Research Questions

Research questions

  1. Is the move advisable?
  2. What are the challenges and opportunities from embarking upon such a path for your client?
  3. Analysis of the general business environment  
  4. How should the company enter the market, if at all (risk, control, etc)?—use joint venture mode
  5. Which are the explanations of how the advice was arrived at?
  6. Which are the industry-specific characteristics using and framework
  7. Have it used aspects general business context – both internationally and nationally (PESTLE)?
  8. Which advice would you give on dealing with institutional and cultural differences and other opportunities and challenges between the host and home countries (use the National Culture framework)
  9.  Recommendations: how should the investment go ahead? (joint venture)
  10. How do academic theories and evidence support the advice given in terms of location and sector?

International Business: China Mobile Limited

Contents

Executive Summary. 2

Introduction. 3

General Business Environment 4

Comparison between Chinese and Saudi National Cultures. 6

China Mobile Limited: Company Profile and PESTEL Analysis. 9

Company Profile. 9

PESTEL Analysis. 9

Political Factors. 9

Economic Factors. 10

Social Factors. 11

Technological Factors. 12

Environmental Factors. 13

Legal Factors. 13

Challenges and Opportunities of the Joint Venture Mode. 14

Recommendations. 16

Conclusion. 17

References. 18

Executive Summary

This report presents findings on the internationalization strategy of China Mobile Limited, a Chinese Multinational Corporation seeking to venture into Saudi Arabia. The report outlines the general business environment in China to shed light on the circumstances under which the company will be venturing into Saudi Arabia. It is evident that China has been opening up its market to foreign investors since the late 1970s, and has more recently, during the late 2000s, started encouraging Chinese MNCs to venture into foreign markets.

            An analysis of the national cultures of China and Saudi Arabia using Hofstede’s dimensions of national culture show that the two countries have a lot to share in terms of socio-cultural characteristics. This means that managers of China Mobile can succeed in their efforts to understand the Saudi way of doing business. The converse is also true for the managers of the Saudi company that will be selected to partner with China Mobile.

            Through PESTEL analysis of China Mobile, this report has also highlighted the main challenges and opportunities that will characterize the company’s entry into the Saudi market. The report found out that the benefits of using the joint venture as the mode of entry outweigh the challenges and risks involved. The risk can be avoided through proper choice of the Saudi partner company. This will lead to numerous benefits for China Mobile through expansion of the company’s business network and market reach while at the same time increasing shareholder value. The report concludes that China Mobile should enter into the Saudi market through a joint venture.

Introduction

            The issue of internationalization strategy continue to trigger a heated debate in both theory and practice (Mu & Lee, 2005; Fan, 2006; Li, Lam & Qian, 2001; Yiu & Makino, 2001). Multinational corporations seeking to venture into foreign countries need to choose their mode of entry well in order to avoid making costly mistakes that may to the ultimate failure of the overall internationalization strategy (Champy, 2008). The choice of entry mode may vary from one host country to the other (Friedman, 2005; Keohane & Nye, 2000). It is imperative for managers of these companies to put into consideration many factors, including national cultures of the home and host countries, challenges and opportunities that come with various modes of entry, general business environment, and the applicability of academic theories in different internationalization strategies.

             Companies that venture into new markets after an in-depth analysis and roll-out of elaborate plans regarding mode of entry that are founded on empirical evidence are likely to achieve success in those markets (Breslin et al., 2003; Buckley, Burton & Mirza, 1997). They are likely to devise effective strategies for addressing cultural and institutional constraints that come with operating in a new business environment. Such companies succeed because they are able to make the right decisions based on their appraisal of factors such as risk, cost-benefit analysis, and overall viability of the new business venture (Choo, 2006). For this reason, it is always important for firms to seek the guidance of professional business consultants in carrying out a survey of the host country.

