Yongqiang - Dealing With Non-market Stakeholders In The International Market

Dealing with Non-market Stakeholders in the International Market: Case Studies of US-Based Multinational Enterprises in China Gao Yongqiang School of Management Huazhong University of Science & Technology, Wuhan, China

Abstract Non-market factors, such as governments and non-governmental organisations (NGOs), play a more important role in international business. Therefore, multinational enterprises (MNEs) should develop strategies to deal with this group of socio-political stakeholders. This article discusses primarily how United States-based MNEs deal with their non-market stakeholders in China by taking Motorola Inc and Microsoft Corporation as cases in point. It concludes that lobbying, commitment, sponsoring, and codes of conduct are the most common and useful instruments for MNEs to deal with their non-market stakeholders in China. The contrasting results of Motorola and Microsoft in China are attributed largely to the varying usage of these instruments. Although this study only targets US-based MNEs, its results will shed light on the understanding and managing of non-market stakeholders in China for MNEs from other countries. Key words: multinational enterprises, non-governmental organisations, nonmarket stakeholders, stakeholder theory

Non-market factors, such as governments and non-governmental organisations (NGOs), play a more important role in international business circles. The inadequate consideration or ignorance of the interests of governments and NGOs frequently results in financial loss of or even failure of businesses. As a consequence, public affairs management becomes a critical success factor in the international business (Nigh and Cochran, 1987; Wartick and Wood, 1998). As China grows to be the largest potential market in the world, along with its inexhaustibly cheap labour forces, more western-based multinational enterprises (MNEs) are attracted to China. However, many MNEs do not consider fully or ignore the impact of non-market factors in China. For example, Microsoft suffered frustration in China until the signing of memorandum with the National Development and Reform Commission of China in 2002 owing to its ignorance of the Chinese culture. 75

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Toyota’s two contumelious “arbitrariness” advertisements issued in the Chinese market in 2003 caused the intense antipathy of the Chinese media and the public. As a result of the unbearable pressure, Toyota apologised to the Chinese and stopped its advertisements. Such kinds of stories atrract a great of public attention. While the importance of socio-political issues and actors in international management is obvious, there are only a few empirical studies that deal explicitly with the relationships of MNEs to their non-market stakeholders (for example, Fleisher, 1993; Meznar and Nigh, 1995; Scherer and Smid, 2000). Management research has been mainly restricted to internal aspects and to relations with the market environment (Wood and Pasquero, 1997). This article attempts to contribute to the current understanding of how MNEs deal with their non-market stakeholders in international business by taking case studies of two United States-based MNEs in China.

Theoretical Background Stakeholder Theory The stakeholder theory originates from Abrams’ work in 1951, which exhorted business leaders to pay attention to their corporate constituents. It was only after Freeman’s (1984) seminal work that the stakeholder concept became widely employed to describe and analyse the corporation’s relationship to society. Donaldson and Preston (1995) reported that there were about a dozen books and more than 100 articles with primary emphasis on the stakeholder concept. A stakeholder is defined as “any individual or group who can affect and is affected by the actions, decisions, policies, practices, or goals of the organisation” (Carroll, 1996). The stakeholder theory seeks to systematically address the question of which stakeholders do or do not deserve or require management attention through evaluation of relationships between organisations and stakeholders based on exchange transactions, power dependencies, legitimacy claims, or other claims (Mitchell et al, 1997). Through identification, evaluation, and assessment of stakeholders and stakeholder relationships, firms can best navigate the public and private strategic environments in which they operate, and in so doing, account for the range of relationships, responsibilities, and interaction in their strategy formulation and implementation (Cummings and Doh, 2000). Although the stakeholder theory advocates that management pays more attention to the potentially important stakeholders, it does not give primacy to one stakeholder group over another, though there will surely be times when one group will benefit at the expense of others. In general, however, management must keep the relationships among stakeholders in balance. When these relationships be-

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come distorted, the survival of the firm is in jeopardy (Freeman, 1998). But the stakeholder theory itself provides no formal process or means of balancing among different stakeholders’ interests.

