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British Journal of Management, Vol.

17, S105S121 (2006)

DOI: 10.1111/j.1467-8551.2006.00481.x

Acquisitions of Chinese State-Owned

Enterprises by Multinational Corporations:
Driving Forces, Barriers and Implications
for HRM
Fang Lee Cooke
Manchester Business School, The University of Manchester, Booth Street West Manchester M15 6PB, UK
This article explores the driving forces for, barriers to, and trends and patterns of
acquisition of Chinese state-owned enterprises (SOEs) by foreign investment and its
implications for HRM and the experience of work for the workers. It questions the level
of objectives alignment between the Chinese side and the FDI during the acquisition of
Chinese SOEs. Issues related to the Chinese managerial skills and behaviour in
acquisition negotiation are discussed as well as the policy making, administrative and
practical role of the local government. The article argues that FDIs acquisition of
Chinese rms creates unique management issues which require further research,
particularly in the area of HRM, in order to establish the likely similarities and
dierences between acquisitions in other countries and those taking place in China and
the implications of this for the globalizing businesses.

China has been one of the two largest foreign
direct investment (FDI) recipient countries in the
world in recent years (International Statistics
Yearbook, 2004). This is largely because of two
factors: investment incentives oered by the
Chinese government and the countrys abundant
availability of cheap labour. It has been argued
that the strong emphasis on foreign investment
and foreign trade has been one of the key factors,
if not the key factor, in the unprecedented growth
of the Chinese economy in recent years. Attracting FDI has been an important part of Chinas
open-door economic policy since 1978 and this
proactive policy has led to the rapid increase of
FDIs in China in the last 25 years (see Table 1
and 2).
During the 1980s, the main route of FDIs
entering the Chinese economy was through joint
ventures (JVs) with Chinese state-owned enterr 2006 British Academy of Management

prises (SOEs). Into the twenty-rst century,

cross-border acquisition remains the main investment mechanism for foreign investment entering
the China market with an increasing level of
freedom. This trend is being accelerated by
Chinas accession to the World Trade Organization (WTO) and the introduction of a number of
laws and guidelines by the Chinese government in
2003 that are aimed to promote merger and
acquisition (M&A) activities from foreign investment. It was reported that 16% of the M&A fund
(about US$ 3.84 billion) in rst three quarters of
2003 in China came from FDIs (Jin and Nie,
2004) and that M&A activities in China have
been increasing by 20% annually in recent years
(China Business, 2005). This new development is
in line with the international trend in the last two
decades in which, it is noted, the level of M&A
activities has increased considerably (Evans,
Pucik and Barsoux, 2002; Hubbard, 1999) in
response to a range of political, economic, social


F. L. Cooke

Table 1. Utilization of foreign capital between 19792003 (end-of-year gures), US$ m(Figures in 100 million USD)

No. of projects

Total amount

Foreign loans

of contracted foreign capital



No. of projects




Total amount of foreign capital actually utilized


Other foreign

No. of projects









Sources: adapted from China Statistics Yearbook, 2004, p. 731.

Table 2. Examples of utilization of foreign capital and foreign investment (end-of-year gures), US$ m

Foreign direct investments
Joint ventures enterprises
Cooperative operation enterprises
Foreign investment enterprises
Foreign investment share enterprises
Cooperative development
Other foreign investments
Sale share
International lease
Compensation trade
Processing and assembly




No. of



No. of



No. of





















Sources: adapted from China Statistics Yearbook, 2002, 2003 and 2004.

and technological pressures and opportunities, with

cross-border M&As particularly noticeable (Boxall
and Purcell, 2003). It must be pointed out at the

outset of this article that acquisitions, instead of

mergers, remain the main pattern of Sino-foreign
alliances, and therefore the discussion in this article

Acquisitions of Chinese SOEs by MNCs

will focus mainly on acquisition, although M&As
will be referred to where appropriate.
Despite the growing signicance of international acquisitions in Chinas economy, there
have been insucient empirical studies into the
driving forces for, barriers to and patterns of
foreign investment acquisitions in China, their
post-acquisition strategies and operating policies
and the implications of these for the governance
structure of the rm and its human resource
management (HRM). This is perhaps in part
because research on M&As is sensitive because of
the often-required condentiality and speed of
change (Walter, 1985) and the consequent diculty in gaining access to organizations to carry
out the study (Salama, Holland and Vinten,
2003). However, these issues are especially important for the SOEs where international acquisition practices through joint ventures (JVs) have
existed for nearly two decades as a government
strategy to rescue the poor-performing state
industry. Although a considerable amount of
academic research has been carried out since the
late 1980s on international joint ventures in China
(e.g. Bjorkman and Lu, 2001; Bjorkman and Fan,
2002; Child, 1994; Child and Faulkner, 1998;
Cooke, 2002; Ding, Fields and Akhtar, 1997;
Luo, 2000a), these works focus mainly on the
management practices of the joint ventures rather
than the acquisition process prior to the establishment of the joint venture. Equally, although Luo
(2000b, 2000c) has written extensively on how
foreign businesses may enter China, these works
focus primarily on the pre-acquisition process
rather than the human resource implications of
acquisition for the workforce.
In practice, confusion, conicts and barriers
that restrict the level of international acquisition
activities in China exist widely (see Luo 2000b and
2000c for more details). This is particularly the
case in the acquisition of SOEs. This is reected in
the fact that when implementing the strategy and
policy, the Chinese authorities have swung
between advance and retreat, between loosening
up and holding back, ambivalence between
benets and problems, gains and losses. Another
problem is that there is a lack of transparency and
participation from M&A experts when governmental departments formulate rules and policies
that govern M&As. As a result, merger and
acquisition administrators (including other authorities involved in the process) often nd it dicult

