Download Study on Multi-national Competitive Strategies of CME in Global

Study on Multi-national Competitive Strategies of CME in Global
Value Chain from Evolutionary Game Theory
LI Zhihong, LIANG Dong
Business School, Jianghan University, Wuhan, Hubei, P.R.China, 430056
[email protected]
Abstract: The insufficiency of the self-innovative capacities and the lack of the social organizational
resources to the Chinese manufacturing industry lead to a long stay in the low section of the global value
chain, which gravely curbs its profit-sharing level in the chain. A long-term squeeze during the profit
distribution in the global value chain is finally shifted to the Chinese labor, the natural resources and the
environment in China. The shift has made China labor forces cheap; worsened natural resources and
environment, which is a massive challenge to the Chinese Manufacturing Enterprises (CME). So this
paper has made a study on how to face and manage the above challenge for the Chinese manufacturing
enterprises. Based on the analysis on the cases of the Chang Jiang Triangle Plain, the paper has analyzed
the competitive strategy in the conditions of the global value chain in the angle of the evolutionary game
theory and expounded that the Chinese manufacturing enterprises are obliged to transfer their
competitive strategy to the multi-national competitive one as soon as possible , make a full use of the
advantages of the global value chain to develop and upgrade the global productive service sector in
order to achieve the shift from the low section to the high of the global value chain. In the end, it
explores the foundation and the main approach to carry out this shift.
Keywords: Global value chain, Competitive strategy, Evolutionary game theory
1 Introduction
The situation is not so optimistic for the manufacturing industry of the Chang Jiang Triangle Plain
though it is developing fast, for the local enterprises are low in the self-innovative capacities and the
economy of the region is still wandering in the low end of the global value chain. According to some
statistic documents to this area, 70% of the enterprises produce the final products. And lots of firms
attempt to obtain the opportunities of upgrading their technology and business by inserting the global
value chain. That’s to say, they hope to upgrade the industry by the spilling-over of the technology of the
foreign investment. But in fact, this path has proved to be a failure. Take Zhejiang province for example,
it has almost a thousand manufacturing clusters while the R&D expenses of the enterprises with certain
scale account for only 0.45% of the sale revenues, which is lower than the national average level
(0.61% ) of the manufacturing industry. Let alone 3% of the developed countries. As for the production
means, an inquiry from Fu Dan University and Hong Kong University shows that the enterprises with
pure OEM are only 22.3% and only 18.3% with ODM. In the meanwhile, the modern service sector in
this region is rather lagging behind, compared with its economic development, which leads to high
transaction costs that gravely curb the further development of the area. In the light of the statistic data,
the 3rd sector of sixteen cities in this region in 2006 only occupies 41.1% of GDP and the production
services are much wanted. Based on the case of the Chang Jiang Triangle Region, this paper makes a
study that Chinese manufacturing businesses are obliged to change such situations through the strategic
adjustment to the development idea.
2 Choice of the Competitive Strategy in the Manufacturing Industry Based on the
Global Value Chain in the Background of the Economic Globalization
2.1 Economic Globalization
Economic Globalization means that the world goes into the epoch of the global manufacturing and the
international industrial transferring becomes a fact. The optimistic arrangement of the world
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manufacturing industry has broken through the firm-society-country boundaries. The world economy is
more integrated and more dependent with each other. The economic globalization includes both market
and production. The former refers to a process joining the scattered markets in various countries
together and the latter to a trend to search for the product and services in the different places of the
world by way of the difference of the productive elements as labor forces, energy and capital, etc.
2.2. Global Value Chain
The theory of the value chain is first put forward by Michael Porter. In this theory, he divides the
value-created activities into the basic and the support. The former concerns the production, sale,
logistics, delivery and the after-sale services while the latter refers to the staffing, finance, planning,
R&D and purchase, etc. The basic and the support comprise a value chain of a firm. Also, he points out
that not all the sections of the chain can create value and that only certain activities can bring value to
the firm. Now, this theory is widely used and deepened. With the progress of the economic globalization,
of the socialization and internationalization of the service sources, technology and service has become
independent commodity. The R&D, production and sale that were realized within the single enterprise in
the past are now finished by different firms. The outsourcing of the productive and service activities is
more and more remarkable. The globalization and specialization of the value chain and the transferring
of the value creation activities from the productive section to the service one have enriched the theory of
Porter’s value chain.
2.3. Comparison of Competitive Strategies
In the light of the cost reduction and of the satisfaction to the demand of the local market, the global
strategy includes four states, namely international strategy, the trans-national one, the global one and the
multi-national ones. These four strategies have their own advantages and disadvantages. (See Table 1)
Strategy
Global
International
Table 1 Comparison of the Global Competitive Strategies
Advantages
Disadvantages
Able to get the experience curve effects
Able to make use of the regional economy
advantages
Able to transfer core competitiveness to the market
abroad
Lack the satisfaction to the local demands
Lack the satisfaction to the local demands
Unable to realize the regional economy
Unable to get the experience curve effects
multi-national
Supply products and sales according to the local
demands
Unable to realize the regional economy
Unable to get the experience curve effects
Unable to transfer core competitiveness to the
market abroad
trans-national
Able to get the experience curve effects
Able to make use of the regional economy
advantages
Supply products and sales according to the local
demands
Able to get the profits from the global learning
3 Choice of the Global Competitive Strategy
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Quite difficult to adjust the organizational structure
Different firms have their own advantages and disadvantages. Which strategy should be chosen depends
on their features. Generally speaking, the following standards can be referred to in choosing the
competitive strategy (See Figure 1).
