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Chapter 1: Introduction
Foreign Direct Investment (FDI) refers to a long-standing venture by an overseas financier in a project based abroad. The foreign direct venture comprises of the parent endeavour and a distant affiliate, which jointly create a transnational conglomerate. As Third World nations eliminate limitations and execute procedures to draw the interest of overseas corporations, business activities and national advancement have become gradually more entwined (National People’s Congress, 1979).
China is the leading beneficiary of FDI among all developing countries (Tsang 1998). This has resulted in the spectacular advancement of its wealth. For this reason, the majority of Multinational Enterprises (MNE’s) strive to enter China and establish joint ventures with Chinese State owned enterprises. The business environment in China became increasingly competitive after China’s accession to the World Trade Organisation (WTO) in 11th December 2001 (Dolles and Wilmking, 2005). When the People of Republic China (PRC) government did away with the investment regulations necessary to conduct business, it gave a new boost to the economic reform process (Chinese Business Review, 2005).
The steady investment of foreign countries into China’s economy over the years has seen it develop admirable transportation and communication systems. The Chinese government has ensured the supply of water and electricity to nearly all homes and workplaces. This enhances China’s prospects as a nation in which to create businesses. The Chinese government has invested massively in structuring and broadening the subway arrangements of the nation’s chief cities. It has also erected and renovated most of the roads in its cities (Leonard, 2008). Airfields and inter-city railway lines are also opening up as Beijing tries to stretch the benefits of its roaring economy across its immeasurable landscape. China even has plans to construct transnational railway lines.
Rather than being indicative of a distinct, cohesive market, China is essentially an assortment of solitary submarkets characterised by contradictory moneymaking, artistic, and topographical features. In the past, overseas businesses have been attracted to coastal regions because of the privileged residents and incomes that are characteristic of individuals who reside there. Thus, the foreign enterprises produce goods that are desired by those richer individuals. Companies that are headquartered in these wealthier areas are those while usually cater to the needs of consumers. Businesses that manufacture commodities for the use of other industries are located in diverse areas, in the countryside, as well as the cities.
Obviously, Chinese and foreign firms often have different priorities for establishing a joint venture due to their different cultures. A survey of 21 international companies, which have established joint ventures in China, was freshly done. The two reasons that inspired corporations to invest in China are achievement of easy market entry and international expansion. In contrast, the main strategic reasons for Chinese companies investing in foreign enterprises are technology transfer and management expertise (Glaister and Wang, 1993). The more China endeavours to attract overseas investment the more it will profit, and its general economy will thrive from the speculation.
Chinese workers in multinational enterprises have often articulated the feeling that they feel ‘invisible’ in their present workplace. They have also insinuated that their corporations are not concerned with the progression of their occupations. Chinese workers who have jobs in transnational enterprises also attest to the unreasonable practice of favouritism. Employees who invest time and energy in international companies have confirmed that many times the most prestigious jobs are given to officials from the homeland of the conglomerate (Shirk, 2008). A bureaucrat who is not Chinese may not even be aware of how to conduct himself in China. However, he will be favoured over his Chinese counterpart who is well aware of how things run in his homeland.
Most gifted and highly accomplished Chinese labourers’ desire and work towards obtaining the best career opportunities and promotion. They are also partial to handsome pay packages. Many people may feel such lofty outlooks are inconsistent with the realities of life as far as a nation’s economy is concerned. Chinese citizens born in the last 3 decades, however, have experienced 30 years of continuous economic expansion, and they are exceptionally confident about their job potentials (Becker, 2002). They have not been given a reason, by the performance of the Chinese economy in their short lifetimes, to aim for anything but the best. Surveys among young Chinese adults indicate that most of them desire to continue pursue higher education. Their reasons for this aspiration are to realize professional and monetary goals (Harvard Business Review, 2002).