This report envisages such a situation to provide professional advice to the CEO of China Mobile Limited, a Chinese multinational corporation seeking first entry into Saudi Arabia. The report analyzes the business environment in both China and Saudi Arabia to determine whether such a move to adopt the joint venture mode of entry is advisable. This advice is based on the analysis of the industry context of the internationalization strategy as well as theoretical evidence on the merits and demerits of this mode of entry.

General Business Environment  

            The business environment in China is characterized by, among other things, state control. This is evident in the fact that state-owned enterprises (SOEs) are immensely influential in corporate circles across China. The power of these enterprises arises mainly from the support that they receive from the Chinese government (Enderwick, 2007). The downside of this mode of operation is that it comes with certain structural constraints that hinder innovation. Against this backdrop, many Chinese SOEs have seized emerging opportunities for internationalization to restructure their operations in order to promote innovation and competitiveness in the global market (Luo, 2007; Fan, 2006; Whalley, 2003).

            China embarked on a process of opening up its economy to the foreign investors in 1978 (Grainger & Chatterjee, 2007). Since then, numerous changes have occurred within the country’s economy one of them is the emergence of an economic model of free market that is pursued through decentralized state control. During the last decade, China has emerged as one of the most attractive target market for Western companies. However, many people contend that doing business with China is a difficult undertaking (Baird, Lyles & Wharton, 1989). This is mainly because of the Chinese national culture, which dictates a framework for a quite complex process of business negotiations involving Chinese counterparts.

China is being targeted by foreign investors because it is the largest emerging market in the world (Ruia & Yip, 2008; Rugman & Li, 2007; Cuypers & Martin, 2010). Despite claims of gross human rights violations during the late 1980s, China continued to rise towards emergence as a major economic hotspot; this is reflected in the country’s rise from position 32 to position 9 in world trade ranking (Ghauri & Fang, 2001). A major economic indicators used to provide this favourable ranking is increased foreign direct investment (FDI). Chinese companies have been investing heavily in foreign countries in recent times. These investments are mainly targeted at developing countries. Similarly, many companies from the developing world are increasingly setting up shop in China. A similar trend has been observed in regards to multinational corporations from the developed world.

            The downside of this rosy image of China is that country also offers a difficult, risky, and frustrating environment for western business interests. Many Western investors become disappointed after their first attempt to venture into China (Hong & Sun, 2006). It is not strange for successful Western companies to pull of China in a huff due to unmet expectations. However, these challenges portray China as a country that poses a special challenge for businesspeople in today’s dynamic era of globalization. To benefit from the numerous business opportunities available in China, these businesspeople must contend with the world’s most lucrative market, the largest bureaucratic system that operates on a Communist platform, and one of the world’s oldest culture. Thus, it is not surprising that the question of doing business in China has been given special mention in international business theory and practice.

            Since becoming a member of the World Trade Organization (WTO) in 2001, China has sought to build its statute as a global trade partner (Johnson & Turner, 2010). This stature has been cemented further through a series of agreements with the US and European Union. This means that the question of Sino-Western business relations will continue to take center stage in the context of global trade. Thus, more Western businesspeople will seek to understand the Chinese cultural framework particularly in relation to business negotiation (Gilboy, 2004). Conversely, it will become important for Chinese investors to understand a thing or two about how cultural practices in other parts of the world influence business negotiation (Nolan, 2001).

Comparison between Chinese and Saudi National Cultures

Hofstede (1980) offers a comprehensive theoretical framework for identifying differences among countries based on culture. This theoretical framework is responsible for the emergence of the concept of ‘national culture’ in management studies (Trompenaars & Woolliams, 2004). Hofstede (1980) defines culture as the collective programming that distinguishes members of one category of people or social group from others. For professor Hofstede, the core objective was to determine how workplace values are influenced by culture. It is in the pursuit of this objective that he conducted comprehensive studies covering more than 70 countries. Following these studies Hofstede, Hofstede & Minkov (2010) published findings of scores of 76 countries based on four dimensions of national culture: Individualism versus Collectivism, Power Distance, Uncertainty Avoidance, and Masculinity versus Femininity.

