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1. Introduction
This introductory chapter provides an overview of China’s economic development since the late 1970s with a focus on the growth of Chinese multinational corporations (MNC) and their transformation into global brands. Furthermore, the research problem and research questions are presented, followed by an explanation of the purpose of this study. Finally, the theoretical framework and methodology of this study are provided, followed by a structural outline of the report.
1.1. Background
After years of declining productivity, recurring food crises and disastrous living conditions due to the misallocation of resources and adverse incentives from 1952 to 1978 under the leadership of Mao Zedong (毛澤東), the government of the People’s Republic of China (PRC)1 found itself under increasing pressure. As a result in December 1978, the Chinese government led by Deng Xiaoping (鄧小平) initiated a series of economic reforms labelled
Gaige Kaifang (改革開放) or "reform and opening up". Along with the opening up for foreign investment, a lift on price controls and regulations, as well as the privatization of state-owned industries, China registered a large increase in foreign direct investment (FDI)
1 In this study, the People's Republic of China (PRC) is referred to as China and the Republic of China (ROC), as Taiwan. This is done merely for the reason of simplification and clear separation of the two economies.
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mostly from Hong Kong, Taiwan, USA, and Japan. Initially, most of China’s exports
originated from labor-intensive industries such as textile, but the country gradually managed to upgrade its manufacturing capabilities. By the mid 1990s, high-tech electronic exports became China’s most dynamic growth driver. (Sung, 2005)
Today, the electronic information industry is considered the most prominent pillar of China’s economy. (Gou, 2006) Since the mid 1990s, it played an important role in China’s rise to a manufacturing powerhouse, and the world’s number one producer of manufactured goods by 2011. As a result of the continued growth of the export-led sector and fueled by an increasing demand for electronics, the electronic information industry has been growing much faster than China’s national GDP, eventually allowing China to surpass the United States in 2004 to become the world’s number one exporter of Information and communication technology (ICT) goods. (OECD, 2005) Initially, most of this growth stemmed from low-value-added products. However, Chinese companies are no longer confined to the production of lower-end products as a number of firms have moved up the industrial value chain. Moreover, those firms that are deemed national champions receive support from Beijing. (Ahrens, 2013)
Most Chinese companies in the telecommunication equipment and networking industry (part of the ICT sector) were originally producing cheap and low-quality electronics. Eventually, they decided to upgrade their innovation and R&D capabilities and invest in comprehensive marketing campaigns to become globally recognized brands. One company that can be considered a poster child of this development is Huawei, which started out in 1987 as a distributor for phone switches and eventually became one of the largest telecommunication
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equipment companies in the world. Huawei’s success story in the smartphone sector is of particular interest. Originally, Huawei focused on the low-cost cost segment within China, but eventually decided to go global and gradually improve its product quality through innovation, R&D and strategic partnerships with companies such as Leica. Through a series of large-scale marketing campaigns and by partnering with prominent figures, Huawei managed to build a premium brand (Shepard, 2016) that eventually became the world’s third largest smartphone brand with a global market share of 10 percent. (IDC, 2017)
1.2. Problem Statement
Empirical and theoretical research has predominantly focused on Western and Japanese MNCs. The emergence of Asian MNCs, particularly from China, has attracted research on the internationalization and success of Chinese MNCs. For example, Sun (2009) explores the internationalization drivers of Emerging Economy MNCs to provide insights into their outbound strategies and development (Sun 2009). In regard to China’s telecommunication equipment industry as a whole, research on competitive strategies and staged catching-up has provided a better understanding of company strategies and government policies. (Fan, 2010) However, most strategic studies apply a resource-based view and analyze organizations without considering the domestic environment that might bring along advantages and disadvantages for corporate performance. For example, Xiyu Cao (2017) suggests that Huawei’s success in Europe can be traced back to their steady improvement of R&D and innovation capabilities and implementation of effective competitive strategies. However, it omits to explain, why Huawei failed to capture significant market share in the U.S. According to Michael Porter, the international competitive performance of firms is influenced by their
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home nations and depends on several factors (Grant, 1991). Fueled by FDI from Hong Kong and Taiwan, the development of China’s electronic information industry has led to the
creation of an industry cluster with a network of suppliers and competitors that fostered strong competition and innovation. Today, China’s ICT market – which mostly consists of
computers, software, and telecommunications goods – is the world’s second largest after the U.S. (export.gov, 2017). Given the country’s highly positive net exports of telecom
equipment and the fact that Chinese telecom equipment companies are consistently filling the ranks of the world’s leading vendors in industrial and particularly consumer-based telecom equipment indicate a strong competitive advantage. This study suggests that the global success of Chinese telecommunications equipment manufacturers hinges on national competitive advantages which laid the foundation of their success.
1.3. Research Questions
This study investigates what competitive advantages China’s telecommunications equipment industry has and which role the Chinese government played in facilitating these advantages.
Furthermore, the study elaborates how these advantages reflected on China’s most prominent telecom equipment manufacturer Huawei.
1.4. Purpose of Study
The fast growth and global success of Chinese telecom equipment vendors suggests the presence of national competitive advantages. The purpose of this study is to examine these
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competitive advantages and draw conclusions about their influence on company performance using the case of Huawei.
1.5. Structure Outline
Chapter 1 – Introduction
In this chapter, background information is given on China’s economic development and the growth of Huawei. Furthermore, the research problem is discussed and research questions presented, followed by an explanation on the purpose of this study.