The impact of globalization in China

Globalization is a widely used term which can be describe or defined in various ways but if we are to describe it in economic terms there are lot of definitions which all bothers down to the same point which is the removal of barriers withing boarders in order for free movement of goods and services

How to view Globalization

Globalization is the objective trend of economic development in the world today, featured by free flow and optimized allocation of capital, technology, information and service in the global context. It is the inevitable result of the development of productive forces and advances of science and technology, especially the revolution of information technology since the 1980s and 1990s.

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As a result, economic interdependence and interaction between countries are becoming ever stronger. In this massive tide of economic globalisation, no country can develop and prosper in isolation. China has learnt from her long history that isolation leads to backwardness. Development,progress and prosperity could only be achieved through opening to and integrating with the outside world, through stepping up exchanges and cooperation with other countries and through absorbing all fine results of human civilization. Therefore, we should embrace and seize the opportunities presented by globalization and adopt reforms to keep up with the steps of the changing world.

Challenges brought by Globalization

Due to the lack of a just and equitable international economic order, the influence of globalization on countries at different stages of development is entirely different. The “dividends” derived from globalization are not fairly distributed. The developed countries have apparent advantages in capital, technology, human resources and administrative expertise and in setting the “rules of the game”. They are usually the most active propellers and the biggest beneficiaries of globalization. The developing countries on the other hand are on the whole in an unfavorably position. Developing countries can obtain some foreign investment, advanced technologies and management expertise, but at the same time they are the most vulnerable to the negative impacts of globalization and lack the ability to effectively fend off and reduce the risks and pitfalls that come along with globalization. In the 1990s, especially in recent years, the gap between the North and the South has further widened. The economic sovereignty and economic security of the developing countries are confronted with enormous pressure and stern challenges. Some least-developed countries are even on the brink of being marginalized by globalization. Therefore, in participation of globalization, developing countries should always be on alert and try by all means to exploit the advantages and avoid all kinds of risk and harm.

China’s Experience

For China, globalization is often seen as a double-edged sword that brings both opportunities and challenges, advantages and disadvantages. How to turn disadvantages into advantages in the tidal wave of globalization depends on formulating the correct policies and strategies. If the policies are correct, challenges can be turned into opportunities. China has learnt many lessons and accumulated rich experiences in dealing with globalisation from its practice of reform and opening-up. In my personal opinion, they can be summarized as follows:

1. To find a road of development that suits the national conditions. In the past 20-odd years, China has maintained an annual growth rate of over 9.3% on average. China is now the 6th largest economy and the 5th largest trading nation in the world. More than 200 million people have been lifted out of poverty. The average life expectancy reached 71.8 years in 2002, close to that of a medium-level developed country. The above accomplishments were achieved against the backdrop of a volatile international situation. The reason why China can achieve so much in such a short span of time and in a constantly changing international environment is because China has found its own road of development, suitable to its national conditions, namely building socialism with Chinese characteristics. In one word, building socialism with Chinese characteristics is to base what we do on the realities of China. While sticking to the basic system of socialism, reforms should be carried out to solve the problems of incompatibility between the productive forces and the relations of production, and between economic base and the superstructure, so as to achieve self-perfection of socialism. Every country is different from the other. While it is important to learn from other countries in the world, no country should simply copy other countries’ model.

2. To adopt opening-up policy. China’s opening to the outside world is comprehensive. It opens not only to developed countries, but also to developing countries, not only in economic field, but also in all areas of social development. At the same time, it is not a blind opening, but a self-conscious one, not a disorganized opening but a systematic one. China’s opening proceeds and deepens in a gradual and step by step fashion. It started from the 4 special economic zones, to coastal cities, then to capital cities of inland provinces and now it has reached an unprecedented stage of all-round opening demonstrated by China’s accession to the World Trade Organization. During its opening-up, China paid special attention to give full play to its comparative advantages to actively conduct international cooperation and competition. For instance, China has fully exploited its advantages of low cost of labour to attract foreign investment and technology to push economic development and better efficiency and quality of economic growth. These measures have brought the Chinese economy increasingly integrated with the world economy.

