document2

THE GLOBAL STRATEGY OF EMERGINGMULTINATIONALS FROM CHINA gsj_1030 97..107

MIKE W. PENG*Jindal School of Management, University of Texas at Dallas, Richardson,Texas, U.S.A.

The global strategy of multinational enterprises (MNEs) from China started to emerge recently.While sizable components of their strategy and behavior are consistent with what we observeof MNEs from other countries, Chinese MNEs are characterized by three relatively uniqueaspects: (1) the previously underappreciated role played by the home country governments ofMNEs as an institutional force, (2) the challenge of going abroad in the absence of significantlysuperior technological and managerial resources, and (3) the rapid adoption of (often high-profile) acquisitions as a primary mode of entry. Overall, this article argues that these threerelatively unique aspects of emerging multinationals from China will have significant ramifi-cations for future theory building and empirical efforts of the global strategy researchcommunity. Copyright 2012 Strategic Management Society.

INTRODUCTION

The global strategy of multinational enterprises(MNEs) from China started to emerge in the begin-ning of the 2000s. Chinese MNEs share on theFortune Global 500 list expanded from zero in 1990to 61 firms in 2010. From 2005 to 2010, ChineseMNEs represent the only grouprelative to MNEsfrom other BRIC countries (Brazil, Russia, andIndia), the United States, the European Union, andJapanshowing a significant increase on theFortune Global 500 list (see Table 1).

What drives the international expansion strategyof Chinese MNEs? Can existing theories on MNEsand foreign direct investment (FDI) account for this

new breed of MNEs (Dunning and Lundan, 2008;Gammeltoft, Barnard, and Madhok, 2010; Luo andTung, 2007; Yang et al., 2009)? Or do we need todevelop new theories to better capture this new phe-nomenon (Child and Rodrigues, 2005; Guillen andGarcia-Canal, 2009; Mathews, 2006; Peng, Bhagat,and Chang, 2010; Ramamurti and Singh, 2009)?This article addresses these questions. While sizablecomponents of the strategy and behavior of ChineseMNEs are consistent with what we observe of MNEsfrom other countries, the arrival of Chinese MNEson the global scene has created a series of relativelyunique impact on research and practice (Buckley etal., 2007; Morck, Yeung, and Zhao, 2008; Peng,2011; Peng et al., 2010). This article focuses on threerelatively unique aspects of such emerging multina-tionals. I argue that global strategy researchers needto pay more attention to: (1) the previously underap-preciated role played by the home country govern-ments of MNEs as an institutional force; (2) thechallenge of going abroad in the absence of signi-ficantly superior technological and managerial

Keywords: global strategy; emerging multinationals; China;outward foreign direct investment (OFDI); institution-basedview*Correspondence to: Mike W. Peng, Jindal Chair of GlobalStrategy, Jindal School of Management, University of Texas atDallas, 800 West Campbell, SM 43, Richardson, TX 75080,U.S.A. E-mail: [email protected]

Global Strategy JournalGlobal Strat. J., 2: 97107 (2012)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1111/j.2042-5805.2012.01030.x

Copyright 2012 Strategic Management Society

resources; and (3) the rapid adoption of (often high-profile) acquisitions as a primary mode of marketentry.

Before proceeding, it is important to note that: (1)my goal is not to claim or prove that the Chineseapproach to global strategy is entirely uniqueit isrelatively unique; (2) for future theory-building pur-poses, the Chinese case is an appropriate setting todiscuss anomalies to the traditional theories of glo-balization due to the significant increase of Chinasoutward foreign direct investment (OFDI); and (3)implications drawn from the Chinese case are rel-evant not just for policymakers and practitioners inChina, but also for policymakers and practitioners inhost countries, both in emerging and developedeconomies. Overall, this article argues that a betterunderstanding of these new MNEs will have signifi-cant ramifications for future theory building andempirical efforts of the global strategy research com-munity. In particular, large dividends may lie aheadfor research on the institution-based view, theresource-based view, market entries, mergers andacquisitions (M&As), and corporate governance.

THE ROLE OF HOME COUNTRYGOVERNMENTS

The role of host country governments has attractedsignificant research attention (Khoury and Peng,2011; Meyer et al., 2009). What is generally ignoredin the recent literature is the role of home countrygovernments of the MNEs undertaking OFDI. Thisis because up to now, most MNE/FDI research hasfocused on FDI made by MNEs from developedeconomies, and market-supporting institutions suchas pro-OFDI policies by Western governments are

now taken for granted and almost invisible (Peng,Wang, and Jiang, 2008: 927). From an institution-based view, since MNEs are affected by the rules ofthe game both at home and abroad, the role of homecountry governments of the MNEs obviously cannotbe ignored (Peng et al., 2008: 927). As recently as inthe 1960s and the 1970s, the U.S. and U.K. govern-ments restricted OFDI (De Buele and Van DenBulcke, 2010). Yet, there is hardly any recentresearch attention devoted to the role of homecountry governments of MNEs.

The rise of Chinese MNEs has necessitated ourattention on the role of home country governments,thus enriching the institution-based view (Cui andJiang, 2010; Peng et al., 2009). As an institutionalforce, the Chinese government has played both apositive and a negative role behind Chinas OFDI.Until the mid-1990s, the Chinese government, in aneffort to conserve foreign exchange, had severelyrestricted OFDI. It started to play a more positiverole by being more supportive of OFDI starting inthe late 1990s (Luo, Xue, and Han, 2010: 79). Start-ing in the early 2000s, the Chinese government hasused a series of policy tools such as low-interestfinancing, favorable exchange rates, reduced taxa-tion, and subsidized insurance for expatriates tofacilitate OFDI. Clearly, a large number of Chinesefirms have responded to these institutional incentivesand ventured abroad.

