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8/18/2019 Acquisitions of Chinese State-Owned Enterprises by Multinationa Corporations - Driving Forces, Ba http://slidepdf.com/reader/full/acquisitions-of-chinese-state-owned-enterprises-by-multinationa-corporations 1/17 Acquisitions of Chinese State-Owned Enterprises by Multinational Corporations: Driving Forces, Barriers and Implications for HRM Fang Lee Cooke Manchester Business School, The University of Manchester, Booth Street West Manchester M15 6PB, UK Email: [email protected] This article explores the driving forces for, barriers to, and trends and patterns of acquisition of Chinese state-owned enterprises (SOEs) by foreign investment and its implications for HRM and the experience of work for the workers. It questions the level of objectives alignment between the Chinese side and the FDI during the acquisition of Chinese SOEs. Issues related to the Chinese managerial skills and behaviour in acquisition negotiation are discussed as well as the policy making, administrative and practical role of the local government. The article argues that FDI’s acquisition of Chinese firms creates unique management issues which require further research, particularly in the area of HRM, in order to establish the likely similarities and differences between acquisitions in other countries and those taking place in China and the implications of this for the globalizing businesses. Introduction China has been one of the two largest foreign direct investment (FDI) recipient countries in the world in recent years (International Statistics Yearbook, 2004). This is largely because of two factors: investment incentives offered by the Chinese government and the country’s abundant availability of cheap labour. It has been argued that the strong emphasis on foreign investment and foreign trade has been one of the key factors, if not the  key factor, in the unprecedented growth of the Chinese economy in recent years. Attract- ing FDI has been an important part of China’s open-door economic policy since 1978 and this proactive policy has led to the rapid increase of FDIs in China in the last 25 years (see Table 1 and 2). During the 1980s, the main route of FDIs entering the Chinese economy was through joint ventures (JVs) with Chinese state-owned enter- prises (SOEs). Into the twenty-first century, cross-border acquisition remains the main invest- ment mechanism for foreign investment entering the China market with an increasing level of freedom. This trend is being accelerated by China’s accession to the World Trade Organiza- tion (WTO) and the introduction of a number of laws and guidelines by the Chinese government in 2003 that are aimed to promote merger and acquisition (M&A) activities from foreign invest- ment. It was reported that 16% of the M&A fund (about US$ 3.84 billion) in first three quarters of 2003 in China came from FDIs (Jin and Nie, 2004) and that M&A activities in China have been increasing by 20% annually in recent years (China Business, 2005). This new development is in line with the international trend in the last two decades in which, it is noted, the level of M&A activities has increased considerably (Evans, Pucik and Barsoux, 2002; Hubbard, 1999) in response to a range of political, economic, social British Journal of Management, Vol. 17, S105–S121 (2006) DOI: 10.1111/j.1467-8551.2006.00481.x r 2006 British Academy of Management

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Acquisitions of Chinese State-OwnedEnterprises by Multinational Corporations:

Driving Forces, Barriers and Implicationsfor HRM

Fang Lee CookeManchester Business School, The University of Manchester, Booth Street West Manchester M15 6PB, UK

Email: [email protected]

This article explores the driving forces for, barriers to, and trends and patterns of 

acquisition of Chinese state-owned enterprises (SOEs) by foreign investment and itsimplications for HRM and the experience of work for the workers. It questions the levelof objectives alignment between the Chinese side and the FDI during the acquisition of Chinese SOEs. Issues related to the Chinese managerial skills and behaviour inacquisition negotiation are discussed as well as the policy making, administrative andpractical role of the local government. The article argues that FDI’s acquisition of Chinese firms creates unique management issues which require further research,particularly in the area of HRM, in order to establish the likely similarities anddifferences between acquisitions in other countries and those taking place in China andthe implications of this for the globalizing businesses.

Introduction

China has been one of the two largest foreign

direct investment (FDI) recipient countries in the

world in recent years (International Statistics

Yearbook, 2004). This is largely because of two

factors: investment incentives offered by the

Chinese government and the country’s abundant

availability of cheap labour. It has been argued

that the strong emphasis on foreign investment

and foreign trade has been one of the key factors,if not the  key factor, in the unprecedented growth

of the Chinese economy in recent years. Attract-

ing FDI has been an important part of China’sopen-door economic policy since 1978 and this

proactive policy has led to the rapid increase of 

FDIs in China in the last 25 years (see Table 1

and 2).

During the 1980s, the main route of FDIsentering the Chinese economy was through joint

ventures (JVs) with Chinese state-owned enter-

prises (SOEs). Into the twenty-first century,

cross-border acquisition remains the main invest-ment mechanism for foreign investment entering

the China market with an increasing level of 

freedom. This trend is being accelerated by

China’s accession to the World Trade Organiza-

tion (WTO) and the introduction of a number of 

laws and guidelines by the Chinese government in

2003 that are aimed to promote merger and

acquisition (M&A) activities from foreign invest-

ment. It was reported that 16% of the M&A fund

(about US$ 3.84 billion) in first three quarters of 

2003 in China came from FDIs (Jin and Nie,

2004) and that M&A activities in China havebeen increasing by 20% annually in recent years(China Business, 2005). This new development is

in line with the international trend in the last two

decades in which, it is noted, the level of M&A

activities has increased considerably (Evans,

Pucik and Barsoux, 2002; Hubbard, 1999) in

response to a range of political, economic, social

British Journal of Management, Vol. 17, S105–S121 (2006)

DOI: 10.1111/j.1467-8551.2006.00481.x

r 2006 British Academy of Management

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and technological pressures and opportunities, withcross-border M&As particularly noticeable (Boxall

and Purcell, 2003). It must be pointed out at the

outset of this article that acquisitions, instead of mergers, remain the main pattern of Sino-foreign

alliances, and therefore the discussion in this article

Table1. Utilization of foreign capital between 1979–2003 (end-of-year figures), US$ m(Figures in 100 million USD)

Year Total Foreign loans FDIs Other foreign

investmentsNo. of projects Value No. of projects Value No. of projects Value

Total amount of contracted foreign capital

1979–1984 3,365 287.69 117 169.78 3,248 103.93 13.98

1985 3,145 98.67 72 35.34 3,073 59.31 4.021989 5,909 114.79 130 51.85 5,779 56.00 6.94

1990 7,371 120.86 98 50.99 7,273 56.96 3.91

1995 37,184 1,032.05 173 121.88 37,011 912.82 6.35

1996 24,673 816.10 117 79.62 24,556 732.77 3.71

1997 21,138 610.58 137 58.72 21,001 510.04 41.82

1998 19,850 632.01 51 83.85 19,799 521.02 27.14

1999 17,022 520.09 104 83.60 16,918 412.23 24.26

2000 22,347 711.30 22,347 463.80 87.50

2001 26,140 719.76 26,140 691.95 27.81

2002 34,171 847.51 34,171 827.68 19.82

2003 41,081 1,169.01 41,081 1,150.70 18.32

Total amount of foreign capital actually utilized

1979–1984 171.43 130.41 30.60 10.42

1985 44.62 25.06 16.58 2.981989 100.59 62.86 33.92 3.81

1990 102.89 65.34 34.87 2.68

1995 481.33 103.27 375.21 2.85

1996 548.04 126.69 417.25 4.10

1997 644.08 120.21 452.57 71.30

1998 585.57 110.00 454.63 20.94

1999 526.59 102.12 403.19 21.28

2000 593.56 100.00 407.15 86.41

2001 496.72 468.78 27.94

2002 550.11 527.43 22.68

2003 561.40 535.05 26.35

1979–2003 6,795.58 1,471.57 4,997.60 326.41

Sources: adapted from  China Statistics Yearbook, 2004, p. 731.