3. To promote regional cooperation for better risk-resistance ability. Due to weakness in economic strength, it’s difficult for developing countries to resist the risk brought about by globalization on their own. Therefore, they should, through strengthening regional economic cooperation, rely on group strength to stand risks. Today, regional and sub-regional cooperation is becoming increasingly active. They complement and correlate with the trend of globalization. China has signed the Framework Agreement with ASEAN on Comprehensive Economic Cooperation with the aim of establishing China-ASEAN Free Trade Zone in 2010. The Shanghai Cooperation Organization is also forging closer economic links alongside with cooperation in security issues.

Strengthening cross-Taiwan straits economic links conforms to the pattern of economic development, serves the overall interests of the Chinese nation and complies with the trend of globalization. To set obstacle to this trend is unwise and is bound to fail. More than 3 million people travelled across the Taiwan Straits, with the two-way trade reaching 44.6 billion US dollars in 2002, an increase of 38% over the previous year. More than 60,000 Taiwan enterprises have invested in the mainland. By the end of 2002, the accumulated cross-straits trade was 267.9 billion US dollars, among which Taiwan enjoys a trade surplus of 182.6 billion US dollars. Now Taiwan is mainland’s 4th largest trading partner. The mainland is Taiwan’s largest export destination and the biggest source of trade surplus. With regard to Hong Kong, more than 50% of foreign investment China has attracted so far comes through Hong Kong. The above figures have clearly attested to a growing economic interdependence between the mainland, Hong Kong and Taiwan. We strongly hope that the Taiwan authorities can have a clear understanding of the situation and does not move against the tide of history.

4. To be vigilant against various risks, especially financial risks. The Asian financial crisis in 1997 has clearly been a microcosm of the challenges and dangers involved in economic globalization. When the crisis swept Asian countries, China adopted a responsible approach. China not only persisted not to devalue its own currency, but also contributed more than US$ 4 billion through bilateral and multi-lateral channels to help the affected countries. This has helped to stabilize the financial situation in Asia as well as the world. Many lessons could be drawn from this crisis. Developing countries have to pay special attention to the restructuring and strengthening of their financial system. Developing countries should keep the destiny of their economy in their own hands and should not lose the grip to others.

5. To push for the establishment of a new international economic order which is just and rational. A globalized economy calls for globalized regulation and cooperation. All countries, big or small, poor or rich, strong or weak, should have the right of equal participation in international economic affairs, and the formulation and revision of “rule of the game” should not be determined by only a small number of countries or groups of countries. To establish a fair and rational international economic order is the only way to ensure that the benefits of globalization are shared more widely and equitably. The new order should uphold the principle of equality and mutual benefit and common development. It should be conducive to narrow the gap between the North and South so as to make it possible for the trend of economic globalization to evolve in the direction favorable to the common prosperity of mankind.

The United Nations Report on Human Development shows that the trend of globalization has made “the poor poorer and the rich richer”. If such a situation were to continue, not only the economic development of the developing countries would be in jeopardy, the economies of the developed countries would also face difficulties in achieving a steady and sustainable growth. In the process of globalization, the developed countries should assume more responsibilities in such fields as restraining the speculative factors in international capital flow, alleviating the debt burden of poor countries, opening the markets and furthering technology transfer to help the economic development of developing countries. In return, they will enjoy more markets and investment opportunities to ensure long-term prosperity. It is indeed a win-win situation which is best testified by the case of China.

China’s Contribution to World Economy

China’s participation in Globalization is by no means a one-way street. When the world economic growth remains weak, China’s economy is one of the few bright spots. As World Bank Report on Global Development Finance 2003 published in early April pointed out that China’s fast growth “helped to drive the recovery in East Asia. Together with policy stimulus in other countries, China’s performance lifted the region to growth of 6.7 % in 2002, up from 5.5% in 2001. Average regional growth of more than 6% is expected for the next two years, with China increasingly becoming the engine of the regional economy.”

