31293 O“? This is to certify that the dissertation entitled A Bilaterai Analysis of the Performance of U.S.-China Equity Joint Ventures presented by Gregory Edward Osland has been accepted towards fulfillment of the requirements for Ph.D. daggeh18usiness Administration — / 13 these hypotheses differ from propositions because they are formed after the analysis of a set of empirical observations. SIGNIFICANCE OF THE RESEARCH This research investigates performance in international equity joint ventures, particularly those between the United States and China. It identifies and compares the elements and bipolar constructs of performance that are utilized by Chinese managers and their U.S. counterparts. Constructs used by the Chinese side of joint ventures have not been been uncovered in previous research available in English. Furthermore, the research breaks new ground in exploring the loci of price decision making in joint ventures, as a measure of decision making control. The dynamics of who makes these decisions among partners of differing cultures may also be applied to other marketing and management decisions. This research also contributes to the understanding of international business by investigating and synthesizing relationships between government, organizational structure, interpartner strategy, industrial tructure, and performance. Strategy includes partner- elated variables, such as decision making control, and ask-related variables, such as critical marketing anagement factors. The research provides an observation— ased conceptual model that explains performance of U.S.- paradigmatic a moepts and t (Parkhe 1992) , (amnion 199( meal-d1 cont: theory 1!? PM patter-once or the critical V particularly 1 developing nai convergent th: the generation for future re: hypotheses cor international significant 1 latched colle players in a PRC parent c senior manage international literature . partners and 14 China equity joint ventures. The reSearch contributes to both international marketing theory development and practice. International joint venture research is at the pre- paradigmatic stage of theory development, in which the core concepts and their relationships are still not understood (Parkhe 1992), particularly the variable of performance (Anderson 1990; Geringer and Hebert 1991). This exploratory research contributes to the development of joint venture theory by providing a more rigorous delineation of performance criteria, and by deepening our understanding of the critical variables that affect IJV performance - particularly between partners from a developed country and a developing nation. Instead of falling prey to premature convergent thinking, this dissertation offers divergence in the generation of theory. The results provide a foundation for future research efforts to measure constructs and test hypotheses concerning operation and performance of international joint ventures. Furthermore, this research is significant in that it represents the first systematic, matched collection of data from the each of the major players in a U.S.—Sino joint venture: U.S. parent company, PRC parent company, U.S. JV senior manager, and PRC JV senior manager. Thus, a complete bilateral perspective of international joint venture performance is introduced to the iterature. The viewpoints and thinking of Chinese JV artners and parents have been addressed infrequently in ”vials joint he rose: officials in ventures. the anger: to be the operation identification affect IJV per public policy of U.S.-China understanding issues that ar the 19905. U. effects of the of such issues on Tariff and 0f criteria or provide a basi Chapter research on 3 Gaps in the l on perfonanc assesses the China. Chapt —»— 15 previous joint venture research. The research may also help managers and government officials improve the effectiveness of international joint ventures. The bilateral approach enables U.S. and Chinese managers to better understand the others' perspectives on the operation and performance of joint ventures. The identification and elucidation of important factors that affect IJV performance, and the provision of managerial and public policy guidelines, may lead to improved performance of U.S.-China JVs. Managers may also gain greater understanding of the macro environment and of critical issues that are faced in the operation of IJVs in China in the 19905. U.S. policymakers can better understand possible effects of their actions on IJVs, and evaluate implications of such issues as China's entry into the General Agreement on Tariff and Trade. Performance results on a large variety of criteria are also introduced to the literature, and rovide a basis for comparisons by managers and academics. ORGANIZATION OF DISSERTATION Chapter II of the dissertation classifies previous esearch on joint ventures into major topics and identifies aps in the literature. This chapter also analyzes research n performance of joint ventures and and integrates and ssesses the literature on international joint ventures in hina. Chapter III presents the research methodology, including a di underlies the is W. surly researd about each of and mm 1 m- 00' why lanes; included. Hy] phenuena and perfomnce 01 infomnts' a criteria deve. an integrated Perfonance, 1 strategy~stru VIII offers I: Iethodologica ilplications. examined and The appendic the reperto lultidinensi references c 16 including a discussion of the interpretivist approach that underlies the research. Each stage of the research process is discussed, emphasizing the rationale and methods of case study research. Chapter IV provides background information about each of the cases. Chapter V identifies, describes, and compares performance criteria used by Chinese and U.S. managers. Comparisons of the criteria used by parent company managers and IJV operating managers are also included. Hypotheses are developed to explain certain phenomena and implications are presented. In Chapter VI performance outcomes of the IJVs are described, using informants' criteria and evaluations as well as other criteria developed by the researcher. Chapter VII presents an integrated model for explaining U.S.-China joint venture performance, based on a modification and extension of the strategy-structure-performance paradigm. Finally, Chapter VIII offers key findings, additional theoretical and methodological contributions, and managerial and policy implications. Furthermore, limitations of the research are examined and directions for future research are proposed. The appendices present the interview guide and results from the repertory grid technique, including data from multidimensional scaling. The bibliography and general references conclude the dissertation. perforunoe f tomtion goa Mom. me third obj and assess th China, identi directions to Placed upon t I" Perfomn both the oath Utilizing an c“liter III - deVeloped be The rev CHAPTER II A.REVIEW OF THE LITERATURE ON INTERNATIONAL JOINT VENTUREB This literature review has three objectives. The first is to classify research on joint ventures, providing a brief discussion of the major theories undergirding joint venture research, and identifying gaps in the general JV literature. The second objective is to uncover dimensions of IJV performance from the three vantage points of (1) JV formation goals, (2) organizational performance, and (3) JV performance, and to assess and interpret the literature. The third objective is to classify, integrate, summarize, and assess the literature on international joint ventures in China, identifying gaps in the research and providing directions for future research. Particular emphasis is placed upon the identification of factors that may affect IJV performance in China. This literature review informs both the methodology and goals of this research. In utilizing an interpretivist approach to the research (see Chapter III - Methodology), specific hypotheses were not developed before the research was conducted. The review is organized in three sections according to he previously discussed objectives - classification of 'oint venture research, performance of joint ventures, and 17 WHOM!!! Kogut 1988!: mm 8313! Geringer 1! The hull initial Ioti‘ 1988b). R68 mildly studying pa 18 IJVs in China. CLASSIFICATION OF JOINT VENTURE RESEARCH The following chart (Table 2.1) identifies the major research topics on joint ventures. These concern the formation, operation, and performance of joint ventures. This outline roughly follows the strategy-structure- performance paradigm developed by Chandler (1962). A prominent study on each particular topic is also provided. Table 2.1 Major Joint Venture Research Streams FORMATION OPERATION PERFORMANCE MOTIVATION/RATIONALE PARTNER-RELATED OBJECTIVE DIMENSIONS VARIABLES Kogut 1988b Beamish & Geringer & Hebert Banks 1987 1991 PARTNER SELECTION TASK-RELATED SUBJECTIVE DIMENSIONS VARIABLES Geringer 1991 Von Glinow & Anderson 1990 Teagarden 1988 The bulk of the literature on joint ventures concerns initial motivations and rationale for forming a JV (Kogut 1988b). Research on the operation of joint ventures has Primarily been undertaken by organization behaviorists studying partner-related variables (e.g Beamish and Banks 1987) and human resource management researchers (e.g. VonGlinow and Teagarden 1988) examining task-related foraation of objectives. to explain in this sect: The Pm venture prodl basis for Is he relation: been well-re 1988). The; effect organ “ring 1935 “Rating de 2'2 Presen Wm 90‘ 19 variables. Virtually no research has been done on managing marketing issues and functions within joint ventures, nor the processes by which these decisions are made. The scarcity of research on the performance of joint ventures has led to initial work on the identification of problems in determining and measuring appropriate dimensions of performance (Anderson 1990; Geringer and Hebert 1991). Rather than attempting to review every topic of joint venture research, this initial overview focuses on the literature that discusses motivations and rationale for the formation of JVs, and ties this literature to the research objectives. A wide variety of theories that have been used to explain and predict joint venture formation are discussed in this section. The particular rationale for the formation of a joint venture produces managerial expectations, which serve as a basis for levels of satisfaction with the JV's performance. The relationship between expectations and satisfaction has been well-researched by social psychologists (see Zeithaml 1988). These expectations also become goals, which directly affect organizational performance (Ruekert, Walker, and Roering 1985). Performance goals are an important factor in marketing decisions, such as pricing (Monroe 1990). Table 2.2 presents a summary of the literature on rationale for joint venture formation. Some authors classify joint venture goals as performance criteria (Baird et.al. 1990; Chowdury 1992). Entry Stability Iegitilacy GOAL Efficiency Market Power Synergy Competence Entry Stability Legitimacy 20 Table 2.2 Rationale for Joint Venture Formation THEORY Transaction Costs (Hennart 1988, 1991) Industrial Organization (Harrigan 1985, 1988) Organizational Learning (Ouchi & Bolton 1988) Organizational Learning (Hamel 1989, 1991) Market Imperfections (Contractor 1990) Resource Dependence CONDITIONS High Transaction Costs Low Production Volumes Competitive Threats/ Opportunities Partner Compatibility Asymmetric Knowledge Political Requirements/ Incentives Environmental Uncertainty High Risks (Pfeffer & Salancik 1978) Institutional Theory (Pye 1986) Lack of Credibility Institutional Pressures and are active casson 1988). use joint mm with other fi: operate with perfomnce efficiency. Indus strategic indicates competitive example. 21 One of the most widely-used theories to provide a rationale for joint venture formation is transaction cost analysis (Williamson 1975; 1981; 1991). This theory shows explanatory power when firms pursue efficiency and can compare relative costs and benefits of several possible modes of operation, such as wholly-owned subsidiaries, joint ventures, and market transactions. Using the logic of transaction cost analysis, joint ventures will be more efficient under market conditions of opportunism and small numbers bargaining (Beamish and Banks 1987), since the partners possess aligned incentives (Osborn and Baughn 1990) and are motivated to show mutual forebearance (Buckley and Casson 1988). Hennart (1991) found that Japanese parents use joint ventures in the U.S. when they need to combine with other firms intermediate inputs which are subject to high transaction costs. In related research Klein, Frazier, and Roth (1990) discovered that under conditions of low production volumes, manufacturers are more likely to collaborate with host firms in foreign markets than to operate with wholly-owned subsidiaries. The primary performance goal within this theory is organizational efficiency. Industrial organization theory, as utilized by strategic management authors such as Harrigan (1985; 1988), indicates that joint ventures may be preferred as a competitive tool for offensive and defensive reasons. For example, two weaker firms may link together in order to collaboration single fin. ventures beta temorary pha fins, joint corporation conditions Into because of incentives (Dunning 19 22 block a stronger company from gaining entry in a new market. The joint venture partners seek to gain market power through their collaboration (Kogut 1988b). Thus, performance of the IJV is evaluated on the basis of how much market power was attained. Enhanced competence and knowledge is another goal for joint venture formation discussed in organizational learning literature. Ouchi and Bolton (1988) provide several case examples in the semi-conductor industry that indicate firms may link up when there is a perception that individual action is inadequate to solve a problem that is common to several compatible industry members. Synergistic collaboration can produce innovations not possible by any single firm. Hamel (1991) provides evidence that joint ventures between large, international oligopolists are a temporary phenomenon. Under conditions where firms possess asymmetric knowledge and skills, partnerships occur until the firm with a learning intent internalizes what it sought from its partner. Kogut and Singh (1988) also found that in relationships between MNEs and smaller developing nation firms, joint ventures are often preferred by the large corporation in order to gain knowledge of unfamiliar local conditions and culture. International joint ventures are sometimes formed because of host government regulations, pressures, and incentives (Contractor 1990). These market imperfections (Dunning 1988) may force a firm to form a JV, even when in the oil i1 through join‘ other 3 fornation 1977). Pye intemationa executive is The legitiaa through one! statue of t] resources C 23 another mode of entry would be preferred. In the 1970s in particular, the aim of several governments was to limit the control of foreign MNEs by placing a ceiling on their shareholding. However, data from 47 nations indicate a _lessening of host government interference in foreign direct investment in the 1980s (Contractor 1990.) According to this theory, the