By Oliver Rui

Over the past few decades, Chinese companies have been on a trajectory of expanding globally. Today, “going global” has shifted from an optional strategy of corporate development to an imperative. So why do Chinese companies need to “go global”? Where do they stand now, and what lessons and challenges do they face?

Addressing these questions, CEIBS Professor of Finance and Accounting Oliver Rui explores the motivations, achievements, and challenges of Chinese companies’ global expansion, offering guidance for future international ventures.

Understanding companies' “Going Global” from the Perspective of Economic Development Trends

The overseas expansion of Chinese companies is intertwined with the historical trends and present state of economic growth.

While the development of human civilization has exceeded 10 millennia, but it wasn’t until the first Industrial Revolution that the world saw any significant economic growth. Prior to the introduction of the concept of ‘GDP’ (Gross Domestic Product), historical economic models show that the economy was in a period of stasis until around 1800. Ian Morris, a Professor of History at Stanford University, emphasizes in his research that economic growth was stagnant for a long time before technological progress began to drive economic and social change. This was primarily due to resource constraints and the lack of effective technological support, trapping human societies in the so-called ‘Malthusian Trap’, a cycle of economic stagnation driven by population growth and limited resources, which persisted until the Industrial Revolution.

Comparative historical analysis leads us to an essential insight: technology and innovation are the fundamental forces propelling the advancement of human civilization. Technological innovation serves as the primary engine for economic cycles, capable of altering periods of stagnation and triggering shifts in economic and political cycles. The emergence of economic cycles is a result of technology cycles, which typically coincide with debt cycles. Throughout these cycles, technological advancement, economic booms and busts, and shifts in the political landscape take place. Moreover, the trajectory of technological development impacts political cycles, encompassing both internal political dynamics, such as issues of wealth accumulation and economic inequality, and external political relationships, such as the interplay of competition and collaboration among countries.

Modern economic growth can be segmented into four distinct cycles. The first cycle, from 1787 to 1842, was marked by the utilization of the steam engine, the invention and use of the spinning jenny, and the textile industry. The second cycle, from 1842 to 1896, was characterized by advancements in steel technology and the railway transport industry. The third cycle, from 1896 to 1946, was defined by the application of electricity, internal combustion engines, and petrochemical technologies, as well as the development of the automobile industry. The fourth cycle, from 1946 to 2008, was distinguished by developments in aerospace, nuclear energy, electronics, computer technology, and the information industry. We are currently in the intermediate phase of the fifth cycle.

In recent years, the rise of global protectionism has led to a contraction of the global market, while the pandemic has severely hindered international investment and trade. The diminishing technological dividend has triggered an economic downturn, with nations resorting to monetary policies as a stimulant for their economies, which, in turn, has intensified the fluctuations of the political cycle. Fiscal and monetary stimulus measures have resulted in asset bubbles and debt crises, further leading to economic and state governance crisis. At the heart of these issues lies widening disparity in wealth.

China’s economy also confronts cyclical challenges, and is currently at a pivotal period of transition from an era of incremental growth to one of stock, experiencing the growing pains of the gradual disappearance of old technological dividends and yet-to-scale new ones. Even without the pandemic, global economic growth was already seeing a slowdown, especially within developed countries and emerging markets. Since 1981, China’s economic growth has been fluctuating, but there has been a consistent decline in recent years.

"Going Global" to Seek New Growth Opportunities

Confronted with deglobalization and internal challenges, China needs to adjust its economic development model.

While China’s reform and opening-up has propelled the rapid growth of the national economy, it also brought challenges like excess capacity and hurdles in domestic market development. These challenges have necessitated China's shift from its traditional export-oriented economic model to a “dual circulation” model that places greater emphasis on domestic demand and technological upgrades. This strategy aims to boost domestic consumption and drive technological innovation while expanding international markets, thereby achieving an outcome to the mutual benefit of both domestic and global markets.

During this transformation, the development of digital and green economies has become a focal point. The digital economy has not only reshaped traditional factors and relations of production, but also optimised production efficiency and the transparency of transactions thanks to artificial intelligence and blockchain technologies. Meanwhile, as global attention turns to sustainable development and environmental protection, the green economy has become key to future growth. China’s commitment to carbon neutrality as a national strategy not only resonates with global trends, but also carves out new markets and prospects for domestic and foreign companies.

Another significant strategy is to promote a large domestic market, which can not only reduce inter-provincial trade barriers, but also facilitate economies of scale and the expansion of market boundaries. By optimising industrial distribution and advancing the construction of highways and high-speed rail networks, China is striving to eliminate invisible inter-provincial barriers and promote more effective allocation of resources.

