Changes in governance of ODI in China

China's ODI regime has traditionally used administrative approvals and foreign currency control to direct the scale and scope of Chinese ODI.Footnote ²⁶ Since 2012, there has been a strategic shift in ODI governance, which is characterized by a gradual withdrawal of central state intervention and a more facilitating government approach to ODI. This gradual withdrawal of the Chinese central state occurred as the large-scale resources investment undertaken by central SOEs no longer dominated Chinese ODI. At the same time, smaller SOEs and private firms, attracted by the market opportunities, steered investment into new sectors in Australia.

As the volume of non-SOE investment started to grow, the Chinese central state relaxed its approach towards reviewing and approving outbound investments.Footnote ²⁷ The administrative approval process was streamlined and decentralizedFootnote ²⁸ and local governments were encouraged to seek growth through ODI. Interjurisdictional competition among local governments over overseas investment projects led by local SOEs and private sector enterprises enhanced local support for ODIFootnote ²⁹ to the degree that firms were able to bypass regulatory barriers.Footnote ³⁰ China's foreign currency regime was also further liberalized. Prior to 2012, Chinese companies faced restrictions in accessing foreign currency to fund international investment.Footnote ³¹ Only when the central government ended the compulsory foreign exchange settlement and sales system (waihui qiangzhi jiesuan zhidu 外汇强制结算制度) in 2012 were domestic firms able to buy or use their self-earned foreign exchange for outbound investment.

Between 2010 and 2015, China's State Administration of Foreign Exchange (SAFE) issued several guidelines on external guarantees to improve the availability of commercial loans for ODI (neibao waidai 内保外贷). Improvements to the availability of commercial loans especially benefited private enterprises and local SOEs, which had previously had difficulties in accessing the policy bank loans reserved for large SOEs. The exact volume of external guarantee loans is unknown. We use overseas loans and advances as an estimate because they represent corporate lending by Chinese banks overseas, most of which was made to Chinese firms. Table 5 shows that the volume of loans and advances to overseas customers for the Industrial and Commercial Bank of China, China's largest bank by total assets, tripled from 472.3 billion yuan in 2011 to 1,315.7 billion yuan in 2016, accounting for 10.31 per cent of the group's total loans. Statistics published by the Australian Prudential Regulation Authority (APRA) show that between 2012 and 2017 loans and advances by Chinese banks in Australia grew more than threefold from about $10 billion to $32 billion.Footnote ³²

Table 5:

Industrial and Commercial Bank of China's Overseas Loans and Advances (billion yuan)

Source:

Industrial and Commercial Bank of China annual reports, 2005–2017, http://www.icbc-ltd.com/ICBCLtd/Investor%20Relations/Financial%20Information/Financial%20Reports/.

In addition to shaping ODI through formal policies and regulations, informal government support also incentivized local SOEs to be more market driven in their ODI. Specialized bureaucracies such as the State-owned Assets Supervision and Administration (SASAC) strengthened the management accountabilityFootnote ³³ and professionalization of SOE investors.Footnote ³⁴ Internal reference reports propagated risk control and economic returns in overseas investment and publicized examples of failed investments in Australia such as Chinalco's attempt to acquire Rio Tinto, the termination of Sinosteel's Weld Range Project and CITIC Pacific's huge debt burden incurred from the Sino Iron project.Footnote ³⁵ In addition, professional support for investment in Australia was made available through regular updates of Investment in Australia Guidelines, which was published by MOFCOM. The Chinese embassy in Australia edited reference books with specific advice for Chinese investors in Australia.Footnote ³⁶

The central government's gradual easing of policies not only facilitated ODI but also helped change its direction. Initially, central state-owned enterprises were the main beneficiaries of streamlined administrative procedures and financial support. The decentralization of approval processes and commercialization of finance helped local SOEs and private enterprises to seek overseas growth opportunities and circumvent domestic market restrictions.Footnote ³⁷ At the policy level, the shift in economic direction under the new government from 2012 created new demand for overseas consumer products, which Chinese firms, with enterprise savings rates among the highest in the world, were quick to exploit, especially in countries such as Australia with stable and mature institutions and products in high demand in China's domestic market.Footnote ³⁸

