Research On Transformation And Upgrading Of China’s Processing Trade Enterpises

Processing trade holds a decisive position in China’s economic development, and contributes greatly to manufacturing export, migration and employment of surplus rural labors, urban and rural integration, training for industrial workers, etc. During recent years, due to the downward trend of global economic situation, processing trade enterprises(“PTEs”) in China started to encounter increasingly prominent obstacles, and transformation and upgrading have become a vital strategic option as a result of their overreliance of particular development paths, vague corporate strategies and lack of talents. Currently, studies on the transformation and upgrading of PTEs mainly focus on the industrial level, and few of them have conducted quantitative analysis on corporate level. Besides, previous studies usually failed to effectively define “transformation” and “upgrading”, and the logical analysis for the strategy choice of transformation path they presented was usually simple and lack of innovation. Therefore, this paper tries to study PTEs’ transformation and upgrading from a micro perspective, and hopes to present its analysis from the perspectives of corporate governance and strategic choice. With the help of dynamic competition theory and dynamic capability perspective, this paper will work out the logics relating to the theory and practice of the strategy choice for PTEs’ transformation and upgrading, and then propose corresponding solutions. Qualitative and quantitative methods are jointly employed in this paper. After defining its research question and reviewing relevant literatures, this paper carries out empirical research and tries to establish a mathematical model with the data samples collected from interviews and questionnaires as well as secondhand data to test and expand the theoretical framework. In this paper, a theoretical framework and a relevant model are set up, and with the aid of two sets of sample cases(three for each set), it presents a case study on PTEs’ transformation and upgrading in China. Research conclusions are presented at two levels. From the level of corporate governance, investment in intangible assets holds a significant role in the transformation and upgrading of processing trade, and intangible assets can better propel corporate performance if the company’s shares are held by top executives; PTEs’ performance in transformation and upgrading is negatively correlated to their corporate scales; and private enterprises should play a leading position in PTEs’ transformation and upgrading. From the level of corporate strategy, “transformation” and “upgrading” differ from each other in concept. “Transformation” usually refers to the strategy that a PTE adopts when it encounters environmental threats and feels competitive tensions, while “upgrading” is the strategic performance and outcomes after a transformation strategy has been applied. “Transformation” includes two strategic options: one is resource diversion strategy, and the other is resource focusing strategy. Resource diversion focuses on applying core resources in new fields after a systematic analysis of these core resources, or nurturing new competitive edges through obtaining new resources; resource focusing, however, pays attention to improving technical innovation and service capability by having a deeper understanding of the PTEs embedded in the global chain of production values. Another conclusion from the corporate level is that PTEs’ competitive tensions and dynamic capacity have much sway for their choice of transformation strategy as well as the upgrading outcomes arising out of this. Their perceived competitive tensions are positively correlated to their rivals’ scales, competitiveness, and the degree of market overlapping in their environment. Differences in competitive tensions may incur variations in the paths of transformation and upgrading, and therefore it is of great importance to have a proper perception and judgment of the competition environment. PTEs should turn to suitable paths for transformation and upgrading in terms of their actual dynamic capability. Resource diversion can be adopted if there are obvious tensions in the competition environment and the company possesses the dynamic capacity of resource identification, integration, and rearrangement; for a company weak in competitive tension but adequate in concrete strategy and behavioral execution force, it’s better to expand horizontally on its existing global chain of production values and opt for resource focusing strategy. Different competition strategies may vary in their upgrading results. Enterprises that choose resource diversion strategy can obtain better industrial upgrading, vertical rise of its global chain of production values, global market expansion, new operation modes, or change of business modes; those choosing resource focusing strategy can obtain more technical innovations, wider horizontal expansion in its global industrial chain, and at the same time undergo changes in operation modes and upgrading in products and processes. The creativeness of this paper are mainly manifested in two aspects: first, it carries out quantitative analysis on enterprises from a micro perspective, and probes into the transformation and upgrading of PTEs in terms of corporate governance and corporate strategy, with the help of empirical and case analyses. Second, this study clearly demarcates the border between “transformation” and “upgrading”, and then from the evolutionary perspective and with the help of dynamic competition and dynamic capacity, it defines “environmental tensions—dynamic capacity—transformational strategy—upgrading performance”—an evolutionary path for PTEs’ transformation and upgrading as well as the correlation between these elements. Policy suggestions for PTEs’ transformation and upgrading are also proposed in this paper. At the macro level, governments need to provide targeted policy guidance and support according to their actual situations and development plans to direct PTEs to transform and upgrade in a way more suitable for local economic reality and targets. Second, administrative means should be adopted to increase the perceived competitive tensions of PTEs of high energy consumption and high pollution so as to force them to transform and upgrade promptly and realize national rearrangement for processing trade. Third, state-owned enterprises in processing trade industry should consider modifying their ownership portfolio and try to take full advantage of the role of private assets in PTEs’ transformation and upgrading. At the micro level, it is proposed that small and medium-sized PTEs should redesign and control the value chain and manage product quality; focus on segmented markets and professional development; stick to customer demands and improve the marketing ability in segmented markets; adhere to their strategic targets, avoid myopic behaviors, focus its resources to take the lead in the industry, and effectively achieve corporate growth, transformation and upgrading.