How foreign firms achieve competitive advantage in the Chinese emerging economy: Managerial ties and market orientation

a r t i c l e i n f o As China experience unprecedented changes in its social, legal, and economic institutions, on what should foreign firms focus more to overcome this challenge, managerial ties or market orientation? This study investigates how managerial ties and market orientation affect competitive advantage and, consequently, firm performance in China. On the basis of a survey of 179 foreign firms in China, we find that both managerial ties and market orientation can lead to firm success—but in different ways. Market orientation enhances firm performance by providing differentiation and cost advantages, whereas managerial ties improve performance through an institutional advantage (i.e., superiority in securing scarce resources and institutional support). Institutional advantage, in turn, leads to differentiation and cost advantages and consequently superior performance. In recent years, foreign investment has poured into China, in the form of either joint ventures or wholly-owned subsidiaries, with an attempt to grab the huge potential of the world's fastest-growing markets. China, for example, has been rated the most attractive FDI destination for seven consecutive years by the world's leading executives since 2002 (FDI Confidence Index Survey, 2008). However, despite the attractiveness of the Chinese market, the unprecedented changes that occur in its social, legal, and economic institutions raise serious strategic challenges for foreign enterprises (Li et al., 2006; Zhou and Li, 2007). Intrigued by these challenges, researchers have demonstrated great interest in strategic issues facing firms operating in China. Two primary types of strategic choices seem to have emerged. The first relates to managerial ties and focuses on network-based strategies that use extensive social ties, based on personal trust and relations, to achieve business success (Li, 2008; Peng and Luo, 2000). The second deals with market-based strategies such as market orientation, which promote the importance of delivering superior customer value through quality products to achieve competitive advantage (Zhou et al., 2006; Zhou et al., 2008). Despite the growing interest in this strategic issue, researchers continue to debate which strategy is more appropriate for emerging economies (Peng, 2003: 283). Some believe that managerial ties are more fitting because formal, market-supporting institutions are always difficult to develop in emerging economies, especially the legal systems that support the use of contracts (North, 2005). Because of this institutional void, managers often must rely more on their ties with the business community and/or government officials to conduct business and coordinate exchanges (Li et al., …