Changes in governance of ODI in Australia

The Australian government's approach has changed from one of reluctant acceptance during the mining investment phase to one of facilitation and pro-active regulation since 2012 when non-mining investment started to lead the charge. Australia's acceptance of Chinese ODI was supported by bipartisan political consensus, which only occasionally became politicized. As a result, Australia has a track record of supporting Chinese ODI.Footnote ³⁹ Compared with other developed economies, Australia's regulatory framework on the whole has been relatively liberal. Its competition regime and hosts of other regulations are structured in ways to encourage foreign investors to operate in a commercial manner.Footnote ⁴⁰ This is partly because Australia's policy on foreign investment has, historically, been relatively open and welcoming.Footnote ⁴¹ More significantly, Australia has a closer trade relationship with China than with any other economy. Australia's export volume to China was AUD 93 billion in 2016, accounting for nearly one-third of Australia's total export volumes.Footnote ⁴² The economic complementarity between Australia and China is substantial, with very few areas of competition.

With regards to formal elements, the China–Australia Free Trade Agreement (ChAFTA) has made it much easier for Chinese private firms to invest in Australia. Concluded in 2014 and in force by the end of 2015, the ChAFTA made Australia one of the few developed economies (along with Singapore, Korea and New Zealand) to have signed a free trade agreement with China. The ChAFTA lifted the threshold for screening of Chinese private (non-SOE) investment in Australia's non-sensitive sectors by the Treasury's Foreign Investment Review Board (FIRB) from AUD 248 million to AUD 1.078 billion. This was a crucial development in the evolution of the Australian ODI regime as most Chinese private investment is below the AUD 1.078 billion threshold. This regulatory change gave private enterprises a cost advantage over SOEs, which face FIRB scrutiny for all investments irrespective of volume. In addition, the ChAFTA provided legally binding commitments to facilitate trade and investment through market liberalization and governance norms, the first such improvements since the Australia–China Bilateral Investment Treaty was signed in 1988. The short investment chapter in the ChAFTA gave Chinese investors national treatment and guaranteed investment protection (Article 9.3).Footnote ⁴³ Such arrangements incentivized Chinese private enterprises to invest.

Chinese SOE investment did not receive any non-screening threshold in the ChAFTA and therefore the increasing number of investment proposals by Chinese SOEs became a central concern for Australia's foreign investment regulator.Footnote ⁴⁴ In Australia's regulatory framework, all investment by foreign SOEs irrespective of volume is automatically examined by the FIRB. While outright rejections of SOE acquisition proposals are rare (see Table 6), the FIRB has increasingly used approval conditions to shape the corporate governance of SOEs and restrict non-commercially driven objectives. Key conditions introduced include localization requirements, governance requirements and shared-ownership requirements, such as joint venture structures. For example, the FIRB does not support vertical integration of supply chains in resources industries by Chinese SOEs and other multinational companies. Decisions in relation to Chinese acquisitions, such as the acquisition by Yanzhou Coal Mining Company Limited of Felix Resources Limited in 2009, included provisions to ensure that the core management of the company was Australian; a number of board members resided in Australia; natural resource assets were marketed and sold at “arms-length terms with reference to international benchmarks”; and Chinese ownership was less than 70 per cent.Footnote ⁴⁵

Table 6:

Applications Decided by FIRB (Proposed Investment)

Source:

Foreign Investment Review Board annual reports, https://firb.gov.au/about-firb/publications.

The FIRB guidance for Chinese investors created incentives in regards to ownership and localization. Private investors are advantaged by exemption from FIRB approval as long as they come under the threshold defined by the ChAFTA. State-owned investments of any size and private investments above the approval thresholds will be guided by the FIRB towards localization in their corporate governance. The commitment of the FIRB to use approval conditions to address national interest concerns is regularly articulated in its annual reports and has led to a growing proportion of applications being approved, subject to conditions. Table 6 gives a snapshot of the FIRB's increased usage of conditions to manage SOE investment. Between 2012 and 2016, the number of approvals with conditions nearly tripled to 14,491 in 2015–2016. Approvals with conditions represent over 57 per cent of the total value of approvals in 2015–2016. Although the FIRB does not provide a breakdown by country of origin, the proportion of Chinese investment applications under the “approved with conditions” category is likely to be high, as Chinese applications to the FIRB since 2014 are in first position, both in terms of numbers as well as volume.

