1. How do you respond to the view that China’s competitive advantage is based solely on a low-cost strategy that results from its workers’ low wages?

2. Do you see dangers from over-reliance on China as a source for the inbound supply chain? That is, what risks do international firms run if they depend heavily on China for their inbound supply chain?

Multinational companies have had a long history of being careful in their investment decisions in China. When recalling his earlier days studying China’s investment climate in 1981, Dr. Karl Harn, a magnate in the German auto industry, said, “For most multinational companies at that time, China was still a . . . [mystery].” In the decades since this observation, the pendulum has swung dramatically in the direction of working with Chinese firms as partners. In the Pudong district, Shanghai’s central commercial hub, 98 international companies have invested in 181 projects worth US$8 billion.

The entry into China has been deliberate and carefully measured by many of these multinational firms. Until the mid-1990s, most multinational companies merely set up representative offices in China and mainly engaged in direct trade. Yet, since 1995, companies have penetrated the Chinese market for several reasons. First, the government has loosened its grip on economic policy, allowing for increasing interaction with corporate partners. Second, China’s economy has grown and a significant percentage of the population is both well educated and has disposable income. China is more than a source for producing goods; it is now a hugely attractive market. Finally, China has continued to pursue economic and infrastructure projects to open and modernize its country even more, increasing its potential customers and business partners.

The multinational firms have responded to the obvious incentives in the Chinese market, and they now seek to establish production facilities in China and to enter into joint ventures and other partnership deals with Chinese firms. The list of multinational organizations that are firmly committed to the Chinese market reads like a Who’s Who list: Omron Corporation (Kyoto, Japan); Hitachi, Ltd. (Tokyo, Japan); Panasonic Corporation (Osaka, Japan); Sanyo Electric Co., Ltd. (now part of Panasonic Corporation, Osaka, Japan); Fujitsu Ltd. (Tokyo, Japan); Toshiba Corporation (Tokyo, Japan); Isuzu Motors Ltd. (Tokyo, Japan); Siemens AG (Munich, Germany); Bayer AG (Leverkusen, Germany); Henkel Corporation (Düsseldorf, Germany); General Electric (aka GE, Faifield, CT); IBM (International Business Machines Corporation, Armonk, NY); Motorola Solutions, Inc. (aka Motorola, Schaumburg, IL); and Dell Inc. (Round Rock, TX).

Consider other multinational companies that have accelerated their large investment in China. McDonald’s has built 52 factories in China. Sweden- Swiss ABB Group (Zürich, Switzerland) established 20 joint ventures. Volkswagen AG (Wolfsburg, Germany) set up four large joint ventures and one sole enterprise with a total investment of US$2 billion. In addition, The Boeing Company (Chicago, IL) has three large joint ventures with Chinese companies, and components used in more than 3,000 Boeing planes now flying worldwide were made in China. Moreover, multinational companies are investing in their localization strategy by hiring Chinese human resources instead of transferring their people overseas. For example, Microsoft (China) Co., Ltd. (Beijing, P.R. China) employs more than 500 Chinese workers, most of them possessing masters and doctorate degrees. In the ABB (China) Group (Shanghai, P.R. China), ten general managers are Chinese.

China is no longer just a source for low-wage labor. Multinational companies have begun locating their research and development departments there. By the end of 2010, Microsoft had invested US$80 million in a China Research Institute and declared recently that a US$50 million investment will be made in the Microsoft Asian Technology Center in Shanghai, the company’s most advanced research institute in China. Siemens has also opened key technology centers in China. Motorola; Nortel Networks Corporation (formerly Northern Telecom Ltd., Mississauga, Ontario, Canada); IBM; Intel Corporation (Santa Clara, CA); DuPont China Holding Co., Ltd. (Shanghai, P.R. China); P&G (Procter & Gamble Co., Cincinnati, OH); Ericsson (Stockholm, Sweden); Panasonic; and Mitsubishi Motors Corporation (Tokyo, Japan) have all established research centers, technological development centers, and laboratories in the country. The Nokia Corporation (Espoo, Finland) has opened its first Chinese Bell Labs in Jinqiao, East of Shanghai, where it is ranked as a top 10 research center for the entire country.

A survey conducted by a Boston-based firm indicates that 90% of companies in Europe, the United States, and Japan have set a strategy to pursue opportunities in China ahead of other ventures: “Their race to invest and relocate their head offices in China clearly tells us that multinational companies have focused their key strategies on China, a stable and developing China cannot be separated from the world, and the world cannot be independent of China, which is creating external business opportunities.”

Despite these advantages, multinational companies doing business in China face some risks and challenges. These risks include the need to conform to the Chinese government’s mandate to form joint ventures with local Chinese companies instead of setting up independent business units as well as China’s often lax handling of intellectual property rights. Consequently, companies face risk of loss of proprietary information and drain of key technological knowledge.