to interpret and implement the regulations. In
addition to regulatory loopholes, the impact of
acquisition on local employment is another
important factor that inuences the attitude of
government ocials and workers towards the
acquisition. Post-acquisition changes in the management of human resources are also very
sensitive issues as the cultural dierences between
the Chinese ex-SOEs and the acquiring foreign
rm may be at their starkest, especially given
the fact that human resource issues often pose
the greatest diculties and are of crucial importance in M&As and post-M&A integration
(Schuler, 2001; Schuler, Jackson and Luo, 2004;
Stahl et al., 2004). Given the Chinese governments determination to continue the privatization or partial privatization of the SOEs through
domestic and international acquisitions, it is
important that issues related to international
M&As of Chinese SOEs are discussed more fully
than has been the case so far in the existing
This article explores the driving forces for,
barriers to, and trends and patterns of acquisition
of Chinese SOEs by foreign investment and its
implications for HRM. The article draws on a
number of sources for its data. These include
interviews with three senior managers from three
ex-SOEs (one in each) that have been partially
privatized (now joint ventures) through acquisition by foreign investment in the last three years
in a large city in southern China, interviews with
two local government ocials who were involved
in the M&As of SOEs and two senior ocials of
the trade-union headquarters of the city. All
interviews were conducted by the author in China
in Mandarin Chinese. Each one-to-one interview
lasted about one hour. Access to these informants
was through personal contacts. The article also
draws on secondary data from journal and
newspaper articles and government reports. Most
of them are in Chinese and were collected in
China. It needs to be pointed out here that it is
not the intention of this article to report the
acquisition process of the three ex-SOEs (coded
here as BreweryCo, TyreCo and PharmaCo).
Rather, it aims to provide an overview on a
number of aspects related to cross-border acquisitions in China, a rapidly developing area where
knowledge remains insucient. Therefore, the
interview information plays an informative role
in the discussion of the article rather than taking

precedence. Because of the sensitive nature of
some of the information, direct quotations of
interviews were kept to a minimum in this article
in order to conceal the identity of informants,
especially the government ocials.
The article is divided into four main sections in
addition to this introduction section. The rst
main section reviews the driving forces for international acquisitions of SOEs in China by contemplating the objectives from both the Chinese and
the FDIs point of view. It also outlines the
patterns of acquisition of Chinese rms by
foreign investment in terms of the industries they
target. The second section questions the level of
objectives alignment between the Chinese side
and the FDI when entering international joint
ventures. Issues related to the Chinese managerial
skills and behaviour in acquisition negotiation
are discussed as well as the multiple role of the
local government. Barriers to acquisitions for
FDIs are then analysed in the context of the
above issues. This is followed by the fourth
section, which discusses the implications of crossborder acquisitions to human resource management, including major aspects of HRM such as
job security, training and development, pay and
performance management, industrial relations,
adoption of Western management techniques,
managerial skills and post-acquisition integration. The conclusion section highlights practical
and research implications of the article, and
argues that international M&As of Chinese rms
creates unique management issues that require
further research, particularly in the area of
HRM, in order to establish the likely similarities
and dierences between M&As in other countries
and that taking place in China and the implications of this for the globalizing businesses.

International acquisitions in China:

driving forces and patterns of
The development of foreign investments in China
has been through three overlapping stages since
the early 1980s. The rst stage began in the early
1980s when the majority of foreign investment
came from Hong Kong, Macao, Taiwan, Japan,
Korea and countries in southeast Asia. Many of
the investors were overseas Chinese. The second

F. L. Cooke
stage began in the early 1990s when MNCs from
Western countries started to use China as a longterm development base by setting up their
production plants in China. The third stage
began after Chinas accession to the
WTO. One emerging feature of FDIs is the
acquisition of SOEs, often through the stock
market by oshore foreign investors or by MNCs
in China.
Driving forces for FDI acquisitions of Chinese
There are a number of driving forces for the
acquisition of Chinese SOEs (Dong and Hu,
1995). First, the Chinese government was forced
to reform the ailing SOEs in the 1980s. The plan
involved three steps: reducing the intervention of
the state in these enterprises by redening the role
of the state as a shareholder with limited
liabilities; revitalizing large and some mediumsized SOEs by further devolving decision rights to
management and continuing economic reform
toward a fair and competitive market; and
privatization and leasing of the small and
medium-sized SOEs. As SOEs are controlled by
the state through the local government, the
performance of SOEs is a strong indication of
the administrative performance of the local
governmental ocials. For their own interest,
ocials want to maximize the prot level of the
SOEs. The prot level of SOEs also has a direct
impact on the tax income and consequently the
building of the infrastructure of the region.
Therefore, local ocials are keen to improve
the performance of the SOEs through merger and
acquisition when it becomes apparent that an
SOE cannot survive on its own. During the early
and mid-1990s, a popular way to pay o
liabilities and create working capital for SOEs
was to convert them into joint ventures with
foreign investors. Other important reasons for
the Chinese side entering into a joint venture
agreement include the desire to acquire knowledge, latest technology and management skills,
and the desire to generate export income (see
Brunner, Koh and Lou, 1992; Child, 1994; Child
and Faulkner 1998; Gu, 1997; Luo, 2000b for
more details). The reform of SOEs has been
pushed to new heights since 1997 (Gu, 2003;
Li, 2003; Zhang, Li and Zhou, 2002) when the
large-scale downsizing, privatization and M&As

Acquisitions of Chinese SOEs by MNCs

involving SOEs, collectively owned enterprises,
domestic private enterprises and foreign investments took place (Cooke, 2005). The idea behind
the M&As is to let the SOEs be voluntarily
acquired by or merged with better-managed
rms. Such an approach is believed to have
combined ownership transfer with management
adjustments, technology upgrading and capital
injections (Dong and Hu, 1995).
A second driving force is to exert control over
foreign rms in China. In the early stage of the
open-door policy, the Chinese government
decided that in order to control the operations
of foreign companies in China, FDIs would be
conned to joint ventures with local (state)
partners. Numerous restrictions were also imposed on the joint ventures in their operations,
including the management of human resources.
In addition, there was strong pressure on JVs not
to lay o workers. However, the level of control
and inuence from the local authorities has
begun to ease o since the early 1990s (Pomfret,
1991) and foreign companies now have considerably more latitude in their business operations in
China, including decisions in HR policies. The
Chinese government now permits 100% foreign
ownership in most industries and the number of
new wholly owned foreign subsidiaries surpassed
that of equity joint ventures for the rst time in
1998 (Bjorkman and Lu, 2001).
A third driving force comes from the growing
needs of the protable enterprises themselves as
part of their development strategies. MNCs can
bring the much-needed capital, advanced technology and managerial techniques to China through
acquisitions (Jin, Qi and Li, 2003). It is true that
most of the technologies introduced to China by
MNCs may not be state of the art, nonetheless,
they are still better than those available to most
enterprises in China. The introduction of these
technologies into China will have a spill-over eect
and promote the upgrading of technology by other
enterprises in the same industry in China (Liu,
2000). A fourth motive for SOEs to be acquired by
foreign rms is to attract foreign capital and to
develop international markets by association with
well-known international brand names.
The driving forces for international acquisitions
from the Chinese government and industries, the
policy change and the resultant investment environment have to some extent shaped the patterns of
acquisitions by foreign investments.