At the state level, governments in Australia are aiming to attract Chinese investment for major infrastructure projects as well as for regional and rural industries and thus are willing to facilitate Chinese ODI. The move from a position of budget surplus to budget deficit in most states during the global financial crisis period has accelerated this shift. State governments have adopted measures to reduce government debt and increase growth including through initiatives to attract Chinese investment. Such initiatives include high-level visits by leading state politicians to Chinese provinces. These visits are usually followed by informal arrangements between provincial and state governments to promote investment activities and outreaches to emerging Chinese infrastructure companies for projects such as transport, energy, tourism, health and commercial building. These state-level initiatives, involving local firms and usually targeted at local-level state partners in China, have the potential to facilitate investment flows particularly from private enterprises and local SOEs in China.

In summary, the gradual co-evolution of regulatory regimes in China and Australia has created local incentives for Chinese investors in Australia, specifically for private firms and local SOEs, to enter the Australian market in new industries. Unlike traditional resource-seeking central SOEs, these smaller investors could not draw on Chinese state funding but instead were encouraged to cooperate locally with resident Chinese banks and build networks to overcome their liabilities of foreignness. The Australian regulatory regime reinforced these incentives by reducing compliance costs for private investors and requiring private and SOE investors to localize by controlling the local integration of management and operations.

New motivations: asset diversification, strategic asset seeking and capability building

Under the state-driven model during the mining investment boom, resource seeking was the main motivation for Chinese firms investing in Australia. The typical investors in this period, usually SOEs, acquired assets for resource offtake as their role was to achieve production targets imposed by their headquarters.Footnote ⁴⁷ Throughout this period, Australia accounted for around 40 per cent of China's iron ore imports, a greater percentage than any other country.Footnote ⁴⁸ After 2012, as Chinese investment widened into broader sectors, this motivation and approach became obsolete. Many of the respondents we interviewed believed that resource seeking was giving way to new motivations (Table 7).

Of the 22 case study companies we interviewed, 18 confirmed that their investment was for asset diversification, in line with Raphael Amit and Joshua Livnat's view that international diversification into mature markets can improve overall corporate performance by creating a stable cash flow, lowering operational risk and increasing leverage and profitability.Footnote ⁴⁹ Chinese firms facing institutional constraints in the domestic market also use international diversification of assets to hedge against domestic political risks.Footnote ⁵⁰ For example, rapid expansion in Australia was part of state-owned company Poly Real Estate's strategic plan to increase its overseas asset base to 5 per cent of its total asset base by 2020. This was the case for most of those companies we interviewed. While bigger companies tended to be guided by long-term targets, smaller ones were more driven by opportunities and trial and error based on economic returns. In this context, Australia's demonstrated economic resilience and political and social stability provided powerful incentives for newly globalizing Chinese firms to invest.

Strategic asset seeking is another well-documented motivation for Chinese ODI. Chinese firms, in spite of their overall size of employment and revenue (see Table 3 for illustration), usually lack well-known brands, management expertise and technology application. Acquiring strategic assets is one way for Chinese firms to address their competitive disadvantages.Footnote ⁵¹ Out of the 22 case study companies, seven referred to strategic asset seeking as their main motive. In contrast to investing in Europe and the United States, which are target markets for acquiring advanced technologies,Footnote ⁵² Australian firms have a more specific reputation among Chinese investors for service orientation and technology application and utilization rather than innovation. This is supported by the general image of Australia as a “green and clean” provider of agricultural products and health services. According to our interview, for example, Chinese company New Hope's acquisition of Australian Real Pet Food was driven by the Australian company's solid track record of up-to-date technology and industry know-how as well as its good reputation in Australia. New Hope had observed Australian Real Pet Food over some time and planned to leverage the ownership of an established Australian company in order to grow into this expanding market in China and internationally.

