Book proposal and book review

195 The China Business Model. Copyright © 2017 I. Beveridge, J. Kadura and A. Stratemeyer. Published by Elsevier Ltd. All rights reserved.

http://dx.doi.org/10.1016/B978-0-08-100750-1.00009-7DOI:

CHAPTER 9

A New FDI Framework in the Chinese Services Industry

Ivana Beveridge1, Johannes Kadura2 and Andreas Stratemeyer3 1Université Panthéon-Assas Paris 2-Sorbonne Universités, LARGEPA, Paris, France 2Peking University, Beijing, China 3California State University, Fresno, CA, United States

9.1 INTRODUCTION: CONTEXT CHANGE IN THE CHINESE MARKET

This chapter suggests a new internationalization strategy for transnational entrepreneurs (TEs) in the relatively unexplored Chinese service segment. Our research question was: what is a suitable internationalization strategy for TEs in the Chinese services segment? We acknowledge the context change in the Chinese market, where the service sector is becoming an important driver of the economy, accounting for 48.2% of China’s economic output in 2014 (KPMG, 2015). This shift from the traditional manufacturing base cre- ates new opportunities in the Chinese services market, fueled by the grow- ing middle class and the pace of urbanization. Our starting assumption was that this unparalleled shift in the Chinese market requires a paradigm change for crafting successful internationalization strategies.

The rise of Chinese entrepreneurial stars, such as Alibaba Group’s founder Jack Ma, has generated keen global interest, portraying China as an emerging entrepreneurial hotspot. China ranks rather high amongst a num- ber of other nations on dimensions such as fear of failures and entrepre- neurial intentions (Global Entrepreneurship Monitor, 2010). Furthermore, China’s homegrown startups are amongst the most successful in the world: in 2014, Alibaba Group had the largest US IPO ever at $25 billion (Forbes, 2014). Although small and medium-sized enterprises are estimated to account for about 60% of China’s industrial output, China’s economic suc- cess is seldom associated with entrepreneurship (IFC – World Bank, 2012).

The Chinese entrepreneurship has attracted research interest in the recent years; however little has been said about specific opportunities and challenges for a growing number of TEs in China. Although a substantial

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body of academic research focuses on opportunities and challenges for multinational companies in China, the opportunities they present in the entrepreneurial sector remain relatively unexplored. Entrepreneurship is not sufficiently studied in emerging and developing economies—the issue of access to information and social networks requires further attention (Child & Hsieh, 2014).

An aftermath of the global economic crisis coupled with rapid glo- balization saw the emergence of TEs, as a new breed of entrepreneurs from developed countries starting businesses in developing countries. In the last decade Transnational Entrepreneurship was established as an inde- pendent field of study between International Entrepreneurship and Ethnic Entrepreneurship. Today, transnational entrepreneurship is a growing phe- nomenon, with an increasing number of Western professionals deciding to utilize opportunities in the fast-developing, dynamic emerging markets that offer a large commercial scale and fast return on investment. Owing to their agility and a unique transnational cultural repertoire, TEs may be in a better position to elaborate, adapt, or modify the rules to novel circumstances (Drori, Honig, & Wright, 2009), internationalize directly (Terjesen & Elam, 2009), and use customer service as a key source of their competitive advantage. TEs are especially well-suited to learning and adapting to the specific cultural and economic characteristics of the host country as opposed to multinational corporations. Thereby, TEs with their unique ability to understand and blend in with the local economy might be able to profit from China’s shift toward a consumption-based economy and set up successful service businesses in China.

As a result of empirical research on a pool of 200 TEs and 150 service clients, we propose a new internationalization strategy specifically suited for the Chinese services segment. Our Transfer-Adapt-Scale (TAS) frame- work is tailored toward TEs operating in the fast-growing and a relatively unexplored Chinese service market. We suggest this three-step framework for TEs in order to succeed in the Chinese market and utilize the cur- rent economic change, unparalleled in Chinese history. Consequently, TEs must initially identify successful business models in their home countries. Rather than copying these service models, TEs need to adapt them to the specific Chinese market segments. Once TEs have successfully adapted their service business to the Chinese market, the next step is to scale up, in order to take advantage of China’s growing middle class as a prospective customer base.