However, the Chinese government has also playeda negative role behind some OFDI from China (Cuiand Jiang, 2010). In terms of the destinations ofChinas OFDI, Hong Kong, Cayman Islands, andBritish Virgin Islands (BVI) routinely occupy the topthree positions (Lau and Bruton, 2008; Morck et al.,2008). To put things in perspective, Chinese MNEsinvest more in the Cayman Islands and BVI thanthey invest in the United States and Great Britain.The Cayman Islands and BVI, in turn, invest more inChina than the United States and Great Britain investin China. The only way to explain these puzzlingFDI patterns is capital round-tripping. In otherwords, some Chinese MNEs invest in these taxhavens to transform themselves into foreign domi-ciled companies, and then they can invest in Chinaas foreign investors to take advantage of tax andother concessions back home. Hong Kong has longserved such a role. But as Chinas control over HongKong gradually intensifies, some Chinese MNEsfind it necessary to go through the trouble of going tolocations as far as the Caribbean to avoid being dis-criminated against at home as domestic firms (Witt

Table 1. BRIC, U.S., EU, and Japanese multinationals inGlobal Fortune 500

2005 2006 2007 2008 2009 2010

Brazil 4 5 5 6 7 7Russia 5 4 5 8 6 7India 6 6 7 7 8 8China 20 24 29 37 46 61BRIC 35 39 46 58 67 83U.S. 170 162 153 140 139 133EU 165 165 170 163 161 148Japan 70 67 64 68 71 68

98 M. W. Peng

Copyright 2012 Strategic Management Society Global Strat. J., 2: 97107 (2012)DOI: 10.1111/j.2042-5805.2012.01030.x

and Lewin, 2007; Yamakawa, Peng, and Deeds,2008). This pattern of Chinas OFDI speaks volumesabout the negative role played by the Chinesegovernment in terms of its discrimination againstcertain domestic firms, especially nonstate-ownedones (Ahlstrom, Chen, andYeh, 2010; Huang, 2003).

GOING ABROAD WITHOUTSUPERIOR RESOURCES

Popularized as the ownership-location-inter-nalization (OLI) framework, the standard explana-tion of FDI is that MNEs possess and leveragesuperior technological and managerial resources thatenable them to enter new markets. However, theemergence of Chinese MNEs creates a puzzle thatchallenges some of this conventional wisdom.1Although these emerging multinationals, like theirold-line counterparts from developed economies,hunt for lucrative locations and internalize transac-tions (conforming to the L and I parts of the OLIframework), they typically do not own better tech-nology and their management capabilities areusually not world class (Barnard, 2010). In otherwords, a big chunk of the O part seems to be missing(Gammeltoft et al., 2010; Mathews, 2006).

For example, in semiconductor wafer factories,Chinese technologies are at least two generations

behind those of Taiwan, the United States, Japan,and South Korea (BusinessWeek, 2009: 42). In inter-nal combustion engines, Chinese automakers are still10 to 20 years behind leading firms (Tao, 2011:293). In terms of managerial resources, ChineseMNEs lack English-speaking, internationally savvymanagers comfortable interacting with local manag-ers, employees, and politicians in host countries. Forexample, the first Chinese manager interviewed inFortunes (2010: 87) cover story about ChinasOFDI in the United Stateswho was featured with ahalf-page photohad to speak to the Fortunereporter through an interpreter. Many Chineseexecutives are ignorant of the rules of the gameoverseas. When lecturing in China, I have foundmany executives are not aware that when enteringthe United States they cannot talk to competitors anddiscuss pricingotherwise they could go to jail forantitrust violations. The fact that these executives areon the verge of leading their firms overseas suggeststhat managers at Chinese MNEs have a long way togo before they are able to master international normsand regulations, some of which are very differentfrom their familiar rules of the game at home.

Anecdotes aside, the regional distribution ofChinas OFDI stock shows that Chinese MNEs arenot comfortable competing globally (Peng, 2012;Peng, Sun, and Blevins, 2011). Figure 1 illustratesthat despite media headlines about Chinas OFDI inAfrica, only 4 percent went to Africa. Hong Kongcommanded a lions share of 66 percent and the restof Asia received another 9 percent. Of the 12 percentthat went to Latin America and the Caribbean, theCayman Islands and BVI absorbed 11 percent.

1 Such a puzzle can also arise from some Western MNEs, whichmay struggle to overcome their home country disadvantages, asrepresented by the metanational firms discussed by Doz,Santos, and Williamson (2001).

Figure 1. Regional distribution ofChinas outward foreign directinvestment stockSource: Adapted from Ministry ofCommerce (MOFCOM). 2010.2009 Statistical Bulletin of ChinasOutward Foreign Direct Investment.MOFCOM: Beijing. Data refer to2009. Total OFDI stock from Chinawas $246 billion as of 2009.

Emerging Multinationals from China 99


Chinas OFDI in the more competitive, developedeconomies of Europe (4%), North America (2%),and Oceania (3%) was relatively insignificant. Thespecial case of tax havens (the Cayman Islands andBVI) aside, these data suggest that Chinese MNEsare not very global and are very regionalcenteredon Asia indeed (Rugman, 2005).2

Given their weaknesses in technology andmanagement know-how, how can we make sense ofthese emerging multinationals? One interesting newframework is the linkage, leverage, and learning(LLL) framework (Mathews, 2006). Linkage refersto emerging MNEs ability to identify and bridgegaps. At home, Chinese firms are widely known toengage in extensive networkingremember theterm guanxi?in search of new opportunities andbetter performance (Peng and Luo, 2000). Theirquest overseas can be viewed as an extension of theirlinkage efforts.

