International Competitiveness of Chinese SMEs

Subject: Global Scale Management
Pages: 8
Words: 2235
Reading time:
10 min
Study level: Master

Chinese SMEs have become dominant in the global market in the past decade due to various supporting factors. This study attempted to tests how resources, country environment, industry environment, global strategy, country environment, and company characteristics enhance the international competitiveness of Chinese SMEs from Zhejiang province.

According to this study, access to finance, the legal policy, industrial clusters, and inter-firm linkages are some of the most critical factors that contributed to the growing influence of Chinese SMEs in the global market (Ping, 2018). Based on a study that was examined under the current research, access to finance is one of the most important elements defining the expansion of Chinese SMEs into the global business environment.

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A study conducted for the purpose of this research indicates that the most critical source of funding for Chinese SMEs were banks. Bank loans are comprised of either small enterprise loans, micro-enterprise loans, individual business loans, or small and micro-entrepreneur loans (Ping, 2018). Moreover, the Chinese government has planned to use different policy measures, including capital replenishment instruments or re-lending programs, to encourage small-and-medium-sized banks to give Chinese SMEs more robust credit support.

The interest rate on one-year lending funds meant for the agribusiness sector was cut by 0.25% (Ping, 2018. Thus, small commercial lenders issued loans were asked to give loans at less than 4.55% (Ping, 2018). As a result, SMEs were guaranteed cheaper loans, which encouraged them to exploit the global market with ease. Besides, China’s Macro-Prudential Assessment framework also encouraged Chinese banks to support SMEs.

For instance, all the Chinese banks that met the minimum regulatory requirements of providing inclusive financial services to SMEs were subjected to a reduced reserve requirement ratio (Lim et al., 2013). During the period in which the study was conducted, the liquidity ratio of Chinese small and medium-sized banks was over 100%, while their capital adequacy ratio was about 12%, which indicates that the local Chinese banks have the capacity to support Chinese SMEs (Global.chinadaily.com.cn, 2020).

About 64% of the country’s SMEs operating in the global environment had insufficient resources to finance their business operations under COVID-19 limitations. Some 26% of the firms surveyed invested their money in the purchase of equipment from the neighboring provinces (Global.chinadaily.com.cn, 2020). Most capital-intensive equipments were purchased from the neighboring Shanghai Province.

Linkages between companies played an important role in promoting the global competitiveness of Chinese companies from Zhejiang province. For example, more than 70% of firms in the hosiery industry in Datang, Zhejiang, relied on the local networks of firms to export their products to the international markets (Liu, Gao and Wang, 2018). Funding for most Chinese global SMEs was initially doe by the government for supporting entrepreneurship. Nevertheless, the burdensome part of doing business in China includes the acquisition of the necessary documentation needed for doing business in the global environment.

The Chinese SMEs in the world market are determined by their increased focus on technology. About 70% of the companies analyzed in this study engaged in business activities in the field of modern technology (Wang and Chin, 2019; Zhou, Mei and Chen, 2019). The capacity of Chinese SMEs to innovate played an essential role in increasing their success in the global market environment. Besides a strong commitment to continuous innovation, most Chinese SMEs that were successful in the worldwide market creates new knowledge or combines new entrepreneurial ways with existing knowledge components that supported innovation.

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The study found out that a considerable share of innovative Chinese SMEs was exploiting the global business environment, with about 24% of new Chinese SMEs that entered the international market being innovative (Zhang and Merchant, 2020). Besides, most Chinese SMEs entering the global business environment are resourceful. For instance, about 17% of new Chinese SME entrants into the global business environment were resourceful (Rialp-Criado and Komochkova, 2017; Zhang and Merchant, 2020).

The most common type of innovation adopted by the current and new Chinese SMEs in the global business environment exploited the changes within the business processes as they were designed to bring cost efficiencies. For example, about 63% of Chinese SMEs from Zhejiang were seen as low innovation companies (Ning, Sutherland and Fu, 2017). Generally, Chinese SMEs from Zhejiang province have been successful in the global business environment due to their aggressiveness towards innovation.

