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Business Model for Chinese Enterprises to Make Overseas Investment, Merger & Acquisition: Types and Conclusions
2010-07-28
By Chen Xiaohong & Wang Jicheng, Research Team on "Study on Approaches to and Policies for Promoting Corporate Mergers and Acquisitions in Economic Adjustment Period", the DRC
Research Report No 065, 2010
I. Theories of Dunning and Porter Can Be Used to Describe and Analyze the Factors and Models Affecting Overseas Investment Made by Chinese Enterprises
Since 21st century, overseas investment, merger and acquisition conducted by Chinese enterprises have been growing rapidly. According to the Ministry of Commerce, from 2002 to 2008, overseas investment stock of Chinese enterprises increased by 6 times and the investment flows went up by 20 times, with the investment stock and flows reaching 1,840 US dollars and 55.9 billion US dollars respectively in 2008; merger and acquisition made by Chinese enterprises abroad have also developed fast, with the amount of investment, merger and acquisition adding up to 54% of all overseas investment in 2008.
Under such circumstances, some have raised the following questions: What is the mechanism for Chinese enterprises to rapidly increase their overseas investment while their technologies and business capacity are relatively poor? Is the overseas investment growing too fast? What factors are expediting the investment growth?
The authors are of the opinion that Dunning's Eclectic or OLI theory and Porter's theory on value chain and competitive advantages can help answer the above-mentioned questions.
According to Dunningh's OLI theory, three primary factors are affecting or deciding on transnational investment by enterprises: Ownership of resource skills (O, business resource advantages such as technology and the basis for overseas investment owned by multinational enterprises), Location (L, which can bypass the trade barriers and is accessible to market and to interests of low-cost bases), and Internalized advantages (I, costs saved by turning transnational trade into intra-company transactions through transnational investment)1. According to the authors, this theoretical framework can be used to analyze the factors affecting transnational investment and can also be used to analyze the factors affecting transnational merger and acquisition. What only needs to be considered is whether the cost of merger and acquisition can be 1+1＞2 after the merger and acquisition. If the M&A profit and welfare is bigger than M&A cost, then the merger and acquisition make sense.
People used to think that only with the business resources and technological advantages can enterprises conduct transnational investment. Dunning pointed out that enterprises can form their advantages also by combining different objectives and factors and that transnational investment strategies and models adopted by multinational enterprise can differ. By giving examples, Dunning pointed out that there can be different models (Column 1).
In Column 1, Models ② and ⑥ are virtually used to make overseas investment by making use of the comparative advantages (0) of enterprises in terms of technology and service; Model ③ is similar to the aforesaid two models, that is, investors must have comparative advantages (0), but should also pay close attention to applying economies of scale brought about by investment, merger and acquisition to increase such comparative advantages (0); Model ④ is actually used by enterprises to acquire such strategic resources as technologies owned by other countries through investment. merger and acquisition (L) and to gain efficiency and development through internal integration; Model ① is virtually used to gain direct access through investment, merger and acquisition to the needed natural resources (L) exclusively possessed by other countries so as to step up those advantages (0).
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Column 1Types of Dunning's Transnational Investment and the Influencing Factors(OLI) ①Gaining of natural resources. To use self-owned funds, technologies, marketing management and relevant supplementary resources as the basis (O) instead of market transactions to gain access to resources with lower cost (I) in countries rich in natural resources and relevant facilities (L). ②Gaining of market. To use self-owned funds, technologies, business organizations, economies of scale and brand formation as the basis (O) to reduce transaction costsby directly producing and supplying on the market of the country (I) where trade barriers exist and policies encouraging investment are carried out (L). ③Pursuit of efficiency. To use self-owned funds, technologies, business organizations and marketing management and the gained resource capabilities characterized by economies of scope and geographical advantages as the basis (O) to gain access through internalization to economies of scale and governance co-efficiency (I) in countries where products are specialized and economically low wages are distributed (L). ④Gaining of strategic resources. To reduce risks and raise efficiency (I) through internalized efficiency based on the above-mentioned capabilities (O) and in countries where needed technologies, markets and other assets are available (L). ⑤Commercial intercourse. To use self-owned superior products and marketing management ability as the basis (O) to stabilize through internalization the production of superior products and reduce contradictions between the agents on the markets that are attractive and have potential customers (L). ⑥Support of services. To use rich customer service experiences accumulated in the native country as the basis (O) to provide customers on valuable customer markets (L) through internalization with services (I) in a more stable and effective way. Source: First Chapter written byAsakawa Kazuhiro (2003). |
According to the theory on value chain and competitive advantage put forward by Porter in his famous Competitive Advantage, the competitive advantages are related to various links of the value chain, including R&D, designing, procurement, manufacturing, marketing and service, and to the whole of the chain (including coordination and financial resources), and the competitive advantages of different enterprises probably come from different links and their combinations2. It suggests that enterprises may increase the advantages of some links in advance through strenuous efforts or merger and acquisition, then form the overall advantages and capitalize on the overall advantages to improve the weak links and to further develop the overall abilities.
Theories of Dunning and Porter have provided an enlightenment that when arguing whether Chinese enterprises have conditions for "going global", we should not only make general discussions and comparisons but also make in-depth breakdowns to see the importance and advantages of making transnational integration of the value chains. Chinese enterprises are less advantageous in R&D and brand marketing management than the leading enterprises of the developed countries. However, Chinese enterprises may be advantageous in some links of the value chain, and appropriate combination of transnational resources can give rise to new advantages. Discovering and applying the advantages from the integration of resources on the value chain calls for entrepreneurs to be bold in making explorations.
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1Source: Dunning (1993) "Multinational Enterprise and Global Economy". There are actually many works and literature introducing Dunning’s theories.
2Porter (1985) has divided the value chain into 5 main links, 3 subsidiary links and 1infrastructure (finance, plan and quality, etc.). This paper has not adopted Porter's categorization and only tells about the importance of the links. See Chapter 2 of Competitive Advantage (1988 Chinese version) by Porter (1985), China Financial & economic Publishing House.