Leverage refers to emerging MNEs ability to takeadvantage of their unique capabilities, which maynot be at the cutting edge, but may neverthelesspossess comparative advantage relative to thecapabilities of their global competitors (Sun et al.,2012). For example, although Chinese mobile phonemakers may not have world-class technologies orbrands such as those possessed by Motorola, Nokia,and Samsung, some Chinese firms capabilities inrapid imitation and creative packaging (such asleather skin phones) have enabled them to wincertain markets overseas (Peng, 2011: 368).

Finally, learning is probably the most unusualaspect among the motives behind the international-ization push of many Chinese MNEs. Instead of theI will tell you what to do mentality typical of old-line MNEs from developed economies, many emerg-ing MNEs openly profess that they go abroad tolearn. This is a new area of organizational learningthat has not been extensively studied by researchers,who have traditionally studied how local firms learnfrom foreign entrants such as MNEs.

To be sure, OLI and LLL frameworks overlap agreat deal (Mathews, 2006). So the debate boils

down to whether the differences are fundamental,which would justify a new theory such as LLL, orjust a matter of degree, in which case OLI would bejust fine to accommodate the new MNEs (Dunningand Lundan, 2008; Gammeltoft et al., 2010). From aresource-based view, linkage, leverage, and learningmay represent the most valuable, rare, and hard toimitate organizational capabilities possessed bysome Chinese MNEs, thus necessitating ourattention.

ACQUISITIONS AS THE PREFERREDMODE OF ENTRY

Acquisitions are not Chinese MNEs only mode ofentry; other modes such as exports are also used(Gao et al., 2010). But acquisitions are clearly aprimary mode of entry (Sun et al., 2012). Why areChinese MNEs so fond of acquisitions? Threereasons emerge. The first is the urgency for fastmarket entry, especially in the areas of naturalresources (Deng, 2009). The second is to acquireexisting world-class brands, such as IBMs PC brandor Volvo. This overcomes a major weakness inChinese MNEs capabilities: weak brandingprowess. While the first two reasons have been notedby the literature, I believe that there is a third, lesstalked about but clearly evident reason: managerialhubris and empire building. It is well known thatexecutive compensation is a function of the size andcomplexity of the firm. Yet, many large ChineseMNEs are still state-owned enterprises (SOEs) andSOEs historically feature egalitarianism in theircompensation structure. The Economist (2010: 4)reports that the head of Industrial and CommerceBank of China (ICBC), the worlds largest bank bymarket value, received just under $134,000 in 2009,a couple of decimal places shy of his Western coun-terparts. Demanding significant pay raises is againstthe norm within the SOE bureaucracy. Yet, by sig-nificantly expanding the size and complexity of thefirm via large-scale acquisitions, a stronger case canbe made to enhance executive compensation. This,perhaps, is one of the reasons behind ICBCs $5.5billion acquisition of 20 percent of equity of SouthAfricas Standard Bank in 2007Chinas largest-ever OFDI deal at that time.

Another question is: given that globally as manyas 70 percent of the M&As fail (Peng, 2011: 397),will Chinese OFDI-based acquisitions do better thanglobal average? Since Chinas OFDI is a new

2 Being regional is not necessarily a sign of weakness (Rugman,2005). MNEs with a more global spread do not necessarilyoutperform MNEs with a more regional focus (Qian et al.,2010). While Chinese MNEs may not possess superior tech-nologies or managerial skills relative to their Western peers,Chinese MNEs may nevertheless be street smart after surviv-ing the institutional voids at home (Khanna and Palepu, 2010;Morck et al., 2008). Such capabilities may be very appropriatefor managing regional (as opposed to global) operations. Ithank both reviewers for raising this interesting point.

100 M. W. Peng


phenomenon, its long-run performance is not avail-able now. However, the limited evidence suggeststhat the performance of Chinese overseas acquisi-tions is unlikely to be better than the global average.Acquisitions have two phases: pre-acquisition andpost-acquisition. During the pre-acquisition phase,overpayment in bidding is the biggest problem.Hope, Thomas, and Vyas (2011) find that acquiringfirms from emerging economies such as China (rela-tive to those from developed economies) have a sys-tematic tendency to bid higher in order to acquireassets in developed economies. Hope et al. (2011:131) attribute this to national pridean indicationthat national, social, or political considerations couldinfluence decision making of individual decisionmakers (business owners or managers), either ratio-nally or irrationally. The fact that when bidding forthe same targets rival bidders from developed econo-mies back off but emerging multinationals keepincreasing the offering price is indicative of poten-tially severe managerial hubris (some of which maybe coated by national pride). It is also indicative ofpoor corporate governancethe lack of mechanismsto control executives and pull back. Clearly, over-payment can result in a winners curse in auctions.Most of the announcements of these (typically high-profile) overseas acquisitions end up destroyingshareholder value, because Chinese investors them-selves have little confidence in these MNEs abilityto effectively manage acquisitions (Chen and Young,2010).3

Announcing high-profile deals is one thing, butcompleting them is another matter. Chinese MNEshave particularly poor records in completing theoverseas acquisition deals they announce (Zhang,Zhou, and Ebbers, forthcoming). From 2000 to2008, only less than half (47%) of the overseasacquisitions announced by Chinese MNEs werecompleted, which compares unfavorably to IndianMNEs 67 percent completion rate (Sun et al.,2012). Chinese MNEs lack of ability and experi-ence in due diligence and financing is one reason, butanother reason is the political backlash and resis-tance they encounter, especially in developed econo-mies (Globerman and Shapiro, 2009). The 2005failure of China National Offshore Oil Corporations

(CNOOCs) bid for Unocal in the United States andthe 2009 failure of Chinalcos bid for Rio Tintosassets in Australia are but two high-profile examples.

