Multinationals in the Middle Kingdom: Performance, Opportunities, and Risks

For many U.S. companies, China is the most promising growth opportunity in the business portfolio. The interest of managements and boards has been backed up with action, making China the preferred country for foreign direct investment in the last several years. Yet the experience also shows that many companies were unprepared to operate in a developing economy and with a foreign culture. The normal start‐up problems have been aggravated by unfamiliar joint venture partners, large regional differences in purchasing power, language, and regulation, and weak enforcement of intellectual property rights. The first wave of China investment by U.S. multinationals, corresponding roughly to the decade of the 1990s, was marked by poor performance. But in the last five years, multinationals have made significant adjustments—particularly, the “localizing” of suppliers, the workforce, and the products offered. And recent data indicates much improved profitability. Still, there remain substantial challenges to further growth, including increasing local competition, a thin human resources market, the lack of prime acquisition candidates, and continued low rates of consumption. The different experiences of multinationals such as Procter & Gamble, Anheuser‐Busch, and Wal‐Mart are used to illustrate these challenges and provide some important lessons for companies now evaluating their opportunities in China.