Bachelor Thesis Organization & Strategy

ANR
Name
Topic
Sub topic
Study Program
Date

: 863002
: J.A.P. (Jeroen) Doomen
: Strategy and structure of multi business and/or multinational firms
: International expansion
: Strategic Management (pre- master)
: June 2010

Words: 6.373

Strategy and structure of multi business and/or

multinational firms

Foreign location decision: The differences

in international expansion strategies
A case of Google and Microsoft in China

Management summary
The most well known way to determ ine Forei gn Direct Investment is by using the
eclectic paradigm of Dunning. Accordin g to t he framework, firms have different m otives for
their location decision.

Namely, natural resour ce, m arket, efficiency and strategic as set

seeking. After deter mining the motivation factor s it is i mportant to look at countr y specific
factors. Dun ning describes that ther e are th ree k ey advantage s which deci de whether a
company should or not invest abroad.
In 1978, the Chinese government assigned sp ecific zones where foreign invest ment
was allowed and the country s economy grew fast. Many researchers found agglom eration
effects which means that companies te nd to in vest in locations where other companies a re
located. Beca use of this, the characteri stics of the coastal zones are attractiv e for foreign
investors. Consequence of this polic y is that the economic development is widely despaired.
Chinese government can influence the firms performance because of high level of regulation.
Google is one the largest

provider on th e search- market. The market shar e was

dropping fast and the com pany could not provide the service level it wanted. T his led to t he
decision to e nter the m arket and as a consequence Google had to sign a pled ge in which the
company complies with self regulation of sear ch content by the Chinese government. In the
beginning of 2010, Google left the Chinese market because of ethical reasons and because of
a low market potential. If we lay the investm ent decision of Google next to the paradig m of
Dunning we can conclude that Google s main motive was market seeking related. Because of
the large market potential of the countr y, Goog le wanted to expa nd their m arket share and
develop new custo mer base by ph ysically entering the market. Microsoft provi des the same
services as Google in China with their product Bing. The m ain difference between the two
firms i s the extent to wh ich they dive rsified their activities. Mi crosoft offers many more
services and products in C hina than Google. It is reasonable to assu me that M icrosoft gains
certain economies of scope since it i s more embedded in the Chinese market. The motivation
reasons for Microsoft to start Bing is also because of market seeking.
In answer to the problem statement, the reasons Google gave t o leave the Chinese
market are mainly based on ethical grounds. If

we look at

economical r easons we can

conclude that the com pany made a profi t. Although it is onl y a small part of G oogles total
profit. Because of better search re

sults, the company was popular with English speaking

Chinese. The market share of Microsoft in the search market is relatively low. It has however
market potential because there are, one the one hand economies of scale to be gained and on
the other hand there is market potential because of Googles retrieval from the countr y. The
main conclusion is that t he two companies had the same motives to enter the market. Google
however, in contrast with Microsoft, left

the market because t he Chinese governments

regulation influenced firm performance and it damaged the brand image of the firm.
2

Table of content
Management summary ........................................................................................................... 2
Table of content ....................................................................................................................... 3
Chapter 1. Introduction .......................................................................................................... 4
1.1 Problem Indication ................................................................................................................. 4
1.2 Problem statement .................................................................................................................. 5
1.2.1 Research questions .......................................................................................................... 5
1.3 Relevance ............................................................................................................................... 5
1.4 Research Design and data collection ...................................................................................... 5
1.5 Overview of the rest of the chapters ....................................................................................... 6

Chapter 2. Location decision .................................................................................................. 7

2.1 Multinational companies and the globalization process ......................................................... 7
2.2 Important factors when considering internalization ............................................................... 7
2.3 Explaining the OLI paradigm ................................................................................................. 8
2.3.1 Interaction between advantages ...................................................................................... 9
2.4 Motives of multinational companies for foreign direct investment ........................................ 9
2.4.1 Natural resource seeking ............................................................................................... 10
2.4.2 Market seeking .............................................................................................................. 10
2.4.3 Efficiency seeking of products and processes ............................................................... 10
2.4.4 Strategic asset seeking .................................................................................................. 10
2.5 Impacts of e-commerce on the OLI paradigm ...................................................................... 11
2.6 Conclusion ............................................................................................................................ 11

Chapter 3. The market of China vs. Multinational companies ......................................... 13

3.1 China on the world market ................................................................................................... 13
3.2 Regulations ........................................................................................................................... 15
3.3 Motives of multinational companies to enter the Chinese market........................................ 15
3.4 Conclusion ............................................................................................................................ 16

Chapter 4. Google and Microsoft in China ......................................................................... 18

4.1 The portfolio of Google ........................................................................................................ 18
4.2 Which factors determine Googles choice to enter Chinese market ..................................... 18
4.3 Which factors determine Google choice to retreat from the Chinese market ....................... 19
4.4. Microsoft on the Chinese market......................................................................................... 19
4.5 Conclusion ............................................................................................................................ 20

Chapter 5. Conclusions and recommendations .................................................................. 21

5.1 Conclusion ............................................................................................................................ 21
5.2 Discussion ............................................................................................................................ 23
5.3 Recommendations ................................................................................................................ 23
5.4 Limitations............................................................................................................................ 23

References .............................................................................................................................. 24

Chapter 1. Introduction
This chapter describes the relevance of the thesis. Beginning with an indication of the
problem followed by

problem st atement and

research quest ions. Finally, this chapte

describes the outlay on what is going to be discussed in the other chapters.

