Academic journal article Management International Review

Understanding Environmental Risk for IJVs in China

Academic journal article Management International Review

Understanding Environmental Risk for IJVs in China

Article excerpt

Abstract:

* Finns still have great difficulty joint venturing successfully in China. We contend that the current understanding of environmental risk in China is incomplete. Specifically, the current conceptualization has three problems: l) lack of integration of unique Chinese environmental characteristics, 2) incomplete distinction between different types of environmental risk, and 3) lack of a conceptualization of how the risk pattern changes as the economy transitions.

* We extend the current risk framework to include the unique features of the Chinese context. We offer guidelines for managing risk tradeoffs over time using two key structural decisions: Channel partner relationship and equity ownership.

Keywords: International joint ventures (IJVs) * Risk management. Transitional economies * China

Introduction

International joint ventures (IJVs) continue to be one of the dominant entry modes for firms investing in China's growing market. China approved more than 41,000 new foreign-invested firms in 2003, a 20 percent increase over 2002, with an estimated investment of U.S. $53 billion (Maloy 2004). According to the U.S.-China Business Council, by 2007 foreign direct investment in China totaled $82.7 billion, with a total of 37,888 new foreign invested enterprises (U.S.-China Business Council 2008). However, many of these ventures are considered unsuccessful by their parent firms and significant problems are commonplace. China is a complex and difficult environment for IJVs.

What is it about the environment that makes IJVs so problematic in China? How does the environment in China impact the risk firms face when operating IJVs? More specifically, can we characterize the risks posed by the environment that all IJVs face to gain insights into risk reduction strategies for IJVs? Given that the environment changes rapidly, especially in transitional markets like China, when should IJVs be appropriate as a general investment strategy? Finally, how can firms mitigate the risk they face in IJV arrangements given that the risks often change over time in an environment like China? This article integrates insights from strategic management, economics, and international business to present a framework for managing risk that captures the complexities of the China IJV environment, and offers a beginning point for answering these important and difficult questions.

The China IJV Environment

IJVs have been studied in a variety of contexts (Reus/Ritchie 2004), most notably, in transitional economies such as China since partnering in these situations offers unique challenges and opportunities (Shenkar 1990). IJVs can be advantageous for both foreign firms and the domestic government that hosts the venture. For the foreign firm, IJVs are a way of gaining localized knowledge and navigating the domestic legal and political environment (Beamish/Banks 1987). Host governments often mandate IJVs too as a way of acquiring technology transfer and business expertise that will help develop the economy internally (Shan 1991). In both cases, the critical issue is shortening the time that would be required to accomplish these goals without the IJV format, and thereby gaining a competitive advantage.

While potentially beneficial to both sides, IJVs have a history of performing below initial expectations in transitional economies (Beamish 1985). This is especially true for China, which Si and Bruton (1999) claimed "is a far more complex environment than encountered elsewhere in the world, with a potentially confusing montage of business classes within any given industry, each regulated by different laws." Even veteran firms with successful ventures in multiple international venues can have a difficult time establishing joint ventures in China. For example, General Motors discovered this complexity in its initial IJV in China, a small vehicle venture in Shenyang in 1992 with Jinbei Automotive. …

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