China’s new foreign investment law opens the door wider to overseas firms. But they’ll have to step up their game to make the most of it
- While foreign firms have long clamoured for greater access to the Chinese market, they will need to catch up with Chinese innovators to reap the benefits of the more level playing field
These changes are certainly welcome news for foreign businesses and the circle of politicians and lobbyists in Washington, who have long complained about a lack of market access in China. For many foreign multinational corporations, China has become one of their largest markets, if not the largest, in the world. Even for those that are only considering first-time entry, such as cross-border payment or credit card businesses, their global business models wouldn’t be complete without a credible presence in China. However, though a favourable signal, these legal changes cannot guarantee foreign multinationals success. The market conditions in China have evolved quite significantly over the past decade.
A major shift in the past decade has been the emergence of Chinese companies as bona fide competitors to foreign multinationals. Whereas foreign multinationals still enjoy advantages in sectors such as luxury goods, premium-branded cars and patented pharmaceuticals, Chinese companies have become serious competitors in e-commerce, fintech, fast-moving consumer goods, appliances and logistics.
Some of these Chinese competitors are large state-owned enterprises, especially in sectors that require strong state roles, such as energy and telecommunications. However, the most formidable, and the majority, are private companies marked by their speed, agility and creativity, in sectors where the playing field is practically open and even.
Belatedly, foreign multinationals have began to recognise the need to learn from China, to innovate in China for China and perhaps even for the world. This will not be easy, as foreign companies need to embrace China as a breeding ground for innovation and for new thought leadership in business strategy. To do this right, they have to put China at the core of their global strategy, instead of seeing it merely as a market, albeit an important one.
So far, most of the foreign multinationals’ localisation efforts have remained basic – hiring local managers and assigning them only roles involving execution, while strategic planning and decision-making take place outside China, either in global or regional headquarters. Not only is this process not fast enough, it also does not take into account sufficiently the changes in the overall China context that can have a disproportionately large impact on a company’s China, and even global, strategy. Foreign multinationals should add substance to their localisation plans by appointing local thought leaders to senior levels, with the appropriate decision-making power and resources.
Like every new measure that comes out of China, the new foreign investment law will not be immune from scepticism from outside. However, the new law signals a friendlier environment that enables foreign multinationals to capture greater value in one of the world’s most important and dynamic markets. In the meantime, they should remember that in this ever-changing, increasingly competitive landscape where innovation is critical, they need to step up their game in China to capture the potential that the market offers.
Edward Tse is founder and CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in greater China. He is also author of China’s Disruptors