NZ Herald reported on the 27th May 2009 that "Fisher and Paykel Appliances has just revealed a $189 million equity raising, with Chinese company Haier set to take a 20 per cent stake in the troubled white ware maker". This deal drew a lot of attention from the media. Haier and FPA also signed a Cooperation Agreement that includes the sharing of market, design and technology resources (www.haier.com). The agreement formed a strategic partnership between Harier and FPA. Haier will be the sole distributor of Fisher & Paykel products in China, and Fisher & Paykel will also market and distribute products of Haier in Australia and New Zealand market exclusively.
This strategic alliance was seen as a milestone for Haier, which previously lost the bid for Maytag the third largest white goods manufacturers in the United States, to Whirlpool. In May 2008, Haier was also negotiation on the acquisition of General electric's appliance unit, but after taking into account the difficulties of cross-cultural integration, Haier finally gave up on the idea of acquiring GE's appliance sector. Fisher & Paykel also said that cooperating with Haier would open the gate for it to enter the Chinese Market and could also be used to promote sales to the Middle East and Africa.
Fisher & Paykel is New Zealand's leading multinational appliance manufacturer, which producing high-end refrigerators, washing machines, dryers, dishwashers and ovens. FPA is developed from a family owned small importing agency firm in 1934. Its current annual production volume is about 1.2 million, In New Zealand it has a 55% market share while in Australia it has an 18% share, ranking second in the local market.
Haier was born in 1984, which is much younger than F&P. Its predecessor was the Qingdao Refrigerator Plant which is a government owned enterprise. Haier Group has a fairly centralized management style. Why Haier - a comparatively young firm with different company culture, history, management style and home country background would like to have a strategic partnership with F&P? What is the motivation and purpose of this strategic alliance for each firm? In order to answer these questions, we analyse both firms' internationalisation process and their business network.
For over half century internationalization has been associated with Western multinational enterprise (MNEs) investing in developing countries. The traditional model of internationalisation process was build based on firms from western countries.
Recent years have seen the emergence of a growing number of multinational enterprises (MNEs) from many of today's newly industrializing countries such as China. By 2005 china has become the world's fifth outward direct foreign investor with a total of US$37 billion (Ministry of Commerce, 2006). Considerable attention to date has been paid to china's expansion of outward foreign direct investment (OFDI).
However, we currently know very little about how Chinese firms internationalise and hardly ever compare it with the internationalisation process of New Zealand firm. The purpose of this study is to understand Haier and F&P's internationalisation process through compare their path of internationalisation with the traditional model of internationalisation; and find out the critical incidents and relationship lead to the strategic partnership, as well as the purpose of the partnership of Haier and FPA.
This study is very important. It can benefit both Chinese and western countries' firms. This study will help Chinese firms to get a better understanding of themselves, help them to learn from the success of Haier Group, and create better internationalisation strategy to compete in the competitive international market. For western firms, a better understanding of Chinese firm's internationalisation process and network could facilitate them to be prepared to compete and cooperate with Chinese firms in the world market and benefit from it.
General background of China's economy and import/export policy
Prior to 1979, China maintained a centrally planned economy. By 1978 nearly three-fourths of industrial production was produced by centrally controlled state-owned enterprises (Morrison, 2008). China followed an extreme form of Import substituting industrialization (ISI) (Duysters et al, 2009) in which Foreign trade was generally limited to substitute the goods that could not be made or obtained in China (Morrison, 2008).
China established the economic reforms in 1979 (Morrison, 2008). The Chinese government clearly established "Open Door" economic policies. China the first time included OFDI in national economic development programs (Yang et al., 2007). In this phase, the Chinese government only give permits to a limited number of large state and provincial trading houses to set up overseas operations. Majority of the OFDI projects were set up in Southeast Asia which has relatively shorter physic distance and similar economy background. Since 1991, Chinese government further liberalised the economy and allow large SCEs to directly invest in international market. After the administrative measures on outbound FID projects was formalised by Ministry of foreign Trade and economic cooperation (MOFTEC) in 1996, many firms started international expansion. It is followed by a increasing number of Chinese firms listed on developed country stock exchanges to rise capital, establish international brand image and reputation.