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We focus on the adaptation stage of our suggested framework. This is where most TEs’ creativity and management skills are needed. Using a Chinese dialectical logic as a departure from prevalent binary models for cultural analysis, we shed light on important cultural parameters that exert strong influence on the adaptation of Western services in the Chinese market.

9.2 THEORETICAL UNDERPINNINGS

TEs are defined as “social actors who enact networks, ideas, information, and practices for purpose of seeking business opportunities or maintain- ing businesses within dual social fields, which in turn force them to engage in varied strategies of action to promote their entrepreneurial activities” (Drori et al., 2009, p. 1001). They are seen as “social actors capable of bear- ing risks and taking strategic initiatives to establish, integrate, and sustain for- eign operations” (Yeung, 2002, p. 37). TEs are rapidly emerging across the world and they form an important aspect of international business expan- sion. Academic research on this topic, however, is limited: it lacks rigor and focuses primarily on concept definition rather than empirical studies and applications (Connelly, 2010; Drori, Honig, & Ginsberg, 2006).

Horizontal Foreign Direct Investment (HFDI) has been the most prevalent Foreign Direct Investment (FDI) model; yet, there is also evi- dence of a surge of vertical Foreign Direct Investment (VFDI) (Hanson, Mataloni, & Slaughter, 2001; Navaretti & Venables, 2004). The OLI para- digm proposed by Dunning (1977) remains one of the prevalent concep- tual frameworks for internationalization. This “eclectic paradigm” suggests a three-tiered framework to determine whether FDI is beneficial in a for- eign country. It suggests advantages of ownership (comparative advantage of the company seeking to engage in FDI), location (attractiveness of the selected location and whether a company derives greater benefit through a foreign establishment) and internationalization (advantages by own production rather than through partnership) as necessary conditions for successful FDI (Dunning, 1977).

Cultural analysis is essential for crafting successful strategy, consider- ing that socio-cultural values are a major aspect of a firm’s environment (Mooij & Hofstede, 2010). The ability to exercise influence in culturally mixed interpersonal networks has a strong impact on global management effectiveness (Fu et  al., 2004). Cultural factors are particularly important,

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given that ethnocentric predisposition and cultural imperialism are amongst the key reasons for failure in a multicultural context (Chaney & Martin, 2010).

The change of values within China are apparent in the last three decades, and they come as a consequence of “proactively invited collisions with foreign systems, foreign values, and foreign lifestyles” (Fang, 2011). Although a number of studies have been conducted on Chinese cultural factors exerting influence on international business, there is an apparent over-reliance on a small number of frameworks to interpret Chinese and Western cultural differences, notably Hofstede’s (1980) cultural dimensions model. Validity and applicability of this model has been questioned by Chinese and international researchers alike, highlighting its static, binary nature. Very few other categorizations of culture have been applied in cross-cultural research; conflicting findings and inconsistencies appeared in the studies using this approach (Briley & Aaker, 2006; Fang, 2003, 2011, 2014; Faure & Fang, 2008; Heine, Lehman, Kaipeng, & Greenholtz, 2002; Hong & Mallorie, 2004; McSweeney, 2002; Tung & Verbeke, 2010; Zhang, Beatty, & Walsh, 2008).

Chen (2011) suggested that dichotomizing culture is a common prob- lem in academic research. Static, polarized, “either/or” and noncontra- dictory approaches classifying cultures along a fixed scale provide general methodological advantages for cultural analysis, however they carry a risk of missing diversity within culture (Fang & Faure, 2011). As the market matures in China, it is necessary to move beyond normative assumptions and to recognize that diverse, context-specific factors beyond bipolar dimensions prevail in the process of attitude formation (Chu, Hsu, & Li, 2008). There is a need to extend the existing binary methodology for the analysis of the Chinese cultural values in order to capture the complexity and changes in today’s Chinese society (Fang & Faure, 2011).

