1.

Given that legal frameworks in China were still evolving, why did GE establish the
China Technology Center (CTC) there?

GE is a developed-country multinational enterprise (DMNE) if we follow the classification of

Govindarajan & Ramamurti (2011). Facing institutional voids, such as the lack of an
innovation infrastructure, weak intellectual property protection and a lack of experienced
scientists, and institutional challenges, regarding culture and language, the move to China
was a risky step. The lack of these formal institutions implies that informal institutions play a
larger role for GE in reducing uncertainty, providing guidance, and conferring legitimacy.
These informal institutions in a culturally and geographically distant country are complex to
GE to understand, since they differ significantly from the more formal market-supporting
institutions in their home country (Peng et al. 2009). However, these difficulties are less a
burden nowadays, since dramatic increases in the speed, quality, and efficiency of
international communication and transportation have reduced the transaction costs of
multinational interchange (Oviatt & McDougall, 1994).
Furthermore, the step to China was logical for three reasons: Firstly, China was a large and
growing market that offered significant potential to GE. Secondly, GE’s technological
capabilities and deeper pockets to fund innovation enables them to outperform local
EMNE’s. Lastly, GE had the opportunity to cooperate with the local governments, research
centers and universities.
China represents the world’s largest population for GEs consumer goods. The Chinese
population was aging, had rising incomes and became more health conscious, which meant
that the market for GE’s products was increasing.
What’s more, GE had deeper reservoirs of technological capabilities and had more R&D
budget available compared to local EMNE’s. Also the prospect of other markets where new
innovations can be exploited gives GE an advantage over local competitors.
In addition, 33% of the Chinese students chose for an engineering degree, which implied that
there would be no shortage of future labor supply. Moreover, China spend a growing
percentage of their GDP on R&D, since they wanted to become the World’s biggest
Innovator. The Chinese government also encouraged foreign MNEs to set up R&D centres in
China. The digital revolution that China was going through offered opportunities for GE’s
healthcare products. GE identified the macro contexts of political and social systems and
openness of China that affect the market contexts. For instance, they realized that China had a
different labor market due to the educational bias towards theory. Collaborating with local
universities enabled GE to train the potential workforce to be able to work for them. In
addition, collaborating with local research centers and a local workforce gave GE the
knowledge to understand China’s specific needs and preferences.
Moreover, GE’s competitors like Siemens and Philips had already established R&D centres
in China or were thinking about building them. In line with the findings of Kogut and Singh
(1988), firms are more likely to invest in countries where their competitors have invested
before.
GE used a combination of two institutional strategies, as outlined by Khanna et al. (2015):
they ‘adapt their strategy’ and ‘change the contexts’. An example of the former is the change
of partial re-design to originating projects that specifically met China’s unique needs as a
means of speeding up its penetration. An example of the latter is the training of new local
recruits from related industries or fresh graduates.

2. What is your assessment of CTC’s ‘In China for China’ (ICFC) strategy?

We consider the ICFC partly successful. The company was able to invest more than $250
million in the strategy, which resulted in 40 new technologies and products and over 1000
patent applications. The revenues were high and the company successfully reinvested in
research and development. Since they wanted to make China a global innovation
powerhouse, we can say that their goal was reached. For this, the company was also awarded
by the Scientific American.
Different markets have different needs and structures in the healthcare industry. A
benefit of the CTC strategy was the ability of GE to achieve economies of scope, benefitting
from the low-cost labor in China, regardless of this high fragmentation. R&D and product
design was centralized to effectively utilize human capital and cost, and localized to meet the
different needs and structures of medical industry in different markets.
When GE just opened their CTC, they focused on adjusting products developed in and
for developed markets to the Chinese market, whereby they focused on the high-end of the
market. However, GE realized that this top-down strategy was not effective, as their products
were still too expensive for the biggest part of the Chinese medical equipment market.
Therefore, GE changed their strategy and really started producing ‘for’ China. Govindarajan
and Ramamurti (2011) argue that one of the main reasons for reverse innovation is the
conditions under which the products are used. Products typically need to be affordable,
portable and easy to use. By implementing the ICFC-strategy and employing a local
workforce, GE was able to develop products that meet the specific preferences of the Chinese
consumers. One example being the LOGIQ Book, that was affordable and compact.

The ICFC was not limited to China, however, since in 2003, 80% of the products made in
Wuxi were exported. This increases the risk of cannibalization of their own products in more
developed market. Evidence of this cannibalization is present, since innovations trickled up
from a ‘poor, emerging market’ to other emerging countries (Indonesia), richer countries,
such Europe and ultimately even the US. Adding new functionalities to their products, such
as the portability and the ease of use, created new demand or a second round of growth in
developed countries (Govindarajan & Ramamurti, 2011). Another risk present was that of
rent-earning opportunities by local competitors. Even though GE had patents that made
expropriation by third parties illegal in their home country, this patent might not be as
enforceable in emerging countries such as China, that lack extensive regulation on
appropriability regimes.

The different ultrasound products it build in collaboration with partners such as the Shanghai
Pulmonary Hospital and different colleagues to build the V-Scan are examples of building a
technology that is improved in poorer countries by which it can serve two markets: the lower
demand market (e.g. emerging economy Indonesia) and the different or similar customer in
the US.
3. Why did the CTC change its strategy from ICFC to ‘In China for the World’ (ICFW)?
What would you suggest to make this strategy more successful?

