The Interactive Development of China’s Retail Industry “Going global” Strategy in the Context of the Belt & Road Initiative

Zhu Ruiting＊

Helping China’s retail industry to “go global” and get actively involved in global value chain competition is an effective way to improve the international competitiveness of China’s retail industry and an important measure to enhance the Chinese manufacturing industry’s position in international markets. The Belt and Road Initiative is China’s national strategy providing guidance for strategic decision-making for China’s retail industry in terms of overseas target market selection, market access selection and overseas investment risk management. As such, efforts should be made to maximize the interactive development of China’s retail industry through the strategies outlined in the Belt and Road Initiative.

the Belt & Road Initiative; China’s retail industry; “Going-global”Strategy; interactive development

1. Strategic Signifcance of China’s Retail Industry “Going Out”

Since the reform and opening-up, China’s economy has made remarkable achievements, lifting China to a global economic power. However, from the value chain perspective, Chinese manufacturing still lies at the bottom of the“smiling curve” in international labor division. We have relied on low-end productsin breakeven operations with low profit through low cost, quantity and consumption. The main reason for this is that Europe, America, Japan and other developed countries have mastered the highend value chain with research & development and design on one end, channel and distribution on the other end. They have also created powerful channel advantages and strong brand influence, thus becoming masters of price decision power and distribution power for most resources.[1]

In order to completely change the passive pattern in international labor division and construct a new pattern of world trade in services matching China’s position as an economic and trade power, we have to improve the technology and brand influence of Chinese manufacturing and at the same time, we should develop an independent distribution chain for Chinese enterprises to replace the present low-price purchase chain led by foreign merchants. We should also develop our own brands to gradually supersede the original equipment manufacturing we now do for others to eventually master overseas markets.In the process, China’s retail industry “going out” has special strategic significance.[2][3]

While promoting Chinese enterprises to “go global”, China should also consider taking the initiative to better integrate industry and resources. Considering the demands for Chinese manufactured products for the world and the needs of China’s retail industry development, we should think about how to obtain capital, technology, market and strategic resources through retail industry foreign investment, letting competent Chinese retail enterprises use their comparative advantages to reorganize the industries and enterprises of other countries, take part in international cooperation and competition so as to acquire market share and international competitive advantages and cultivate multinational retail enterprises. Accomplishing this requires us to raise China’s retail industry “going global” to the national strategy level.[4][5]

2. The Strategic Relationship between China’s Retail Industry“Going Global” and the Belt and Road Initiative

To integrate regional economies and promote globalization, China put forward the Belt and Road Initiative strategic concept in 2013. According to the Belt and Road Initiative, the Silk Road Economic Belt is an economic cooperative region formed by China, Central Asia and West Asia. Regarded as the longest and most promising economic corridor in the world, the Silk Road Economic Belt connects the Asian-Pacific economic circle in the east and leads to the developed European economic circle in the west. As a strategic idea, “the 21st Century Maritime Silk Road” is committed to constructing a tighter community of providence with the countries along the road. The involved regions cover ASEAN, South Asia, West Asia, East Africa, North Africa, and Europe, among others. The greatest feature of the Belt and Road Initiative strategy lies in the framework of equal cultural recognition.It aims to pursue cooperation in “policy coordination, facilities connectivity, unimpeded trade, financial integration, and people-to-people bonds.” Moreover, the Belt and Road Initiative covers developed countries, developing countries, neighbors and countries far away and can guide the development of win-win economic collaborations. Along with the construction of connectivity, it provides a huge opportunity for Chinese enterprises (retail industry included) to “go global”. As the Chinese government announced in Vision and Actions on Jointly Building Silk Road Economic Belt and 21st Century Maritime Silk Road, the construction principles, framework, cooperation priorities, and cooperation mechanisms of the Belt and Road Initiative have been established.The outline of a new globalization blueprint is becoming increasingly clear. The global industrial chain is extending and the production network is enlarging and improving, which has a far-reaching influence on guaranteeing the sustainable and innovative development of global safety.

Within the framework of the Belt and Road Initiative, China’s retail industry should fully capitalize on the advantages of China’s leading trade liberalization negotiations, seize the opportunity of network connectivity construction in foreign and domestic markets, give consideration to current and long-term situations, formulate appropriate and elastic foreign market investment strategies, and develop plans to implement and apply an integrated layout and coordination of overall global proliferation of China’s retail industry.

The interactive development model of China’s retail industry “going global” strategy and the Belt and Road Initiative strategy is shown as Picture 1.

