Divestment: How It Occurs and Consequences from China Market - Literature review Example

Introduction The scope of international retailing in the markets of developing nations and s has been characterized by the application of a range a models and approaches to ensure that the organizational objectives of the companies which are venturing into such countries are met successfully and effectively. With reference to the understanding of the wider retail environment and the various facets of the same, it can be identified that the component of international retailing has emerged as one of the most critical elements within the wider structure because it essentially contributes towards the enhancement of distribution channels while, working towards advancing the company’s potential to participate and compete in a cut-throat business environment (Quinn and Alexander, 2002). However, at this point it is important to notify that companies possess a range of strategic capabilities to target developing markets yet the scope of these strategic approaches and applications may not be similar or comparable in case of each and every company which is seeking to enter developing markets globally. For example, as suggested in the research of Antoniou, Lam and Paudyal (2007) companies may choose to abide by behavioral trends and complexities in their quest to explore profitable options nonetheless, the viability of this selection maybe objected and come under scrutiny. Similarly, the study of Li (1995) postulates that a company may choose to follow a range of strategic agendas to manage its operations in international markets thereby, guiding its operations on the basis of 1) diversification strategies 2) organizational training and learning strategies and 3) strategies to enter the prospective market. However, the research findings educate senior managers and decision makers that following a strategy which teaches the company from past experiences to operate more effectively in the future is highly recommended. While, the scholarly literature and data which has been produced on the subject of international markets and international retailing over a period of decades has largely focused on examining the roots of strategic approaches to aid business success in unexplored territories, it is important to highlight that the scope of research work on the concept and issue of international divestment has not been addressed on a comprehensive scale in business and management publications (Benito and Welch, 1997; Alexander and Quinn, 2002; Pu and Que, 2004). Fluck and Lynch (1999) develop a theoretical framework to examine the trends and decision making patterns with reference to divestitures by highlighting the aim of achieving financial synergy and reaping its subsequent benefits. Accordingly, the research of Hamilton and Chow (1993) focuses on examining a sample size of New Zealand based corporations to identify their motivations in opting for divestitures. This study cites the primary reason for divesting because it is “…motivated by the need to convert unattractive assets into liquid form…to strengthen the balance sheet, or reinvest in either the core business or new areas” (Hamilton and Chow, 1993, p. 479). Another component which must be addressed with reference to the concept of divesting is linked with identifying the components which motivate companies from divesting their businesses from the economies of developing nations. The methodologies for conducting divestment are variable thereby, aiding a specific company to engage in divestment by choosing either one of the possible options. According to the definition of divestment which has been provided by Manuel (2014), this concept is associated with a company’s decision to eliminate the presence of a subsidiary or business division from their financial reports and accounting procedures. Accordingly Benito (2005) defines divestment as an activity whereby a company decides to shut or put up its units in overseas destinations for sale. The motivations for divestment can also be explored in the light of understanding the demands of the company and the strategic direction which it chooses to take. Henceforth, if a company’s corporate objective behind the creation of subsidiary was to incorporate the business unit as a part of its wider business strategy in international locations, then the likelihood of divestment is reduced in relation with the long-term operations of the company (Benito, 2005). The economic potential of China which emerged as an attractive opportunity and prospect for foreign companies was initially realized when the nation chose to transition from a planned economy towards establishing an economic structure which allowed for the influx of foreign investment towards the departure of the 1970s. As reported by Carlson (2013), this factor enhanced the confidence and faith of investors in realizing the nation’s potential as the focal point of economic activity and opportunities for growth and development. The attractiveness of the Chinese market is characterized by the presence of numerous factors including a large potential consumer base because of demographic elements