Based on Hofstede’s dimensions of national culture, China’s scores on power distance, individualism, masculinity, and Uncertainty Avoidance are 80, 20, 66, and 30 respectively (Hofstede, Hofstede & Minkov, 2010). The same study also provides scores for the national culture of Saudi Arabia based on the same four dimensions (Power Distance, Individualism, Masculinity, and Uncertainty Avoidance), which are 95, 25, 60, and 80 respectively (Hofstede, Hofstede & Minkov, 2010).

A score of 80 for power distance in China means that the Chinese society accepts the view that it is acceptable for inequalities amongst people to exist. This inference is based on an understanding of the concept of power distance, which addresses the question of inequality in society. Despite the universality of inequality, cultural attitudes towards it differ from one society to the other. For China, the score implies that there is a polarization of subordinate-superior relationships, meaning that abuse of power by superiors may continue unabated. Moreover, people are discouraged to have aspirations that stretch beyond their rank in the social hierarchy. On the other hand, Saudi Arabia’s score of 95 shows that the Saudi people are even more permissive to a hierarchical order in which everyone’s status is defined by existing cultural norms. Like in China, these inequalities are reflected in centralized structures in organization, where subordinates expect to receive instructions on what to do by autocratic bosses.

The dimension of Individualism addresses the level of interdependence among members of a society. China’s score of 20 shows that it is a highly collectivist society, such that people act to pursue the interests of groups and not necessarily close family members. This means that promotions may be made based on memberships in in-groups such as family, close friends, long-time friendships, and business relations. Relationships with colleagues belonging to in-groups are cooperative while those involving out-groups attract hostility. Personal relations are exalted over organization and task. Saudi Arabia’s score on Individualism is 25, meaning that, like China, it is a collectivist society. Members of this society are expected to promote long-term commitment to their memberships in existing groups, including families, extended families, friendships, and extended relationships. This leads to a tendency by people to overlook many other societal rules in the pursuit of collectivism. Any violation of norms governing these relationships leads to loss of face and shame.

China also scores highly on Masculinity, an indication that the society is driven by competition, success, and achievement. People in this culture have a strong desire to be identified as the best performers in their respective areas of endeavor. With a score of 66, China is a highly masculine society, where success is the main source of motivation for people. Many Chinese people are willing to sacrifice leisure and family priorities to spend more time in the workplace. For example, Chinese students are profoundly interested in scoring high marks in school above all else since this is the most important criteria for achieving success. For Saudi Arabia, the score of 60 for Masculinity places the country at cultural proximity to China. Like the Chinese, Saudis “live to work”; they promote structures for guaranteeing equity in the way performance is measured to create a fairly standardized conception of success.

Uncertainty Avoidance (UAI) is about the strategies that societies put in place to address the fear of the unknown. Some attempt to control the future while others simply choose to let it happen. With a UAI score of 30, China comes across as a society where ambiguity is tolerated. This is reflected in the Chinese language, which contains numerous ambiguous meanings. To avoid uncertainty, Chinese also seek to be adaptable and to engage in entrepreneurial activities such as small- and medium-sized, family-owned, businesses. Saudi Arabia’s UAI score is 80, meaning that unlike the Chinese society, the Saudi society abhors ambiguity. This abhorrence of uncertainty is reflected in the rigid codes of behavior and belief that the Saudi culture maintains. The level of intolerance of unorthodox ideas is very high, hence the tendency to maintain rules that justify resistance to innovation.

China Mobile Limited: Company Profile and PESTEL Analysis

Company Profile

China Mobile Limited is a Chinese multinational corporation that offers mobile telecommunications services to China and Hong Kong. It specializes in offering voice services, voice value-added services, data services, data traffic services, information services, technology development services, and the sale of electronic communication services such as mobile phones. The company exercises full control over the equity of China Mobile (Hong Kong) Group Limited. It has also established wholly-owned subsidiaries across 31 provinces in China. On the basis of market value, it is the largest among all Chinese companies that are listed in overseas stock markets. The company plays a leading role in the growth of the mobile communications industry in both China and in the international scene. More than a decade since its establishment, the company has already established a comprehensive telecommunications network that facilitates the delivery of high-quality services to consumers.