Some cultural misunderstandings can also contribute to the ‘disconnected’ feeling that plagues some Chinese employees of multinational enterprises. The Chinese respect their elders in a more demonstrative way than Westerners. They do not refer to those who are above them by name or disagree with them directly (Jacques, 2009). While Westerners value a bigger pay package as a symbol of promotion, for the Chinese, a higher title is indicative of a promotion. Thus, a Chinese worker at a multinational company will ‘feel’ worthy if his employers accompany his enhanced salary with a new job description or title. Another cultural gaffe commonly repeated by the directors and managers of multilevel enterprises has to do with causing their employees to ‘lose face’.
Foreign enterprises must come up with teaching courses that give their members of staff the business abilities that they need. Chinese employees will be stimulated to work hard and stay with a company when their professional goals are part of its aims. Overseas businesses that do away with subtle discrimination, offer first-rate incomes and put into operation regular instructive tutoring packages will hang on to China’s most talented workers. Because of a satisfied workforce, they will also produce progressively more considerable proceeds (Shirk, 2008).
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Purpose and Importance
The purpose of this project is to comprehend the phenomenon of joint ventures in China. This is a hot topic nowadays, and it is likely that the number of joint ventures will continue to increase in the future. It is not an easy way for the foreign companies to enter the Chinese market. A joint venture is when two or more parties pool their resources and expertise to achieve a goal (Zheng, 2004). As this process involves two or more companies, the details for its realization can be complicated. This project will look into how the foreign companies can enter into joint ventures in China successfully.
Aims and Objectives
The research will satisfy the aims and objectives listed below:
- Discuss the business environment between foreign countries and China.
- Explain the reasons for forming joint ventures with China.
- Explore literature to highlight how foreign companies move towards adopting joint venture approaches in China.
- Analysis factors that contribute to successful joint ventures in China.
Chapter 2: Literature Review
This chapter will evaluate the objectives that I mentioned in the previous chapter. This will be achieved through relevant journals that are obtained from Brunel’s online compilation of databases or from the Internet. The information also comes from books obtained from the library, as well as articles and reports. I searched for key words such as ‘joint venture in China’, ‘foreign direct investment’ and ‘strategy’ in selected fields in order to narrow down the search (Becker, 2002).
Business Environment in China
Foreign direct investment can be traced back to the 1950’s during which the major source was the Soviet Union. China and the Soviet Union concluded a three decades treaty of peace, security, and friendship on 14th February 1950. The People’s Republic of China, lacking a lacking an economic base and technical skills, was willing to be schooled in the fields of ideology and foreign policy. In return, the Soviet government would extend financial and material support to China. Economic cooperation was an important facet of the treaty and enabled China to achieve impressive industrial development and growth. The treaty also ensured the supply Soviet weapons and equipment to modernize the Chinese army (Jacques, 2009).
As a country that had effectively utilized the communist principles, the Soviet Union provided an admirable example for China. China reorganized its science establishment along Soviet lines. The Soviet model is characterised by a bureaucratic rather than professional principle of organization. There is separation of research from production, as well as the establishment of specialized research institutes (Lipsey, 1999). There is a high priority placed on applied sciences and technology including military skills.
The Chinese Communist Party also sought inspiration from the Soviet Union in the area of the development of its visual propaganda. Mao Ze Dong and other leaders were convinced that Socialist Realism was the greatest instrument with which to come up with original varieties of art. It provided a realistic view of communist life and represented in loud and optimism (Zheng, 2004). Socialist Realism focused on industrial plants, blast furnaces, power plants, and infrastructure expansion.
The Soviet Aid Program of the 1950’s was intended to develop China’s economy and organize it along Soviet lines. In the first section of the Five-Year arrangement (1953-1957), China was the beneficiary of the greatest all-inclusive skills and equipment movement in engineering history. The Soviet Union financed 156 industrial projects concerning mining, power generation, and heavy industry. In accordance with the Soviet economic prototype, these were massive capital-intensive projects. By the late 1950’s, China had made considerable advancement in areas such as electric transmission, steel construction, essentialchemicals, machine apparatus and military gear. China wanted to optimally employ its raw resources such as steel and coal. The program also aimed at instructing the Chinese workers on how to operate imported or duplicated Soviet factories. In meeting these goals, China adopted Soviet governance practices (Jacques, 2009).