Non-market Stakeholders In the stakeholder literature, there is a line of argument that anyone or anything that is affected by the organisation’s activities—including animals, fish, and inanimate objects—are all potential stakeholders (Starik, 1994). Alternatively, there is also a more limited view that defines stakeholders as those groups or individuals that are in some mutually dependent relationship that, if not dealt with properly, may lower corporate performance (Nasi et al, 1997). This article prefers the latter definition of stakeholders since the objective is to understand how MNEs deal with their social stakeholders. To a business, the typical stakeholders are considered to be consumers, suppliers, government, competitors, communities, employees, stockholders (Carroll, 1996), and executives (Wallace, 1995). Stakeholders of a business can simply be divided into two groups: the market and non-market stakeholders (see Figure 1).

Figure 1: A Typology of Stakeholders

Non-market Stakeholders:

Market stakeholders: Company:

Governments

Suppliers

shareholders executives employees

Competitors

Customers

NGOs

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As illustrated in Figure 1, the market stakeholders primarily denote the stakeholders coming from the business system and typically include suppliers, consumers, competitors, stockholders, executives, and employees. Non-market stakeholders are also called socio-political stakeholders (Holtbrugge and Berg, 2004). Although there are several classifications of non-market actors in stakeholder literature (for example, Freeman, 1984; Wartick and Wood, 1998; Post et al, 2003), the typical non-market stakeholders are deemed to be governments (for example, central government, state/provincial government, and local government) and NGOs. The NGO pertains to: “any non-profit, voluntary citizens’ group which is organised on a local, national or international level. Task-oriented and driven by people with a common interest, NGOs perform a variety of services and humanitarian functions, bring citizens’ concerns to governments, monitor policies and encourage political participation at the community level. They provide analysis and expertise, serve as early warning mechanisms and help monitor and implement international agreements (United Nations, 2003).”

Non-market Strategy or Instruments As a result of the influence of non-market stakeholders of the host country on the operation of MNEs, beyond market strategies, MNEs must develop sociopolitical strategies that enhance their legitimacy and increase their acceptance by the non-market environment (Boddewyn, 1995; Kostova and Zaheer, 1999). The strategies or instruments to deal with the non-market stakeholders of business have partly been identified in the literature as those related to corporate political action (CPA) (for example, Getz, 1993; Hillman and Hitt, 1999; Oberman, 1983). CPA literature focuses mainly on the political strategies or tactics that corporations used to deal with governments. The strategies identified are information strategy, financial incentive strategy and constituency building strategy (Hillman and Hitt, 1999). Commonly used tactics include lobbying, PAC (political action committee) contributions, charity contributions, honoraria for speaking, paid travel, personal service, advocacy advertising, and political training (Hillman and Hitt, 1999). Unfortunately, the CPA literature hardly covers MNEs’ strategies or instruments to deal with host governments in the international market. Although the stakeholder theory provides no formal process or means of balancing different stakeholders’ interests, some stakeholder literature discussed the strategies or tactics or instruments that businesses can use to deal with their non-market stakeholders. For example, according to Welge and Holtbrugge (2003), MNEs can use eight instruments to cope with their socio-political stakeholders, namely, codes

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of conduct, lobbying, bribery, sponsorship, public relations, consultation, voluntary self-restriction, and legal remedies.

Non-Market Stakeholders in China and the Conceptual Framework Chinese Governments Governments are generally considered as the most important and powerful stakeholders of businesses. Chinese governments and the Communist Party are considered to have the highest impact on the operations of foreign companies (Holtbrugge and Berg, 2004). The prominent role of the governments can be explained by their influence on economic activities and the high degree of regulation. In today’s China, the all-important means that Chinese governments take to influence or intervene in economic activities is the approval process. Procedures to acquire official approval are very time-consuming (Holtbrugge and Berg, 2004) and costly. Moreover, China is perceived as a country with a decentralised government structure. National laws are often only broadly drafted at the central level and their implementation is left to the discretion of regional and local administrations (Holtbrugge and Berg, 2004). The decentralised government structure gives provincial and local governments freedom to intervene in economic activities. “In this context, any prominent administrator is in a position to give a goahead to an exception and can find out a suitable reason for it, such as to relieve rural poverty, to reduce losses incurred by a state-owned firm, or to defuse disturbances among a group of employees” (Blackman, 2000). Therefore, to satisfy the request of provincial and local governments is as important as to satisfy the request of the central government in China. To MNEs, Chinese governments not only request them to respect Chinese traditional culture and comply with the laws and regulations and commercial rules, but also expect them to bring capital and advanced technologies or management skills, which is why China implemented an open-door policy in 1978. Although governments act in the name of and are taken as the representative of public interest, government officials are may have self-interest (Getz, 1997). MNEs are advised to keep good guanxi (relationship) with Chinese government officials (Gao and Tian, 2006).