China has also provided the world with the largest rising market. When more than 1.25 billion people become well-off, the demand on everything will be enormous. Just to give you an example, in the coming 10 years alone, China will import US$ 2 trillion of goods from the outside world. A recent article in the Economist highlighted the benefits brought by China’s growth: “Millions of consumers in other countries are gaining from the low prices and high quality of Chinese goods. A billion Chinese are escaping the dire poverty of the past. Business across the globe will profit from supplying a vast new market. These are wonders to be celebrated, not threats to be agonized over.”

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China (SMEs) And The Internationalization Process of Chinese Enterpreneurs

Chinese privately owned, small and medium-sized enterprises (SMEs) are rapidly internationalizing, yet little research has been reported about how these entrepreneurs manage decisions during internationalization. This study investigates how social networks (guanxi) are used when making strategic, competitive, and marketing decisions. Interviews in China with a small sample of SME entrepreneurs revealed that cultural and ethnic factors play a surprisingly important role in their successful internationalization. In the article, we discuss managerial implications for successful internationalization of Chinese entrepreneurs, we question the completeness of current theories on the internationalization process, and we propose specific directions for future research. © 2009 Wiley Periodicals, Inc. Little scholarly research has been conducted on how Chinese small and medium-sized enterprises (SMEs) undertake internationalization. This is surprising when one considers the very significant contributions made by SMEs to national economic growth in China in recent years. For example, 2.2 million fully private enterprises were operating in China in 2002, accounting for U.S. $200 billion in investment and employing 29.3 million people (People’s Daily, 2002). By 2004, the nonpublic sector accounted for 53 percent of total employment, up from only 17 percent in 1995 (Demurger, Fournier, Shi, & Zhong, 2007). In 2005, approximately 50 percent of China’s GDP was the result of activity in the private sector (National Bureau of Statistics of China, 2006), and this was forecast by the Chinese Academy of Social Sciences to rise to more than 75 percent in the next five years (People’s Daily, 2006). Similarly, RTTNews (2006) has predicted that 70 percent of all Chinese enterprises will eventually belong to the private sector, creating eight out of ten new nonagricultural jobs. By 2007, registered capital in the Chinese private sector was valued at 10.1 trillion yuan (approximately U.S. $1.42 trillion), growing at an annual rate of 22.7 percent (Xinhua News Agency, 2008). Indicators such as these demonstrate that Chinese entrepreneurs play a key role in the national economy, and many aim to become a force in the global marketplace through internationalization (I. H. Chow, 2000; Humphreys, 2007). The goal of this study is to understand how Chinese entrepreneurs in SMEs are using their social networks to internationalize their operations. (Hereafter, we refer to “social networks” interchangeably as guanxi, following Zhou, Wu, & Luo, 2007.) A basic premise is the recognition that factors in any sociocultural and business environment will directly affect the behavior, performance, and success of local entrepreneurs (Kim, Hurh, & Fernandez, 1989). This is particularly true in China, where social networking through guanxi has been found to determine success not only in business activities, but also in industrialization and modernization (Hutchings & Weir, 2006). Three research questions guide this study: What motivates Chinese entrepreneurs to undertake internationalization? What paths do Chinese entrepreneurs take toward internationalization? what role do culture and social networks (guanxi) play in Chinese SMEentrepreneurs’ path of internationalization? 2009 Wiley Periodicals, Inc. Published online in Wiley InterScience (www.interscience.wiley.com) Global Business and Organizational Excellence • DOI: 10.1002/joe.20299 • November/December 2009 61 The first two questions relate to microlevel issues and decisions involving entrepreneurs themselves, whereas the third question links these decisions conceptually to elements in the broader social context of the Chinesemarket.We expect to find that guanxi plays a significant, if not critical, role in any internationalization efforts by Chinese entrepreneurs. We first present a brief economic profile of the Chinese market in order to characterize local conditions in which Chinese SME entrepreneurs undertake nternationalization. Next, we review relevant contributions to the literature in order to establish a theoretical basis for developing an interview protocol for use in personal interviews with entrepreneurs in China. Our research method is described in detail before results are presented and compared to previous findings reported in the literature. This “closedloop” approach is a key feature of the study because it ensures that our results do not remain merely anecdotal but are fully integrated into the existing body of knowledge. Then we explore managerial implications, acknowledge limitations of the study, and outline specific avenues for further research. This is a pioneering analysis of cultural factors affecting internationalization of Chinese entrepreneurs. Findings from this exploratory research will lead us to conclude that current theories of internationalization do not adequately reflect the actual experience of Chinese entrepreneurs who use guanxi for internationalization. This is a key contribution of the article and is supported by an urgent call for scholars to re-examine established theories in light of the new realities of internationalization, as the process is being experienced in China. The Chinese Economy and Chinese Entrepreneurs in SMEs By the late 1970s, Lester (1978) had already recognized that the entrepreneurial orientation of Chinese people would become a source of real strength for the national economy. Wei, Varela, and Hassan (2002) reinforced this early prediction, suggesting that Chinese privatization would bring about the largest transformation of industrial ownership in modern history. Their results confirmed that newly privatized Chinese firms achieve higher profitability, greater levels of employment, and better sales efficiency than state-owned enterprises (SOEs). Although SOEs still vastly outnumber private firms, their performance has been hampered by a complex burden of massive debts, inefficient organization and operation, and lost profits. Since the early 1980s, China’s private sector has grown at an annual rate of 20 percent, which is a much faster rate than the 9.5 percent rate of growth for the national economy over the last 20 years (People’s Daily, 2002). All these successes led Child and Tse (2001, p. 5) to characterize China as “the largest, the fastest growing, and the most heavily engaged in international business and investment” among transitional economies. Although SOEs still vastly outnumber private firms, their performance has been hampered by a complex burden of massive debts, inefficient organization and operation, and lost profits. It is ironic, however, that, prior to 1999, the Chinese government had barred entrepreneurs from operating directly in foreign trade, only authorizing them to conduct international business through intermediary SOEs. Financing options were also tightly restricted, which seriously hindered the growth of SMEs. Fortunately, after January 1, 1999, private firms were allowed to seek import and export licenses from the Ministry of Foreign Trade and Economic Cooperation of China (2002). After China joined the World Trade Organization in 2001, private firms were permitted to trade freely and directly with foreign companies, if they satisfied certain conditions (such as registration, size, and financial competency). Economic liberalization released much pent-up energy among entrepreneurs in SMEs, 62 November/December 2009 DOI: 10.1002/joe Global Business and Organizational Excellence including a desire to internationalize, as this study will demonstrate The

