SPOTLIGHT ON STRATEGIC MANAGEMENT THE INTERNATIONAL DIMENSION

							    CHINA AND EMERGING MARKETS: RESTRUCTING THE GLOBAL ECONOMY1


                                        Michael A. Hitt
                                     Texas A&M University


                                            SUMMARY
        There are 64 emerging economies, 13 of which are in transition from
centrally planned economies (Wright, Filatotchev, Hoskisson & Peng, 2005).
Several of these emerging economies have developed rapidly and offer significant
opportu nities for multinational corporations to market their goods. Therefore,
many of these emerging economies have become attractive markets for foreign
firms. In addition, firms from some of the emerging economies are becoming
importan t players in global markets. This is particularly true in China and India,
for example. In fact, recent data suggest that firms based in emerging economies
have accounted for $862 billion of foreign direct investment in other countries
over time (UNCTAD, 2004). And, this amount of foreign direct investment from
firms based in emerging economies is increasing each year (Mathews, 2006).
        However, even though emerging market firms have become stronger and
emerging country markets are becoming more attractive, such countries also
often have institutional deficits (Khanna & Palepu, 1997).         Because of the
institutional differences, we have learned that not all emerging markets are
created equal. Multiple factors may affect the firms in emerging markets but the
variation in institutional contexts, especially the economic maturity and potential
that exist within them as well as the stability of the institutional structure in
existence can have considerable effect on the strategies employed by emerging
market firms as well as those used by multinational corporations that enter these
markets.
BRIC Countries
        In a white paper prepared for Goldman Sachs, four countries were
identified as having a potentially significant future impact on the global
economy. These countries are Brazil, Russia, India and China, and are referred to
as the BRIC countries. The largest economies in the world include those from the
United States, Japan, Canada, the United Kingdom, Germany and France. These
are sometimes referred to as the G6 countries. The white paper suggested that
the BRIC economies in total will exceed the totaled gross development product
(GDP) of the G6 countries by the year 2040 (Wilson & Purushotha m a n, 2003).
Furthermo re, these BRIC countries will have a larger economy than all other
countries except Japan and the U.S. by 2016, only 10 years in the future. Finally,
it is forecasted that India’s economy will be larger than Japan’s economy by the
year 2032 and that China’s economy will be larger than the U.S. economy by the
year 2041 (Wilson & Purushot ha ma n, 2003).
        Each of the BRIC countries also have multiple and different attributes and
thus each is distinct. For example, Brazil is the largest country in Latin America


