• What were the main factors behind Bauing Group’s decision to expand internationally?

Why do you think Bauing Indonesia was so successful?

Suggestions

• Application – as appropriate/relevant of (Yip’s) internationalisation drivers: market,

government, cost, and competitive

• Application – as appropriate/relevant of the Uppsala model, the eclectic paradigm (also known as the OLI framework), the RBV theory, and Mathews’ LLL model
  • Application – as appropriate/relevant of the idea of FSA (same as RBV and you need to recognise that)
  • Application – as appropriate/relevant of home-country advantage/Porter’s Diamond
  • Application – as appropriate/relevant of host-country advantage (or Locational advantage in OLI)

Main proof-points

The first factor behind this decision was increasing competition in the building and decoration industry in China. In 2016, most public companies in this industry in China experienced decreasing gross margins due to increased period costs, decreased operational capabilities, and poor cash flow. Bauing Group’s performance from 2013 to 2016 illustrates many of these factors. For example, from 2013 to 2016, Bauing Group’s net profit was increasing, but its growth rate was decreasing (see case Exhibit 3): (1) the growth rate of total revenue became negative in 2016, (2) costs had been increasing since 2013, and (3) the operational cash flow was unstable. To address these issues, one of the inevitable choices for Bauing Group was to expand abroad.

A second factor in this decision was the great business opportunity provided by the One Belt, One Road (OBOR) initiative promoted by the Chinese government. OBOR, a development strategy

proposed by China’s President Xi Jinping, focused on connectivity and co-operation between Eurasian countries, primarily the People’s Republic of China (PRC), the land-based Silk Road Economic Belt, and the ocean- going Maritime Silk Road, all of which provided a great opportunity for Bauing Group. In recent years, OBOR’s key focus areas have included infrastructure investment, construction materials, railways and highways, automobiles, real estate, power grids, and iron and steel, in addition to China’s push to take a larger role in global affairs with a China-centred trading network. Bauing Group’s primary business matches well with this primary focus on infrastructure

investment. As China’s leading integrated construction and design enterprise, Bauing Group can utilize its comprehensive qualifications, rich experience, and good reputation in this industry to bid for various projects under OBOR.

In addition to the government’s support for the OBOR initiative, a major reason for Bauing Group Indonesia’s success are the cultural similarities between China and Indonesia. I expect you to use Hofstede’s framework – which looks at the effects of a society’s culture on the values of its

members, and how these values relate to behaviour – and you’ll see then that the cultures of China and Indonesia are very similar in terms of dimensions such as power distance, individualism, long- term orientation, and indulgence.

• Power Distance: This dimension deals with inequalities among individuals in societies and expresses the attitude of a culture toward these inequalities among us. China and Indonesia both have higher power distance index rankings. That is, people in both societies believe that inequalities among people are acceptable. Relationships between subordinates and superiors tend to be polarized, and there is no defence against power abuse by superiors. Formal authority and sanctions influence individuals, who are, in general, optimistic about people’s capacity for leadership and initiative. “People from both cultures believe that people should not have aspirations beyond their rank.”
  • Individualism: The individualism dimension addresses the issue of the degree of interdependence a society maintains among its members. People in individualistic societies tend to take care of only themselves and their immediate family. However, in collectivist societies, people belong to in-groups, which usually look after their members in exchange for loyalty. The cultures of China and Indonesia are both highly collectivist, so people in these two countries act in the interests of the group and not necessarily in their own interests. This collectivism will affect hiring and promotions within organizations, as closer in-groups (e.g., family members) will receive preferential treatment. Employees have low commitment to organizations (but not necessarily to the people in the organizations). Although relationships with colleagues and others in the same in-groups are close and co- operative, people can be cold or even hostile to out-groups. Personal relationships usually prevail over task and company.
  • Long-Term Orientation: This dimension refers to the methods societies use to maintain links with their own past while dealing with the challenges of the present and future; different societies prioritize these two existential goals differently. Normative societies, which score low on this dimension, prefer to maintain time-honoured traditions and norms, and hold suspicious views of societal change. In contrast, societies that score high on this dimension often take a more pragmatic approach; they encourage thrift and efforts in modern education as a way to prepare for the future. On this dimension, China scores 87, and Indonesia scores 62, which means that both countries have a highly pragmatic culture. In these societies, people believe that that truth depends greatly on the situation, the context, and the time. People can adapt traditions easily to changed conditions, and exhibit a strong propensity to save and invest, to thriftiness, and to perseverance in achieving results.
  • Indulgence: This dimension refers to the extent to which people try to control their desires and impulses based on the way they were raised. Cultures with relatively weak control are called indulgent, and those with relatively strong control are called restrained. Both China and Indonesia are restrained societies because both countries score low on this dimension. Restrained societies tend toward cynicism and pessimism. In contrast to indulgent societies, restrained societies put less emphasis on leisure time and more emphasis on controlling the gratification of their desires. People with this orientation usually believe that their actions are restrained by social norms and feel that indulging themselves is wrong.

2.                What challenges do the company face in entering the US market?

Suggestions

An application of “distance” issues using Ghemawat/CAGE model Cultural Distance/Conflicts (using Hofstede again)

China and the United States have many cultural differences, particularly in terms of power distance, individualism, long-term orientation, and indulgence.