and the availability of productive and cost-effective labor. Regardless of these factors, the findings of recent evaluations and examinations presented by scholars such as Chang (2008) suggest that divestment of foreign companies is an evident issue which has not been explored and critically documented in business literature originating from the country as well as internationally. According to Carlson (2013) numerous factors are attributable to the incidence of divestment with reference to the application and incidence of the concept in the Chinese economic environment and structure. These factors can be highlighted as absence or lack of flexibility, the company’s inability to demonstrate localization, inadequacies due to poor decision making, arrival in the market under inappropriate circumstances and failure because of strong competitive pressures (Carlson, 2013). Considering the presence of these attributes and characteristics in the Chinese market and the onset of numerous possibilities which may trigger any decisions pertaining to divestment it can be suggested that a critical and comprehensive examination of this issue is highly recommended. In the light of the economic conditions and structure of the Chinese market, the evidence from international company operations and the rising need to address the issue of divestment the objectives f this paper have been established to analyze and examine the concept and its implications. Therefore, by incorporating and interpreting the findings of scholarly data, relevant literature and research reviews, this research aims to examine the concept of divestment, how it occurs and consequences from the market in China. Literature Review The concept of the international divestment process has been strongly influenced by concept of the international investment process and the domestic divestment process. Thus, it is possible to see the divestment of international operations as the reverse of the investment process and taking place within the same framework as domestic divestment decisions (Quinn, 2002). In the study of 59 divestments by large U.S. companies in the period 1975-1980, Duhaime and Grant(1984) identified three factors with significant bearings on the decision to divest: low financial strength(return on equity) of the divested from relative to its industry average; weak performance and prospects of the divested units; and low interdependency between the divested unit and other areas of the divestors activitie ( Robert, 2012). The following literature review explores the concept in a comprehensive manner by applying four theoretical models. General Divestment The comprehensive study of Xiao-Lei (2007) titled The Divestment of Foreign Direct Investment in China——An Example of Korea’s Direct Investment specifically explores the issue of the divestment of FDI (Foreign Direct Investment) in China. However, the source of reference for this scholarly work emerges from the patterns of divestment of foreign capital which have emerged in Korea. Thus, this research is rooted in the exploration of the Korean model to identify specific implications for the Chinese market. The nature of Chinese and Korean enterprises postulates that the scale of investment which is featured in both the nations respectively may act as a determinant of large-scale companies’ decisions to either implement a policy of further investment or divestment. Nonetheless, the concept remains that these decisions have to be adopted by considering future implications for each of the economies’ viability and prospects. Considering this argument, the incorporation of this study would allow the research to develop objective outcomes by comparing various companies’ decisions to either invest in Korea or divest in China. Therefore, by assessing this study conclusions could be derived regarding the factors which enhance and establish the suitability of Korea as a focal of investment under a scenario where large-scale firms have been focusing upon divesting from China. Accordingly, another comprehensive and insightful research titled Divestment of MNCs in China and Its Countermeasures under Financial Crisis by Lei (2009) on the issue of divestment focuses upon identifying the financial crisis as a primary variable in the multinational companies’ decision making regarding the closure of their operations in China. The premise of this research is based upon the identification of an alarming trend which suggests that the investment of MNCs in China is on a decline as a negative consequence of an uncertain global financial situation. According to Lei (2009) the source of this obstruction can be identified as a lack of funding capabilities on the part of MNCs which are no longer able to exercise their ability to attract further investment and enhance the cycle. Similarly, the focus on this study is also generated towards identifying and highlighting the underlying factors in China’s economic structure which may be hampering the MNCs’ decision to promote the scale of operations. These factors are rooted in legal implications and the aspect of costs and expenses which must be borne to continue production. The implications