Even assuming successful completion, integrationis a leading challenge during the post-acquisitionphase. This is a worldwide challenge (Peng, 2011)and not necessarily a Chinese problem per se.However, the lack of internationally savvy manage-rial talents at Chinese MNEs (discussed earlier)gives us little confidence that these firms will do abetter job integrating acquired targets and generatingvalue. Five years after TCL acquired FrancesThomson in 2004, TCLs chairman admitted thatTCL lacked managerial capabilities to successfullyintegrate Thomson and had to suffer huge losses.

In general, acquirers from China have often takenthe high road to acquisitions, in which acquirersdeliberately allow acquired target companies toretain autonomy, keep the top management intact,and then gradually encourage interaction betweenthe two sides (Birkinshaw, Bresman, and Nobel,2010). In contrast, the low road to acquisitionswould be for acquirers to act quickly to impose theirsystems and rules on acquired target companies(Birkinshaw et al., 2010). Although the high roadsounds noble, this is a reflection of these acquirerslack of international management experience andcapabilitiesthis is part of one L (learning) in theLLL framework (Mathews, 2006) discussed earlier.However, in the case of TCLs acquisition ofThomson, although all of Thomsons French andinternational executives were invited to stay after theacquisition, most of them left after two to threeyears. Unfortunately, after the departure of inter-national talents, TCLs Chinese executives did notlearn enough. TCL ended up changing CEOs fourtimes in its first four years after the acquisition,significantly contributing to its post-acquisitionturmoil. In another high-profile case, Lenovo alsodid not learn enough and failed to leverage its acqui-sition of IBMs PC division to attain global marketleadership. Recently, it scaled back its global ambi-tions and focused more on China markets.

DISCUSSION

Contributions and research implicationsThis article contributes to the literature by high-lighting three relatively unique aspects of the globalstrategy of emerging multinationals from China.

3 Chen and Youngs (2010) findings of the value-destroyingimpact of Chinese MNEs announcements of overseas acquisi-tions on shareholder value are corroborated by Aybar andFicicis (2009) similar findings, based on a larger, more globalsample of MNEs from a variety of emerging economies.



For researchers, large dividends may lie ahead in atleast five areas: (1) the institution-based view, (2) theresource-based view, (3) market entries, (4) M&As,and (5) corporate governance.

First, the institution-based view has historicallybeen enriched by research focusing on emergingeconomies (Khoury and Peng, 2011; Li and Peng,2008; Meyer et al., 2009; Peng, 2003; Peng et al.,2008, 2009). But that China literature primarilydeals with domestic firms in China and MNEscompeting in China. Now, research efforts probinginto the rise of Chinese MNEs active in overseasmarkets will further enrich the development of theinstitution-based view (Child and Rodrigues, 2005).Work on the role played by home country govern-ments opens a line of inquiry previously missing inglobal strategy research (Sun, 2010). The mostrecent development in the institution-based view isNorths idea of open access, defined as equal accessto competition in economic and political arenas sup-ported by rules of the game (North, Wallis, andWeingast, 2009). Leveraging the open access logic,the global strategy field can gain significant mileageby working on (1) how the Chinese government canensure open access for both SOEs and non-SOEs intheir competition for resources that facilitate OFDI,and (2) how host country governments can ensureopen access for Chinese and non-Chinese firms com-peting in their jurisdictions (Sun, 2010).

Second, novel frameworks such as LLL canpropel the resource-based view to new heights. Forexample, at a time when the U.S. economy is notdoing well and numerous U.S. jobs are being jetti-soned by domestic companies, what unique andspecial capabilities do some Chinese MNEs havewhen they come to manufacture products in theUnited States (Fortune, 2010)? Unlocking thispuzzle will not only enhance our understanding ofthis topic per se, but will likely contribute to thefurther development of the resource-based view(Mathews, 2006).

Third, the literature on market entries needs to beexpanded to account for the antecedents and conse-quences of decisively favoring M&As as opposed toother entry modes. On the one hand, one can arguethat in the absence of gradually expanding involve-ment overseas, Chinese MNEs have given up thepossible benefits of a real options approach. On theother hand, evidence on the benefits of a real optionsapproach is not conclusive (Tong, Reuer, and Peng,2008). Studies on the performance of ChineseMNEs overseas market entries are rare. Whether

their performance would have been better if they hadused a more gradual, real options-based approachremains to be seen in future research.

