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Internationalization pathways of Chinese private firms

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Nigel Driffield and Meng Song show that variations in internationalization of private Chinese firms can be better explained by traditional internationalization theories than by the typical approach proposed in the recent literature that centers on state-created advantages.

Image courtesy of interviewee. April 15, 2024

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The discussion focuses on the internationalization of Chinese firms, differentiating between state-owned enterprises (SOEs) and private sector firms. The speakers argue that prior studies overly generalize the behavior of Chinese firms, conflating state influence with the characteristics of being Chinese. They suggest that private Chinese firms follow similar internationalization pathways as firms from other countries, engaging in a gradual process of exporting before moving to foreign direct investment (FDI).

Key points include:

1. **Distinction Between State Influence and Chinese Identity**: The speakers emphasize the importance of separating the effects of being state-owned from the broader notion of Chinese firms, indicating that many private firms exhibit behaviors aligned with international norms.

2. **Internationalization Pathways**: They observe that private Chinese firms’ strategies for international growth resemble those of firms from developed nations, involving incremental steps such as starting with exporting and then moving into foreign markets progressively.

3. **Role of Firm-Specific Advantages**: The discussion highlights that individual firm capabilities—such as efficiency, innovation, and technology—are crucial for success in international markets, rather than solely relying on government support.

4. **Comparative Analysis**: They recommend comparing Chinese firms that successfully internationalize with those that do not, rather than broadly comparing all Chinese firms with those from developed nations.

5. **Impact of Financial Performance**: The financial health of private firms is vital for them to engage successfully in international endeavors, particularly in seeking knowledge abroad through various forms of investment.

6. **Policy Implications**: The speakers suggest that if the Chinese government aims to boost non-state-owned firms' roles in international markets, it should consider policy support to enhance their financial capabilities and resources.

The overarching theme is that understanding individual firm dynamics is essential in crafting effective policies for enhancing China's global business presence.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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I think where we came at this from is there are an awful

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lot of people who study internationalization

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of Chinese firms,

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and they then infer various things from their results

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and they say, so Chinese firms are very,

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very different from everybody else.

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And actually what, what we thought was they're conflating

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state owned or state influenced,

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and Chinese, those two things not being the same.

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Um, so for example, were you to look at the Korean firms

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who internationalized with,

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although they were private with, with strong,

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I'll call it encouragement

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or strong emphasis on strategy from their home government.

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They, they took a particular

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internationalization development pathway.

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And, and Chinese SOEs state home enterprises are,

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are very similar that they are, if not directed,

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but strongly influenced by the government

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to achieve certain names.

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Um, and we thought, well, that's, that's a feature

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of being state owned or state influenced.

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It's not really a feature of being Chinese.

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So what we did specifically was to take a set

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of private sector firms, private sector Chinese firms,

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and then say, well,

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what does their international pathway look like?

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And, and that's when we get actually their international

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pathway looks exactly the same as any other set of firms

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who internationalize, they could be Danish or Malaysian or,

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or whatever that, that it's a set

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of private sector firms making a series of decisions over

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how they internationalize that they might sort

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of dip their toe in the water than they do a little bit more

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than they do a little bit more and so on.

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So, so that was very much where we started from, was to, was

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to try and disentangle the idea

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of being Chinese from being state owned

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because we see an awful lot

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of Chinese investment coming into the west

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and coming into the uk.

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And if we're going to try and attract it or not attract it

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or maximize the benefits of it, we need

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to better understand their strategy.

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I totally agree with Nigel

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and thank you very much for giving such a good explanation.

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So, the point I think Nigel wants to make is to,

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instead of comparing,

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multinationals from develop countries with multinationals,

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coming from China directly,

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and we need to compare, multinationals coming from China

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and the firms from China that do not manage

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to go internationalized.

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Yeah. So this is our, point of making this paper.

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So if we, if we start with, there's, there's an awful lot

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of literature that tries to conceptualize

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internationalization decisions,

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and typically they tell the story as though

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it's a nicely laid out incremental process.

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So for example, it used to be that they would tell a story

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where you start off by exporting,

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then you export a little bit more, then you engage

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with maybe, some form of, sort

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of assembly process in a another country.

