign investment.
As to the serious damage caused by MNCs through the
internal trade on China’s economic interests, government
should strengthen supervision. Meanwhile, market economic
system should be further perfected and more standardized and
transparent legal systems should be formed soon. This is the
key to restrain the impact caused by the foreign-invested
enterprises of China, especially the wholly foreign-owned
enterprises to China’s economic benefits and security.
5.2 For Enterprises
5. 2.1. Increase Innovation and Cultivate the Core
Competitive Power
For a long time, Chinese enterprises depended
excessively on foreign investors, and did not have their own
core technology and marketing channels. The management
level was still very poor and backward. Therefore, with the
gradual trend of sole proprietorship and technology diffusion
effect, Chinese enterprises should further enhance the ability
of independent innovation and development and cultivate the
core competitive power.
The R&D of an enterprise is one of the key factors to
determine the success. Therefore, the government should
regulate relevant policies and capital supports, encourage
enterprises to increase awareness of R&D independence and
improve the R&D capacity. In the meantime, the R&D cost
should be increased. It can be achieved through the following
two ways: First, technical personnel’s wages and welfare
should be improved. Major scientific and technological
achievements shall be greatly rewarded. Second, technology
strategic alliance can be established so as to improve
technology level.
Many developed countries in the world in this regard
have provided us very good cases. For example, IBM now
has established about 400 computer development technology
strategic alliances in the world. These alliances have made
outstanding achievement in developing new products,
penetrating mutual techniques, sharing market shares and
improving competitive power. Chinese enterprises should
adopt such advanced method and actively join the strategic
alliance of MNCs. This will help a lot for Chinese enterprises
to expand the international markets.
5.2.2 Cultivate Talents, Promote Enterprise
Development
Talent is the core factor for the development of any
enterprises. That large quantities of outstanding talented
people in China were attracted to MNCs caused great loss for
Chinese enterprises. Chinese enterprises must strengthen
human capital cultivation and build a kind of excellent
internal growing environment for talents through breaking the
old and rigid system and building a new, more creative talent
incentive system so as to form a set of internal incentives
with scientific, standardized and fair competition and
promotion.
5. 2.3 Brands Protection
Consumers trust the brand they are purchasing. P&G,
along with other leading global consumer goods companies,
fiercely protects its brands. In any one year it issues hundreds
of lawsuits worldwide, but is particularly active in the US
market, where infringement laws are most fiercely protected.
On the contrary, Chinese enterprises used to lack a sense of
brands protection or misuse of the brands; hence some
well-known brands became less powerful to consumers’ ears
and gradually disappeared from their lives. It is quite
necessary that the Chinese enterprises pay more attention to
the brands protection and maintenance.
6. Conclusion
This study provides a valuable addition to both the entry
mode decision and P&G literature. It extends what we know
about P&G entry mode choices. MNCs should concentrate
not only on the entry mode decision but also on adapting the
proper strategies for winning the game. The strategic
transformation from joint ventures to sole proprietorship of
MNCs in Chinese market satisfied their own needs to adapt to
the Chinese market development and policy development,
and their own development interests as well. This
transformation will exert far-reaching influence on Chinese
market and enterprises. We hope that through the analysis of
this phenomenon, Chinese enterprises will gain some
experiences when facing the competition from the wholly
foreign-owned enterprises and survive themselves in the
fast-developing market, both home and abroad.
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