1   Based on an article that is in press (2006) at Business Horizons
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but its potentially significant future economic impact is because of its very rich
natural resources. A number of countries have made major investment s in
Brazil, China being among those, in order to gain access to its natural resources.
Russia has significant natural resources as well but also has strong human
capital in certain areas, especially in certain scientific and engineering fields.
Alternatively, India and China have significant human capital and their
economies are developing rapidly as suggested by the statistics presented above
(Hitt, Li & Worthington, 2005).
        Partly because of the attractiveness of their markets, the firms in BRIC
countries generally have more bargaining power in forming partnerships with
multinational corporations, especially those desiring to enter the emerging
economy country’s markets. As such, the BRIC firms often can extract more
knowledge and other types of resources from their foreign partners. However, in
several of these countries, especially China and India, local firms are likely to
have more capabilities and, thus, are better able to exploit the knowledge and
other resources obtained from their foreign partners. In addition, because of
their greater capabilities and the extraction of more knowledge and resources
from foreign partners, BRIC firms also generally are better able to exploit their
capabilities in other less mature emerging markets. Part of the reason for their
ability to exploit their capabilities is their knowledge of operating in emerging
markets. As a result, BRIC firms often have a competitive advantage relative to
multinational corporations when they compete in other emerging markets (Hitt et
al, 2005).
Institutional Stability
        Henisz (2002a, 2002b) has suggested that institutional stability plays an
importan t role in the development of many countries, and is especially importan t
for emerging market countries. For example, the institutional stability of two of
the BRIC countries differs. Both China and Russia are transitioning from a
centrally planned economy to a more open market economy.                While were
commu nist dominated and managed their economies centrally, both have
undergone significant changes. As a result, these two countries differ markedly
in their institutional stability (Hitt, Ahlstrom, Dacin, Levitas & Svobodina, 2004).
China has evolved slowly toward more open markets. Its evolution started over
25 years ago but it still maintains forms of central control. While there have
been criticisms of this slow evolution, China has been able to maintain
institutional stability while simultaneously promoting economic developmen t
and growth. Alternatively, Russia followed a more revolutionary approach with
substantial change over a much shorter period of time. The change initially
produced highly decentralized political control that created substan tial
uncertainty. And, almost overnight, the institutions that existed were dissolved.
Of course, the Yeltsin regime did allow many former state - owned and operated
firms to move to private ownership. Yet, some of the assets were purchased at
very low prices by individuals, now referred to as oligarchs, who gained
substantially wealth. Some suggest that Russia now has a form of market
capitalism but with oligarchs controlling large and important businesses in
Russia. Additionally, the Putin government is reinstituting more central control
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as shown by the Yukos affair and by placing government officials on the boards
of major private companies in Russia. Additionally, Russia has experienced
problems with the black market and substantial crime and corruption that
evolved from the lack of institutions.
       The two different levels of institutional stability (stability in China and
instability in Russia) have led firms in those countries to operate in substantially
different ways with quite different strategies. For example, Chinese firms, for the
most part, have operated with the longer - term orientation and with the intent of
building capabilities that allow them to compete in their local markets and
foreign markets against other major corporations. Alternatively, Russian firms
have operated with a much shorter range orientation. They have attempted to
obtain the resources needed to survive but have not focused on the developmen t
of capabilities and the implementation of long- term strategies (Hitt et al, 2004).
Institutional stability has contributed greatly to China’s positive economic
develop ment. As a result, some refer to China as the mother of emerging
markets and transition economies.
The Chinese Econom y and Its Future
       China’s current and future economic and industrial power has been
recognized by many (Boston Consulting Group, 2004). For example, China’s
economic power is exemplified by the fact that it is expected to be the fifth
largest source of outward foreign direct investment during 2004 - 2007 (Buckley,
2005). In addition, China has become the largest global recipient of foreign
direct investment in recent years (UNCTAD, 2003). China has many resources,
among those is a population of 1.3 billion people with many low- rage workers.
As a result, it has become an attractive location for many large foreign
manufacturers (Li & Hitt, 2006).
       China now places a major emphasis on the development of technology,
realizing the importance it plays in economic development. For example, in a
recent five- year period, China increased its annual R&D investment s as a
percentage of its GDP by 279 percent. Additionally, China has developed 53
national technology developmen t zones that provide support, tax reduction and
other benefits to technology- based new ventures. In fact, China is currently the
most R&D intense of emerging market countries and is seventh of all countries in
the world (Li & Hitt, 2006).
       Because of these investment s and other forms of support for technology
develop ment, the number of technology ventures increased by almost 20,000
during the period 1996 - 2003. Additionally, during this time period, the number
of employees in such ventures more than tripled and annual sales revenues for
these ventures increased by $227 billion (China’s National Bureau of Statistics,
2004). Interestingly, China has also been the recipient of approximately 300
multinational corporations’ R&D facilities in recent years.         This is due to
primarily to the fact that multinational corporations want to develop products
that are attractive to Chinese consumer s to tap into the large Chinese markets.
But they also want to tap into the capabilities built in China over time in order to
develop products that are also attractive in global markets (Li, Holmes & Hitt,
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2005; Buckley, Clegg, Cross & Tan 2005). While there are many factors that have
contributed to China’s economic growth rate, clearly, the investment in and
develop ment of technology have the potential to continue China’s economic
develop ment.
        China’s current economic growth rate is approximately 9 percent annually,
which is impressive economic. Yet, China is a huge country and its economic
develop ment is not spread evenly across the country. Most of its economic
growth has occurred in four regions along China’s gold coast. These regions
include the Pearl River Delta, Yang Tze River Delta, Qingdau and Dalian. In these
regions, the economic growth has averaged approximately 13.3 percent in recent
years (Heilemann, 2005).        Also exemplifying the tremendou s economic
develop ment in China are the 146 new cities created in the country with
populations over 1 million people in the period of 1990 - 2000 (Ohmae, 2002).
Still, China has need for much more development. For example, its GDP is only
about 17 percent of the GDP. And China’s per capita GDP is only approximately
3.3 percent of that in the U.S. (Stein, 2005). Yet, other data suggest continued
economic development and the building of capabilities in China. For example, in
2001, 89,000 state - owned enterprises had net losses. However, in 2004 about 78
percent of the Chinese businesses had earnings increases. In 2003, net income
for these firms increased by 75 percent and in 2004, it increased another 41
percent (Bailey & Song, 2005).
        China must continue its institutional transition and development. More
open and developed institutions are needed to ensure China’s future economic
prowess. Furthermore, a number of other changes are necessary for China to
truly become a world economic power.          For example, while China attracts
substantially more foreign direct investment than does India, India receives
considerably more foreign private equity capital (Ahlstrom, Yeh & Bruton, 2006).
There are multiple reasons for this but one of them is the uncertainty involved in
earning returns on that private equity in China. The uncertainty regarding equity
investmen ts relates partly to the rule of law. The rule of law is in its nascent
stage and enforcement can be capricious (Ahlstrom, Nair & Law, 2003). Of
particular importance is the development and protection of intellectual property
rights. In addition, China must continue to build its internal equity capital
market in order to provide the financial capital needed for economic
develop ment. To date, China has been able to balance the order needed with the
change thereby providing a good environment for economic growth and
develop ment. However, China must continue to make the transition and changes
while maintaining an appropriate balance of change and stability (Ohmae, 2002;
Heilemann, 2005).
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