A notable new motivation for Chinese firms to invest in Australia was localized learning and capability building. Ten of our case firms identified capability building as their main motivation for investing in Australia. Australia's mature institutional environment, its relatively small market size, physical isolation and the presence of local and international firms allowed Chinese firms with limited international experience to use Australia as a testing ground for trialling products and skills.Footnote ⁵³ Geographic proximity and overlapping time zones with China and a multicultural work force made Australia a convenient location for Chinese firms to apply advanced technologies in new institutional environments. Huawei, for example, rather than setting up R&D facilities, invested in Australia to build up institutional capabilities. As John Lord, the chairman of Huawei Australia, put it: “We're developing a model [in Australia] … once that model is mature, that model will be exported to other regions and countries around the world, so that's the first step of us moving out.”Footnote ⁵⁴ In 2011, Huawei Australia created a local board of directors – the company's first local board anywhere in the world – to address transparency concerns. Smaller and resource constrained companies were also using the capability-building mode of investment. As the CEO of the private company Hailiang Australia summarized, “we don't have an endless supply of money to acquire top international brands. We can't manage them either. The investment allows us to build local networks and understand the market, but more importantly, build up our own brand and capabilities.”Footnote ⁵⁵

The emergence of strategic orientation and entrepreneurial subsidiaries

The transition from state-controlled to corporate-driven Chinese ODI entailed changes to managerial strategies, decision making and governance of local subsidiaries. Our interviews with Chinese companies in Australia indicate that in order to survive competition, subsidiaries had to think creatively to formulate business initiatives that provided practical and effective solutions to the pressing problems they faced in their local markets. During the mining and energy investment phase of Chinese ODI, in spite of the large-scale investment, local subsidiaries were usually small in staff numbers and limited in their decision-making powers.Footnote ⁵⁶ The changes in institutional and market drivers since 2012 have exposed subsidiaries to more competition and required them to be more competitive and actively interact in the Australian market. While these subsidiaries were newcomers to local competition in the host market, they were now under pressure to learn fast as Australian and Western firms had until then occupied these sophisticated competitive markets. Gradually, Chinese parent firms adjusted their strategic control and encouraged more entrepreneurial subsidiaries. This approach gave subsidiary managers discretion to take strategic initiatives in response to local circumstances.

According to our case study interviews, in order to maintain strategic control while enabling local initiatives, Chinese firms increasingly appointed qualified agents who were especially trusted by headquarters to head these entrepreneurial subsidiaries. For example, the local CEO positions in Huawei Australia were rotated among a group of global senior managers every four years. In the case of SOEs, more senior headquarter executives were appointed as local CEOs. This arrangement provided ongoing strategic communications and trust between subsidiaries and headquarters. Private companies mostly appointed trusted family members with professional backgrounds to manage the foreign subsidiaries. This structure enabled a fast response to local opportunities while ensuring that the Australian subsidiary was fully integrated into the group's network.

Significance of dynamic capabilities

The commercial motivation for ODI and empowerment of local subsidiaries do not necessarily mean that subsidiaries were capable of coping with the specific market challenges faced in Australia and addressing their overall “liabilities of foreignness.” Extant research identifies three main sources of “liabilities of foreignness.” First, the lack of operational capabilities, i.e. experienced managers, remains a major obstacle for Chinese firms wishing to expand in developed economies.Footnote ⁵⁷ Second, differences in markets as well as cultural and institutional distance weaken the ability of Chinese firms to compete with Western firms.Footnote ⁵⁸ Last but not least, Chinese firms are in a disadvantaged position in terms of their perceived legitimacy by host country stakeholders.Footnote ⁵⁹