primary goal for forming an IJV is to gain the governmental approval to enter a domestic market. Pfeffer and Salancik's (1978) resource dependence theory explains joint venture formation as a means to gain stability. The theory indicates that joint ventures enable firms to become more certain of resource availability, as in vertical ventures between suppliers and manufacturers. Risks inherent in large-scale exploration efforts, such as in the oil industry (Kent 1991) are also shared and reduced through joint ventures. Other sociological explanations for joint venture formation draw on institutional theory (Meyer and Rowan 1977). Pye (1986) was one of the first to suggest that American executives may be motivated to form partnerships with Chinese firms due to social pressures. Forming international joint ventures give the appearance that the executive is on the "cutting edge" of fashionable trends. The legitimacy of the manager and the firm is enhanced through such actions (Baum and Oliver 1991). The social status of the individual executive increases, and financial resources continue to be provided by banks and shareholders fonation is he perform Ianagers or 1 elpirically bilaterally. linkages bet outcoaes. The fol perfornance 24 who perceive that the executive is "doing a good job" because of undertaking a new high-profile activity (Meyer and Rowan 1977). Legitimacy and enhanced credibility are performance goals that exist on less conscious levels than the other sets of goals. ' The well-publicized increases in the numbers of new international joint ventures in the 19805 motivated many researchers from several disciplines to attempt to find theoretical explanations for this phenomenon. However, two gaps in the literature are apparent. First, little research has been undertaken to try to explain why host firms and nations joint venture with MNEs, particularly those in developing countries. The literature on joint venture formation is dominated by the MNE partner's perspective. The performance goals of Chinese and American joint venture managers or parent companies have rarely been been compared empirically to these formation theories nor analyzed bilaterally. Second, few researchers have investigated the linkages between formation rationale and performance outcomes. The following section uncovers other dimensions of IJV performance previously discussed in the literature. PERFORMANCE OF JOINT VENTURES To explicate dimensions of IJV performance, this section begins with a review of the general organizational (Anderson 19! 1986). Hanav with which tv effects (one takes the in Hitt 1988), goals. Pou Afriyie 198 1983), are elenents of 25 performance literature. Several models of organizational performance are described and assessed. Then specific literature on joint venture performance is summarized, assessed, and interpreted. ORGANIZATIONAL PERFORMANCE DIMENSIONS Although performance is generally the ultimate dependent variable in marketing and management research on organizations (Cameron 1983), there is little agreement among researchers about the dimensions of this construct (Anderson 1990; Geringer and Hebert 1991; Lewin and Minton 1986). Managers also use a variety of different criteria with which to evaluate an organization's outcomes and effects (Chakravarthy 1986; Eccles 1991). This research takes the interpretivist position that performance is a socially-constructed variable. Rather than being some objective reality, performance is a mental abstraction used by individuals to interpret their own reality. The effectiveness of a firm is interpreted differently by the firm's multiple stakeholders (BagozZi and Phillips 1982; Hitt 1988), based on differing constructs of performance goals. Four models, derived from the literature (cf. Afriyie 1988; Lewin and Minton 1986; Quinn and Rohrbaugh 1983), are used in this research to suggest some possible elements of performance. (See Table 2.3.) H: W Profitability Sales liarket Share. E'roduct QUali Production Le Oistoner Sati Government Se Earent Conpar Stockholder E The ente marketers am base (Buzzel. internal, co the firm and correlated w perfOrmance Compal‘isons Potential fc deprECiatior (Chakravartr The ada orqanizatiox are hits-reg 1978) . Thun EXtErnal CO 26 Table 2.3 Models of Organizational Performance Enterprise Output Model Economic Development Model Profitability Job Creation Sales Foreign Exchange Earnings Market Share Social/cultural Effects Product Quality Technology Inflow Production Level AdaptivelOpen Systems Model Internal Process Model Customer Satisfaction Trust Government Satisfaction Stability Parent Company Satisfaction Harmony Stockholder Satisfaction Control The enterprise output model is used most frequently by marketers and is exemplified by research using the PIMS data base (Buzzell et.al. 1975). These measures are generally internal, conventionally centering on financial results of the firm and on how market share or product quality is correlated with profitability. But financial measures of performance record only the history of a firm. Moreover, comparisons between firms are problematic due to the potential for accounting manipulation and differences in depreciation policies and methods of valuing assets (Chakravarthy 1986). The adaptive/open systems model measures how well an organization is meeting the demand of various groups that are interested in the organization (Pfeffer and Salancik 1978). Thus, an organization becomes sensitive to its external constituent groups and adapts to these smeholders. pedal is resc 1986). The into between varic joint venture various enpl< and liclntyre are low on H utilize rela Anderson (19 necessary pr profitabilit the adaptive may Partiall reliance on Host na about the me fims' aCtiv GCOnomiC dev dimensions < a foreign f the adaptiv. maintains s particularl both transa of foreign 27 stakeholders. One of the primary goals when utilizing this model is resource acquisition and support (Lewin and Minton 1986). The internal process model concerns relationships between various groups within the firm, such as between joint venture partners (Beamish and Banks 1987) or between various employee groups or departments (Kanter 1983). Kale and McIntyre (1991) suggest that people from cultures that are low on Hofstede's (1980; 1983) masculinity scale will utilize relational variables in evaluating performance. Anderson (1990) calls these variables "inputs" that are necessary prerequisites of "output" measures such as profitability. Difficulties in measuring dimensions of both the adaptive/open systems model and internal process models may partially account for North American managers' heavy reliance on enterprise output measures. Host nations' governments are particularly concerned about the macroeconomic and social effects of transnational firms' activities within their borders (Afriyie 1988). The economic development model includes the performance dimensions of job creation and technology acquisition. From a foreign firm's perspective, this model is an extension of the adaptive/open systems model, as the organization maintains sensitivity to an important stakeholder group. Particularly in developing countries, governments may be both transactional and contextual parties in the activities of foreign firms (Shan 1991). ninensio variables the (fi'mtzberg an about particu perforaance q and Roering ] perfornance c goals that he the business Bannister l9: dichotonous . performance, variables. think about control," "q Attempt and to ident hampared by measures of evident in t models, a 16 °r9anizatim unable to n “mansions appeal’s tha' indillidual 28 Dimensions of performance can become independent variables that affect the operation of an organization (Mintzberg and Quinn 1991). Managers often make decisions about particular strategies or tactics based on the performance goals that they have developed (Ruekert, Walker and Roering 1985). A manager's perception of the performance of the operation can be based on the performance goals that have been consciously or unconsciously set for the business. Personal construct theory (Fransella and Bannister 1987; Kelly 1955) suggests that bipolar or dichotomous constructs underly these elements of performance, whether they are independent or dependent variables. Examples of constructs that show hpp managers think about performance could include "low control—high control," "qualitative-quantitative," "internal-external." Attempts to evaluate the performance of joint ventures, and to identify factors that affect outcomes, have been hampered by disagreements and uncertainty regarding the measures of performance (Geringer and Hebert 1991). As is evident in the previous discussion of four performance models, a large literature addresses the issue of assessing organizational performance; yet, researchers have been unable to reach any consensus or provide theory-based conclusions (Anderson 1990; Lewin and Minton 1986). It appears that performance is "whatever matters" to the individual or group doing the evaluation. Different constituencies possess different measures and perspectives about that cc PERPOWCB C Researcl of dinension: last decade 1 ventures, pa: conceptual/t] findings fro: 29 about what constitutes performance (Hitt 1988). PERFORMANCE OF JOINT VENTURES Researchers have analyzed JV performance on a multitude of dimensions. Table 2.4 summarizes 22 studies from the last decade that have centered on the performance of joint ventures, particularly IJVs. The performance measure(s), conceptual/theoretical framework, sample, methodology, and findings from each study are listed by author. .rtesian Grow Westley Prof: £1985) Fare: eXp: hrsecta1 lsheghian Eff i. {3933} Lab cap all Bearish Sati (1987) of par BeamiSh S . atl & Hunks of (1987) pa: 30 Table 2.4 Studies on Performance of Joint Ventures PERFORMANCE AUTHOR‘S) MEASQBELSL FRAMEWORK Anderson 14 inputs- Marketing (1990 outputs on Strategy continuum Artesian Growth Strategic E Buckley Profits Mgt. (1985) Parent Economics exports Expectations Asheghian Efficiency: Economics (1982) labor, capital, all factors eamish Satisfaction Organiza- 1987) of both tion partners Behavior Beamish Satisfaction OrganiZa- i Banks of both tion $1987) partners Behavior Efficiency Transac- tion Costs 1! SAMPLE METHODOLOGY FINDINGS MNCs Conceptual Parents Prescriptive use finan- cial data, New JVs should use inputs, mature JVs -outputs Foreign Structured 55% met parents interviews expecta- of 42 (Frequencies) tions. Yugoslav Less pro- JVs fit than at home 11 US- Secondary JVs more Iranian data efficient compared (Nonpara- than w/nonJV metric local Iranian tests) firms firms 12 IJVs Structured MNCs of in LDCs interviews high perf. (12 MNC (Nonparame- JVs depend mgrs, 3 tric tests)on partner ‘LDC JVGMs) MNCs of low perf. JVs don’t 12 IJVs Structured 7/12 both in LDCs interviews satisfied (12 MNC (Nonparame- JVs more mgrs, 3 tric tests) efficient LDC JVGMs) when mutual satisfac- tion, need, & commit- ment C ”-— PER? mow) 2.5.! Cinufj SliI'VI {2992) 10m;‘ stab. inte: v/p. expo fact Centrac- Gov’ tor quit (BEG) exp izp loca Finnerty Shaz e:.a‘.. ret 41-956) Geringer Sati a 595911 Sun Stat Gones- Sta‘ casSeres -11: (1987) ‘se ~bu n Hibibr Butnett Sat (1989) AUTHOR‘S) Chowdury (19.92) Contrac- tor (1990) Finnerty et.al. (1986) Geringer & Hebert (1991) Gomes- Casseres (1987) Habib & Burnett (1989) 31 Table 2.4 PERFORMANCE MEASURE S FRAMEWORK Survival, Strategic longevity, Mgt. stability, integration w/parent, export sales, factor usage Gov’t re- quirements: exports, imports, local labor Strategic Mgt. Shareholder Finance returns Satisfaction Strategic Survival Mgt. Duration Stability Stability: -liquidate -se11 JV -buyout part- ner Strategic Mgt. Satisfaction Political Economy (cont’d.) EX SAMPLE METHODOLOGY FINDINGS WOS & JVs Secondary WOS more of 180 data stable, US MNCs: (Descrip- more 1901-1975 tive integrated statistics, than JVs chi square) 20K US Secondary India, IJVs data Nigeria, in 47 (Regression) Mexico, nations S. Korea have highest performance requirements 208 in Secondary No abnormal U.S. data shortterm (t—tests) returns 69 IJVs Mail surveys Survival & in US, (Spearman duration (parents) rank-order correlated 48 IJVs nonpara- w/ in Can. metric satisfac- (parents, tests) tion. IVGMs) Assessments more similar when similar cultures 3555 WOFE Secondary JVs more 2378 IJVs data unstable (1900-75) (Frequen- (due to cies) failure & adaptation 38 Mail survey Foreign matched (t-test, partner parents regression) satisfied (IJVs in more than chemicals host (Opposite of theory) PER? . <1 meals EL: *1 33185 PTO; ’1953} cnoe.c I ease Stab: Learn ‘ 6' I a. f‘ - Pane-0.1a Dr 5 Oper Liebrenz eas .1990) ms. I tra Reynolds Dura Prof Part asse of s Rosser Tech (1990) tra Econ sy: chz Inf] tu: lo] Teagarden Par" , ass. Voncllnow of . “9%) re. AUTHOR S Lyles (1988) Paliwoda & Liebrenz (1990) Reynolds (1984) OSSGI‘ (1990) eagarden & onGlinow 1990) PERFORMANCE MEASURE S Profits Operating ease Stability Learning Profits Operatig ease Technology transfer Duration Survival Profits Partner assessment of success Technology transfer Economic system changes Infrastruc- ture deve- lopment Partner assessment 32 Table 2.4 (cont’d.) JV FRAMEWORK SAMPLE METHODOLOGY FINDINGS Organiza- tion Theory Strategic Mgt. Strategic Mgt. HRM Political Science Strategic Mgt. of effective- HRM ness 2 US parents 2 EC parents (not partners) 10 EC, US IJVs in East Europe 52 US- Indian JVs PRC & USSR IJVs 6 US- Mexico JVS Case studies Parents’ (Patterns) Case studies Interviews (Frequen- cies) Literature Review Judgement attitudes, priorities, methods re: JV change over time. Learned to value good partner relations All claimed profits. Difficult to operate. Mature technology transferred 75% were profitable for 10+ yrs. Changing goals affect duration Little important macro effect in PRC or USSR Case studies Contextual, (Framework) environmen- tal, & HRM influences on JV effec- tiveness PERI“ ifiORlS Eur—‘5 Hamel Berg {1991) We Harrigan Sure (1988) Dara Kat ROI {1991} Mar) Abil as: lea Koqut Sta] (19883) (a) lane 5‘ Nee Bedhish Of (1990) pa —j— AUTHOR(S) Hamel (1991) Harrigan (1988) Kent (1991) Kogut (1988a) Lane & Beamish (1990) 33 Table 2.4 (cont'd.) PERFORMANCE MEASURE18) FRAMEWORK Bargaining Org. power of Theory partner(s) Strategic Competitive- Mgt. ness of partner(s) -through interpartner learning Survival Strategic Duration Manage- Partner as- ment sessment of Industrial "success" Organiza- tion ROI Strategic Market power_ Mgt. Ability to assess oil leases Stability Strategic (mortality) Mgt. Meets needs HRM of both Strategic partners Mgt. £2 SAMPLE METHODOLOGY FINDINGS 2 EC- Case stu- Internaliza- Japan dies tion of alliances (Proposi- partners’ in Europe tions) skills: 6 other some MNCs collabora- tion is transitional 895 in Secondary Horizontal U.S. data more than Surveys vertical Interviews JVs on (Regression) 3 (Frequencies) measures 563 in Secondary JVs:lower U.S. oil data ROI, more industry (Regression, mktpower, 479 non- frequencies) same JVs in ability US oil as nonJVs 148 in Secondary Mortality U.S. data peaks at Mail survey 5-6 yrs Case study (Regression) (Frequencies) IJVs in Conceptual Success LDCs (Based on factors: previous reasons research) for JV, partner choice, structure, relationships This dis with an anall’ perfornance. JV Perfomanc The stuc in the ways 1 operationali: the theoreti: researcher a: measure perf framework op measures of Buckley 1985 Efficiency ( output EOdel 111anai'iement I measures as Geringer anc‘ ThOSe using likely to us constitUenc; Beamish 198' emanager.s the JV Used Teagarden a marketing S 34 This discussion of joint venture performance begins with an analysis of dimensions used to evaluate JV performance. Then, performance outcomes are considered. JV Performance Dimensions 1 The studies in Table 2.4 reveal significant differences in the ways that performance of joint ventures has been operationalized. There seems to be a relationship between the theoretical or conceptual framework utilized by the researcher and the particular indicators that are used to measure performance. Those with an economics or finance framework operationalize performance according to various measures of financial profitability (e.g. Artesian and Buckley 1985; Finnerty et.al. 1986), or measures of efficiency (e.g. Ashegian 1982) that fit the enterprise output model. Organization theorists and some strategic management researchers evaluate JVs with such "objective" measures as duration and stability of equity share (e.g. Geringer and Hebert 1991; Harrigan 1988; and Kogut 1988a). Those using an organization behavior framework are more likely to use satisfaction of managers and various constituencies as the preferred measure of performance (e.g. Beamish 1987; Habib and Burnett 1987). A related measure is a manager's subjective assessment of the effectiveness of the JV used by HRM researchers (e.g. Reynolds 1984; Teagarden and VonGlinow 1990b). Anderson (1990) uses a marketing strategy perspective to argue that a mixture of indicators is the partners satisfaction Another or group's [)6 research IJV from the part 'iet, when tht different, t! different (G: authors did 2 assessments . Performance i PerSpective? company's pe 5‘ Parent com Strictly fro managears and Premature di Performance (BeamiSh 198 W Most of perfol'mance others Comp; —>— 35 indicators is most appropriate, ranging from harmony among the partners to relative product quality to customer satisfaction and rate of profit. Another problematic issue concerns which individual's or group's perspective should be analyzed. Those who research IJV performance measures often obtain their data from the partner who has the same nationality as they do. Yet, when the national cultures of the partners are different, the assessments of IJV partners may also be quite different (Geringer and Hebert 1991). Unfortunately, these authors did not examine underlying reasons for the different assessments. Furthermore, should the evaluation of performance be done from the JV perspective or the parent perspective? Hamel (1991) evaluates IJVs from the parent company's perspective, as an integral unit of the MNC. But a parent company that evaluates the JV's performance strictly from its own viewpoint risks alienating both the JV managers and its partner (Anderson 1990), and may cause premature dissolution of the venture. Measures of performance from multiple perspectives are advisable (Beamish 1987; Hitt 1988). Performance Outcomes Most of the researchers in this review evaluated the performance of joint ventures on an absolute basis; while others compared the performance of joint ventures with other modes. The findings are not so useful for this research, since it does with that of other nodes. of studies tl‘. performance 1' sho compare 5 slight maj or: exceeded the: Beamish and 1 {Paliwoda an: management tn temporary ph Those w Efficient th 1982); but 1 “Wm (19 more stable the Opposite diSSolutions iHVestigat ec‘ Wholly. Parent SYste “Mum-prism SubidiAries the host g0. Korea Place InternatiOn —>—’ 36 since it does not compare the performance of IJVs in China with that of other nations, northe performance of IJVs with other modes. However, it can be noted from this small group of studies that evaluations with absolute measures of performance indicate mildly successful results: while those whocompare JVs with other modes find more mixed results. A slight majority of respondents report that their JV met or exceeded their expections (e.g. Artesian and Buckley 1985: Beamish and Banks 1987). Most of the JVs were profitable (Paliwoda and Liebrenz 1990; Reynolds 1984), tranferred «management technologies (Hamel 1991; Lyles 1988), yet, were temporary phenomena (Hamel 1991; Kogut 1988a). Those who compared JVs found that they were more efficient than local, developing country firms (Ashegian 1982); but less profitable than non-JVs (Kent 1991). Chowdury (1992) found that wholly-owned subsidiaries were more stable than JVs, whereas Comes-Casseres (1987) found the opposite result. The reasons for ownership changes and dissolutions of JVs and wholly-owned subsidiaries need to be investigated before conclusions can be made. Wholly-owned subsidiaries are more integrated with the parent system than JVs (Chowdury 1992), indicating the unsurprising finding that parents are better able to control subidiaries. In addition, Contractor (1990) discovered that the host governments in India, Nigeria, Mexico, and South Korea place the most regulations and requirements on international joint ventures. PRC governmental regulations regarding IJl international The pun summarize, a: ventures in providing di emphasis is may affect I assessment 0 venture (Wu internationa PUblished in comDares the time, topic, and draws 5c “Pics and 1 Identificatj CIASSIFIChT: A sum; in Table 2. i fore ign di 1‘. —>— 37 regarding IJVs are included in the following section on international joint ventures in China. IJVs IN CHINA The purpose of this section is to classify, integrate, summarize, and assess the literature on international joint ventures in China, identifying gaps in the research and providing directions for future research. Particular emphasis is placed upon the identification of factors that may affect IJV performance in China. Beginning with an assessment of the political risks of setting up a joint venture (Wu 1982), more than two dozen studies on international joint ventures in post-Mao China have been published in journals and books. First, this review compares the studies briefly on the dimensions of period of time, topic, framework, methodology, and sources of data, and draws some conclusions. Then, it elaborates on the topics and results found in the literature on IJVs in China. Identification of gaps in the research and directions for future research are integrated into the analysis. CLASSIFICATION OF THE STUDIES A summary of twenty six of these studies is presented in Table'2.5. Discussions of the more general topic of foreign direct investment in China are not included in the review, nor a trade nagazir from surveys organized chz the macroenvi 38 review, nor are articles from legal journals. Articles from trade magazines are only included when they provide data from surveys of IJVs. The studies in this review are organized chronologically, reflecting the dynamic changes in the macroenvironment in China. Research Arthritis} Date. To: 3.; 1981 {1952}- 333215,. 1983 in; i Sigh v. Q‘:\ Eeai'yx 1935 it! \ «é: |eo¥ ‘- ‘2'9 198 3.956; BEVEdson 195 1.371 ‘ l “at"- Coun- 198 Gil for Us- China Trade {1957) (1987) BeamiSh & 1 Wang (1989) (1990) H \0 V°nGlinow Tee“Jrad (1983) en WU (1982) Daniels, Krug & N igh. (1985) Hendryx (1986) Pye (1986) Davidson (1987) Nat’l Coun- cil for US- China Trade (1987) Campbell (1987) Beamish & Wang (1939) Eiteman (1990) VonGlinow & Teagraden (1988) Research Author(s) Data To: 1981 1983 1985 1985 1985 1986 1986 1986 1986 1987 39 Table 2.5 on International Joint Ventures in China Topic(s) Framework(s) Methodology Source(s) History, Political Literature Previous Political Science Review Studies Risk Formation, Dunning Interviews US JV Eclectic (Frequencies) Managers Theory (Description) Negotiation, - Experience Tianjin- Operation Case Study Otis - (Description) Elevator (Prescription) Negotia- Political Experience US JVs tion Science (Description) (Prescription) Formation, Contingency Interviews US parent Operation (Frequencies) cos., (Description) US JVmgrs (Prescription) Formation, - Mail Survey US parent Operation, (Frequenc1es) cos, Performance (Description) US JVmgrs Formation, - Mail Survey EC, US, Performance (FrequenCies) Japan Formation Contingency (JV Char- acteris- tics) Negotiation - Operation Human (Transfer Resource of HRM Management technology) JV Mgrs. Analysis of China In- Secondary Data vestment (Frequencies) Guide (Description) Mail survey US mgrs. (Frequencies) seeking (Description) JVs (Prescription) Literature Previous Review Studies (Conceptual) Campbell [1969) -book Sham (199:) Bolton {1990) Mann 11959) -book Ihohurn, et.al. {1990) ~book Baird et.al. {1990) ShEukar (1990) Teagarden ‘ VOUGlinow (1991) Hu, et-al, (1992) 191 19 19 19 ...; f‘.‘ —>— 40 Table 2.5 (cont’d.) Authorfs) Data Igpiglgl ErgmgwgrkLgl Methodolo Source(s) To: Campbell 1987 Formation, - Case studies EC US HK (1989) Operation (Typologies) Japan JV -book (Description) managers Shan, 1987 Formation Transaction Analysis of Natl Coun- (1991) Cost Secondary cil for US . Data ChinaTrade (Regression) Std &Poors Holton 1988 Negotiation, HRM Interviews US JV mgrs (1990) Operation (Description) Mann 1988 Negotiation, - Case study Beijing (1989) Operation (Description) Jeep, -book Secondary Data Thoburn, 1988 Formation, Dunning Interviews HK JVmgrs et.al. Operation Eclectic (Description) Guangdong (1990) Theory (Frequencies) Govt Data -book Baird 1988 Operation Contingency Classroom PRC, US et.a1. Performance Survey Students (1990) (t-tests, Ranks) Shenkar 1989 Formation, HRM, Literature Previous (1990) Operation Org. Design Review, studies, Interviews UK US HK (Description, JV mgrs. Prescription) Teagarden 1989 Formation Org. Design Interviews Various & VonGlinow Operation (Typologies) mgrs in (1991) Performance PRC Hu, et.al. 1989 Performance Internatio- Analysis of USCBC (1992) —US Parent nalization Secondary Data, Stock Price Data WSJ (Mean dif- ferences) ta 3’ \ *6 C) L ES-L‘hina 19‘. Business Council {ESC'SC} [1990) took Pearson 19 {1991) took Tc 3 Jones 19 (:99: Shapiro 19 Etal. (1991) ~boo‘r Beamish lg (1993) Wallah (1992) H StQIZer eLal. (1992) —>— Author(s) US-China Business Council (USCBC) (1990) -book Pearson (1991) -book Tu & Jones (1991) Shapiro et.al. (1991) -book Beamish (1993) Abdallah (1992) Stelzer et.a1. (1992) Data To: 1990 1990 1990 1990 1990 1990 1991 41 Table 2.5 (cont’d.) Topic(s) Framework(sl Methodology Sourcefs) Formation, - Mail surveys, PRC Data Operation, Secondary data US JV Performance (Data base) mgrs. (Frequencies) Formation, Political Interviews, US EC HK Operation, Science Lit. Review JVmgrs., Performance (macro) (Description) PRC mgrs/ Officials Foreign Experts, Secondary Data Operation HRM Literature Previous Review Studies (Description, Prescription) Environment - Experience Xerox JV, (Formation, Literature USCBC data, Operation) Review Previous (Typologies, studies Description, Prescription) JV Charac- Contingency, Literature Previous teristics, Org. Design Review, studies (Design, Interviews Various Performance) (Typologies JV mgrs. Description) and PRC parents Operation Accounting Case Study Babcock & Performance (Description, Wilcox Performance Contingency Mail Survey (Frequencies) Prescription) Beijing U.S. Parents (Means) The topi with the evol cover the yea joint venture managenent, c fourteen stud studies since concerned pri international Internat the interest range of dis< variety of f; andlyze IJVs Political so (1985), and 1 Political ti discussions Thoburn eta theory to ex transaction Shares, The aPPlied to H on Parent fi ihCorPOrate factors that —>— 42 The topics and publication dates appear to correspond with the evolution of IJVs in China. The five studies that cover the years 1979 to 1985 center on the formation of joint ventures. Operational issues, such as human resource management, come to dominate the subject matter of the fourteen studies covering the years 1986 to 1989. The seven studies since the Tiananmen Square incident of June 1989 are concerned primarily with evaluating the performance of international joint ventures in China. International joint ventures in China have attracted the interest of researchers and consultants from a wide range of disciplinary backgrounds. This is reflected in the variety of frameworks that have been used to describe and analyze IJVs in China. Three studies primarily incorporate political science models and viewpoints: Pearson (1991), Pye (1986), and Wu (1982) informally use bargaining and political risk frameworks. Economic theories frame the discussions in three studies: Daniels et.al. (1985) and Thoburn et.al. (1990) incorporate Dunning's (1980) eclectic theory to explain IJV formation; while Shan (1991) utilizes transaction cost analysis in his explanation of ownership shares. The internationalization theory (Cavusgil 1980) is applied to Hu et.al.'s (1992) study of IJV formation effects on parent firm's stock prices. Six of the studies incorporate a contingency approach as the authors identify factors that may affect organizational design, management, and performance (Baird et.a1. 1990; Beamish and Wang 1989; Beamish 1993: et.al. 1992). studies: thes 1987; Canpbel National Cour 1990: and US- Although of data colle according to Table 2.6.) personal int: aperience. 1 secondary da' —>— 43 Beamish 1993: Davidson 1987; Shenkar 1990; and Stelzer et.a1. 1992). Frameworks are not apparent in eight of the. studies: these are written by or for practitioners (Campbell 1987; Campbell 1989: Eiteman 1990; Hendryx 1986: Mann 1989; National Council for US-China Trade 1987; Shapiro et.al. 1990: and US-China Business Council 1990). Although many of the studies implement several methods of data collection, the 26 studies can be classified according to the main type of data collection method. (See Table 2.6.) The primary data collection methods are personal interviews, case studies, surveys, and personal experience. Reviews of other studies and analysis of secondary data comprise the other types. IJh mums Personal Inte Daniels et.al Davidson (198 Holton (1990) Pearson (1991 Shenkar (199C Thoburn et.al Case Studies hbdallah (19S Campbell (195 Hendmr (198E hann (1989) Shapiro et.al Teagarden S \ Surveys Baird et. a1. Campbell (19: Eiteman (19m National Cour U‘~3~'China Stelzer et.aj U.S.-China 51 COUDCil (1' Wm: Pye (1986) haPlro et.a —>— 44 Table 2.6 IJVs In China - Data Collection Methods PRIMARY DATA SECONDARY DATA Personal Interviews Beamish & Wang (1989) Daniels et.al. (1985 Hu et.al. (1992) Davidson (1987) Shan (1991) Holton (1990) Pearson (1991) Shenkar (1990) OTHER LITERATURE Thoburn et.al. (1990) Beamish (1993) Tu & Jones (1991) Case Studies VonGlinow & Teagarden Abdallah (1992) (1988) Campbell (1989) Wu (1982) Hendryx (1986) Mann (1989) Shapiro et.al. (1991) Teagarden & VonGlinow (1991) Surveys Baird et. al. (1990) Campbell (1987) Eiteman (1990) National Council for U.S.-China Trade (1987) Stelzer et.al. (1992) U.S.-China Business Council (1990) Personal Experience Pye (1986) Shapiro et.al. (1991) The U.S. the National databases on China, as we] investment ii of informatit of IJVs in C] Beamish (199: (1989), Pear: and Teagardez China Busine: However, the State Admini since it is Politically- 1993; Campbe Council 1990 Probably ade in China; ho that roly on Statistics ( PerSOna have Centere study in 198 managers frc approach of is Prob)emat —i— 45 The U.S.