Why do Chinese firms go global if China’s such a large market?
This is the second in a three-part series of posts that summarize key takeaways from my recent trip to Europe where I spoke about topics from my new book, China Goes West: Everything You Need to Know About Chinese Companies Going Global (To read Part I about Chinese companies building global brands, click here).
Over the course of my trip, I delivered presentations about Chinese companies going global to 14 different organizations across seven cities. The most interesting part of each session for me personally was the Q&A session following my talk where I gained firsthand insight into what specific aspects of this trend mattered most to my audience. The questions varied significantly throughout the trip as audiences ranged from business executives at events like the Hamburg Summit, to academics at universities like the London School of Economics to government and policy at the Institute of International and European Affairs. One question I received at almost every event was:
“Why do Chinese companies want to expand internationally if the domestic market is so large?”
It would take an entire book to provide a sufficient answer to this question, but I typically answered by breaking the common misconception held by observers of this trend. People all too often attribute Chinese companies going global exclusively to the government’s 走出去 or ‘go out’ policy. Indeed, government policy is an important factor to consider as the internationalization of Chinese firms helps the government invest its vast foreign exchange reserves (state sector investment), obtain critical natural resources to sustain China’s economic growth, and develop a series of “national champions” (Chinese firms that are able to compete globally in key industries).
However, focusing solely on government policy only reveals one part of the story. Even more important – and what matters most for Western multinational executives– are the business drivers for why Chinese companies go global. The business environment in China has changed dramatically in recent years – the days of 10% GDP growth are over, labor costs have increased significantly, and competition has heated up across industries. Chinese companies are not immune from the consequences of doing business in this new reality. As a result, Chinese firms are going global for many of the same reasons that Western firms do, including:
- Geographic diversification
- New capability acquisition (ex: technology, brands, talent)
- Cross-border capital relocation
It’s also important to keep in mind that there is still a lot of opportunistic investment occurring that may neither be due to government policy nor sound business strategy and may result from the personal motivations of the executives leading these Chinese firms. That’s why we see examples like a Chinese bulldozer firm acquiring an Italian yacht company the same way we have previously seen Chinese firms in a heavy industry like chemicals decide to enter obscure business areas like noodle restaurants domestically.
Come back next week to find out whether Western multinationals should view the internationalization of Chinese companies as a threat or an opportunity, or feel free to leave a comment and share your views on why Chinese companies are expanding beyond the walls of the Middle Kingdom.