Table2. Examples of utilization of foreign capital and foreign investment (end-of-year figures), US$ m

Item 2000 2002 2003

No. of 

projects

Contract

value

Used

value

No. of 

projects

Contract

value

Used

value

No. of 

projects

Contract

value

Used

value

Total 22,347 71,130 59,356 34,171 84,751 55,011 41,081 116,901 56,140

Foreign direct investments 22,347 62,380 40,715 34,171 82,768 52,743 41,081 115,070 53,505

Joint ventures enterprises 8,378 19,648 10,380 18,502 10,380 14,992 12,521 25,506 15,392

Cooperative operation enterprises 1,757 8,117 1,595 6,217 1,595 5,058 1,547 7,479 3,836

Foreign investment enterprises 12,196 34,309 22,173 57,255 22,173 31,725 26,943 81,609 33,384

Foreign investment share enterprises 8 194 19 739 19 697 37 389 328

Cooperative development 8 112 4 55 4 272 8 86 32

Others – – – – – – 25 – 531Other foreign investments – 8,751 8,641 – 1,982 2,268 – 1,832 2,635

Sale share – 6,931 – – – – – 42 275

International lease – 24 – 130 – 131 – 129 129

Compensation trade – 12 – – – 4 – – 7

Processing and assembly – 1,784 – 1,852 – 2,133 – 1,661 2,525

Sources: adapted from  China Statistics Yearbook, 2002, 2003 and 2004.

S106   F. L. Cooke

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will focus mainly on acquisition, although M&As

will be referred to where appropriate.

Despite the growing significance of interna-

tional acquisitions in China’s economy, there

have been insufficient empirical studies into the

driving forces for, barriers to and patterns of 

foreign investment acquisitions in China, theirpost-acquisition strategies and operating policies

and the implications of these for the governance

structure of the firm and its human resource

management (HRM). This is perhaps in part

because research on M&As is sensitive because of 

the often-required confidentiality and speed of 

change (Walter, 1985) and the consequent diffi-

culty in gaining access to organizations to carry

out the study (Salama, Holland and Vinten,

2003). However, these issues are especially im-

portant for the SOEs where international acquisi-

tion practices through joint ventures (JVs) haveexisted for nearly two decades as a governmentstrategy to rescue the poor-performing state

industry. Although a considerable amount of 

academic research has been carried out since the

late 1980s on international joint ventures in China

(e.g. Bjorkman and Lu, 2001; Bjorkman and Fan,

2002; Child, 1994; Child and Faulkner, 1998;

Cooke, 2002; Ding, Fields and Akhtar, 1997;

Luo, 2000a), these works focus mainly on themanagement practices of the joint ventures rather

than the acquisition process prior to the establish-

ment of the joint venture. Equally, although Luo(2000b, 2000c) has written extensively on how

foreign businesses may enter China, these works

focus primarily on the pre-acquisition process

rather than the human resource implications of 

acquisition for the workforce.

In practice, confusion, conflicts and barriers

that restrict the level of international acquisition

activities in China exist widely (see Luo 2000b and

2000c for more details). This is particularly the

case in the acquisition of SOEs. This is reflected in

the fact that when implementing the strategy and

policy, the Chinese authorities have swungbetween advance and retreat, between loosening

up and holding back, ambivalence between

benefits and problems, gains and losses. Another

problem is that there is a lack of transparency and

participation from M&A experts when govern-

mental departments formulate rules and policies

that govern M&As. As a result, merger and

acquisition administrators (including other autho-

rities involved in the process) often find it difficult

to interpret and implement the regulations. In

addition to regulatory loopholes, the impact of 

acquisition on local employment is another

important factor that influences the attitude of 

government officials and workers towards the

acquisition. Post-acquisition changes in the man-

agement of human resources are also verysensitive issues as the cultural differences between

the Chinese ex-SOEs and the acquiring foreign

firm may be at their starkest, especially given

the fact that human resource issues often pose

the greatest difficulties and are of crucial im-

portance in M&As and post-M&A integration

(Schuler, 2001; Schuler, Jackson and Luo, 2004;

Stahl   et al ., 2004). Given the Chinese govern-

ment’s determination to continue the privatiza-

tion or partial privatization of the SOEs through

domestic and international acquisitions, it is

important that issues related to internationalM&As of Chinese SOEs are discussed more fullythan has been the case so far in the existing

literature.

This article explores the driving forces for,

barriers to, and trends and patterns of acquisition

of Chinese SOEs by foreign investment and its

implications for HRM. The article draws on a

number of sources for its data. These include

interviews with three senior managers from threeex-SOEs (one in each) that have been partially

privatized (now joint ventures) through acquisi-

tion by foreign investment in the last three yearsin a large city in southern China, interviews with

two local government officials who were involved

in the M&As of SOEs and two senior officials of 

the trade-union headquarters of the city. All

interviews were conducted by the author in China

in Mandarin Chinese. Each one-to-one interview

lasted about one hour. Access to these informants

was through personal contacts. The article also

draws on secondary data from journal and

newspaper articles and government reports. Most

of them are in Chinese and were collected in

China. It needs to be pointed out here that it isnot the intention of this article to report the

acquisition process of the three ex-SOEs (coded

here as BreweryCo, TyreCo and PharmaCo).

Rather, it aims to provide an overview on a

number of aspects related to cross-border acqui-

sitions in China, a rapidly developing area where

knowledge remains insufficient. Therefore, the

interview information plays an informative role

in the discussion of the article rather than taking

Acquisitions of Chinese SOEs by MNCs   S107

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precedence. Because of the sensitive nature of 

some of the information, direct quotations of 

interviews were kept to a minimum in this article

in order to conceal the identity of informants,

especially the government officials.

The article is divided into four main sections in

addition to this introduction section. The firstmain section reviews the driving forces for inter-

national acquisitions of SOEs in China by contem-

plating the objectives from both the Chinese and

the FDIs’ point of view. It also outlines the

patterns of acquisition of Chinese firms by

foreign investment in terms of the industries they

target. The second section questions the level of 

objectives alignment between the Chinese side

and the FDI when entering international joint

ventures. Issues related to the Chinese managerial

skills and behaviour in acquisition negotiation

are discussed as well as the multiple role of thelocal government. Barriers to acquisitions forFDIs are then analysed in the context of the

above issues. This is followed by the fourth

section, which discusses the implications of cross-

border acquisitions to human resource manage-

ment, including major aspects of HRM such as

 job security, training and development, pay and

performance management, industrial relations,

adoption of Western management techniques,managerial skills and post-acquisition integra-

tion. The conclusion section highlights practical

and research implications of the article, andargues that international M&As of Chinese firms

creates unique management issues that require

further research, particularly in the area of 

HRM, in order to establish the likely similarities

and differences between M&As in other countries

and that taking place in China and the implica-

tions of this for the globalizing businesses.