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NGOs in China The rising influence of non-governmental organisation (NGOs) is one of the most significant developments in international affairs over the past 20 years. NGOs have grown in number, power, and influence since the 1980s (The Economist, 2000). Some observers regard NGOs as a counterweight to business and global capitalism (Foreign Policy, 2000; Scholte, 2000). Although there are problems with this perception (Kapstein, 2001), the emergence of NGOs seeking to promote more ethical and socially responsible business practices is beginning to cause substantial changes in corporate management, strategy, and governance (Doh and Teegen, 2003). However, compared with some western countries such as USA, NGOs in China are relatively underdeveloped. There are about 800,000 NGOs in China, including various funds, trade unions, and other civil associations. Considering that China is so large a nation, the scale of NGOs is relatively smaller. Among the NGOs, the media play an outstanding and more important role in the business environment of China. The media can lead public opinion, which in turn imposes on business operations. On the contrary, other NGOs such as trade unions, civil associations, and so forth, are comparatively weak in China. It is worthy to point out that governments keep control over the media and other NGOs in China. Although the media can comment on and criticise the misconduct of businesses or even governments, the underlying rule is that if a conduct or business is approved by the governments, the media within the jurisdiction of the governments should not say “no”. Thus, it is critical for businesses to deal with the NGOs in China. With the progress of pluralism in Chinese society, NGOs are getting more “voices” in public affairs. As a result, their influence on businesses should not be overlooked. MNEs are expected by Chinese NGOs to conduct their business ethically. In other words, MNEs are expected to comply with Chinese laws, regulations, commercial rules, and social values. At the same time, MNEs are also expected by NGOs to give a helping hand in settling down laid-off workforce, providing charitable donations, improving community’s medical and sanitary conditions, and so on.

Dealing with Non-Market Stakeholders: The Conceptual Framework In China, the adaptability and effectiveness of these eight instruments need to be tested. (Wedge and Holtbrugge, 2003) In a subsequent study, Holtbrugge and Berg (2004) found that in China, lobbying is the most important instrument of public affairs management, followed

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by bribery, codes of conduct, public relations and sponsoring. Voluntary selfrestriction, consultation, and legal remedies are seldom used. Besides, in a case study of Microsoft Corporation in China, Tian and Gao (2003) identified that the commitment is an important and useful instrument for MNEs to build a good relationship with governments in China. Moreover, based on the investigation of MNEs’ behaviour in China and literature review, Gao and Tian (2006) consider lobbying and sponsoring as the most popular instruments to influence government decisions in China. Since bribery is illegal in China, this article excludes it as a legal instrument to cope with the governments. In addition, sponsoring is one of actions and the most important component of public relations in China, therefore, this article substitutes sponsoring for public relations. Based on Gao and Tian (2006), Holtbrugge and Berg (2004), and Tian and Gao (2003), this article concludes that lobbying, commitment, sponsoring and codes of conduct are the most frequently used instruments by MNEs to deal with their non-market stakeholders in China (See Figure 2).

Figure 2: Conceptual Framework

Chinese governments

Interaction Chinese NGOs Lobbying Commitment Sponsoring Codes of conduct

MNEs

Case Studies Method and Case Selection This article adopts the case study approach to illustrate how US-based MNEs influence their non-market stakeholders in China. The selected MNEs are Motorola Inc and Microsoft Corporation. These are prominent MNEs in China and sufficient data and material are available on the Worldwide Web. Motorola and Microsoft were among the top 100 companies in the world, and they acted

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as good representatives of US-based MNEs. Secondly, Motorola and Microsoft are companies that the Chinese are very familiar with. Sufficient reports, news or reviews make it possible to discuss their instruments to deal with their non-market stakeholders in China. Thirdly, Motorola is considered as successful while Microsoft is considered as almost doing-nothing in China. This contrasting nature makes it easier to demonstrate the appropriate instruments for MNEs to deal with their non-market stakeholders in China.