Confucian philosophy has held a dominant position in the Chinese history and it still exerts great influence on the Chinese business dynamics, forming the framework for business practices today. The concept of “rule by man” was advocated throughout the Chinese history by Confucian scholars, versus the “rule by law” suggested by the followers of the legalist school (Fung, 1966). Jacobs, Gao, and Herbig (1995) point at the historic origin of this concept, revealing the differences from the Western world where a combination of contractual relations used for the serf system, and church support exercised control over behavior and served as a dis- ciplinary mechanism. Ancient China had neither contractual relations nor

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religion, and it remained without a code of civil law similar to the Roman law, with only the criminal law and imperial decrees (Hendryx, 1986).

9.3 METHODOLOGY

We applied a mixed research methodology. We first collected data using qualitative observations on a group of 200 TEs, currently representing active members of the “China Entrepreneur Net” platform. This Beijing- based nonprofit organization caters to a growing pool of TEs in China. At the time this chapter is written, it has 850 members in China and abroad. Observations were held over a period of the 2 years since its inception in January 2014, with a view of understanding which internationalization strategies are used by successful TEs in the Chinese service sector. This was combined with a quantitative survey of 47 TEs in the Chinese service industry who are also the members of the platform. The survey focused on understanding their main business challenges and factors of success in the Chinese service market. In order to understand specific factors for suc- cessful adaptation of the TAS model, we applied an ethnographic research method to study one transnational service startup. Ethnographic research was operationalized through participatory observations held over 18 months on a total population sample of 150 Chinese service customers, and in-depth semi-structured interviews in Chinese with 49 respondents from this group were conducted. We used stratified random sampling in both cases. The advantage of this method is the ability to representatively sample even the smallest and most inaccessible subgroups, inclusive of the rare extremes in the given population. Moreover, it has a high statistical precision, thereby requiring a small sample size that saves time and effort (Särndal, Swensson, & Wretman, 2003).

In order to move beyond the prevalent binary models for cultural analysis, we used the prism of paradox theories previously mentioned as a valuable approach to reveal other possibilities in any theories constructed on clear-cut distinctions (O’Driscoll, 2008; Ybema, 1996). Fang (2011, p. 45) suggested that, although China management research has been a subject of much interested in recent years, “business journals have had the propensity to unquestioningly adopt ‘established’ Western approaches without penetrating beneath their underlying assumptions.” To avoid the traps of using a Western-centric approach to study Chinese service con- sumers, we applied a dialectical approach to cultural analysis through the inherent Chinese symbolism of Yin and Yang. Fang (2011, p. 27)

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also suggests that there is a potential to incorporate Yin Yang dialecti- cal thinking in cross-cultural research as “more embracive and holistic in nature than the current cultural models.” The Yin Yang perspective for understanding cultures is suggested as a valuable prism for cultural analysis because potential paradoxical values coexist in any culture. This approach embraces opposite traits of any cultural dimension, and presents an alter- native to the static cultural dimension model (Fang, 2011). The ability to manage paradoxes is proposed as China’s most important cultural charac- teristic. From a Chinese perspective, everything embraces opposite prop- erties; Chinese worldview is essentially “both-and” instead of “either/or” (Fang, 2003).

This dialectical approach to cultural analysis was operationalized through the framework of “eight pairs of paradoxical values” suggested by Faure and Fang (2008): (1) Guanxi vs Professionalism; (2) Importance of face vs Self-expression and directness; (3) Thrift vs Materialism and osten- tatious consumption; (4) Family and group orientation vs Individuation; (5) Aversion to law vs Respect for legal practices; (6) Respect for etiquette, age and hierarchy vs Respect for simplicity, creativity and competence; (7) Long-term orientation vs Short-term orientation; and (8) Traditional creeds vs Modern approaches.

