Academic journal article Multinational Business Review

American Firms in China: Issues in Managing Operations

Academic journal article Multinational Business Review

American Firms in China: Issues in Managing Operations

Article excerpt

This paper examines the types of operational issues that American firms in China face, how managers approach these issues, and their impact on organizational success. Key operational issues center around accessibility to quality production inputs, supply of utilities, the role of the Chinese representative on the subsidiaries' governing boards, and implementation of modern managerial techniques. Successful operations and resolution of firm-specific problems depended on forging good relations with the Chinese government, using joint ventures and large sized investments, and on long-term presence in the country. Plant location and patent rights violations were not significant areas of operational concern.

Despite economic liberalization in China over the past twenty years, business conditions for foreign firms have remained difficult. The political system was controlled by the Communist Party. The government also dominated the economy through its ownership of state-owned enterprises and through its control over infrastructure, utilities, sources of input, distribution networks, and pricing. Thus, foreign firms had to conduct normal business operations in a politicized and bureaucratic environment. The absence of an independent, quick, and efficient judicial system compounded the difficulties.

The influence of the Communist Party was ensured in all business organizations through employees who were its members (Houdard, 1998). Foreign-owned firms were required to have a Chinese citizen, a nominee of the Party, as chair of the subsidiary's board of directors. The central government in Beijing had denoted certain regions on the southern and eastern coastal areas to be Special Economic Zones where considerable autonomy was permitted with respect to business activities. Much of foreign direct investment in China had taken place in these zones. Outside the zones, more traditional, communist orthodoxy prevailed. This paper identifies and examines the issues faced by American owned firms in China with regard to managing business operations there.


Only limited scholarly work has been reported on the day-to-day operational issues faced by foreign firms in China and how foreign managers have perceived and reacted to these issues. Below is a brief review of extant research on the subject.

Guanxi. Pye (1992) defined guanxi as "friendship with implications of continued exchange of favors." Thus, guanxi is something more than just interpersonal friendship; it is a reciprocal obligation to respond to requests for assistance. Guanxi (or connections) exists both at the individual level and the corporate level. Although not unique to China, guanxi plays a crucial role in China by providing the lubricant that enables decision outcomes to be desirable to the various parties. This is because, until recently, resources, which are tightly controlled, had been allocated in a top down fashion by the state and guanxi was a popular way to solicit favors from the authorities (Tsang, 1997). Thus, developing, cultivating, and expanding one's guanxi was of fundamental importance in China. Developing guanxi took time, and foreign firms, who had been in China for a long time, were likely to have an edge over newer entrants. Foreign firms teamed up with host country organizations in joint ventures to access the network of guanxi. Part of developing good guanxi was to nurture good relationships with government officials and Communist Party members. While offering the opportunity to obtain permits and approvals and suspension of application of policies and rules, guanxi was also a form of insurance to effectively resolve commercial disputes since the judicial system was seen by Western firms to be biased, slow, and inefficient.

Quality. Notions of product quality and quality standards were relatively new in China. Most American managers in China were of the view that Chinese standards were too low, a perception shared by Chinese managers. …

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