of incorporating this study in the research are pivotal because they specifically outline the areas of concern for the Chinese economy which are leading towards the approval of decision making regarding closure and divestment. Lei (2009) essentially identifies this as a refocusing strategy of firms and suggests the establishment of a framework to govern the execution of divestment decisions as a governance measure. The implications of highlighting this study are that it would aid the understanding of divestment decisions which have been taken by MNCs in China in prior years. The concept of general divestment as it has been outlined in several literary works in rooted in understanding the company’s primary motivations for proceeding with this activity. This concept is primarily attributed to a prolonged and strategic decision to conduct financial restructuring to proceed with benefitting from external opportunities which may be available in other regions. This concept has also been highlighted in other research material and industrial reviews which are explored in this paper. In Foreign Investment, Divestment and Relocation by Japanese Electronics Firms in East Asia, Belderbos and Zou (2006) establish their research by exploring the major reasons which lead companies to execute the decision of conducting divestment. According to this research, prior observations and examinations of trends with specific regard to the economic performance of Asian countries suggests that companies are more likely to divest from nations where the variable cost of hiring labor is reportedly higher than countries which boost of the availability of low cost factors of production (Belderbos and Zou, 2006). However, it is important to highlight that while; the functioning of the Chinese economy is characterized by the presence of low-cost labor efforts to divest show a volatile trend where other Asian countries including Japan and Singapore still possess a credible success rate in attracting investments. Nonetheless, the recommendations for curbing divestment are linked with enhancing opportunities to demonstrate cooperation on a regional level and improve regulations to promote investment (Belderbos and Zou, 2006). In comparison with the opportunities which are available in ASEAN countries and the innovative opportunities in Japan which may enhance the nation’s attractiveness as a potential hub of activity for MNCs the prospective benefits in China maybe remain ignored. Nonetheless, the trends and patterns suggest that the implications for divestment for China are critical for the future of the nation’s economy because it is heavily linked with the influx of foreign direct investment and capital from the operations of MNCs. Resource Based-View The business environment means the surroundings of an organization and the climate in which the organization functions (Ginter, 1990). The purpose of internal analysis is that an organizations future success bases on its own internal conditions as well as external conditions. And the managers are in a position to identify the Strengths and Weaknesses of their firm. Resource-Based View is an approach to achieve competitive advantage. A resource based view, exemplified by Barney (1991), suggests that it is firm specific differences that drive strategy and performance. The supporters of this view argue that organizations should look inside the company to find the sources of competitive advantage instead of looking at the competitive environment for it. Resource Based View divides into tangible assets and intangible assets. Tangible assets are physical thighs, like buildings machinery capital and land etc.. Intangible assets prefect to brand reputation and trademarks, thus, resources and products are two principal sides for a firm (RBV, 2013). Focuses on the characteristics of a firm that contributes to a sustainable competitive advantage (heterogeneity and immobility) than other, and when firms have greater creative and innovative capacity, this will cause internal sources of change, then competitive advantage emerge (Grant, 2010) Industry based-vied An industry-based view, represented by Porter (1980), argues that conditions within an industry, to a large extent, determine firm strategy and performance. Besides the internal factors, the industry-based view - as an external factor - addresses how a firm’s strategy is a function of the industry. Porter’s five forces can be used to describe industrial structure and can be used to forecast industry profitability in the future that has been illustrated in below Figure 1 picture. It helps in identifying opportunities and threats and can also be utilized as a model for devising strategies for working with industry structure or for changing industry structure (Porter, 1979). When some firms faster and more effective in exploiting change or resource heterogeneity among firms, these will cause the change of external sources by changing customer demand, changing prices and technological change, then competitive advantage emerges (Grant, 2010). The research of Yuxin (2009) titled On the Motivation of Multinationals Divestment: Taking Korean Corporations in China as