Sequential internationalization of Korean SMEs in China

Chapter 14 develops a new sequential internationalization theoretical framework to explain the processes of internationalization by SMEs from a dynamic emerging economy. It is applied to 18 FDI cases of Korean SMEs in China to analyze the changing map of the division of labor between parent firms in Korea and subsidiaries in China. We have found that the internationalization process has been sequential, reflecting the cautious behavior of SMEs with more resource constraints compared to the case of large firms. They proceeded from a product-based division of labor to a value-chain-based one, and finally to a market-based division of labor between the parent firm and its local subsidiaries. In the first stage, Korean SMEs establish production subsidiaries in China to manufacture low-end goods for re-exportation. In the second stage, the subsidiaries expand production scope to high-end goods, while the parent firm administers R&D, marketing, and production of some high-end goods. In the third stage, as the Chinese market grows in importance with local consumers’ increasing purchasing power, the subsidiaries integrate marketing and local-market-specific R&D with the existing value chains.