After China entered WTO in 2001, the reductions in tariffs and foreign investment barriers have increased domestic competition (Duysters, 2009), many Chinese firms started the aggressive overseas expansion. Yang etc. state that previously raised capital from overseas stock market allow Chinese firms internationalise through translational mergers and acquisitions (M&As). In 2004 alone, Chinese firms engaged in 13 cross-border M&As (Liu, 2007). Hong and Sun (2006) point out the reason that M&A become the main form of Chinese FDI is mainly because their need to access natural resources, overcome the low brand image of Chinese products, obtain the developed distribution networks and the advanced technology from developed counties.
In 2007, China reported that its FDI is increased to $16.1 billion from $2.9 billion in 2003, and ranking it as the world's 13th largest investor (China Ministry of foreign Commerce, 2007). On September 29, 2007, the Chinese government officially launched the China Investment Corporation in an effort to better manage its foreign exchange reserves. Some analysts believe that china will increasingly use it reserves to purchase foreign firms, or shares of foreign firms, that are perceived to be profitable (Morrison, 2008).
On the 7th of April 2008 in Beijing, New Zealand and China signed the Free Trade Agreement after three years negotiation process. The agreement is entered into force on 1 October 2008. New Zealand is the first developed country to negotiate a free trade agreement with China.
The Free Trade Agreement between New Zealand and China (NZ-China FTA) entered into force on 1 October 2008. The NZ-China FTA was signed on the 7th of April 2008 in Beijing, bringing to the end a negotiation process that spanned fifteen rounds over three years (http://www.mfat.govt.nz/Trade-and-Economic-Relations/Trade-Agreements/China/index.php).
China is now New Zealand's fourth largest trading partner, taking over $1.6 billion of New Zealand's merchandise exports and over $1 billion of services. New Zealand government believe New Zealand's agriculture, manufactures and services operators will receive huge gain from the huge and growing demand from Chinese market.
General background of NZ's economy and import/export policy
New Zealand is a relatively small economy in the western world, population wise it is also a small country in the world scale. The small size of this country decides that historically New Zealand had a highly protected, regulated and subsidized economy. This stemmed at least partly from trends started in the first half of the 20th century, when the First Liberal Government and later the First Labour Government introduced both social security systems with for the time very wide-ranging scope (from state pensions to unemployment benefits and free education and health care), while also regulating industry, mandating trade unionism and industrial arbitration. Imports were also heavily regulated.
By the 1960s, the New Zealand economy's terms of trade began to decline. This was largely due to the decline in export receipts from the United Kingdom, which in 1955 took 65.3 percent of New Zealand's exports. By the year ended June 1973, during which Britain formally entered the European Economic Community, this had fallen to 26.8 percent. By the year ended June 1990 its share had fallen to 7.2 percent and in the year ended June 2000 its share was 6.2 percent (http://en.wikipedia.org/wiki/Economy_of_New_Zealand). It is also the reliance of export to UK (and the US) that determined New Zealand's late entry to the wider world market. As late as 1960, two-thirds of export income was earned in just two traditional markets the United Kingdom and the United States of America (Akoorie & Enderwick).
Over the past 20 years the government has transformed New Zealand from an agrarian economy dependent on concessionary British market access to a more industrialized, free market economy that can compete globally (CIA World Fact Book).
The transition process started from a closer relationship with Australia. In 1966, the two countries signed the New Zealand Australia Free Trade Agreement (NAFTA), which significantly encouraged export activities. Fisher and Paykel also began to turn its attention towards to exports from the late 1960s after the signing of the agreement. Supporting the agreement, then New Zealand government introduced a range of export incentives: all export expenditure became 150% tax deductible; for every one appliance exported a licence to import parts for two appliances was granted; tax rebates were offered for increased annual sales (Hansen and Hunter, 2005). With the incentives from government, Fisher & Paykel and few other New Zealand firms were able to establish exports not only to Australia but also other world markets By 1975, exports represented 20% of total sales at Fisher & Paykel, though most of these to Australia.
With the Closer Economic Relations (CER) between Australia and New Zealand came into force in 1983, many New Zealand firms including Fisher & Paykel were able to boost their export to Australia helped by a reduction in tariffs and duties. New Zealand firms from this point were able to export unhindered into Australia other than exporting through an Australian distributor. Through the 1990s to the 2000s, New Zealand continued its growth in export, with an ever increasing volume to emerging Asian markets like Japan, China and South Korea. By 2008, The big four trading partners of New Zealand are Australia 23.2%, US 10.1%, Japan 8.4%, China 5.9% (2008) (CIA World Fact Book).