1.1 Problem Indication
In his resear ch, Sideri, 1997 focuses on the im portance of the location decision of
multinational companies in the overall globali zation process. Also Held and McGrew (2000)
are stating that multinational companies play a central role in the globalization process as they
greatly influence social and political changes. So what are the determ inants of m ultinational
companies to invest in specific foreign market s? This decision depends on diff erent factors.
Which location should we choose? A quite cr ucial decision which has major internal and
external effects on a firm his success abroad and on the overall globalization.
When we look at the wo rld m arket, o ne of the m ore upcom ing countries is China.
According to US National Intelligence Council,

2010, China will have the second largest

economy in t he world in 2025. In Chi na, political institutions play a bi g rol e in strategic
decisions and also performance of a firm because of their influence on managerial incentives,
behavior of agencies and transaction costs (Li Park and Li,

2 004; Walder, 199 5). For

example, when doing business in China, co mpanies must agree with the Chinese govern ment
rules of self-censoring any information that is found inappropriate (Dann, & Haddow, 2008).
According to Dunning (1 993) firm s tend to avoid entering foreign markets with a
high level of macroeconomic uncertaint y. Especia lly if the size of the investm ent is larg e
(Campa, 1993). Also when entering a foreign ma

rket it is not onl y im portant to take th e

market into account but also political factor s (Baron, 1995, Hillman & Hitt, 1999, Bonardi,
Hillman, & Keim, 2005). Govern ment policy is i mportant in for mulating strategy because of
its influence on dem and and suppl y of goods and s ervices. The question that arises i s wh y
would multinational co mpanies enter a foreign market like China which is characterized by
uncertainty and frequent c hanges on an institutio nal and market level? To what extent does
this uncertaint y have an im pact on firm s tr aditional way s in determ ining foreign m arket
locations?
Recently, Google retreated with all its ac tivities from China. The two reasons Google
gave of reassessing its Ch ina operations wer e their dismay with the Chinese governments
ceaseless efforts to lim it free speech on the web and the hack atta ck launched from China in
December 2009 that targeted G

oogle's secure servers in the

United States (Wall Street

Journal, 20 10). The ques tion that co mes up he re is what were the reasons for Google

on

entering the Chinese market in the first place and what was their strategy?

Another big Internet co mpany which also ope rates i n China is M icrosoft. What are
the differences in international strategy between
similarities on the strategies in China of two

the se two? By comparing difference s and

of t he m ost i mportant Internet co mpanies,

Google and Microsoft, this thesis gives a total overview on this question.
In most cases resear ch focuses onl y on industry level how a firm reacts on a certain
happening. On a corporate level on the other hand little is known. By combining these two
levels this th esis tend to full y investiga te the two arias. So by fir st focusing on an industr y
level, giving a theoretical framework and furthe r on researching the case of Google in China
this paper combines these two, resulting in an total view on the problem statement.
1.2 Problem statement
What are the differences and similarities between the international expansion strategies of
Google and Microsoft with regard to the Chinese market?

1.2.1 Research questions

1. What are the general determinants of multinational companies with regard to their foreign
location decision?
2. What are the characteristics and policies of China in regard to multinational companies?
3. What are the strategies of Google and Microsoft on entering the Chinese markets?
1.3 Relevance
This paper provides a fram

ework on the sim

ilarities and differences on the

international location strategies of Goo gle and Microsoft on the Chinese market. This thes is
tries to solve and explain conflicting views and findings on the subject.
By comparing and discuss ing a cas e thi s thesis provides a clear a nd comprehensive
framework in a do main where knowledge is scatte red. The results of this thesis gives insight
in corporate location decision policy of multinational firms.
1.4 Research Design and data collection
The research design of this paper is based on descriptive research and fully relies on
secondary sources. To dis cuss and evaluate the r esearch question, literature survey has to be
done by using the University library of Tilburg for scientifically articles (secondary research).
Keywords to find the right articles are for exam

ple corporate expansion ,

corporate behaviour, location decision and other subjects that can be related to the suband main question(s). By looking at the refere

nces of an

article that was

used, further

information is tried to be found about a subject also known as the so called snowball method.

After re ading different art icles, the arti cles a re c ategorized to the subjects th at are
discussed. By looking at the artic les that were found about one subject, the y will discuss the
subject to answer the questions that lead to a conclusion of the main question.
The types of publications that are u

sed fo r this literature rev iew are; Strategic

Management Journal, Academy of Management Journal, Journal of Management, Journal of

International Business Studies, Management Inte rnational review and International Business
review among others. In order to fully research the problem statement it is needed to look into
non quality journals as for exam ple Pr o-Quest and ABI/Infor m. These sources provide well
substantiated articles on the subject Google an

d M icrosoft in g eneral and on the Chines e

market.
1.5 Overview of the rest of the chapters
In each of th e next chapt ers, one sub question is discussed. The first chapter

will

discuss the different theories on international location decision. Chapter two will focus on the
characteristics of the Chinese market. The third chapter focuses on the differen t international
strategies of Google and Microsoft. Finally in the last chapter all the conclusions will be put
together to give recommendations and answer the main problem statement.

