Dependency or interdependency: United States power generation firms' entry into China.

Author:Croft, Lena

ABSTRACT

Conventional theories of market entry assume choice availability. This investment assumption is subject to challenges in the power generation market of an emerging economy where the host government controls most key resources and market entry choices. With such constraints, entrants become heavily dependent on their host country partners. This study investigates how the resource dependency frameworks explain better in respect of some US power generation firms that manage to operate electricity facilities in China whereas some have to abort. Using cross-case analysis, patterns emerged illustrate how two groups of entrants manage key resources differently.

Keywords: Market Entry, Resource Dependency, US Power Generation Sector, China

INTRODUCTION

Exploiting ownership advantages was an explanation of foreign direct investment (FDI) in early literature (Hymer 1976; Kindleberger 1969) where studies mainly focused on FDI of firms from developed countries (DCs) to less developed countries (LDCs) (e.g., Beamish 1985, 1993; Globerman and Shapiro 2003; Hooley et al. 1996). Equipped with firm-specific resources and skills leading to monopolistic advantages, presumably firms from DCs would be able to overcome liabilities of foreignness, choose the mode of entry to minimize transaction costs, and compete with indigenous firms from LDCs. Two assumptions for market entry under the asset-exploitation perspective are: (1) foreign firms, in particular those from DCs, possess monopolistic advantages to compete with indigenous firms (Ramamurti and Doh 2004), and (2) choices of entry are available (e.g., Agarwal and Ramaswanmi 1992; Brouthers and Brouthers 2003; Brown, Deve and Zhou 2003; Lu 2002; Luo 2000; Meyer and Tran 2006; Pan and Tse 2000; Tihanyi et al. 2005; Tse, Pan, and Au 1997; Yiu and Makino 2002). Yet, previous studies on asset exploitation have failed to provide sufficient explanations as to why some firms possessing similar ownership advantages have failed to enter a market whereas the others have entered. Furthermore, where the host country has extended institutional constraints by unilaterally confining foreign firms to form joint venture with indigenous firms, the relationship between foreign and indigenous firms becomes complementary in nature. Entry into a country would rely on managing of key resources between foreign and host country partners rather than competing with indigenous firms. This increases the dependency of entrants on resources of indigenous firms. With the emphasis of key resources dependency between partners upon entry, the resource dependency framework fills the literature gap by providing a new perspective to examine market entry. We argue that entry into market relies on how parent firms of a joint venture manage key resources of partners. The study of FDI in power generation sectors provides a good research setting to understand problems such as regulatory risks, administrative expropriation problems (Ramamurti and Doh 2004) that most MNEs from DCs are facing while launching internationalization strategy in LDCs. In this paper, we examine the critical problem by investigating how power generation firms from the United States enter the China market.

CONVENTIONAL THEORY OF FOREIGN DIRECT INVESTMENT

The eclectic theory or the OLI model of Dunning is by far the most quoted orthodox approach to explain FDI (e.g. Agarwal and Ramaswami 1992; Brouthers, Brouthers and Werner 1999; Glass and Saggi 2002; Hill et al. 1990; Peng 1995; Woodcock, Beamish and Makino 1994). The term 'eclectic' emerged from three paradigms including ownership-specific advantages (originating from Hymer), location-specific advantages (borrowing the idea first espoused by Vernon 1966), and internalization advantages (Coase 1937; Williamson 1975) to form one unified framework (Dunning 1985). The paradigms subsequently explain (1) why firms are able to compete with local firms in a foreign market, under the general assumption that there are some disadvantages of foreignness--ownership advantages, (2) why they choose to locate their operations in the foreign market, instead of keeping them at home--location advantages; and (3) why they choose to carry out their operations themselves, instead of licensing their ownership advantages to independent local firms--internalization.