Fourth, M&A research can benefit from probinginto cross-border M&As undertaken by emergingmultinationals (Sun et al., 2012; Zhang et al., forth-coming). Why is there so much shock and aweassociated with such M&As (culminating in aChina on steroids literature such as Jacquess(2009) book, When China Rules the World, featuringan unsubstantiated view that Chinese MNEs aretaking over the world)?4 Media hoopla aside, Ibelieve this is, in part, because we in the globalstrategy research community have not done enoughresearch to inform the public debate about the natureof such cross-border M&As (Peng, 2006). In fact,we have not done much research on domestic M&Asin China and other emerging economies either(Yang, Sun, Lin, and Peng, 2011).5

In the first study comparing domestic M&As inChina and the United States, Lin et al. (2009) findthat acquisition behaviors are indeed different. Usingthe same theoretical framework and sampling thesame industry during the same period, Lin et al.(2009) report that in the United States, centrallylocated firms in an alliance network can enjoy thebenefits of high centrality and do not need to acquirealliance partnersthis finding is consistent with thepredictions made from standard network theory(Burt, 1992; Yang, Lin, and Peng, 2011). However,in China, centrally located firms, to derive benefitsfrom their high centrality, need to more aggressivelyand more quickly acquire alliance partnersthisfinding is opposite to standard predictions. Lin et al.(2009) speculate that due to the dynamic, fast-moving institutional transitions unfolding in China,any competitive advantage associated with highcentrality is likely to erode very rapidly, promptingcentrally located firms to quickly acquire alliancepartners. Spilling over to their overseas acquisitions,Chinese MNEs may also be interested in

4 The characterization of this literature as China on steroidscomes from Lampton (2010: 7).5 In the first paper in the management literature on the growth ofthe firm in emerging economies, Peng and Heath (1996) arguethat M&As are not feasible and, thus, not relevant for research-ers and that research attention should be devoted to genericgrowth and interorganizational relationships such as alliances.This argument made sense at that time, and this paper has goneon to become one of the most cited papers in this literature.However, as Peng and Heaths (1996) lead author, I have toadmit now that in retrospect, the prediction that M&As do notdeserve serious research attention is clearly wrong.

102 M. W. Peng


aggressively and quickly acquiring target firmsoutof fear that any competitive advantage associatedwith the acquisition moves may erode rapidly if theydo not act quickly. While this is one plausible expla-nation of the high propensity to use acquisitions toenter overseas markets, clearly, more research isneeded to probe into this propensity to engage inM&As (Yang, Lin, and Peng, 2011; Yang, Sun, Lin,and Peng, 2011).

Another M&A topic that has not been investigatedin the context of Chinas OFDI is M&A failure andabandonment (Zhang et al., forthcoming). This topicwarrants our attention because less than half of over-seas M&A deals announced by Chinese MNEs arecompleted (Sun et al., 2012). In general, globalstrategy researchers have conducted numerousstudies on completed acquisitions. In contrast, thereis very little research on abandoned acquisitions.

The fifth topic that will yield large dividends iscorporate governance (Globerman, Peng, andShapiro, 2011; Young et al., 2008). As alluded toearlier, aggressive (andaccording to somereckless) acquisitions may be indicative of manage-rial hubris and poor corporate governance. Chen andYoung (2010) have gone one step further by labelingsuch behavior expropriation of minority sharehold-ers. Given that most large Chinese MNEs are SOEs,whose interests these SOEs and their managers rep-resent when undertaking overseas expansion will befascinating areas for future research. A simplisticview that SOEs and their managers are soldiers forChina Inc., executing orders from Beijing is notsubstantiated by facts on the ground (Peng and Xiao,2011). Because of internal factions and competition,SOEs have become more competitive and exhibitmore diverse strategies. In fact, how to maintaincontrol is a constant headache for Beijing (Peng andXiao, 2011). From a corporate governance stand-point, how these diverse and complicated relation-ships play out, in the context of these MNEsoverseas drive, will remain a fascinating newresearch agenda in the future.

A fair question concerns how the Chinese govern-ment is fundamentally different from other homecountry governments of MNEs. For example, if theChinese government just offers low-interest loansfor international expansion, how is it different fromthe main bank in a Japanese keiretsu and the import-export banks of many other countries? The answer isthat the Chinese government does not just offerlow-interest loans. While most MNEs from Japanand other countries are private firms, most large

Chinese MNEs are SOEs. Thus, the Chinese govern-ment offers far more comprehensive support pack-ages, and has stronger control over these firmsstrategies. Another question is: if the Chinese gov-ernment is creating distortion that leads to capitalflight to the Cayman Islands and BVI, how is itdifferent from the loopholes in the U.S. tax law thatlead to so many special purpose entities by Americanmultinationals? The answer boils down to the mag-nitude of degree. Despite the numerous U.S. specialpurpose entities in the Cayman Islands and BVI,presumably for tax haven purposes, these countriesappear neither on the top five recipient countries ofU.S. OFDI nor on the top five countries making IFDIin the United States. These countries are routinelyamong the top five for both OFDI from China andIFDI in China.

Lastly, it is important to note that the characteris-tics for Chinese MNEs identified are relatively, butnot absolutely, unique. To some extent, MNEs fromother emerging economies also share some of thesecharacteristics. For example, Kalotay and Sulstarova(2010) report that OFDI made by Russian MNEs isalso influenced by home country policies. Barnard(2010) and Tan and Meyer (2010) document the lackof strong firm capabilities among MNEs from SouthAfrica and Taiwan, respectively. Gubbi et al. (2010)find that Indian MNEs are also fond of undertakingacquisitions overseas. Clearly, new theories on theseemerging multinationals will need to isolate them asone group vis--vis old-line multinationals fromdeveloped economies. At the same time, they willneed to differentiate MNEs from one country,such as China, from MNEs from other emergingeconomies (Li and Peng, 2008; Sun et al., 2012).

Implications for policymakers and practitioners

For policymakers in China, the implications aretwofold. First, they need to strengthen their positiverole behind OFDI, by sharing state-controlledresources with both SOEs and non-SOEs. Given thesuspicion of political motives behind some SOEsOFDI, the Chinese governments one-sided supportof SOEsat the expense of unmet needs of non-SOEswill only backfire. Second, Chinese policy-makers need to minimize their negative role.Unequal treatment between domestic and foreignfirms has driven some Chinese firms abroad, andremoval of such unequal treatment (technically abol-ished as of 2008) may reduce some capital round-tripping. Further, the Chinese government still has to



approve all OFDI deals. From the standpoint of aseller of a company in a host country, a bid from aChinese MNE, which is subject to approval by theChinese government, represents another layer ofuncertainty.