Chapter 2. Location decision

This chapter will answer the second sub question formulated in paragraph 1.2.1.
1. What are the general determinants of multinational companies in regard to their foreign
location decision?
In order to answer the

problem st atement it is i

mportant to understand the

determinants for a multinational co mpany to in ternationalize to a certain country. What are

the reasons for firm s and what are th e si milarities between the co mpanies. The general
determinants of international location decision f ound in this chapter will be used in the next
chapters.
2.1 Multinational companies and the globalization process
Held and M cGrew (2000) state that in the global econo

mic, political and social

changes, multinational c ompanies play a cen tral role. There are several

reasons why

multinational co mpanies play such a essential ro le. According to Sideri (1997), because the
production process is divided int o m ultiple loose operations, together with availability of
lower costs o f transport and co mmunication networks resulted in a separation of locations o f
different production stages. These location choi ces of m ultinational companies have a direct
influence on the results and course of the globalization process. He also notes that the process
hereby is not constant across the world markets. Sideri (1997, 38) concludes i n his research
that globalization is an essential process driven by economic factors.
Subramanian and Lawrence (1999)
remain distinctive. There are, for exam

argue th is b y stating t hat national l ocations

ple, polic y barriers at the borders,

geography and

cultural differences . Buckley (2001) also notices the ability of national co mpanies to keep
foreign firms at a disadvantage. For example, the fact that domestic markets determine prices
and wages f or a significant part, local fir

ms are often highl y embedded in the dom estic

economy and have good relationships with national government.

2.2 Important factors when considering internalization
Hymer (1976) and Kindelberger (1969) state th
investment beco me suc cessful, the foreign ma

at in order

rket needs to have s

to let the foreign

tructural ma rket

imperfections. They focus on the 'monopolistic' advantage to explain why firms tend to ente r
foreign m arkets. A firm s needs to hav e so me kind of ownership advantage such as prod uct
differentiation, managerial expertise, new technology or patents. This way, it compensates the
disadvantages it has co mpared to firms that opera te in their home countr y, for exam ple, less
information, uncertainty, cultural differences, or political regulations. Other researchers focus
on certain aspects.

Caves (1971) for inst

ance focuses on product differentiation as a

7

monopolistic advantage. He states that im perfect competition leads to product differentiation

and foreign direct invest ment because of the fact that foreign direct invest ment was preferred
above, for exam ple, licensing. Also Knicker bocker (1973) and Flowers (1976) state that
multinational companies are active in imperfectly competitive markets. They do so because of
the "follow the leader" principal, which means that co mpanies t end to follow other firms i n
their location decision, or as a reaction on foreign companies entering their home market
In literature, a lot of researchers tried t o determine which factors are most important
for multinational firms in the internationaliza tion process. For instance, Buckl ey and Casson
(1976) focus on the understanding of the working of multinational firms. They were one o f
the first to de sign a theory which clai med that the de cision to enter foreign markets depends
on industry, region, nation and firm specific fact ors. For example, market structure, cultural
differences, political and financial factors. Th

ey also showed in their framework that

multinational companies which are active in research and development industries tend to have
a higher level of internalization.
Another well known research is the resource based approach of Penrose (1959) The
resource based approach exam

ines t he possi ble co mpetitive advantages for com

panies

(Barney, 1991; Penrose, 1959 & Peteraf, 1993) . The basic assu mption is that t he competitive
advantage is developed

by m atching the resources and co

mpetences to environm ental

opportunities.
The theoretical framework u sed in this thesis is a well known way to determ ine the
extent and the pattern of FDI of multinational firms, namely the OLI paradigm of Dunning
(1977). He suggests that the location decision of a com pany depends on the abilit y to create
an advantages or m ultiple advantages toward s (potential) com petitors (Dunning, 1993).
Dunning (1998) also suggest that fir ms tend to search for locations where they can fully use
their key competences.
2.3 Explaining the OLI paradigm
The OLI paradigm of Dunning states that the multinational activities of a firm ar e
driven by three ty pes of a dvantages, namely : Ownership, Location and Interna lization. The
configuration of these thr ee parameter s deter mine whether a fir m should or should not
undertake foreign activities. Dunning ( 1977, 1988, 1993, 1995) r evised his paradigm several
times to explain the changes in perceptions of multinational companies over time.
The ownership advanta

ge consists of

management, patents and all kinds of

firm s intangible assets like skilled

tec hnology. These advantages shoul d be sufficient

enough to outweigh the costs made for ope rating and setting up f

oreign activities. The

ownership part of Dunning s framework can infl uence the foreign direct investment decision
in two ways. The first part is that companies which have mobile ownership advantages tend to
8

choose markets on which these spe cific advantag es can be expl oited. Secondly, com panies
tend to co mbine firm specific advantages with ownership advantages who are lookin g to add
more to the factor ownership. Madho k (1997) an d Priem & Butler (2001) state that fir m
specific benefits may be more beneficial in one market than in the other.
As for the location, an a dvantage on this are a ari ses fro m the ch aracteristics of the
foreign market. For example,

market size, cheap pr oduction or business environm ent. A s

earlier mentioned, com panies try to choose loca tions which fit their core co mpetences. Th e
containment of location specific benefits helps companies with the decision to select markets
where superior m arket performance can be gained

(Cavusgil & Zou, 1994 , Makino et al.,

2002 and Papadopoulos et al, 2002).

Makino, Lau and Yeh (2002) state in their resear

ch that when it is

possible t o

combine loca tion factors with fir m spe cific factors it is possible to create ne w or im proved
competencies, which gives an advantage towards competitors.
The last fact or Internalization, which al so can be seen as effi

ciency advantages,

depends on the focus of the co mpany to produce abroad or rely on the market, for instance by
licensing. Where ownersh ip and intern alization are firm specifi c the location part differs by
country.
A reason for a firm to enter a market is that it allows the transf er of ownership in
such an effi cient way that is outweighs the competitive disadvantages with the local fir ms.
(Zaheer, 1995).
2.3.1 Interaction between advantages
It is alluring to look at the factors ownership and location as

two separate parts.

Dunning (1 993) suggests that they m ay be interdep endent. Namely , b y selecting a market
(location) th e co mpany may im prove or decline the ownership factor of

t he fram ework.