International acquisitions in China:

driving forces and patterns of acquisitions

The development of foreign investments in China

has been through three overlapping stages since

the early 1980s. The first stage began in the early

1980s when the majority of foreign investment

came from Hong Kong, Macao, Taiwan, Japan,

Korea and countries in southeast Asia. Many of 

the investors were overseas Chinese. The second

stage began in the early 1990s when MNCs from

Western countries started to use China as a long-

term development base by setting up their

production plants in China. The third stage

began after China’s accession to the

WTO. One emerging feature of FDIs is the

acquisition of SOEs, often through the stockmarket by offshore foreign investors or by MNCs

in China.

Driving forces for FDI acquisitions of Chinese

SOEs

There are a number of driving forces for the

acquisition of Chinese SOEs (Dong and Hu,

1995). First, the Chinese government was forced

to reform the ailing SOEs in the 1980s. The plan

involved three steps: reducing the intervention of 

the state in these enterprises by redefining the roleof the state as a shareholder with limited

liabilities; revitalizing large and some medium-

sized SOEs by further devolving decision rights to

management and continuing economic reform

toward a fair and competitive market; and

privatization and leasing of the small and

medium-sized SOEs. As SOEs are controlled by

the state through the local government, the

performance of SOEs is a strong indication of 

the administrative performance of the localgovernmental officials. For their own interest,

officials want to maximize the profit level of theSOEs. The profit level of SOEs also has a direct

impact on the tax income and consequently the

building of the infrastructure of the region.

Therefore, local officials are keen to improve

the performance of the SOEs through merger and

acquisition when it becomes apparent that anSOE cannot survive on its own. During the early

and mid-1990s, a popular way to pay off 

liabilities and create working capital for SOEs

was to convert them into joint ventures with

foreign investors. Other important reasons for

the Chinese side entering into a joint ventureagreement include the desire to acquire knowl-

edge, latest technology and management skills,

and the desire to generate export income (see

Brunner, Koh and Lou, 1992; Child, 1994; Child

and Faulkner 1998; Gu, 1997; Luo, 2000b for

more details). The reform of SOEs has been

pushed to new heights since 1997 (Gu, 2003;

Li, 2003; Zhang, Li and Zhou, 2002) when the

large-scale downsizing, privatization and M&As

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involving SOEs, collectively owned enterprises,

domestic private enterprises and foreign invest-

ments took place (Cooke, 2005). The idea behind

the M&As is to let the SOEs be voluntarily

acquired by or merged with better-managed

firms. Such an approach is believed to have

combined ownership transfer with managementadjustments, technology upgrading and capital

injections (Dong and Hu, 1995).

A second driving force is to exert control over

foreign firms in China. In the early stage of the

‘open-door policy’, the Chinese government

decided that in order to control the operations

of foreign companies in China, FDIs would be

confined to joint ventures with local (state)

partners. Numerous restrictions were also im-

posed on the joint ventures in their operations,

including the management of human resources.

In addition, there was strong pressure on JVs notto lay off workers. However, the level of controland influence from the local authorities has

begun to ease off since the early 1990s (Pomfret,

1991) and foreign companies now have consider-

ably more latitude in their business operations in

China, including decisions in HR policies. The

Chinese government now permits 100% foreign

ownership in most industries and the number of 

new wholly owned foreign subsidiaries surpassedthat of equity joint ventures for the first time in

1998 (Bjorkman and Lu, 2001).

A third driving force comes from the growingneeds of the profitable enterprises themselves as

part of their development strategies. MNCs can

bring the much-needed capital, advanced technol-

ogy and managerial techniques to China through

acquisitions (Jin, Qi and Li, 2003). It is true that

most of the technologies introduced to China by

MNCs may not be state of the art, nonetheless,

they are still better than those available to most

enterprises in China. The introduction of these

technologies into China will have a spill-over effect

and promote the upgrading of technology by other

enterprises in the same industry in China (Liu,2000). A fourth motive for SOEs to be acquired by

foreign firms is to attract foreign capital and to

develop international markets by association with

well-known international brand names.

The driving forces for international acquisitions

from the Chinese government and industries, the

policy change and the resultant investment envir-

onment have to some extent shaped the patterns of 

acquisitions by foreign investments.

Patterns of international acquisitions in China

There are three major characteristics of acquisi-

tions of SOEs by foreign investments. A first

characteristic is that foreign investors are increas-

ing their level of investment and stock control of 

the acquired SOEs, some even become solelyforeign-owned. A second feature is that foreign

investment has been shifting away steady from

traditional industries towards the new, high-tech

and high value-added industries. There is also a

growing interest in investing in light industries

and commercial industries. A third feature is that

while foreign investment prior to the 1990s had

mainly come from Hong Kong, Taiwan, Macao

and other countries in the Asian Pacific Rim,

with relatively low level of technology and in

relatively small-scale and simple operation mode,

investors since the 1990s have been large MNCs,with larger investment projects and strategicoperations. These operations also develop a

sophisticated business chain, from product devel-

opment and manufacturing to marketing, sales

and after sale services. Establishments/offices are

set up in different geographical locations in China

for strategic purposes. Some MNCs have also set

up research and development (R&D) centres and

regional headquarters in China to complete theirChina business strategy (Jin, Qi and Li, 2003).

In the 1990s, foreign firms mainly acquired

smaller SOEs that might be average performers.Into the twenty-first century, MNCs’ M&A

activities in China were becoming more strategic.

They began to target larger and profit-making

SOEs and moved from targeting individual

enterprises to targeting the whole industry, as

the Chinese Government began to open up its

industries to FDIs. For example, in the 1990s,

MNCs acquired and gradually dominated the

drinks, cosmetics, detergent and film industries.

Since the 2000s, MNCs have been expanding

proactively into China’s rubber, pharmaceutical

and household electrical appliance industry. Theacquisition pattern also changed from   ad hoc

acquisitions to concentration acquisitions, pur-

posefully targeting key companies in the same

industry or all SOEs in the same geographical

locations. In the 1980s, MNCs entered the

Chinese market with capital and technology

assets. In the 1990s, they entered with their own

brand name products that replaced the Chinese

brands or acquired the Chinese brands and then

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replaced them with their own. This has typically

been the case in the car industry, with most of the

Chinese brands replaced by foreign ones through

international joint ventures (Liu, Bai and Yin,

2001). As legal restrictions are gradually relaxed,

international joint ventures as a common corpo-

rate mode is being replaced by wholly foreign-owned enterprises. Currently the attractiveness

for foreign investment is in M&A deals especially

in the manufacturing industry, most notably in

semiconductors and microelectronics, home ap-

pliances, electronic medical equipment, machin-

ery and services (e.g. retail and hotel).

In general, MNCs embark on M&A activities

in China to develop product market, to con-

solidate their international competitive position,

to take advantage of its cheap production costs

and to streamline the chain of supply, produc-

tion, marketing and sale in the same location (Jin,Qi and Li, 2003). There are two main reasons forMNCs acquiring SOEs. One is that they foresee

the upsurge of China’s economy and the en-

ormous market potential, therefore enter their

target industry and product market through

acquisitions. They intend to defeat their compe-

titors in order to monopolise the market and gain

scale of economy (e.g. Koda). This is the

investment type of acquisitions. The other reasonis that they consider the price of the SOEs on sale

is estimated too low, therefore they intend to buy

it and then make a profit by selling it. This is theopportunistic type of acquisition (Jin, Qi and Li,

2003), although the former seems to be more

dominant than the latter.

MNCs’ acquisition of SOEs – a win-winsolution?

