Expectations vs Reality: The Luring of the Red Dragon : The study of the Chinese institutional environment as perceived by Swedish SMEs

Abstract: Since the expansion of globalization, and the opening up of the Chinese market in particular, over the last 15 years or so, Swedish SMEs have had to face increasing international competition for market share of their products and skills. In order to compete successfully, Swedish SMEs are increasingly looking to establish manufacturing units in Asian and other countries, which offer the prospect of lowering production costs and thereby increased profits.   This study wishes to shed light on the differences and similarities in perceptions of SMEs exporting to China and those Swedish SMEs who have already established production in the Chinese market. This study of perceptions and realities regarding the institutional environment and the impact on production costs may help those Swedish SMEs who are considering establishing production in China. By being more aware of the realities of the institutional environment in China, they may be better equipped to select the best entry mode.      The literature has focused on the institutional theory, internationalization process and more specifically,  entry modes and production costs. What makes this study even more interesting is the aspect of perception between Swedish SMEs who only differed in their level of experience in the Chinese market. For this reason, major concepts of perception were also reviewed.   This was used a qualitative research strategy with a case study design that approached respondents via online qualitative surveys. There were five Swedish exporting SMEs and four Swedish SMEs who had established production in China. There was a need for these two sets of respondents in order to fulfil the prupose of this study.   The main findings of this thesis revealed that there are clear differences in perception of exporters and producers about the influence from the institutional environment on SME production costs, and that these differences in perception may influence SME entry mode choice into the Chinese market. The outcome of the research demonstrates that overall, exporters seems to underestimate the negative influence of the majority of institutions and their influence on their company, including their business activity in general and their potential production costs in particular. Although not as definitive, the findings also revealed a link between the perception of the influence from the institutional environment and SME entry mode choice. The analysis suggested that overall, exporters highlighted the negative influence from the institutional environment on increased risk, uncertainty and costs were the reasons that they chose to export instead of produce. This is in line with the suggestion of the authors of this thesis that there is a link between perception of the influence on the institutional environment and entry mode choice. All in all, it can be said that exporters have quite a different perception of the influence from the institutional environment compared to producers in the Chinese market. The authors identified that the difference in perception, in particular the misconception of the influence could have derived from the perception of the influence from particular institutions such as government and business culture, where exporters perceived a less significant negative influence whereas producers perceived a significant negative influence.      This thesis has valuable managerial implications and is relevant to the “real world” since many Swedish SMEs may have difficulties in understanding the full extent of the external environment in China. This may lead to faulty perceptions of the institutional environment, leading to potentially wrong managerial decisions, including entry mode choice. The findings of this study are valuable since they demonstrate that exporters’ perception is generally over optimistic compared to the reality of the institutional environment. The outcome of this thesis is very valuable for those SMEs considering to enter the Chinese market as it can help to guide them about the reality of the institutional environment and appropriate entry mode choices based on empirical cases from producers in the Chinese market.