9.4 DISCUSSION

9.4.1 Transfer-Adapt-Scale Framework The Chinese society is experiencing an unparalleled change of con- text, undergoing a transformation from a production-based society to a consumer-and-service society. We suggest that TEs are in a unique posi- tion to take advantage of the transformation process in China and use this potential to tap into a vast services market with a substantial, emerging middle class. Today, China has approximately 52% urban population. This is expected to increase to 63% in 2022 when China’s middle class could number 630 million, or 76% of urban Chinese households and 45% of the entire population. The upper-middle class currently accounts for 20% of China’s urban private consumption and is expected to comprise 56% of urban private consumption by 2022 (McKinsey & Company, 2014). This large consumer group is picking up Western consumption patterns and integrating them within their own cultural milieu.

This societal change is unparalleled in the Chinese history and neces- sitates a paradigm shift for crafting successful internationalization strategies.

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To that end, we propose a new internalization strategy for TEs in the Chinese services industry visualized in the TAS framework presented in the Fig. 9.1.

TAS is a threefold framework that involves the following steps: a trans- fer of successful Western service models in the specific industry segments where opportunities for TEs arise from contextual circumstances; their adaptation to suit the local consumption needs and tastes; and scaling up to utilize the commercial scale of the emerging Chinese services market. Our research indicates that there are four main areas of interest for the Chinese service consumer, including: quality of life, creativity, prestige, and knowledge-related services. These are also the services where TEs have a potential to obtain competitive advantage vis-à-vis large multinationals. Adaptation involves customizing the service offering to suit the local mar- ket needs, including the finding and managing the Chinese partner who becomes a potential buyer if a TE decides to exit by selling to the same partner, or through other types of mergers or acquisitions. Commercial scale could be achieved through organic growth or through partnerships. The scaling process applies relevant to geography, structure and capital, and expansion into second-, third- and fourth-tier cities in China.

TAS is specifically tailored toward the services industry in China. It makes use of context and takes advantage of the transformation process that China is going through. Its approach is market-led, and is based on matching the very specific Chinese market needs to what Western econo- mies have to offer in terms of services. As such, TAS encompasses the mar- ket process, allowing TEs to contribute to the current transformation in China. While adjusting to the market conditions, TEs simultaneously have the potential to shape the market and influence its trends. TAS framework

Transfer

Adapt

Scale

Geographic

Structural

Financial

Local tastes

Quality of life

Creativity

Prestige

Knowledge Local customs

Figure 9.1 Transfer-Adapt-Scale framework.

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considers added benefits of partnerships in certain segments, in order to scale within the Chinese services market—characterized by volume and vast differences between the regions.

Finally, the TAS framework incorporates macro factors by looking at industry-level developments at a regional level. It matches the most pro- spective industries in a single market to regional developments, as to pave the way for future regional expansion. All of the prospective service areas identified by the TAS framework present strong potential for further development in Asia for the TEs expanding from their China base.

9.4.2 Main Challenges for TEs in the Chinese Service Market In this section, we demonstrate findings from the quantitative survey of 47 TEs in the Chinese service segment. As shown in the Fig. 9.2, cultural challenges—namely lack of understanding of Chinese cultural values— present the single biggest business issue for 34% of TEs. Partnership issues resulting from cultural challenges emerged as the second biggest issue for TEs in the Chinese service domain (25.5%), therefore showing that 59.5% of business challenges for TEs in this sector have a strong correlation to cultural factors.

As shown in Fig. 9.3, lack of information about the market (23.4%) and unclear procedures (31.9%) jointly account for 55.3% of the main issues regarding doing business in China. We suggest there is a clear corre- lation between cultural factors and a lack of information about the market and its procedures, as shown in the Fig. 9.2.