Despite the push and pull factors that fuel the

international acquisition activities in China in

recent years, cross-border acquisitions may not

yield the desired benefits for the Chinese fora number of reasons. These include the likely

misalignment between the objectives of the SOEs/

Chinese government and that of the FDIs, the

skill gaps and opportunistic behaviour of the

Chinese managers in acquisition activities, and

the undue intervention from the local govern-

ment. For the MNCs, there are also a range of 

barriers in the whole process of acquisition, from

pre-acquisition negotiation, acquisition to post-

acquisition management, that prevent their an-

ticipated benefits from materializing.

Objectives alignment? 

While Chinese SOEs wish to join force with

MNCs for survival, product and technologicaldevelopment, system innovation and human

capital development, MNCs may only be inter-

ested in picking the well-performing SOEs for

acquisition rather than helping troubled SOEs to

survive (e.g. Xu, 2003). By the 1990s, MNCs

targeted mainly the well-performing large SOEs

for acquisition. They were keen to be the

controlling party by becoming the sole owner of 

the acquired enterprise or controlling at least 50%

of its stocks (Chen, 1999). They tend to leave the

debt to the Chinese side and may also sell their

stocks suddenly to make a quick profit. Profitsmay be transferred out of China instead of being

re-invested for development. It has been reported

(Chen, 1999) that MNCs imported out-of-date or

second-hand equipment into China as being new,

or quoting a higher than actual price. It has also

been noted (Chen and Wang, 2003) that in the

acquisition negotiation process, the proportion of 

share holdings between the two parties is often the

focus of disagreement. There tend to be major

differences between the strategic objectives of largeSOEs and that of the acquiring MNCs. Mean-

while, some SOEs are the blue-chip companies of their industry and represent the Chinese state of 

the art in the international arena. Surrendering

ownership and control to MNCs may have a

negative strategic consequence to the Chinese

industry. This is particularly the case in industries

of strategic importance such as automobile,chemical and petroleum, electronics, metallic,

and aviation where large SOEs concentrate.

Even when the Chinese side owns the majority

of the shares, the MNC partner makes the

decision about what technology to introduce to

China. On many occasions, only old technologyis introduced to China; for example, the US

Government strictly forbids the export of ad-

vanced technology to other countries. Therefore,

most of the R&D activities for product develop-

ment are carried out in the United States. This

makes it difficult to materialize the wish of the

Chinese acquired enterprise to upgrade their

technology through acquisition by an American

firm (Zhan, 2003). As a result, the enterprise in

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China only serves as a cheap site for the MNC to

manufacture and assemble low value-added

components with the intensive use of a semi-

skilled labour force with little opportunity for

upskilling, a situation similar to that in other

Asia-Pacific developing countries such as Malay-

sia (Frenkel and Peetz, 1998; Wilkinson   et al .,2001). In addition, the incentive for firms to

innovate or for MNCs to introduce state-of-art

technology into China may be reduced when

technology spill-over and unintentional leakage

of technical know-how enable the Chinese to

imitate the product and technology.

FDIs have brought only limited R&D activities

to China, a situation worsened by the fact that

some MNCs abolished the original Chinese R&D

departments after the acquisition and rely on the

MNC’s own R&D centre abroad for technical

support. This reduces China’s development ca-pacity. This is especially the case in the IT andtelecom industry in China, which has the highest

proportion of MNC investments and product

market share. MNCs control the majority of the

shares of the enterprise in order to maintain trade

secrets and market dominance. To a large extent,

MNCs have monopolized the development of the

IT and telecom industry and dominated the

product market in China, quashing the opportu-nity for survival and development of domestic IT

and telecom enterprises (Wang and Liu, 2002).

Another case in point is that of the film-manufacturing industry. Koda and Fuji’s price

war in China has pushed the rest of the (Chinese-

owned) photographic film manufacturers close to

bankruptcy. Koda and Fuji have now mono-

polized the film market in China and if one of 

them withdrew from China or retreated from the

price war, it would undoubtedly lead to a price

increase. This is in addition to the financial and

social burdens that are transferred to the state by

MNCs through redundancy of surplus labour.

At a macro level, the monopoly of industry by

MNCs may tip the balance of the industrial sectorsin China. The monopoly of MNCs of an industry

will also suppress the growth of domestic enter-

prises. Once the industry is open to foreign

investment, the government will have little power

to influence the business strategy of the MNCs

operating in that industry, thus reducing the

Government’s capacity to oversee the strategic

balance of that industry in relation to the whole

economic structure of the country. At the corpo-

rate level, the MNC establishment in China may

become more dependent upon the rest of the MNC

in its new international labour division in terms of 

product development, marketing and sales, and

concentrating solely on manufacturing (Liu, 2000).

This is reflected in the fact that many MNCs

control the most senior positions in China in orderto implement their global strategy, and force the

Chinese managers into lower positions, although

many MNCs have started to localize their profes-

sional and managerial staff.

Managerial skills and behaviour

The low effectiveness of acquisitions of SOEs has

been a focus of academic debate in China.

However, one fundamental problem has often

been neglected, that is, the role of senior managers

in SOEs in M&A activities. A number of problems may occur during the decision-making

and negotiation period of the acquisition that

may have a negative effect on the target enter-

prise. One relates to the competency and the other

the behaviour of the managers. Chinese managers

have often been criticized for their lack of 

managerial skills and opportunistic behaviour in

general (Cooke, 2005). Similar problems appear

to exhibit themselves in acquisition pricing,

negotiation and post-acquisition integration.Entrepreneurs use M&As as a business strategy

to advance their own interest instead of that of theenterprise. This includes financial benefits (e.g.

salary, bonuses and stocks) and non-financial

benefits such as power to control, personal prestige

and reputation. The absence of an independent

asset-evaluation system provides an opportunity

for senior managers to use their position to reducethe SOE asset value for acquisition to bargain for

their new position and terms and conditions in the

new organization (Cai and Shen, 2002). This is

evidenced by a research report published by the

Shanghai Stock Exchange Institution, which re-

vealed that many restructured enterprises involvingthe transfer of ownership tended to make a profit

in the first year but made a loss from the second

year (Cai and Shen, 2002). This indicates that

short-term profit making may be the top priority

of senior managers instead of long-term develop-

ment of the enterprise (Cai and Shen, 2002).

The lack of a sophisticated asset-evaluation

system and the absence of an open and compe-

titive tendering for the targeted SOEs may also

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lead to a heavy loss of state assets. While tangible

assets may be valued at too low a price, intan-

gible assets, including tacit knowledge, special

skills, brand name, reputation, image and tech-

nical know-how, are often not included in the

evaluation. The Chinese have yet to learn how to

protect their intellectual property rights throughpatent rights. Other loss of intangible asset

includes the loss of famous domestic brand

names in recent years following the acquisition

by MNCs who subsequently replace well-estab-

lished Chinese brands with foreign brands. Many

Chinese brand names had national reputations

and had been established after years of hard work

(Jin, Qi and Li, 2003).