Literature Review
Internationalisation process
Internationalisation refers to the actual activities of or an attitude the firm holds towards engaging in business activities across the national borders (Kindleberger, 1969). Internationalisation has been widely used to describe the process in which the firms gradually increase their international involvement (Johanson & Vahlne, 1977). In this research, the concept of internationalisation is defined as "the process of increasing involvement in international operations across borders" (Welch and Luostarinen, 1988).
In the past two decades, many researches have been done about the internationalisation process. In the previous literature, internationalisation process is seen as an incremental process involving a varying number of stages (Johanson and Wiedersheim, 1975; Bilkey and Tesar, 1977; Cavusgil, 1980, Czinkota, 1982). This concept is supported and followed by many researchers in the world and widely used as basis for much empirical research (Madsen & Servais, 1997). Johanson and Wiedersheim-Paul (1975) categorised the internationalisation process into four stages: no regular export - export via independent representatives - establishment of subsidiary - overseas production/manufacturing units. Each stage requires a higher degree of international involvement. Base on Johanson and Wiedersheim-Paul's (1975) work, Johanson and Vahlne (1997) further developed a dynamic theoretical model - the "Uppsala Internationalisation model (U-M)", which seeing the internationalisation involving time consuming knowledge acquiring process. Some other researchers focusing on developed the Innovation-Related Internationalization Models (Bilkey and Tesar, 1977; Cavusgil, 1980) based on Roger's stages of the adoption process (Rogers 1962, pp.81-86). They see the firm's internationalisation process as an innovation for the firm. The similarity of the two researches is both streams indicate that internationalisation process is a slow and incremental process, due to the lack of knowledge of the foreign market, especially 'experiential knowledge" and high perceived uncertainty (Madseon and Servais, 1997).
Uppsala internationalisation process model
The Uppsala Model is a traditional internationalisation model developed by Johanson and Vahlne (1977), based on empirical observations of four Swedish firms from their studies in international business at the University of Uppsala. The Uppsala internationalisation model described internationalisation as the process through which the firm acquires, integrates, and uses experiential knowledge, as well as developing an increasing commitment to its foreign markets. Johnason and Vahlne (1977) indicate that the resources committed to the foreign markets and the knowledge about foreign market and operations affect both commitment decisions and the way current activities are performed. These in turn change knowledge and market commitment.
Johanson and Vahlne (1977) assume market commitment is composed of two factors: the amount of resources committed and the degree of commitment, i.e., the difficulty of finding an alternative use for the resources and transferring them to alternative usage (Madsen & Servais, 1997). Market knowledge includes general knowledge about market operations and market specific knowledge and both of them are essential for a firm's international activities. Knowledge can be objective or experiential, but the market specific knowledge is assumed to be gained mainly through experience in the foreign market operation. Johanson and Vahlne (1977) conclude the direct relationship between market knowledge and market commitment: knowledge can be considered as a resource, a better knowledge about a market can be seen as a more valuable resources and the commitment to the market is stronger.
Johanson and Vahlne (1977) state that current business activities are the prime source of experience. They also postulate that decisions to commit resources to foreign operations depend very much on experience of operation in the foreign market. Increasing experiential market knowledge can reduce the perceived uncertainty and risk, so decisions to commit further resources to specific foreign market will more often be taken (Madsen & Servais, 1997). This implies that market commitment can only be increased gradually in small incremental steps because acquisition, integration and use of knowledge of foreign market are a time consuming process.
To explain the internationalization across country markets, Johanson & Vahlne (1977) argue firms are expected to follow a sequence from low to high commitment modes of operation and choose the new market with successively greater psychic distance (Du, 2003). Psychic distance has been defined as factors preventing or disturbing the flow of information between firm and market, including factors such as differences in language, culture, political systems, education level, or industrial development level (Johanson and Vahlne 1977). They assume the high commitment and psychic distance increase the risk and uncertainty of the investment. Therefore, firms start their internationalization on market with the lowest perceived market uncertainty, often in counties which are close to the home country (Melin, 1992).
Network
In a more and more homogeneous market, the business environment is no longer viewed as a neoclassical market with many independent suppliers and customers. The firms operate in a web of connected business relationships. The exchange in one relationship is linked to exchange in another. These webs of connected relationships are labelled business networks (Johanson and Vahlne, 2009).
