Firm Strategy and Industrial Development in China
Edited by Mariko Watanabe
Chapter 1: An analytical framework for the vigorous entry and low price phenomenon
This chapter presents a framework for analyzing the vigorous entry and low price phenomenon found in Chinese industries. We will attempt to extract common themes and logic from research undertaken by a variety of observers of Chinese industry. In particular, we focus on the links between the vigorous entry and low product price phenomenon we have seen in the introduction and vertically disintegrated transactions. As already discussed in Section I.2.1 of the Introduction, the legacy of technology since the planned economy era, the huge domestic market, technology transfer from abroad and foreign direct investment (FDI) are important factors and preconditions for industrial development. As voluminous monographs on industrial research have pointed out, the vigorous entry and low price phenomenon, based on these preconditions, dominates the behavior of domestic firms. This chapter will concentrate on presenting an explanation of the mechanism of appearance of the vigorous entry and low price phenomenon. The domain of operation that a firm enters forms a part of a value chain for a particular industry. Chinese firms often subdivide this domain into narrower sections to aid entry into the market. Chinese companies sometimes even subdivide domains that are usually regarded as being dealt with by a single firm. We call this phenomenon vertical disintegration. In order to consider why and how vertical disintegration takes place, in Section 1.1 we first review the literature related to vertical integration, the opposite of vertical disintegration.