PESTEL Analysis

Political Factors

The Chinese political environment greatly influences the operations of China Mobile. The distinctive manner in which China enacts and enforces laws on labor and taxation reflects the importance of political patronage in a country with a long history of state control over large corporations. As a state-owned enterprise, China Mobile has continued to operate in a manner that reflects the socio-economic and political preferences of the Chinese state. This influence is likely to affect the company’s ability to venture into Saudi Arabia. The Chinese government will have an impact on the success of whichever strategy that China Mobile uses to venture into Saudi Arabia.

Economic Factors

China continues to play a leading role in the current growth of the world economy. However, China continues to face several economic challenges such as inflation. To address this problem, it will be important for the country to impose certain monetary restrictions. This restrictions will in turn have an effect on the way large corporations such as China Mobile operate. Proper monetary policymaking will create an ideal environment for the Chinese economy to grow, thereby giving established local companies the leverage they need during capital-intensive process of internationalization.

As an emerging economy, China prioritizes subsidization of operations relating to the telecommunications. This is because the dynamism of this sector enables it to tap into emerging economic opportunities in order to create auxiliary benefits to other sectors. The important role that is being played by other economies, notably, Japan, European countries, and the USA should also be put into consideration because it will influence the strategies that Chinese SOEs will adopt while venturing into new markets such as Saudi Arabia.

The telecommunications industry in China provides many opportunities not just for innovation but also cooperation with other multinational corporations from other countries in efforts to build brands and unique competencies. The industry also plays a critical role in the shaping-up of the newly emerging, highly competitive economic environment in China. Conversely, economic indicators in China such as GDP, interest rates, and inflation rate will continue to have a huge impact on the prices of products and services being provided by China Mobile. This is an important factor because consumption trends play a critical role in overall corporate growth, and by extension, the ability by a company to roll out a successful internationalization strategy.

Lastly, many large telecommunications companies in China are entering the international market through joint ventures. For a long time, joint ventures were thought be less beneficial than wholly foreign-owned enterprises (Kirby, & Kaiser, 2003). Today, the reverse seems to be true going by the growing popularity of joint ventures. For China Mobile, the joint-venture mode of entry provides an opportunity to leverage on the brand familiarity and market knowledge of local telecommunications firms operating in Saudi Arabia (Kirby, & Kaiser, 2003). With the right choice of partner, China Mobile will succeed in its use of joint venture as a mode of entry into Saudi Arabia. The economic environment in China provides an ideal precedent for this strategy because foreign joint-venture venture mode of entry has been the most dominant strategy for Chinese companies operating in foreign markets since the late 1990s (Yan & Warner, 2001).

Social Factors

            A major social factor is the digital divide in China. Middle-class and ruling-class people in urban areas have greater access to telecommunications services than the urban poor. This kind of social stratification profoundly influences the social groups that most telecommunications companies target with their products. By extension, it influences the companies’ choice of growth strategies, expansion priorities, target markets, and pricing.

            The present age of social media has greatly affected the way telecom companies operate in China. A similar trend has unfolded across the world, thereby making it possible for Chinese to use locally-acquired competencies in foreign markets. As more people switch to telecom services that facilitate seamless interaction on social media such as smartphones and tablet computers, telecom companies must embrace the kind of dynamism that makes it possible for those services to be offered at competitive prices using a strategy that makes it possible for existing growth objectives to be achieved.

Technological Factors

            Technological factors are important for China Mobile because the technology-intensive nature of the industry in which the company operates. As such, new technologies are increasingly being invented to improve quality, coverage, and cost of communication. According to Cheng (2006), leading multinational corporations (MNCs) spend up to 20 percent of their revenue on research and development. The telecommunications market in China continue to grow at an above-average rate compared to trends in the rest of the world. This rapid market growth is echoed by the recent increase in the number of leading global multinational telecommunications companies that have started operating in China.

