WHAT FACTORS AFFECT HONG KONG SMALL TO MEDIUM ENTERPRISE (SME) TRADING FIRMS’ SUCCESSFUL EXPANSION OF THEIR BUSINESS TO CHINA?
Master of Arts in International Accounting
Final Research Proposal
Submit to Dr. Neale G. O’Connor
By Stanley T C Lau
Year one MAIA student
City University of Hong Kong
Mobile: 9026 5409
File Name: RMA-SMEexpandtoChina-Stanley.doc
10 December 2001
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The concern of the strategic position of Hong Kong trading companies in China market has been a hot topic for business practitioners operating around the Far East Market (Li, 2001). The author is currently a management consultant for some Hong Kong SME trading and manufacturing firms. Most of these firms have, during the past 10 years expanded their business to China. The author uses interview and case study method, draws on internationalization theory (Dunning, 1981) and using the perspectives of network and transaction cost theory to explain and examine the factors that affect the successfulness of Hong Kong SME trading firms when they expand their business to China. By drawing on the independent variables such as firm size, networks, proximity, ethnicity, language, entry mode, knowledge of market and free cash flow, impacts are investigated to the dependent variable – firm performance (expressed in terms of rate of return on assets) in order to evaluate the successfulness of expansion. The study also examines what factors are favorable and pertinent to the expansion and the possibility of further research in giving an answer to the question of how to do a successful business in China by Hong Kong SME trading firms.
Introduction & Motivation
China has a very potential market for attracting Foreign Direct Investment (FDI) as evidenced by the high level of investments from different countries showed in Table 1 below. Hong Kong, because of the change of economic environment and its proximity to the mainland China, a lot of companies in Hong Kong have been considering expansion to China.
In Li (1995) cited in Kui-Wai Li’s article: The changing Economic Environment in the People’s Republic of China, he argues that the Austerity plan in 1995 could be boiled down to a few objectives. One of the main targets is to use monetary control and credit restrictions as the chief way to cool down the economy. However, the side effect would be a hindrance to SMEs in Hong Kong when they tried to expand their business to China. Table one shows that Hong Kong is the region that has the highest level of investment in China. However, you can see only stunted growth or even negative growth from the 5 largest investing countries reported from 1993 through 1997.
As a management consultant for some Small Medium Enterprises (SMEs) trading and manufacturing firms in Hong Kong, I found that a lot of my clients consider expansion when they want to increase their competitive advantages or even survivability (see figure 1). However, a quite high percentage of my clients become failure in their course of expansion. For the period from 1993 – 2000, there were 10 out of the 14 SMEs from the portfolio of my clients failed in their China business ventures or even went into company liquidation after their expansion to China (their coded names and industries are listed in appendix 4).
The author was curious by the phenomenon and would like to have a study on the factors affect Hong Kong SME trading firms successful expansion of their business to China.
Table 1 – Growth Trend for the five Largest Foreign Direct Investments in China
Source: China Statistical Yearbook, Beijing, various years.
Extracted from Oliver H.M. Yau and Henry C. Steele, (2000), China Business
Figure 1 – Decision of Hong Kong SME Trading Firms to expand
SME Trading Firms
Stay as it is
Out of Business
Stay as it is
Lower percentage Higher percentage
Brief Literature Review
An examination of the literatures about Hong Kong SME trading firms’ successful expansion to China, there virtually no article around provides a clear avenue towards this direction. Instead, there are quite a lot of articles focused on Internationalization, Competitiveness and Growth on SME trading firms in different jurisdictions found.
Li, 2000 gave the author a basic block to begin with because it illustrated from a various angles about how Western manufacturer would like to access the China market through Hong Kong SME trading firms (as an intermediary). In the research by Li, network (proximity), experience (knowledge of market) and transaction cost (Free cash flow and size) are held out as important independent variables to have effects on the Western manufacturer’s choice of Hong Kong trading firms as an intermediary to China.
Another researchers Sylvie and Desiree (2001) also endorsed that firms will develop network relationships organically to internationalize. Siu (2001) argues that owner-manager’s activities have a bearing on the expansion and marketing in China. Thomas Man et al. (2002) also proposed that entrepreneurs commitment competencies, relationship, opportunity, competitive scope and organizational capabilities have a positive impact on the firm performance. Ahmed (1998) found that the degree of internationalization is positively related to firm performance. However, no literature has mentioned on the factor: language in their studies of expansion or internationalization.
In conclusion, the fundamental question raised in this paper is what factors affect the successfulness of Hong Kong SME trading firms when they expand their business to China. For reference, you may also find a summary of some important literature review in appendix 1 attached at the end.
Li (2001) used three perspectives namely network, transaction cost and resource-based to identify that among the other things (inimitability, flexibility, opportunity costs) experience (knowledge of the market) and transaction costs (e.g. size of the firm, proximity, network and language), are positively related to the tendency that the Western firms will use Hong Kong trading firms as an access to the China market. By the same token, when the Hong Kong SME trading firms consider an expansion to China, the above factors will be favorable to them for expansion.