-China Business Council (1990), formerly called the National Council for U.S.-China Trade (1987), developed databases on U.S.-based companies' direct investments in China, as well as other descriptive data on foreign direct investment in China. These data bases served as the source of information for most of the analyses of characteristics of IJVs in China, and were incorporated into the work of Beamish (1993), Campbell (1989), Hu et.al. (1992), Mann (1989), Pearson (1991), Shan (1991), Shapiro et.al. (1991), and Teagarden and VonGlinow (1990). Most of the the U.S.- China Business Council data is based on PRC-collected data. However, the reliability of PRC FDI data (by MOFERT and the State Administration of Industry and Commerce) is suspect, since it is subject to inconsistent definitions, mistakes, politically-based exaggerations, and incompleteness (Beamish 1993; Campbell 1989; MacGregor 1992: U.S.-China Business Council 1990). The U.S.-China Business Council data is probably adequate for general descriptions of IJV activity in China; however, the results and conclusions of analyses that rely on this database to test hypotheses with statistics (e.g. Shan 1991) must be viewed with caution. Personal interviews and case studies on IJVs in China have centered on U.S. managers' perspectives. Campbell's study in 1987 was one of the first to seek data from foreign anagers from other nations as well (1987; 1989). This pproach of only studying foreign managers in joint ventures 's problematic for at least two reasons. A joint venture is by definitior Acquiring dat capture the c as an inconpl Chinese lanes Western nanat discovered 1:] research net] (Adler, Camp] More re« primary data Company offi VonGlinow 19 have often r their respon data that sy from foreign managers. host of Provide Clas (Teagarden a BusineSS C01) internat i One first Steps necessary. Characterist 1531198 is e: —i— 46 by definition a partnership between at least two parties. Acquiring data from one side of the relationship can fail to capture the dynamics of a joint venture and must be viewed as an incomplete analysis. Second, evidence exists that Chinese managers possess constructs that are different from Western managers (Tse et.al. 1988). Researchers have discovered that that Western-based constructs and positivist research methods fail to explain Chinese managerial behavior (Adler, Campbell,and Laurent 1989; Stewart and Chong 1990). More recently, attempts have been made to acquire primary data from Chinese joint venture managers and parent company officials (Beamish 1993; Pearson 1991; Teagarden and VonGlinow 1990a). Yet, access has been limited, and Chinese have often refused to give more than the "party line“ in their responses (Pearson 1991). There is no known published data that systematically matches and compares the responses from foreign parents and from both sets of IJV operating managers. Most of the studies are descriptive in nature. Some provide classifications (Beamish and Wang 1989), typologies (Teagarden and VonGlinow 1990a), and frequencies (U.S.-China Business Council 1990). In this early stage of research on international joint ventures and business in China, these first steps in the theory building process are useful and necessary. A clearer understanding of the environment, characteristics of IJVs, and identification of critical issues is essential. Although most authors integrate infernal Prof propose hypol (1993), and l inductively. transaction c correlations data on IJVs To port same organiz general IJV performance. toPics. Thi integrate an China. This on IJVs in a covers tOpic ———" 47 informal propositions into their work, only four studies propose hypotheses. Teagarden and VonGlinow (1990a) Beamish (1993), and Hu et.al. (1992) appear to develop hypotheses inductively. Shan (1991) develops hypotheses from transaction cost analysis and then tests these with correlations and a truncated Tobit model using secondary data on IJVs in China. To portray the state of knowledge on IJVs in China, the same organization scheme that was used to analyze the general IJV literature is used: formation, operation, and performance. Table 2.7 reveals the expanded list of 33 topics. This represents the first known attempt to integrate and synthesize the diverse literature on IJVs in China. This framework can be used to help analyze research on IJVs in any country or market area, although it only covers topics discussed in the PRC literature. P OICBLOE TCCITRECCAN. (— 50 comparative advantages of lower labor costs (Pearson 1991: Thoburn et.al. 1990). Using Dunning's eclectic, economic theory, it can be generalized that Western parent companies are market-seeking, while Asian companies are resource- seeking. Chinese parents seem most intent on economic development goals. Reasons for Joint Ventures Versus Other Modes The rationale for the use of joint ventures rather than other forms of FDI or importing/exporting must also be analyzed from the vieWpoints of various nationalities. Of the seven goals from the joint venture literature that were discussed in the first section of this chapter (efficiency, market power, synergy, competence, entry, stability, and legitimacy), PRC IJV literature centers on the use of JVs as a condition for entry for Westerners. In the early 1980s foreign investors were required to develop joint ventures with Chinese companies, instead of forming wholly-owned subsidiaries (Shapiro et.a1. 1991). From a foreign investors' perspective, the JV mode was necessary due to these market imperfections.“ Several studies find support that political requirements and incentives were the number one reason that Western firms chose the JV mode (Beamish 1993; Daniels et.al. 1985; Teagarden and VonGlinow 1990a). Daniels et.al. (1985) note that political disincentives, in the form of both high tariffs and non-tariff barriers, discouraged Western companies from attempting to export to enetrate Chinese markets. The lack of trademark and patent protection 21. than riskier agreements ( investors al for the loca and cultural greater know Japanese con China via ex 1991). Smal number of IJ joint ventur resources vi compared to 1990). Th Lavs on J oir their Prefer offer the pc Partners, tt mama(Jo-ment a CieVelopments Party can be foreign firm (Pearson 195 from the 01.11 We), Chine —i— 51 protection also led investors to use joint ventures rather than riskier forms such as licensing and other contractual agreements (Daniels et.al. 1985; Pearson 1991). Western investors also chose equity joint ventures because of a need for the local partner's knowledge of the Chinese political and cultural environment (Thoburn et.al. 1990). Possessing greater knowledge of the Chinese culture than Westerners, Japanese companies have shown a preference for selling to China via exports, more than investing within China (Pearson 1991). Small Hong Kong investors, who formed the largest number of IJVs (U.S.-China Business Council 1990), preferred joint ventures for the gains in efficiency from pooling resources with Chinese firms and reducing transaction costs compared to using wholly-owned enterprises (Thoburn et.al. 1990). The Chinese central government issued the 1979 Laws on Joint Ventures with clear statements that this was their preferred mode (Shapiro et.al. 1991). Joint ventures offer the potential for Chinese firms to learn from their partners, thus to gain competence in various functions of management and the ability to sustain technological developments. At the same time the government and Communist Party can better control the activities and influences of foreign firms when Chinese serve as partners in the ventures (Pearson 1991), than when the enterprises are wholly-owned from the outside. At the national, enterprise, and personal evel, Chinese also stand to gain legitimacy by linking with irms that have global reputations as the best and biggest (Osland 1990 officials an formation ha The rational statelents a Canpbel offered pres (1986), and this topic. vac ms, 35 basis of pre intermediarj IJVs with Cl Eiteman (19g Ilahufacturir began the J1 firms- The: Partners vi) (1989) and 5 Partners Wh< resonCeS tl including t1 local and C! The ne< 3Years in I —f— 52 (Osland 1990). Systematic interviews and surveys of Chinese officials and partners regarding their rationale for JV formation have not been found in the literature, however. The rationale has been inferred from national policy statements and regulations. Partner Selection Criteria Campbell (1989) studied partner selection methods and offered prescriptive advice. Davidson (1987), Hendryx (1986), and Shapiro et.al. (1991) also provide advice on this topic. In Campbell's sample of 29 foreign parents of PRC IJVs, 38% of the firms selected Chinese partners on the basis of previous contacts, 38% used consultants and other intermediaries to find local partners, and 21% began their IJVs with Chinese partners who initiated the process. Eiteman (1990).found that almost half of the U.S. manufacturing firms in his sample of 25 IJV negotiators began the JV formation process at the initiative of Chinese firms. These Chinese companies appeared to be seeking partners with original and superior technology. Campbell (1989) and several of the other authors advise selecting partners who appear to possess the complementary skills and resources that are essential for the success of the JV, including the possession of sufficient influence at the local and central government levels. Negotiation Strategies The negotiation process that takes between 6 months and 3 years in China (Campbell 1989) is made difficult by the pervasive Ch 1986: Bolton onus at Chi negotiating (Hendryx 198 negotiators Chinese (Can Westerners b styles and p negotiations Davidson (19 et.al. (1991 new 0f the °Perating ir nationalitie C°lmoil 199c * Hong * U.S.} _i— 53 pervasive Chinese belief that it is a zero-sum game (Hendryx 1986: Holton 1990; Shapiro et.al. 1990): a foreigner's gain comes at China's loss. Many of the difficulties in negotiating that were experienced in the early 19803 (Hendryx 1986: Pye 1986) are disappearing as Chinese negotiators become more experienced in dealing with non~ Chinese (Campbell 1989: Shapiro et.al. 1991), and as Westerners become more familiar with Chinese negotiating styles and perspectives. Guidelines for successful IJV negotiations in the PRC are provided by Campbell (1989), Davidson (1987), Eiteman (1990), Pye (1986), and Shapiro et.al. (1991). Foreign Parent Characteristics 0f the 2,491 international equity joint ventures operating in China in 1990, the foreign parent company nationalities were identified as (U.S.-China Business Council 1990): * Hong Kong 65% (1,658) * U.S.A. 11% (290) * Japan 8% (204) * SE Asia 7% (163) * Europe 5% (119) * Other 2% (57) Since 1990 Taiwanese investors have made the largest number of new commitments to start up IJVs in China (Beamish 1993; MacGregor 1992). Thus, when including Hong Kong, most of the ventures are between overseas Chinese and the PRC. It is likely that many of the small IJVs from other countries and China a1 1991). This Chinese IJVs closeness an concludes th not particul Two stu characterist formation ar They collect internationa Public/prive that firms c take risks, (1991) does foreign pare of 42 U.S. y blllion. Tl the aVerage 18'4' Most multination; Council (19'. Vehtures in owned bUSinv ——— 54 and China also involve overseas Chinese (Shapiro et. al. 1991). This pattern of large percentages of overseas Chinese IJVs is predictable, considering the cultural closeness and geographical proximity. Beamish (1993) concludes that the origin of the foreign partners in IJVs is not particularly foreign. Two studies investigated relationships between characteristics of U.S. parents and other dimensions of formation and performance (Hu et. al. 1992; Shan 1991). They collected data on U.S. parent company size, international involvement, degree of diversification, and public/private status. A belief underlying both studies is that firms differ in their perception of, and ability to take risks, and to manage uncertainties. However, Shan (1991) does not report descriptive statistics of these foreign parent characteristics. Hu et.al.'s (1992) sample of 42 U.S. parents has a median annual sales figure of $11.3 billion. The average percent of foreign sales is 27%, while the average number of foreign subsidiaries turns out to be 18.4. Most studies examine IJVs whose parents are large multinational companies. However, the U.S.-China Business Council (1990) reports that 40% of the U.S. parents of joint ventures in China are very small family or individually- owned businesses. PRC Paren C Data on Merely ident (U.S.-China (1991) and V place of the important va control from linked to a or municipal hybrids, inc influence (1 Mai. The reI bl’ several ,‘ and Wang l9: VonGlinow 11 f°r a trans; Share in an the amount . °f the Vent reSuits ind °f ownersni the duratio anestment (U'S“China 55 PRC Parent Characteristics Data on PRC parents is extremely difficult to obtain. Merely identifying the PRC parent(s) of an IJV is not easy (U.S.-China Business Council 1990; Pearson 1991). Pearson (1991) and VonGlinow and Teagarden (1988) suggest that the place of the PRC parent in the Chinese bureaucracy is an important variable that may affect the degree and type of control from the Chinese side. The parent may be directly linked to a ministry or bureau at the national, provincial, or municipal level. Furthermore, some PRC parents are hybrids, incorporating several levels of government influence (VonGlinow and Teagarden 1988). IJV Characteristics The relative equity share in the IJV has been discussed by several authors in the PRC IJV literature (e.g. Beamish and Wang 1989: Campbell 1989; Shan 1991; Teagarden and VonGlinow 1990a). Shan (1991) tests and finds some support for a transaction cost hypothesis that a foreign investor's share in an IJV in China is inversely correlated with (1) the amount of uncertainties and risks and (2) the dependency of the venture on relationships with the host country. His results indicate that the foreign firm carries a lower share of ownership when the investment amount increases and when the duration of the venture decreases (Shan 1991). Average investment by foreign firms was only $1.12 million in 1990 (U.S.-China Business Council 1990), reflecting uncertainties about the ir Liv contract contract ler years (U.S.- Shan (1 share of the be less dept involved in sectors. Hc coal have d: lover energy manufacturir 1990). Foreigi in Boijing ; Other locat. the coastal Beijing, Ti. inland loca' IDVestors a: political/l. than in the far from Be Shan ( a larger Sh legal, and to that of ’—— 56 about the investment climate. However, the duration of the IJV contracts is increasing (Beamish 1993). The average contract length was 15 years, with durations extending to 50 years (U.S.