The liabilities of foreignness not only point to Chinese firms’ weakness in operational capabilities but also to their difficulties in catching up with competitors from developed economies where competitive advantages are traditionally determined by accumulated critical resources like intellectual property rights and optimized operational capabilities.Footnote ⁶⁰ David Teece, Gary Pisano and Amy Shuen's dynamic capabilities model provides one perspective on how Chinese firms that lack deep organizational capabilities could compensate for their disadvantages.Footnote ⁶¹ This model emphasizes that newcomer firms may catch up with incumbents through continuously modifying their routines and resources to fit with the rapidly changing environment.Footnote ⁶² Chinese firms operating in advanced economies developed and employed dynamic capabilities in order to compensate for their weak operational competences, which put them at a disadvantage in the first place. Instead, they used dynamic capabilities strategically to modify their routines and resources and to create local competitive advantages in spite of their lack of operational capabilities. Examining Chinese case companies in Australia, we find firms used three types of dynamic capabilities to bypass operational weaknesses and create competitive advantages in the host market (as shown in Table 6). We see these dynamic capabilities drawing on the domestic experience Chinese firms gained through the reform period: use of multiple networks, experiential learning and the reconfiguration of assets. The following analysis focuses on each of these aspects.

Embedding in multiple network configurations

Our findings show Chinese firms tuned their networking capabilities to fit the Australian market by establishing collaborative links with the local subsidiaries of other Chinese companies in Australia (see Table 7). Wind farm developer Beijing Energy, for example, forged close links with existing Chinese wind farm developers in Australia. These networks helped Beijing Energy to gain access to strategic information and build a reputation in the Australian market that attracted the attention of Australian firms. Similarly, Greenland established strategic alliances with other Chinese developers in Sydney. Even though some of these Chinese developers were Greenland's competitors, the collaboration raised Greenland's standing sufficiently to partner with prestigious local institutions. In addition, Chinese firms were capable of extending their networks to include Australian partners. One successful example is the Shandong-based Luye Medical Group. The group acquired Australia's third largest private hospital operator, Healthe Care, in 2015 to gain access to Healthe Care's local networks of hospitals and doctors and its strong links with health funds, which enabled Greenland to rapidly expand its business in China and Asia.

A small number of Chinese firms were capable of building networks in China and extending them into Australia as a way to compensate for their weakness in local organizational capabilities. Wind turbine manufacturer Goldwind, for example, entered Australia in the early 2010s when the market was dominated by large global firms such as Vestas, GE and Siemens. According to our interviews with Goldwind, upon entry, the firm faced significant brand and legitimacy challenges. In response, Goldwind cultivated unique network links with energy firms back in China to entice them to enter the Australian market. These energy firms, including major SOEs like CECEP and Guangdong Nuclear Power, invested in wind farms developed by Goldwind and helped to establish a local reputation for Goldwind. While these networks originated in China, they became embedded in Australia and provided Goldwind with a unique source of local competitiveness. Goldwind could not have attained this status by relying purely on upgrading their operational capabilities to the level of their local competitors.

There is ample research to show that Chinese firms have some distinct advantages in networking. China's weak formal institutions compound distortions in incentives. Most Chinese firms use networks to gain a competitive advantageFootnote ⁶³ by having members engage in reciprocal, preferential and mutually supportive actions that stabilize economic activities.Footnote ⁶⁴ Chinese firms also use networks as a strategic mechanism to overcome resource disadvantages, information asymmetryFootnote ⁶⁵ and the lack of formal finance.Footnote ⁶⁶ The frequent usage of networks has several implications. First, transaction costs of networking can be significantly reduced, owing to the scale of application. Second, the iterative process of networking in their domestic market provides Chinese firms with advantages for engaging in networking activities in Australia, creating distinct capabilities compared with local and Western firms.

Accelerating experiential learning through sequential investment

In the second phase of internationalization, rather than using sequential investment to gain resource control, some of our interviewed companies had used sequential investment to accelerate experiential learning and seize opportunities to upgrade their capabilities. When asked about the incentives for firms to learn through sequential investment, our interviewees’ response was, “Why would we not? This is what we have been doing all the time in China.” Similar to networking capabilities, Chinese entrepreneurial firms have developed distinct advantages in experiential learning in their domestic market. Because of the weaknesses in China's innovation systems such as low investment in public R&D and weak protection of intellectual property rights,Footnote ⁶⁷ Chinese firms have tended to develop highly flexible business models with an emphasis on experiential learning, quantifiable gains and low risk, rather than investing in long-term R&D per se.Footnote ⁶⁸ These experiential learning capabilities are geared towards rapid commercialization and have enabled Chinese companies to absorb know-how and upgrade capabilities in an ongoing incremental fashion that has allowed for flexibility and resilience in the face of rapidly changing markets.