The eclectic theory of Dunning (1981) maintains that the firm possessing ownership and location advantages uses them in conjunction with other factor inputs existing in the foreign country.
Besides, there are a lot of strategic factors (see hypotheses below) I reckon most important to SME trading firms which affect them very much on their successful expansion of their business to China. A detail study and analysis to these factors are considered very useful and helpful for SME trading firms in Hong Kong of which intended an expansion in China.
On the basis of theoretical approaches presented above, I find that the eight independent variables have great impact on the successfulness of Hong Kong SME trading firms’ expansion of their business to China. Therefore, I wish to hypothesize as follows:
H1: Upon expansion of the Hong Kong SME trading firm to China, the stronger the network of the firm with China, the better the performance of the firm would be after expansion.
H2: Upon expansion of the Hong Kong SME trading firm to China, the bigger the size of the firm, the better the performance of the firm would be after expansion.
H3: Upon expansion of the Hong Kong SME trading firm to China, the more the free cash flow of the firm is available, the better the performance of the firm would be after expansion.
H4: Upon expansion of the Hong Kong SME trading firm to China, the nearer of the firm to its place of expansion in China, the better the performance of the firm would be after expansion.
H5: Upon expansion of the Hong Kong SME trading firm to China, the closer the place of expansion to the origin of the owner manager (ethnicity), the better the performance of the firm would be after expansion.
H6: Upon expansion of the Hong Kong SME trading firm to China, the better the understanding of the language of the place of expansion by the owner manager, the better the performance of the firm would be after expansion.
H7: Upon expansion of the Hong Kong SME trading firm to China, the simpler of the entry mode (such as sole ownership instead of joint venture), the better the performance of the firm would be after expansion.
H8: Upon expansion of the Hong Kong SME trading firm to China, the more the experience (knowledge of market) of the owner manager towards the place of expansion in China, the better the performance of the firm would be after expansion.
Figure 2 – Framework of Study
3. Free Cash Flow
7. Entry Mode
8. Knowledge of Market
• Duration of expansion in China
• Duration of continuous expansion in China
• Firm performance of expanded China business
Method of Study
A plan to use case study as the main analysis tool in order to understand the main impact of the factors is considered to be desirable. Interviews to the owner managers of my client firms who has China venture experienced will be conducted (appendix 4). Survey questionnaires (appendix 2) and interview will be used together for data collection. Survey questionnaires are designed in such a way that subject firm’s owner manager or chief executive officer can respond according to their actual experience in the firm. Questionnaires are structured in order to acquire perceptual answers as well as factual answers e.g. rate of return to assets.
A longitudinal study is planned to make sure factors are definitely correlated to the dependent variable (successful expansion) over a period of time.
John H. Dunning (1981), Trade, location of economic activity and the multinational enterprise: A search for an eclectic approach, Readings in International Enterprise pp250-274
Kua-Wai Li (2000), The Changing Economic Environment in the People’s Republic of China, China Business: Challenges in the 21st Century edited by Oliver H.M. Yau and Henry C. Steele pp29-67
Peter J. Buckley and Malcolm Chapman (1996), Theory and Method in International Business Research, International Business Review Vol. 5, No. 3, pp233-245
Per-Anders Havnes and Knut Senneseth (2001), A Panel Study of Firm Growth among SMEs in Networks, Small Business Economics 16: pp293-302
Lee Li (2001), Networks, Transactions, and Resources: Hong Kong Trading Companies’ Strategic Position in the China Market, Asia Pacific Journal of Management, 18, pp279-293
Wai-Sum Siu (2001), Small Firm Marketing in China: A Comparative Study, Small Business Economics 16: pp279-292
Sylvie Chetty, Desiree Blankenburg Holm (2000), Internationalization of small to medium-sized manufacturing firms: a network approach, International Business Review 9 pp77-93
Thomas W.Y. Man, Theresa Lau and K.F. Chan (2002), The competitiveness of small and medium enterprises: A conceptualization with focus on entrepreneurial competencies, Journal of Business Venturing 17 pp123-142
Torben Pedersen and Bent Petersen (1998), Explaining gradually increasing resources commitment to a foreign market, International Business Review 7 pp483-501
Ahmed Riahi-Belkaoui (1998), The effects of the degree of internationalization on firm performance, International Business Review 7 pp315-321
Dave Crick, Shiv Chaudhry and Stephen Batstone (2001), An Investigation into the Oversea Expansion of Small Asian-Owned U.K. Firms, Small Business Economics 16: pp75-94
George Tesar and A.H. Moini (1998), Longitudinal study of exporters and nonexporters: A focus on smaller manufacturing enterprises, International Business Review 7 pp291-313
Berrin Dosoglu-Guner (2001), Can organizational behavior explain the export intention of firms? The effects of organizational culture and ownership type, International Business Review 10 pp 71-89
Appendix 1 – Literature review Table
Theory and Model
Basic research question
Nations implicated, sectors compared, timeframe etc
1. Networks, Transactions, and Resources: Hong Kong Trading Companies’ Strategic Position in the China Market
Use network, transaction costs and resources base perspectives to hypothesize their relationship towards Western manufacturing firms tendency to use Hong Kong trading firm as export intermediaries
What is the strategic position of Hong Kong Trading companies?