-China Business Council 1990). Shan (1991) found that foreign firms assume a greater share of the JV in resource-related business. These would be less dependent upon local firms than foreign firms involved in IJVs in manufacturing, service, and construction sectors. However, resource-related IJVs in petroleum and coal have died out, following disappointing results and lower energy prices. A trend to more light industry manufacturing IJVs is apparent (U.S. China Business Council 1990). Foreign investors with IJV locations on the coast and in Beijing also carry a higher share of equity than those in other locations (Shan 1991). 63% of the IJVs are located in the coastal areas, 18% are in the metropolitan cities of Beijing, Tianjin and Shanghai, and 19% are found in other inland locations (U.S.-China Business Council 1990). Investors are supposedly more certain about the political/legal environments on the coasts and in Beijing than in the free-wheeling special economic zones and areas far from Beijing's control (Shan 1991). Shan (1991) argues that committing the local partner to a larger share of the IJV under conditions of political, legal, and bureaucratic uncertainties aligns its interests to that of the joint venture. In turn, this reduces the incentives o to the detri share also 0 costs for th Analysi that the equ time (Beanie for U.S.-Chi U.S.-China E share appear consistent '- uncertainty share (commj hiSher forei liberalizati that now enc omEd enter; China have a complexity I enviroannti 5°m9tines ir dUal manage: stmctural < together par political, 1 lEVels 0f C< prOblemS ( S] ”— 57 incentives of the local partner to pursue goals that may be to the detriment of the IJV. Increasing the local partner's share also offers the potential to decrease the switching costs for the MNC. Analysis of the literature in the last decade suggests that the equity share by foreign parents is increasing over time (Beamish and Wang 1989: Campbell 1989; National Council for U.S.—China Trade 1987; Teagarden and VonGlinow 1990a: U.S.-China Business Council 1990), although the average share appears to be slightly below 50%. This would be consistent with the internationalization hypothesis that as uncertainty decreases through experience, foreign ownership share (commitment) increases (Cavusgil 1980). This trend of higher foreign equity shares also reflects the progressive liberalization of foreign direct investment laws in China that now encourage foreign majority ownership and wholly- i owned enterprises (Pearson 1991). Equity joint ventures in China have also been analyzed in terms of structural complexity (Shenkar 1990: Teagarden and VonGlinow 1990a) and environmental diversity (Shenkar 1990). Multiple partners, sometimes including three or more partners, and the typical dual management structures, account for the high levels of structural complexity. Multiple national affiliation brings together parent companies which are anchored in different olitical, economic, and legal systems (Shenkar 1990). High evels of complexity and diversity may lead to operational roblems (Shenkar 1990). Operational issues are covered in the followir OPERATION Follovi classified a UV literati are four com Task-related resource mar Ovnersr although the PRC most IJ\ functions (f Control by E manovenrxent s “Pressman- Produce Cont are Particul 1989). Tear; variableS ir Contml: str and alliance hypothesiz e 58 the following section. OPERATION Following Geringer (1991), operational variables are classified as partner-related and task-related. In the PRC IJV literature control, conflict, interdependence, and trust are four commonly mentioned partner-related variables. Task-related variables include management functions of human resource management, marketing, and accounting. Partner-Related Variables Control Ownership shares seem to be correlated with control, although the linkage is not absolute (Schaan 1988). In the PRC most IJVs manifest shared control of management functions (Beamish 1993), although some exhibit dominant control by either the host or foreign parent side. A dual management structure, with a Chinese and American representative for each management position, seems to produce continuous struggles for control. These problems are particularly evident in the Beijing Jeep venture (Mann 1989). Teagarden and VonGlinow (1990a) identify three ariables in Chinese IJVs that appear to be dimensions of ontrol: strategic flexibility, parental operating autonomy, nd alliance-related decisionmaking control. They ypothesize that the higher the degree of operating autonomy, fill that the for Pearson monopoly ove selling enal: ventures. h vithhold cap controls on Many au IJVs in Chin (1989; 1990) lead to IJV exPoet that Unlimited re risk than f0 “st are when affe Wers diff sholler (199 Objectn,es c °bloctiVeS i foreign ex ch Three S of IJV Partn it 59 autonomy, the higher the degree of strategic flexibility that the foreign parent company will have. Pearson (1991) argues that the Chinese government's monopoly over foreign currency and much of the buying and selling enabled it to control many activities of joint ventures. Meanwhile, the capcity of foreign investors to withhold capital explain why the government lessened its controls on joint ventures. Conflict Many authors discuss problems between the partners in IJVs in China (e.g. Hendryx 1986; Shenkar 1990). Holton (1989; 1990) suggests that different assumptions and risks lead to IJV conflict. For example, he believes that Chinese expect that IJV profits are assured and that foreigners have unlimited resources. Chinese managers face more downside risk than foreigners for failure, and find that potential rewards are limited. Loyalty of personnel to the parent company affects employee turnover and makes motivating workers difficult (Tu and Jones 1991). Pearson (1991) and Shenkar (1990) suggest that differences in goals or objectives can lead to conflict. Foci of conflict in bjectives include: (1) enter PRC market and generate oreign exchange, and (2) lower labor costs and expand jobs. Interde endence Three studies explicitly investigate the interpendence f IJV partners in China. Teagarden and VonGlinow (1990a) generalize ‘ and jointly relating to more interd1 autonony e11 partners: (I the more tht related hyp< Shan's partners' re upon the loc Partners the more depends SPeCific knc to the burea in resourc9_ Partners tha ConStruction equity than Study Baird believe that than do Puller in this Stud mid“)? of The Chi (1990) Sampln *7—1 60 generalize that partners are highly interdependent in IJVs and jointly carry out strategic and operating decisionmaking relating to alliance activities. They hypothesize that the more interdependent the partners are, the less operating autonomy either parent enjoys. The more interdependent the partners: (1) the more they engage in joint activity and (2) the more they share operating decisionmaking control, are related hypotheses. Shan's (1991) analysis of dependence considers foreign partners' reliance upon local relationships, rather than upon the local partner, per se. By extension, those foreign partners that are highly dependent upon local markets are more dependent upon local partners that possess country- specific knowledge and skills, as well as close connections to the bureaucracy. Shan (1991) infers that foreign parents in resource—related IJVs are less dependent upon local partners than those in manufacturing, service, and construction sectors, since they possess a larger share of equity than those in the latter three sectors. In another study Baird et.al. (1990) found that Chinese MBA students elieve that mutual need is more important in IJV success han do American MBA students. Since none of the students in this study had experience with IJVs, the external alidity of this study is limited. $£E§E The Chinese and American students in Baird et.al.'s . 1990) sample both state that trust is the most important factor leadi al. (1991) c Chinese JV 1 that Bong Kc the trust of similarities Country.“ 1* PRC IJVs do highly inpor No rese the relative It appears t °f a Particu baCkground t Studies that perspeCtiVe VODGlinow lg Teagarden 19 (Davidson 19 accountant c Little atten marketing ta sourcing hig diSCUSsed in Q t'al- 1991) —7— 61 factor leading to successful joint ventures. Shapiro et. a1. (1991) observes that most Western JV managers and Chinese JV managers do not trust each other. They suggest that Hong Kong investors/managers are better able to earn the trust of their Chinese partners because of cultural similarities and the perception of a common "Mother Country." However, researchers who interviewed managers in PRC IJVs do not indicate that trust is perceived to be a highly important factor in IJVs in China. Task-Related Variables No researcher of PRC IJVs has systematically analyzed the relative importance of the various JV management tasks. It appears that analysts' conclusions about the importance of a particular task is based mostly upon the training and background that they bring to the research. Five of the studies that are written from a human resources management perspective (Hendryx 1986; Holton 1990; Teagarden and VonGlinow 1990a; Tu and Jones 1991; and VonGlinow and Teagarden 1988) highlight personnel issues. A marketer (Davidson 1987) emphasizes marketing problems, while an ccountant centers of financial issues (Abdallah 1992). ittle attention has been given to the influence of arketing tasks on IJV performance. However, problems in ourcing high quality components and materials in China are iscussed in several studies (e.g. Campbell 1989; Shapiro t.al. 1991). It is beyond the scope of this literature review to SL each of the HR! tasks is coverage of Hendrya greatest sir citing diff: primary sou1 motivating, difficult f< seek to hair other manage and Teagarde mama‘Jers am the limited employees (5 “thong SUCCESSful . MS in Chi; fev {ESEarC} certain Varj resu1ts. SeCohd' rele performaIlCe —7— 62 review to summarize the descriptions and prescriptions about each of the management tasks of an IJV. A brief review of HRM tasks is warranted, though, due to the extensive coverage of this topic in the PRC IJV literature. Hendryx (1986) identifies personnel management as the greatest single challenge to the Tianjin-Otis Elevator JV, citing differences in political/economic systems as the primary source of conflict. Selecting, training, motivating, and firing Chinese employees of IJVs is difficult for foreign parents and managers because Chinese seek to maintain control of the HRM function more than any other management tasks (Holton 1990; Pearson 1991; VonGlinow and Teagarden 1988). Retaining well-qualified Chinese managers and technical personnel is also problematic, due to the limited supply and great demand for these types of employees (Shapiro et.al. 1991). PERFORMANCE Although both foreign and Chinese companies hoped for successful joint ventures, studies on the performance of IJVs in China indicate that the results have been mixed. A ew researchers have investigated the relationships between ertainvariables and performance, attempting to explain the esults. First, outcomes of IJVs in China are reviewed. £ econd, relationships between two factors and the erformance of IJVs in China are considered. Outcms Perform financial re exports, and subjective l 'objective' profits are industries a published re venture pOpu provide indi Studies often link i fmign mane survey of 11 dissatisfact the Percenta revealed. 1 18 ”'8' Pars mana‘Jers fm- achieved or Seller eta] thirds of U. that their \ Those that i hightst 19W 63 Outcomes Performance outcomes have been analyzed in terms of financial results, instability, technology transfer, exports, and managerial satisfaction. The use of a subjective measure reflects difficulties in obtaining "objective" data, and awareness that measures such as profits are not directly comparable across different industries and stages in JV life cycles. There are no published results of random samples of the equity joint venture population. However, some surveys and case studies provide indications of performance outcomes. Men Studies using satisfaction as a measure of performance often link it to expectations. Several studies investigate foreign managers' satisfaction. Campbell's (1987) 1985 survey of 115 foreign companies in Beijing indicates mild dissatisfaction with projected financial returns. However, the percentage of responses that were from IJVs is not revealed. In contrast Davidson's (1987) 1984-1985 study of 18 U.S. parent companies and an unreported number of U.S. JV managers found that more than two-thirds claimed their JV achieved or exceeded performance expectations. Similarly, Selzer et.al. (1992) found in 1991 that approximately two- thirds of U.S. parent companies in their survey reported hat their ventures in China met or exceeded expectations. hose that have been operating the longest reported the ighest levels of satisfaction. Pearson's (1991) interviews during 1988 with 28 joi about the p prospects. half of the interviews the perforn studies no differences authors unc relative sa indicate the suclgest "di methodologj “10 ms results; RC “kw for ; resPorlses: Classified et'al- (195 their 1991 high” Tl companieS E majth o: SurveyS apl 0f the U'S IIIIIIIIIIIIIIllIll-IIIIII:7——————————'—* 64 during 1988-1990 of Chinese and foreign managers involved with 28 joint ventures indicates that managers were positive about the performance, and optimistic about future prospects. In contrast, Beamish (1993) reports that over half of the Chinese and foreign managers in his 46 interviews from 1988-1990 indicated a dissatisfaction with the performance of the joint venture. In each of these studies no numbers are provided that might suggest differences in responses by type of informant. Nor do the authors uncover the criteria that are used to indicate relative satisfaction. To summarize, three of the studies indicate managerial "satisfaction" with PRC IJVs, while two suggest "dissatisfaction." Due to inadequate reporting of methodologies, the results cannot be compared. Financial Results Two measures have been used to evaluate financial results: ROI and parent company stock price. Campbell (1989) asked for ROI data from 30 IJVs in 1985. Only 14 provided responses: eleven reported "good" ROI, while three were classified as "poor, low, or below expectations." Stelzer et.al. (1992) found that 60% of the U.S. parent companies in their 1991 study reported a five-year average ROI of 10% or higher. The overall average was 11.6% ROI, with 12% of the companies seemingly losing money in their IJVs in China. The majority of the companies that responded to both of the surveys appear to be profitable to their U.S. (The results of the U.S.-China Business Council's (1990) survey of whether the conbined pr Hu et. ms in Chi involvenent price at th large nulti: change in t‘ Instab. of a joint ‘ 50% line, a venture (Ki: China Trade Stable IJVs Stability mg of the 1va Ownership ls One of out°°mes frc the °utC0mes Exports, Techno] found that 9 Mel and an —7— 65 whether the IJV is profitable is of little use since it combined prospective and operational IJVs.) Hu et.al. (1992) found that for 34 U.S. firms with 42 IJVs in China, U.S. companies with low international involvement enjoyed a positive reevaluation of their stock price at the time of the IJV announcement. Firms with a large multinational network saw no statistically significant change in their stock values. Instability Instability refers to major changes in ownership shares of a joint venture, including foreign ownership crossing the 50% line, a partner selling out, and liquidation of the venture (Killing 1983). Both the National Council on U.S.