Foreign Firms In China Research Articles

Caught in the deglobalisation crosswind? De-risking by “China+1” or “In-China-For-China”

PurposeForeign firms in China, particularly those from the Global West, are in a difficult position as deglobalisation and strained international relations create risk. This paper offers research avenues on how operations and supply chain management scholars can analyse the risk factors, de-risking practices, and de-risking outcomes of foreign firms in China.Design/methodology/approachThis paper is primarily based on interviews with managers of foreign firms’ subsidiaries and joint ventures in China between late 2019 and early 2024 and employs institutional theory to develop a conceptual framework.FindingsSix risk factors motivating foreign firms to consider “China+1” (diversification and multi-sourcing) or “In-China-For-China” (localisation with potential bifurcation) are identified. Four pathways focusing on politics, locations, technologies, and people enable further investigation of these de-risking strategies.Originality/valueThis is the first paper to take a deeper look at perceptions, worries, and considerations of foreign firms in China and offers specific recommendations for impactful research.

Multinationals' profits in China: Impact of tax avoidance

Based on proprietary and hand-collected source country information on foreign-owned firms in China, this paper empirically explores the effect of the tax avoidance of multinational firms on the profit rate of foreign-owned firms. Foreign firms in China previously benefited from various preferential tax policies and had a lower effective tax rate compared to domestic firms. The results show that the increase in the difference between the statutory maximum tax rate in the parent country and the domestic tax rate will increase foreign firms' pretax profit margin. This effect is more pronounced for younger firms and wholly foreign-owned firms. Further tests indicate that the transfer pricing in export and import activity of foreign firms is an important channel for multinational firms to shift profits. In year 2008, the implementation of the new Enterprise Income Tax Law has unified the corporate tax rate for both domestic and foreign firms at 25 percent. The tax reform reduces the profit margin of foreign firms, especially those with larger tax rate differentials. This paper explains multinational firms' profit performance from the novel perspective of tax avoidance.

Social trust and the location choices of foreign firms in China-The moderating role of formal institution and cultural distance.

The institutional environment has a significant impact on the location of overseas investments by multinational enterprises (MNEs). However, there remain two research gaps. First, fewer studies focused on the impact of subnational regional institutions on the location choices of MNEs. Second, study on informal institutions has been more limited. This study investigates the effect of the informal institution (social trust) in the Chinese subnational region on the location choices of foreign firms and the mechanism of its role. Using the sample of foreign firms' location choices in China from 2008 to 2020 in Orbis Global Enterprise Database, this study finds that social trust positively related to the location choices of foreign firms in subnational regions. Our results also show that this positive effect is contingent on the formal institution and the cultural distance between home and host country. When the formal institution is strong and the cultural distance between home and host country is high, social trust has a more significant positive impact on the location choices of foreign firms in subnational regions. Besides, the results show that cost advantage, information advantage and innovation advantage are important mechanisms for social trust to influence foreign firms' location choices in subnational regions. This study is important for understanding the role of subnational regional informal institutions in influencing strategic decisions of MNEs. At the same time, it has certain guiding significance for governments in attracting foreign direct investment and for multinational enterprises in selecting suitable overseas investment locations.

How do institutional forces affect firm agility through organisational justice? Differences between Chinese and foreign firms in China

While institutional environment is increasingly affecting supply chains, the effects of institutional forces on firm agility remains largely unexplored. This paper integrates institutional theory with the organisational justice and agility literature to explore whether institutional forces (i.e. legal protection, the importance of guanxi, and government support) affect agility of local and foreign firms in China through organisational justice. Results from structural equation modelling of survey data from 241 manufacturers in China demonstrate that Chinese firms gained agility through procedural, distributive, and interactional justice created by the three institutional forces. Gaining less justice from all three institutional forces (especially guanxi), the agility of foreign firms relied on only distributive justice. Legal protection and guanxi worked for Chinese firms, whereas foreign firms are somewhat disadvantaged in this regard and relied mostly on government support to provide distributive justice for building agility.

Foreign-firm work experience and entrepreneurial choice in China

This paper analyses the effect of foreign-firm work experience on entrepreneurial choice in China. We propose a theoretical framework to explore the possible positive and negative effects of foreign-firm work experience on the decision to become an entrepreneur. Based on a large-scale individual-level database from China, this paper finds a significant and robust negative relationship between prior foreign-firm work experience and entrepreneurial choice, which can be explained by the characteristics of jobs in foreign firms in China. Our results indicate that FDI crowds out Chinese entrepreneurship at the individual level.