Internationalization Process

Internationalization of the firm is customarily regarded as a process of successive stages of outward expansion by the firm (see Cavusgil, 1980; Johanson & Vahlne, 1977; Turnbull, 1981; Wind, Douglas, & Perlmutter, 1973). It is also seen as a continuous process of strategic decision making (Melin, 1992), with emphasis on international market selection and choice of mode of entry (Bradley, 1995). This process takes place in a gradual and orderly manner, incorporating learning from domestic market growth, which, in turn, provides experience useful in future xport activities (Cavusgil, 1982). Two integrative theoretical models are widely accepted as explaining critical components of the internationalization process. These are Rogers’s (1962) innovation-related model (designated as the I-model) and the Uppsala School’s model (the U-model). Both the U-model and the I-model are behaviorally oriented, insofar as managers are assumed to take decisions and actions sequentially as they gain new information and assimilate new experience. Each theory is related to the present study in the next two sections. The I-Model and Chinese SMEs’ Internationalization Process. Rogers’s (1962) I-model framed the decision to go international as an innovation for the firm, drawing attention to a necessary learning sequence that is involved in adopting any innovation (see Anderson, 1993). Managers typically need large amounts of information, both to compensate for lack of prior knowledge or experience and to educe the high levels of uncertainty routinely associated with large-scale innovation (such as internationalization). Managers typically need large amounts of information, both to compensate for lack of prior knowledge or experience and to reduce the high levels of uncertainty routinely associated with large-scale innovation (such as internationalization). In the case of Chinese entrepreneurs, we expect them to turn instinctively to their social networks (guanxi) as sources of information. We expect them to rely heavily on colleagues, friends, and business contacts for advice about how to handle the risk of internationalization, obtain necessary information, make informed decisions, and plan effectively for further expansion. The U-Model and Chinese SMEs’ Internationalization Process. The Uppsala School’s U-model, developed by Johanson and iedersheim-Paul (1975), distinguishes four successive phases of market entry: (1) no regular export activities; (2) exporting through independent agents; (3) use of an overseas sales subsidiary; and (4) creation of overseas production manufacturing units. This model posits two constructs: “state” and “change.” “Market commitment” and “market knowledge” are components of the “state” construct, while “decisions to commit resources” and “current business performance” are components of “change.” Researchers at the Uppsala School also identified psychic distance (PD), referring to perceived similarities and differences in culture, political systems, education, and industrial progress between the home country of firm managers and the proposed market of entry (Hallen & Wiedersheim-Paul, 1984). Global Business and Organizational Excellence DOI: 10.1002/joe November/December 2009 63 PD theory holds that managers are less likely to enter country markets that they perceive to be dissimilar from their home market (Jain, 1989; Johanson & Wiedersheim-Paul, 1975). Based on this model, we developed some general expectations about how Chinese entrepreneurs in SMEs approach the decision to internationalize operations, choose which country markets to target first, determine how they feel about these markets (in terms of PD), make decisions about modes of market entry, type and quantity of resources to commit to the new venture, and how to manage future expansion.