Patterns of international acquisitions in China
There are three major characteristics of acquisitions of SOEs by foreign investments. A rst
characteristic is that foreign investors are increasing their level of investment and stock control of
the acquired SOEs, some even become solely
foreign-owned. A second feature is that foreign
investment has been shifting away steady from
traditional industries towards the new, high-tech
and high value-added industries. There is also a
growing interest in investing in light industries
and commercial industries. A third feature is that
while foreign investment prior to the 1990s had
mainly come from Hong Kong, Taiwan, Macao
and other countries in the Asian Pacic Rim,
with relatively low level of technology and in
relatively small-scale and simple operation mode,
investors since the 1990s have been large MNCs,
with larger investment projects and strategic
operations. These operations also develop a
sophisticated business chain, from product development and manufacturing to marketing, sales
and after sale services. Establishments/oces are
set up in dierent geographical locations in China
for strategic purposes. Some MNCs have also set
up research and development (R&D) centres and
regional headquarters in China to complete their
China business strategy (Jin, Qi and Li, 2003).
In the 1990s, foreign rms mainly acquired
smaller SOEs that might be average performers.
Into the twenty-rst century, MNCs M&A
activities in China were becoming more strategic.
They began to target larger and prot-making
SOEs and moved from targeting individual
enterprises to targeting the whole industry, as
the Chinese Government began to open up its
industries to FDIs. For example, in the 1990s,
MNCs acquired and gradually dominated the
drinks, cosmetics, detergent and lm industries.
Since the 2000s, MNCs have been expanding
proactively into Chinas rubber, pharmaceutical
and household electrical appliance industry. The
acquisition pattern also changed from ad hoc
acquisitions to concentration acquisitions, purposefully targeting key companies in the same
industry or all SOEs in the same geographical
locations. In the 1980s, MNCs entered the
Chinese market with capital and technology
assets. In the 1990s, they entered with their own
brand name products that replaced the Chinese
brands or acquired the Chinese brands and then

replaced them with their own. This has typically
been the case in the car industry, with most of the
Chinese brands replaced by foreign ones through
international joint ventures (Liu, Bai and Yin,
2001). As legal restrictions are gradually relaxed,
international joint ventures as a common corporate mode is being replaced by wholly foreignowned enterprises. Currently the attractiveness
for foreign investment is in M&A deals especially
in the manufacturing industry, most notably in
semiconductors and microelectronics, home appliances, electronic medical equipment, machinery and services (e.g. retail and hotel).
In general, MNCs embark on M&A activities
in China to develop product market, to consolidate their international competitive position,
to take advantage of its cheap production costs
and to streamline the chain of supply, production, marketing and sale in the same location (Jin,
Qi and Li, 2003). There are two main reasons for
MNCs acquiring SOEs. One is that they foresee
the upsurge of Chinas economy and the enormous market potential, therefore enter their
target industry and product market through
acquisitions. They intend to defeat their competitors in order to monopolise the market and gain
scale of economy (e.g. Koda). This is the
investment type of acquisitions. The other reason
is that they consider the price of the SOEs on sale
is estimated too low, therefore they intend to buy
it and then make a prot by selling it. This is the
opportunistic type of acquisition (Jin, Qi and Li,
2003), although the former seems to be more
dominant than the latter.

MNCs acquisition of SOEs a win-win

Despite the push and pull factors that fuel the
international acquisition activities in China in
recent years, cross-border acquisitions may not
yield the desired benets for the Chinese for
a number of reasons. These include the likely
misalignment between the objectives of the SOEs/
Chinese government and that of the FDIs, the
skill gaps and opportunistic behaviour of the
Chinese managers in acquisition activities, and
the undue intervention from the local government. For the MNCs, there are also a range of
barriers in the whole process of acquisition, from
pre-acquisition negotiation, acquisition to post-

F. L. Cooke
acquisition management, that prevent their anticipated benets from materializing.
Objectives alignment?
While Chinese SOEs wish to join force with
MNCs for survival, product and technological
development, system innovation and human
capital development, MNCs may only be interested in picking the well-performing SOEs for
acquisition rather than helping troubled SOEs to
survive (e.g. Xu, 2003). By the 1990s, MNCs
targeted mainly the well-performing large SOEs
for acquisition. They were keen to be the
controlling party by becoming the sole owner of
the acquired enterprise or controlling at least 50%
of its stocks (Chen, 1999). They tend to leave the
debt to the Chinese side and may also sell their
stocks suddenly to make a quick prot. Prots
may be transferred out of China instead of being
re-invested for development. It has been reported
(Chen, 1999) that MNCs imported out-of-date or
second-hand equipment into China as being new,
or quoting a higher than actual price. It has also
been noted (Chen and Wang, 2003) that in the
acquisition negotiation process, the proportion of
share holdings between the two parties is often the
focus of disagreement. There tend to be major
dierences between the strategic objectives of large
SOEs and that of the acquiring MNCs. Meanwhile, some SOEs are the blue-chip companies of
their industry and represent the Chinese state of
the art in the international arena. Surrendering
ownership and control to MNCs may have a
negative strategic consequence to the Chinese
industry. This is particularly the case in industries
of strategic importance such as automobile,
chemical and petroleum, electronics, metallic,
and aviation where large SOEs concentrate.
Even when the Chinese side owns the majority
of the shares, the MNC partner makes the
decision about what technology to introduce to
China. On many occasions, only old technology
is introduced to China; for example, the US
Government strictly forbids the export of advanced technology to other countries. Therefore,
most of the R&D activities for product development are carried out in the United States. This
makes it dicult to materialize the wish of the
Chinese acquired enterprise to upgrade their
technology through acquisition by an American
rm (Zhan, 2003). As a result, the enterprise in