Policymakers in host countries need to embracepragmatic nationalism as opposed to being influ-enced by the China on steroids literature, which istypically not substantiated by data (Peng, 2012).6Pragmatic nationalism refers to considering boththe pros and cons of FDI and approving FDI onlywhen its benefits outweigh its costs (Peng, 2011:193). Despite media hoopla, data suggest that atpresent, Chinese OFDI represents only approxi-mately 1 percent of the global OFDI total, of which2 percent has come to North America (roughly 0.5%to Canada and 1.5% to the United States). Ranking12th in the world, China is not even among the top10 originating countries of OFDI (Peng, 2011: 183).Such a relatively tiny sum of OFDI simply does notallow Chinese MNEs to take over the world (Peng,2012; Peng et al., 2011). An exhaustive review of thepros and cons of Chinese FDI in the United States byan American expert and a Canadian expert notes:

It seems feckless on the part of U.S. policymakers tostigmatize Chinese investment in the United Statesbased upon imprecise and likely exaggerated esti-mates of the relevant costs and risks of that invest-ment (Globerman and Shapiro, 2009: 180).

Globerman and Shapiro (2009) proceed to adviseU.S. policymakers that Chinese OFDI necessitatesno additional, specific legislation. At a time whenU.S. unemployment is high, global FDI volume isdown, but companies from China are spendingbillions to build factories in the U.S.and creatingnew jobs for American workers (Fortune, 2010: 84),maintaining a welcoming investment climate isclearly beneficial to the host country. This holds truenot only for the United States, but also for other hostcountries in developed and emerging economiesalike.

Practitioners from China need to master the rulesof the game overseas. They can learn from theirJapanese colleagues, whose OFDI had a rocky startin the United States (and elsewhere) in the 1980s.

Over time, Japanese MNEs have persisted andbecome an indispensable part of the host countryeconomy. The key is to thicken ones skin, anattribute most Chinese claim to lack. The moreserious point is endurance in the face of resistance.They should also take a page from U.S., European,and Japanese executives who came to China in the1980s, when whether China should allow thesecapitalists and imperialists to make money waspart of the national debate. Over time, such a debatedisappeared in China and foreign MNEs, thanks totheir thick skin, are now a legitimate part of Chinaseconomic landscape. One last implication forChinese practitioners concerns acquisitions. Herethe standard advice from textbooks applies: do notoverpay, avoid a bidding war, and focus on integra-tion (Peng, 2011). In addition, given that high-profileacquisitions are often torpedoed by politicizedprocesses, it is advisable to go after low-profileacquisitions, which are routinely approved in hostcountries.

Non-Chinese practitioners dealing with ChineseMNEs can take comfort in knowing that relative toJapanese and Korean MNEs, Chinese MNEs aremore likely to appoint host country nationals as man-agers. This may be due to the lack of internationaltalents among their ranks or due to the more open-minded nature of some Chinese MNEs. The upshotis the same: more managerial jobs for locals. Thesejobs are not necessarily limited to those in theChinese subsidiaries and may also include consult-ing, financing, legal, and training jobs outside thesefirms.

On the competitive dimension, practitioners atlocal firms competing with the newly arrivedChinese subsidiaries need to be aware that ChineseMNEs intend to stay for the long haul (Fortune,2010). In other words, they are willing to absorbshort-term losses for quite a while. Once Chinesesubsidiaries start producing locally, a favoriteweapon used by incumbent firms against the arrivalof low-cost made-in-China goods (antidumpingduties) will become irrelevant. Therefore, the advicefor competitors of Chinese firms in host countries isto get the cost down and prepare to fightor beprepared to collaborate.

CONCLUSION

This article has focused on the three relativelyunique aspects associated with the global strategy of

6 United Nations data suggest that OFDI stock from Russia isfar more than that from China (Kalotay and Sulstarova, 2010).Yet, there is hardly any literature on Russia on steroids to takeover the world.

104 M. W. Peng


emerging multinationals from China. At this point,it is neither clear whether existing theories canadequately account for this new phenomenon, norevident that we need entirely new theories. What isclear is that future theory building and empiricalefforts in this area will feature both change and con-tinuity in the global strategy literature.

In conclusion, given both the strengths and weak-nesses of these emerging multinationals, I suggestthat a sensible approach is not to view them as scary,fire-breathing dragons on the verge of taking overthe worldthey are far from being capable of doingthat. To be sure, host country governments, firms,and the public need to be serious in dealing with thispreviously unknown breed of organizations on theglobal scene. Therefore, a useful metaphor is toview these emerging multinationals as fast, stronghorses unleashed by the forces of globalization inthe twenty-first century.

