Multinational enterprises (MNEs) operating in China face a unique set of challenges, according to new research published in the Journal of International Business Studies. The recently published study, Evolution of MNE Strategies amid China’s changing institutions – a thematic review, co-authored by Klaus Meyer, Professor of International Business from the Ivey Business School, analyzes how China's distinctive institutional environment shapes the strategies and operations of foreign companies within its borders. These findings emerge from a comprehensive review of 331 academic articles published between 2001 and 2022. As China continues to attract significant foreign investment, understanding and navigating these challenges has become crucial for MNEs seeking to capitalize on the country's economic growth.
Meyer examines these challenges revealed in his research in this installment of Impact’s Ask the Experts.
What are the main challenges MNEs face when operating in China?
When it comes to operating in China, our research reveals MNEs face a number of specific challenges. First and foremost is the issue of gaining organizational legitimacy – essentially, earning the right to operate within China's unique business landscape. This goes beyond just following the rules; it's about being accepted by the local stakeholders. Secondly, MNEs have to grapple with protecting their property rights, especially their intellectual property (IP). China's approach to IP protection has historically been quite different from what many Western companies are used to. Lastly, there's the complex task of navigating China's institutional environment. It's not just about overcoming barriers; it's also about understanding how Chinese institutions both enable and direct business activities in ways that can be quite foreign to outside companies.
How do MNEs gain legitimacy in China?
Gaining legitimacy in China is a multifaceted process. Of course, complying with local laws and regulations is the bare minimum, but it goes far beyond that. MNEs need to build positive relationships with a wide range of stakeholders – from consumers to businesses to government officials. One key aspect that often gets overlooked is the importance of offering something unique. Ultimately, a key condition that legitimizes an MNE’s business is the ability to offer something that local firms cannot. They need to bring products, services, or expertise not found in the resident marketplace. It's also crucial for MNEs to develop strategies that are tailored to the Chinese market. What works in their home country often doesn't translate directly to China. Interestingly, engaging in corporate political activities can be beneficial. By providing feedback to Chinese policymakers, MNEs may be able to indirectly influence the institutional environment in ways that enhance their legitimacy. One common misconception is that MNEs should simply copy local firms to fit in. Our research shows that this rarely works well – MNEs need to find a balance between adapting to local norms and maintaining their unique competitive advantages.
What strategies can MNEs use to protect their intellectual property rights (IPR) while operating in China?
MNEs operating in China face significant challenges in protecting their intellectual property rights due to historically weak institutional protection and enforcement. Despite legislative advances, cultural attitudes and law enforcement practices still hinder effective IPR protection. To mitigate these risks, MNEs employ various strategies. They often practice selective technology deployment, showing more willingness to accept IPR risks for peripheral technologies or components of complex products, while safeguarding their core technologies.
When full internalization is not feasible or too costly, MNEs adopt quasi-internalization mechanisms. These include combining contractual and relationship governance, choosing partners with compatible corporate agendas and organizational fit, and fostering internal linkages within the global MNE. These MNEs must also navigate the delicate balance between transferring knowledge-based assets to Chinese subsidiaries for value creation and maintaining control over these assets.
As local Chinese firms' technological competence increases, MNEs seek to deploy more advanced technologies to remain competitive. Indeed, in areas where Chinese companies are racing ahead technologically, such as electrical vehicles or digital business models, Western MNEs may develop innovations locally to stay ahead in the market. Such strategies combining global resources with location-specific resources in China require, careful, risk-aware practices for China operations.
How do Chinese industrial policies influence MNE strategies?
Chinese industrial policies play an intriguing role in shaping MNE strategies. Rather than just setting rules, Chinese government policies actively enable and direct business activities. For instance, the government often promotes investments in sectors it deems strategic, or in regions it wants to develop. This creates opportunities for MNEs, but it also means to some extent they need to align their strategies with these national priorities. There are cases where local policies guide MNEs toward activities that support technological and economic development in specific ways. It's a delicate balance. These policies aim to promote growth and technological catch-up, but they're also designed to maintain government control over the economy. This creates a unique environment where MNEs must navigate both constraints and opportunities. They need to understand not just what's allowed, but what's encouraged, and how that aligns with their own goals.
How is China's institutional environment different from other emerging markets?
China's institutional environment is quite unique among emerging markets. In many emerging economies, we often talk about "institutional voids" – gaps in the market-supporting institutions that companies rely on. But in China, it's a different story. Instead of voids, we see a mix of constraining and enabling institutions. The government is much more actively involved in directing economic activities than in many other markets. For instance, there are specific programs and policies designed to attract foreign investment, but also to promote domestic technological catch-up. This creates a dynamic where MNEs might be courted for their expertise in one area, while facing increasing competition from rapidly advancing domestic firms in another. It's not just about overcoming barriers; it's about understanding and leveraging a complex institutional landscape. This environment creates unique challenges for MNEs, but also unique opportunities. Companies that can navigate this landscape effectively can find significant success, but it requires a level of institutional awareness and adaptability that goes beyond what's needed in many other markets.
For more information on the challenges and opportunities MNEs face in China, read Meyer’s latest research Evolution of MNE Strategies amid China’s changing institutions – a thematic review in The Journal of International Business Studies.