Picture 1 Interactive development model of China’s retail industry “going global” and Belt and Road Initiative

3. Key Issue Analysis of the Interactive Development Model of China’s Retail Industry “Going global” and Belt and Road Initiative Strategy

The overseas expansion of our retail industry is a very complicated process and the key to success is having complete overseas market expansion strategies, developing powerful capacity for resource integration, and doing well in evaluating and managing strategic risks. Before stipulating overseas market entry and competitive strategy, retail enterprises need to analyze overseas market environments thoroughly to determine target markets and choose suitable market strategies. In the overseas investment decision-making of China’s retail industry, target market selection, market entry mode selection, and risk evaluation and control are the most important strategic contents.

3.1 Overseas target market selections for China’s retail industry

To those Chinese retail enterprises committed to “going global”, target market selection is the most important decision when planning to expand international operations. Research regarding the selection of overseas target markets has won the attention of western scholars.[6][7]Foreign researches have constructed theoretical frameworks for international retail overseas expansion market selection referred to as market proximity models. The market proximity triangle consisting of geography, economy and culture extends to the market proximity pentagon model made of culture, economy, society, public policy and retail structure, which provides a theoretical basis for market selections, especially for markets in the initial stages of internalization. Also, scholars research overseas market selection for retailers from the perspective of psychological distance and regard psychological distance as a significant factor affecting retail international expansion and organizational performance.[8][9]Psychological distance refers to the degree of recognized and perceived differences between the cultural and business environments of the home and host country markets. From the aspect of retail international development, geographicalproximity and cultural similarity have been the most important standards by which multinational enterprises select overseas markets.

The internationalization of Chinese retail enterprises is still in the initial stage. Compared with the retail enterprises of developed countries, China’s retail industry lags in international popularity, retail professional skill, and in cultural and image identification. Combining the characteristics of China’s retail industry and the overseas target market selection of retail industry “gone global”, the overseas market selection of Chinese retail enterprises should mainly consider geographical distance, cultural difference, market scale and consumption level of target countries, and the infrastructure level and policy environment of host countries.Basically, priority should be given to developing countries with favorable economic development, good market potential and in stable political relationships with China. In this sense, the current ideal retail overseas markets include Southeast Asia, Middle Asia and North Africa, which stretch along the Belt and Road Initiative.

Based on the principles of overseas target market selection and combining the national strategy of the Belt and Road Initiative, China’s retail industry can take a step toward internationalization through neighboring countries and regions, especially Southeast Asian markets. (Suning Commerce Group Co Ltd and Gome Electrical Appliances Holding Ltd, the two biggest electronic offline retailers in China have made beneficial attempts.)

To reduce the risks of international operations, enterprises can make full use of the geographical advantages and international resources of Hong Kong, Macao and Taiwan to enter foreign markets. First, enterprises should consider the node countries and cities along the Belt and Road Initiative. Then on the premise of sound operation, extend “The Belt”from the middle and west parts of China to West Asia and extend “The Road” from Southeast Asia to South Asia, West Asia, East Africa and North Africa, and finally converge the Belt and Road Initiative in the European market.

There are two patterns Chinese retail enterprises can follow to “go global”. One is an overall global proliferation strategy and the other is a regional concentration strategy. As for Chinese retail enterprises which are still not strong enough, a soundly-operated regional concentration strategy is a better choice.[10]The advantages of a regional concentration strategy lie in reducing logistics costs, shortening delivery times, assuring product freshness, lowering competition, enhancing regional popularity and lower marketing costs. Chinese retail enterprises should insist on localized preferential strategies, ensure high quality management in overseas markets, improve anti-risk capability, put stress on growth-type branch stores to rapidly occupy the market and acquire a high market growth rate, and be strong enough to withstand regional economic fluctuations. The overseas target market selection of China’s retail industry based on regional concentration strategy is shown as Picture 2.

Picture 2 Overseas target market selection in the context of regional market concentration strategy

China’s retail industry should give priority to the countries and regions which are along the Belt and Road Initiative, in free trade zones and oversea economic and trade cooperative zones, and have signed investment protection agreements with China to open overseas markets. These considerations areimportant for two reasons. It can give full play to the regional concentration strategy and help control multinational operational risks. These markets can also help the Chinese retail industry to effectively bypass trade barriers, lower trade friction, and acquire advanced technology and scarce resources.