Local Inter-Firm Linkages

The study indicated that linkages between different firms in Zhejiang province played an essential role in increasing the representation of SMEs from Zhejiang in the world markets. In Datang, production is structured based on several SMEs around large-sized companies that specialize in a specific manufacturing trade (Tan et al., 2020).

Since they have databases that contain information from downstream and upstream manufacturers, large enterprises within the province form a strong network that connects other small firms with the outside market. For instance, the linkages among the local competitors in Datang support the hosiery market in Zhejiang province as they ensure that the supply of products is maintained. Nevertheless, the dominant Chinese interpersonal ties that dictate almost every aspect of social interaction facilitate the coordination between different competitors in the hosiery industry in Zhejiang (Hsueh and Chang, 2016).

Thus, about 50% of the Chinese SMEs in Datang province would like to have a collaborative engagement with competitors (Tan et al., 2020). Although getting market information and technology is significant in shaping collaboration between firms, most SMEs tend to neglect the short-time benefits that come with knowledge spillover to collaborate with their competitors.

Role of Local Government

The study reveals that the central Chinese government plays an insignificant role in assisting the hosiery cluster in Datang, Zhejiang. However, the local government of Zhejiang plays an important role in supporting the development of the hosiery cluster, particularly the Datang hosiery (Hu, Xu and Miao, 2020).

For instance, this study established that the collaboration between the private sector as well as the local government has greatly supported the development of the hosiery industry in Datang (Xu, 2017). However, the function of the Zhejiang local government involves the dissemination of technology, industrial planning, and the promotion of the brands developed in Zhejiang to the outside world.

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Industrial Clusters

The study has also demonstrated that industrial clusters have played a critical role in propelling the local SMEs from Zhejiang into the world market. Zhejiang province has a significant advantage, as it is adjacent to Shanghai, which is the largest town in China. Zhejiang province has established itself as a manufacturing hub in China, with 64% of firms registered in the region being manufacturing firms (Wu, Wang and Zheng, 2019).

Moreover, most businesses in Zhejiang province are privately owned, and most of them specialize in a specific manufacturing category. 78% of the SMEs operating from Zhejiang command about 30% of the Chinese market share, while 14 sectors from the province command about 10% of the global market share of the industries in which they operate. For example, necktie manufacturers in Shengzhou occupy about 50% of the global market (Wu, Wang and Zheng, 2019). Besides, Zhejiang has more than 90% of SMEs registered in China.

The success of Zhejiang as an industrial hub and home to several Chinese SMEs is because of the well-established industrial cluster. Zhejiang has specialized SMEs and regional production organizations, which have played a greater role in propelling most SMEs to the global scene. The proximity of various firms have also reduced the transaction costs and increased information sharing as well as external spillovers (Hu, Xu and Miao, 2020).

Moreover, the clustering of several SMEs within a single geographical location has increased demand and developed most SMEs, which has enhanced their chances of exploiting the global market.

The competitiveness of Zhejiang SMEs in the global market can be traced back to the early establishment of industrial clusters in the province. Several firms manufactured several related products and supplied related raw materials, which supported the development of several firms within the same industry. For instance, firms operating in the plastic industry in Taizhou formed relatively integrated production networks with other related firms in Luqiao.

Intellectual Property

China is a knowledge-based economy as many emerging SMEs obtain their competitive advantages on new technologies. In such an economy, business strategies are dynamic as an increasing number of sources of competitive advantages moves towards the acquisition of knowledge. According to Porter Brosnan, Doyle, and O’Connor (2016), the movement towards enhancing competitive advantages results in the selection of a different set of activities that can deliver a unique mix of values. Therefore, firms must develop unique capabilities to create desired unique values.

Thus, SMEs from Zhejiang rely on intellectual property to capture new world markets. This study found out that about 21% of Chinese SMEs from Zhejiang are registered brands in China, while another 7% are registered in foreign countries in which they operate (Mei, Zhang and Chen, 2019).

