Connect with us

China

Why Foreign Firms Struggle to Break Into China

In 2017, an analysis by Goldman Sachs found that while S&P 500 companies earned 30 percent of their revenues outside of the United States, China accounted for only 1 percent of their revenues.

Avatar

Published

on

For growth-starved Western entrepreneurs, the Chinese market is appealing. Think about it: Since 1995, China’s economy has grown by a factor of 18.5, from US$735 billion to US$13.6 trillion (excluding Hong Kong).

Loading...

In terms of purchasing power parity, it is now the number one economy in the world.  

Trade wars are not even the biggest problem.

Accordingly, many foreign companies have gone out of their way to build supply chains within the country and go-to-market mechanisms in order to access its market. Across industries, American firms have invested more than US$276 billion in China since 1990.

In 2018, foreign direct investments from all countries flowing into China reached US$139 billion.

Despite these investments, only some Western companies have been able to make large inroads in the Middle Kingdom. For example, Coca-Cola, which has been in China for 40 years, now sells 140 million servings of soda in the country per day.

Since 2012, China has been General Motors’ largest retail sales market. Although sales have since slowed down, the Greater China region was Apple’s third-largest source of revenues in 2018. Buoyed by brisk sales and despite the existence of copycats, Lego is planning to open 80 new shops in China this year.

But putting these success stories aside, our new research shows that China remains an elusive market for most US businesses. In the S&P 500, a mere 41 companies generate 10 percent or more of their global revenues in China.

In 2017, an analysis by Goldman Sachs found that while S&P 500 companies earned 30 percent of their revenues outside of the United States, China accounted for only 1 percent of their revenues.

A proper trade agreement won’t be a panacea

Nonetheless, many Western business leaders are hoping for China and the US to reach a trade agreement as soon as possible. An underlying assumption is that the end of the trade war will create a kind of golden bridge for US companies to reach China’s one billion-plus consumers.

A proper trade agreement is unlikely to be the key to such riches. Our research shows that breaking into China is very difficult because of its intricate business landscape, one dominated by domestic mega firms operating in a tight matrix of political influence.

In particular, the Chinese Communist Party controls a lot more enterprises, directly or indirectly, than Westerners imagine. This creates severe hurdles for foreign firms that wish to do business there.

There are parallels to be drawn between China’s fast-growing conglomerates and the chaebol of South Korea and keiretsu in Japan. These large groups of companies are themselves embedded in sprawling, hierarchical businesses. Similarly, the affiliates and subsidiaries of Chinese mega firms are typically part of a network of cross-owned enterprises. The ownership structures, often opaque, represent high barriers to entry for foreign companies.

Adding to these difficulties, Chinese mega firms are unique in the degree of involvement of the government, be it at the national, provincial or municipal level, in corporate affairs. Rather than merely serving as a regulator, the state is itself a large business owner and plays a much greater coordination role than most Westerners…

Read More

INSEAD Knowledge is the expert opinion and management insights portal of INSEAD, The Business School for the World. Knowledge showcases the latest business thinking and views from award-winning faculty and global contributors

China

Clear skies over Asia’s new foreign investment landscape?

East Asia Forum

Published

on

Compounding the fallout of the US–China trade war, the global pandemic and recession have caused considerable speculation on the future of foreign investment and global value chains (GVCs). But though there is likely to be some permanent change, it will probably not be as great as politicians expect.

Loading...
(more…)

Continue Reading

China

Will Myanmar’s coup help China influence ASEAN?

The Myanmar crisis is becoming increasingly tragic, with the military’s use of lethal force now killing over 60 protestors.

Avatar

Published

on

On 16 January 2021, Chinese Foreign Minister Wang Yi concluded a visit to four ASEAN countries. One destination was Myanmar, the upcoming country coordinator of the ASEAN–China dialogue and now centre of international attention after the country’s military seized power.

Loading...
(more…)

Continue Reading

China

Rapid growth in China post-COVID makes it ripe for investment

Being “first in and first out” of COVID-19, China is the only country among the G20 that is thought by the Organisation for Economic Co-operation and Development (OECD) to have increased GDP in 2020.

Avatar

Published

on

China’s economy rebounded sharply.

In January 2020 as the world began to learn of COVID-19, many market observers predicted a challenging year for Asia. While there continue to be headwinds from the health and economic crisis, Asia, and China in particular, has demonstrated comparatively advantageous resilience.

Loading...
(more…)

Continue Reading

Most Viewed

Subscribe via Email

Enter your email address to subscribe and receive notifications of new posts by email.

Join 14,079 other subscribers

Latest

Trending