(1)When the cost pressure is great and that of satisfying the local demands small, the global competitive
strategy can be chosen.
(2) When the cost pressure and that of satisfying the local demands are both small, the international
competitive strategy can be chosen.
(3) When the cost pressure and that of satisfying the local demands are both great, the trans-national
competitive strategy can be chosen.
(4) When the cost pressure is small and that of satisfying the local demands great, the multi-national
competitive strategy can be chosen.
high
Trans-national
Global
Cost pressure
International
Multi-national
low
low
Pressure satisfying local demands
high
Figure 1 Choice of the Global Competitive Strategy
4 Analysis of the Competitive Position in the Global Value Chain to Chinese
Manufacturing Industry in the Angle of the Evolutionary Game Theory
4.1. Points of View of the Evolutionary Game Theory
The Evolutionary Game Theory is a kind of new approach that combines game theory and dynamic
evolution process. It exposes that gaming is a long-time process, during which the participants and the
game object can all change that will lead to the alteration of the game system. It is originated in the
game study about the conflict-cooperate conducts of the animals and the plants by Fisher Hamilton and
Trivers. In 1973, Smith and Price first put forward the Evolutionary Stable Strategy, its basic concept,
which marked the birth of the Evolutionary Game Theory. In 1978, Taylor and Jonker proposed
replicator dynamic, which is a second breakthrough of the Evolutionary Game Theory. This concept
expounds a dynamic convergent process about the ecological evolution to the stable state. In the light of
the theory, if most of the individuals in a group have chosen Evolutionary Stable Strategy (ESS), a few
individuals will be unable to change this group. The conduct result of a single game individual depends
not only on the game rules, but also on the relative frequency of the particular rules of the other game
individuals. These particular rules are supposed to be able to be inherited and their inheritors will carry
on these conduct rules. When these rules surpass the weighted average levels of the group, their
frequency and adaptation will rise. Otherwise, drop. When these rules are equal to the average weighted
level of the group, their frequency and adaptation will be stabilized at a fixed point. Unless a powerful
shock from the outside invades into this group, its system will not deviate from the existent stable
，
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locked state.
4.2. Exploration of the Position in the Global Value Chain of the Chinese Manufacturing Industry
Based on the Evolutionary Game Theory
To make use of the above points of view in the study of the Chinese manufacturing industry, we can see
that since the 90s of the 20th century, the global manufacturing based on the value chain has altered the
structure of the world economy and China has become “world factory”. According to the value chain
theory, the Chinese manufacturing enterprises are limited in the production and services relative to the
product inside the enterprises and lie in the low section of the chain, where profits are lean. These firms
are squeezed in getting the profits to the result that this cost is finally transferred to the labor, natural
resources and environment. Explained with the points of view of the evolutionary game theory, this
situation lying in the low end of the chain has been locked in the evolutionary stable state of the value
chain system, which can not be broken through unless a strong outside shock strikes. Concretely
speaking, the Chinese manufacturing industry is obliged to make use of the development trend of the
global manufacturing industry at present and to change the development track of the present global
value chain so as to make a breakthrough in some point in the chain. Now the development trend of the
global manufacturing industry is shown like this: the productive services including finance, human
resources and R&D, etc. have become newly-born sectors. China has stepped into the service economy
from the product one. Developing productive services is the breakthrough that the Chinese
manufacturing enterprises reverse their situation lying in the low end of the global value chain. This is
feasible in theory. Analyzed from ESS, the Chinese manufacturing enterprises belong to the group of the
global value chain. Their conduct rules are constrained both by their own group and by their rivals. In
the global value chain, the Chinese manufacturing enterprises can’t be pushed onto the high section of
the chain by the other groups. They must take the following measures before they reach the high section:
continuously strengthen their own conduct rules is able to affect the conduct rules of the other groups so
as to make the frequency of their own conduct rules surpass the existent average level of the group rules
and break through the group stable state. In the end, a new stable state that the Chinese manufacturing
enterprises dominate the high section of the chain will be established. Therefore, at present, the task of
the Chinese manufacturing enterprises is to make a full use of the drastically changing global value
chain, integrate the existent resources, set up the productive service network and reduce the transaction
cost in order to raise the competitive position in the global value chain of the Chinese manufacturing
enterprises and to realize a transfer from the low section to the high section of the global value chain.
Many cases that the developing countries or regions successfully join in the process of globalization in
the world before becoming developed ones have proved the study of this paper.
5. Conclusion
In the light of the evolutionary game theory and the proof of the cases of the developed countries or
places, it is possible for the Chinese manufacturing enterprises in the developing countries or places to
be transferred from the low end to the high end of the global value chain if they fully integrate the social
resources, raise the capacities of the social organization and of the network level of the productive
service sector in the chain and keep strengthening the influence to the global value chain of their own
conduct rules. To reach this aim, the choice of the competitive strategy is the chief step. Of the multiple
competitive strategies, the multi-national one should be the main alternative for the Chinese
manufacturing enterprises.
Acknowledgments:
This paper is supported by the MOE Project of Key Research Institute of Humanities and Social Science
in Jiang Han University
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