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The reasons for the increased globalization of Chinese SMEs from Zhejiang are similar. For example, most companies expanded into international markets due to policy deregulation in China. Although studies indicate that a large number of Chinese SMEs engage in international activities, a small of them have expanded into the global market. About 40% of Zhejiang SMEs are export-orient, while 32% are import-oriented. Moreover, about 12% have entered into cooperation with foreign firms (Mei, Zhang and Chen, 2019).

Export-oriented SMEs have been growing in recent times in Zhejiang, China. The proportion of export-oriented SMEs at the time of the current study was about 18%, which implies that Zhejiang SMEs have started to have a global outlook (Mei, Zhang and Chen, 2019). Several factors contribute to the increasing popularity of Zhejiang’s SMEs in the global market.

Besides, SMEs from Zhejiang have also produced several products that are lowly priced in the international market, which has increased the demand for those products in the global market. A secondary study to the current study revealed that most Chinese entrepreneurs from Zhejiang provide would like to exploit the global market as they sought information about the international market.

Government Policy

Government policies have also played an important role in shaping the local Zhejiang SMEs into global business players. The Chinese government has realized that SMEs play a greater role in creating employment. As a result, the government has come up with policies that support SMEs. Different provinces in China, including Zhejiang, have published various administrative rules that promote the development of SMEs. The policies have mostly focused on increasing the local SMEs’ access to the market, developmental innovation, and fiscal, monetary mix.

The National People’s Congress formulated the Small and Medium-size Enterprise Promotion Law, which was the first specialized law promoting the development of SMEs in 2003 (Li, 2018). As a result, the operational efficiencies of Chinese SMEs were enhanced. The amendment of the Securities Law and Cooperation Law in 2003 also ensured an equitable treatment of SMEs according to the law (Xu, Chen and Xu, 2017). Zhejiang province applied favorable tax laws, thereby encouraging the separation of service departments from huge manufacturing companies.

The rise of internet e-business became more adapted to the current high-efficiency logistics, thereby offering better services to several SMEs as online trading became more popular. The Zhejiang local government has also implemented several policies that favor SME expansion in the region. Those policies include the small-sized enterprise development program, the human resource development, and the credit guarantee.

Several scholars have stated that information systems play a critical role in economic growth, especially for SMEs, as SMEs play crucial roles in several economies around the world. Nevertheless, SMEs have significant differences from large firms in international markets. For example, differences emanate from the lack of complex management information systems, the quality of available information, or a less allocation of resources to information search.

Thus, the development of knowledge management, as well as organizational learning, is crucial in helping SMEs develop competitive advantages. Studies conducted among various Zhejiang SMEs in this study indicated that most Zhejiang SMEs operating in international markets have greatly applied ICT in their operations.

For example, 72% of the international SMEs from Zhejiang have websites, and more than 60% of those firms have an online delivery facility (He et al., 2020). Furthermore, most SMEs applied management information systems, which made them more competitive than others from different countries. Nevertheless, the turnover generated by online trading was insignificant.

Conclusion

SMEs play an important role in the global business environment, especially at the current times when technology has made it easy to exploit international markets. Zhejiang province is one of the most developed industrial and entrepreneurial regions in China. Thus, most Chinese SMEs from Zhejiang have begun dominating the global business environment.

The increasing influence of Chinese SMEs from Zhejiang in the international market is due to the ease of access to finance, the local legal policy, well-established industrial clusters, and inter-firm linkages. Inter-firm linkages ensure that local SMEs collaborate rather than compete in running their business operations in the international scene, which enhances global competitiveness. The local government also plays an important role in the development of international SMEs in Zhejiang province.

For instance, the Zhejiang local government undertakes several roles, including the dissemination of technology, industrial planning, and the promotion of the brands developed in Zhejiang to the outside world. In addition, the deregulation of Chinese business policies greatly empowered most SMEs in the country to exploit the international market. Finally, the Chinese government supports the development of SMEs as part of its national policy to create employment.

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