At the heart of China’s domestic economic circulation initiative are key elements such as supply-side reform, demand-side expansion, industrial foundation reengineering, and industrial chain upgrading, coupled with the mutual promotion of domestic and international cycles. The focus of supply-side reform lies in reconstructing the industrial base and enhancing the overall value of the industrial chain through technological innovation and optimized production processes to address the challenges of rising costs and difficulties in upgrading. Demand-side expansion involves bolstering the domestic demand system by boosting consumption upgrades and encouraging domestic consumption, which can not only foster economic growth, but also help balance the demands of domestic and international markets. The mutual promotion of domestic and international cycles requires that the domestic economic cycle not only be integrated into the international cycle, but also maintain a degree of independence to ensure the stability and sustained development of the domestic market.

On the global stage, Chinese companies are no longer solely venturing abroad in search of resources. Instead, they are implementing a “going global” strategy across the entire industrial chain to identify new growth opportunities in the global market, with the aim of seeking new international markets and investment opportunities to sustain continuous development.

Throughout the life cycle of a product, from initial exploration to growth, maturity, and eventual decline, a pivotal strategy is to extend the product’s lifespan. Industrial relocation serves as an effective means to this end. At the onset of industrial development, companies prefer regions that offer a favourable environment for innovation and greater operational flexibility. As the industry reaches maturity, production activities gradually shift towards lower-cost regions to reduce savings and expand the market.

Historically, developed countries facilitated the optimization of the global industrial chain layout by relocating industries with lower added value to developing countries. Since the 19th century, the world has witnessed four major waves of industrial relocation, starting with Britain, the United States and Germany, then to Japan, followed by the “Four Asian Tigers,” and eventually to mainland China. Each relocation not only altered production costs but also had a profound impact on the global market structure.

Additionally, changes in global governance, the new technological revolution, the steering role of industrial policies, and the trend towards sustainable development are all key factors in the current industrial shift. For instance, regional trade agreements, such as the Regional Comprehensive Economic Partnership and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, have reshaped the global investment and trade landscape. Technologically, the application of digitalisation and artificial intelligence is driving a global reconfiguration of the industrial chain, not only shortening its geographical span, but also enhancing the automation and intelligence of the production process.

Blueprint for Overseas Expansion and Southeast Asia Investment Analysis

Studies indicate that with the sustained growth of a nation’s economy, its capacity for outward investment progressively strengthens, and the scale of investment expands correspondingly. When the per capita GDP crosses the threshold of $10,000, the proportion of outward investment surges rapidly. Given that China’s per capita GDP has exceeded $10,000, the ratio of outward FDI stock to GDP is expected to increase.

Industry analysis reveals that the service industry, especially the leasing and business service sectors, accounts for a majority of China’s outward investment. Within the industrial sector, the structure of outward direct investment has shifted from being dominated by the mining sector a decade ago to a focus on manufacturing. According to data from the first ten months of 2023, China’s manufacturing sector has seen a continuous increase in outward direct investment, primarily in key industries such as metals, electronics, components, automobiles, renewable energy, and chemicals.

According to analytical reports from relevant consulting agencies on the motivation of Chinese companies’ overseas expansion, from 2018 to 2023, proximity to markets and clients emerged as the leading motive, accounting for 40% of the driving factors; followed by market growth at 25%, and access to skilled labour at 22%. In recent years, the optimisation of regulatory environments, growth of industry clusters, and government policy support have also become increasingly important in driving companies towards globalization.

Geographically, $1.6 trillion out of the $2.7 trillion outward direct investment (ODI) flows in 2022 was channelled through Hong Kong, accounting for 58% of the total. Southeast Asia, the European Union, and the United States are also primary destinations of actual ODI stock. From 2018 to 2022, the compound annual growth rate of China’s ODI stock in Southeast Asia and the EU reached 11.7% and 9% respectively, suggesting the figure could double approximately every six and eight years respectively at this rate. China’s ODI stock in the United States was relatively lower at only 3.3%.

Over the years, Southeast Asia has witnessed rapid economic growth and technological advancement, with its GDP growing faster than the global average. With a substantial population base of 680 million as of 2021, its development trajectory bears resemblance to the nascent phase of China’s reform and opening up: a significant influx of rural labour into urban areas, proactive government efforts in foreign investment attraction, industrial innovation and upgrading, and robust infrastructure development.