During those years, numerous posters were created to acquaint the Chinese workforce with the fact of the Russian instructor who would be training them. The Soviets were portrayed as the elder and more knowledgeable sibling (laodage), on whose side the Chinese people had to lean on in order to be taught about modernism. The heads of both nations, Mao Ze Dong and Joseph Stalin, were regularly depicted in posters sharing discussions. In the impressions of artists that captured Mao’s visit to Moscow during the 1949-1950 period, both leaders were illustrated as standing on the same level. This proved to the Chinese population that they were not ‘lower’ in intelligence than the Russians, but merely learning from them. This, however, was a contradiction of how things actually stood in the association between the two nations then. China entered this bilateral relationship as a junior partner, essentially making this an unequal relationship (Moore, 1993). Most posters devoted to the Soviet support of the Chinese broached this sensitive topic with a degree of unease.
In spite of all attempts to depict equality, the ‘teacher’ obviously held a higher position than the eager pupils who absorbed his every word. These images, therefore, did not inspire in Chinese employees feelings that showed international proletarian solidarity or class brotherhood. Instead, there existed a pervasive feeling of Soviet condescension towards the seemingly insecure Chinese ‘students’ (Das, 2007). The Chinese acceptance and gratefulness, on the other hand, may have masked elements of envy. In the coming years, there was growing dissatisfaction with this state of affairs.
There was also a bigger anxiety about the legitimacy of China’s own revolutionary experience. One of the assertions that occasioned the Sino-Soviet split was the perception that China’s Great Leap Forward movement would not bring communism about any faster than the Soviet methods. The Chinese charged the Soviets with searching for technocratic answers as a substitute for activist resolutions and progressively more disregarding ideology. The Chinese felt that the Soviet Union’s material success made the nationals of that country more relaxed and slow in implementing the statutes of communism.
In matters of trade, the business environment changed because of the economic reform process, which commenced in the late 1970s. In 1976, Mao Zedong passed away and in 1978, China opened its economy to foreign businesses and begun to attract large amounts of direct foreign investment. Starting from 1978, FDI in China started giving back to the economy. Before 1978, Chinese firms were practically sealed off from trade with the rest of the world. The required levels of imports and exports were created by the regime in its five-year profitability strategy.
The Reform Movement
Post Mao China instituted an ‘open door’ policy that saw the renunciation of the self-reliance mentality. Led by Deng Xiaoping, the Chinese government aimed at overtaking the Western developed nations in industrial and economic progress by the year 2000. China recognized that trade investment and technology were essential for full modernization to be achieved (Huang, 2005). The new reformist doctrine had set goals that would realize the dream of industrialization. These included filling the domestic savings gap necessary for economic development with foreign capital inflows. China also needed to attract advanced foreign technology and managerial skills. An additional goal was to enhance exports to enlarge foreign trade income.
To encourage foreign traffic, the domineering capacities of the twelve government-possessed foreign trade companies were decreased. Foreign enterprises were then allowed to set up their own operational businesses. Later, these newly formed conglomerates were allowed to be self-governing in administration and liberty in financial tasks. Big private corporations were given permits to trade. The foreign trade corporations and private firms were allowed to retain up to 25% of their foreign exchange earnings. In 1979, a joint venture law allowed the establishment of unique financially viable regions in Shenzhen, Zhuhai, and Fujian.
At the same time, government set new regulations that allowed joint ventures using foreign capital. At the second session of the Fifth National People’s Congress in July 1979, ‘The decree of the People’s Republic of China on Joint Endeavours using Chinese and Overseas Investment’ was adopted (National People’s Congress, 1979). The Sixth National People’s Congress in ‘Regulations for the Implementation of the edict of the People ’s Republic of China on Joint Projects using Chinese and Overseas Investments enhanced this later. Investment was formulated to liberalize the domestic market and clarify the business environment for foreign joint ventures (National People’s Congress, 1983). It shows that foreign companies welcomed the new policies that were set up by China. Many nationalities came to China to do business when China’s government officials embraced change.