Therefore these two factors interact in the international market selection process.
2.4 Motives of multinational companies for foreign direct investment
According to Dunning (1 993) the m otives of international location decisions are
classified into four main types on which firms decide to enter a foreign market. These factors
focus on market seeking, resource seeking, stra tegic ass et s eeking or efficiency seeking.
Hereby, m arket and resou rce have the primary g oal to generate economic profits with firm
specific assets. Strategic a sset seeking focuses on adding to the existing assets . (Kuemmerle,
1997, 1999; Narula and Dunning, 2000 & Makino et al., 2002).
Efficiency seeking m otivation com es from the r ational process which lea

ds to

dispersion of co mpany ac tivities to foreign markets. In the foll owing paragraph we will
explain these types in more detail.
9

2.4.1 Natural resource seeking

According to Dunnin g (1 993), t he m otivation for resource seeking com panies for
foreign investment comes from the fa ct they can get resources at a lower cost than in their
domestic market; that is, if these resources ar e available at all. In his research Dunning
categorizes t hree types of resource see king; (1 ) physical resource s, for exam ple seeking fo r
raw materials. (2) seeking for skilled and m otivated labor at a lower cost level. (3) companies
looking for k nowledge on marketing, t echnology, o rganizational or m anagement level. An
important motivation factor is the willingness of a country to provide for example support and
infrastructure to foreign companies.
2.4.2 Market seeking
Firms that ar e motivated by m arket s eeking are looking for inve stments that serve
markets. By this they therefore invest in certain parts or countries. Dunning d
besides the factors of ma

istinguishes,

rket size and expect ed gr owth rate, four m ain motivations f or

companies to invest abroad. (1) Im portant customers, suppliers localized in a certain market
and the company has to follow them in order to keep their business with the m. (2) In order to
acquire local demands of products a firm needs to adapt to local requirements and it has to be
present in the market. (3) The third possible motive is the fact that transaction and production
costs may be lower when markets are served from a local distance. (4 ) The com pany invests
in a specific market b ecause his co mpetitors are also present there. This r efers back to th e
statement of Knickerbocker (1973) and Flowers (1976) who say that companies tend to enter
a certain market because of the follow the leader principle.
2.4.3 Efficiency seeking of products and processes
The motivation comes from geographically

dispe rse operatio ns of produ ction,

distribution, and marketing activities trough common governance or synergy. Dunning (1993)
distinguishes two m otivation factors which are: (1) scale and scope

motives, and (2 )

advantages of costs. Also Cohen (2007) notes that in order to lower the costs co mpanies need
to lower labor costs or generate economies of scale. Dunning stat es that, in or der for foreign
production to take place, the designated market has to be well developed and open.
2.4.4 Strategic asset seeking
In his last motivation t ype Dunning descr ibes str ategic asset s as a m ain motivation
factor to engage in foreign investment. Fir ms who seek strat egic assets invest in a country
because of the fact that th ey can carry out th eir strategic objective. If we look at si milarities
between the types strategic asset ty pes of effi ciency seeking, firms are se eking to capitalize

10

common ownership of a network of c apabilities and activities in different ar eas. (Dunning,

1993).
To summarize the framework, we can conclude that according to Dunning companies
first determ ine what their

motives are for in ternalization. Second, the y wi ll look which

advantages are available following the OLI paradigm. This results in the following figure.
2. Country specific advantages
1. FDI motives:

Ownership advantages

Natural resource seeking

- Intangible assets

Market seeking

Location advantages

Efficiency seeking

- Foreign market characteristics

Strategic asset seeking

Internalization advantages
- Efficiency advantages

Figure 1. Summary of the Dunning framework

2.5 Impacts of e-commerce on the OLI paradigm

Dunning and Wymbs (2001) more recently proved the impact of electronic commerce
on the framework.

Singh and Kundu (2002) t herefore a dded the factor Network to th

paradigm. They fou nd t hree way s in whic h electronic co mmerce can im prove business
opportunities in foreign countries.
First of all, they conclude that Internet leads to network based advantages. Accor ding
to Hanson (2000) the num ber of members within a network represents its value. So the value
of an Internet co mpany is directly related to the number of web-users. Secondl y, the Interne t
has e mbeddedness advant ages. This i s linked to the network

of business relations that

improve economic action which can be separated into two classes, structural and relational.
According to Granovetter (1992),

structural em beddedness refers to

the level of

connectedness to the other. In Internet ter ms this wo uld m ean the level of linkage betwe en
websites. Str uctural em bedddedness refers to e nhancing coordination, inform ation sharing,
better governance, reputational endorsements and information asymmetry (Granovetter, 1992;
Jones, Hesterly and Borgatti, 1997; Singh, 2001). Finally, the Internet has so called electronic
brokerage advantages. Because of the increasing num ber and quality of alternatives, search
costs decrease, resulting in cost savings and thus less risk of opportunism.
2.6 Conclusion
The best known way for m ultinational co mpanies to determ ine whether to invest
abroad depends on whether or not the investm ent has Ownership, Location or Internalization
advantages. The location is external for the company and it is important to gather the pros and
11

cons of the country in order to determine if it is wise to enter. The OLI paradigm gives a good
basis for the decision.
To distinguis h the reasons of m

ultinational com panies to enter certain

markets

Dunning classifies four main types. This approach gives more insight in the decision process
of FDI. The four main motives are market seeking, efficiency seeking, strategic asset seeking
or natural resource seeking. These m otives, t ogether with the possible advantages from the
OLI fra mework determ ines in m ost c ases the d ecision to enter a foreign market or not.
Besides these motives, al so E-co mmerce has it s i mpact on the O LI paradig m. It has thre e
main advantages which can improve business opportunities in foreign countries.