China’s CTC strategy was challenged due to the increasing globalization. They noted that
globalization became a vital aspect of their strategy, which made ‘In one country for one
country’ outdated and irrelevant. By changing their strategy to ICFW, the DMNE pursued
glocalization and reverse innovation simultaneously. Their change to ICFW was motivated
by several factors.
Firstly, they noted that their products, initially developed for China, had demand in developed
markets. Even though the profit margins of the low-end market products were lower than
those of the products designed for developed markets, the potential revenue that could be
generated from meeting this long-tail of the market, was significant and should thus not be
ignored.
Secondly, the products were successful in other emerging markets as well. For example the
Brivo CT 315/325 scanners developed in China were less expensive, compact and energy
consuming, hereby also attracting other emerging and developed markets. By exporting their
products to these markets, they were able to gain market share as one of the first movers.
Moreover, CTC had the potential to become a world innovator due to the improved
environment for innovation, increasing capabilities and results. The improvements of the
quality of education and levels of experience for researchers, made it possible for GE to
produce more complex products in China to profit from the low-cost labor, and then reap the
benefits in other parts of the world. This allowed CTC to outperform countries on the mid-
income level and compete in high income countries.
According to Govindarajan and Ramamurti (2011) this is the third stage of reverse innovation
“winning in developed-country markets” that comes after (1) winning in key emerging
markets, and (2) winning in other emerging markets. GE, as a DMNEs has an advantage in
the third stage as they already have a strong brand and strong distribution channels in
developed markets. However, it is important that the company positions the reverse
innovation products strategically to overcome the risk of cannibalization.
To make the “In China for the world”-strategy even more successful, we suggest that GE
improves their cross-collaboration efforts. The collaboration with different partners in various
parts of the world provides significant insights on research and development. With this
insights, they can both deepen their existing knowledge on health care tools, as broadening
their knowledge with a network composed of different technology sources. In this manner,
they create innovation capabilities which can be leveraged across disciplines and enable the
firm to recognize resource recombination opportunities to generate future innovations (Awate
et al. 2013). Furthermore, these innovation capabilities are a source of competitive advantage,
since they are hard to imitate by both the EMNEs that GE increasingly competed with in
China as the other DMNEs, such as Siemens and Philips.
Moreover, they should station R&D stations in other (emerging) areas to improve the
prospect of successful innovation. According to Govindarajan (2011), GE must make sure
that is has the mindset of a “humble student” instead of a teacher to be able to really learn
from the local conditions. Combining the best practices from different regions can generate
the best innovation and product development to enhance success globally.

4. To what extent do you observe signs of the Headquarters knows best’ syndrome in the
case?

The headquarters knows best’ syndrome was present to a certain extent. In the beginning,
Jack Welch, CEO of GE, was drawn towards India for FDI, attracted by low-cost labor and
the country’s outsourcing potential. It took considerable time for Chen to persuade the
headquarters that China had market potential that should be addressed. This problem is
caused by difficult vertical dynamics of the company. The headquarter focused
disproportionately on India, as opposed to China, which created a tunnel vision (Bouquet et
al. 2016). Reflecting this lack of attention, even though several colleagues including the head
of GE China supported him, Chen only obtained a small investment of $200,000 to start
business in China and a team of only 10 people.

A few problems in the vertical and horizontal dynamics of the company hindered GE to turn
its global presence into a real source of competitive advantage (Bouquet et al. 2016). The first
priority of CTC was to solve the specific local technology problems and support local
businesses to develop products and suppliers. This is a reactive strategy that lacks
receptiveness to subsidiary contributions and ideas and hence led to missed sales, as evident
by the problems that project teams faced. The initial products did not sell well because
Chinese customers found them too expensive. However, CTC changed to a more proactive
strategy gradually by changing the price and distribution channel, inviting a product manager
that observed the project team and sold the innovative products back to headquarters and
increasing funding for more projects.
Even though GE reassigned talents to China to learn on-site about Chinese practices, this
effort should be two-way rather than one-way. In other words, the transfer of workers should
be matched (Bouquet et al. 2016). Even though the American workers got to better
understand the Chinese culture and its different demand characteristics, the Chinese workers
did not get the opportunity to gain a better understanding of the American work culture. This
could have increased the working relationship and boost knowledge sharing between the
Chinese and American workers and reduce the chance of employees leaving the company,
which is a particular problem that GE faced in China, since the pool of talents was scarce.
The headquarter syndrome was also visible in the choice of the leading center when
executing an R&D project. This was determined by factors such as expertise and export
constraints. Even though this minimized duplication, it could minimize the knowledge
sharing between subsidiaries that benefits innovative ideas, because they compete for
attention from headquarters that choose the leading center.
Furthermore, the R&D employees needed to report to multiple leaders. This makes upward
communication unnecessarily complex and could hinder information sharing and hence
suboptimal use of potential. This problem could be solved by a virtual communication plan
that provide centers all around the world with cues vital to ‘sense-making’ and reduces the
complexity of upward and horizontal communication and collaboration.
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