Case Study: CITIC in Australia - Navigating Liability of Foreignness

This case study examines the challenges faced by China International Trust and Investment Corporation (CITIC) in its Sino Iron project in Australia, focusing on the liabilities of foreignness. These liabilities included lengthy government approval processes, fluctuating iron ore prices, and difficulties in negotiating with major mining companies. Institutional differences such as higher labor costs, differing work ethics, and increased hostility towards Chinese investments further complicated the project. The company also faced increased regulations and the imposition of a Resource Super Profits tax. To overcome these challenges, CITIC obtained necessary government permits, invested in infrastructure, established a team to address environmental concerns, and utilized advanced technology to reduce labor costs and resource consumption. Despite the obstacles, CITIC successfully navigated the liabilities of foreignness through strategic investments and adaptive management practices. Desklib offers a variety of resources for students, including solved assignments and past papers.

Introduction
 Liability of foreignness refers to additional costs that foreign firms incur when doing business
overseas in which when done by local firms they do not incur (Zaheer, 2002).
 China International Trust and Investment Corporation (CITIC) undergone this in Australia. First
and foremost, the government of Australia took so long to approve CITIC’s request.
 This was followed by iron ores global price changing dramatically. CITIC had to negotiate with
three biggest mining companies that is Vale of Brazil, Rio Tinto and BHP Billiton but the last two
were not interested in investing jointly with Chinese companies.
 Despite the fact that some steel companies in Chinese had accepted 100% price increase, CITIC
feared that it would be bad timing because of the delays in Australia. Furthermore, there was a
40% increase of magnetite iron ores compared to other premium resources.

Institutional differences
 The delays meant that there would be higher labor costs and cost of prospecting with US$350
million on top of US$3.5 billion which had always been the original plan.
 Besides, local managers could on regular time leave work and take vacations but still demand for
bonuses at the end of the year. Additionally, when it was time to leave work, local engineers
could do it without worrying of any problems that would result.
 Moreover, they had no sense of belonging and loyalty like it is in Chinese and thus in case of any
problems arising they would blame each other and end up solving none.
 Again, at the end of 2009, when there was wave of acquisition in Australia, there was a sudden
increase of hostility and resistance to Chinese steel companies by Australian people.
 They held that the investments would only make Chinese government rich hence saw no point of
caring for them. As a result, the company had to work with different stakeholders which ended up
challenging it (Sun, Zhang & Chen, 2013).
 On top of that, the government increased regulations arguing that the Chinese company would
reduce their tax, affect local environment and diminish local employment opportunities.
 For instance, Australian Foreign Investment Review Board (FIRB) required that China’s
Nonferrous Metal Mining Group had to reduce its stake during Lynas acquisition.

Liabilities in foreignness
 Furthermore, in May 2010, the government of Australia announced that 40% Resource Super
Profits tax would be imposed on mining firms in July 2012 so as to pay for high cost of
infrastructure pensions and investment that had increased (Sethi & Guisinger 2008).
 On top of this, laborers in the China Company paid $100,000 which meant that they were paid
like university professors in Australia and twice Australian’s average income.
 In addition, some workers could even rest a week depending on their type of work. The
worker’s airfare was paid by the company in case they went home in times of vacation.
 Again, with rise of resource projects, there was a demand for more workers hence they
demanded for pay rise or else they would switch to other companies. As a result of this, the
company thought of importing workers from China but Visas for workers became a problem in
Australia (Huang &Zhu, 2016).
 This was after the government of Australian required that each worker passes an English test
and this was difficult for china to achieve.

Overcoming liabilities of foreignness
 To overcome the liabilities of foreignness, firstly, by March in the year 2010, the company obtained all the government permits
which were key in their projects (Zaheer, 2007).
 Concerning the government permits, CITIC overcame the challenges through obtaining various environmental permits which were
critical in the project and future expansion.
 It also invested in the Australia’s infrastructure because the business could not function well with bad infrastructure.
 Additionally, a team was established which would deal with historical remains to explore on the project site. In one year, they had
monitored sea turtles, underground water, birds on the land and animals in caves.
 In addition, there was environmental performance auditions of Sino Iron contractor so as to ensure that the natural environment was
protected.
 The CITIC also overcame the labor cost problem by using the world’s most powerful and biggest rod mill, the largest wheel loader
in the world and the largest excavator (Petersen & Pedersen, 2002).
 As a result, China’s domestic equipment industry was developed hence increasing mining abilities while reducing consumption of
resources thus ended up utilizing low-grade iron ores.

References
 Zaheer, S. (2002). The liability of foreignness, redux: A commentary. Journal of International Management,
8(3), 351-358.
 Sun, S. L., Zhang, Y., & Chen, Z. (2013). The challenges of Chinese outward investment in developed
countries: The case of CITIC Pacific's Sino Iron Project in Australia. Thunderbird International Business
Review, 55(3), 313-322.
 Huang, X., & Zhu, Y. (2016). How Does Liability of Foreignness Impact the Behavior of Chinese MNCs? A
Case Study of Sino Iron Project. In Managing Chinese Outward Foreign Direct Investment (pp. 44-63).
Palgrave Macmillan, London.
 Sethi, D., & Guisinger, S. (2008). Liability of foreignness to competitive advantage: How multinational
enterprises cope with the international business environment. Journal of International Management, 8(3), 223-
240.
 Zaheer, S. (2007). Overcoming the liability of foreignness. Academy of Management journal, 38(2), 341-363.
 Petersen, B., & Pedersen, T. (2002). Coping with liability of foreignness: Different learning engagements of
entrant firms. Journal of International Management, 8(3), 339-350.