Nowadays, Southeast Asia consumers are increasingly dependent on digital technology. The pandemic has made them more accustomed to online shopping, engaging in e-commerce activities, and online networking. There is also a growing awareness of health and environmental issues among Southeast Asian consumers. Factors such as product quality, brand reputation, price competitiveness, and product practicality remain the primary concerns in making consumer decisions.

Traditionally, western countries introduced cutting-edge technologies to China, where products were manufactured and then sold to developed countries. Currently, a new model spearheaded by China is in place, channelling technologies, and production capability directly into Southeast Asia to better serve the local consumer markets. Leveraging insights from Japan and the EU, China and Southeast Asia are deepening the connectivity of personnel, data, and capital to forge a closer community of innovation. On the supply side, China and Southeast Asia can take advantage of their complementary economies of scale to deepen partnership. Coordination in domains like resources, technology, and finance enables them to create an innovative closed-loop system. On the demand side, the consumer markets of China and Southeast Asia are not only immense in scale but also diverse in needs, offering a broad arena and boundless opportunities for the commercialization of innovative products.

Advantages and Challenges for Chinese Companies’ Overseas Expansion

As the fifth wave of globalization surges forward, Chinese companies are facing fresh opportunities for overseas expansion. The target of outward investment is shifting from traditional labour-intensive industries to those with greater technological sophistication, coupled with a proactive search for new international markets.

Currently, Chinese companies are venturing overseas by exporting production capacity, i.e., leveraging resources and labour of the host countries to cut costs and sidestep trade barriers; brands, i.e., expanding markets through online platforms and offline networks, such as direct retail and e-commerce; channels, i.e., optimising international sales channels and distributing products and services through digital platforms; culture, i.e., promoting local culture and creative products to the global market; and technology, i.e., introducing cutting-edge tech products such as smartphones and electronic devices to the global market.

Looking ahead, there are five main directions of overseas investment for Chinese companies: the consumer goods industry; traditional industries, such as engineering manufacturing, basic materials, and chemicals; emerging industries such as renewable energy, automobiles, and robotics; leading enterprises in industrial chains, especially those in the automotive components and electronics sectors; and the globalisation of business models, such as the burgeoning opportunities for cross-border e-commerce with technological progress.

Given that, Chinese companies possess five key strengths in their globalisation efforts. First, a strong supply chain, including excellent manufacturing capabilities, advanced digital infrastructure, and a wide spread of international logistics network.

Second, the advantage of domestic market. China has the world’s second-largest consumer market, which provide a solid foundation for companies' globalisation. With the ongoing growth in market size, China is steadily narrowing the gap with the United States in terms of consumer market and is expected to eventually become the world’s largest consumer market.

Third, private companies play a pivotal role in China’s foreign trade. Their rapid growth is fuelling Chinese companies’ expansion into international markets and increasing Chinese brands' global influence.

Fourth, the Chinese government has implemented a multifaceted and varied suite of policy measures to support companies’ international ventures, such as streamlining export processes, reducing export costs, and enhancing export efficiency, providing tax reductions or rebates for companies going global to alleviate their financial burden. These measures aim to stimulate trade growth and establish a high-quality ecosystem for business ventures abroad.

Fifth, localised operational capabilities. The success of Chinese companies in international markets can be partly attributed to their ability to adapt operations to the culture and regulations of the target market. This ability allows Chinese companies to better adapt to external markets, mitigate risks, and effectively manage and avoid potential legal and cultural conflicts.

At the same time, Chinese companies also face challenges in their international ventures, such as cultural and legal differences, the complexity and high risks of international management, and the greater difficulty in maintaining brand reputation and gaining consumer trust. In the future, these companies should avoid simply replicating domestic approaches, and take local political, cultural, and legal environments into considerations; prioritize long-term strategic objectives over short-term expansion; enhance internal capabilities like brand building, market analysis, financial and logistics management; conduct comprehensive market research and strategic planning for effective overseas layouts; cultivate and attract international talents to improve global operational capabilities; and strengthen the management of legal and regulatory risks.

The formidable manufacturing capabilities and the complete industrial and supply chains that China has developed over 40 years of reform and opening up present a competitive edge unparalleled in other countries. As predicted by authoritative international institutions like Goldman Sachs, the journey for China to catch up with the United States may be fraught with challenges, yet with immense market size, the country is destined to excel. Chinese companies and entrepreneurs should be confident and fully leverage the opportunities brought about by globalization. Despite clouds on the horizon, we should have faith that spring is sure to follow winter.

Oliver Rui is a Professor of Finance and Accounting at CEIBS. For more on his teaching and research interests, please visit his faculty profile here.