Efficiency in negotiations is also low from the

Chinese side, often involving many people and

numerous meetings. The government officials

interviewed described the negotiation process of one of the acquisitions they were involved in as amarathon. In addition to the initial intentional

discussions before the acquisition negotiation

formally started, the Chinese negotiation team

held over ten internal meetings, each meeting

involved at least half a dozen people. More

than 170 people/times from the Chinese team

were involved in the actual negotiation meetings

with the MNC representatives. By contrast, theMNC only sent two representatives throughout

the negotiations, with the senior manager only

showing his face on a couple of the most im-portant occasions. The two MNC representatives

had clear idea of what the company wanted and

were able to stick to their agenda throughout the

negotiations in spite of the repeated attempts

from the Chinese representatives to soften those

demands. In the end, the two parties signed the

deal with plenty of concessions from the Chinese

side, with the MNC basically getting what they

wanted. In addition, all the logistic costs (e.g.

chauffeured transport, banquets and gifts) of 

these meetings were born by the Chinese SOE, as

part of the Chinese hospitality and face-gainingexercise. According to the government officials

interviewed, this is just a typical example of 

negotiation with foreign investors. The reason

why so many people were involved from the

Chinese side is that nobody wants to take

responsibility for the decision in case it goes

wrong and yet everybody (especially those from

the local government) wants to be involved and

have a say in it.

Intervention from local governments

A unique feature in the (international) M&As of 

Chinese SOEs is that the local governments tend

to have a close and direct involvement in the

decision-making and negotiation process. In

principle, SOE assets belong to all people andthe state, local governments are entrusted to look

after these assets from an administrative point

of view. Enterprise managers are employed

to manage the assets from an operations point

of view. Therefore, enterprise managers cannot

make decisions in the transfer of asset ownership

without authorization. Because of this complex

ownership and governance structure of SOEs,

local governments tend to have heavy involve-

ment in SOE M&A activities. Local governments

have a vested interest in the asset of the SOEs and

are reluctant to give enterprise managers fullautonomy to handle the M&A activities. In theabsence of a well-developed capital market and

M&A agency bodies, the M&A of SOEs will be

difficult to complete smoothly without the sup-

port and participation of the local government.

Many methods commonly used in M&As in

developed countries are not applicable in China.

In addition, an M&A agency system centred on

investment banks is not yet established. Invest-ment banks have not been able to provide

financial consultancy services to the enterprises

involved. Under those circumstances, local gov-ernments have to step in to broker the deal. The

positive role of the local governments in M&A

activities therefore includes that of an agency,

monitoring and harmonization role. Moreover,

the administration of SOEs in China is segmented

by regional administration and industrial admin-

istration. Cross-region and cross industry M&As

will disrupt the   status quo   and require a new

balance of interests. The involvement of the local

governments will help oversee the flow of assets

and the rebalance of the interests of different

administrative regions and industries.However, the direct and often parochial inter-

est of local governments in SOEs also creates

problems that compromise the interest of the

enterprise concerned. For example, local govern-

ments may be keen to get rid of the burden of 

poor-performing SOEs, and quote a low price for

acquisitions. Some local governmental officials

may be eager to establish their own performance

record and therefore cut corners to make it easy

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for the MNCs to acquire their targeted SOEs.

Tax regulations are sometimes interpreted gener-

ously by the local tax authorities in order to

attract FDIs. A minority of government officials

are also involved in corruption and benefit from

the low pricing of SOEs (Liu, 2000). As Kracht

(2002) points out, two more forces – governmentand   guanxi   – need to be added to Porter’s five-

forces system of analysing the different market

forces concerning competitors, customers, sup-

pliers, substitutes and new potential competitors

as key factors determining success.

Barriers to FDIs’ acquisition of Chinese SOEs

While the intervention of the local governments

and the opportunistic behaviour of some man-

agers may be to the advantage of the MNCs,

there are a number of barriers that make theiracquisition activities a difficult task which may

dampen enthusiasm for acquisitions from FDIs.

First the existing administrative system, as

discussed above, posts a range of related admin-

istrative problems and makes it very difficult to

carry out cross-region and/or cross-industry

acquisitions. These problems include, for exam-

ple: taxation problems (based on same region,

same industry and same fiscal level) and banking

problems (bank loan based on region). Theseproblems affect mainly those MNCs that are

already in China if they wish to acquire SOEsin another region rather than those wishing to

enter China through acquisitions. Second, FDIs

may encounter difficulties in selecting SOEs for

acquisition because of the lack of information in

the market and the lack of good SOEs in the

stock market because the majority of SOEs havenot yet reached the minimum standard require-

ments for being listed in the stock market (Wang

and Liu, 2002). These problems are in part

caused by the fact that the stock market in China

is not well established and there is insufficient

transparency and information flow.Third, there is generally a lack of clear

regulatory guideline related to M&As, although

this situation is being addressed by the Chinese

government. For example, the State Restructuring

Regulations, enacted in January 2003, set out the

requirements and procedures for the approval of 

the restructuring of SOEs into foreign-invested

enterprises. This is followed by the promulgation

of the M&A Regulations in March 2003, which set

out a framework for foreign investors’ acquisitions

of all types of domestic enterprises and the

restructuring of such enterprises upon acquisition,

including SOEs. Thus, the M&A Regulations will

also apply to the acquisition of SOEs, although

conflicts may arise between the two new regula-

tions (China Legal News, November 2003). In lightof the absence of a clear set of legal or adminis-

trative procedures for M&A approval, M&A

parties often have to rely heavily on administrative

approval, involving the authorization of different

administrative departments (Jin, Qi and Li, 2003).

This practice carries an inherent bureaucratic low

efficiency (Cooke, 2003). In addition, the enforce-

ment of business and employment laws in China is

not without problems as a result of variations in

the interpretation of the laws and the often-lax

approach of officials to enforcing the laws (Cooke,

2002; Warner, 1996).Fourth, as was discussed earlier, an indepen-

dent system consisting of financial and legal

agency bodies has yet to be developed in China to

provide professional services for M&A activities.

While large MNCs can tap into their global

corporate base of expertise to overcome this

deficiency, small foreign businesses wishing to

expand their operations in China will find it

difficult, if not impossible, to find their own wayin this jungle.

The growth of international acquisition activ-

ities in China creates a new set of requirements forand problems in human resources. For example,

there is a lack of managerial talent in acquisition

deals; there is also a deficit in professional staff 

familiar with acquisition businesses in the existing

legal and banking industries to enable these

institutions to develop M&A businesses. Simi-

larly, post-acquisition integration will trigger

further challenges to the management that are

specific to the Chinese institutional environment.

It is to these issues that we now turn.

Implications of acquisitions for HRM inChina

Western literature on the implications of M&As

for human resource management has highlighted

the ‘human’-related challenges to post M&A

integration (e.g. Cartwright and Cooper, 1993;

Hubbard and Purcell, 2001; Marks and Mirvis,

1982; Morrison and Robinson, 1997; Nikandrou,

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Papalaxandris and Bourantas, 2000; Robinson

and Rousseau, 1994; Schraeder and Self, 2003;

Schuler and Jackson, 2001; Schuler, Jackson

and Luo, 2004; Stahl   et al ., 2004; Weber, 1996).

They often point to issues such as cultural

differences, communication problems, workforce

morale, trust, management style and organiza-tional politics as barriers to integration that may

contribute to M&A failures. They point out that

financial benefits anticipated from M&As are often

unrealized because of conflicts of organizational

cultures and that cultural integration remains a

major managerial challenge (Cartwright and

Cooper, 1993). Marks and Mirvis (1982) showed

that HR issues accounted for between one-third

and half of all merger failures and ‘there is no

indication that things have improved in the last

two decades’ (Boxall and Purcell, 2003, p. 220).