In Australia, entrepreneurial Chinese firms have used experiential learning to combine domestic and local know-how to gain specific technical or cost advantages, such as technical leapfrogging, over local competitors (see Table 7). The more important strategic aspect of this learning was that it could traverse borders through new combinations of, for example, technological and management learning. As Chinese firms repeatedly engaged in experiential learning in the domestic market, they had less organizational inertia in acquiring new knowledge and transmitting complex knowledge across borders. A good example of the use of experiential learning can be seen in the Shandong-based coal company, Yankuang Group. According to interviews with Yankuang, the firm entered the Australian market by acquiring Austar, a small, low-quality coal mine, and used it to learn “the Australian way” of local operation in preparation for several major acquisitions. In 2017, after acquiring Coal & Allied, one of the best managed coal assets from Rio Tinto, Yankuang made a surprise move by merging its Australian management structure with Coal & Allied. A top Yankuang Australia executive called this “a transformative acquisition” for Yankuang, one which gave the company a radical upgrade of its management capabilities while at the same time making it Australia's largest thermal coal producer.Footnote ⁶⁹

Besides using sequential investments to upgrade capabilities, our interview data suggest that Chinese firms also used sequential investments to integrate market knowledge and diversify into new industries. As suggested by John Mathews, experiential learning has enabled Chinese firms to catch up and upgrade their capabilities in their highly dynamic domestic environment.Footnote ⁷⁰ Turning learning into a transformational experience made it a dynamic capability which could compensate Chinese firms for their lack of operational capabilities. With a track record of transformational learning experiences, Hangzhou-based Tianma Bearing Group (TMB) exemplified experiential learning over time. Starting in Western Australia, Tianma Bearing, following its successful acquisition of a major Australian premium winery, rapidly expanded its scale of operations by acquiring additional wineries in South Australia. It went on to acquire two cattle stations in Queensland to further expand its knowledge of Australian agriculture and exploit new opportunities in China. Tianma Bearing's expansion strategy in Australia mirrored its development path in China. Between 2002 and 2007, Tianma Bearing went through four cycles of acquisition-based transformation, at the end of which the group operated in multiple specialized markets, with eight subsidiaries across China (Table 8).

Table 8:

Main Acquisitions Made by TMB in the 2000s

Tianma's experience resonates with the findings of interviews with other Chinese companies in Australia, particularly private firms that did not face headquarter administrative restrictions on diversification. Experiential learning through sequential acquisitions enabled Chinese firms such as Tianma to rapidly gain new and situation-specific knowledge with small losses and immediate feedback and exploit new opportunities through first mover advantages.

Reconfiguring resources

Reconfiguring resources and strategic assets is a core element of dynamic capabilities. In the first phase of internationalization, Chinese firms’ low-cost strategies to meet operational targets set by headquarters often militate against creativity and the pursuit of new opportunities. For the second phase, a commonly held view among our interviewees was that management tasks involved not just solving operational issues but also turning opportunities into advantages through reconfiguring existing resources and orchestrating assets into optimal configurations. This was done by exploiting physical, social or institutional inputs that other firms ignored (slack) and creatively combining them with resources for different applications.Footnote ⁷¹ In the Chinese domestic context, this is reminiscent of the concept of “bricolage,” which was developed by French anthropologist Claude Levi-Strauss to describe the skill of using whatever resources are at hand and recombining them to create something new.Footnote ⁷² In the organizational context, bricolage activities often refer to the ability of resource-constrained firms to overcome limitations imposed by dominant definitions of the resource environment and get things done.