Fig. 9.4 shows the most attractive industries for TEs in China, dem- onstrating the aforementioned change in the maturing service market.

Figure 9.2 Single biggest issue regarding doing business in China.

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Consulting takes up 27.7%, leading traditional sectors, such as trade and manufacturing, which jointly represent 25.5%.

Rising interest in private education in China further testifies to the market change. This relatively unexplored segment is ranked as one of the most prospective industries for development over the next 10 years (McKinsey & Company, 2014). Asian students represent 52% of foreign students enrolled worldwide, and they are set to account for 70% of the global demand for international higher education by 2025. The number of Chinese students overseas more than tripled between 2003 and 2013 and 92 % of them are self-funded (ICEF Monitor, 2015). This trend has lead to a rapidly raising demand for undergraduate education across Asia using English to teach academic subjects and life skills to prepare children for studying abroad. English language international schooling has developed

Figure 9.3 Biggest worries when it comes to starting and growing a successful busi- ness in China.

Figure 9.4 Industries of interest (for entrepreneurship in China).

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exponentially in the first decade of this century, and the number of stu- dents attending English-speaking international schools grew globally by 140% (International School Consultancy Group, 2014). This process is accompanied with the shift from a traditional nonprofit to a for-profit model, the proliferation of private educational companies, and a grow- ing army of “edupreneurs” (Bunnell, 2014). Demand outstrips supply in a counter-cyclical Chinese private education market, offering a substantial commercial scale (Morgan Stanley, 2011). If the potential for international schooling is realized in China, “it is likely to dwarf growth in any other country” (ICEF Monitor, 2014).

9.5 PARAMETERS FOR WESTERN SERVICE ADAPTATION IN CHINA

In many transition countries, firms innovate primarily by adopting exist- ing products and technologies and adapting them to local circumstances (European Bank for Reconstruction and Development, 2014). Thereby, adaptation presents a unique opportunity for TEs to innovate and gain competitive advantage over multinationals. We focused on cultural fac- tors serving as parameters for the adaptation stage of the TAS framework. Likewise, these factors present a source of competitive advantage for TEs in China. In this section, we present findings from the ethnographic research of one TE startup, combined with qualitative observations per- formed amongst 200 TEs.

Ethnographic research was performed on one successful TE startup in the educational domain. This company manages a full-time preschool and a part-time tutoring school in Beijing, and uses English to teach academic subjects and life skills. It has achieved high market growth (30%) and client retention (over 80%).

All company clients were subjects of observations and interviews as Chinese parents or buyers of education whose children are aged 3–15. They have middle- and upper-middle class income and they were born between the mid-1960s to mid-1980s. This “generation X” received tradi- tional Chinese education and they are now experiencing a very different China from the one in which they were born.

We used the dialectical Yin Yan approach to cultural analysis, opera- tionalized through “eight pairs of paradoxical values.” Our research has empirically demonstrated that a tendency to reconcile between paradoxi- cal values is the key driver of consumer attitudes in this Chinese services

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segment. Paradoxes that appear binary from the perspective of Western formal logic are complimentary in the eyes of the Chinese consumers. Thereby, the opposites are not seen as a win-lose proposition or a dilemma as a predicament of choice. Instead of “either/or,” the “both-and” (Fang, 2003) approach prevails in their behavior.

This is shown on the example of parental perception of differences between Western and Chinese educational systems. Figs. 9.5 and 9.6 show how respondents perceive differences between the two educational sys- tems. As shown in Fig. 9.5, only 36.7% of the respondents believe that there are essential methodological differences between the two educa- tional systems, while 55.1% consider that there are “some differences.” In both cases, Western education is not seen as superior to the Chinese in order to justify high tuition fees charged by the Western learning cen- ters. In particular, preschool fees in first and second Chinese cities are on par with or higher than many prestigious US schools. This indicates that Chinese consumers in this segment are significantly different from their counterparts in other non-Western countries where English language education is considered superior to the national public education. The ris- ing middle class, especially in Asia, is increasingly turning to international schooling as a better alternative to the national education offered in public schools (Hayden & Thompson, 2011).