Explaining Cases utilizes a sample of Korean companies highlight firms’ motivations for opting for a strategy of divestment. The application of theoretical frameworks with reference to this particular piece of research is inclined towards assessing the trends and behavioral patterns of companies’ activities as an indicator of decision-making and approaches towards strategic development. The benefit of integrating this research in the study is that it would allow the creation of an argument that company’ motivations for divestment cannot be generalized and are therefore, marked by the presence of individual patterns and trends which compliment the overall corporate objectives. The research of Ding, Guariglia and Knight (2010) basis the assessment of investment trends on a micro level rather than as a segment of the entire economic structure of the nation. The study postulates that by applying three separate hypotheses which can be identified as 1) restructuring hypothesis 2) inadequate financing hypothesis and 3) sluggish expansion hypothesis, the functioning of public firms can be deemed as ineffective and also incompetent (Ding, Guariglia and Knight, 2010). The effect of this consideration is that it leads to movement of burden upon the private sector which is left with no significant option but to launch a campaign of divestment to be able to arrange significant funds for sustaining and eventually expanding the existing scope of operations (Ding, Guariglia and Knight, 2010). The conditions for exploring the projections and subsequent impact of divestment in China can be promoted by examining an industry based view of the entirety of the nation’s economic structure. For example, by integrating the role of both state-owned or public and private institutions the extent of the scale of divestment and its consequences on China can be addressed. In the present case and as it would be proven by research, the phase, timings and patterns of investment withdrawal of MNCs are different for each scenario. This also sheds light on the individualistic pattern of each divestment and claims that the differences of each case must be considered to derive objective conclusions. The restructuring of foreign investment on the part of international companies is an aspect which has also been explored in the research of Dun-fu (2002). According to the study titled International Corporate Divestment Theory and its Latest Development, it has been stated that when exposed to the conditions of an global business landscape companies are expected to demonstrate expertise in understanding the scope of future investments and the potential of present business units for the purposes of securing capital and coping with the implications of uncertainty. This research rests on promoting a resource-based view of identifying underlying competitive advantages of the company as a source of building the strategic direction of the firm’s international operations. Huai-feng (2004) states that owing to the differences in companies’ motivations for progressing towards the selection of divestment to serve a range of corporate objectives it is important to highlight that each decision is nonetheless individualistic and maybe classified as either voluntary or involuntary. In the case of voluntary divestment the primary factors which can be blamed for shaping the companies’ decision are essentially rooted in the identification of failures or undesirable implications which led to the decision. Huai-feng (2004) defines these patterns in activities under the category of ‘defensive’ because they are adopted in a scenario where the company is left with minimal choices and must progress towards making a decision which would mend present issues. Thus, any decisions of divestment taken along the lines are voluntary. This research is beneficial for exploring and classifying the decisions of each of the relevant companies as voluntary or involuntary. In their study titled The Experimental Research of Transnational Companies Withdrawing Funds, Dongfang and Yanmei (2006) suggest that the time patterns for divestment are correlated with the economic scenario and conditions of the nation with specific reference to the execution of legal barriers and hindrances. Henceforth, owing to the changes in these variables a company may choose to either invest or divest by assessing the circumstances. The influences and factors which impact divestment are noted in this study and it is helpful considering that multiple variables would have to be applied to consider each case critically. The application of research data to evaluate divestment decisions by Wang and Zhu (2006) focuses upon comprehending the sources of decisions. According to this study an institution-based view of divestment is adopted by considering how the issue of possession and ownerships affect’s the firm’s decision to divest operations from China. Most importantly the values of basing financial capital acquisition via divestment is also altered because companies possess varying corporate objectives. The conclusions of this study also highlight vast implications for the economic future of China because it suggests that