By Prof. Daniel Chng, Associate Professor of Strategy and Entrepreneurship, CEIBS

Over the past 30-plus years, foreign companies in China have experienced ups and downs, while witnessing the country’s growing integration into the world economy. Despite the fact that China has evolved from being “the world’s factory” into a market for multinationals, however, the passion of foreign companies for doing business in China seems to have cooled.

So, how will they weigh the new Chinese market in their future expansion strategies? And, what impact will such changes bring to China?

Foreign Companies’ Journey in China

Multinational corporations (MNCs) have been operating in the Chinese market for more than three decades. There are at least two distinct dimensions of their activities in China, both of which are now experiencing headwinds for different reasons.

China became the world’s factory

First, China has long been considered “the world’s factory” – that is, MNCs have been manufacturing and processing products in China and exporting them to foreign markets since the 1980s.

In order to promote the country to foreign manufacturers, during the last 20 years of the 20th century, the Chinese government created policies favourable towards both infrastructure development and key industries such as mobility and shipbuilding.

From the 1990s to the 2010s, China also allowed open competition between state-owned, private, and foreign companies, which propelled the development of various sectors in China.

China became a consumer market

Second, MNCs have long regarded China as an essential consumer market. Around the beginning of the 21st century, foreign brands started to sell products in China (some of which were also manufactured here).

From the 2000s to the late 2010s, foreign consumer brands continued to grow in China, demonstrating the willingness of Chinese consumers to purchase foreign products during that period.

Beginning in 2008, policies intended to boost domestic demand also encouraged foreign brands to enrich their product portfolio in China, moving from selling basic products to high-end offerings.

The appeal of global brands faded

These developments made the Chinese market an important destination for MNCs. China has a vast and efficient ecosystem of manufacturing and logistics facilities, and is a leader in industries such as AI and digital payment. Chinese consumers also have more disposable income and a willingness to spend on international brands and products.

The appeal of undifferentiated global products started to wane in the late 2010s, however, fuelled partly by the growing popularity of traditional Chinese culture and domestic brands, such as Hanfu (a style of traditional Chinese clothing) and Chinese sportswear brand Li-Ning. The COVID-19 pandemic, beginning in 2020, further disrupted retail and logistics operations, weakening the development of foreign brands in the country, while geopolitical tensions during this period gave rise to a number of popular domestic products.

As a result, MNCs became much more pragmatic about doing business in China, and the euphoria of the “indispensable” Chinese market faded.

Who Will Stay in China?

There was significant foreign investment in China from 1990 to the early 2010s. However, as manufacturing costs in the country increased after 2010, this investment steadily declined. In particular, a large amount of foreign capital exited China in the five years leading up to 2023, including several American internet companies and Korean manufacturers and consumer brands (many of whom left due to geopolitical reasons).

The decline in foreign investment has continued since the article's original publication. According to China's National Bureau of Statistics, foreign investment that was actually utilised fell by 9.5% in 2025 to 747.7 billion yuan, following a decline in 2024.

Manufacturers with established bases will stay

In short, foreign companies such as Siemens, ABB and other non-high-tech manufacturers with well-established China-based production facilities and on-going business needs in China and Asia are more likely to stay here. Although their operating costs in China are growing, they continue to benefit from an efficient and established manufacturing ecosystem that ensures high productivity. In addition to factories, this ecosystem also includes logistics infrastructure (such as ports and roads), as well as well-trained workers.

While these companies may also seek growth opportunities by providing higher-value products, this could prove to be their most significant challenge, one made even more difficult by the effects of COVID-19, on-going trade and tech conflicts, and global supply chain disruption.

Differentiated brands hold their ground

Luxury and strong global brands can continue to do well in the Chinese market, while those that fail to provide differentiated products and meet local customer needs, such as H&M and GAP in the years leading up to 2023, risk losing ground. GAP sold its mainland China business to Baozun in January 2023, moving to a franchise model.

Brands with unique IPs and high-quality, reliable products and services (such as Coca-Cola) or those that offer more comprehensive solutions than those of Chinese manufacturers (such as Philips-branded lighting products from Signify, formerly Philips Lighting) can also succeed.

Departures may cost China talent

While foreign tech and internet, consumer goods and electronics companies whose shares in China’s consumer market have declined over the past decade may leave, in the short term, their departure may not have much impact on China’s manufacturing industry, which could soon be served by other companies or industries.

However, in the long run, the departure of foreign companies from China may hinder the country’s talent cultivation. For one, Chinese professionals will miss the opportunity to work and learn from their expatriate colleagues at these MNCs. Chinese executives will be faced with the problem of how to manage their companies from a global perspective. As such, the development of Chinese talents will be an issue that needs to be addressed in the long term.

Cross-Cultural Management in China

As multinational corporations expanded their operations in China, differences in management approaches became increasingly apparent. These differences affect how companies transfer knowledge, develop local leadership, and work with Chinese partners. Understanding them can help explain the cross-cultural challenges MNCs face in the Chinese market.

Knowledge transfer moved from expats to local managers

Three types of activities can help us understand some of the cross-cultural issues commonly faced by MNCs and their management teams. These include:

1. Global knowledge is transferred from expats to local talents.
2. Expats lead local talents in adapting knowledge and facilitating local innovation.
3. Global experts support local talents to boost global innovation.