ACKNOWLEDGEMENTS

Ideas for this article were first presented as my keynotespeech at the China Goes Global Conference held atHarvard University Kennedy School of Government(October 2009). Portions of these ideas were also pre-sented at the Pacific Region Forum at Simon FraserUniversity (October 2009); Northeastern University(October 2009); UT Dallas as part of the 40@40 Lec-tures (March 2010); Society for Design and ProcessScience Conference, Dallas, Texas (June 2010);INSPER, ESPM, and FGV, So Paulo, Brazil (June2010); City University of Hong Kong (July 2010); andManagement Research Forum at the Chinese Universityof Hong Kong (December 2010). I thank Steve Tallman(editor) for encouragement, Kaz Asakawa (associateeditor) and two reviewers for guidance, and Ilon Alan,Dirk Boehe, Xiao-Ping Chen, Alvaro Cyrino, AndrewDelios, Larry Farh, Antonio Gelis Filho, Brian Hurley,Elizabeth Jones, Chung-Ming Lau, Kwok Leung, Eliza-beth Lim, Yuan Lu, Marjorie Lyles, Dan McCarthy,John McIntyre, Luiz Mesquita, Curt Moore, SheilaPuffer, Ravi Ramamurti, David Springate, Sunny LiSun, Anne Tsui, Rosalie Tung, Zhixin Xiao, and HaibinYang for helpful comments and discussions. BrianPinkham provided research assistance. This researchwas, in part, supported by the National Science Foun-dation (CAREER SES 0552089) and the ProvostsDistinguished Professorship at UT Dallas. All viewsand errors are mine and not necessarily those of theunderwriters.

REFERENCES

Ahlstrom D, Chen S, Yeh KS. 2010. Managing in ethnicChinese communities: cultures, institutions, and context.Asia Pacific Journal of Management 27: 341354.

Aybar B, Ficici A. 2009. Cross-border acquisitions and firmvalue: an analysis of emerging-market multinationals.Journal of International Business Studies 40: 13171338.

Barnard H. 2010. Overcoming the liability of foreignnesswithout strong firm capabilities: the value of market-based resources. Journal of International Management16: 165176.

Birkinshaw J, Bresman H, Nobel R. 2010. Knowledge trans-fer in international acquisitions: a retrospective. Journalof International Business Studies 41: 2126.

Buckley PJ, Clegg J, Cross AR, Voss H, Zheng P. 2007. Thedeterminants of Chinese outward foreign direct invest-ment. Journal of International Business Studies 38: 499518.

Burt RS. 1992. Structural Holes. Harvard University Press:Cambridge, MA.

Business Week. 2009. The China hype. 2 November: 3642.Chen YY, Young MN. 2010. Cross-border mergers and

acquisitions by Chinese listed companies: a principal-principal perspective. Asia Pacific Journal of Manage-ment 27: 523539.

Child J, Rodrigues SB. 2005. The internationalization ofChinese firms: a case for theoretical extension? Manage-ment and Organization Review 1: 381410.

Cui L, Jiang F. 2010. Behind ownership decision of Chineseoutward FDI: resources and institutions. Asia PacificJournal of Management 27: 751774.

De Buele F, Van Den Bulcke D. 2010. Changing policyregimes in outward foreign direct investment: fromcontrol to promotion. In Foreign Direct Investments fromEmerging Markets: The Challenges Ahead, Sauvant KP,McAllister G, Maschek WA (eds). Palgrave Macmillan:New York; 277304.

Deng P. 2009. Why do Chinese firms tend to acquire stra-tegic assets in international expansion? Journal of WorldBusiness 44: 7484.

Doz Y, Santos J, Williamson P. 2001. From Global toMetanational. Harvard Business School Press: Boston,MA.

Dunning J, Lundan SM. 2008. Institutions and the OLIparadigm of the multinational enterprise. Asia PacificJournal of Management 25: 573593.

Economist, The. 2010. The bigger and bigger picture. 15May: 4.

Fortune. 2010. American made . . . Chinese owned. 21May: 8492.

Gammeltoft P, Barnard H, Madhok A. 2010. Emergingmultinationals, emerging theory: macro- and micro-levelperspectives. Journal of International Management 16:95101.



Gao GY, Murray JY, Kotabe M, Lu J. 2010. A strategytripod perspective on export behaviors: evidence fromdomestic and foreign firms based in an emergingeconomy. Journal of International Business Studies 41:377396.

Globerman S, Peng MW, Shapiro D. 2011. Corporategovernance and Asian companies. Asia Pacific Journalof Management 28: 114.

Globerman S, Shapiro D. 2009. Economic and strategicconsiderations surrounding Chinese FDI in the UnitedStates. Asia Pacific Journal of Management 26: 163183.

Gubbi SR, Aulakh PS, Ray S, Sarkar MB, Chittoor R. 2010.Do international acquisitions by emerging-economyfirms create shareholder value? The case of Indian firms.Journal of International Business Studies 41: 397418.

Guillen MF, Garcia-Canal E. 2009. The American model ofthe multinational firm and the new multinationals fromemerging economies. Academy of Management Perspec-tives 23(2): 2335.

Hope OK, Thomas WB, Vyas D. 2011. The cost of pride:why do firms from developing countries bid higher?Journal of International Business Studies 42: 128151.

Huang Y. 2003. Selling China. Cambridge University Press:New York.

Jacques M. 2009. When China Rules the World. Penguin:New York.

Kalotay K, Sulstarova A. 2010. Modeling Russian outwardFDI. Journal of International Management 16: 131142.

Khanna T, Palepu KG. 2010. Winning in EmergingMarkets: A Road Map for Strategy and Execution.Harvard Business School Press: Boston, MA.

Khoury TA, Peng MW. 2011. Does institutional reform ofintellectual property rights lead to more inbound FDI?Evidence from Latin America and the Caribbean. Journalof World Business 46: 337345.

Lampton DM. 2010. NBR Analysis: Power Constrained:Sources of Mutual Strategic Suspicion in U.S.-ChinaRelations. National Bureau of Asian Research: Seattle,WA.

Lau CM, Bruton GD. 2008. FDI in China: what we knowand what we need to study next. Academy of ManagementPerspectives 22(4): 3044.

