Academic journal article SAM Advanced Management Journal

Are Joint Ventures Losing Their Appeal in China?

Academic journal article SAM Advanced Management Journal

Are Joint Ventures Losing Their Appeal in China?

Article excerpt

Most firms entering China's market continue to use the joint venture not only as a entry vehicle but also as a method of sustaining ongoing operations. But they have encountered serious difficulties because of China's unique and rapidly changing business environment. This study analyzes the joint venture in the light of that environment and makes recommendations based upon on-site interviews with top-level managers in China. It is designed to improve the joint venture for those who wish to continue using it and to enhance its use as a transition-vehicle for those contemplating new organizational structures.

Background

When Deng Xiao Ping declared his Open Door Policy in 1978, he began a gradual reversal of Mao Tse Tung's isolationist, anti-capitalist, economic ideology of nearly three decades. Foreign firms, ever attentive to new possibilities to increase profits, made a cautious and gradual entry into China's market. But what began as a trickle reached a virtual avalanche in the 1990s. China's population of more than 1.2 billion loomed as a potential market beyond any one's wildest dreams.

With little knowledge of the cultural and political obstacles that lay before them, foreign investors made major commitments, confidently taking on the risk while believing that their past successes elsewhere would assure early and impressive rewards in China. Many were wrong. Unfamiliar with China's weak infrastructure, corrupt business practices, and unique form of networking, many sustained major losses. Others, disillusioned, withdraw. Exhibit 1 is a profile of some representative companies that continue to use the joint venture in China and others that are discontented with it.

Companies that survived tended to have substantial resources. They learned that long-term commitment is essential in China and that profits cannot generally be realized for years. They learned also that an undeveloped market poses major problems and that market size is not the sole measure of success.

During that period of more than 25 years, the joint venture, consisting of a foreign investor and a Chinese entity, became the market-penetrating vehicle of choice. In fact, it now accounts for approximately 80% of foreign direct investment in that country. ("Trading with China," 1997). It was preferred to the subsidiary, wholly owned by the foreign investor and doomed to failure because the Chinese quickly alienated it as a foreign irritant. Even less desirable was the use of a foreign branch because it would further minimize contact with China's market and its controlling power structure. The last possibility, direct import/export, was the least desirable because it provided no effective opportunity to develop a presence in China. The joint venture was seen as the only realistic way to generate Chinese interest and support, create a viable presence, smooth the way into a strange market, establish the complex network necessary for success, and provide a conduit to deal effectively with China's unusual culture and business practices.

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Having established a relatively firm foothold in China, some companies are considering the possibility of converting their joint ventures into wholly owned foreign subsidiaries. They believe that they have maximized the advantages of the former and are in a position to reap the benefits of the latter in terms in more effective management, greater control over resources, and increased authority over the hiring and firing of personnel. For those companies, the joint venture is beginning to lose its appeal. ("Going it Alone," 1997; "And never the Twain," 1997; "That Receding Horizon," 1997; Milking Manuchuria," 1977). But most firms continue to use it, often provisionally, because of its market-penetration and market-expansion potential. At the same time, because of the problems they have encountered, they are seeking major revisions in the way their joint ventures are understood and implemented. …

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