Foreign Direct Investment in Food Retailing: The Case of the People’s Republic of China

Abstract

Foreign direct investment (FDI) in food retailing has generated a considerable amount of attention in both the media and the business world throughout the 199Os, with a strong focus on Asian and Central and Eastern European countries. Among these countries, China is a key player and a nation that no international retailers can afford to ignore due to its population size of 1.2 billion and its rapid economic development. Food retailers from different parts of the world have been keen to use their modern retail concepts and technology to seek expansion opportunities in China. Consequently, two important questions emerge: What does the process of FDI in food retailing entail? Is the retail and distribution market in China easily entered? Regarding the first question, substantial research effort has been vested in this topic. However, a conceptual framework that incorporates the whole scope and complexity of the process is still lacking. For the second question, a prudent scrutiny reveals that foreign food retailers are confronted with a lot of complications due to the legacy of the previous command economy and the unique Chinese social and business structure. The thesis develops an analytical model in which critical variables, and their logical relationships, are used to analyse and explain the process of FDI of food retailers in the contemporary era, using China as the domain for the empirical work. Methodologically, the study adopts a qualitative approach using case studies with thirteen foreign food retailers in China. The research focuses on three main areas: long-term strategic objectives behind retail international expansion, market entry issues, and retail operational issues. Firstly, the long-term strategic objectives that underlie retailers’ undertaking of foreign direct investment are investigated. Evidence shows that the prevailing concept of reactive retail internationalisation and the tenet of psychic distance do not fully reflect the reality of retail internationalisation. Secondly, three issues related to market entry are explored. The first issue is the legal and regulatory infrastructures that foreign retailers face when entering China. The second issue is the selection of Chinese partners, managing partner relationships and the share of managerial control. The third issue is the technical and political procedures of site selection and store development. The empirical work reveals that the lack of a systematic and well-developed legal system complicates the process of foreign direct investment and having a Chinese partner who possesses the appropriate guanxi network alleviates the problem. Furthermore, the exercise of dominant control over operational and managerial issues is practised by the foreign retailers in their joint ventures. Significant conflicts between partners appear not to exist under such an arrangement. On the other hand, political procedures of site selection and store development are found to be onerous. In terms of technical procedures, respondents reported that the methods that are being used in developed countries are not entirely applicable in China. The third area on which the research focuses is operational issues that foreign food retailers confront in the host countries. These include supply chain management; adjustment and adaptation; and development of human resources. Findings suggest that there are two types of retail know-how: core and peripheral. No changes to core elements should be made in the overseas operation so that the uniqueness of the individual retailer is preserved. Adjustments, however, have to be made to peripheral elements in order to match particularities of local consumer demand. A learningoriented culture within a retail organisation is found to be an important underlying element that contributes significantly towards successful retail internationalisation. Taking a holistic perspective, the foreign direct investment behaviour in the retailing sector and the manufacturing sector, from which the prevailing foreign direct investment theories were developed, appear to be very different. The foreign direct investment behaviour of retailers seems to be better explained and understood within a framework that emphasises market power seeking, stresses the dynamics of different elements that constitute retail know-how, and underscores the notion of knowledge accumulation and utilisation.