- China Trade (1987) and Beamish (1993) observed relatively stable IJVs in China. Beamish (1993) explains that this stability may be due to such factors as the short duration of the IJVs and the bureaucratic difficulties in adjusting ownership levels. One of the few researchers to evaluate performance outcomes from Chinese perspectives is Pearson (1991). Among the outcomes she examined are technology transfer and exports. W Technology has two levels in PRC IJVs: hardware and anagement skills (Shapiro et.al. 1991). Pearson (1991) ound that government officials were not satisfied with the evel and amount of hardware flowing into China. In two JV case studie 1986: Hahn foreign tec‘ of-the art' desire of t‘ (1991) also were acguir skills, fro: foreign nan. lack of inc. behavior. often felt managers. ' the transfe: m5 (Natim to learn. In the Vere requir: ' ti’pically This require and to help Howevel.’ mar relatively s eXport targs failure was 66 case studies this dissatisfaction was also evident (Hendryx 1986; Mann 1989). Laws to provide greater protection of foreign technology and incentives to introduce both "state- of-the art" and "appropriate“ technology further reflect the desire of the leaders for more technology transfer. Pearson (1991) also uncovered little evidence that Chinese managers were acquiring management skills, especially decisionmaking skills, from their foreign partners. Explanations include foreign managers' unwillingness to train Chinese and the lack of incentives for Chinese to learn and adopt innovative behavior. Davidson (1987) reports that U.S. JV managers often felt frustrated in their attempts to train Chinese managers. This lack of learning by Chinese may be due to the transfer of superfluous and less qualified personnel to IJVs (National Council 1987; Shenkar 1990) who are less able to learn. Engzté In the early—to-mid 19805 manufacturing joint ventures were required to export a certain percentage of their output - typically 20% to 100% (Pearson 1991; Shapiro et.al. 1991). This requirement was intended to protect domestic companies and to help China gain foreign exchange (Pearson 1991). owever, many joint ventures, particularly those producing elatively sophisticated products, were unable to meet the xport targets, and were allowed to sell domestically. This ailure was due to the lack of competitiveness of the roducts in price and quality. Ventures that involved sinpler aSSl partners, in In 1988 lar; care produc1 burdened Hi1 appears tha1 one its per: Relationshi; Many vz literature a China. Thes Partner and section, as foreign exci However, Oil] SYStematical of control a perf”fiance. Beamish is enhanced He armies U. are So far I that d°minar managerial S then SimilaI *7— 67 simpler assembling and processing, often with Hong Kong partners, were more successful at exporting (Pearson 1991). In 1988 large MNCs producing consumer foods and personal care products were allowed to make domestic sales, and not burdened with large export requirements (Pearson 1991). It appears that Chinese leaders have accepted the failure of one its performance criteria. Relationships with other Variables Many variables have been suggested in the popular literature as potentially important to IJV's success in China. These include several of the formation variables and partner and task-related variables discussed in the previous section, as well as factors such as acquiring financing and foreign exchange (U.S.-China Business Council 1990.) However, only a few variables have been researched systematically in China. Two of the latter are the effects of control and parent company international involvement on performance. Control-Performance Beamish (1993) concludes that IJV performance in China is enhanced when control is divided along functional lines. e argues that the Chinese culture, economy, and politics re so far removed from the experience of most Westerners hat dominant control is risky. Meanwhile, the lack of anagerial skills by the Chinese makes dominant control by hem similarly risky. Teagarden and VonGlinow (1990a) observe tha functions 3 fonts. How reportedly study inves I__t Hu et. ventures on IJVs in Chi parents witi increased v. announcemen' conclude th. addition of de"elopment PositiVely ] the costs 0; 1992) , CONCLUSIONs the last dec Descript i 0m ——'y 68 observe that IJVs in China split the control of management functions and become profitable faster than passive alliance forms. However, they note that satisfaction levels are reportedly lower in IJVs than in passive alliances. Neither study investigates how the control is split. Internationalization of Parent - Performance Hu et.al. (1992) test empirically the impact of joint ventures on shareholder's wealth for U.S. firms that formed IJVs in China from 1981 to 1989. They find that U.S. parents with low levels of international involvement enjoyed increased valuations of stock prices during the week when an announcement of their new IJV in China was made. They conclude that for firms with limited overseas activity, the addition of an IJV in China represents a major step in the development of a multinational network that is viewed positively by investors. At the time of the announcement, the costs of market entry are no longer relevant (Hu et.al. 1992). CONCLUSIONS Although research on IJVs in China has been ongoing for he last decade, it is still at an early stage. escriptions and prescriptions dominate the literature. The eed to identify, describe, and measure performance ndicators is apparent. Furthermore, variables that may ffect performance still need to be uncovered, measured, and related to I developed. partners nee objectives a current stat been identif the followin —7 69 related to performance. Only a few hypotheses have been developed. In particular, the perspectives of Chinese partners need to be incorporated into the research. The objectives and methodology of this research are based on the current state of knowledge of IJVs and the gaps that have been identified. The research methodology is discussed in the following chapter. This c2 tvo purpose: 0f the inte: 3‘8 method: research pm An inte Science unde This Philoso relativist p Eisenhardt ( in“ their d exemPlified earning in - tradition co; dimensions. somewhat from relativistic 01‘ meaningles CHAPTER III RESEARCH METHODOLOGY This chapter on research methodology seeks to fulfill two purposes. The first is to describe and support the use of the interpretivist philosophy of science that underlies the methodology. The second is to describe and justify the research methodology. INTERPRETIVIST PHILOSOPHY OF SCIENCE An interpretivist perspective on the philosophy of science underlies the methodology used in this dissertation. This philosophy of research lies between the positivist and relativist positions. Bonoma (1985), Parkhe (1992), and isenhardt (1989) incorporate an interpretivist philosophy 'nto their discussions of case research. This philosophy is xemplified by Hamel's (1991) research on interpartner earning in two IJVs in EurOpe. The interpretivist radition contrasts with the positivist tradition on many imensions. (See Table 3.1.) Interpretivists also differ omewhat from relativists. This researcher rejects the lativistic views that causes and effects are inseparable meaningless (Hirschmann 1986) and that knowledge is only 70 particulari Ozanne 1988 IIIIIIIIIIIIIIIIl---::%————————————fi 71 particularistic, incapable of being generalized (Hudson and Ozanne 1988). PRINCIPAL PROPONENTS KOST DEPORT GOALS GEOLOGY HPORTMCE 4 CONTEXT BASIC FIELD APPLICATION W003 for covsmucr v1 miHODS for EXTERNAL VA] HETHODS fol- INTERNAL var RELIMiILITv PREFERRED QU TATIVE TECHN OTHER 3 FOR TANDA EVALUATI IIIIIIIIIIIIIIll-Illlll---::r——____ 72 Table 3.1 Alternative Research Approaches PRINCIPAL PROPONENTS MOST IMPORTANT GOALS ONTOLOGY IMPORTANCE OF CONTEXT BASIC FIELD OF APPLICATION METHODS for CONSTRUCT VALIDITY METHODS for EXTERNAL VALIDITY METHODS for INTERNAL VALIDITY METHODS for RELIABILITY REFERRED QUANTI- ATIVE TECHNIQUES THER STANDARDS OR EVALUATION INTERPRETIVIST/ SUBJECTIVIST TRADITION Bonoma 1985 Eisenhardt 1989 Parkhe 1992 Discover theory Generate hypotheses Socially-constructed reality Critical- subjects' frame of reference Case studies Triangulation Explicit logic Judgment Replication logic Comparison w/literature Within-case analysis Cross-case patterns Analysis of informants' truthfulness Thorough documentation Two + judges Backtranslation Multidimensional scaling Rich, interesting description Logical inference POSITIVIST TRADITION Hunt 1992 Siegel 1988 Test theory Test hypotheses Objective reality Minimal - researcher's frame of reference Cross—sectional surveys Factor analysis Random sampling Sampling logic Comparison w/literature Intercorrelations Assess with coefficient alpha, Spearman- Brown Backtranslation Multiple regression Causal modeling Statistical significance A cent is to devel: generalizab goal that i: stage of re: ventures (P; still being Interpi constructed independent this researc Phenomenon t upon the per 1983). Interpz subjECtiVist behavior fro 1973) . Rece CavuscJil (19 busineSS res tems’ aCCor than from th effeCtin re. ger"grating h' constructs, ‘ Carried Out multiple, in. _f 73 A central goal of the interpretivist research tradition is to develop testable hypotheses and theory which are generalizable (Eisenhardt 1989). This is an intermediate goal that is appropriate for the current pre-paradigmatic stage of research that exists on international joint ventures (Parkhe 1992), where the critical constructs are still being discovered. Interpretivists believe that social reality is constructed by people, rather than existing as an objective, independent phenomenon (Kelley 1955). A key variable of this research, performance, is a socially-constructed phenomenon that seems to be viewed in many ways, depending upon the person or group (Hitt 1988; Quinn and Rohrbaugh 1983). Interpretivists, sometimes referred to as subjectivists, emphasize the need to try to understand human behavior from the actor's frame of reference (e.g. Geertz 1973). Recently, Boyacigiller and Adler (1991) and Yeoh and avusgil (1991) strongly recommended that international usiness researchers study firms and people on their own erms, according to their categories and meanings, rather ban from those of the researcher. Case studies are an ffective research method to accomplish the goal of enerating hypotheses that arise from the subjects' onstructs, in their frame of reference. The research is rried out in the informants' environment with the use of ltiple, in-depth interviews and on-site observations. These nethc (Glaser and interpretiv discussion The de project invu including p: research de: participatic data analys: Particular a justificatic Investi PEIformance’ gaps in our . C°n5tr11cts t1 Parrot-name 1 developed or Ventures~ Tr eXpliCated, r developed to to the litera “Sino j i . IIIIIIIIIIIIIIIIIIlllll---__———____ 74 These methods produce theory that is grounded in the context (Glaser and Strauss 1967). Other critical aspects of an interpretivist approach will be incorporated into the discussion of the research methodology stages. The development of the research methodology for this project involved several interrelated stages and decisions, including problem formulation and development of objectives, research design, site and sample selection, securing participation in research, data collection techniques, and data analysis strategies. The following section discusses particular aspects of each of these stages, including justification for a case study method. PROBLEM FORMULATION Investigation of the literature on joint ventures, performance, and IJVs in China revealed several important gaps in our understanding. We do not know the elements and constructs that Chinese managers use in evaluating performance nor the processes by which these criteria are developed or decisions are made in international joint ventures. The relevant variables have not necessarily been explicated, nor has a nomological net of hypotheses been developed to explain and predict performance. In addition to the literature, this author's experience.from working in a U.S.-Sino joint venture from 1986-1989 and initial interviews and discussions with North Americans and Chinese aurently i ventures it pafiOUNUKm acadenics . l. T More s; directed to 1- Wha use man per of imp. Hav: the How Spec Crit Amer Perf 3' What IIIIIIIIIIIIII...-IIIII-I-l-—————___f 75 currently involved in operating or researching joint ventures in China led to the conclusion that these performance issues are not well understood by managers or academics. Thus, the research objectives are: 1. To identify, describe, and compare performance criteria and outcomes from the perspectives of both Chinese and U.S. managers. To develop a framework that provides explanatory constructs and hypotheses concerning performance of U.S.-China joint ventures. More specifically, this dissertation research is directed to answering the following research questions: 1. What elements and constructs of performance are used by Chinese and U.S. managers of U.S.-China manufacturing joint ventures? How are the performance criteria of Chinese and U.S. managers of an IJV similar and different? What are the implications of these similarities and differences? Have the criteria changed over the life cycles of the IJVs? What accounts for any observed changes? How are the IJVs performing on the criteria specified by the informants, as well as on other criteria? How are the perceptions of Chinese and Americans similar or different with respect to performance criteria? What variables affect these performance outcomes? Who makes the marketing decisions in the IJV, such a: In thi ventures, t {Parkhe 199 incorporate Therefore, . appropriate and questim A case fulfilling 1 enable a re: single or no description depth Case 3 that attempt processes (M perfomanCe in IJVs. Th. more than one and Wtcomes. data that fal IIIIIIII'lll'..