Motorola and Microsoft in China Motorola is one of the most successful foreign companies in China. It entered China as early as 1987. Motorola firstly established an office in Beijing, then it set up Motorola Electronics Co Ltd (China) in Tianjin in 1992. Today, Motorola (China) has become a big group with one fully-owned company, one holding company, nine joint ventures, and 24 subsidiaries. Its total number of employees is about 12,000 in China. In 2001, Motorola achieved total sales of 31.3 billion yuan (nearly US$3.8 billion) in China. It continued to be the biggest foreign-invested company in China in 2002 (total sales of US$ 5.7 billions). Fortune (Chinese version) described it as the best employer in China, and one of the most laudatory foreign companies in China. In 2002, Motorola won an award for “the best satisfaction on service” and a certificate for “best service on innovation” awarded by Ministry of Information Industry of China. In 2003, Motorola won the “CCTV investment” award from Chinese Central TV (CCTV). Microsoft is US-based firm and one of the top 100 companies in the world, but its road is much bumpier than Motorola’s in China and is still a long way to being successful. Microsoft came to China in 1992 and founded Microsoft China Co Ltd in 1995. Today, Microsoft has one Research & Development Center (1995), one Academy of Asia (2001), one Global Technology Center (2001), and three joint ventures in China. However, the performance of Microsoft in China is worse than Motorola’s. The total earnings of Microsoft in China in 2001 is only about US$100 million. The presidency of Microsoft China has changed five times.

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Table 1: Brief Comparison between Motorola and Microsoft in China Characteristics of Company

Motorola in China

Microsoft in China

Timing of entering into China (year) Timing of establishment of subsidiary company (year) Number of joint ventures (till 2005) Number of Employees (till 2005) Total investment in China (till 2004) Total sales (2002) Total sales (2004)

1987

1992

1992 9 About 9,000 US$3.5 billion US$5.7 billion US$33.9 billion

1995 3 About 900 US$100 million* US$200 million* US$370 million*

Note: * denotes estimates since Microsoft did not disclose its financial reports about its subsidiaries in China. Data sources: Web sites of Motorola (China) and Microsoft (China), and “Microsoft in China: The earning doesn’t match the effort” (news on www.sohu.com, 26.5.2005).

Comparison of the Different Use of Instruments by Motorola and Microsoft The significant difference of performance between Motorola and Microsoft in China is mainly determined by the different use of the four instruments to cope with the governments and NGOs.

1) Lobbying Lobbying is also called “gongguan” in Chinese. To lobby, a firm should have built good guanxi (relationship) with the governments first. Therefore, to build relationship with governments is the first step and the core of lobbying. In this sense, lobbying like building guanxi with government officials in China. Before entering China, the president of Motorola visited dignitaries of the Central Government of China in Beijing to gather their opinions on the entry of Motorola. In order to get a favourable impression from Chinese governments, Motorola took a series of actions at the start of its entry. The most influential behaviour is to donate cell phones to Chinese government officials in the Great Hall of the People. Former Chinese premier Li Peng attended the ceremony on behalf of the Central Government. This action attracted extensive attention and the name of Motorola was quickly and widely diffused in China. Microsoft also attaches importance to lobbying in China. Whenever the high executives of Microsoft come to China, they visit high-ranking government officials. But compared with Motorola, Microsoft’s lobbying has its shortcomings. Firstly, almost a year after Microsoft’s entry into China, Bill Gates came to China

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for the first time. Chinese government officials felt that Gates looked down on the Chinese market. Secondly, it is said that Gate’s attitude is overbearing when he visited Chinese government officials, which irritated most officials.

2)Commitment To commit substantive investment in China is also an important instrument used by many MNEs to strengthen their relationship with the Chinese governments. Since foreign investment helps to accelerate the economic growth and to ease laid-offs, commitment acts as a an important role for MNEs to get support from Chinese governments. Besides, the commitment of transferring advanced technologies and management skills is also warmly welcome by Chinese governments in order to promote the competitive advantage of Chinese enterprises. As a start, Motorola advocated training technicians and managers for 1,000 state-owned enterprises voluntarily, which obtained a good impression from the Chinese governments. As early as 2001, Motorola made a commitment to the Central Government that in the following five years, Motorola would have purchased US$10 billion worth of parts and fittings and services from Chinese enterprises, and by 2006, the annual output of Motorola, as well as the total investment in China, will both reach US$10 billion. By autumn 2003, Motorola had trained 4,000 technicians and managers from 1,000 state-owned enterprises in 26 provinces. Today, Motorola has become the largest foreign investor in China with a total investment of nearly US$4 billion. On the contrary, Microsoft was unwilling to commit to Chinese governments in the early stage. The only thing that Microsoft wanted to do was to sell products and services in China and make profit. As a consequence, Microsoft received no support from Chinese governments. Under the attack of the public and NGOs of China, the non-market environment of Microsoft worsened rapidly. To cope with the pressure from non-market stakeholders, Microsoft has to set up two joint ventures with Chinese companies and sign a memorandum of understanding with the National Development and Reform Commission of China in 2002. Moreover, Microsoft made commitments to the Central Government to give a hand in promoting the software industry and train professionals.