Factors Affecting Internationalization by Chinese Entrepreneurs

Participants in our sample identified a range of unique and inimitable competitive advantages that flow from their human capital and organizational capital resources. These include membership in extensive domestic social and business networks; access to overseas Chinese networks and contacts; access to timely business advice about competitive strategies; and access to market information based on real-life experience. In this respect, factors relating to country of origin convey special advantages to Chinese entrepreneurs when going international. From a competitive point of view, Chinese entrepreneurs need to exploit these unique resources to the fullest extent possible because comparable benefits are not typically available to their competitors from the West. In other words, SMEs that are not owned or managed by ethnic Chinese may find themselves at a competitive disadvantage by not having access to these types of unique resources. Some of the factors for successful internationalization by Chinese entrepreneurs in SMEs identified in this study can therefore be summarized as follows:Chinese entrepreneurs who enter geographically close export markets can use their home base in china as a source of supply.Chinese entrepreneurs who expand into culturally or geographically distant markets can reduce the negative effects of perceived psychic distance or actual geographic distance through the support that they receive from guanxi members at home and abroad. Chinese entrepreneurs who enter culturally close ethnic Chinese markets, even at great geographic distance, can continue to build social networks, accumulating further resources of human and organizational capital.Chinese entrepreneurs who expand into culturally or geographically distant markets can reduce the negative effects of perceived psychic distance or actual geographic distance through the support that they receive from guanxi members at home and abroad. Thus, we recommend that Chinese entrepreneurial SMEs: make full and continuing use of social networks when considering, initiating, and pursuing internationalization activities; make full and continuing use of social networks as sources of general business information, market-specific knowledge and advice, and insights about competitive strategies;continue to expand social networks domestically and internationally through contacts with overseas Chinese in geographically distant markets.