The traditional Western approach to resource reconfiguration is one that is well planned and within fixed organizational boundaries.Footnote ⁷³ In contrast, the Chinese approach is characterized by flexible organizational boundaries. Several examples demonstrate how Chinese companies, particularly private ones, survive and even flourish by taking an entrepreneurial approach by recombining and reusing the slack resources at hand in Australia (see Table 7). According to our interviews, this slack included financial capital, physical resources (land, buildings), intangible resources (IP, managerial skills) and social capital (relationships) across Australia and China. How Hailiang Group reconfigured its assets provides a good example. After entering Australian real estate in 2015, Hailiang branched out into agriculture and education. For its expansion into agriculture in Australia, Hailiang was able to turn to the slack in its supermarket businesses in China, which were a spinoff from large-scale real estate development. The supermarkets enabled Hailiang to overcome the problems of finding distribution channels faced by most Australian agricultural exporters. For its expansion into education in Australia, Hailiang was able to take up the slack from its Australian real estate operations to create assets for its partnership with Australian schools, who needed building investment and development. Hailiang entered into several joint venture agreements with Australian private schools by providing capital and building expertise, while the Australian schools supported Hailiang's fast growing global education business in China and other continents.

Wind turbine manufacturer Goldwind offers another example of reconfiguration and asset orchestration. As discussed above, Goldwind entered Australia through small-scale wind farms and successfully sold them to Chinese energy companies. Owing to policy uncertainties at the time, local banks were reluctant to finance wind farms. To overcome this constraint, Goldwind Australia exploited its existing network linkages with Chinese energy companies to offer them flexible joint venture arrangements. This way, Goldwind offered comprehensive Australian risk management solutions to major Chinese energy companies and at the same time gained access to their capital and finance during the early stages of wind farm development in Australia. The economies of scale attained in these joint ventures through low cost capital and large wind farm development secured a strong competitive position for Goldwind. Summarizing Goldwind's business model in Australia, its vice-president in Australia explained: “this is a new model we developed for the Australian market. It was a recombination of existing and new resources and optimized our outcomes.”Footnote ⁷⁴

Goldwind's case illustrates the ability of Chinese firms to flexibly recombine resources. These skills in reconfiguring resources reflect the demands of the dynamic Chinese markets for which they were developed. In these markets, where institutional settings were underdeveloped and chronic uncertainties prevailed, resource-constrained Chinese firms had to adapt by constantly reconfiguring their resource endowments to form new capabilities as well as by shifting resources into new markets or away from their existing markets.Footnote ⁷⁵ This ongoing reconfiguration helped them to overcome the potential opportunistic behaviour of partners and competitors.

To sum up, our findings suggest that by localizing their operations and individually and collectively developing dynamic capabilities, Chinese firms have gained entrepreneurial opportunities in the Australian market. They acquired their underlying dynamic capabilities during the economic reform process in China, but were unable to deploy them as long as they were constrained by central state control. We find that their capabilities are dynamic, as described by David Teece, in that they can compensate for their lack of organizational capabilities to gain competitive advantages.Footnote ⁷⁶ Our findings suggest that developing and projecting dynamic capabilities are entrepreneurial processes that are institutionally and commercially embedded in the local host environment and require considerable autonomy on the part of the local subsidiaries.

Improved performance

The success of the dynamic capabilities strategy is visible in the improved performance of Chinese firms. As part of our interviews, we investigated the performance of Chinese subsidiaries in Australia. Performance was measured by asking the top managers of 22 Chinese firms in Australia to respond to a five-point scale. The use of subjective, perceptual measures of performance is well supported in the literature and has been shown to be highly correlated with objective, accounting-based measures.Footnote ⁷⁷ Table 9 provides a representation of our findings. It is evident that the internationalization path of Chinese firms varies and that some firms are doing better than others. It was also somewhat surprising to find that, contrary to cases of earlier failures in developed markets, two-thirds (16) of the case study companies indicated that their turnover had grown over the last three years, and nearly half (9) stated that their profitability had grown. These findings suggest that by using dynamic capabilities, some Chinese firms do overcome their initial liabilities of foreignness in Australia.

Table 9:

Subsidiary Performance in Australia