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International Business Review 16 (2007) 139–141

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Editorial

Foreign direct investment in East Asia’s transitionaleconomies: Perspectives on development and

transition

Foreign direct investment (FDI) activity in East Asia’s transitional economies, especiallyChina and Vietnam, has burgeoned in recent years. The growth trajectories of thesecountries has kindled foreign investor interest, as have new business opportunities arisingfrom the liberalisation of these markets and the steady rise of a larger consumer base. Asone might expect, the scale of academic research on this phenomenon has mirrored theincreased interest by multinational enterprises (MNEs), with a fairly considerable volumeof research now in progress. This special issue of International Business Review provides awindow for a cross-section of this research.

The six excellent papers in this special issue can be grouped into three sets of issues. Thepapers by Buckley et al. and Giroud are focused on the impact of TNCs on the hosteconomies, especially in terms of knowledge transfer through spillovers and othermechanisms; Indro and Richards and Ma and Delios, on the other hand, examine TNCs’choice of location within a host country (China) or between host countries (in SoutheastAsia), as well as mode of entry and ownership structure; while Demir and Soderman andCheung and Leung assess TNCs’ expansion and corporate development strategiessubsequent to the initial entry.

These are salient and important issues, and all of these papers provide interesting,valuable and relevant insights. In addition, as a unifying theme, the authors’ were askedwhether ‘transition’ had any effect on the development path of the economies in question(and, by extension, similar countries the world over) or on the strategies or behaviour ofMNEs prior to, or after, entry. All of East Asia’s transition economies are developingeconomies (including China and Vietnam which are the main transition economiesexamined in this volume), but not all developing countries are in transition from a centrallyplanned to a market system.1 Unfortunately, many researchers tend to ignore thisdistinction, sometimes treating concepts such as ‘developing’, ‘transitional’ and ‘emerging’as being conterminous.

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.ibusrev.2007.03.001

is fair to say that many developing countries are transitional in a similar vein. For example, in many

te-owned enterprises are—or have been—a significant element of the economy. These countries

major emerging players on the world scene, for instance, India, Mexico and South Africa. This is an

pect which warrants further examination.

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The findings of these papers on the theme of transition and development are interestingand broadly coherent. Buckley et al., focusing on knowledge transfer through jointventures between state-owned enterprises (SOEs) and MNEs argue that China’s status as atransition economy has imparted two advantages. First, its industrialisation under acentrally planned system means that it had a basic industrial structure suitable for furtherdevelopment in its transition to a market economy. Secondly, SOEs for all their initialinefficiencies were, or became, suitable conduits for knowledge transfer, throughadaptation and learning in joint ventures (JVs) with MNEs. However, they also argue,it is possible for non-transitional developing countries—e.g. the Republic of Korea—toestablish appropriate or analogous systems to further their development process. Incontrast, Giroud, who compares backward linkages between local firms and MNEs inVietnam (another transition economy), argues that many Vietnamese government policiesare stifling the small, private companies essential to establishing viable linkages with localsubsidiaries of foreign enterprises. This may be precisely because the government issupporting SOEs, but to the detriment of other essential parts of the economy (China toomay wish to take note of this danger). Nevertheless, according to Giroud, there is still timefor Vietnam to put appropriate policies in place and the Malaysian experience could serveas a useful guide.Turning to the issue of mode of MNE entry into transition economies and ownership

structure, Indro and Richards argue that foreign companies are more likely to establishjoint ventures in Vietnam than in other ASEAN countries (frequently in partnership withSOEs because of the significant role of the state in the economy). However, the scale of JVsestablished in Vietnam is generally smaller than in non-transition developing countries inthe region; and the foreign ownership share tends to be smaller. Foreign companies aretreading carefully in a country where there is an underdeveloped legal infrastructure andtrust between partners is not fully attained. Though MNEs resort to informal, relationalcontracting as a substitute for formal enforcement, this is not entirely satisfactory. IfVietnam, and other transition economies at a similar level of legal development, are to gainfrom higher technology industries and knowledge transfer, they need to strengthen theirregulatory systems. Further interesting insight along these lines comes from the paper byMa and Delios who examine MNE entry in two locations within the same transitioneconomy, China. They show that the differences in institutional characteristics betweenBeijing (the ‘politically oriented’ city) and Shanghai (the ‘economically oriented’ city) havea marked impact on mode of entry, industrial traits and survival rates of MNEsubsidiaries. In other words, policies do matter and can make a difference.The papers by Demir and Soderman and Cheung and Leung essentially use China as a

tabula rasa to test the applicability of theories of corporate development and expansion innew, unknown markets or environments. Demir and Soderman argue that the experienceof Swedish companies in China suggests that a linear model of corporate expansion into anew economy, rooted in learning about that economy is not fully applicable. In particular,there is a major disjunction between anticipated problems and actual challenges. Theypropose a modified model to understand the development and expansion of MNEs in newenvironments. Cheung and Leung more specifically use the experience of transnationaladvertising agencies (TNAAs) in China to test the Uppsala or stages theory ofinternational expansion. They show that changes in TNAA entry/expansion modes,though ostensibly sequential stages as per the Uppsala model, rooted in experientialknowledge, can also be understood in terms of changes in the legal environment, responses

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to market expansion and client-following strategies. Stages theory is not rejected per se,but a more nuanced approach is recommended.

As well as examining a variety of other issues, all these papers provide interestingperspectives on development and transition. They are not the final word on either of theseor other themes examined, but together they represent a valuable staging post inunderstanding critical issues.

Hafiz MirzaProfessor of International Business, Bradford University School of Management, Emm Lane,

Bradford BD9 4JL, UK

E-mail address: h.r.mirza@bradford.ac.uk

Nick J. FreemanIndependent Consultant, Ho Chi Minh City, Vietnam