21 cases were collected and dividedinto 4 groups for case study andcomparison purpose.
Results were found to be in support of the hypotheses: Basically, the research wanted to prove that western manufacturers are happy to enter the China market by way of Hong Kong trading companies due to the later’s good networks, and their comparative low transaction costs in using them and their resources.
2. Small Firm Marketing in China: A Comparative Study
Use Chinese cultural value to explain the marketing performance of small firms in China
What are the factors affect the marketing performance of small firms in China
Use semi-structured personalinterview for 20 different cases
The research results approved that the business philosophy of Chinese small firms, is sales or production oriented. The specific politico-economic structure also makes Chinese small firms aware of the importance of good relationship with customers, government officials and other business associates. In short, the factors are Chinese cultural values, politico-economic environment, SEO dominated environment and industry sector.
3. Internationalisationof small to medium-sized manufacturing firms: a network approach
The basic assumption of this paper is that business takes place in a network setting, where different business actors are linked to other through direct and indirect business relationship.
How do firms use business networks when they internationalize?
Based on a longitudinal studyconducted in 1992-1995 of 4manufacturing firms in New Zealand
By using Johnson and Mattsson’s (1988) model as a framework, it provides an understanding of four different ways in which firms internationalize, and how both firm and market characteristics influence this process.
Type of Study
Basic research question
Nations implicated, sectors compared, timeframe etc
4. Hong Kong’s China-invested companies and their reverse investment in China
Descriptive Research – based on field survey results
What are the characteristics of Hong Kong’s China-invested companies and their reverse investment in China
Filed survey administered byquestionnaires and follow up byinterviews was conducted in 1993. Thirty CICs were identified through personal connections. Only 8 managers among the 22 respondents who returned the questionnaires.
Characteristics are described
5. International management strategies of Chinese multinational firms
What are the characteristics of the International management strategies of Chinese multinational firms
40 of the most frequently quotedChinese companies manufacturing operations abroad were selected on the basis of information collected from the records of unofficial sources (empirical findings)
with Characteristics are described.
Appendix 2 – Questionnaire
Questionnaire on what factors affect Hong Kong SMEs trading firms when they expand their business to China?
The following questionnaire will be sent to owner managers of SME trading companies in Hong Kong whom has expanded an operation in China (e.g. representation office or manufacturing plant etc.)
Please answer the following questions:
1. Where is your operation in China? ________________________________
2. What is the nature of your operation in China? ______________________
(e.g. representation office, trading firm or factory etc.)
3. Why do you have to set up an operation in China ____________________
4. What are the rates of return on assets of your company 3 years before the expansion?
5. What are the rates of return on assets of your company 3 years after the expansion?
Please circle a number from the following statements in which you feel appropriate.
1. Strongly Agree 5. Fairly Disagree
2. Agree 6. Disagree
3. Fairly Agree 7. Strongly Disagree
Good networking enables you to expand more efficiently and effectively to China.
Due to the smaller size of your company, you are easy in expanding you business to China.
Your understanding of the language gives you an advantage in expanding to China.
The situation of your company in Hong Kong does not give you an advantage in expanding to China.
As a Chinese in Hong Kong, you think it is not an advantage for you to expand to China.
Your knowledge of China market gives you more confident in expanding to China.
A better free cash flow in your Hong Kong Company gives you better strength in expanding to China. (Free cash flow = net operating income + change of investment on operating assets)
A different entry mode for your expansion to China might not affect your growth in China.
Thank you for your time
Appendix 3 – Comments from Dr. Neale G. O’Connor
Research Question and Motivation
1. Conflicts of motivation and the research question.
2. Clarify whether the study concentrates on factors affect SMEs decision to expand their business to China or factors affect how SMEs expand their business to China.
3. Provide Statistics to support the study. (e.g. how much % of SMEs expand to China failure, or how much % growth of SMEs expand to China.
Framework of Study
1. Some of the independent variables (IV) cited are in fact theory rather than IV (e.g. transaction costs)
2. An example for IV should be size.
3. Suggestion for a better and more interesting dependent variable (DV) would be “the duration of expansion of SMEs to China” or “the duration of continuous expansion of SMEs to China”.
Method of Study
1. For a study of fewer building blocks and more preliminary study like this, only CASE STUDY and INTERVIEW methods are preferred.
2. Longitudinal Study is also recommended if the study of how SMEs’ decisions to expand into China is varied over time.
Revised Research Question
What factors affect Hong Kong SME trading firms’ successful expansion of their business to China?
Appendix 4 – List of failed projects in expansion to China 15