Conversely, 77.6% of respondents believe that there are essential struc- tural differences between the two educational systems, as shown in Fig. 9.6.

Dialectical prism for cultural analysis enabled us to see the “both-and” cultural trait clearly on this example: structural differences are not seen as an indicator of superiority/inferiority of the Western/Chinese systems.

Figure 9.5 Methodological differences between Western and Chinese educational systems.

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Rather, they are an indication of differences in communication patterns inherent to each system. Communication is thereby seen as a mirror of structural system differences. Western centers are characterized with direct, frequent and nonhierarchical communication. Conversely, in the Chinese system characterized with a high volume of students, communication is obscure, top-down and hierarchical—happening through the middlemen (teaching assistants) who serve as negotiators between parents, children and teachers. Respondents acknowledge the advantages of a hierarchical Chinese family setup that instills flexibility because it enables the children to switch between different contexts, a skill acquired from having to com- municate differently with people of different seniority. Simultaneously, they see the advantage of the Western schooling environment, where they spend a substantial amount of their time. Because the Western school setup is independent from the hierarchical, societal, and family webs, it enables them to experience new forms of communication not otherwise available in the traditional family or in the public schools.

As shown in Fig. 9.7, for 59.2% of the respondents, in-person commu- nication, (i.e., personal selling) was the only marketing tactics used in the process of school selection. The remaining 40.8%, who used advertising (26.5%) and social media (14.3%), used these channels only in combina- tion with personal selling.

We suggest that a choice of marketing tactics is an expression of para- doxical value orientations. Although paradox management is inherent to this consumer group, they seek personalized guidance through this process and this influences the choice of marketing tactics. Because the nature of communication with Western service providers is used as a benchmark of differences between the two systems, communication has a strategic role

Figure 9.6 Structural differences between Western and Chinese educational systems.

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in the client management process. Communications based on the ability to understand the paradoxical nature of values serves as a source of com- petitive advantage.

Beyond exerting influence on marketing tactics, paradoxical value ori- entations call for a change in organizational structure, role allocation and class scheduling. Our ethnographic case revealed that client communica- tion functions are built into every organizational role, rather than hav- ing fully dedicated marketing roles. This implies bridging the traditional divide between faculty and administrative staff. Because faculty need to perform marketing roles, scheduling becomes increasingly complex— considering that in-person time with clients and prospects needs to be built in between the classes on an ongoing basis.

9.5.1 Contradictory Values In this section, we demonstrate the presence of contradictory value pairs. We focus on three out of eight pairs of paradoxical values used as the conceptual framework for our research: Traditional creeds vs Modern approaches; Aversion to law vs Respect for legal practices; and Guanxi vs Professionalism.

Paradox management process related to “Traditional creeds vs Modern approaches” is particularly apparent in services with high credence char- acteristics. These services promote many of the apparently “irrational” reactions toward uncertainty (Kahneman, Slovic, & Tversky, 1982). This was clearly demonstrated in the example of education. In line with the Confucian tradition, the majority of Chinese parents believe that every child could excel academically if they studied hard: almost everyone is

Figure 9.7 Marketing channels used in the process of selecting a school.

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capable of improving through education and only the most intelligent and the most stupid do not change (Confucian Analects, 1893, 17, p. 3). While parents wish to identify unique talents and design a personalized learning path for their children, the pressure to succeed in multiple academic areas is prompting them to augment the Chinese public education with pri- vate tutoring across all academic subjects. With China actively stepping on the global scene, a new societal ideal encompasses the notion of “bringing up global citizens with strong Chinese roots.” This desire is prompting the parents toward a large amount of supplementary classes in Western edu- cational centers in English language, in addition to tutoring in Chinese. The range of options between traditional creeds and modern approaches results in a process of endless tradeoffs between a belief that each child can succeed in multiple academic areas owing to hard work, and a desire to identify their unique talents and strengths. This is reflected in the fol- lowing statement by one of the respondents: “We may not attribute suc- cess to supplementary Western education but we are very likely to blame ourselves for not doing so if the children don’t succeed academically and in life.”