            Today, Chinese telecommunications companies are able to compete fairly well with MNCs. At the same time, competition among these companies on the domestic front is high as they seek to secure industry leadership in terms of innovation capability. This environment of competition has been made possible by the long-haul switch to fully competitive markets across China. It is for this reason that domestic telecom giants such as Huawei are quickly catching up with their Western counterparts in the establishment of new mobile communications and network systems such as mobile intelligent networks, Third Generation Wireless Communication (3G) and Fourth Generation Wireless Communication (4G) standards integrated gateways, and Global System for Mobile Communications (GSM) standards.

            The Chinese government has been keen to support domestic telecom firms, with China Mobile standing out as a major beneficiary. In this situation, major domestic telecommunications companies have joined hands with various state agencies with a view to derive immense benefits and increase profitability. This kind of support is likely to give China Mobile some leverage in its search for a partner in its entry into Saudi Arabia. As the Chinese government continue to provide incentives for technological development, the country’s telecom companies will be able to offer products and services at low prices, thereby giving them competitive advantage over MNCs in both local and foreign markets.

Environmental Factors

China faces numerous environmental problems, many of which may affect the country’s telecommunications industry, albeit indirectly. For example, overreliance on coal is a problem that cuts across all industries. The Chinese government welcomes the adoption of ingenious strategies by all companies to launch initiatives that promote green development, for example, power generation projects that harness the renewable sources of energy.

Water shortage is also a major problem in China. As telecommunications companies such as China Mobile expand, they may want to be engaging in corporate social responsibility projects that facilitate the harnessing of water resources for the betterment of the Chinese economies. Other environmental challenges that have an impact on the country’s economy include climate change, natural disasters such as earthquakes, and air pollution.

 Legal Factors

            The main legal factors to be considered in China’s telecom industry include unfair competition law, antitrust law, and pricing law. In China, there is a lot of emphasis on Unfair Competition Law, which applies not just to the telecom industry but also across the country’s economic landscape. A major omission in this law is the issue of prohibiting market allocation and price fixing agreements among various competitors. This legal gap has been filled through the country’s pricing law. At the same time, China has laid down mergers and acquisitions rules, which are only applicable to the acquisitions of equity within some of the country’s domestic enterprises as well as in foreign transactions.

            Although enforcement sometimes poses a major challenge, the antitrust policies of the Chinese government act as major incentives for companies to diversity while at the same time making mergers and acquisitions a safe undertaking. The same thing may be said regarding the country’s tax laws, which provide numerous potential benefits to business enterprises. The laws improve capacity for competition while at the same time paving way for China’s ultimate compliance with international tax standards.

Challenges and Opportunities of the Joint Venture Mode

The joint venture acts as the most ideal mode of entry for China Mobile. This decision is based on an in-depth analysis of the various challenges and opportunities that the company should expect to face in its efforts to venture into Saudi Arabia. To begin with, the assistance that China Mobile receives from the Chinese central government places it in a position where it is able to handle the various financial risks that come with the joint venture mode. Moreover, this decision is in line with the notion of new regionalism in which MNCs are increasingly being encouraged to venture into new markets by entering into partnerships with companies from host countries (Breslin et al., 2003).

Many Saudi companies may be interested in partnering with China Mobile in harnessing the tremendous growth potential of an industry that would otherwise be highly restricted. At the same time, the exchange of ideas between the two companies will lead to the emergence of a culture of innovation through special research and development projects (Chan-Olmsted & Jamison, 2001). The outcomes of these ideas may lead to an improvement in the Saudi company’s presence in China as well as China Mobile’s presence in Saudi Arabia. Yu & Tan (2005) point out that the kind of preferential policy incentives that the Saudi telecom company may get by venturing into China using this model may be inaccessible if another mode of entry was to be used. At the same time, the joint venture will reduce risks as well as operational conflicts since both companies will work out a way of protecting their respective intellectual property rights while at the same time adjusting their strategy with a view to enhance their level of competitiveness (Wang Lo, & Yang, 2004).

