Research Proposal

1. Title: Foreign firms in China under threat: Local suppliers turn into competitors after upgrading (Arrunada & Vazquez, 2006)

2. A general overview of the area of the study introduce the proposal by identifying and summarizing the subject you intend to research

The situation in China is one where anonymous contract manufacturers and suppliers are increasingly turning into competitors. They are pushing the brands they used to make aside and replacing them with their own products. Yet original equipment manufacturers (OEMs) are compelled by circumstances to outsource certain manufacturing processes as a way of reducing costs. This strategy also enables them to improve worker productivity while at the same time free up a lot of capital. It also enables OEMs to dedicate all their efforts to activities that add more value to the product such as design, research and development (R&D), and marketing. To achieve these gains, most manufacturing activities are outsourced to contract manufacturers in low-wage countries.

China is one of the low-wage countries where many foreign companies are turning to for the manufacture and supply of vital components required in the assembly of various products. Other than low-wage benefits, OEMs also hope to benefit from economies of scale as well as exposure to the technologies used to manufacture products for other OEMs. This relationship with contract manufacturers creates a situation where they are even able to recommend changes to the OEM’s products.

However, foreign companies outsourcing some of their manufacturing processes to China face a threatening scenario where their technologies are being exposed to competitors. Worse still, the suppliers are increasingly upgrading their manufacturing activities to a point of becoming direct competitors. Such suppliers easily take advantage of the benefits that they provide to the OEMs. Therefore, foreign firms must not underestimate domestic suppliers in China; they are quickly upgrading their business models to a point of emerging as competitors.

3. A contextual summary of research in this area (be very specific for each section)

Researchers acknowledge the existence of the problem of suppliers of components who turn into competitors (Arrunada & Vazquez, 2006). Arrunada & Vazquez (2006) uses the terms “promiscuity”, “infidelity”, and “betrayal” to refer to instances where contract manufacturers turn into competitors to OEMs. In the case of promiscuity, contract manufacturers pursue liaisons with numerous OEMs. In infidelity, distributors and retailers shift their business to a supplier of the foreign company. On the other hand, betrayal occurs when contract manufacturers choose to keep the foreign company’s intellectual property to themselves or worse still, to transmit it to OEM’s competitors.

However, not all researchers see foreign linkages domestic suppliers from a negative perspective. In this regard, Foreign Invested Enterprises (FIEs) in China are viewed as an important source of competition for local firms, thereby forcing them to pursue efficiency in their use of resources as well as the adoption of upgrading capabilities (Gadiesh, Leung & Vestring, 2007). The general feeling is that although there is an extensive link between Chinese enterprises and the global economy, their involvement remains very shallow (Steinfeld, 2004). Their activities are undifferentiated, they are preoccupied with commodity manufacturing, competition is built around cost-cutting measures, and innovation is lacking (Steinfeld, 2004).

In the debate on the interaction between domestic firms and FIEs in China, protectionism theory is being used (Kennedy, 2005). The competence-based growth model is also being used especially in discussions on how suppliers and contract manufacturers operate (Lee & Chen, 2000). The concept of protectionism arises because FIEs tend to be highly regulated in China. Moreover, the avenues through which they can make profits tend to be highly limited. Yet as China continues to be integrated into the global economy, there is growing awareness of the important role that external factors play in the ongoing process of diversification of interests both within China and around the world. The competence-based growth model is being promoted because many contract manufacturers tend to be resource-constrained on the one hand and global outsourcing activities in many vertically de-integrated industries have become dominant industrial practices (Lee & Chen, 2000).

The key findings of researchers working on this topic

Many researchers point out that China is increasingly being integrated into contemporary economic institutions at the international level (Kennedy, 2005; Yang, 2006; Saxenian, 2002). One of the ways through which this integration is taking shape is through the emergence of production links bringing together foreign firms and domestic suppliers and contract manufacturers. In such relationships, foreign firms operate as OEMs.

Researchers also highlight the threat of contract manufacturers who turn into competitors of OEMs (Yu & Liao, 2006; Brown & Hagel, 2005; Bair, 2005),

). Chinese suppliers operate in an evolving business environment that motivates them to develop their own brands (Yu & Liao, 2006). In these efforts, they end up exploiting the intellectual property rights of foreign OEMs.

The need to forge these relationships arises from the fact that numerous changes have been occurring in the world of manufacturing at the global level. In these changes, there is a shift from traditional mass production networks to the rise of vertically integrated corporations that specialize in product design and development. In this context, the production process has become a transnational phenomenon. In this context, many foreign companies are increasingly turning to Chinese suppliers through outsourcing arrangements.

Researchers argue that outsourcing arrangements cannot be evaded since manufacturing companies need to form production links with low-cost countries especially China to establish competitive advantage, lower production costs, and maximize profitability (Jiang, 2002; Lo & Chung, 2007; Gadiesh, Leung & Vestring, 2007). Moreover, in today’s corporate practice, very few companies consider manufacturing an essential component of their businesses (Arrunada & Vazquez, 2006). Such companies must look for ways of dealing with the threat posed by suppliers who turn into competitors. Other challenges in the case of foreign companies that deal with Chinese suppliers include underdeveloped physical infrastructure, state-owned distribution that lack the necessary expertise, regional protectionism, and an enormous distribution sector that is highly fragmented (Jiang, 2002). Foreign companies outsourcing some of their processes to China have to deal with bureaucratic restrictions, such that they are unable to import, sell, and service goods and services through transparent processes (Jiang, 2002).

4)Identified an initial current framework on which to base your research as this will anchor your proposal into a strand of theory more clearly

This research will be based on the competence-based growth model. According to Lee & Chen (2010), the competence-based growth model is appropriate for studies focusing on contract manufacturers who operate in an environment of resource constraints, vertically de-integrated industries, and growing popularity of global outsourcing practices. This model is ideal in situations where there is a need to highlight the various ways in which suppliers can upgrade and leverage their operations to be able to undertake value-adding manufacturing activities in a manner that satisfies the needs of various outsourcing buyers.

The core undertaking in this model entails an in-depth analysis of leveraging and competence-building initiatives that are a reflection of conscious efforts by manufacturers to learn and navigate the delicate dynamics of contemporary buyer-supplier linkages. On this basis, it is possible for a researcher to explain the various ways through which contract manufacturers can upgrade their activities without violating terms and conditions relating to intellectual property rights, unfair competition, and disclosure of the buyer’s technologies to competitors. Moreover, the competence-based growth model was selected because of its appropriateness in explaining the high rate of growth being experienced in outsourcing and contract manufacturing despite the business hazards involved.

The theoretical strand to which the competence-based growth model belongs is based on the notion that differential firm performance occurs because a firm possesses rare, valuable, difficult to imitate, non-substitutable resources (Lee & Chen, 2010; Ravichandran, Lertwongsatien & Lertwongsatien, 2005; Liu, 2008; Palpacuer & Parisotto, 2003; Matthyssens, Vandenbempt, & Weyns, 2009). Once contract manufacturers turn into competitors, they join the sector as latecomers. To compete effectively in knowledge-intensive industries, they are compelled to embrace resource leverage, linkage-formation, and learning strategies (Mathews, 2002). In other words, there are compelled to embrace new competencies in order to continue growing.

5) Specify what your proposal will address in particular and what your aims and objectives are. One overall aim and 3 objectives: An introduction of your key research questions (tight focus)-150 words

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