12

Chapter 3. The market of China vs. Multinational companies

This chapter will answer the second sub question formulated in paragraph 1.2.1.
2. What are the characteristics and policies of China in regard with multinational
companies?
This chapter describe s th e general ch aracteristics of China. As mentioned e arlier,
China is a fast upco ming countr y in th e worl d and to answer the problem statement it is
important to know its policy, its regulation, and its characteristics
3.1 China on the world market
The continuing economic growth rate and improved market conditions attracted lots
of investment of foreign companies into China. Herewith, it surpassed the United States as the
biggest foreign direct inv estment country i n 20 05. Between the period of 19 70 to 2 000 t he
overall economy of China grew eight times its size (in fixed price). The inward foreign direct
investment grew from zero, to US 60.6 billion in 2004. (National Bureau of Statistics, 2003b,
p. 58; Chinanews.cn, 2005).
Main reason for m ultinational com panies to enter the Chinese market as st ated by
Wei, Liu, Parker, and Vaidy a (1999). "factors such as greater international trade, lower wag e
rates, more R&D,

manpower, hig her GDP

growth rates, quicker im

provements in

infrastructure, m ore rapid advances in agglom eration, m ore preferential policies, and closer
ethnic links with overseas Chinese positively affect FDI location".
For exam ple, Chen (2008) investigated the reason why m any large multinational
companies lo cate their R &D centers in Beijing. He concludes that ther e are significant
reasons to choose this location. Chen did not only look at the cheaper labor costs in China, but
also considered the supply side and institutiona l factors. In this way we can understand in
what way and for what reason the co-development between globally innovative networks and
local economies goes. Chen states that this a pproach enriches the OLI paradigm of Dunnin g
because this gives a more dynam ic explanation of the location factor. In his research h

concludes that the main reason for the loca tion choice is a large num ber of skilled labor,
because of t he good uni versity networks in the

region. Another reason is

that the fierce

competition among multinational companies for the host market and this, toget her with local
imitators, forces the m to l ocate and integrate production, m arketing and R&D in the sa me
region, in order to keep their market share.
In the year 1 978 t he gove rnment of China introduced an export orientated p olicy.
This led to t he implementation of so called special econom ic zones (SEZ). T hese are ar eas
where China allows foreign direct invest ment. In 1980, four SEZ were established. In 1984 ,
fourteen coastal cities and econo mic and tec hnological development zones within these
cities were opened. These are small zones desi gned to attract i nvestment of multinational
13

companies in technology. In 1985, China opened delta economic zones open delta econo mic
zones which are coastal zones creating an open coastal belt. This government policy led to a
high level of FDI into the coastal areas of China. (Luo, Brennan, Liu and Luo, 2008).
According to Bai

et al. (2004) and Wen (2004), China

shows increasin

agglomeration, which can be explained by th ese attractive Chinese market con ditions. Head
& Ries (1996) and Head, Ries, & Swenson (1999) note that agglomeration externalities and
incentives goal is to attract multinational companies. They conclude that firms tend to enter
countries or locations where other co mpanies are concentrated. The main reason is that these
locations normally have good infrastructure and a good industrial base; this results, together
with policy incentives, in further agglomeration. Bai et al. (2 004) and Wen (2004) conclude
that the agglomeration resu lts in the low ering of the b arriers on free flow go ods and services
during China's economic reform.
Other researchers like Gong (1995) & Head and Ries (1996) state that these so called
clustering effects (the location distributi on of i nvestment in China) have a positive effect o n
agglomeration, infrastructure and government po licy. Porter (19 98) also argues that thes e
clustering effects generates a positive effect. Ot her researchers agree with the conclusion that
geographic c lustering results from the establish ment of the same firms or industries in
certain area, which arises fro

m agglomeration factors. e.g. high knowledg

e and sharing

between companies, specialized person nel, and high input pro viders because of industry
demand. (Shaver, 19 98). Fan and Wei ( 2006) find a clear similarity between sp eed and price
convergence, which is a measurement of efficiency, with the Chinese economy and other well
developed market economies. This pro vides s upport on t he view that China changed int o a
market-orientated economy.
Although the country is la rge and has a great num ber of foreig n direct investment in
China, the lo cation and e conomic dev elopment, together with government polic y, is very
unevenly spread. For exam ple, zones t hat were opened earlier fo r foreign direct investm ent
have greater autonom y an d authorit y, a nd have a more western- style in terms of business
culture and facilities (Luo, Luo, & Liu, 2008). Also, Buckley (2002) notes that the econom ic
development is very different across the provinces of China and is concentrating in the coastal
areas. A ccording to several studies, this is due

to foreign direc t investm ent in m ainly the

coastal part of China.