Introduction to the Special Issue on the New Silk Road of Innovation: R&D Networks, Knowledge Diffusions, and Open Innovation

Introduction to the Special Issue on the New Silk Road of Innovation: R&D Networks, Knowledge Diffusions, and Open Innovation

Imitation, Innovation, and Technological Complexity: Foreign Knowledge Spillovers in China

In the last two decades, the world has witnessed the rise of Chinese innovation. China, once a manufacturing hub for the West, has become a major player in the development of many new technologies. We assess how foreign knowledge spillovers spurred this transformation. To this end, we assemble a rich micro-level data set of firm patenting and accounting information. The aggregate data show that over time Chinese firms have gained leadership over foreign firms in China both in terms of production and patenting. Nevertheless, the aggregate trends mask rich industry heterogeneity pointing to the limits of cross-firm knowledge spillovers. While foreign firms have lost market leadership in low-tech (simple) industries, they have maintained strong leadership in high-tech (complex) industries. Exploring foreign knowledge spillovers using patent citations data, we show that only firms in low-tech (simple) industries eventually decrease their reliance on foreign knowledge for innovation. Our findings suggest that imitation is a path to indigenous innovation only in low-tech (simple) industries and point to the need of industry-specific policies.

Staff localization strategy and host country nationals’ turnover intention

Based on signaling theory, this study demonstrates the use of a multilevel framework to examine the effects of two alternative staff localization strategies (embedding and excavating localization) on the turnover intention of host country nationals (HCNs) as well as the mediating roles of perceived career opportunity (PCO) and cynicism. We collected multisource data from 476 HCNs working for 19 foreign firms in China. Data were analyzed using the multilevel structural equation model (MSEM). We find that the embedding localization strategy has a stronger effect on HCNs’ turnover intention as compared to the excavating localization strategy. While both PCO and cynicism significantly mediate the relationships between embedding localization and turnover intention, only PCO mediates the relationship between excavating localization and turnover intention. The implications of our study are discussed with regard to the key findings.

The effect of foreign firms’ population density on exit likelihood in a host country

PurposeThe purpose of this paper is to examine the relationship between a foreign firm’s likelihood to exit a host country and the population density of foreign firms in its industry in that county, as well as the moderating influences of this relationship. The authors hypothesize that a foreign firm’s likelihood to exit has a U-shaped relationship with foreign firms’ population density in the industry and this relationship will be weakened when: the foreign firm is located in a region where foreign firm presence is high; the foreign firm is in an industry that has a longer history of foreign direct investment; the firm has a longer tenure in the host country; and the firm is more adapted to the market and institutional environments of the host country.Design/methodology/approachThe authors test the hypotheses using a data set containing over 45,000 foreign firms in China between 1998 and 2007.FindingsThe results show that the exit likelihood of a foreign firm has a U-shaped relationship with foreign firms’ population density in the firm’s industry in the host country. Furthermore, this relationship is moderated by the population density of foreign firms in the region where the firm resides, the length of time since the first foreign entrant in the industry and the extent of the focal firm’s local adaptation.Originality/valueThe study contributes to organizational ecology theory and the international business literature by extending the density-dependence model to the study of foreign firm survival/exit. Whereas a foreign firm’s fate in the host country is heavily influenced by the population density of foreign firms in its industry, it can borrow legitimacy from other sources, or try to create legitimacy through its own actions, to reduce the impact of such density effects.

China’s Economic Relations with Japan, South Korea and Taiwan Sustained by Persistent Technological Gaps

Japan, South Korea and Taiwan are China’s leading sources of imports, a result of China’s efforts to attract foreign direct investment (FDI) to develop its high-technology industry in the 1990s and beyond. Foreign firms in China have relied on importing key components and capital equipment from their home countries. Despite its industrial upgrading in recent years, China continues to run an increasingly large trade deficit with the three economies due to its lack of key technology.