The Economic Impact of the ‘Open Door Policy’
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The effect of these open door strategy steps on trade and inflow of investments has been impressive. Between 1978 and 1990, China’s total exports grew by almost 18% per year. China also witnessed a six-fold increase in the volume of trade. The nation’s low labour costs alone could not have offset this incredible growth. China renovated its overseas trade arrangement and wanted to enlarge the function of market forces in business and investment assessments as well as promoting manufactured exports. Additionally, China has sought to improve the price competitiveness of Chinese goods through devaluations of its currency. The devaluation of the Yuan greatly bolstered the cost leverage for firms allowing them employ cheap labour. They can also expand production and export labour-intensive manufactured goods.
Another mechanism used by China is the adoption of countertrade. Company tools and equipment were imported from the West for development of China’s coal and steel industry. The output from such firms was then used to pay for the imported tools and raw resources. In addition, policy trends leading up to China’s WTO accession since 2001 accelerated economic growth. China’s export market grew more predictable. The FDI increase in China was caused by WTO accession. Due to the fact that WTO membership earned China the most favoured nation (MFN) status, large FDI investments were attracted to China’s export industries.
The Peak Stage 1992-1995
Foreign investment inflows rose by 147% between 1992 and 1993. After this amazing leap forward, foreign investments rose by another 17% between 1994 and 1995. By 1995, China was enjoying investment inflows of up to 38 billion dollars, equivalent to the average annual inflows the sum of other developed countries in the early eighties. Shanghai rose as China’s economic centre with the opening up of the new Pudong area (Yang & Lee, 2002). The Chinese government sought to develop Shanghai into an international hub for finance and trade. It also sought to replicate Shanghai’s success in various hubs around the country. Hi-tech enterprises, established manufacturers, and financial companies were encouraged to set up their Chinese branches in Pudong with preferential treatments from central and local government. A number of new sectors were also opened up to foreign investors. These included wholesaling and retailing, accounting and information consultancy, banking and insurance (Das, 2007).
The Adjustment Stage (1994- 2000)
During this period, the flow of foreign investment remained high although the rate of growth slowed down. The emphasis shifted from the quantity of investment available to its quality. Enterprises in various industries were provided with different preferential treatment. The guiding directory of the guidelines categorized all the FDI projects into three types: encouraged, restricted, prohibited, and permitted. The projects in infrastructure and undeveloped agriculture with advanced technology to satisfy market demand fell into the first category. Those whose production exceeded domestic demand and who engaged in exploration of rare and valuable resources were relegated into the second category. The third category comprised of projects that would jeopardize national security. It also included projects requiring the use of sizeable amounts of land or those endangering military facilities (Das, 2007).
The Post- Terrorist Attack Stage (2001- Present)
China was accepted as an affiliate of the global Trade Organization on 11th November 2001. Upon achieving its membership, the country started to fulfil the basic principles of non-discrimination, pro-trade and pro-competition. Accession to the WTO gives incentives for more export oriented foreign investments. China’s exports gain protection from opposing measures. Additionally, China’s domestic market attracts foreign investment in industries where there is a large market potential (Elmuti & Kathawala, 2001).
The Chinese government promised not only policy transparency, but also market access to investors as well as better governance. This made the country a perfect location for overseas investors. The Chinese government was largely successful. A big group of mechanized companies and TNCs undertook streamlining processes at some point in this period. They increased their commitment and FDI to Chinese market. In 2003, FDI increased to $53.2 billion, while $60.6 billion was realized in 2004 (Das, 2007). The business environment in economic reforms as well as China’s WTO accession was effective changes that attracted more foreign companies to form joint ventures in China.