The education system in China is hierarchical and defined by test performance (Huang & Gove, 2012). While the majority of respondents acknowledge that a university degree matters, most believe that passing the gaokao (高考), the college entry exam, is no longer a prerequisite for aca- demic and professional success. Yet, equally, a belief in the efficiency and the ultimate authority of the strict Chinese testing system remains a strong driver of behavior. In the Western centers, however, they are introduced to new, personalized approaches to learning. New learning methods hold a promise of installing new skills otherwise missing in the Chinese public system. In order to determine the effectiveness of new programs the par- ents still often revert to familiar indicators derived from the Chinese tra- ditional education. As indicated by one respondent: “Our Chinese system does not divide the children according to IQ, but instead into ‘children that obey’ and ‘children that don’t’. But this (Western) is a different system. Pushing them harder does not work since they are not working to pass a test, and then another test. Yet still, we need to know how many new words they learned at any point or how many pages they need to cover for each homework.”

“Aversion to law vs Respect for legal practices” presents one of the most challenging aspects of service adaptation in China for TEs. The “rule of man” profoundly affects interactions in China, and relational ethics as a

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management tool prevails over the “rule of law.” Interpersonal relationships are the ultimate point of reference for problem solving, rather than con- tracts. Contracts merely serve as a starting point for relationship building; when there is a conflict, a humanistic approach wins over the legalistic one.

Our observations indicated that management of service contracts pres- ents a major hurdle for cash-strapped TEs. The cash flow predictions in a retained service business are based on an estimated flow of service fees, such as regular tuition fees in the education segment, which should be rel- atively easy to predict, due to nature of education as a service. Despite this, relationship development between clients and the service providers often results in renegotiation of the service terms, and this greatly increases the complexity of client management process. In practice, this implies that substantial concessions and discounts are expected as a prerequisite for client retention. Moreover, it has a strong impact on client acquisition in service domains where word-of-mouth has a prominent role, such as our ethnographic case where 69.4% of the respondents used friend referrals as the sole method for selecting the school; similarly, 65.3% would not select a school that has not been recommended to them by their peer groups. This tendency to mitigate the two opposing values requires a fair amount of flexibility to ensure the financial health of the business on one side, whilst ensuring client retention on the other. In particular, one of the biggest challenges for TEs is billing for services (i.e., professional time) provided as part of relationship building outside of the service scope as such. Although clients understand the terms of service contracts, the time invested in relationship building is not seen as “professional time,” and therefore can’t be billed.

The rule of man is strongly related to the value pair of “Guanxi vs Professionalism.” We established that a majority of TEs find the cli- ent ability to balance between guanxi (relationships) and professionalism extremely challenging. The main challenge lies in their lack of ability to understand the contexts in which guanxi is favored over professionalism (and vice versa). The interplay between these two values has a particularly strong impact on service dynamics and affects all aspects of client man- agement. The tendency to revert from professionalism to guanxi and back exerts a strong influence across all stages of client management, including both acquisition and retention, in B2B as well as B2C domains. Although clients expect service quality and thereby seek to select (and stay with) the service providers based on their track record and their ability to deliver, they simultaneously revert to guanxi-based interactions throughout the

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service process. This is also one of the main reasons why Chinese service clients require a substantial amount of in-person time which is hard to bill.