Li Y, Peng MW. 2008. Developing theory from strategicmanagement research in China. Asia Pacific Journal ofManagement 25: 563572.

Lin Z, Peng MW, Yang H, Sun SL. 2009. How do networksand learning drive M&As? An institutional comparisonbetween China and the United States. Strategic Manage-ment Journal 30(10): 11131132.

Luo Y, Tung RL. 2007. International expansion of emergingmarket enterprises: a springboard perspective. Journal ofInternational Business Studies 38: 481498.

Luo Y, Xue Q, Han B. 2010. How emerging marketgovernments promote outward FDI: experience fromChina. Journal of World Business 45: 6879.

Mathews JA. 2006. Dragon multinationals: new players in21st century globalization. Asia Pacific Journal of Man-agement 23: 527.

Meyer KE, Estrin S, Bhaumik SK, Peng MW. 2009.Institutions, resources, and entry strategies in emergingeconomies. Strategic Management Journal 30(1): 6180.

Morck R, Yeung B, Zhao M. 2008. Perspectives on Chinasoutward foreign direct investment. Journal of Interna-tional Business Studies 39: 337350.

North DC, Wallis JJ, Weingast BR. 2009. Violence andSocial Order: A Conceptual Framework for InterpretingRecorded Human History. Cambridge University Press:New York.

Peng MW. 2003. Institutional transitions and strategicchoices. Academy of Management Review 28(2): 275296.

Peng MW. 2006. Making M&A fly in China. Harvard Busi-ness Review 84(3): 2627.

Peng MW. 2011. Global Business (2nd edn). South-WesternCengage Learning: Cincinnati, OH.

Peng MW. 2012. Why Chinas investments arent a threat.Harvard Business Review, February: http://blogs.hbr.org/cs/2012/02/why_chinas_investments_arent_a.html(accessed 23 February 2012).

Peng MW, Bhagat RS, Chang SJ. 2010. Asia and globalbusiness. Journal of International Business Studies 41(3):373376.

Peng MW, Heath PS. 1996. The growth of the firm inplanned economies in transition: institutions, organiza-tions, and strategic choice. Academy of ManagementReview 21(2): 492528.

Peng MW, Luo Y. 2000. Managerial ties and firm perfor-mance in a transition economy: the nature of a micro-macro link. Academy of Management Journal 43(3):486501.

Peng MW, Sun SL, Blevins DP. 2011. The social responsi-bility of international business scholars. MultinationalBusiness Review 19(2): 106119.

Peng MW, Sun SL, Pinkham B, Chen H. 2009. Theinstitution-based view as a third leg for a strategy tripod.Academy of Management Perspectives 23(3): 6381.

Peng MW, Wang DYL, Jiang Y. 2008. An institution-basedview of international business strategy: a focus on emerg-ing economies. Journal of International Business Studies39(5): 920936.

Peng MW, Xiao ZX. 2011. Busting the China Inc. myth.Harvard Business Review, June: http://blogs.hbr.org/cs/2011/06/busting_the_china_inc_myth.html (accessed 23February 2012).

Qian G, Khoury TA, Peng MW, Qian Z. 2010. Theperformance implications of intra- and inter-regionalgeographic diversification. Strategic ManagementJournal 31(9): 10181030.

Ramamurti R, Singh JV (eds). 2009. Emerging Multi-nationals in Emerging Markets. Cambridge UniversityPress: New York.

106 M. W. Peng


Rugman AM. 2005. The Regional Multinationals. Cam-bridge University Press: Cambridge, U.K.

Sun SL. 2010. Internationalization, diversification, andentrepreneurship strategies of Chinese firms. Unpub-lished PhD dissertation, University of Texas at Dallas.

Sun SL, Peng MW, Ren B, Yan D. 2012. A comparativeownership advantage framework for cross-border M&As:the rise of Chinese and Indian MNEs. Journal of WorldBusiness 47: 416.

Tan D, Meyer KE. 2010. Business groups outward FDI: amanagerial resource perspective. Journal of InternationalManagement 16: 154164.

Tao QT. 2011. Competing in Chinas automobile industry.In Global Business (2nd edn), Peng MW (ed). South-Western Cengage Learning: Cincinnati, OH; 288294.

Tong T, Reuer J, Peng MW. 2008. International jointventures and the value of growth options. Academyof Management Journal 51: 10141029.

Witt MA, Lewin AY. 2007. Outward foreign direct invest-ment as escape response to home country institutionalconstraints. Journal of International Business Studies 38:579594.

Yamakawa Y, Peng MW, Deeds D. 2008. What drives newventures to internationalize from emerging to developedeconomies? Entrepreneurship Theory and Practice32(1): 5982.

Yang H, Lin Z, Peng MW. 2011. Behind acquisitions ofalliance partners: exploratory learning and networkembeddedness. Academy of Management Journal 54(5):10691080.

Yang H, Sun SL, Lin Z, Peng MW. 2011. Behind M&As inChina and the United States: networks, learning, andinstitutions. Asia Pacific Journal of Management 28(2):239255.

Yang X, Jiang Y, Kang R, Ke Y. 2009. A comparativeanalysis of the internationalization of Chinese andJapanese firms. Asia Pacific Journal of Management 26:141162.

Young MN, Peng MW, Ahlstrom D, Bruton GD, Jiang Y.2008. Corporate governance in emerging economies: areview of the principal-principal perspective. Journal ofManagement Studies 45: 196220.

Zhang J, Zhou C, Ebbers H. Completion of Chinese over-seas acquisitions: institutional perspectives and evidence.International Business Review. Forthcoming.



document2

Documents