Chinese SMEs in Germany: an exploratory study on OFDI motives and the role of China’s institutional environment

Abstract

Purpose This paper aims to use the institutional perspective to jointly explore the underlying motives that drive Chinese private small- and medium-sized enterprises (SMEs) to invest in the developed economy of Germany and the role China’s institutional environment is playing in this context. Design/methodology/approach Given the lack of recent in-depth studies, the authors use multiple case study method to present rich insights from elite interviews with executives belonging to seven Chinese SMEs and industry experts, as well as the study of firm documents, social media and the latest governmental policies. Findings The results indicate not only market-, resource- and strategic asset-seeking motives, but contrary to the literature, also efficiency-seeking goals. Further driving factors are the integration in global value chains and high degrees of entrepreneurial orientation. The second major finding is that China’s institutional environment induces widely divergent effects. Its ministries established new outward foreign direct investments (OFDI) support measures that are beneficial for some SMEs’ post-entry operations. However, some firms are not aware of any support measures or suffer from discrimination that hinders innovation and from which they try to escape by investing abroad. Originality/value This paper considers different levels of analysis (firm, entrepreneur, institutional environment) to investigate Chinese SMEs’ motives in Europe’s largest market. By examining why and how these firms use OFDI to a developed economy, the authors address an essential question for China’s economy that is of primary political and academic concern (“How can China get that improved innovation that often seeds entrepreneurial growth?”). In addition, the study contributes to the growing discussion of institutional escapism in emerging markets by revealing five institutional hardships Chinese SMEs are facing and how this relates to their internationalization.

China’s OFDI support mechanisms in Germany: how governments can work together to promote SME internationalization, reduce liability of foreignness and contribute positively to society

“…This cooperation, facilitated by internationalization, benefits the realization of the ambitious “Made in China 2025” initiative and adds to the ongoing debate on how China’s SMEs can further shift up the “smile-curve” of value-added (Ahlstrom et al , 2018; Meng et al , 2020; Hänle et al , 2022). As Ahlstrom et al (2018) pointed out, a large number of China’s SMEs still rest at the lower middle of the bowl-shaped smile curve in many industries.…”

“…The Chinese Government plans to create 1,000 Chinese Hidden Champion firms with a budget of $1.3bn on this project (China Quality Supervision, 2020). Hidden Champions are highly specialized small- to medium-sized businesses that are global leaders in their niche markets with extremely high degrees of internationalization (Simon, 1996, 2009, 2022; Hänle et al , 2022). In addition, a “Five-year action plan for SME promotion,” jointly launched with the Bank of China, and the “SME development plan 2016–2020” specify further actions to promote OFDI of China’s small and medium-sized businesses (MIIT, 2016 Chapter 4, Article 6):…”

“…As Ahlstrom et al (2018) pointed out, a large number of China’s SMEs still rest at the lower middle of the bowl-shaped smile curve in many industries. When China’s SMEs move further up the smile curve in industrial innovation via OFDI (Hänle et al , 2022), that shift will significantly contribute to China’s path to becoming a global innovation leader and, in so doing, also strengthen China’s capabilities to address globally pressing issues such as sustainability. At the same time, cooperation and exchange with Chinese partners can also contribute to extending the innovativeness of German firms into areas where China is leading the field, for example, when it comes to digitalization in consumer markets or e-mobility.…”

“…With their contribution of more than 50% of China’s tax revenues, more than 60% of its gross domestic product, more than 70% of innovations in technology and 80% of job positions (National Bureau of Statistics of China, 2017), SMEs substantially contribute to economic growth and social development. China’s SMEs are increasingly active and invest in international markets (Hänle et al , 2021; Simon, 2022), for example, by establishing subsidiaries in Germany (Hänle et al , 2022). However, the majority are privately owned and differ fundamentally from large multinationals and state-owned firms in central elements such as ownership structures, strategies and number of resources (Yan et al , 2018; Zhang et al , 2016).…”

“…This is one reason that next to the continuous state support for larger firms’ OFDI, China’s Ministry of Industry and Information Technology (MIIT, 2016, 2017, 2018) entered a series of new policies specifically tailored to also promote the OFDI of SMEs into force. Hence, to understand how this overarching direction of China’s Government translates into actual support mechanisms in a developed investment country is a compelling question for IB scholars and an essential issue for China’s economic development to avoid a potential “middle-income” trap (Ahlstrom et al , 2018, p. 309; Hänle et al , 2022).…”