Acquisitions of Chinese SOEs by MNCs

China only serves as a cheap site for the MNC to
manufacture and assemble low value-added
components with the intensive use of a semiskilled labour force with little opportunity for
upskilling, a situation similar to that in other
Asia-Pacic developing countries such as Malaysia (Frenkel and Peetz, 1998; Wilkinson et al.,
2001). In addition, the incentive for rms to
innovate or for MNCs to introduce state-of-art
technology into China may be reduced when
technology spill-over and unintentional leakage
of technical know-how enable the Chinese to
imitate the product and technology.
FDIs have brought only limited R&D activities
to China, a situation worsened by the fact that
some MNCs abolished the original Chinese R&D
departments after the acquisition and rely on the
MNCs own R&D centre abroad for technical
support. This reduces Chinas development capacity. This is especially the case in the IT and
telecom industry in China, which has the highest
proportion of MNC investments and product
market share. MNCs control the majority of the
shares of the enterprise in order to maintain trade
secrets and market dominance. To a large extent,
MNCs have monopolized the development of the
IT and telecom industry and dominated the
product market in China, quashing the opportunity for survival and development of domestic IT
and telecom enterprises (Wang and Liu, 2002).
Another case in point is that of the lmmanufacturing industry. Koda and Fujis price
war in China has pushed the rest of the (Chineseowned) photographic lm manufacturers close to
bankruptcy. Koda and Fuji have now monopolized the lm market in China and if one of
them withdrew from China or retreated from the
price war, it would undoubtedly lead to a price
increase. This is in addition to the nancial and
social burdens that are transferred to the state by
MNCs through redundancy of surplus labour.
At a macro level, the monopoly of industry by
MNCs may tip the balance of the industrial sectors
in China. The monopoly of MNCs of an industry
will also suppress the growth of domestic enterprises. Once the industry is open to foreign
investment, the government will have little power
to inuence the business strategy of the MNCs
operating in that industry, thus reducing the
Governments capacity to oversee the strategic
balance of that industry in relation to the whole
economic structure of the country. At the corpo-

rate level, the MNC establishment in China may

become more dependent upon the rest of the MNC
in its new international labour division in terms of
product development, marketing and sales, and
concentrating solely on manufacturing (Liu, 2000).
This is reected in the fact that many MNCs
control the most senior positions in China in order
to implement their global strategy, and force the
Chinese managers into lower positions, although
many MNCs have started to localize their professional and managerial sta.
Managerial skills and behaviour
The low eectiveness of acquisitions of SOEs has
been a focus of academic debate in China.
However, one fundamental problem has often
been neglected, that is, the role of senior managers
in SOEs in M&A activities. A number of
problems may occur during the decision-making
and negotiation period of the acquisition that
may have a negative eect on the target enterprise. One relates to the competency and the other
the behaviour of the managers. Chinese managers
have often been criticized for their lack of
managerial skills and opportunistic behaviour in
general (Cooke, 2005). Similar problems appear
to exhibit themselves in acquisition pricing,
negotiation and post-acquisition integration.
Entrepreneurs use M&As as a business strategy
to advance their own interest instead of that of the
enterprise. This includes nancial benets (e.g.
salary, bonuses and stocks) and non-nancial
benets such as power to control, personal prestige
and reputation. The absence of an independent
asset-evaluation system provides an opportunity
for senior managers to use their position to reduce
the SOE asset value for acquisition to bargain for
their new position and terms and conditions in the
new organization (Cai and Shen, 2002). This is
evidenced by a research report published by the
Shanghai Stock Exchange Institution, which revealed that many restructured enterprises involving
the transfer of ownership tended to make a prot
in the rst year but made a loss from the second
year (Cai and Shen, 2002). This indicates that
short-term prot making may be the top priority
of senior managers instead of long-term development of the enterprise (Cai and Shen, 2002).
The lack of a sophisticated asset-evaluation
system and the absence of an open and competitive tendering for the targeted SOEs may also

lead to a heavy loss of state assets. While tangible
assets may be valued at too low a price, intangible assets, including tacit knowledge, special
skills, brand name, reputation, image and technical know-how, are often not included in the
evaluation. The Chinese have yet to learn how to
protect their intellectual property rights through
patent rights. Other loss of intangible asset
includes the loss of famous domestic brand
names in recent years following the acquisition
by MNCs who subsequently replace well-established Chinese brands with foreign brands. Many
Chinese brand names had national reputations
and had been established after years of hard work
(Jin, Qi and Li, 2003).
Eciency in negotiations is also low from the
Chinese side, often involving many people and
numerous meetings. The government ocials
interviewed described the negotiation process of
one of the acquisitions they were involved in as a
marathon. In addition to the initial intentional
discussions before the acquisition negotiation
formally started, the Chinese negotiation team
held over ten internal meetings, each meeting
involved at least half a dozen people. More
than 170 people/times from the Chinese team
were involved in the actual negotiation meetings
with the MNC representatives. By contrast, the
MNC only sent two representatives throughout
the negotiations, with the senior manager only
showing his face on a couple of the most important occasions. The two MNC representatives
had clear idea of what the company wanted and
were able to stick to their agenda throughout the
negotiations in spite of the repeated attempts
from the Chinese representatives to soften those
demands. In the end, the two parties signed the
deal with plenty of concessions from the Chinese
side, with the MNC basically getting what they
wanted. In addition, all the logistic costs (e.g.
chaueured transport, banquets and gifts) of
these meetings were born by the Chinese SOE, as
part of the Chinese hospitality and face-gaining
exercise. According to the government ocials
interviewed, this is just a typical example of
negotiation with foreign investors. The reason
why so many people were involved from the
Chinese side is that nobody wants to take
responsibility for the decision in case it goes
wrong and yet everybody (especially those from
the local government) wants to be involved and
have a say in it.