The Reasons Foreign Companies Choose Joint Ventures to Conduct International Business
Some industry sectors in China demand a Chinese partner. This regulatory position gives the overseas investor no choice if he intends to continue with his project. The foreign investor’s immediate concerns move to mmanagement, diligence, and equity structures in his potential partner’s business establishment (Tsang, 1998). If a potential partner’s premises, workforce and production capabilities, are a match for his product, then he can examine the issue further to establish if there are more similarities. He should examine his partner’s suppliers in terms of the deliverance of products and raw materials as well as the sale of commodities.
The foreign investor can even sell his products through an existing respected Chinese brand to save on the expense of building on a market. The marketing aspect also plays a crucial role in determining the investor’s success in his venture. It is advisable for him to link up with an industry that is already well known in the Chinese market. A commodity that is recent to China may take a long while to be established by the market (The U.S.-China Business Council, 2011). The Chinese partner also has to be willing to invest in the business to the same extent as the foreign investor.
Two major factors influence foreign firms in selecting new market targets. Concerning internal factors, they comprise of operational capability, competitive edge, and potential profitability. Where external conditions are concerned, they include the stability of political, economic system and technical conditions (Yang and Lee, 2002). Additionally, profits/losses and risk sharing are a motive for forming joint ventures. For example, if there is an investment project that is too risky or too large for a single firm to handle, a partner will share the financial risk. Alternatively, if the business environment is unfriendly or uncertain for foreign companies, a joint venture will require a multinational company to share the risks (Yan and Luo, 2001). Investors of the joint venture will share profits based upon each respective investor’s equity interest.
Foreign investors in China lowered their manufacturing costs by engaging in joint ventures. The foreign and Chinese sides both share the expenses connected with promotion, merchandise development, and other charges. The lower labour cost has been a determinant in the quantity of FDI realized in China (Moore, 1993). However, in the recent years of fast, economic development, more firms in China tend to shell out a greater salary to their employees in order to attract high quality workers (Lipsey, 1999).
The Types of Foreign Companies Adopting a Joint Venture Approach in China
Joint ventures are divided into two forms one is equity joint ventures (EJVs), and the other is contractual joint ventures (CJVs). Contractual joint ventures are formed between foreign investors and a domestic enterprise. The foreign partner provides different things from the Chinese Entrepreneur. For example, the foreign corporation will contribute technology and the Chinese company supplies the labour, materials, and physical facilities. The contractual joint venture is attractive to foreign investors because it lowers the risks for foreign them. From 1979 to 1982, CJVs accounted for 46% of all FDI inflow. However, between 1990 and 1992, the importance of CJVs in total FDI begun to decrease and the numbers finally stayed at about 20% in 1990. In 1992, they decreased further to 18% just before the peak period begun (Fung, Iizaka, and Tong, 2002).
Equity joint ventures (EJVs) consist of at least two investors, who in this study are foreign and Chinese. Profits, losses, and risks of EJVs are shared among investors according to their respective registered capital contributions. The companies invest in the joint ventures with the foreign corporations, investing at least 25% of the total investment (The US-China Business Council, 2011). The percentage of firms that adopted the EJVs increased by 8.4% to more than 60% of all FDI inflow from 1979 to 1989. When the Asian financial crisis broke out, the number of EJVs continued to grow until 1997. However, the importance of EJVs share in total FDI inflow has continued to decrease since 1990 (K.C Fung, H. Iizaka & S. Tong, 2002).
What Does It Take For Joint Venture To Succeed In China?
Thorough planning is the key factor to success of the joint ventures, which includes planning, commitment and agreement. The three of them must be mutually developed. The firms need to attain a lucid appreciation of the goals and principles of each corporation. The firms also need to come to an agreement about the market conditions. They need to discuss the concerns, potency, and intentions of each company. They must also be formulated, managed, and implemented. The joint venture will not receive the adequate managerial resources if they do not have the commitment of the senior management (Elmuti and Kathawala, 2001). It is a foregone conclusion that thorough planning is one of the keys to the successful formation of joint ventures.