From 1980, China began to act against regionally unbalanced macro policies. Chinese
government raised the req uirements of entry i nto t he coastal areas. W ith this p olicy, China
tried to secure the so call ed high value invest ments into the country and encourage inland
investment, which had to result in more labor in these areas. (Ministry of commerce, 2007 &
Leow, 2007) . Kronenbergs research (2004) co ncluded that, although t hese measures wer e

14

taken, the inland areas are still well underdeveloped co mpared to the coastal areas if we look
at for instance infrastructure and education level.
3.2 Regulations
In their strategy , firm s not onl y focus on form ulating strategies which lead to high
performance but they also have to take political factors into account (Baron, 1995; Hillman &
Hitt, 1999 a nd Bonardi , Hillman & Keim, 2005) . The gl obal character of industrialized
countries which are regulated to a large extent often determine the fast pace of market entries
and the strong commitment to this

market. The first reason for this is th

e concentrated

location of these industries and the tendency to have a monopolistic character. Secondly, there
is the possibilit y t hat market entry

will be restricted by

the governm ent. Thirdl y, the

government tend to own important parts of the industry. Because of these characteristics it is
important for multinational co mpanies to estab lish operations quickl y whe n the y arise.
(Sarkar et al., 1999).
In China, institutions play a big role in strategic decisions and per formance of a fir m
because of their influenc e on m anagerial incen tives, behavior of agencies, a nd transaction
costs (Li Par k & Li, 2004 and Walder, 1995). I n these r egulated markets governments have
the power to alter the profits of firms considerably (Henisz, 2000 and Henisz & Zelner, 2001).
This leads u s to the question on h ow appropria te the traditional views of fi rms locating
decisions in an e merging market ar e, when the market is charac terized by unpredictable and
frequent changes in the market and institutional system.
3.3 Motives of multinational companies to enter the Chinese market
Looking back at the previous chapter where Dunning (1993) classifies locations into
four different types, Luo et al., (2008) stat

e that the location decision for

multinational

companies in to China, and especi ally for inla nd are as, concentra tes on three aspects. Thes e
are: natural resource se

eking, m arket seeki ng, and efficiency seeking of product and

processes.
Dunning (1993) mentions that natural resource seek ing concentrates on the fact that
locations who have natural resources

and re lated communication, infrastructure and ta x

incentives are far m ore attractive for multinational companies. Wei (1999), Hsiao and Shen,
(2003) proved that the i mprovements of the comm unication i n China lead to increasing
foreign direct investment into China. Also, the fact that has been proved by several empirical
studies is th at in countries like USA and China there is a positive link

between good

infrastructure and investment inflows. (Head et al., 1995 & Shaver, 1998).
The Market seeking argument concentrates on market potential. Dunning suggest that
looking for n ew markets is a great motivation for FDI. Chinas econom ic d evelopment is
15

widely despaired. Several studies proved that

Chinese provinces which have larger gross

domestic product (GDP) l arger per capita and higher GDP rates attract more FDI (Head &
Ries, 1996, Broadman & Sun, 1997 and We

i e t al., 1999). Multinational co mpanies

characterize t he central an d west of China as co mplex and uncertain because of the higher
degree of interference of the government in these parts and because of the cultural distance.
The argument on efficiency seeking concentrates on factors like agglomeration level,
quality and cost of labor and proxim ity of the location. As earlier mentioned, agglomeration
has i mpact o n location decision. On the part

of labor cost, lite rature shows us different

opinions. Some say that higher labor costs k eep off investm ent (Coughlin and Segev, 2000 ;
Belderbos an d Carree, 2002). Others

find that there is a statistical insignificant relation

between the cost of labor and the geographic distribution (Chen, 1996; Head and Ries, 1996;
Broadman an d Sun, 1997). In later research, Cassid y, (20 02); W ei et al., (1999) and Fu ,
(2000) concl ude that ther e is a negative re lation b etween wage and incom ing FDI. Chen g
(2006) argues this conclusion and finds a positive relation between wage and FDI. The fact is
that FDI depends on different factors. What we can say is that areas with low labor costs and
high productivity results in increasing F DI in China and areas with low productivity will not.
Firms who decide on efficiency

usu ally re quire highly qualif ied personne l, which is,

according to Dunning (1993), associated with higher level of wage.

On the part of the qualit y of labor, em pirical studies have found a positi ve im pact
between the quality of personnel and FDI. (Glickman and Woodward, 1988; Coughlin an d
Segev, 2000 & Sun et al., 2002). On t he contrary , Broadman an d Sun (2 002), which used
Chinese data, have found that lower qualification of labor has a negative effect on FDI.
Another part of efficiency seeking firms is the proximity of the locati on. Coughlin and Segev
(2000) find that a geographical proximity to metropolitan location in the USA is an advantage
in attracting FDI. They estimate that for China this also is the case. The resea rchers see this
increases in the FDI investment into a province as evidence of agglomeration externalities.
3.4 Conclusion
Looking back at the research question we can conclude that the overall characteristics
and pol icies of China differ per region . Since the i ntroduction of the po licy in 19 79 that
allowed foreign direct investment into certain zones, FDI increased significantly. This growth
mainly focused on the coastal areas which led to high level of disparity of development of the
overall country.
Several res earchers find agglom eration effects whic h means that firms tend to enter
locations where other

companies ar e located ; because of t he different policies

and

agglomeration effect s, the coastal provinces have a relative good infrastructure, qualified
labor, closer ethnic link and a west ern-style of business. Because of th e focus of governm ent
16

on technology they also have a high R&D level in certain areas. This last factor led to a high
level of R&D centers in for instance Beijing.
There are se veral reasons for firm s to enter China

but m ost of them

make this

decision because of natural resource se eking, market seeking and efficiency seeking We can
conclude that overall, China scores well on all three arguments which leads to a high level of
foreign investment. However, when we look back at the first chapter, I discussed that market
imperfections were necessary for firms to decide to e nter a market. The cas e of China shows
us that the advantages of a high level of regulation outweighs the disadvantages.