3) Sponsoring Among the activities to cultivate public relations, sponsoring is the most frequently used strategy. Sponsoring not only helps MNEs to build a good image in the minds of government officials and to get their support, but also gets the support of NGOs by establishing an image of “corporate citizenship” in China. Motorola always pays attention to the charitable causes or projects in China,

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such as education, gymnastics, environmental protection, and helping the poor. Up to 2002, Motorola had contributed to the Hope project, a charitable project to help poor children return to school and set up 38 Hope primary schools, which benefit thousands of children. The contribution to higher education of China had exceeded RMB10 million. In addition, Motorola sponsored the 21st Universiade, the Ninth National Games of the People’s Republic of China, National Basketball League of China, and assisted China in its bid to join the World Trade Organisation. Besides, Motorola initiated a project named “Green China” that targets environmental protection in China. Motorola proposed “taking China as the hometown”, “to be a Chinese company” and “to be a citizen of China”, all of that have received favour from the Chinese governments and the public. Microsoft showed its generosity in China. In August and December 2002, it donated US$100,000 to the China Youth Development Foundation. It donated some software to the Web site of the China Welfare Fund for the Handicapped and RMB250,000 to set up the Hope primary school in December 2002. In May 2003, Microsoft contributed RMB1,500,000 to the Chinese governments for fighting SARS. In July 2004, Microsoft offered US$10 million to support elementary and normal education in China.

4) Codes of Conduct Almost every MNE has its own code of conduct. But China also has its business game rules. The integration of the business game rules of China with the codes of conduct of MNEs determines the success or failure of MNEs in China. Codes of conduct act as an important factor, which can affect the good impression and support from the governments, but lack of it will result in the antipathy and adverse actions of the governments and NGOs. Motorola showed a good fit between its own codes of conduct and the business game rules of China. Firstly, it abides by the laws and regulations of China, and makes substantive investment and sets up joint ventures with Chinese enterprises according to the request of Chinese governments. Secondly, it respects Chinese social and business culture, and tries to adapt its organisational culture to Chinese social and business culture. Its behaviour is widely accepted by Chinese governments and NGOs. Thirdly, it shows a good understanding of Chinese political climate. As early as 1992, Motorola took the lead to set up branches of the Communist Party of China (CPC). In addition, Motorola announced that members of CPC have the priority to get jobs from it, while other foreign-invested enterprises did not mention whether they would employ members of CPC or not. These behaviours gave CPC and Chinese governments a very good impression of Motorola.

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Comparatively, Microsoft also has its own codes of conduct, but it doesn’t care about integrating it with the business game rules of China. Firstly, Microsoft was unwilling to establish joint ventures with Chinese companies and made substantive investment in China in the early stage, though Chinese governments asked it to do so. Secondly, Microsoft organisational culture is not accepted by the Chinese governments and NGOs but Microsoft doesn’t want to change it. Thirdly, Microsoft once accused Chinese companies of piracy in 1999, which reflected that Microsoft didn’t understand the business game rule in China. The legal suit is often considered the last way to solve problems in China. Although Microsoft abides by Chinese laws and regulations, its hesitation and inability to integrate its organisational culture with the business game rules of China results in an adverse relationship with Chinese governments and the NGOs.

Conclusion and Implications Although this article only discusses the US-based MNEs, the results are also helpful and useful for MNEs based elsewhere. The implications to MNEs are as follows. To build good relationship with the Chinese governments and officials is always the most important thing for MNEs. Lobbying is based on this kind of relationship. Sponsoring can obtain a good impression from host governments and NGOs for MNEs and contributes to the relationship building with Chinese governments and NGOs. Since China needs foreign investment and advanced technologies and management skills to accelerate economic growth and promote the competitive advantage of Chinese enterprises, commitment acts as a very important instrument for large MNEs to do business there. Lack of codes of conduct or conflict between codes of conduct of MNEs and the game rules of the host nation will result in the antipathy and negative actions of the government and NGOs.The four instruments, especially lobbying, commitment, and codes of conduct, should be adopted together.

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