While these Western lessons may have genericimplications for M&As in China, cross-borderacquisitions in China exhibit their own character-

istics of HRM that are unique to the Chinese

context. As we can see from Tables 2 and 3, MNCs

and JVs are making up an increasingly large

proportion of businesses and employment in China

whose employment policy and practice has a

strong bearing in reshaping the pool of human

resources and the experience of work for asignificant proportion of workers. Cross-border

acquisitions in China therefore have both positive

and negative impacts on HRM in SOEs specificallyand in HRM in China more generally. These HR

implications stem from changes required as a direct

result of the acquisition itself and as a longer-term

HR strategy that evolves after the acquisition

under the influence of the MNC.

Job security

One immediate concern after the acquisition is

that of job security. The majority of SOEs are

overstaffed, and downsizing has been a major

initiative in the restructuring of SOEs in the last

decade. Issues related to redundancy are often thefocus of debate in acquisition negotiations. While

the MNC aims to retain only a minimum number

of employees selected on the basis of competency,

the SOE concerned and the local government

would like the MNC to retain as many employees

as possible and offer a generous redundancy

package in order to reduce the burden of the state

and minimize the negative social impact (Jin, Qi

and Li, 2003). In some cases, however, it is not   T   a    b    l   e    3 .

    I   n    f   o   r   m   a   t    i   o   n   o   n    f   o   r   e    i   g   n    i   n   v   e   s   t   m   e   n   t    i   n    C    h    i   n   a    (   e   n    d   o    f    2    0    0    3    fi   g   u   r   e   s    )

    I    t   e   m

    N   o .   o    f

   e   n    t   e   r   p   r    i   s   e   s         *

    G   r   o   s   s    i   n    d   u   s    t   r    i   a    l

   o   u    t   p   u    t   v   a    l   u   e

    (    b    i    l    l    i   o   n   y   u   a   n    )         *         *

    V   a    l   u   e  -   a    d    d   e    d

   o    f    i   n    d   u   s    t   r   y

    (    b    i    l    l    i   o   n   y   u   a   n    )

    T   o    t   a    l   a   s   s   e    t   s

    (    b    i    l    l    i   o   n   y   u   a   n    )

    S   a    l   e   r   e   v   e   n   u   e

    (    b    i    l    l    i   o   n   y   u   a   n

    )

    S   a    l   e   s   p   r   o    fi    t

    (    b    i    l    l    i   o   n

   y   u   a   n    )

    V   a    l   u   e  -   a    d    d   e    d

    t   a   x   p   a   y   a    b    l   e

    (    b    i    l    l    i   o   n   y   u   a   n    )

    E   m   p    l   o   y   m   e   n    t

    (    i   n   m    i    l    l    i   o   n

   p   e   r   s   o   n   s    )

    A   v   e   r   a   g   e   a   n   n   u   a    l

   w   a   g   e    (   y   u   a   n    )

    N   a    t    i   o   n   a    l    t   o    t   a    l

    1    9    6 ,    2

    2    2

    1    4 ,    2

    2    7

    4 ,    1    9    9

    1    6 ,    8

    8    1

    1    4 ,    3

    1    7

    8    3    4

    5    4    9

    5    7 .    5

    1    4 ,    0

    4    0

    S    t   a    t   e  -   o   w   n   e    d   a   n    d   s    t   a    t   e  -    h   o    l    d    i   n   g

   e   n    t   e   r   p   r    i   s   e   s

    3    4 ,    2

    8    0

    5 ,    3

    4    1

    1 ,    8    8    4

    9 ,    4

    5    2

    5 ,    8

    0    3

    3    8    4

    3    0    3

    2    1 .    6

    1    4 ,    5

    7    7

    E   n    t   e   r   p   r    i   s   e   s   w    i    t    h    f   u   n    d   s    f   r   o   m

    H   o   n   g    K   o   n   g ,

    M   a   c   a   o   a   n    d    T   a    i   w   a   n

    2    1 ,    1

    5    2

    1 ,    7

    4    3

    4    6    8

    1 ,    6

    2    2

    1 ,    6

    7    5

    9    3

    4    5

    7

    1    4 ,    6

    9    1

    F   o   r   e    i   g   n  -    f   u   n    d   e    d   e   n    t   e   r   p   r    i   s   e   s

    1    7 ,    4

    2    9

    2 ,    6

    9    3

    6    9    2

    2 ,    3

    0    4

    2 ,    6

    8    5

    1    8    5

    7    4

    5 .    6

    1    9 ,    3

    6    6

    S   o   u   r   c   e   :   a    d   a   p    t   e    d    f   r   o   m    C    h    i   n   a    S   t   a   t    i   s   t    i   c   s    Y   e   a   r    b   o   o    k ,

    2    0    0    4 .

    N   o   t   e   s   :         *    F    i   g   u   r   e   s   r   e    f   e   r    t   o    i   n    d   u   s    t   r    i   a

    l   e   n    t   e   r   p   r    i   s   e   s   a    b   o   v   e    d   e   s    i   g   n   a    t   e    d   s    i   z   e  –   w    i    t    h

   a   n   a   n   n   u   a    l   s   a    l   e   s    i   n   c   o   m   e   o    f   o   v   e   r    5   m    i    l    l    i   o   n

   y   u   a   n .

         *         *    T    h   e   g   r   o   s   s    i   n    d   u   s    t   r    i   a    l   o   u    t   p   u    t   v   a    l   u   e    i   s   c   a    l   c   u    l   a    t   e    d   a    t   c   u   r   r   e   n    t   p   r    i   c   e   s    (   o   r    i   g    i   n   a    l   n   o    t   e   s    f   r   o   m    C    h    i   n   a    S   t   a   t    i   s   t    i   c   s    Y   e   a   r    b   o   o    k ,    2    0    0    4 ,   p .

    5    1    3    ) .

S114   F. L. Cooke

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the most competent employees who are retained.

As one senior manager interviewed said:

‘In our post-acquisition restructuring this time, the

key is to select and retain the most suitable

employees. They are not necessarily the most

competent ones, but the most suitable ones. We

then help them to get into their role and startperforming as soon as possible. During the

redundancy, we don’t normally retain people

through demotion. In other words, those who are

not selected for new managerial posts will have to

leave the firm. It is difficult for demoted employees

to settle down in their new posts. They tend to look

for better opportunities elsewhere and then leave

once they find one. For those who stay, they may be

there just to mark time rather than giving of their

best to the firm, and we don’t want these people

because they don’t add any value to the firm’

(Personnel Manager of TyreCo).

Job security level in MNCs and JVs is generally

lower than that in the SOEs, especially for the

older workers, with fixed-term employment con-

tracts being the norm. The aggressive competitive

strategy of some MNCs also causes ongoing job

losses. For example, it was reported that in 1997,

Kodak launched a price war with Fuji in China.

This has led to the redundancy of 20 000

employees in 1997, followed by another 3400 in

1999 and 3000 in 2001 (Zhan, 2003).

Training and development

Acquisition creates immediate needs for training,

as the Marketing Manager of PharmaCo observed:

‘We needed to provide training to our marketing

and sales people, to inform our suppliers and

customers why the acquisition took place and what

the company’s new business strategy and policy

would be; whether or not and/or how they might be

affected. We sent our people to their companies to

answer their queries arising from the acquisition in

order to allay their worries.’