Among the ownership advantages (O) identified by Kindleberger (1969) based on the extension of Hymer's dissertation in the sixties (1976), access to sources of finance and patent, or generally unavailable technology is seen as the major 'O' advantages of foreign firms, mainly those from developed countries, to enter a market. Logically, entrants from DCs generally possessing 'O' advantages should be able to compete with indigenous firms from LDCs. Yet, in the early 1990s, among the fifteen US power generation firms (USPGs) despite having better access to capital and advanced technology than those from LDCs, some have failed to realize power generation facilities and have exited the market. This raises the question as to why some firms from the same home country possessing the same ownership advantages have failed to enter whereas some have entered. A firm is generally considered as having 'entered' a market when an institutional arrangement for organizing and conducting international business transaction (Anderson and Gatignon 1986; Root 1987). In this study, a firm is seen as 'entered' a market, when a power facility is erected and ready for commercial operation in selling electricity to buyer(s). Thus, successful entry into a market is based on the realization of consummated project(s) in the host country. Consummated projects are defined as power generation projects that are ready for selling electricity to buyer(s). To answer the question, this paper takes on a resource dependency perspective to first examine the ownership advantages of USPGs and their potential joint venture partners (both from the host and home countries), and how some USPGs select their partners leading to completion of power generation projects in a new market.

A RESOURCE DEPENDENCY PERSPECTIVE

In the course of studying organization survival, resource dependency theory is extended to explain how organizations acquire key resources from external environments. After identifying the controlling parties of key resources, organizations strive to manage key resources through co-opting, coalescing, or contracting in order to reduce the dependency on parties who are in control of key resources (Pfeffer and Salancik 1978). This theoretical framework, different from institutional theory, emphasizes task environments (Oliver 1991). According to Daft (2001: 131), "needed resources (or key resources) are classified into ten sectors or subdivisions of the external environment where organizations choose to interact with and must respond to survive".

Pfeffer and Salancik (1978) further categorize interdependency based on the power relationship among players. When all players have the same power or access to resources, the interdependencies are symmetric. However, asymmetrical situations arise when there is an imbalance of power among players. An interdependent situation occurs when both organizations depend on the resources of others and the situation is reached in an oligopolistic market structure in which firms have increasing impact on each other (Pfeffer and Salancik 1978). Two groups of interdependency are classified.

i) Competitive interdependency: Pfeffer and Nowak (1976) suggest that organizations of similar nature and functions compete for markets, and financial and human resources.

ii) Symbiotic interdependency: The output of one actor is input for another or when two systems are mutually dependent upon each other's output (Marion 1999). Organizations are said to face symbiotic interdependencies with other organizations when there is a mutual dependence between unlike organizations (Hawley 1950: 36).

Of the theoretical background on resource dependency, the arguments are based on the premise that options are available. When the orthodox theory is extended to socialist countries where the rules of market economy cannot be applied completely, the theory is subject to a test. Previous studies on resource dependency including Brouthers and Bamossy (1997) illustrate how socialist governments in central and east Europe manipulate their key stakeholder status to exert influence on the negotiation progress by withholding, providing exclusive access or causing changes in bargaining power to key resources. In the study of White (2000), resource dependency theory is extended to examine buy, make or ally decisions in the context of Chinese state-owned pharmaceutical firms. The results indicate that competitiveness as an external factor, affects how firms manage their resources. Other than extending to the socialist countries, resource dependency theory is also applied to public sectors where resources are scarce (Dansky et al. 1996, Iecovich 2001). These empirical findings indicate that those who are able to manage key resources in external environments, in particular those of their partners, survive. From a resource dependency perspective, firms' survival relies on how they manage resources from the external environment. This assumption leads to a proposition suggesting US power generation firms that have entered China have better managed their resources. A pilot case is suggested to generate propositions.

THE CHINESE POWER GENERATION MARKET

With a total asset of about Reminbi (RMB) (1) 800 billion, the electric power sector in China is of strategic importance to the central government. One sixth of all state-owned assets were operating under a socialist system, it is understandable why the sector was previously closed for FDI and tightly controlled. The economic growth of the country within the last two decades has significantly increased the demand for electricity. To cope...

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