Cooperation among partners is vital for a significant joint endeavour. However, collaboration does not necessitate using similar approaches. Every joint equity endeavour associate plays auxiliary and complementary characters with the other. Therefore, both collaborators usually espouse different strategies. The Chinese associates’ tactics must be in conformity with the State trade and industry expansion programme. In China, there are many advantages of entering the market via joint venture strategies. A joint venture will provide great flexibility in arranging business relationships in a technique that profits both sides (Grub and Lin, 1991). This pertains to the administration of the joint undertaking and its sponsorship. Joint venture investing also reduces capital expenditure as well as labour. It is also easier to obtain the capital, technology, and societal as well as governmental backing.
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Analysis of prospective partners is important in ensuring the success of joint ventures. A successful joint venture requires that both corporations have similar goals and intents. This makes a safe environment for the investments (Shirk, 2008). A tactical coalition must be ordered in such a manner that it will thrive through the requirement for speed, adjustment, and evolution. The establishment of a triumphant tactical grouping is formed during the internal formation process (Lorange, Roos and Smith, 1992). In selecting a partner, it is important to establish credibility in a potential joint venture partner. This means a partner who has a strong and stable relationship with their customers. There is one thing the firms need to remember. The purpose of the joint venture is to enhance both businesses. This is the best accomplished by offering related products and services. This contributes to higher quality of products and a long lasting relationship between the two business institutions (Mokgoabone, 2005).
The Legal Aspect of Joint Ventures
The official, bureaucratic concerns in China are comparatively well defined and easy to navigate with the assistance of a knowledgeable attorney. The tariff and fiscal facet of them, however, necessitate specific professional tax expertise to solve them (Ohmae, 1992). The association between recorded assets and spent resources, the addition of equipment and profits repatriation abilities comprise some of those sensitive issues. If financial and tax issues are not dealt with from the beginning, the joint venture business remains at a distinct disadvantage.
When a foreign partner discreetly does some research on his future partner, he can find out how the partner runs his businesses and treats his members of staff. He will also find out how his future partner handles his legal and fiscal responsibilities. If the partner’s own businesses leave much to be desired, it is likely that he will not perform as well as required in the joint venture. It is also important for the overseas investor to be aware of the holidays in the Chinese calendars and the cultural norms of his workforce to avoid offending them unintentionally (Buckley, 2010). Cultural differences are very much a part of business life in China. Migrant workers whose homes are far from the site of the production property may require additional days of leave in order to celebrate holidays. The workers may be intending to travel by public road transport, and this means delays and various pit stops. Air travel, a common form of transport in the United States, is not as affordable to many factory workers in China.
Financial diligence in China can be an awkward issue to resolve because there are no publicly available record systems that allow the viewing of reported accounts. Field investigators usually determine the position of the business if certain requirements are needed. There are sometimes discrepancies because China’s tax bureau does not efficiently collect taxes due to logistical issues. Therefore, tax avoidance is rife as standards of reporting are less sophisticated than they are in the Western developed countries (Naughton, 2006).
As a result of China’s openness to doing business with foreign nations, her economy has sky rocketed in a matter of less than six decades. The willingness of China’s leaders to carry out business ventures with nations that embrace different ideologies from communism has borne remarkable fruits. Its national industries have expanded because of the competitiveness that the presence of foreign corporations brings to the market place. In the area of price reform, the Chinese have proceeded cautiously in granting operational independence to producers (Moore, 1993). The Chinese economy has also experienced a lot of inflation in the past twenty years, deterring the government from implementing full-scale liberalization. High rates of growth achieved over short periods usually raise inflationary worries.
While capital investment is crucial to growth, it becomes more portent when accompanied by market-oriented reforms that induce profit incentives. These should be availed to rural enterprises and small businesses (Becker, 2002). The combination can release a productivity boom that will propel aggregate growth. The Chinese government encouraged the growth of rural enterprises by not focusing exclusively on the urban, industrial sector. Thus, it was able to relocate the vast majority of workers from the rural farms and into industries without creating an urban crisis. Additionally, China’s open door policy has spurred foreign direct investment in the nation, creating more jobs and relieving the Chinese economy with international markets.
In the next months, I shall carry on searching for more information and data for this chapter. It will be more detailed and reliable.
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