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And then eventually as, as you reach a certain scale,

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then you start making stuff abroad.

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And, and it's, it's, the literature often tells this story

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as though it's a really kind of smooth incremental process

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of we do this, then we do this, then we do this, and,

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and life's not like that.

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You know, life is, life is messy.

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You can, you know, the, the famous strategy about, you know,

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everybody has a strategy until they get punched in the face.

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Um, business is exactly the same.

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You know, that, that you can have a brilliant strategy,

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but then something happens, you know, you can have a,

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an amazing strategy.

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And then as many firms founded, you know, the president

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of America sends out a tweet

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and that changes, changes everybody's perception of things.

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Um, so, so I think that the, so the, the, as I say,

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the prior literature sets out this,

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this kind of nice smooth process.

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And one of the things that we're saying is actually,

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it's not like that that, that it's,

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it can be sector specific, it can be region specific.

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Different firms might behave in different ways.

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Um, one of the things that, that we highlighted for example,

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is, is the literature talks about these things

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that they tend to label as firms specific assets

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or ownership advantages.

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In other words, things that, things that are specific

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to the firm that's enabled a firm to internationalize.

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And, and one of the things we identify is actually, yes,

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that is true, but they also, they also covered things

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that you might not have thought about, like particular kind

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of, you know, particular accreditations

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or particular types of organization

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or the ability to manage resources in particular ways rather

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than just kind of focusing on technology

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or your ability to make widgets cheaper than somebody else's

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ability to make widgets.

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So I think, I think that's what we're trying

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to get across. I think.

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So I think another contribution of this paper is

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that we distinguish, between FDI,

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motive motives

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and we look at the, drivers

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of conducting FDI motivated by different motives.

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So we, we find that for, FDI for firms looking,

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for knowledge, they need to really have like strong,

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knowledge, themselves,

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and they also need to have really good financial

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performance, to allow them to seek knowledge abroad.

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Whereas, the series also predict

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that exporting is leading, to FDI.

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But we also, in our finding, we find that,

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exporting experience is more related to firms

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that are seeking market abroad rather than, more related

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to other, motivated FDI.

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So I think that's another contribution that,

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this paper makes.

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So, the data we used, is called national survey of

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above scale private firms in China.

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So it is collected

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and maintained by the supervisory agency

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of private sector in China is called All China Federation

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of Industry and Commerce.

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So basically conducts, conducts yearly surveys

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of private sectors to understand their behavior,

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to understand their role in the Chinese economy.

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So the, the, the, the,

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the firms are really large scale firms.

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Uh, they, they, they have operating, income

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of more than 3 million, RB all

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for about 45 million US dollars per year.

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And, the reason for us to use this survey is, is that

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because it covers a wide range of, firm,

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characteristics, their business activities,

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their innovation behavior,

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and their internationalization behavior.

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So, we have lots of variables that is rarely available,

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in large scale service.

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And also, for the, modeling, we're using,

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multilevel, sorry, multi logic model

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and logic model to study what makes firms

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to internationalize

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and to study, what motivates firms to do different kinds

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of FD activities.

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So I think our, key story is that, we compare firms

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that, are able to do exporting

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and firms that are able to do FDI

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and we compare those firms with, firms

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that remain domestic,

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that only serves domestic market, right?

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So what we find that is, if you want, if,

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if a Chinese private firm wants to do exporting, they need

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to be efficient enough, they need to have a higher,

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higher productivity than other firms.

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And they also need to have some knowledge in, in, in terms

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of innovation input such as r and d

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and also innovation output such as patents.

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So these capabilities, these capabilities in, efficiency

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and technologies allow them to go, to, export

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and for, for, other firms that wants to,

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to go a step further to conduct FDI, exporting,

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destinations important for these firms

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to learn about foreign markets, to learn about, for example,

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product, preferences, customer preferences,

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about, the competition, what's the competition like,

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in foreign countries, and also accumulate some experience

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to operate business there.

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And all this kind of experience, we summarize it

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as exporting experience in helping firms to,

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conduct FDI.