Business network is also defined as "a set of two or more connected business relationships, in which each exchange relation is between business firms that are conceptualised as collective actors" (Emerson, 1981). In another word, business network is a set of connected business relationships among collective actors, such as customers, suppliers, distributors, competitors, and government (Axelsson & Johanson, 1992).
Many researchers highlight the importance of networks in internationalisation process of a firm (Bell, 1995; Coviello & Munro, 1995; Ellis, 2000; Johanson & Mattsson, 1992; Johanson & Vahlne, 2009). Relationships is "bridges to foreign markets", it can provide firms with the opportunity and motivation to internationalise (Sharma and Johanson, 1987). Developing new relationship, and learning through the relationships, enable forms have the ability to enter foreign markets (Johanson & vahlne, 2003). Network relationships can also affect the firm's foreign market selection, the mode of entry (Coviello and Munro, 1995; Chen and Chen, 1998), and internationalisation strategy (Welch & Welch, 1996). The network is not only important in the internationalisation process of firms in developed economy, but also has impact on the internationalisation of multinational companies from emerging market (Elango & Pattnaik, 2007).
Johanson and Mattsson (1988) discussed the internationalisation of firms in the context of both the firm's own business network and the relevant network structure in the whole market. They suggest that a firm's success in entering new international markets is depending on its position in a network as well as relationship within current markets.
Revised Uppsala Model - The Business Network Internationalisation Process Model
With all the evidence showed above, the internationalisation process of an individual firm cannot be seen in isolation. The business environment itself is a network. Understanding the whole environmental conditions as well as business network which the firm operate is necessary for analysing a firm's internationalisation process (Madsen and Servais, 1997).
By taking the impact of the business network into account, Johanson and Vahlne revised the Uppsala Model they built in 1977 and developed a Business Network Internationalisation Process Model in 2009 (see Figure 1).
In this network model, they assume that the internationalisation process is pursued within a network. The position of the parties involved in the network can be characterised by their level of knowledge, trust and commitment among the network. The firm's market knowledge especially their recognition of opportunities effect the firm's decision on increase or decrease the level of commitment to one or several relationships in its network. A change in commitment will either strengthen or weaken the relationship, therefore change the firm's network position.
Furthermore, a firm's existing network position and especially the opportunities find through the partnership affect the speed, intensity and efficiency of the firm's learning, knowledge creating and trust building process. In turn, the specific knowledge, trust and commitment determine the firm's new position in the network.
A network of business relationships provides a firm with an extended knowledge base (Johanson and Vahlne, 2009, 4pp), also the existing business relationships make it possible to identify and exploit opportunities. Johanson & Vahlne mentioned in their 1977 article that knowledge may lead to the identification of opportunities. As some types of knowledge are only confined to network insiders, and not accessible to everyone, a strong commitment to partners allows firms to build on their respective bodies of knowledge, making it possible for them to discover and create opportunities (Johanson and Vahlne, 2009).
Therefore, Johanson and Vahlne (2009) argue that the "insidership" in relevant networks is a necessary condition for successful business development. In another words, the "outsidership" becomes a liability when a firm attempts to enter a foreign market without any relevant network in the specific market. The liability of being outside of such a network leads to difficulties for the firm when engaging in an internationalisation process, rather than any psychic distance between the two markets.
Strategic Partnership
Strategic partnership is defined as "signifying an agreement between two or more firms to engage in joint activities, all the while preserving their separate identities" (Mytelka, 1991). Forming a partnership is a quick way for MNEs to become an insider from a foreigner. Rather than emulate incumbent MNEs by entering markets through large investments in wholly owned subsidiaries, a crucial characteristic of this strategy is to become a insider through forging partnerships so as to reduce risk, acquire knowledge, and gradually increase commitment to overseas markets. (Mathews, 2006)
Internationalisation of developing countries' MNEs
The international marketing literatures mentioned above are all emerged in Europe and the US. It appears that most theories focus on explaining the internationalising behaviour of large manufacturing firms from developed countries that expand internationally. This is not surprising as during pre-1980s North America and Western Europe are where the foreign direct investment (FDI) from and Asia and Latin America are seen as the host countries (Boyce & Ville, 2002).