3.2 Mode selection of China’s retail industry entering overseas markets

According to the WTO General Agreement for Trade of Service (GATS), trade service includes cross-border supply, consumption abroad, commercial presence and the movement of natural persons. At present, China has signed 14 freetrade agreements which cover 22 countries and regions. These include: the free-trade agreements between China and ASEN, Singapore, Pakistan, New Zealand, Chile, Peru, Costa Rica, Iceland, Switzerland, Korea and Australia; Closer Economic Partnership Arrangement (CEPA) between Mainland China and Hong Kong and Macao; and the cross-strait Economic Cooperation Framework Agreement (ECFA) between Mainland China and Taiwan. Also included are the countries and regions in the Asian-Pacific Economic Circle and the European Economic Circle. Many of these countries and regions are along the Belt and Road Initiative. To help Chinese retail enterprises select target markets, the author have sorted, analyzed, and compared the market access, entry conditions and policies of the countries which are along the Belt and Road Initiative and which have signed freetrade agreements with China (see Table 1). Given the vigorous development of cross-border e-commerce in recent years, cross-border B2C e-commerce has become an effective way for China’s retail industry to “go global”. Table 1 analyzes the main contents of market access of related countries in cross-border e-commerce and related logistics delivery (express delivery service) business.

Table 1 Market access table for selected service trade projects for China free trade agreement countries

Remarks: The table was sorted based on the specific commitments of service trade agreements signed by China and the named countries．① 1, 2, 3 and 4 represent the four forms of service trade． All projects target movement of natural persons． Unless otherwise stated, others are “no commitment is made except horizontal commitments．”② “?” the limitations on wholesale or retail products． Detailed information can be seen in the schedule of the specific commitments in Trade in Services Agreement(TiSA)．③ The table targets the countries or regions except “Hong Kong, Macao and Taiwan．” Therefore, the CEPAs between Mainland China and Hong Kong and Macao, as well as the ECFA between Mainland China and Taiwan are not calculated in the table．

From Table 1, the countries or regions signing free trade agreements with China have limitations on the movement of Chinese natural persons in wholesale & retail, cross-border e-commerce business and logistics delivery (express delivery) but basically have no limitations on cross-border delivery and consumption abroad. In terms of commercial presence, some countries establish access conditions while some have no limitations. Therefore, China’s retail industry“going global” and entering these target countries/ regions to engage in wholesale and retail business needs to satisfy the requirement of opening real stores stipulated by “commercial presence.” There are fewer obstacles in the cross-border e-commerce platform and logistics delivery (express delivery) system. It creates conditions for China’s retail industry to enter free trade agreement countries and regions to carry out domestic and foreign trade integration through cross-border e-commerce platforms and logistics systems. China’s retail industry can seize the opportunity of connectivity construction and take the lead to realize “going global” through cross-border B2C e-commerce in the countries along the Belt & Road Initiative.

3.3 Overseas investment risk management of China’s retail industry

The overseas investments of China’s retail industry are still in the initial, exploration stage and the challenges are daunting. The industry must face and resolve the complicated international environment with its capricious operational risks, and determine how to establish a risk prevention mechanism for overseas investments that is suitable for the current situation of Chinese retail enterprises. Developing a strategy to deal with these variables is of great significance.

Many developing markets are in countries involved in political upheavals, Pakistan and Afghanistan, and others bothered by religious and national problems like countries in South Asia, Middle Asia and North Africa. Many countries are trapped in the battlefields of superpower games, domestic regime changes, political transformations and thus pose big safety and political risks. Many countries have unstable or “changeable” policies and regulations. All these problems constitute the risk factors for China’s national strategy promotion and Chinese enterprises “going global”. Moreover, different laws, social cultures and commercial environments directly influence and restrict the development of the various markets. Consequently, the analysis and evaluation of national and trade risks in the countries along the Belt and Road Initiative has become one of the most important tasks for China’s retail industry “going global”.

Chinese retail enterprises implementing multinational operations must master the political, legal, cultural and commercial environment of target markets in the various countries or regions, formulate suitable and elastic investment and development plans, construct risk prevention mechanisms and develop management modes jointly participated in by “government-trade associationenterprise.” More specifically, the government must provide macro policy guidance and improve policy and regulation support including overseas investment insurance. The trade associations should assist the communications inside and outside the industry. Enterprises must incorporate risk prevention in their strategic management to clearly identify the risks inherent in operating in the various host countries, implement risk evaluation and research, establish timely risk prevention programs, provide rapid response systems and related regulation mechanism, and recruit and cultivate expert multinational operational risk management personnel.