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And then, if some firms wants to go further,

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if if they are, seeking knowledge abroad,

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they really need to have, a strong knowledge themselves,

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and also need, need to have, internal,

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financial support to allow them to seek knowledge abroad.

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So I think that's our story. Thank you. Yeah.

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So I think, I think amongst some that up really well,

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and you'll notice that the story that Hmong told,

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there was a firm level story.

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It was all about firms doing this firm,

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firms having disability.

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And, and that's one of the things that I think we, we want

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to bring out that perhaps I didn't mention earlier, that,

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an awful lot of the literature

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that focuses particularly on emerging economies

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and FDI from emerging economies essentially contrasts

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what we call firm specific advantage that we talked about

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before with what is usually labeled

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as country specific advantage.

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And the idea is that firms from the west have, if you like,

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leading technology, they have knowledge, they have all

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of this, firms from emerging economies.

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What they have is they have, they have government support

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or they have, they have, they have activities

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that they're doing at large scale, you know,

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like say RAM in India making millions and millions

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and millions of packets

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of paracetamol every day, whatever it is.

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But it underplays the technological

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or the knowledge side of things.

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And what we've demonstrated here is

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that actually when you look at a set of firms where you can,

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you can isolate that country level effect

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because all of these firms are Chinese,

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you still then get the importance of the firm.

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In other words, it's not government support

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or government influence that's driving this, it's knowledge

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and technology and ability

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amongst Chinese firms exactly the same

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as if we were talking about German firms.

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So I think as ever with these things, given one of, one

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of the things that you, that you notice

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is foreign investment is something

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that governments think they should have a policy on.

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And so if you are going to have a policy on something,

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ideally you should also understand it.

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And one of the things that we see,

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and this is not a, a comment specifically on, on the UK

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or anything like that, if you are,

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but if, if you're going to have a policy that says, we want

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to not just attract this stuff,

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but we want to make sure

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that we generate the maximum benefit, you know,

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if we're offering a, a subsidy

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or if we're offering some form of incentive, you then want

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to maximize the benefit, whatever that benefit might be,

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whether it's technology or jobs

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or knowledge or, or whatever.

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So if you are, if you're going

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to have a policy on something first,

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you need to understand it.

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Um, so one of the things that we are trying

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to do in this paper is to help people understand

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what the motivations are, four firms,

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Chinese firms seeking to go abroad.

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Um, the, the literature tends to focus as, as Mung alluded

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to before, tends to focus on phrases like market seeking,

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IE looking for new markets or technology seeking

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or efficiency seeking.

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And what we're demonstrating is

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that actually the Chinese firms

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that are internationalizing are doing it in exactly the same

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way that sometimes they're looking for new markets,

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sometimes they're looking for, for new technology.

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What this tells us is where you can identify ex-ante firms

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who are from anywhere internationalizing to connect

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to technology in the, the host country.

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That's the stuff you don't subsidize.

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You know, by all means let firms come in if they're gonna

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create jobs, but what you don't do is give incentives

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for people to connect to your technology.

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So it's about helping us understand the motives,

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understanding what's going on,

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and then we can better have a set of policies to maximize

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that for whichever host country you care to think about.

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I think that just summarize the findings, really, the,

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the implications really well.

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The only thing I want to add is that, I,

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I think the paper we, specify that the, the,

12:58.465 --> 13:01.565
for private firms, especially their financial performance is

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very, very important for them to seek knowledge abroad.

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And if the Chinese, government wants to,

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encourage more non seeking FDI, they perhaps should,

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give like more support for private sectors in,

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in order for them to do that.

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Because state owned firms, they tend to get a, the majority

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of financial resources.

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But it's a question mark in terms of,

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how much technology they are able to acquire the board.

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And I think if the Chinese government wants to,

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let private firms to play a bigger role here, perhaps they,

13:33.635 --> 13:35.365
they, they can think about some policies

13:35.365 --> 13:37.645
to give more support for the private sectors.

