The Responses of Chinese Cosmetic SMEs to the Impacts of Large Foreign Firms: an Examination of Attitudes and Strategies

Abstract

Foreign direct investment (FDI) offers China many business spillovers, which provide useful guiding principles and marketing experiences for the Chinese economy. However, foreign firms are also powerful rivals to China’s domestic firms, and create high levels of competition. In this study, the Chinese cosmetic industry is investigated in terms of the impacts of FDI. Competition in China’s cosmetics industry has become very keen, with the number of large foreign cosmetic companies increasing dramatically as the industry has expanded. Because China is one of the world’s major economies, there are also large numbers of local cosmetic small to medium enterprises (SMEs), which are growing rapidly to occupy the domestic market. High quality overseas brands have raised consumers’ expectations, so local cosmetic SMEs are facing the competitive pressure of globalization. This study analyses the development of Chinese cosmetic SMEs, in terms of the attitudes and strategies these firms are adopting to deal with pressure from foreign firms. Face-to-face interviews were conducted with the representatives of ten Chinese cosmetic SMEs, located in Shanghai and Shandong provinces. These regions were chosen because the majority of successful and normative local cosmetic SMEs are located in these provinces. The samples chosen all met the definition of Chinese SMEs in terms of company size, annual turnover and the existing form of each company. The AMC framework, applied in recent management research, was used to analyze ten in-depth interviews relating to the impact of foreign cosmetic companies on Chinese cosmetic SMEs. This study indicated that most of the Chinese cosmetic SMEs showed positive attitudes towards the impact of large foreign firms; they believed the entry of large foreign firms provided them with advanced standards to follow. In addition, most of the them held a positive attitude towards collaboration with large foreign firms, as positive spillovers can be generated in many ways, including technology transfer, knowledge and managerial know-how. Potential new approaches and future strategies are also highlighted; for example, beauty salons as an emerging area provide huge potential for Chinese cosmetic SME engagement. However, in the face of fierce competition from large foreign firms, acquiring all the necessary resources (technology, managerial know-how, innovation skills) means that Chinese cosmetic SMEs still have a long way to go.