Supply chain integration and coordination for international sourcing in the context of China’s processing trade

Published date15 October 2018
DOIhttps://doi.org/10.1108/IMDS-11-2017-0528
Date15 October 2018
Pages1730-1748
AuthorMingu Kang,Kihyun Park,Ma Ga (Mark) Yang,Mark H. Haney
Subject MatterInformation & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems
Supply chain integration and
coordination for international
sourcing in the context of
Chinas processing trade
Mingu Kang
School of Management, Zhejiang University, Hangzhou, China
Kihyun Park
Department of Management, School of Business,
Robert Morris University, Moon, Pennsylvania, USA
Ma Ga (Mark) Yang
Department of Management, College of Business and Public Management,
West Chester University of Pennsylvania,
West Chester, Pennsylvania, USA, and
Mark H. Haney
Department of Management, School of Business,
Robert Morris University, Moon, Pennsylvania, USA
Abstract
Purpose The purpose of this paper is to explore how a foreign invested manufacturing companys (FIMC)
components sourcing process evolves in order to improve its supply chain outcomes in the context of Chinas
processing trade.
Design/methodology/approach Grounded in the theory bases of the international sourcing process and
supply chain integration, this study utilizes a single-case-study approach with a small- to medium-sized FIMC
engaged in Chinas processing trade.
Findings This study identifies three stages of the comp onents sourcing process: simple as sembly stage,
components localiza tion stage and supply chain integ ration stage. In addition, the cas e study suggests that
the type of processing trade evolves from processing with supplied materialsto processing with imported
materials as the sourcin g process proceeds thro ugh the three stages and the in ternal and external
environments change .
Originality/value To our knowledge, this paper is the first to focus on an FIMCs components sourcing
process in the context of Chinas processing trade. It contributes to a better understanding of how FIMCs
progress through the components sourcing process and apply different types of processing trade in China to
maximize their supply chain outcomes.
Keywords China, Supply chain integration, International sourcing,
Foreign invested manufacturing company (FIMC), Processing trade
Paper type Research paper
1. Introduction
Over the past three decades, China has experienced rapid economic growth, and has
emergedasbothanimportantmarketandakey international sourcing destination
(Christopher et al., 2006; Ivarsson and Alvstam, 2010; Nassimbeni and Sartor, 2006;
Aluguri et al., 2015). Because of the availability of qualified suppliers, low costs and
market accessibility, China has gained increasing importance among foreign
manufacturingcompaniesasoneofthemostattractivedestinationsfortheir
manufacturing and investment (Long et al., 2015; He, 2002; Swan and Allred, 2009;
Nassimbeni and Sartor, 2006; Yang et al., 2011). Since the mid-1990s the inflow of FDI
Industrial Management & Data
Systems
Vol. 118 No. 9, 2018
pp. 1730-1748
© Emerald PublishingLimited
0263-5577
DOI 10.1108/IMDS-11-2017-0528
Received 10 November 2017
Revised 10 February 2018
21 March 2018
Accepted 1 April 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
1730
IMDS
118,9
( foreign direct investment) to China has increased significantly (Qu and Brocklehurst,
2003), largely driven by the manufacturing sector. According to the Chinese National
Bureau of Statistics, FDI inflows in the manufacturing sector have increased remarkably
and accounted for 51 percent of total FDI inflows to China during the period from
19972015. Although in recent years FDI in the service sector has been growing faster
than FDI in the manufacturing sector, manufacturing still occupies a major position in the
overall inflows of FDI to China.
In addition, since the mid-1990s, FDI has accounted for roughly 50 percent of
Chinas exports and has played a very important role in Chinas export-oriented growth
strategy. Interestingly, about 4550 percent of Chinastotalexportshavebeen
attributable to the processing trade, which has also been closely associated with
manufacturing FDI inflows (Xu and Lu, 2009; Lemoine and Ünal-Kesenci, 2004). The term
processing traderefers to the operational process of importing raw materials and input
components tax-free, and then exporting finished products assembled from the raw
materials and components (Liu and Ma, 2010; Liu, 2013). Processing trade activities in
China contribute almost half of Chinas international trade. Such processing activities also
significantly depend on foreign invested manufacturing companies (FIMC) operating in
China (Ling et al., 2009), which conduct about 80 percent of the total processing trade
(Guillaume et al., 2007).
Previously, most of the literature related to Chinas processing trade has focused
on macroeconomic perspectives such as trade surplus (Gu et al., 2014; Bai and Liu, 2014),
the relationship between FDI and the processing trade (Zhang and Song, 2002;
Branstetter and Lardy, 2006; Ling et al., 2009) and technology transfer issues (Lemoine
and Ünal-Kesenci, 2004). Despite the great contribution of FIMCs to the processing trade
and the importance of supply management in processing activities, there has been almost
no attempt in the supply chain management literature to investigate supply chain issues
related to Chinas processing trade. To address this lack of research, the current study
examines the evolution of one firms components sourcing process toward supply chain
integration. The context of our case study is small- to medium-sized FIMCs in the
electronics industry in China. The electronics industry faces low profitability, shortening
product life cycles, and intense global competition. Many electronics companies, including
multinational companies, have moved their manufacturing functions to China in order to
gain a cost advantage and expand their markets. It is very important for foreign
electronics companies in China to establish a system which enables them to supply
low-unit-cost and high-quality components.
The reason for our focus on small- to medium-sized firms is that they often suffer
resource and scale disadvantages in their internationalization initiatives due to constraints
on management time and lack of managerial expertise, competence, and information
(Pangarkar, 2008). Because of this, small- to medium-sized FIMCs are likely exposed to more
risks in their sourcing practices than large FIMCs. They can potentially run into serious
problems because they lack the resources and capabilities to effectively deal with legal,
institutional, and socio-cultural differences in the host country (Kotabe and Murray, 2004).
In addition, due to the difficulties in internalizing all the functions in a supply chain, it is
strategically important for small- to medium-sized FIMCs to process components sourcing
efficiently and effectively. Because of these challenges, there is a great need to investigate
the international sourcing process from the perspective of small- to medium-sized FIMCs in
China. The current research focuses on one such multinational firm operating in China
through an in-depth case study. By examining the focal firms components sourcing process
in the context of Chinas processing trade, this study contributes to the knowledge of how
small- to medium-sized FIMCs can undergo integration processes in their supply chain.
By doing so it also contributes to the current literature on international sourcing.
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