the consequences of divestment are far-reaching and comprehensive. For example, divestment decisions by multinational companies have the potential to impact the employment structure of the nation by reducing the number of jobs and employment opportunities in certain manufacturing and retailing sectors of the country. The structural changes of divestment are not only limited to financial, organizational and capital restructuring but can also be applied to the scale of external implications. For example, as suggested by the industrial-based view of divestment each company’s impact of launching the decision of divesting is different for each market therefore, it is not possible to ignore this component. In Factors influencing divestment decision‐making: Evidence from a field study, Duhaime and Grant (1984) argue that in case of firm’s which are characterized with large-scale diversification in operations and managerial decision making a single factor cannot be attributed to the decision of divesting. Out of a sample size of 40 organizations the research suggests that before embarking upon a decision to divest or not, managers have to consider multiple factors which are primarily linked with the scope of the existing operations and how and whether they do or do not complement the existing functioning of the firm. Henceforth, after evaluating existing performance companies must screen the business for potential competitive threats and how these threats can be decreased within the wider scope. Moreover, the unit should also demonstrate continued relevance to the parent company and must also be able to enhance the value of the parent company’s operations otherwise the decision for divestment may occur because of a failure to demonstrate a positive correlation amongst these factors. Figure 1: Porter’s five forces (Source: Porter, 1979, p. 137-145) Resource Based View and Industry Based View can be criticized for largely ignoring the formal and informal institutional underpinning that provides the context of competition among industries and firms studied with these lenses (Kogut, 1992). In other words, they assume institutions as ‘‘background’’. Institution based-view Since the diversity of firm strategies around the world can arise as the result of many possible forces internal or external to the organization, thus, strategy researchers have primarily focused on industry conditions (Porter, 1980) and firm resources (Barney, 1991) as drivers of firm differences, leading to competition- and resource-based perspectives, respectively. A firm also needs to take into account wider influences from sources such as the state and society when crafting and implementing its strategies (DiMaggio and Powell, 1991;Oliver, 1997). These influences are broadly considered as institutional frameworks (North,1990; Scott, 1995). This new perspective can be called an institution-based view of business strategy (Peng, 2000a). Institutions help reduce uncertainty for organizations and Institutional frameworks are made up of both formal and informal constraints (North, 1990). Formal institutions include political rules, regulations, and economic contracts. Informal constraints, on the other hand, include socially sanctioned norms of behavior, cultures and ethics (Scott, 1995). North (1990) suggests that in situations where formal constraints fail, informal constraints will come into play to reduce uncertainty and provide constancy to organizations. These insights have important implications for the development of an institution-based view of business strategy (Peng, 2000a). Today, we are much more conscious of the importance of the relationships between organizations and institutions. Treating institutions as independent variables, an institution-based view on business strategy, therefore, focuses on the dynamic interaction between institutions and organizations, and considers strategic choices as the outcome of such an interaction (figure 2), it is show the relationship among institutions, organizations, and strategic choices. Specifically, strategic choices are not only driven by industry conditions and firm-specific resources that traditional strategy research emphasizes (Barney, 1991; Porter, 1980), but are also a reflection of the formal and informal constraints of a particular institutional framework that decision makers confront (Oliver, 1997; Scott, 1995). Figure 2. Institutions, organizations, and strategic choices. Source: Peng, M.W. (2000). Business Strategies in Transition Economies: p. 45. Thousand Oaks, CA: Sage. The experiences we learn from the divestment of Home Depot are that they did not choose a Right time to entry China market. Next experience is the companies did not clearly and understand the nature of China’s housing market. They did not do enough homework in advance. Thirdly is they did not clearly Chinese habit and interest, Chinese do not like to shopping mall that far away from a city center. And it is a misread mission that Home Depot tried to bring American notions of DIY to a market. China is a do-it-for-me market, not a do-it-yourself market, so Home Depot has to adjust. It was a failure of planning for Mattel that