R&D and patenting activities of foreign firms in China: The case of Japan

This study investigates the research and development (R&D) and patenting activities of foreign firms in China. Utilizing a panel dataset of Japanese affiliates during the period 2001–2007, we first examine the determinants of R&D activity and find that local market-oriented firms place more emphasis on R&D, whereas process export-oriented firms are less likely to conduct R&D. Affiliates within a large business group that has more affiliates have a higher propensity to undertake R&D. Using only firms with positive R&D expenditures, we next estimate the patent production function. Results indicate that the patent elasticity of R&D for Japanese affiliates is high, suggesting that they are more productive on patent production than other firms. Moreover, local market-oriented firms do need more patents to protect their products, whereas scientific firms demonstrate a lower willingness to register patents in China.

Does Cancellation of Preferential Tax Policy Reduce Foreign Direct Investment Inflows?

AbstractIn light of recent tax cuts by the US, should China reintroduce a preferential tax policy to attract foreign direct investment? This paper investigates whether China's 2008 tax policy change affected inward foreign direct investment. In contrast to previous studies, we break foreign investment down into suspect and real foreign investment using firm‐level data from 1998 to 2008 and conduct a difference‐in‐difference estimation to determine the effect of the tax policy change on both types of foreign investment and compare these to the effect on domestic investment. The results show that the 2008 tax policy change reduced the amount of suspect foreign investment and its effect on real foreign investment was insignificant, indicating that foreign firms in China are more concerned with the investment environment and economic stability than taxes. Therefore, China should create a regulated business environment instead of readopting supernational treatment for foreign enterprises.

Job flows, returns to skill, and rent-sharing at the dawn of the new millennium: A firm-level inquiry from the BRICS

We present a firm-level inquiry on labour-demand characteristics in the BRICS economies, using standardized data from the World Bank Enterprise Surveys for the pre-crisis period of 2002-2003. The BRICS countries are the growth champions of that period, with numerous discussions on the effect of growth on inequality and the role of skills on labour-market performance. We examine employment, employment growth and its constituents, as well the returns to skill and the incidence of rent-sharing. We find that SMEs in the BRICS exhibit lower gross employment growth, compared to large firms. Large firms in Brazil, Russia and South Africa are responsible for most of the net job creation. In contrast, small and medium firms in China and India exhibit higher net job creation rates compared to large firms. Younger firms in Brazil, Russia and India generate higher net job creation figures, in contrast to China and South Africa, in which it is the large firms that generate more net new jobs. Foreign firms in China exhibit the highest net job creation, while in Brazil and India domestic firms create most of the new net employment. Private firms are responsible for most of the net job creation and job reallocation in all BRICS counties. The returns to skill are lower in SMEs and young firms, and we find evidence in favour of rent sharing, particularly in Brazil and India, by foreign and exporting firms, and by SMEs in China.

The role of Yin-Yang leadership and cosmopolitan followership in fostering employee commitment in China

PurposeUtilizing a paradox perspective, the purpose of this paper is to investigate the leadership-followership dynamic in foreign firms in China, specifically, the extent to which Yin-Yang leadership behaviors of Japanese expatriates and cosmopolitanism of Chinese employees influence employee commitment.Design/methodology/approachData were collected through an online survey of Chinese employees who directly report to a Japanese supervisor in a Japanese subsidiary in China. Based on responses from 97 Chinese employees in three Japanese subsidiaries in China, the authors test if their cosmopolitan orientation and perceived Yin-Yang leadership behaviors of Japanese supervisors are related to employee commitment.FindingsYin-Yang leadership and cosmopolitan followership have a positive effect on employee commitment. Further, cosmopolitanism moderates the link between Yin-Yang leadership and employee commitment such that the follower’s cosmopolitanism compensates for lower levels of Yin-Yang leadership, especially a relative lack of Yin leadership behaviors.Research limitations/implicationsResults suggest that Yin-Yang leadership and cosmopolitan followership work together as a two-way street of cultural adaptability to build employee commitment, highlighting the interplay between leadership and followership in multinational enterprises. Future research should attempt to further refine the Yin-Yang leadership construct, and to gain a larger sample representing multiple expatriate nationalities to corroborate the relationships found in this study.Originality/valueThe study applies a context-based approach to developing culturally relevant leadership, through analyzing both the emic and etic concepts of culture in China. In doing so, the authors extend the application of paradox theories to the cross-cultural leadership literature utilizing the Yin-Yang principle, which is particularly relevant in societal contexts where rapid and dramatic change brings to the fore competing values, needs and employee preferences.