• Power Distance: Chinese society believes that inequalities among people are common and acceptable. However, U.S. society believes that everybody is unique, and that everyone has a different power level.
• Individualism: China is a highly collectivist culture, but U.S. culture is highly individualistic, with a strong belief in the premise of “liberty and justice for all.” U.S. society is loosely knit; people are expected to look after themselves and their immediate families only, and to not rely (too much) on authorities for support. Within U.S. organizations, hierarchy is established for convenience, superiors are accessible, and managers rely on individual employees and teams for their expertise. Both managers and employees expect to be consulted, and information is shared frequently. At the same time, communication is informal, direct, and participative to a degree.
• Long-Term Orientation: China has a very pragmatic culture. However, in U.S. society, people tend to analyze new information to check whether it is true. U.S. companies measure their performance on a short-term basis—for example, profit and loss statements are issued and evaluated on a quarterly basis. This shorter-term orientation also motivates individuals to strive for quick results within the workplace.
• Indulgence: China is a restrained society that has a tendency towards cynicism and pessimism. However, the United States is an indulgent society, and people in this culture believe they should “work hard and play hard.”

These cultural differences could pose many problems and issues for a Chinese company such as Bauing Group in the United States.

Administrative Distance/Political Challenges:

Unlike in Indonesia, Bauing Group will find it difficult to benefit from the OBOR initiative in the United States. Bauing Group USA will have very limited government support from both China and the United States. U.S. President Donald Trump withdrew the United States from the Trans-Pacific Partnership (TPP) agreement on his first day in office. As Joshua Meltzer points out, “Having withdrawn from TPP, the U.S. administration has failed to articulate a trade and investment agenda for Asia that can compare to the TPP or China’s ambition for BRI [the Belt and Road Initiative].”

Economic Distance/Business Challenges:

Companies from outside the United States “must consider a series of interrelated business factors in order to establish a successful U.S. presence.” Bauing Group does not have relevant experience in the U.S. market, and it would need to particularly consider the following issues:

• Tax Structure: Bauing Group needs to ensure its compliance with taxation rules both in

China and in the United States, which requires “sophisticated and coordinated analysis and

strategic planning between the tax professionals of both the company’s home country and the U.S.”

• Contacts: The personal and professional connections of a company’s chief executive officer and top management personnel are very important, and they can contribute to the success of companies’ crucial goals, such as “key executive recruiting, the establishment of important vendor and partner relationships, and [identifying] marketing and sales

opportunities.”

• Logistics: In addition to legal and business considerations, non-U.S. companies must understand the local environment and must also consider culture when addressing management issues, such as “obtaining an Employer Identification Number, setting up a bank account, or finding the right location for operations.”
  • Immigration: Because U.S. immigration laws are complex and the legal consequences of attempting to navigate this system without knowledgeable advice could be significant, Bauing Group would need to seek the advice of an immigration attorney who works specifically with immigration related to business. This attorney would also help the company save time and legal fees.
  • Employment and Human Relations: Bauing Group should consider recruiting U.S. personnel for its U.S. operations. These employees would be valuable because of their understanding of local expectations and markets regarding issues such as stock options, equity compensation plans, health insurance, and retirement benefits, which can differ dramatically from country to country.

3.                Which market entry mode do you recommend Bauing Group adopt in the US market?

Suggestions

After taking into account what you’ve just done in Q. 2 in terms of the cultural, business, and political environment of the United States, it is clear that FDI by acquisition is likely to be the most suitable and beneficial market entry strategy for Bauing Group in the United States, so I’d expect you to also discuss why other entry modes are NOT that suitable.

• The primary business of Bauing Group is construction. Production and delivery are usually

simultaneous. This characteristic of Bauing Group’s business excludes exporting as an option.

• Companies in the target market that want to use the parent company’s name and resources usually initiate licensing and franchising arrangements. In this case, Bauing Group, as the parent company, initiated the plan to enter the U.S. market. Therefore, licensing and franchising are unsuitable for Bauing Group.
• Turnkey projects involve an agreement between a company and the local government of the target market. The target market country is usually a politically and economically fragile country that aims both to attract well-established companies to start business in the target country and, after a period of time, to take over their business. The United States is not a politically or economically fragile country, which makes the turnkey projects less suitable as an entry mode for Bauing Group.
• The cultural differences between China and the United States are too significant to bridge, which makes joint venture and strategic alliance options less suitable. These cultural differences will

cause too many problems and issues (e.g., language, business, tax, personnel) for a Chinese company such as Bauing Group, in terms of co-operating and communicating with a U.S. company.

• The characteristics and the primary business of Bauing Group make FDI via greenfield investment less suitable. The nature of Bauing Group’s business is not production, which requires establishing a factory or infrastructure. Instead, Bauing Group’s primary business is providing relevant building and decoration services. Its business focuses on the construction of sports sites, luxury hotels, and transportation stations; the design and decoration of hospitals; and the decoration of luxury residences.
• Direct acquisition of an existing company in the building and decoration industry in the United States could give Bauing Group many advantages, and it could also help the company avoid many issues and challenges. For example, acquisition could help Bauing Group quickly and smoothly enter the U.S. market. After acquisition, Bauing Group could utilize the existing resources and experiences of the acquired company and avoid the various potential issues of starting a new business in the United States.

Use of Dyer et al. (2004) ‘When to Align and When to Acquire’ would be suggested in this discussion to support the argument for FDI via acquisition. Though open to debate, you must keep in mind the distance issues from Q. 2, and they almost axiomatically rule out any sort of non-equity arrangements on trust/reciprocity grounds and they mitigate against the efficacy of an alliance.

Given the nature of the business, I’d say the synergies are sequential or reciprocal, the relative value of soft to hard resources is medium, the extent of resource overlap/redundance is likely be high, market uncertainty is appears to be medium, and the level of competition is medium to high, thus underscoring the argument for acquisition rather than an equity-alliance.

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