F. L. Cooke
Intervention from local governments
A unique feature in the (international) M&As of
Chinese SOEs is that the local governments tend
to have a close and direct involvement in the
decision-making and negotiation process. In
principle, SOE assets belong to all people and
the state, local governments are entrusted to look
after these assets from an administrative point
of view. Enterprise managers are employed
to manage the assets from an operations point
of view. Therefore, enterprise managers cannot
make decisions in the transfer of asset ownership
without authorization. Because of this complex
ownership and governance structure of SOEs,
local governments tend to have heavy involvement in SOE M&A activities. Local governments
have a vested interest in the asset of the SOEs and
are reluctant to give enterprise managers full
autonomy to handle the M&A activities. In the
absence of a well-developed capital market and
M&A agency bodies, the M&A of SOEs will be
dicult to complete smoothly without the support and participation of the local government.
Many methods commonly used in M&As in
developed countries are not applicable in China.
In addition, an M&A agency system centred on
investment banks is not yet established. Investment banks have not been able to provide
nancial consultancy services to the enterprises
involved. Under those circumstances, local governments have to step in to broker the deal. The
positive role of the local governments in M&A
activities therefore includes that of an agency,
monitoring and harmonization role. Moreover,
the administration of SOEs in China is segmented
by regional administration and industrial administration. Cross-region and cross industry M&As
will disrupt the status quo and require a new
balance of interests. The involvement of the local
governments will help oversee the ow of assets
and the rebalance of the interests of dierent
administrative regions and industries.
However, the direct and often parochial interest of local governments in SOEs also creates
problems that compromise the interest of the
enterprise concerned. For example, local governments may be keen to get rid of the burden of
poor-performing SOEs, and quote a low price for
acquisitions. Some local governmental ocials
may be eager to establish their own performance
record and therefore cut corners to make it easy

Acquisitions of Chinese SOEs by MNCs

for the MNCs to acquire their targeted SOEs.
Tax regulations are sometimes interpreted generously by the local tax authorities in order to
attract FDIs. A minority of government ocials
are also involved in corruption and benet from
the low pricing of SOEs (Liu, 2000). As Kracht
(2002) points out, two more forces government
and guanxi need to be added to Porters veforces system of analysing the dierent market
forces concerning competitors, customers, suppliers, substitutes and new potential competitors
as key factors determining success.
Barriers to FDIs acquisition of Chinese SOEs
While the intervention of the local governments
and the opportunistic behaviour of some managers may be to the advantage of the MNCs,
there are a number of barriers that make their
acquisition activities a dicult task which may
dampen enthusiasm for acquisitions from FDIs.
First the existing administrative system, as
discussed above, posts a range of related administrative problems and makes it very dicult to
carry out cross-region and/or cross-industry
acquisitions. These problems include, for example: taxation problems (based on same region,
same industry and same scal level) and banking
problems (bank loan based on region). These
problems aect mainly those MNCs that are
already in China if they wish to acquire SOEs
in another region rather than those wishing to
enter China through acquisitions. Second, FDIs
may encounter diculties in selecting SOEs for
acquisition because of the lack of information in
the market and the lack of good SOEs in the
stock market because the majority of SOEs have
not yet reached the minimum standard requirements for being listed in the stock market (Wang
and Liu, 2002). These problems are in part
caused by the fact that the stock market in China
is not well established and there is insucient
transparency and information ow.
Third, there is generally a lack of clear
regulatory guideline related to M&As, although
this situation is being addressed by the Chinese
government. For example, the State Restructuring
Regulations, enacted in January 2003, set out the
requirements and procedures for the approval of
the restructuring of SOEs into foreign-invested
enterprises. This is followed by the promulgation
of the M&A Regulations in March 2003, which set

out a framework for foreign investors acquisitions
of all types of domestic enterprises and the
restructuring of such enterprises upon acquisition,
including SOEs. Thus, the M&A Regulations will
also apply to the acquisition of SOEs, although
conicts may arise between the two new regulations (China Legal News, November 2003). In light
of the absence of a clear set of legal or administrative procedures for M&A approval, M&A
parties often have to rely heavily on administrative
approval, involving the authorization of dierent
administrative departments (Jin, Qi and Li, 2003).
This practice carries an inherent bureaucratic low
eciency (Cooke, 2003). In addition, the enforcement of business and employment laws in China is
not without problems as a result of variations in
the interpretation of the laws and the often-lax
approach of ocials to enforcing the laws (Cooke,
2002; Warner, 1996).
Fourth, as was discussed earlier, an independent system consisting of nancial and legal
agency bodies has yet to be developed in China to
provide professional services for M&A activities.
While large MNCs can tap into their global
corporate base of expertise to overcome this
deciency, small foreign businesses wishing to
expand their operations in China will nd it
dicult, if not impossible, to nd their own way
in this jungle.
The growth of international acquisition activities in China creates a new set of requirements for
and problems in human resources. For example,
there is a lack of managerial talent in acquisition
deals; there is also a decit in professional sta
familiar with acquisition businesses in the existing
legal and banking industries to enable these
institutions to develop M&A businesses. Similarly, post-acquisition integration will trigger
further challenges to the management that are
specic to the Chinese institutional environment.
It is to these issues that we now turn.

Implications of acquisitions for HRM in

Western literature on the implications of M&As
for human resource management has highlighted
the human-related challenges to post M&A
integration (e.g. Cartwright and Cooper, 1993;
Hubbard and Purcell, 2001; Marks and Mirvis,
1982; Morrison and Robinson, 1997; Nikandrou,


Source: adapted from China Statistics Yearbook, 2004.
Notes: *Figures refer to industrial enterprises above designated size with an annual sales income of over 5 million yuan.
**The gross industrial output value is calculated at current prices (original notes from China Statistics Yearbook, 2004, p. 513).






