Cross-Border Cooperative Agreements: The Case of China

By Cornett-DeVito, Myrna; DeVito, Raffaele | Multinational Business Review, Fall 1994 | Go to article overview

Cross-Border Cooperative Agreements: The Case of China


Cornett-DeVito, Myrna, DeVito, Raffaele, Multinational Business Review


INTRODUCTION

The use of international cooperative agreements in the form of joint ventures has increased during the decade of the 1980s (UNCTC, 1988), and this pace appears to be continuing into the 1990s. Mowery (1988) defines the international joint venture (UV) as follows :

"....an instance of interfirm collaboration in product development, manufacturing, or marketing that spans national boundaries, is not based on arm's-length market transactions, and includes substantial contributions by partners of capital, technology, or other assets. "

The IJV referred to as a "state enterprise-multinational corporation" joint venture (Raveed and Renforth, 1983) is of particular importance in the context of cross-border agreements with organizations in the People's Republic of China.

Daniels and Radebaugh (1992) identify six external factors to be considered when a strategic decision has been made to expand into the global arena. The factors are labeled as political, legal, cultural, economic, historical and geographic. This paper addresses the six environmental factors as they apply to IJVs in the People's Republic of China. Examples are drawn from an active IJV in Shanghai. Much of the information on this IJV was gathered during a research visit to the manufacturing facility during spring 1991. Data gathering techniques included an on-site interview in Shanghai and material secured from corporation and government agencies.

This paper will present an overview of IJV activity in China since 1979; will detail one of the joint venture sites visited in Shanghai in May 1991; and will discuss the effect of six external factors on the IJV and subsequent reactions by management.

CHINA'S JOINT VENTURE STRUCTURE

An overview of joint venture structure and activity in the P.R.C. provides a background for this IJV illustration. The P.R.C., under the leadership of Deng Xiaoping, took a major step in 1979 by opening the gates to foreign investment. The primary avenues to investing in China are equity joint ventures, contractual joint ventures, and wholly foreign-owned enterprises.

China's 1979 Joint Venture Law defines the two types of JVs as follows:

An equity joint venture (EJV) is a limited liability corporation jointly invested in and operated by the Chinese and foreign partners. Profits, risks and remaining assets upon expiration of the venture are shared according to the percentage of equity held by each party. The corporation has legal person status.

A contractual joint venture (CJV), also known as a cooperative joint venture, can take two forms: a limited liability entity with legal person status that closely resembles the equity joint venture in structure and operation and a business partnership in which the parties cooperate as separate legal entities and bear liabilities independently.

In either case, profits and assets remaining after expiration are divided as specified in the contract and not necessarily according to investment shares. (U.S. China Business Council, 1990). Foreign investment in China for the ten-year period 1979-1989 is detailed in the table.

SHANGHAI VOLKSWAGEN AUTOMOTIVE

Shanghai Volkswagen (SVW) is a Sino-German equity joint venture whose partners include Shanghai Automotive Industry Corporation, China National Automotive Industry Corporation, Bank of China, Shanghai Trust and Consultancy Company and Volkswagen AG of Germany. The total fixed assets investment is approximately US$210 million. Capital investment in the project has been contributed on a 50%-50% basis by the Chinese and German partners (Shanghai FETC, 1987).

According to the technical executive director of SVW, although operations began in September 1985, the negotiations process had required several years of patience dating back to 1978. The first full year of production resulted in 3,500 cars under the model name, Santana. In 1988-89 production reached 15,600 cars. …

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