-------L_ 76 as pricing of JV products? How can this loci of decision making be explained? What effects does this decision making control have on performance? RESEARCH DESIGN In this early stage of research on international joint ventures, the relevant variables are unknown or unclear (Parkhe 1992). Specific hypotheses about performance that incorporate Chinese and U.S. perspectives await formulation. Therefore, an exploratory research design is the most appropriate approach for addressing the above research goals and questions. A case study approach is the most desirable method for fulfilling the above research goals. In-depth case analyses enable a researcher to focus on the dynamics present within single or multiple settings, accomplishing aims of description and theory generation (Eisenhardt 1989). In- depth case studies are particularly appropriate for research that attempts to gain new understanding of organizational rocesses (Marshall and Rossman 1989), such as the erformance criteria development and price setting dynamics 'n IJVs. This approach enables the researcher to interview nd observe multiple participants in their own context at ore than one time in order to reliably explicate variables nd outcomes. This kind of field research can accomodate ta that falls outside of narrow hypotheses (Wright, Lane, and Banish survey rese The co relationshi govement require a f knowledge a case study : data collec 1989). Thi: Clinical ca: endedness i1 unel'ipeCtecl < Marshall anc The at1 used bY Chi: the failure research met (Adler , Cam; This problen different tr (1992) found questionnair capture the Ina"pillars. different fr pethOds W i ll _f 77 and Beamish 1988), providing richer understanding than survey research (Bonoma 1985). The complexity and ambiguity of the joint venture relationships between U.S. and Chinese partners and various government and Communist Party officials and agencies, require a flexible, discovery-oriented approach. As new knowledge about the phenomena unfold while in the field, case study methodologies enable the researcher to adjust the data collection process and questions (Marshall and Rossman 1989). This flexibility is not possible in survey research. Clinical case study research builds flexibility and open- endedness into the process, which enables the uncovering of unexpected constructs and relationships (Bonoma 1985: Marshall and Rossman 1989). The attempt in this research to uncover the constructs used by Chinese managers is particularly necessary, due to the failure of Western-based constructs and positivist research methods to explain Chinese managerial behavior (Adler, Campbell,and Laurent 1989; Stewart and Chong 1990). his problem also exists in other countries that are much ifferent those of the Western European culture. Naidu 1992) found that Beamish's (1985) joint venture estionnaire of preconceived constructs and items failed to apture the thinking and behavior of Indian joint venture anagers. The Indian managers utilized constructs that were ifferent from the ones used by Beamish. Clinical research thods will be utilized to uncover ways that Chinese nanagers tr Case 5 The richnes theory that (Eisenhardt different k the hypothe generalizal: large sanpl the hypothe crganizatio research ca research. Case s is possible interaction: These gener; that were d! answer the 1 Selecting t1 IIIIIIIIIIIIIIIIIII-lllll---——_______, 78 managers think about performance. Case study approaches face several limitations, though. The richness and detail of case study research can lead to theory that is overly complex, with too many constructs (Eisenhardt 1989). Parsimony may not be attained. A different kind of weakness of case study research is that the hypotheses may be quite idiosyncratic, with limited generalizability (Eisenhardt 1989). Empirical tests of a large sample are required to determine the extent to which the hypotheses cover several settings or a broad number of organizations. On a pragmatic level, publishing case study research can be more difficult than publishing survey research. SITE AND SAMPLE SELECTION Case study researchers should select sites where entry is possible and a rich mix of people, processes, and interactions will be present (Marshall and Rossman 1989). These general criteria, and the following specific criteria that were developed according to which IJVs would best nswer the research questions, provided a basis for electing the population of joint ventures to investigate. See Table 3.2). CATEGORY Nationality Economic St N Legal St Size Chinese Aut location Age It is had eXperie evaluating 9°0ds for a are more 1i who are 1 in articulate Differences power in Be free“"lleeli Sought thro QXtraneous ‘ only Sector USing . 79 Table 3.2 Scope of the Joint Ventures Studied CATEGORY CHOICE Nationality of Parents United States and China Economic Sector Manufacturing JV Legal Structure Equity (not contractual) Size At least US$5,000,000 capitalization Chinese Authority National, local Location Beijing, Tianjin, Guangzhou, Shenzhen Age Producing goods for at least 3 years It is especially important to investigate JVs that have had experience in making operational decisions and in evaluating performance - thus the requirement of producing goods for at least three years was stipulated. Larger JVs are more likely than small JVs to have professional managers Who are linked to multinational parent companies and can articulate strategies and processes most clearly. Differences may be evident between IJVs near the center of power in Beijing and those based near Hong Kong in the more free-wheeling province of Guangdong. External validity is sought through judgmental sampling that constrains extraneous variation. For example, manufacturing is the only sector of the economy that is considered. Using these criteria and the U.S.-China Business Council (1! of 23 joini in Decenbe: sectoral C] in the 199( The pa of the pers joint ventu structure c in December 1991. (Relaxing the age, size, location, and sectoral criteria, there were 290 U.S. equity JVs in China in the 1990 USCBC database.) of the perspectives of several sets of participants in the joint venture decisions. See Figure 3.1 for the typical structure of a complete set of participants. F———-——_— | | I. U.S. PAR i * Intern : * Region 81 U.S. PARENT COMPANY * International HQ * Regional HQ JOINT VENTURE * General Manager (U.S.) * Deputy Manager (PRC) * Other Managers (U.S. and PRC) \ PRC PARENT COMPANY * Manufacturer * Government Agency Figure 3.1 Typical Structure of a U.S.-China IJV Each t fluee loca1 for each s: and a join1 research i] an four t: convention: parent com; the IJV we: either Asia organizatic headquarter company man manufacturi managers in general man mama(JG-rs fr Fourte for the Stu reasons: th Guangzhou), (e'g' HMS/T. mm to be H U'S' " Pare] and the CUr; The 90; ———7 82 Each complete case involved research at a minimum of three locations. At least two interviews were carried out for each side of the joint venture: a parent company manager and a joint venture manager. Thus, the ideal case in this research involved at least three times as many organizations and four times as many sets of managers as are analyzed in conventional single organization case research. The U.S. parent company managers who were directly responsible for the IJV were interviewed. These managers were based at either Asia—Pacific regional headquarters of the organization in Hong Kong, or at the international headquarters of the corporation in the U.S. Chinese parent company managers responsible for the IJV were located at manufacturing companies and at government agencies. IJV managers interviewed at the operating level included U.S. general managers, Chinese deputy managers, and functional managers from both sides of the JV. Fourteen of the twenty three joint ventures qualified for the study. Nine JVs were eliminated for the following reasons: the IJV ceased operations (e.g. Data Science in Guangzhou), U.S. parents sold their share of the venture (e.g. HMS/Transworld to Japanese investors), the "IJV" was found to be solely owned by Chinese companies who became 'U.S." parents for tax reasons (e.g. BITIC of California), nd the current whereabouts were unknown (e.g. Shenzhen ubber Products Co.). The goal was to analyze both American and Chinese nanagers i: least 20 i} exploratorj these nunba patterns (I intent was companies 1' provide in! gaining acc China, secu- success fac Access allthorities attained 0n. Campbell, a1 entry throng C°ntacts in connections Tianjin, anc prevented vj managers . Three y enabled the people who p IIIIIIIIIIIIIIIIIIIIIIIII-"""'————7 83 managers in least five sets of cases and to complete at least 20 interviews with IJV participants. Given the exploratory, interpretivist goal to discover hypotheses, these numbers are thought to be sufficient to uncover patterns (Hamel 1991; Marshall and Rossman 1989). The intent was to collect data from all of the qualified companies in the population that would allow access and provide information. Recognizing the difficulties in gaining access to senior managers and organizations in China, securing participation in the research is a critical success factor in the research goals. SECURING PARTICIPATION IN THE RESEARCH Access to firms in China, and especially to Chinese authorities, is very difficult, and can generally be attained only through personal connections (McGuinness, Campbell, and Leontides 1991). Attempts were made to gain entry through personal, government, corporate, and academic contacts in the U.S., Canada, Hong Kong, and China. onnections were limited to three major cities: Beijing, ianjin, and Guangzhou. Financial and time limitations also revented visiting a larger number of organizations and anagers. Three years of working for a joint venture in China nabled the researcher to develop relationships with several ople who provided introductions to gatekeepers and senior managers. Washingtm Beijing a2 connectiov this resei assistano Chinese pa translator Nankai Un. Tianjin f: manager f; at Nankai access to Understam Working 1] access to Init: company e: p°pu1atioi regional ( Companies the inten were Visil ASsu] results a: °fficiale 77 84 managers. Contacts with the U.S. Department of Commerce in Washington, D.C. and the Foreign Commercial Service in Beijing also provided useful assistance. Through connections with the Beijing College of Economics, where this researcher was a visiting scholar in fall 1992, assistance was given in gaining access to several JVs and Chinese parent companies in Beijing. The interpreter and translator, a comparative management doctoral student at Nankai University in Tianjin, assisted in gaining entry to Tianjin firms and bureaus. An acquaintance who worked as a manager for an IJV in Guangzhou, and management professors at Nankai University who have connections there, helped gain access to companies in Guangdong Province. The understanding and language skills that were developed from working in China also enabled this researcher to gain better access to Chinese than most previous researchers. Initial telephone conversations with U.S. parent company executives revealed that several of the MNCs in the population supervise the China joint ventures from a regional office in Hong Kong. Managers from three parent companies in Hong Kong were visited both before and after the interviews in China. Other U.S. parent company managers were visited in the U.S. after gathering data in East Asia. Assurances of anonymity and an offer of a report of the results also helped in gaining access to managers and officials. Promises were made to not reveal the names of companies or individuals who participated in the research. The f Three of t study were researcher. inaccurate five of th were inter conducted . parent con; including ; incomplete technique . pith goven and the U4 vere with < The interv: length. N, discussions recheck fac previouSly' range of ti are prESent In‘de; Etthod used IIIIIIIIIIIIIIIIIII-Illll--::——————___t 85 The final sample consisted of eight joint ventures. Three of the fourteen JV companies that qualified for the study were either unwilling or unable to meet with the researchers. Three others could not be located due to inaccurate information or recent changes by the JVs. In five of the eight JVs, both Chinese and American managers were interviewed. In addition complete interviews were conducted at four U.S. parent companies and four Chinese parent companies. Altogether 43 people were interviewed, including 25 complete interviews with IJV participants, 6 incomplete interviews with JV participants, 5 repertory grid technique interviews with JV participants, and 6 interviews with government, academic, or business experts from the PRC and the U.S. Of the complete JV participant interviews, 12 were with Chinese managers and 13 with American managers. The interviews averaged approximately ninety minutes in length. Not included in these totals were the follow-up discussions with several Chinese and American managers to recheck facts or to clarify points that had been made previously. Descriptive characteristics, revealing the range of the sampled joint ventures and parent companies, are presented in Chapter IV. DATA COLLECTION In-depth interviews were the primary data collection ethod used in this research. Marshall and Rossman (1989) identify 5 a useful i contextual strength: clarificat thenes. ] of a speci Howev apparent. uncover tr. be willing COPY of th this incre and compje vere not u especially and interp in‘depth i °°llected possible it relationsh 1989). IsSue. conSiderat Establish}. aceomplish. —7— 86 identify several strengths of this method. An interview is a useful way to get large amounts of expansive and contextual data quickly. Flexibility is a second major strengthzinterviews allow immediate follow-up for clarification, omissions, and newly discovered issues and themes. Interviewers can take advantage of the uniqueness of a specific case (Eisenhardt 1989). However, several weaknesses of interviews are also apparent. Although interviews offer the potential to uncover the "native's perspectives," the informant may not be willing to share all the information that is needed. A copy of the research result was offered to each participant: this increases respondents' motivation to provide accurate and complete information (Geringer 1991). Tape recorders were not used, since these can inhibit transparency, especially when discussing sensitive performance outcomes and interpartner relationship problems. Another weakness of in-depth interviews is that the volumes of data that are collected can be difficult to manipulate and analyze. It is possible to be so immersed in detail that larger themes and relationships are never detected (Marshall and Rossman 1989). Issues of validity and reliability are critical in a consideration of how to acquire important data. Establishment of construct validity is an important step in ccomplishing the research goals of identifying key onstructs and generating testable hypotheses (Nunnally 1978). Ca evidence p that are e data were critical c A ded‘ the resean and logic. begin the I clinical ca (Harshall e questions a For the maj factors, ir mm categoz also utiliz The Inter-vi Open-e technique a that are in IIIIIIIIIIIIIIIIlllllllll---——_______ 87 1978). Careful formulation of construct definitions and evidence produces the sharply defined, measurable constructs that are essential for valid theory. Multiple sources of data were used to discover, define, and distinguish the critical constructs. A deductive approach was utilized at the beginning of the research to develop a model derived from the literature and logic. A model provides an initial guide from which to begin the observations and analysis; but the goal of clinical case research is not to test the preconceived model (Marshall and Rossman 1989). Open-ended and a few closed questions were developed from major categories in the model. For the major issues of performance criteria and performance factors, informants were first encouraged to provide their own categories and constructs. Structured questions were also utilized to explore these topics. (See Appendix 1 - The Interview Guide.) Open-ended interview questions and the repertory grid technique are methods that were used to uncover constructs that are important to the managers, but that may not have been discussed in the literature. In addition, several Likert scales were completed by the researcher