The effect of local environment on innovation: a comparison of local and foreign firms in China

The effect of local environment on innovation: a comparison of local and foreign firms in China

The effect of local environment on innovation: a comparison of local and foreign firms in China

Innovative activities have become increasingly important to firms in emerging markets, particularly in China in recent years. Facing weak institutional and competitive environments in China, firms building local connections to react and to innovate can hold a better competitive position. Our study investigates how building local connections and local competition may influence a firm's innovation and compares the moderating effect of ownership (local vs. foreign firms) on firm innovation in the early 2000s. Our empirical findings suggest that, in China, local connections are conducive to firm innovations. Compared with local firms, foreign firms tend to have more innovations. However, when facing severe local competition, local firms are engaged in more innovative activities than foreign firms. We suggest the advantages of local connection owned by local companies may outperform the foreign companies. The foreign companies need to adapt their strategies to succeed in the fast changing emerging market.

Dual Localization Strategy and Host Country Nationals' Turnover Intention

We develop a dual localization strategy model. The first strategy, labelled the infiltrating localization strategy, improves localization at the subsidiary level by embedding expatriates within the local surroundings while ensuring headquarters control over the subsidiaries. The second strategy, labelled the apparent localization strategy, involves replacing expatriates with local managers in order to leverage local resources; this strategy may entail a certain amount of control risk. We examine how these two localization strategies affect the turnover intention of host country nationals (HCNs) and the mediating effects of perceived career opportunity (PCO) and cynicism. With multisource and multilevel data collected from 476 HCNs working for 19 foreign firms in China, we find that the infiltrating localization strategy has a stronger effect on HCNs turnover intention than the apparent localization approach. PCO and cynicism both fully mediate the relations between apparent localization and turnover intention, while PCO only partially mediates the relation between infiltrating localization and turnover intention. The relationship between localization strategy and HCNs turnover intention is discussed.

How do sub-national institutional constraints impact foreign firm performance?

This paper examines the impact of sub-national institutions on the performance of foreign firms in China. Building on institutional theory, we envisage that the negative effect of sub-national institutional constraints is moderated by firm size and age, entry mode, and market orientation. Our hypotheses are tested on a large-firm-level dataset of about 29,000 foreign firms in 120 cities in China within the period of 1999–2005. We find that firm size and age both have a diminishing positive impact on foreign firm performance; moreover, there is a U-shaped relationship between firm age and foreign firm performance in cities with higher level institutional constraints. We also find that joint ventures help mitigate the negative impact of sub-national institutional constraints on foreign firm performance when the level of institutional constraints is higher.

Information processing fit in the context of emerging markets: An analysis of foreign SBUs in China

The institutional uncertainty of many emerging markets challenges the decision making processes of foreign managers and require advanced information gathering and processing activities. Organizational Information Processing Theory (OIPT) asserts that an adequate information level determines decision effectiveness and thereby firm performance. Although studies integrated OIPT's contingent perspective, the actual identification of the adequate information processing per se received little attention. In this paper, we examine the optimal fit between the uncertainty levels of foreign firms in China and their information processing activities. We draw on data from 128 foreign firms' strategic business units (SBUs) in China and unveil that the examined SBUs face substantially different business environments with respect to dynamics and associated information processing requirements. We develop distinct ideal profiles for information processing capacities and assess whether an alignment with the ideal profile results in improved performance. Our study results show that the degree of alignment (i.e. fit) between an SBU's business environment and its ideal information processing profile is positively associated with strategic quality and company performance, empirically confirming OIPT's central tenet of ‘fitting’ organizational information processing capacities with requirements. We stipulate managers to emphasize the ideal information processing profile according to the level of information processing requirement they face.

Strategic guanxi orientation: How to manage distribution channels in China?

Abstract This study focuses on the role of guanxi in distribution channel management in China from the perspectives of both foreign and domestic Chinese firms. Based on a literature review and in-depth interviews with suppliers and retailers, the article provides managers with a theoretical framework for acquiring, institutionalizing and utilizing guanxi in a distribution channel system as a strategic resource to achieve long-term competitive advantages. The framework explicates three stages of strategic guanxi orientation (SGO), highlights the critical role of institutional environmental uncertainties in shaping a firm's SGO, and explores both the benefits and costs associated with adopting SGO in channel management. In addition, the study provides executives of foreign firms in China with practical guidelines on how to improve channel performance in an emerging and competitive market.