In 2010, the Chinese central government released a new policy that encourages Chinese SOEs to enter into joint ventures with foreign firms in order to improve the level of foreign investment utilization (Salidjanova, 2011). This policy has led to a remarkable growth in foreign companies’ interest in understanding various partnership options available and their benefits. The joint venture mode of entry stands out because it does not require the Saudi firm to lose any control over decision-making. Moreover, the hierarchical structure of China Mobile fits in well with the Saudi national culture. Hofstede’s dimension on power distance shows that at a score of 80 and 95 respectively, both China and Saudi Arabia are permissive to power distance, meaning that one should expect hierarchical structures to be promoted in companies operating in both countries. This phenomenon makes joint venture the best mode of entry for China Mobile in its quest to set up shop in Saudi Arabia.

A major challenge will be the tendency by some members of the Saudi political class to exploit the joint venture to achieve political goals instead of creating an ideal environment for the pursuit of profits or long-term development by both companies. To avoid this problem, it is imperative for China Mobile to appoint a partner that does not rely heavily on political patronage for survival. Similarly, it is important for China Mobile to examine several potential partners in terms of commercial and financial performance as well as service delivery and quality management history (Kim & Gray, 2008). This will enable the company to avoid the pitfall of selecting a firm that may end up becoming a liability to the partnership.

Recommendations

This report makes the following recommendations for China Mobile’s strategy for entering the Saudi market:

  1. The company should use a joint venture approach because of its low level of risk and high level of potential for mutual benefits.
  2. Contiguity between the China and Saudi Arabia in terms of dimensions of national culture, particularly power distance, is an important factor for the potential success of the joint venture approach.
  3.  China Mobile should conduct a strategic market analysis of the target partner as well as due diligence to ensure that the partnership is compatible with all the long-term organizational goals of the two companies and that no legal factors are likely to halt its implementation.
  4. China Mobile’s managers should evaluate the past experiences of the target company in terms of partnering with foreign companies. It may be good to avoid partnering with Saudi companies that have in the past tended to avoid partnerships as this may hint at future difficulties cooperating with the Chinese telecom company.
  5. The company should adopt an appropriate framework for examining how the joint venture mode of entry is likely to affect its performance of during the duration of the joint venture, for example, the extended transaction costs model.

Conclusion

            This report has found out that China Mobile should adopt a mode of entry known as joint venture. There are three reasons for this choice. Firstly, many Chinese companies have increasingly adopted this mode of entry since the late 1990s with astounding success in foreign markets. Secondly, an analysis of Chinese and Saudi national cultures based on Hofstede’s dimensions of national culture shows many similarities. This means that managers of China Mobile and their counterparts in the selected partner company from Saudi Arabia will have a lot to share because of cultural contiguity between the two countries particularly in the important dimension of power distance. Lastly, the business risks and challenges of using mode of entry outweigh its benefits in terms of increased performance, expansion of markets, and innovation. A big risk would present itself if China Mobile chose to partner with a company that turns out to be a liability in the partnership. Fortunately, this problem can be avoided through proper due diligence on the part of Chinese telecom company.

            The move by China Mobile to enter the Saudi market is advisable because it is in line with the official policy of the central government of China, which continues to encourage Chinese SOEs to enter into joint ventures with foreign firms in order to improve the level of foreign investment utilization in the country. As long as globalization continues to occur, many successful Chinese companies will continue to face pressure to venture into foreign markets. Such companies will continue to rely on joint ventures as the most readily available strategic weapons of expanding the companies’ networks of business units while at the same time increasing shareholder value. Thus, China Mobile will have made the right decision to enter the Saudi market through a joint venture.

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