17

Chapter 4. Google and Microsoft in China

This chapter will answer the last sub question as formulated in paragraph 1.2.1.
3. What are the determinants of Google on entering the Chinese market?
After discussing t he different location strategies of m

ultinationals on the

world

market and describing the characteristics of China in the second part, this chapter will answer
the strategy which Google followed when entering the Chinese market.
4.1 The portfolio of Google
The Internet portfolio of Google consists of three main products. First of all they
provide users products and ser vices which find, create and organ ize information. Secondly,
for advertisers, which revenue 96 percent of the total earnings in first quarter of 2010, Google
provides diff erent way s to make online adds as offline advertisement on television to
customers across Google sites and the Google

network. The third pr oduct is aimed at

members of the Google network and other conte nt prov iders. Google pro vides different
service programs which are meant to extend the reach of advertisement of the advertisers.
The international results of the co mpany increased to 53% of the total revenues tha t
were made in the first quarter of 2010. This

is because of the increased acceptance of th e

advertisement program an d because of the fact that Google tries to develop

and adapt to

localized versions of their products in the international markets. The company is localized and
has offices all over the world. (Google annual report, 2009)
4.2 Which factors determine Googles choice to enter Chinese market
China has more than 330

million web u sers in 2009. On the

search-market the

Chinese companies are dominant. Baidu dominates the search market with 58,4%. Google has
a market share of 35,6% in the sam

e year. (Business week, jan 2010) Google is

popular with English speaking Chinese who state that the local sear

mainly

ch engines are

insufficiently global.
Before Google decided to phy sically enter China by setting up an establishment, the
search function could already be accessed. Name ly, through local Internet providers it was
possible to access the search engine indirectly. However, the performance of this servic e was
slow and very inconsistent. Representatives of Google stated in a congressional testimony that
one of the main reasons to enter the Chinese

market was due pragmatic c alculation. By

entering the market and setting up a operating un it Google would be able to access google.cn
with far better quality and giving a better experience. This also would give significant benefits
to Google and generate the opportunity to develop a new customer base. (Levi, 2006).
Dann and Haddow (2008) state in their research that part of the reason for Google to
physically enter the Chinese

market was th at it was losing market sha

re to Chinese
18

competitors as for exam ple Baidu, who raised its market share with over 40% between 2003
and 2005. Besides competition, Googles share decreased below 30% of the total market. This
pragmatic calculation, whi ch indeed wo uld stop the downfall of the market share to a lower
point and give Google the ability to give faster service to the cust omers led to t he decision to
sign the so

called Public pledge of

self-regulation and professional ethics for China

Internet industry which meant that com panies who are active on the Internet- market in
China self sensor their services.
4.3 Which factors determine Google choice to retreat from the Chinese market
Former vice president of Google Schrage stat es in a testimony that it not meaningful
for Google to be present i n China when users can not full y access information and m iss out
on m any feat ures and to ols of Goo gle. Another reason was the hack attack launched from
China in Decem ber 2009 that targeted Google's secure servers in the United States. Chines e
government gained access in Gm ail accounts on U.S. secure servers and was able to read
subject lines. (Wall Street Journal, 2010).
Another m ain reason was the fact that many stakeholders of Google found the com panys
approval to com ply with censorship as betrayal of the core values dont be evil (Financial
times, 2006b).
Last deter minant was the fact that Google sim

ply did not had much at stake. the

company earned around 300 m illion dollars in one year in China. One third of this am ount
was fro m Chinese fir ms using Google- ads outside of China. This leaves 200 million loss,
which is less than 1 percent of the tota l global income in 2008. ( Wall street jo urnal, april 6 ,
2010).
4.4. Microsoft on the Chinese market
The portfoli o of Microsoft is m uch wider co mpared to Google; t he co mpany h as a
higher level of diversification. T he companys relatively long pr esence in the countr y gives
experience advantages com pared to Google. The online services business of Microsoft is
relatively the same and consists of an ad vertising platform, information offerings as Bing and
personal communication services a s for exa mple e-mail services. The revenues mainly come
from the advertising part. In 2009 Microsoft

launched a new version of the

search engin e

Bing. The way Microsoft is trying to distinguish it from their competitors is by bringing faster
and more relevant information. (Microsoft annual report, 2009).
Microsoft introduced Bing search in the may 2009. In China the search engine ha s
with alm ost 1 percent m arket share a very sma ll part of the se arch market in China. The
retrieval of Google from China results in opport unities for other com petitors as for instance
Microsofts Bing. Because of the absence of Googl e there is an open m arket space of about
19

30 percent. (Canadian business magazine, 2010). Shortly after the announcement of Google to
leave the Ch inese market Microsoft s leaders said that they have the intention the stay

in

China and comply with the regulation rules. (Dow Jones and company inc, 2010).
4.5 Conclusion
As mentioned before, t he decision of Google to p hysically ent er China is i ndeed
pragmatic: it would stop the downfall

of market sh are and it w ould give the co mpany the

opportunity to give faster service to the custo mers and it would g enerate the opportunity to
exploit and develop a new customer ba se, The high degree of regulation, t he stakeholders
disproval and low market potential led to the decision to leave the search- market in China
Microsoft has because of its longer presence i

n the count ry relativel y more

experience with doing bus iness in China. At this moment Microsoft has a very small market
share. The services that they provide are co mparable with Google if we look at the search
market. Although the regulation rules Microsoft will continue its business in China.

20

Chapter 5. Conclusions and recommendations

This chapter will give an overall conclusion a nd answer the problem statement as formulated
in paragraph 1.2.1.
What are the differences and similarities between the international expansion
strategies of Google and Microsoft with regard to the Chinese market?
In this chapter we will look

back at a ll the inf ormation gained and m ake an

conclusion in order to answer the problem statement.