opened the world’s largest “House of Barbie” in a prime location of Shanghai. And the products were selling in the shop could not be too expensive, and too confusing in its mixture of adult pleasures and children’s toys. And they must realise that Barbie is not a cultural icon in China as she is in America, Chinese consumers couldn’t care less about Barbie-branded product. Thus, it is misread that Chinese consumers would want a whole range of pricey Barbie-themed clothing, foods, and goods. The lessons of Mattel are that before they go in big in China, they must do the research homework first. Companies need to be flexible, adaptable, and responsive to Chinese tastes. That means experimenting before dropping $30 million on a mega-store. For the companies of e-Bay, although a local competitor, like Taobao is a threat for them running the business in China Market, but it cannot be ignore that e-Bay neglect social relationship is a quite fatal factor. And today, e-Bay has learned from its experience and the companies have refocused away from the domestic market, toward helping Chinese sellers market directly to consumers abroad (Carlson, 2013). However, the existing concepts of retailer internationalisation do not provide sufficient consideration of the retail divestment process. This paper will focus on some cases of retail divestment activity and will highlight the key themes that arise from the experiences of these companies. The company experiences will be discussed in the context of the general literature on divestment (Quinn, 2002). Case of divestment Companies Entry Date Entry Motive Exit Date Exit Motive Home Depot 2006 acquired a local firm, stocked its 12 stores with tools and materials 2012 shut its seven remaining stores and fired 850 workers in China Mattel 2009 Spent $30 million making the six-story shop a temple to all things Barbie. It included a restaurant, a hair and nail salon, a cocktail bar, and a spa. 2011 the House of Barbie closed E-bay 2004 E-Bay bought a local company, Eachnet, switched it to the eBay platform 2006 They shut down their portal, abandoning the Chinese auction market. Google 2006 Google.cn was a bare-bones search engine, with no Gmail, blog software, or YouTube 2010 Announced would no longer be censoring at the government’s behest. It moved its servers to Hong Kong. Its market share dipped from 30 percent to 3 percent in 2013. Best Buy 2006 opening of its first Chinese retail store and bought a stake in the electronics chain Jiangsu Five Star Appliance 2011 it closed all its wholly owned brand stores in China in 2011 Amazon 2004 Purchased Joyo.com, a Web retailer operating in China, for about $75 million in cash and stock. 2013 Amazon has a very small market share in china and it is Alibaba that dominates. Wal-mart 1996 Open the first shop in shengzhen, over the ten years development, the shops were increased to hundreds in more than forty cities in china 2008 In 2008 Wal-Mart has 208 stores throughout China. Within the past 12 years of trying, Wal-Mart has not only failed to become profitable, but it even had to accept a loss in market share. It has dropped from rank 17 in 2004/2005 to rank 30 this year. Tesco 2004 operates 25 hypermarkets in China and has formed a substantial presence in China 2013 losses for each of its nine years trading alone in China, achieved just 150 million yuan of average sales per store at its 121 outlets in 2012 Market&Spence 2008 Open the major stores on the upmarket in Shanghai. For now, M&S has 14 stores in China 2012 sales at the company’s stores in China have been doing 30% lower than internal targets set by executives Groupon 2011  Increase the number of employees in China to 1,000. Team buying websites in China have reached about 1,700 units. 2013 they are closing 10 of their Chinese offices and have fired several hundred employees. Taco Bell 2003 Open three major restaurant, two in shengzhen and one in shanghai 2008 shops in Shanghai and Shenzhen were shut down Nestlé 1996 Nestle head office for China opened in Beijing, Joint-venture (80% Nestle) with Totole in Shanghai. 2011 closing one of its three ice cream factories in mainland China and rowing back on retail sales in Shanghai Danone 1987 Danone Group and its partner, Wahaha Group Company, are shareholders in a joint venture (JV) company that is the largest beverage company in China 2011 “suspended” operations at its Shanghai yoghurt plant Procter & Gamble 1988 Enter China Market 2014 Reduce this years earnings forecast revenue growth from 1-2% cut to 0-2%, earnings per share increased from 5-7% down to 3-5% growth Henkel 1988 the head office of Henkel for China opened in Beijing 2008 Leave from Chinese washing market Unilever 1988 Open the first joint venture in Guangzhou, China 2006 Jie Connaught toothpaste leave china market Mercedes-Benz 2003 Daimler - Chrysler AG and BAIC signed in Beijing 2013 Mercedes-Benz executives angrily Chinese dealers, Daimler encountered challenges from internal sales system. 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Factors influencing divestment decision‐making: Evidence from a field study. Strategic Management Journal, 5(4), 301-318. Read More