Understanding Chinese Firms' Internationalization Strategies

00:00:00 - I think where we came at this from is there are an awful lot of people who study internationalization of Chinese firms, and they then infer various things from their results and they say, so Chinese firms are very, very different from everybody else. And actually what, what we thought was they're conflating state owned or state influenced, and Chinese, those two things not being the same.
00:00:34 - who internationalized with, although they were private with, with strong, I'll call it encouragement or strong emphasis on strategy from their home government. They, they took a particular internationalization development pathway. And, and Chinese SOEs state home enterprises are, are very similar that they are, if not directed, but strongly influenced by the government
00:01:03 - and we thought, well, that's, that's a feature of being state owned or state influenced. It's not really a feature of being Chinese. So what we did specifically was to take a set of private sector firms, private sector Chinese firms, and then say, well, what does their international pathway look like? And, and that's when we get actually their international pathway looks exactly the same as any other set of firms
00:01:36 - or whatever that, that it's a set of private sector firms making a series of decisions over how they internationalize that they might sort of dip their toe in the water than they do a little bit more than they do a little bit more and so on. So, so that was very much where we started from, was to, was to try and disentangle the idea of being Chinese from being state owned because we see an awful lot of Chinese investment coming into the west
00:02:05 - And if we're going to try and attract it or not attract it or maximize the benefits of it, we need to better understand their strategy. I totally agree with Nigel and thank you very much for giving such a good explanation. So, the point I think Nigel wants to make is to, instead of comparing, multinationals from develop countries with multinationals, coming from China directly, and we need to compare, multinationals coming from China
00:02:38 - to go internationalized. Yeah. So this is our, point of making this paper. So if we, if we start with, there's, there's an awful lot of literature that tries to conceptualize internationalization decisions, and typically they tell the story as though it's a nicely laid out incremental process. So for example, it used to be that they would tell a story

Complexities of International Business Strategies

00:03:08 - then you export a little bit more, then you engage with maybe, some form of, sort of assembly process in a another country. And then eventually as, as you reach a certain scale, then you start making stuff abroad. And, and it's, it's, the literature often tells this story as though it's a really kind of smooth incremental process of we do this, then we do this, then we do this, and, and life's not like that. You know, life is, life is messy.
00:03:41 - everybody has a strategy until they get punched in the face. business is exactly the same. You know, that, that you can have a brilliant strategy, but then something happens, you know, you can have a, an amazing strategy. And then as many firms founded, you know, the president of America sends out a tweet and that changes, changes everybody's perception of things. so, so I think that the, so the, the, as I say, the prior literature sets out this,
00:04:10 - And one of the things that we're saying is actually, it's not like that that, that it's, it can be sector specific, it can be region specific. Different firms might behave in different ways. one of the things that, that we highlighted for example, is, is the literature talks about these things that they tend to label as firms specific assets or ownership advantages. In other words, things that, things that are specific to the firm that's enabled a firm to internationalize.
00:04:42 - that is true, but they also, they also covered things that you might not have thought about, like particular kind of, you know, particular accreditations or particular types of organization or the ability to manage resources in particular ways rather than just kind of focusing on technology or your ability to make widgets cheaper than somebody else's ability to make widgets. So I think, I think that's what we're trying
00:05:12 - So I think another contribution of this paper is that we distinguish, between FDI, motive motives and we look at the, drivers of conducting FDI motivated by different motives. So we, we find that for, FDI for firms looking, for knowledge, they need to really have like strong, knowledge, themselves, and they also need to have really good financial performance, to allow them to seek knowledge abroad.
00:05:46 - that exporting is leading, to FDI. But we also, in our finding, we find that, exporting experience is more related to firms that are seeking market abroad rather than, more related to other, motivated FDI. So I think that's another contribution that, this paper makes. So, the data we used, is called national survey of above scale private firms in China. So it is collected