National total
State-owned and state-holding
Enterprises with funds from
Hong Kong, Macao and Taiwan
Foreign-funded enterprises


Average annual
wage (yuan)
(in million
tax payable
(billion yuan)
Sales prot
Sale revenue
(billion yuan)
Total assets
(billion yuan)
of industry
(billion yuan)
Gross industrial
output value
(billion yuan)**
No. of

One immediate concern after the acquisition is

that of job security. The majority of SOEs are
overstaed, and downsizing has been a major
initiative in the restructuring of SOEs in the last
decade. Issues related to redundancy are often the
focus of debate in acquisition negotiations. While
the MNC aims to retain only a minimum number
of employees selected on the basis of competency,
the SOE concerned and the local government
would like the MNC to retain as many employees
as possible and oer a generous redundancy
package in order to reduce the burden of the state
and minimize the negative social impact (Jin, Qi
and Li, 2003). In some cases, however, it is not


Job security

Table 3. Information on foreign investment in China (end of 2003 gures)

Papalaxandris and Bourantas, 2000; Robinson

and Rousseau, 1994; Schraeder and Self, 2003;
Schuler and Jackson, 2001; Schuler, Jackson
and Luo, 2004; Stahl et al., 2004; Weber, 1996).
They often point to issues such as cultural
dierences, communication problems, workforce
morale, trust, management style and organizational politics as barriers to integration that may
contribute to M&A failures. They point out that
nancial benets anticipated from M&As are often
unrealized because of conicts of organizational
cultures and that cultural integration remains a
major managerial challenge (Cartwright and
Cooper, 1993). Marks and Mirvis (1982) showed
that HR issues accounted for between one-third
and half of all merger failures and there is no
indication that things have improved in the last
two decades (Boxall and Purcell, 2003, p. 220).
While these Western lessons may have generic
implications for M&As in China, cross-border
acquisitions in China exhibit their own characteristics of HRM that are unique to the Chinese
context. As we can see from Tables 2 and 3, MNCs
and JVs are making up an increasingly large
proportion of businesses and employment in China
whose employment policy and practice has a
strong bearing in reshaping the pool of human
resources and the experience of work for a
signicant proportion of workers. Cross-border
acquisitions in China therefore have both positive
and negative impacts on HRM in SOEs specically
and in HRM in China more generally. These HR
implications stem from changes required as a direct
result of the acquisition itself and as a longer-term
HR strategy that evolves after the acquisition
under the inuence of the MNC.

F. L. Cooke


Acquisitions of Chinese SOEs by MNCs

the most competent employees who are retained.
As one senior manager interviewed said:
In our post-acquisition restructuring this time, the
key is to select and retain the most suitable
employees. They are not necessarily the most
competent ones, but the most suitable ones. We
then help them to get into their role and start
performing as soon as possible. During the
redundancy, we dont normally retain people
through demotion. In other words, those who are
not selected for new managerial posts will have to
leave the rm. It is dicult for demoted employees
to settle down in their new posts. They tend to look
for better opportunities elsewhere and then leave
once they nd one. For those who stay, they may be
there just to mark time rather than giving of their
best to the rm, and we dont want these people
because they dont add any value to the rm
(Personnel Manager of TyreCo).

Job security level in MNCs and JVs is generally

lower than that in the SOEs, especially for the
older workers, with xed-term employment contracts being the norm. The aggressive competitive
strategy of some MNCs also causes ongoing job
losses. For example, it was reported that in 1997,
Kodak launched a price war with Fuji in China.
This has led to the redundancy of 20 000
employees in 1997, followed by another 3400 in
1999 and 3000 in 2001 (Zhan, 2003).

Training and development

Acquisition creates immediate needs for training,
as the Marketing Manager of PharmaCo observed:
We needed to provide training to our marketing
and sales people, to inform our suppliers and
customers why the acquisition took place and what
the companys new business strategy and policy
would be; whether or not and/or how they might be
aected. We sent our people to their companies to
answer their queries arising from the acquisition in
order to allay their worries.

More generally, MNCs and JVs in China provide

a higher level and variety of health and safety and
skill training opportunities to their employees
than most other forms of ownership (Cooke,
2005). Many blue-chip MNCs and JVs also pride
themselves on employee training and development. However, it should not be taken for
granted that all MNCs and JVs in China will
provide the level of skill training that is antici-

pated of acquisitions. As was noted earlier, the

majority of FDIs is mainly in the manufacturing
industries, relying on intensive labour rather than
advanced technology. The lack of R&D investment or activities may also reduce the need and
opportunity for Chinese technical sta. Another
negative impact is that the entrance of MNCs into
China increases the employment cost of Chinese
professional and managerial sta, especially in
light of the wage war to compete for the rare
supply of local talent as skill supply increasingly
lags behind business growth. This in turn reduces
the workforce stability and organizational competence of domestic Chinese rms.
Pay, performance management and work
All three managers interviewed admitted that
wage income of their employees has generally
increased after the acquisition, reecting the fact
that, in China, wage levels are highest in foreignfunded enterprises (see Table 3). This is in part
because foreign-funded businesses are required
by regulations to pay wage at a level no lower
than the average wage of the same industry in the
local area. However, the wage increase is
accompanied by longer working hours and much
tighter performance control that is closely related
to individual and collective productivity. All
three enterprises have abolished their seniority
pay system and implemented a much atter
grading system mainly linked to performance
level and the position of the individual. Work
intensication has been the case for both
managers and workers.
Employment regulations and labour disputes
There are a number of employment-related
regulations that MNCs need to follow, at least
in principle, during and after the acquisition.
These include, for example, the State Restructuring Regulations, the Labour Law of China (1995)
and the Trade union Law (amended in 2001). The
State Restructuring Regulations require the SOE
being re-organized to rst seek the opinions of
the sta and Workers Congress of the SOE. In
addition, the Labour Law provides a general
framework of labour protection in terms of
recruitment and dismissal, pay, working time,
training, social security and health and safety

protection and so on, which applies to all employing organizations in China. However, in contrast
to their relatively higher level of pay and training
provision than SOEs, MNCs and JVs tend to be
more pragmatic in their observation of the
employment regulations, and there are frequent
violations of certain aspects of the regulations,
notably in working hours and social insurance.
There is a much lower level of union recognition and a higher level of labour disputes in
MNCs and JVs that are also more collectively
involved compared with the state sector. The
trade union ocials interviewed admitted that
foreign investment rms were the most dicult
ones to tackle:
They will not say no to you when you ask them to
set up a trade union, they will say, yes, we are
preparing to set one up. Two years later, they are
still preparing for it. Some of them who would
not set up a trade union even put up a sign at the
gate of the factory, saying: Those who wish to join
the trade union should go to such and such place to
register. Nobody dare to go for fear of job loss.
(Deputy Chairman of the Trade Union Headquarters)