4. Countermeasures and Suggestions for the Interactive Development of China’s Retail Industry“Going Global” and the Belt and Road Initiative Strategy

China’s retail industry “going global” strategy, overseas target market selection, market access mode (time, access conditions, policies and methods) selection, overseas investment risk management and other key strategic decisions highly agree with and overlap the strategic plan of the Belt and Road Initiative in theory and content. Therefore, we should reinforce top-level design, actively explore the countermeasures and suggestions for the interactive development of China’s retail industry“going global” and the Belt and Road Initiative both in domestic and foreign directions, in the aspect of the national plan, law, policy, coordination, service platforms and cluster-type “going global” of correlative industry aspects, to give full play to the overall maximum effect of national strategy.

4.1 Strengthening the communication coordination of bilateral and multilateral frameworks by enlarging cooperation between governments

The Belt and Road Initiative includes goals related to cooperation priorities and strengthening policy communication as top priorities. We should reinforce intergovernmental cooperation by actively constructing multilevel macro policy communication mechanisms, aim to expand interest integration, promote mutual trust and reach expanded cooperative consensus. Countries along the line should make full communication in terms of economic development strategies and countermeasures, jointly formulate plans and measures to promote regional cooperation, negotiate and solve cooperative problems and provide policy support for practical cooperation and large project implementation. As the initiator of the Belt and Road Initiative, China should actively lead and strengthen policy communications and coordination within bilateral and multilateral frameworks to create favorable external environments for Chinese enterprises to “go global” .

Recently, China has signed bilateral investment protection agreements with more than 130 countries. But China signed most of these agreements as an investment host country rather than as an investment export country. Therefore, in the negotiations of the Asian-Pacific free trade zone, regional investment protection agreements, free trade zones and overseas economic and trade cooperative zones involved in the Belt and Road Initiative, we should establish a policy communication and coordination mechanism with host countries, sign bilateral investment protection agreements, actively carry out commerce and tradecirculation policy dialogue between governments to reduce or relieve limitations made by host countries on China’s commerce and trade service enterprises “going global”. Also it should be clearly stated through legislation that Chinese export credit insurance companies are entitled to exercise the subrogation right to claim against host countries pursuant to the agreements. In the bilateral negotiation at the government level, mutual promises should be made to protect the enterprise assets and personal security of the other party. We should avoid political discrimination policies and violence and jointly build claim systems at the national level. Meanwhile, Chinese enterprises should be supported when using WTO trade dispute settlement mechanisms to protect their rights and interests. When the government signs an agreement with an investment country, tax credits and local preferential tax policies can be established; the application scope of overseas tax credit for enterprises “going global” should be improved and double taxation should be avoided.

4.2 Strengthening top-level design and constructing strategic support systems for the interactive development of China’s retail industry“going global”

In the context of the Belt and Road Initiative, the promotion of interactive development of China’s retail industry “going global” needs to facilitate, support and guarantee measures designed to prop up the retail industry “going global” through legislation, coordination of systems and mechanisms, construction of service platform systems and clustertype “going global” methods of correlative industries at the national level.[11]

4.2.1 Reinforcing the top-level design and overall planning of “going global” in the aspect of law and regulation support systems

① Strengthen top-level design at the national level. Using China’s economic sustainable development as the starting point, we should further enhance the sense of urgency, crisis and mission of Chinese enterprises “going global”, upgrade retail enterprises “going global” to a national strategy and integrate it into the framework of the Belt and Road Initiative strategy. Also, we should establish “going global” centralized management organizations to take charge of integrated planning of international development for Chinese enterprises, issue industrial guidance catalogues of international development for Chinese enterprises, define the preferential state and key tasks of retail industry international development, construct mid-term and long-term development plans for the retail industry based on international competition, determine the targets, ways and measures of Chinese retail enterprises’internationalization, give full play to multilateral and bilateral mechanisms, encourage enterprises to absorb advanced production factors and cultivate internationally known brands by setting up or merging with research and development organizations.

② Formulating and improving relevant laws and regulations. Since the reform and opening up, China has focused on attracting foreign businesses and investment and has issued a series of laws and regulations designed to “introduce” China to potential businesses.But there are still no authoritative laws regarding “going global”, which has become a big obstacle to the healthy and orderly development of foreign direct investment from China. Given the vigorous development of China’s foreign investment since the implementation of “recording first, approval supplement” in 2014, it has become imperative that we should formulate China’s Foreign Investment Law and Overseas Investment Insurance Law, which aims to define the legal status and regulation of related investment subjects, create favorable legal environments and comprehensive guaranteeconditions including risk prevention and controls for Chinese enterprises making investments overseas.