Understanding China's Private Sector Dynamics

00:06:16 - of private sector in China is called All China Federation of Industry and Commerce. So basically conducts, conducts yearly surveys of private sectors to understand their behavior, to understand their role in the Chinese economy. So the, the, the, the, the firms are really large scale firms. they, they, they have operating, income of more than 3 million, RB all
00:06:47 - And, the reason for us to use this survey is, is that because it covers a wide range of, firm, characteristics, their business activities, their innovation behavior, and their internationalization behavior. So, we have lots of variables that is rarely available, in large scale service. And also, for the, modeling, we're using, multilevel, sorry, multi logic model
00:07:19 - to internationalize and to study, what motivates firms to do different kinds of FD activities. So I think our, key story is that, we compare firms that, are able to do exporting and firms that are able to do FDI and we compare those firms with, firms that remain domestic, that only serves domestic market, right? So what we find that is, if you want, if,
00:07:51 - to be efficient enough, they need to have a higher, higher productivity than other firms. And they also need to have some knowledge in, in, in terms of innovation input such as r and d and also innovation output such as patents. So these capabilities, these capabilities in, efficiency and technologies allow them to go, to, export and for, for, other firms that wants to, to go a step further to conduct FDI, exporting,
00:08:25 - to learn about foreign markets, to learn about, for example, product, preferences, customer preferences, about, the competition, what's the competition like, in foreign countries, and also accumulate some experience to operate business there. And all this kind of experience, we summarize it as exporting experience in helping firms to, conduct FDI. And then, if some firms wants to go further, if if they are, seeking knowledge abroad,
00:08:59 - and also need, need to have, internal, financial support to allow them to seek knowledge abroad. So I think that's our story. Thank you. Yeah. So I think, I think amongst some that up really well, and you'll notice that the story that Hmong told, there was a firm level story. It was all about firms doing this firm, firms having disability. And, and that's one of the things that I think we, we want

Understanding FDI in Emerging Economies

00:09:29 - an awful lot of the literature that focuses particularly on emerging economies and FDI from emerging economies essentially contrasts what we call firm specific advantage that we talked about before with what is usually labeled as country specific advantage. And the idea is that firms from the west have, if you like, leading technology, they have knowledge, they have all of this, firms from emerging economies.
00:09:59 - or they have, they have, they have activities that they're doing at large scale, you know, like say RAM in India making millions and millions and millions of packets of paracetamol every day, whatever it is. But it underplays the technological or the knowledge side of things. And what we've demonstrated here is that actually when you look at a set of firms where you can, you can isolate that country level effect because all of these firms are Chinese,
00:10:30 - In other words, it's not government support or government influence that's driving this, it's knowledge and technology and ability amongst Chinese firms exactly the same as if we were talking about German firms. So I think as ever with these things, given one of, one of the things that you, that you notice is foreign investment is something that governments think they should have a policy on. And so if you are going to have a policy on something,
00:11:03 - And one of the things that we see, and this is not a, a comment specifically on, on the UK or anything like that, if you are, but if, if you're going to have a policy that says, we want to not just attract this stuff, but we want to make sure that we generate the maximum benefit, you know, if we're offering a, a subsidy or if we're offering some form of incentive, you then want to maximize the benefit, whatever that benefit might be, whether it's technology or jobs or knowledge or, or whatever.
00:11:31 - to have a policy on something first, you need to understand it. so one of the things that we are trying to do in this paper is to help people understand what the motivations are, four firms, Chinese firms seeking to go abroad. the, the literature tends to focus as, as Mung alluded to before, tends to focus on phrases like market seeking, IE looking for new markets or technology seeking or efficiency seeking. And what we're demonstrating is that actually the Chinese firms
00:12:05 - way that sometimes they're looking for new markets, sometimes they're looking for, for new technology. What this tells us is where you can identify ex-ante firms who are from anywhere internationalizing to connect to technology in the, the host country. That's the stuff you don't subsidize. You know, by all means let firms come in if they're gonna create jobs, but what you don't do is give incentives

Understanding FDI Motives for Policy Development

00:12:34 - So it's about helping us understand the motives, understanding what's going on, and then we can better have a set of policies to maximize that for whichever host country you care to think about. I think that just summarize the findings, really, the, the implications really well. The only thing I want to add is that, I, I think the paper we, specify that the, the, for private firms, especially their financial performance is very, very important for them to seek knowledge abroad.
00:13:07 - encourage more non seeking FDI, they perhaps should, give like more support for private sectors in, in order for them to do that. Because state owned firms, they tend to get a, the majority of financial resources. But it's a question mark in terms of, how much technology they are able to acquire the board. And I think if the Chinese government wants to, let private firms to play a bigger role here, perhaps they, they, they can think about some policies
00:13:35 -

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