Although all three enterprises still retained the

trade unions that were established during their
SOE years, managers interviewed generally observed that the unions hardly played any role in the
acquisition negotiation and subsequently played a
less active (welfare) role after the acquisition, as if
there had been a de facto trade union derecognition. This is not necessarily a result of the
foreign partners unsympathetic/hostile attitude
towards unionism. Rather, it may reect the limited
role of the trade unions in major decision-making
in the enterprises (even though this is their right as
specied in the Labour Law) and the ensuing
ambiguity of organizational identity felt by the
Adoption of Western management techniques and
workforce resistance
MNCs are often regarded as a potential source of
convergence in international HRM in that they
are expected to use their international perspective
to promote the diusion of best practice HR
techniques (Evans, Pucik and Barsoux, 2002;
Rubery and Grimshaw, 2003). This appears to be
the case in China, but only recently (Bjorkman

F. L. Cooke
and Lu, 2001; Lasserre and Ching, 1997) after
they were granted more autonomy to operate in
China. One of the most important consequences
of foreign involvement in Chinese joint ventures
has been the introduction of a more systematic
management approach in that the systems were
dened in writing, standardized and operated on
a regular basis (Child, 1994). Braun and Warner
(2002) found that a majority of MNCs in their
sample have placed a high strategic importance
to the HRM function and have attempted to
introduce internally consistent high performance
HRM practices. Bjorkman and Fan (2002)
further observed that the MNCs in their sample
had HR practices that tended to be more closely
in line with the high performance HRM system
as dened by Western HRM scholars than with
the personnel practices found in local Chinese
companies. This is in spite of the fact that these
HR best practices were mainly Western practices transferred and adapted to suit the Chinese
However, MNCs and JVs HR policies are not
necessarily embraced by their employees with
enthusiasm. For example, an earlier study by
Child (1994) found that, in the 30 JVs studied,
there had been various attempts to introduce
Western personnel tools with varying, but never
signicant, degrees of success. A common complaint amongst Western managers was that
Chinese sta were reluctant to accept personal
responsibility (Child, 1994). Another earlier
study (Ilari and Grange, 1999) on a Sino-Italian
joint-venture motor company in southern China
also revealed that the Italian partner found it
dicult to transfer its rm-specic advantages
to the Chinese ground because of the cultural
dierences in the two employment systems.
Legewies study (2002) on issues related to the
control and co-ordination of Japanese subsidiaries in China further highlights the problems of
an expatriate-based management system in transferring a typical Japanese rms strength, namely
socialization and networking, abroad and in
building up an ecient transnational network
of global operations. Nonetheless, there is
evidence to suggest that eort is made by MNC
managers to reconcile the twin pressures for
control and adaptation rather than satisfying one
at the expense of the other (Child and Heavens,
1999). A discernible trend is that Western HR
policies are gradually being accepted and inter-


Acquisitions of Chinese SOEs by MNCs

nalized by the younger generation of the Chinese
workforce who can no longer seek job security in
the state sector. This is reected in the fact that
MNCs and JVs are often perceived to be the
most popular employers (Beijing Youth Newspaper, 15 November 2002).
In all three enterprises, Western management
techniques have been implemented, notably that
of performance-related pay, ISO 9000 quality
series recognition, team working, problemsolving and plant care. This nding is similar
to that of Evans, Pucik and Barsoux (2002).
However, according to the managers interviewed,
these initiatives have received only moderate
enthusiasm from the shopoor workers, who
displayed compliance rather than commitment
to them. What they seemed to resent most was
the performance-related pay system and the
secrecy of bonuses (in BreweryCo, the system
has changed three times because of the workers
complaints). This is one of the areas where the
cultural dierence between the West and the East
is most distinct. The dierence in organisational
cultures has often been cited as one of the
important barriers to post-acquisition integration. MNCs acquiring Chinese SOEs are likely to
encounter even more diculties in the integration
because of the dierences of national culture.
Post-acquisition integration and harmonization of
terms and conditions
Unlike Western rms that may face erce market
competition and hostile bids, there is a relatively
lower level of competition in China, which allows
organizations more time for post-M&A adjustment. While M&A failure rate tends to be
relatively high in the Western economy, China
may have a lower M&A fatality rate in part
because MNCs are considered to be desirable
employers and in part because of the high
unemployment rate that may suppress any workforce discontent for fear of job losses. In any
case, the SOE concerned may be in a very bad
shape in the rst place and any change may
inject new life, or at least hope, into the
organization. However, the extent to which
anticipated improvements have been made for
those that were prot-making prior to acquisitions is unknown.
The discontent caused by the gaps in terms and
conditions between expatriate and Chinese man-

agers tends to be a problem. As more and more

Chinese managers and professionals have acquired management know-how and technical
competencies that were once held by expatriate
managers and professionals when foreign rms
rst entered China, this closing gap of knowledge
increases the bargaining power of local managers
and professionals, who are beginning to feel a
sense of distributional injustice arising from the
dierentials between expatriates and local Chinese
(Leung, Wang and Smith, 2001) and demand
terms and conditions similar to those enjoyed by
expatriates. For example, Tsangs study (2001)
revealed that a third of the Chinese managers
studied considered that the pay gap between the
Chinese managers and the expatriate managers
was unfair because their skills and eorts were
similar. Expatriate managers also saw the pay gap
as a barrier to their integration with their Chinese
colleagues, who resent pay dierentials.
In all three enterprises, only a small number of
expatriate senior managers and technical sta were
based in the Chinese plant, and these tended to pay
regular visits to their home country. According to
the managers interviewed, there was a level of
resentment to their control/intervention from both
the shopoor workers and the Chinese managers.
In one enterprise, the foreign partner had to roll
back the number of expatriates and the number of
management initiatives, particularly to do with the
new pay system, and let the Chinese managers take
charge. Integration between the expatriates and
the Chinese and harmonization of the terms and
conditions between the two groups appear to be an
important issue in post-acquisition management.