③ Increase policy support in administrative examination and approval, finance and taxes. This includes determining an enterprises’ subject status in foreign investment and promoting the convenience of foreign investment. Therefore, we should accelerate the transformation of government functions, reform and improve administrative examination and approval systems for foreign investments, streamline administration and delegate power, enlarge the approval and management rights in local overseas investment fields, and generally attempt to stimulate market vitality. We should set up special funds or capital for overseas investment finance, support enterprises to “go global” by using loans and interest subsidies, substituting subsidies with rewards, applying acquisition funds and reserves against loss, strengthen the support of “going global”enterprises involved in “changing business tax to value-added tax,” income tax and tariffs. Besides, we should innovate financial support, simplify the approval process of overseas investment finance, employ foreign exchange reserves to promote “going global”, accelerate RMB internalization and take full advantage of the experience of China’s (Shanghai) Pilot Free Trade Zone.

4.2.2 Planning and coordination of systems and mechanisms

① We should enhance the level of existing ministerial joint conferences, construct special coordination mechanisms to accelerate the implementation of “going global” strategy and cultivate local multinational companies at a higher level. Within the existing framework of the Belt and Road Initiative construction organization, we can establish special service groups for “going global” including the retail industry and coordinate the foreign investment of the service industry.

② We should reinforce the policy research and formulation of “going global” enterprises and further define the responsibility and authority of the National Development and Reform Commission, the Ministry of Commerce, the Ministry of Finance, the Ministry of Foreign Affairs, the General Administration of Customs, the People’s Bank of China, the State Administration of Taxation and the State Administration of Foreign Exchange, as well as strengthen the policy coordination, resource planning, action arrangement and risk response.

③ We should intensify the policy and resource planning and coordination between central and local governments, strengthen project coordination and guidance, streamline administration and delegate power, improve work efficiency and stress the planning, guidance and service of enterprise overseas investment. Since many regions in China are enthusiastic about participating in the construction of the “Belt and Road Initiative”, we should deal properly with the relationships between national interests and local interests as well as overall interests and enterprise interests to avoid internal friction.

4.2.3 Construction of service platform systems

① We should improve the public service system of “going global”, construct unified service platforms for overseas investment affairs, provide relevant project consultation, overseas guidance, exit and entry controls, and financing insurance.

② Learning from the Japan External Trade Organization and the American Chamber of Commerce, we should develop civil or semi-official associations or organizations and enhance their professional functions relating to overseas investment services. Through government purchasing services and subsidy methods, we should encourage investment banks and law firms to provide services. We should also cultivate entrepreneur groups withglobal vision and familiarity with international rules and talents acquainted with international market rules and practices with high foreign language levels in foreign trade, finance, law and management, to provide powerful talent support to assist enterprises in making overseas investments.

③ We should promote commercial diplomacy and serve the “going global” strategy of Chinese enterprises. Presently, Chinese commercial personnel account for only a small proportion of foreign diplomats. This is a striking contrast to the high proportion of commercial personnel in western embassies in China. China should also actively conduct civil diplomacy and jointly create sound external environments for Chinese enterprises to“go global” with the help of foreign chambers of commerce and associations in China.

(D) Promote cluster-type “going global” of related industries.

China should take the circulation industry approach to developing a strong and efficient global retail presence. This requires a close funda-mental relationship between manufacturing and consumption to construct a market security mechanism to support our retail industry to “go global” by enhancing their international competitiveness.The main measures include driving the construction of the circulation market system, pushing the integration of Chinese circulation standards with international standards, strengthening business coordination, promoting the integration of domestic and international trades, reinforcing and giving full play to intermediary industry, motivating the clustered international expansion of the whole industrial chain of Chinese retail industry by intensifying the interactive development of correlative industries in the whole value chain dominated by retail terminal, and boosting managerial and administrative level by introducing commercial technology of modern retail industry.

(English editor: Jia Fengrong)

This paper has been translated and reprinted with the permission of Reform of Economic System, No.2, 2016.

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*Zhu Ruiting, professor, Business School, Shanghai Jianqiao University．

*Foundation item“:A Study on the Strategies and Supporting Systems of‘Going Global’of Chinese Retail Industry”which belongs to the Humanities and Social Sciences Research Projects of Ministry of Education (13YJAZH147)．