More generally, MNCs and JVs in China provide

a higher level and variety of health and safety and

skill training opportunities to their employees

than most other forms of ownership (Cooke,

2005). Many blue-chip MNCs and JVs also pride

themselves on employee training and develop-

ment. However, it should not be taken for

granted that all MNCs and JVs in China will

provide the level of skill training that is antici-

pated of acquisitions. As was noted earlier, the

majority of FDIs is mainly in the manufacturing

industries, relying on intensive labour rather than

advanced technology. The lack of R&D invest-

ment or activities may also reduce the need and

opportunity for Chinese technical staff. Another

negative impact is that the entrance of MNCs intoChina increases the employment cost of Chinese

professional and managerial staff, especially in

light of the wage war to compete for the rare

supply of local talent as skill supply increasingly

lags behind business growth. This in turn reduces

the workforce stability and organizational compe-

tence of domestic Chinese firms.

Pay, performance management and work

intensification

All three managers interviewed admitted thatwage income of their employees has generallyincreased after the acquisition, reflecting the fact

that, in China, wage levels are highest in foreign-

funded enterprises (see Table 3). This is in part

because foreign-funded businesses are required

by regulations to pay wage at a level no lower

than the average wage of the same industry in the

local area. However, the wage increase is

accompanied by longer working hours and muchtighter performance control that is closely related

to individual and collective productivity. All

three enterprises have abolished their senioritypay system and implemented a much flatter

grading system mainly linked to performance

level and the position of the individual. Work

intensification has been the case for both

managers and workers.

Employment regulations and labour disputes

There are a number of employment-related

regulations that MNCs need to follow, at least

in principle, during and after the acquisition.

These include, for example, the State Restructur-ing Regulations, the Labour Law of China (1995)

and the Trade union Law (amended in 2001). The

State Restructuring Regulations require the SOE

being re-organized to first seek the opinions of 

the staff and Workers Congress of the SOE. In

addition, the Labour Law provides a general

framework of labour protection in terms of 

recruitment and dismissal, pay, working time,

training, social security and health and safety

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protection and so on, which applies to all employ-

ing organizations in China. However, in contrast

to their relatively higher level of pay and training

provision than SOEs, MNCs and JVs tend to be

more pragmatic in their observation of the

employment regulations, and there are frequent

violations of certain aspects of the regulations,notably in working hours and social insurance.

There is a much lower level of union recogni-

tion and a higher level of labour disputes in

MNCs and JVs that are also more collectively

involved compared with the state sector. The

trade union officials interviewed admitted that

foreign investment firms were the most difficult

ones to tackle:

‘They will not say no to you when you ask them to

set up a trade union, they will say, ‘‘yes, we are

preparing to set one up’’. Two years later, they are

still ‘‘preparing’’ for it. Some of them who would

not set up a trade union even put up a sign at the

gate of the factory, saying: ‘‘Those who wish to join

the trade union should go to such and such place to

register’’. Nobody dare to go for fear of job loss.

(Deputy Chairman of the Trade Union Head-

quarters)

Although all three enterprises still retained the

trade unions that were established during their

SOE years, managers interviewed generally ob-

served that the unions hardly played any role in the

acquisition negotiation and subsequently played aless active (welfare) role after the acquisition, as if there had been a   de facto   trade union de-

recognition. This is not necessarily a result of the

foreign partners’ unsympathetic/hostile attitude

towards unionism. Rather, it may reflect the limited

role of the trade unions in major decision-making

in the enterprises (even though this is their right as

specified in the Labour Law) and the ensuing

ambiguity of organizational identity felt by the

workforce.

Adoption of Western management techniques and 

workforce resistance

MNCs are often regarded as a potential source of 

convergence in international HRM in that they

are expected to use their international perspective

to promote the diffusion of ‘best practice’ HR

techniques (Evans, Pucik and Barsoux, 2002;

Rubery and Grimshaw, 2003). This appears to be

the case in China, but only recently (Bjorkman

and Lu, 2001; Lasserre and Ching, 1997) after

they were granted more autonomy to operate in

China. One of the most important consequences

of foreign involvement in Chinese joint ventures

has been the introduction of a more systematic

management approach in that the systems were

defined in writing, standardized and operated ona regular basis (Child, 1994). Braun and Warner

(2002) found that a majority of MNCs in their

sample have placed a high strategic importance

to the HRM function and have attempted to

introduce internally consistent high performance

HRM practices. Bjorkman and Fan (2002)

further observed that the MNCs in their sample

had HR practices that tended to be more closely

in line with the ‘high performance HRM system’

as defined by Western HRM scholars than with

the personnel practices found in local Chinese

companies. This is in spite of the fact that theseHR ‘best practices’ were mainly Western prac-tices transferred and adapted to suit the Chinese

environment.

However, MNCs and JVs’ HR policies are not

necessarily embraced by their employees with

enthusiasm. For example, an earlier study by

Child (1994) found that, in the 30 JVs studied,

there had been various attempts to introduce

Western personnel tools with varying, but neversignificant, degrees of success. A common com-

plaint amongst Western managers was that

Chinese staff were reluctant to accept personalresponsibility (Child, 1994). Another earlier

study (Ilari and Grange, 1999) on a Sino-Italian

 joint-venture motor company in southern China

also revealed that the Italian partner found it

difficult to transfer its firm-specific advantages

to the Chinese ground because of the cultural

differences in the two employment systems.

Legewie’s study (2002) on issues related to the

control and co-ordination of Japanese subsidi-

aries in China further highlights the problems of 

an expatriate-based management system in trans-

ferring a typical Japanese firm’s strength, namelysocialization and networking, abroad and in

building up an efficient transnational network

of global operations. Nonetheless, there is

evidence to suggest that effort is made by MNC

managers to reconcile the twin pressures for

control and adaptation rather than satisfying one

at the expense of the other (Child and Heavens,

1999). A discernible trend is that Western HR

policies are gradually being accepted and inter-

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nalized by the younger generation of the Chinese

workforce who can no longer seek job security in

the state sector. This is reflected in the fact that

MNCs and JVs are often perceived to be the

‘most popular employers’ (Beijing Youth News-

 paper, 15 November 2002).

In all three enterprises, Western managementtechniques have been implemented, notably that

of performance-related pay, ISO 9000 quality

series recognition, team working, problem-

solving and plant care. This finding is similar

to that of Evans, Pucik and Barsoux (2002).

However, according to the managers interviewed,

these initiatives have received only moderate

enthusiasm from the shopfloor workers, who

displayed compliance rather than commitment

to them. What they seemed to resent most was

the performance-related pay system and the

secrecy of bonuses (in BreweryCo, the systemhas changed three times because of the workers’complaints). This is one of the areas where the

cultural difference between the West and the East

is most distinct. The difference in organisational

cultures has often been cited as one of the

important barriers to post-acquisition integra-

tion. MNCs acquiring Chinese SOEs are likely to

encounter even more difficulties in the integration

because of the differences of national culture.

Post-acquisition integration and harmonization of 

terms and conditions

Unlike Western firms that may face fierce market

competition and hostile bids, there is a relatively

lower level of competition in China, which allows

organizations more time for post-M&A adjust-

ment. While M&A failure rate tends to berelatively high in the Western economy, China

may have a lower M&A fatality rate in part

because MNCs are considered to be desirable

employers and in part because of the high

unemployment rate that may suppress any work-

force discontent for fear of job losses. In anycase, the SOE concerned may be in a very bad

shape in the first place and any change may

inject new life, or at least hope, into the

organization. However, the extent to which

anticipated improvements have been made for

those that were profit-making prior to acquisi-

tions is unknown.