When MNCs in China started with the first step during the 1980s, 1990s and 2000s, there were some “getting to know you” cross-cultural challenges, but nothing significant, and local Chinese talents were very open to learning from their foreign colleagues. During this period, foreign management structures worked reasonably well and global knowledge was transferred to and applied in China. Minor issues were easily overcome with cultural sensitivity training and socialisation activities for both expats and Chinese talents.

More cross-cultural challenges emerged around 2000, however, as MNCs moved to the second stage and local Chinese talents developed. At this time, the MNC-subsidiary organisational structure needed to become more decentralised and more decision autonomy and accountability needed to be given to local subsidiaries and managers. As a result, local talents needed to learn global knowledge to be more relevant to their MNC employers.

In particular, while local talents with local business or technical knowledge needed to play an increasing role, they often lacked leadership skills and advanced knowledge. This led to a practice of inpatriation, where local talents were assigned to management roles overseas (often in headquarters or other local subsidiaries) before returning to leadership positions in China.

At the risk of over-generalising, I have observed that many local Chinese talents are less inclined to seek global positions. In contrast to Indians and Europeans, Chinese managers prefer leadership roles in China (something which may have to do with risk aversion in East Asian culture).

Chinese and foreign firms value speed differently

Chinese and foreign companies greatly differ in product and service development values. For example, MNCs often focus on searching for “ideal” solutions and pay less attention to user feedback. Chinese companies, on the other hand, attach importance to “fast” solutions and proactive user feedback to improve their solutions, something which is frequently manifested in the form of products that are less reliable but which undergo rapid iteration and are supported by better customer service.

MNCs are also more focused on long-term and sustainable benefits driven by the market. However, Chinese companies tend to seek growth through rapid changes and emerging opportunities, such as electric cars (which have enjoyed explosive growth in China in recent years due to supportive policies).

Trust is built differently in China

Foreign companies and Chinese counterparts also differ in how they cooperate. Employees at foreign companies often emphasise transactional cooperation, while social interactions are more valued in China and Asia. Trust within or amongst Western companies is often built on common interests and competencies; in China, the source of trust is more complicated and vague, and more difficult to explain.

Strategic Transformation in Chinese Companies

As MNCs expanded their footprint in China, local Chinese companies were also growing. So, how should they compete with MNCs? And, what strategic adjustments should China make in the new business environment?

Most MNCs from developed countries have focused on middle and high-end customer segments (in both B2B and B2C). However, today there are unique and fast-growing segments where local Chinese enterprises can compete directly with MNCs for these customers both domestically and overseas.

While MNCs in China are now struggling with rising costs and declining margins due to slowing market growth, many don’t see emerging Chinese players as a critical challenge yet since they possess organisational and management capabilities that are more effective, efficient, and sustainable for their targeted customer segments. Chinese companies, even the most successful ICT giants, for example, still suffer from structural, organisational, and management issues that hinder their ability to compete directly with MNCs for middle and high-income customers, though they are making progress.

China should focus on encouraging MNCs to increase their commitment to the Chinese market and attract new MNCs, especially those from other ASEAN countries. Companies such as Indonesia’s GoTo Group and Thailand’s CP Group – both of which are well established in their home countries – could find China’s market valuable as they map out their own global footprint.

In this way, China could evolve from being the “factory of the world” for established Western MNCs to an enabler of emerging market MNCs. Moreover, China should allow them to use its production base and market to compete with mature MNCs and local Chinese companies as a way of promoting development.

Author attribution

Daniel Chng is Professor of Strategy and Entrepreneurship at CEIBS. His research focuses on organisational and managerial strategic behaviours during periods of adversity, including organisational decline and the threat of failure. He also studies how organisations learn from failure and the challenges entrepreneurs face when building new ventures in emerging economies. For more on his teaching and research interests, please visit his faculty profile.

Frequently Asked Questions

Why are foreign companies leaving China?

Some foreign companies have reduced their operations in China because of rising manufacturing costs, geopolitical tensions and supply chain disruptions. Changing consumer preferences have also increased competition from domestic brands. As Chinese consumers increasingly favour local products, foreign businesses offering similar products without clear advantages may struggle to maintain their market position.

Which foreign companies still do well in China?

Foreign companies with established manufacturing operations, strong global brands and differentiated products are better positioned to succeed in China. These include manufacturers benefiting from efficient production networks, luxury brands and businesses offering reliable products or comprehensive solutions. Meeting local customer needs remains important as competition from domestic companies increases.

What is inpatriation?

Inpatriation is the practice of assigning employees from foreign subsidiaries to positions at a multinational company's headquarters or other international offices. MNCs in China adopted this approach to help local managers develop global business knowledge and leadership skills. These employees could then return to China better prepared for senior management responsibilities.

How does Chinese business culture differ from Western business culture?

The article identifies differences in product development and business relationships, although these vary between companies. Chinese firms often prioritise rapid solutions and customer feedback, while Western multinationals may favour longer-term development. Cooperation also differs: Western companies often emphasise transactions and competencies, while personal relationships can carry greater importance in China.