5.1 Conclusion
In general research ers agree on the fact th at the foreign location that multinational
companies choose has im pact on the globalization process. The factors that are im portant in
de foreign location decision are divers, because of th e fact that there are a lot of elements that
are i mportant in the choice. Where res

earchers agre e on is that

there must be so me key

benefits on the location. One focuses hereby on market im perfections, and th e other focuses
on how to exploit ke y competences of t he company. Another conclusion is that so me sectors,
as for instance resear ch and development firms relatively are more willing to physically enter
a foreign market. To underpin the foreign st

rategy of co mpanies many o f them use a

framework. De most well known is the paradig m of Dunning. He describes that it is first
important to lay down the motives that are important. He distinguishes four main types which
are, market s eeking, natural resource s eeking, efficiency seeking or strategic asset se eking.
After determining t his com panies need to cat egorize advantages co mpanies have on t his
element. The fra mework has th ree main types of advantages na mely: Ownership advantages ,
location advantages and ownership advantages.

The main conclu sion is that FDI of firm s

depends on the one hand on the motives of companies, and the other side on countr y specific
factors, which combined leads to a foreign investment or not.
China is one of the countries that is

developing f ast. By the year of 2005 is has

surpassed the United States as largest f oreign investment countr y. After the decision of the
Chinese government to set special economic zones, which allowed foreign fir ms to invest i n
the country the investment rate grew rapidly. We can conclude that although Chinas growth ,
this mainly focuses on the coastal areas. Researcher conclude that the main rea son for this is
the attractive terms of these zones. Many research ers see that there are agglomeration effects,
which means that foreign direct investors focus on parts where other companies are located to
profit of the attractive te rms. These t erms are for exa mple ch eap but skilled labor, good
infrastructure and good international trade. Beside s this resear chers note parts of China a
more market

orientated approach.

Because of t he fact that

China appointed special

technological zones we can conclude that the country focuses on this business area.
21

The regulations of t he government has infl uence on managerial incentives, behavior

of agencies and transacti on costs which influe nces the perfor mance of the f irm. Also th e
political influence is despaired, where so me researchers note tha t the coastal areas have a
more western style of business.
If we look back at the

first chapter wh ere we described the main m otives of

companies to gether with countr y specific factors we can say that in China three of the four
motives are most used. These are n

atural resource se eking which content focuses on

communication and infrastructure. Proved is

that the im provement in comm unication and

infrastructure will lead t o m ore invest ment. The second part

is m arket seeking which

concentrates on market potential. Multi national companies charac terize the central and west
of China as

complex and uncertain because of

the higher

degree of interference of the

government in these parts and the cultural distan ce but also note great market potential. The
last part is efficiency

seeking m otives whic h focuses on quality and cost of labor and

proximity of the location . As earlier mentioned, agglom

decision. The main conclusion from this part

eration has im pact on location

is that although the regul

ations of the

government has impact on the firm s performance, the advantages and agglo meration effects
led to the fact that many multinational companies invest in the country.
Google is together with the local co mpany, Baidu, the largest provider on the searchmarket. The m otives of Google t o enter the Ch inese market lies with pragm atic calculation.
The market share was dro pping fast and the co mpany could not provide the service level it
wanted. This led to the decision to enter the ma rket and sign a pledge which contains that the
company approves self regulation

of search content by the C

hinese gover nment. In the

beginning of 2010 Google left the Chinese market because of ethical and low market potential
reasons. If we lay the investment decision of Google next to the paradigm of Dunning we can
conclude that its main motive was market se eking related. Because of the

large market

potential of the countr y, Google wanted to expand their market share and develop new
customer base by physically entering the market.
Microsoft provides with the beginning of may 2010 the same services as Google in
China with their product Bing. The main differe nce between the firms is the d iversification
of Microsoft compared to Google. We could say that Microsoft has certain economies of scale
where it i s li kely to be more e mbedded in the Chinese market. We c an conclude that the
motivation reasons for Microsoft to start Bing part is also because of market seeking.
In answer of the pr oblem statem ent the reasons Google gave t o leave the Chinese
market are purely ethical. If we look at economical reasons we can conclude that the company
made a profit. Although it is a small

part it is still a profit. Besides this the co mpany had

market potential with English speaking Chinese b ecause of better search r esults. The share of
Microsoft is relatively low. It has

market potential becaus e on the one the one hand

22

economies of scale and because the retr ieval of Google from the countr y this probably will
give new market potential for the company. So the main conclusion is that the two co mpanies
have the same motives to enter the market. Th e difference lies with the part that Google
decided that, other that Microsoft, the regulati ons of the Chinese government influenced their
firms performance to greatly.
5.2 Discussion
In this thesis the most well known theory around foreign location decisions is chosen.
There are a lot of researchers who have done studies around the subject. For this case study
this framework fits. It is possible that for other market types another framework could be used
as for example network based companies. Therefore it is not wise t o take general conclusions
on the subject. The specific charac teristics of firms and countries differ fro m each other an d
the cannot be generalized
5.3 Recommendations
In this thesis I mainly focused on the search -market. Because of the large a mount of
research and development co mpanies in China it is maybe interesting to res earch the way
large co mpanies of this sector co mpete on this market. And the level of

marketing and

innovation play a role.

It could be interesting if in other busi

ness s ectors have the s ame strategies a s

described in this thesis. Maybe it is possible with more ca se s tudies to generate a gen eral
theory around this process.
5.4 Limitations
The main pr oblem that was f aced was the lack of quality journals for the fourth
chapter. Because the recent retrieval of Google from China and the introduction of Bing the re
was not a lot of information about history, strategy and performance of the com panies in the
country. The refore I had to base my thesis mainly o n colored articles as for exam

ple

business week and financi al times. Although this, I think that t he interpretation of the divers
opinions is well succeeded.

23

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