The discontent caused by the gaps in terms and

conditions between expatriate and Chinese man-

agers tends to be a problem. As more and more

Chinese managers and professionals have ac-

quired management know-how and technical

competencies that were once held by expatriate

managers and professionals when foreign firms

first entered China, this closing gap of knowledge

increases the bargaining power of local managersand professionals, who are beginning to feel a

sense of distributional injustice arising from the

differentials between expatriates and local Chinese

(Leung, Wang and Smith, 2001) and demand

terms and conditions similar to those enjoyed by

expatriates. For example, Tsang’s study (2001)

revealed that a third of the Chinese managers

studied considered that the pay gap between the

Chinese managers and the expatriate managers

was unfair because their skills and efforts were

similar. Expatriate managers also saw the pay gap

as a barrier to their integration with their Chinesecolleagues, who resent pay differentials.

In all three enterprises, only a small number of 

expatriate senior managers and technical staff were

based in the Chinese plant, and these tended to pay

regular visits to their home country. According to

the managers interviewed, there was a level of 

resentment to their control/intervention from both

the shopfloor workers and the Chinese managers.

In one enterprise, the foreign partner had to rollback the number of expatriates and the number of 

management initiatives, particularly to do with the

new pay system, and let the Chinese managers takecharge. Integration between the expatriates and

the Chinese and harmonization of the terms and

conditions between the two groups appear to be an

important issue in post-acquisition management.

Conclusions

This article has provided an overview of the

driving forces for the acquisition of Chinese SOEs

by foreign investors. These forces come from both

the political and economic needs from the Chineseside as well as FDIs’ strategic intent. While cross-

border acquisition activities have been increasing

and spreading into more and more industries, there

are a number of pitfalls in the process that may

prevent the anticipated benefits from being realized

for both sides involved and for China at a macro

level. These pitfalls may also be a source that

discourages potential foreign investors from ac-

quiring Chinese firms. Importantly, cross-border

Acquisitions of Chinese SOEs by MNCs   S117

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acquisitions trigger a range of implications for

human resource management that are unique to

the Chinese context.

Practical implications

This article has a number of practical implica-tions. For foreign investors, the infrastructure for

M&A deals in China is not yet developed and

they should rely on their own professional

support for advice. However, the entry of foreign

banks in the Chinese finance and banking

industry will undoubtedly facilitate the develop-

ment of an independent and professional finance

agency system to provide services for M&A

activities. There are also complicated and poten-

tially conflicting laws in China that need to be

followed when operating in China, in spite of the

fact that the interpretation and observation of them tend to be lax. Intervention from the local

governments also tends to be relatively frequent,

which can be a source of support as well as

interference, causing non-market behaviour. Care

should also be taken in implementing HR

strategies in order to minimize cultural clashes

and inter-group disputes. For the Chinese side,

the primary motive for foreign investors to

acquire Chinese enterprises is to grow their

business and gain competitive advantages instead

of the economic and social wellbeing of China,

although this may be a coincidental outcome.There is an urgent need for the Chinese to acquiremanagerial skills in handling acquisition negotia-

tion and post-acquisition management. The

Chinese government also has the dilemma

between, on the one hand, the need to control

the way MNCs should carry out their acquisi-

tions in China so that they are not harmful to the

balance of the macro economy of the country

and, on the other, the need to attract FDIs tocreate employment and economic growth. With

China gradually improving its policies, regula-

tions, taxation and credit mechanism, the level of 

international acquisition is likely to grow, sup-

ported by international capital back-up and the

growth of healthy Chinese enterprises.

Research implications

As for research implications, there have been few

empirical studies on international acquisitions in

China, although there have been several major

studies of the management of joint ventures. As

this is a relatively new phenomenon, its impact on

China in terms of its human resource development,

R&D and technological advancement remains to

be seen. With the limited number of companies

that are listed in the stock market, full assessmentof these impacts are likely to be difficult because of 

the lack of statistical information on non-listed

ones. However, one can perhaps reasonably

predict that the failure rate of international

acquisitions may be lower in China because MNCs

enter the Chinese market to take advantage of the

cheap production cost and to develop a new

market rather than trying to achieve cost savings

through synergy of two organizational systems

through a high level of integration and standardi-

zation. Therefore the need for cultural integration

may be less compelling for the acquired andacquiring party. It would be useful to carry outinternational comparative studies to explore simi-

larities and differences of international M&As in

different settings. Equally, more research is needed

on cross-border M&As in China because its

context is unique, and common analysis of the

M&A phenomena in the Western economies may

not provide an adequate analytical tool to make

sense of what takes place in China. As Baker andMcKenzie (2003) observe, Western-style mergers

between two companies are uncommon in China.

More importantly, research is needed to assess theunique impact of M&As on HRM in the Chinese

context in order to establish how M&As may

affect employees’ loyalty, identity, trust, commit-

ment and motivation at work, how these psycho-

logical feelings are managed and to what effect,

and what the implications are for managerial skills.

These research studies should take into ac-

count the diversity of foreign ownership and HR

strategy in China. Bartlett and Ghoshal (1989)

classify MNCs into four categories: multi-domes-

tic companies that are organized on a decentra-

lized basis; international organizations that areorganized to exploit the parent company’s know-

how and knowledge, with ‘core competence’

centralized and others decentralized (Leong and

Tan, 1993); global corporations that treat the

world market as an integrated whole and operate

a tightly centralized management system with

limited delegation to local subsidiaries; and

transnational corporations that combine aspects

of each of the first three types in order to be

S118   F. L. Cooke

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sensitive to local conditions, to develop compe-

titive strategies at a global level and to generate

and share knowledge throughout the corporation

(Rubery and Grimshaw, 2003). The extent to

which each of these typologies of MNCs is

present in China is unknown. However, it can

be reasonably suggested that the implications of each type for the development of China’s

competitive advantage as a nation and the

adoption of human resource strategy are likely

to differ. This may be further complicated by the

evolution of the MNC itself as part of their

business life-cycle and the development of their

international profiles. In the case of China, there

are different forms of foreign-invested enter-

prises, each carrying its own characteristics that

reflect its home country and parent company

influence, the MNC’s business strategy and the

influence of local institutional forces. Lastly, thestudy of international M&As is necessarily amulti-disciplinary and inter-disciplinary under-

taking (Cartwright and Cooper, 1995; Stahl  et al .,

2004) in order to advance our currently limited

understanding of the socio-cultural dynamics in

cross-border M&As (Stahl   et al ., 2004). This is

particularly important for China as the under-

standing of cross-border M&As in China requires

the collective work from the fields of businesslaw, economics, finance, organizational psychol-

ogy, human resource management and more.

Acknowledgements

The author would like to thank the two referees

for their helpful comments on the earlier versions

of this paper.

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Fang Lee Cooke is Professor of HRM and Chinese Studies in Manchester Business School, the

University of Manchester. She has written and published widely on issues related to human resource

management, business and employment in China. She also has a strong interest in researching on

outward Chinese investment and the employment of migrant Chinese in developed countries, and

has published  HRM, Work and Employment in China  (2005).

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