Recent years have seen the emergence of a growing number of multinational enterprises (MNEs) from many of today's newly industrializing countries such as China, India, Mexico, Malaysia and Rusher (Duysters et al., 2009). Considerable attention has been attracted to the internationalisation of firms form developing counties. Many research indicated the distinctive characteristics of emerging countries' multinational companies (Mathews, 2006; Child and Rodrigues, 2005; Madsen and Servais, 1997).
Some researchers argue that the perspective of developing counties' internationalisation is different from the mainstream perspective.
In international business, the mainstream perspective assumes that firms will internationalise base on a definable competitive advantage that allows them to secure enough return to cover the additional costs and risks associated with operating aboard (Buckley and Ghauri, 1999; Caves, 1971). It is the case for most internationalisation of developed counties. Their internationalisation is motivated by a firm's wish to exploit its existing ownership advantages.
However some studies concluded that developing country multinationals generally suffer from significant competitive disadvantages compared to MNCs from developed counties. These disadvantages include outdated technology, inefficient management systems, limited knowledge of overseas market (Child and Rodrigues, 2005). Among the MNEs from developing countries develop international links is a way to seek assets and address their relative disadvantages (Wesson, 1999). Matthews (2002, p.471) conclude that latecomer firms did not start from positions of strength, but rather seeking some connection with the technological and business mainstream in order to 'catch up' with early developing countries.
Moreover, previous literature point out the latecomers are all internationalised rapidly and aggressively (Mathews, 2006). Once the firm executed a 'gestalt switch' from domestic to global player, they see the entering of the first foreign market at an initial step, the aim they set up is not only entering the specific foreign market, but using it as a step stone to entering the world. In this way, outward FDI can be used as an effective channel for firms to acquiring appropriate assets and resources, and allow the firms from developing counties to close the gap that separates them from leading companies (Child and Rodrigues, 2005). In the study of Dragon Multinationals, Mathews (2006) pointed out that partnerships is used as an effective means to leveraging their way into new markets for turning initial disabilities into sources of advantage.
Also, the government policy, regulations and involvement in the business ownership is typical in developing and transition economies (Peng, 2000). The government's impact on the international expansion of MNE from developing economy is much greater than those from the developed economy.
Basis on the recognition of the differences between the nature of MNC from developing counties and developed counties, the emerging countries' MNC attracted much more attention in the literature.
Duysters (et al., 2009) examined the emerging multinationals growth and internationalization, such as the internationalisation mode and the choice of overseas destinations, through a comparative case study of MNEs of two emerging countries China and India. They conclude that strategic alliances and acquisition are the ways to acquiring design capabilities through developed network of partners and sourcing capabilities and both cases proved that the gains of FDI in a long term can outmatch the resource commitment and the associated costs in a short term (Duysters et al, 2009). Yang, Jiang, Kang and Ke (2007) explained the differences and similarities of international expansion of Chinese and Japanese MNEs, based on institution-, industry-, and resource-based views of internationalization. They suggest that firms international expansion is not only influenced by industry and resource based considerations but also shaped by the domestic and international institutional frameworks. The Chinese MNE's success through internationalisation was explained by Du (2003), as well as Li and Liu (2002) using Dawar and Forst's survival strategy theory and the classic "environment - strategy - performance framework" (Miller and Friesen, 1983).
However, the Uppsala Model and the Business Network Model (revised Uppsala Model) are both developed base on the firms in western developed countries. Little research has been done on the international activities of Chinese companies, especially trough comparison with companies from developed western counties. Moreover, the Business Network Model (2009) has never been tested in any developing country. Furthermore, Haier and Fisher & Paykel Appliance are both influential multinationals in their home countries even in the world. Their strategic partnership setup an example for the strategic alliance of firms from developing and developed countries. However, there is hardly any research has been done on the critic event from a theoretical level.
This study will analyse the internationalisation process of Haier and F&P through comparing with the Uppsala Internationalisation Process Model, and using the strategic alliance between Haier and F&P as a case study to examine the Business Network Internationalisation Model. The purpose of this study is to get a better understanding of Haier and F&P's internationalisation process through compare their path of international expansion with the traditional model of internationalisation; explain the critical incidents and relationship lead to Haier and Fisher & Paykel's strategic alliance and using the revised Uppsala Model to explore how and why a strategic partnership formed.