This article has provided an overview of the
driving forces for the acquisition of Chinese SOEs
by foreign investors. These forces come from both
the political and economic needs from the Chinese
side as well as FDIs strategic intent. While crossborder acquisition activities have been increasing
and spreading into more and more industries, there
are a number of pitfalls in the process that may
prevent the anticipated benets from being realized
for both sides involved and for China at a macro
level. These pitfalls may also be a source that
discourages potential foreign investors from acquiring Chinese rms. Importantly, cross-border

acquisitions trigger a range of implications for
human resource management that are unique to
the Chinese context.
Practical implications
This article has a number of practical implications. For foreign investors, the infrastructure for
M&A deals in China is not yet developed and
they should rely on their own professional
support for advice. However, the entry of foreign
banks in the Chinese nance and banking
industry will undoubtedly facilitate the development of an independent and professional nance
agency system to provide services for M&A
activities. There are also complicated and potentially conicting laws in China that need to be
followed when operating in China, in spite of the
fact that the interpretation and observation of
them tend to be lax. Intervention from the local
governments also tends to be relatively frequent,
which can be a source of support as well as
interference, causing non-market behaviour. Care
should also be taken in implementing HR
strategies in order to minimize cultural clashes
and inter-group disputes. For the Chinese side,
the primary motive for foreign investors to
acquire Chinese enterprises is to grow their
business and gain competitive advantages instead
of the economic and social wellbeing of China,
although this may be a coincidental outcome.
There is an urgent need for the Chinese to acquire
managerial skills in handling acquisition negotiation and post-acquisition management. The
Chinese government also has the dilemma
between, on the one hand, the need to control
the way MNCs should carry out their acquisitions in China so that they are not harmful to the
balance of the macro economy of the country
and, on the other, the need to attract FDIs to
create employment and economic growth. With
China gradually improving its policies, regulations, taxation and credit mechanism, the level of
international acquisition is likely to grow, supported by international capital back-up and the
growth of healthy Chinese enterprises.
Research implications
As for research implications, there have been few
empirical studies on international acquisitions in

F. L. Cooke
China, although there have been several major
studies of the management of joint ventures. As
this is a relatively new phenomenon, its impact on
China in terms of its human resource development,
R&D and technological advancement remains to
be seen. With the limited number of companies
that are listed in the stock market, full assessment
of these impacts are likely to be dicult because of
the lack of statistical information on non-listed
ones. However, one can perhaps reasonably
predict that the failure rate of international
acquisitions may be lower in China because MNCs
enter the Chinese market to take advantage of the
cheap production cost and to develop a new
market rather than trying to achieve cost savings
through synergy of two organizational systems
through a high level of integration and standardization. Therefore the need for cultural integration
may be less compelling for the acquired and
acquiring party. It would be useful to carry out
international comparative studies to explore similarities and dierences of international M&As in
dierent settings. Equally, more research is needed
on cross-border M&As in China because its
context is unique, and common analysis of the
M&A phenomena in the Western economies may
not provide an adequate analytical tool to make
sense of what takes place in China. As Baker and
McKenzie (2003) observe, Western-style mergers
between two companies are uncommon in China.
More importantly, research is needed to assess the
unique impact of M&As on HRM in the Chinese
context in order to establish how M&As may
aect employees loyalty, identity, trust, commitment and motivation at work, how these psychological feelings are managed and to what eect,
and what the implications are for managerial skills.
These research studies should take into account the diversity of foreign ownership and HR
strategy in China. Bartlett and Ghoshal (1989)
classify MNCs into four categories: multi-domestic companies that are organized on a decentralized basis; international organizations that are
organized to exploit the parent companys knowhow and knowledge, with core competence
centralized and others decentralized (Leong and
Tan, 1993); global corporations that treat the
world market as an integrated whole and operate
a tightly centralized management system with
limited delegation to local subsidiaries; and
transnational corporations that combine aspects
of each of the rst three types in order to be

Acquisitions of Chinese SOEs by MNCs

sensitive to local conditions, to develop competitive strategies at a global level and to generate
and share knowledge throughout the corporation
(Rubery and Grimshaw, 2003). The extent to
which each of these typologies of MNCs is
present in China is unknown. However, it can
be reasonably suggested that the implications of
each type for the development of Chinas
competitive advantage as a nation and the
adoption of human resource strategy are likely
to dier. This may be further complicated by the
evolution of the MNC itself as part of their
business life-cycle and the development of their
international proles. In the case of China, there
are dierent forms of foreign-invested enterprises, each carrying its own characteristics that
reect its home country and parent company
inuence, the MNCs business strategy and the
inuence of local institutional forces. Lastly, the
study of international M&As is necessarily a
multi-disciplinary and inter-disciplinary undertaking (Cartwright and Cooper, 1995; Stahl et al.,
2004) in order to advance our currently limited
understanding of the socio-cultural dynamics in
cross-border M&As (Stahl et al., 2004). This is
particularly important for China as the understanding of cross-border M&As in China requires
the collective work from the elds of business
law, economics, nance, organizational psychology, human resource management and more.

The author would like to thank the two referees
for their helpful comments on the earlier versions
of this paper.

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Fang Lee Cooke is Professor of HRM and Chinese Studies in Manchester Business School, the
University of Manchester. She has written and published widely on issues related to human resource
management, business and employment in China. She also has a strong interest in researching on
outward Chinese investment and the employment of migrant Chinese in developed countries, and
has published HRM, Work and Employment in China (2005).