Opportunities for Partnering With Chinese

Entrepreneurs in SMEs China’s economy has enjoyed many years of highlevelg rowth, and its domestic market has proven to be a magnet for direct investment by foreign companies. Large Chinese companies and SOEs alike have benefited from working with foreign partners in their home market, thereby accelerating their learning curve for doing business overseas. Yet it is the private sector in China that is expected to be theengine of future economic growth, and SMEs, for their part, will play an increasingly important role as global competitors. China’s economy has enjoyed many years of highlevel growth, and its domestic market has proven to be a magnet for direct investment by foreign companies. Many Chinese entrepreneurs who own or manage SMEs are increasingly determined to enter overseas markets, as illustrated by members of our sample. Foreign companies looking to enter China must therefore actively consider how they might work with this new type of partner. Joint ventures that manufacture products in China for export to world markets will offer some valuable reciprocal benefits: accelerated learning for the Chinese entrepreneur, balanced by the possibility of eventual assimilation of the foreign partner into a Chinese social network. Good guanxi with Chinese partners will doubtless yield tremendous long-term strategic and competitive benefits for foreign partners. Not only will they gain access to domestic market segments in China, but they will also be able to build competitive advantage, as insiders in social networks. Contributions and Future Research Contributions This study provides interesting and even surprising qualitative insights into the actual experience of Chinese entrepreneurs who are managing international decisions. Throughout the article, we have discussed our results by reference to results from earlier research and existing theoretical constructs. Our findings have generally supported previous results, confirming the value of dominant theories such as internationalization; the resource-based view of the firm; resource availability; sources, types, and uses of information; development of global strategy; modes of market entry; and selection of target markets. Less support has been found for application of theories about “born global” firms and asset-seeking behavior. Based on this study, we conclude that guanxi must be recognized as a sine qua non factor in the process of internationalization of entrepreneurial Chinese SMEs. Guanxi represents a unique and inimitable competitive resource that combines elements of human and organizational capital. This being the case, it appears unavoidable that any generalized theory of the internationalization process must recognize and include a social network construct. Yet this is not the case at the moment, insofar as the I-Model and U-Model theories are concerned. As a consequence, we consider that the main contribution of this exploratory and pioneering study is to call into question the completeness of current theories of internationalization. Our evidence, albeit modest, suggests that none of these theories yet adequately identifies and includes all factors affecting the internationalization process for firms beyond those of Western Europe and North America. This shortcoming is particularly evident in the case of the internationalization of small and medium-sized Chinese entrepreneurial firms. Our concern about shortcomings of current internationalization theory has received recent support from Elango and Pattnaik (2007). Their study of Indian firms’ membership in business groups concludes that “. . . certain assumptions and notions of the Uppsala model (i.e., deterministic sequential stages, commitment, state/change variables) need to be extended to incorporate the confluences of Global Business and Organizational Excellence DOI: 10.1002/joe November/December 2009 73 these linkages within a firm’s network” (Elango & Pattnaik, 2007, p. 551). In addition, these authors propose a theoretical link between network membership and an improved ability to reduce the liabilities of foreignness (mentioned earlier) through shared learning by members of the network. For our part, we would argue that other important theories mentioned in this article, such as membership in large business groups, social embeddedness, and absorptive capacity, also need to be properly integrated into any general theory of internationalization. The need for further work is all the more urgent as we see new firms (such as Chinese SMEs) entering international markets from their home base in emerging economies. The unique competitive advantages associated with guanxi make it possible, despite limited company resources, for Chinese SMEs to select, enter, and compete in geographically distant markets (such as Canada and South Africa) in a way that current theory would not predict. Furthermore, our findings call attention to the shortcomings of psychic distance theory. The unique competitive advantages associated with guanxi make it possible, despite limited company resources, for Chinese SMEs to select, enter, and compete in geographically distant markets (such as Canada and South Africa) in a way that current theory would not predict. Moreover, PD theory does not adequately encompass the workings of guanxi, either as a compensatory factor for lack of market knowledge and prior experience or as a means of reducing uncertainty in decision making. Elango and Pattnaik (2007) concur with our conclusion, stating that further research is needed into how members of networks and business groups choose their overseas customers and markets, and how they build global market portfolios. A theoretical “missing link” here appears to be the unseen workings of guanxi and business networks. Finally, we would argue that learning theory needs to be revisited in the context of the internationalization of the firm. Social networks must be properly recognized as primary sources of information, rapid learning, and vicarious knowledge. Once again, we are supported by Elango and Pattnaik (2007, p. 552), who recommend that “future researchers may want to look into how firms within and network transfer learning (i.e., internationalization knowledge: Eriksson et al., 1997) to other members. . . [because] it is still not evident what formal or informal mechanisms are used for transfer of learning” (emphases added).

Blueprint for Future Development

The first 10 to 20 years of this century