9.5.2 Dialectical Approach to Communication With the Chinese Service Clients Our research suggests that communication with the Chinese service cli- ents is at the core of the aforementioned challenges and it suggests the benefits of paradox theory to interpret the nature of communication in China. Academic research on Chinese communication has, thus far, focused primarily on understanding the impact of traditional Confucian cultural values. While their influence remains powerful and exerts strong influence on communication between Chinese and Westerners, the para- dox inherent in the Chinese culture and communication has rarely been researched (Fang & Faure, 2011). Dialectical prism for cultural analy- sis reveals that communication in China reflects the co-existence of two opposite but complementary forces of Yin and Yang (Chen, 2008, 2009; Fang & Faure, 2011). As such, communication is an evolving, nonlinear process (Chen & Starosta, 2003). At the core of this process is the notion of “harmony” as a symbol that provides the Chinese people with cognitive and affective orientations (Chen, 2011). Harmony is interpreted as a pro- cess rather than a destination, and it is achieved through the endless dialec- tical interaction of the opposing forces of Yin and Yang. Harmony, however is also the main goal of communication and a measure of communication competence (Chen, 2011; Chen & An, 2009).

Our ethnographic case has shown that communication is an indicator of differences between the Chinese and the Western educational systems for the Chinese clients. As such, it also presents one of the main bench- marks for gauging the service value. While the clients expect results in terms of their children’s performance, they have very limited points of ref- erence to gauge the value of credence service, in particular because the new mode of education is not geared toward testing.

We suggest that research of communication with the Chinese service clients from the standpoint of paradox theory and dialectical logic presents an interesting area for further research. A better understanding of con- texts in which one of the contradictory values wins over the other would help decrease complexities in client management. In the service segments identified by the TAS framework, it is safe to assume that many service consumers have limited points of reference from their prior experience, therefore, are likely to use communication as an important benchmark of

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service quality. Communications based on the understanding of contradic- tory values and the contexts in which they arise could become a source of competitive advantage.

9.6 CONCLUSIONS

The current transformation of China from production to a consumer- and-service society is unparalleled in its history. This change of context necessitates a paradigm shift for devising successful internationalization strategies. Considering that startups in the emerging industry segments face different challenges than established companies in mature segments, our research has enabled us to shed light on issues that otherwise may not be pertinent, or apparent, to large multinationals in China. Our findings suggest that a growing number of successful entrepreneurs in China fol- low the TAS framework. This approach to internationalization allows the TEs to become a part of the transformation process China is currently experiencing and assume a proactive role in this process. Adaptation stage of Western services in China presents a particular challenge for TEs, how- ever it simultaneously offers most opportunities for innovation and for achieving competitive advantage over large multinationals.

This chapter contributes to transnational entrepreneurship research in a number of ways: It suggests a new internationalization model to meet the emerging needs of TEs operating in the Chinese services industry, taking into consideration contextual and specific cultural factors affecting service adapta- tion. TAS framework is specifically tailored toward entrepreneurship, rather than being a customized framework designed for large multinationals.

Our research demonstrated that “eight pairs of paradoxical values” framework could be applied in the service segment in China toward gain- ing a better understanding of cultural factors that drive service adaptation. A dynamic startup environment provided a good opportunity to apply this framework as an alternative to prevalent binary approaches to cultural analysis. To our knowledge, no other empirical studies applying this frame- work have been conducted in China to date. Application of this frame- work has helped identify new factors of success for TEs in the Chinese services market. These findings suggest that understanding the nature of contexts in which one of the opposing values prevails relative to the other decreases the complexity of service management. We reveal the elements that could be used as a source of TEs competitive advantage over large multinationals, such as communication.

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Fang (2011, p. 46) suggested that although Chinese management research has attracted increasing interest in the recent years, in many cases, however, China has been used as a “venue for collecting empirical data to blindly please ‘established’ Western models, without seeing China as an important source of inspiration for theory building and theory rebuild- ing”. This chapter contributes to the body of research that acknowl- edges the value of applying ingenious Chinese frameworks to understand China’s rising role in the international business domain. Future research using this dialectical approach is encouraged in other markets, considering that all cultures have the same potential and, despite the different expres- sions of their dynamics, similar paradoxical propensities.

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