and interpreter after each case for further evidence, and as a reliability check. Background secondary data on the joint ventures and on-site observations were two other data sources that helped provide triangulated evidence. mm A te and inter experts 0 shift in attempt t variables incorpora' limited n'- decisionm. Dre-tests interview Structure In t1 document“ during the recOrded a attempted Closure b) learning?”1 (Eisenharc. trained it each Case. by the We Convergenc IIIIIIIIIIIIIIIIIII-lllll---———_____rl 88 -t sts t te 'ew A tentative conceptual framework, research methodology, and interview guide were reviewed by academic and business experts on China in June 1992. These discussions led to a shift in objectives. Whereas the original intent was to attempt to identify and describe many partner-related variables that explain performance, it was decided to incorporate a marketing task focus and link that to a limited number of partner-related variables, such as The revised interview guide was decisionmaking control. This pre-tested with a U.S. firm who had a JV in China. interview helped improve the design of the interview structure and the questions. Reliability In the attempt to acquire reliable data, thorough documentation was used. Extensive field notes were taken during the interviews. Observations and impressions were recorded after visiting each site. This researcher attempted to push his own thinking and avoid premature closure by asking questions such as "What new ideas am I learning?" and "How does this case differ from the last?" (Eisenhardt 1989). In addition, the judgments of the trained interpreter and the researcher were compared after Several Likert-type scales that were filled out A each case. by the two of us helped assess interjudge reliability. convergence of observations and judgments enhances confidenc: the likel. nay be pr: It v; of the da‘ interjudg. and check; the accur. An If knowledge. experienc. interview English 5} P€rfonaed Compared « version, , Process, 1 areas of I content, & (Nestionm ensure Co: °°mplete11 Comparing To 0‘ not With». questions ——-————fi 89 confidence in the findings. Different perspectives increase the likelihood of capitalizing on any novel insights that may be present (Eisenhardt 1989). It was also necessary to evaluate the trustworthiness of the data from each case. Subjective impressions, interjudge assessments, multiple interviews within a case, and checks with secondary data sources were used to assess the accuracy of the interview data. An MSU graduate student from China, who is knowledgeable about marketing research and has extensive experience in translating English documents, translated the interview guide into Chinese. The interpreter, a native English speaker who is knowledgeable about the subjects, performed back translation of the questions. Then we compared the original English version with the translated version, and made revisions as necessary. This three-step process, using translators who are knowledgeable about the areas of content, helps resolve problems of functional, content, and linguistic equivalence when developing questionnaires in two or more languages. Finally, to help ensure consistency a "test—retest" was accomplished by completely analyzing the data at two different times and comparing the results. To overcome the possibility that Chinese managers were not entirely truthful or open in their responses to direct questions (Pearson 1991), the repertory grid technique (RGT) was used. A discussion of the assumptions and corollaries of this t Repertory Rape: clinical ; researcher world. T] that are 1 vocabularj Braine 194 (1955) ant technique: respond tc S/he Sees Personal 1 and inter; the Predic the degree related, Sever are: a A F num def ali * p90 of —————fi 90 of this technique follows. Repertory Grid Technique Repertory grid techniques (RGT) were developed in clinical psychology as an indirect method to help a researcher understand the way the other person views the world. The RGT produces an exhaustive set of constructs that are meaningful to the respondents and couched in their vocabulary, rather than the researchers' words (Frost and Braine 1967). Personal construct theory, developed by Kelly (1955) and extended by Bannister (1962, They presuppose that an individual does not 1987), underlies the techniques. respond to the "real" situation X, but to situation X as s/he sees it. Further, each person develops his own personal repertoire of constructs in order to conceptualize and interpret his world, and to anticipate events. Thus, the prediction of human behavior is primarily dependent on the degree to which constructs can be identified and related. Several corollaries of the personal construct theory are: * A person's construct system is composed of a finite number of dichotomous constructs. Kelly (1955) defines a construct as a way in which two things are alike, and yet different from a third. * People differ from each other in their construction of events and in the ways they organize their c01 * wi' cc] otl A la: have devei Britain (. 1987) . Eisei data is t] is both t1 Process." within-ca: V01uminou: “much ta an attemm Patterns. Case t0 er CaSes. Tc t0 identij ROSSnan 15 Spirit Of T0 at 91 constructs. * Within one culture, each individual tends to have construct relationship patterns that are similar to others in that culture. A large number of forms and applications of the RGT have deve10ped over the last forty years, primarily in Great Britain (e.g. Frost and Braine 1967: Sampson 1972; Bannister 1987). DATA ANALYSIS Eisenhardt (1989, p. 539) observes that, "Analyzing data is the heart of building theory from case studies, but is both the most difficult and least codified part of the process." Two methods that were used in this research were within-case analysis and cross-case analysis. Within-case analysis can help researchers cope with the voluminous amounts of data. Data reduction is facilitated through taking notes of the field interviews. For each case an attempt was made to generate categories, themes, and patterns. This process allows the unique patterns of each case to emerge before attempting to generalize themes across cases. To avoid premature conclusions, attempts were made to identify several alternative explanations (Marshall and Rossman 1989). Each case was studied thoroughly in the Spirit of a series of individual experiments (Yin 1984). To analyze across cases several charts were used that categoriz character across-gr second ta sinilarit 1989). s This simi tapo: look The : cate< not a Anotl Verifying fit with t logic of c Marshall a eXamined f ca59$ are being anal hYpotheses by the Gas discOnfir-m. (Eisenhard' Each . CaSes Consti withil which Point: F V311 BaSed 0n Int IIIIIIIIIIIIIIIII-Illlml---:::——____ 92 categorized the cases according to several JV and parent characteristics. These categories revealed important across-group differences and within-group similarities. A second tactic was to select pairs of cases and then list similarities and differences between each pair (Eisenhardt 1989). She states (1989, p. 540-541): This tactic forces researchers to look for the subtle similarities and differences between cases. The jux- taposition of seemingly similar cases by a researcher looking for differences can break simplistic frames... The result of these forced comparisons can be new categories and concepts which the investigators did not anticipate. Another step that was used to shape hypotheses was verifying that the emergent relationships between constructs fit with the evidence in each case. In the replication logic of case analysis (Eisenhardt 1989: Hamel 1991; Marshall and Rossman 1989; Yin 1984) each hypothesis is examined for each case, not for the aggregate cases. The cases are treated as a series of experiments, with each case being analyzed as whether it is consistent with the hypotheses. Sometimes support for a hypothesis is provided by the case evidence, while other times it is revised, disconfirmed or thrown out for insufficient evidence (Eisenhardt 1989). Eisenhardt (1989: p.542) states: Each case is analogous to an experiment, and multiple cases are analogous to multiple experiments. This constrasts with the sampling logic of traditional, within-experiment, hypothesis-testing research in which the aggregate relationships across the data points are tested using summary statistics such as F values. ased on multiple sources of evidence, logical inferences were deve depends 0 rather th positivis propositi This hypothesi- construct: research . definitim process it Suggest, s Current cc ambiguity rather the constructs Besid some hYpot the of re U'S‘ Daren mana‘lers. In Ca hot aVaila; °°n8tru Ct 1 indicators Cases do m evidence t} ——’" 93 were developed. The general validity of the conclusions depends on the plausibility of the logic of the analysis rather than on statistical significance. Although in the positivist tradition what emerges would be called propositions, interpretivists classify these as hypotheses. This research process is different from positivist hypothesis-testing research which a priori develops single constructs from multiple indicators. In clinical field research it is hoped that a posteriori the construct, its definition, and measurement will emerge from the analysis process itself (Eisenhardt 1989). As Daft and Lewin (1990) suggest, significant research requires breaking out of current conceptual boxes, often by reaching into an area of ambiguity to define new variables or create a new logic, rather than merely examining relationships among traditional constructs. Besides analyzing the data on a case-by-case basis, some hypotheses were derived by analyzing data according to type of respondent: U.S. JV managers, Chinese JV managers, U.S. parent company managers, and Chinese parent company managers. In case studies techniques such as factor analysis are not available to collapse multiple indicators into a single construct measure (Eisenhardt 1989). One reason is that indicators may vary across cases, such as when all of the cases do not have all of the measures. Moreover, there is evidence that the constructs and indicators used by Chinese anagers , European/ 1989: Tse pretests or to try Anericans analysis to the 5: each grou establish cell size statistic research, scale sur throngh 5 —.———_— 94 managers and officials differ from those of managers from a European/American culture (Adler, Campbell, and Laurent 1989: Tse, et.al. 1988). Thus, it is inappropriate to do pretests on a large number of student subjects in the U.S., or to try to sum the field responses of Chinese and Americans together. A further reason not to use factor analysis is that the statistical power is insufficient, due to the small number of observations that can be made for each group of managers in this research on large-sized, established joint ventures in China (Nunnally 1978). Small cell sizes can misleadlingly produce results that are statistically insignificant. In future joint venture research, when conditions in China allow the use of large- scale surveys, factor analysis and hypothesis testing . through statistical analysis will be possible. This China joi research to fanili range of aSpects a; * in: e W] * tY] * W] s eq.l * mar * etr * age * loc * Siz " n ‘ n ‘ t ‘ 5 exp * Pro inv CHAPTER IV CASE PROFILES This chapter presents background on the eight U.S.- China joint ventures that were studied through field research in the PRC, Hong Kong, and the U.S. The purpose is to familiarize the reader with each case and reveal the range of cases along several dimensions. The following aspects are considered: * industry * type of customer * type of technology * type of competition * equity shares * management structure * ethnicity of general manager * age (years manufacturing) * location * size - number of employees - number of expatriate employees — total equity - sales * exports as a percentage of sales * profit as a percentage return on sales * investigator confidence in the data 95 The specific protect t IJV name, the eight dinensior variables later che confiden: These ra‘ "very 10‘ intervie' a case, data in high in internal understa is a Se; “Ot affe the inf, being d: intem‘ introdut Th each di‘ “Scrip (Within ’7— 96 The names of the IJVs, their parent companies, and specific products are kept confidential, in order to help protect the anonymity of the respondents. Instead of the IJV name, a number from 1 to 8 is used to designate each of the eight IJV cases. Background data on the seventeen dimensions is recorded for 1992. The relevance of these variables and some of the relationships are discussed in later chapters. An assessment of the investigator's confidence in the data for each case is also provided. These ratings, "very high," "high," "medium," "low," and ”very low," are based on the numbers of informants interviewed in each case, the consistency of the data within a case, and a subjective assessment of the accuracy of the data in each case. Thus, the data of a case ranked very high in investigator confidence are viewed as reliable and internally valid. Confidence in the informant's understanding of the questions and concepts being discussed is a separate issue at the measure level. This aspect does not affect the rankings because of the belief that all of the informants had a good understanding of the concepts being discussed. Since open-ended questions dominated the interviews, informants used their own words and often introduced the concepts. This chapter first describes the cases according to each dimension (across-case description). Then, a descriptive summary is presented of each of the eight cases (within-case description). Background data are presented in the follos histogram ’fi— 97 the following table (Table 4.1) and in a series of histograms at the end of this chapter (Figures 4.1 to 4.8). IIDUSTRY CCSIfil‘ERS TECE’OIDG‘: COHPE'IITK IX C-OV'ERN! S-YEAR P] rs 2mm attic-ms 0': mIC: (U.S. Re] LOCATION as}: (Yrs. EMPLOYEES EXPATRIAT TOTAL EQU SALES (19 EXPORTS ( PROFIT (R INVESTIGA CONFIDENC IIIIIIIIIIIIIIIIIIIIIIII---::———————____tt 98 Table 4.1 IJV Case Profiles JV 1 JV 2 JV 3 JV 4 INDUSTRY Consumer Vehicles Consumer Electronics/ Packaged Personal Computers Foods Care CUSTOMERS Consumers Organizations Consumers Organizations TECHNOLOGY Low COMPETITION Monopoly/ Duopoly D>S IN GOVERNMENT No 5-YEAR PLAN US EQUITY SHARE 60% MANAGEMENT GM - U.S. GM ETHNICITY Hong Kong (U.S. Rep.) Chinese LOCATION Tianjin AGE (Yrs. Mfg.) 6 EMPLOYEES 360 EXPATRIATES 1 TOTAL EQUITY-US$ $5 million SALES (1992-US$) $31 million EXPORTS (% Sales) 0% PROFIT (R.O.S.) 24% INVESTIGATOR High CONFIDENCE Medium-High Low Medium—High Oligopoly Oligopoly Oligopoly D>S D=S D=S Yes No No 42% 65% 67% Dual - US/PRC GM - U.S. GM - U.S. Euro-American British Taiwan Chinese Beijing Guangzhou Beijing 8 4 7 6200 1105 400 10 80 16 $60 million $33 million $18 million $636 million $82 million 130 million <1% 20% 5% 10% 5% 13% High Very High High INDUSTRY CCST'OHERS TEu’Z'Eh'OLOG‘ COHPETI'ITI' IX C-OVERN' S-YEAR CS EQUITY KKKAGEHEN ca rmrc {U-S. Rep EOCATION AGE (Yrs. EMPLOYEES EXPATRIA’I TOTAL EQU SALES (19 EXPORTS ( PROFIT (F INVESTIGA CONFIDENC IIIIIIIIIIIIIIIIIIII---::_____________—_7 INDUSTRY CUSTOMERS TECHNOLOGY COMPETITION IN GOVERNMENT 5-YEAR PLAN US EQUITY SHARE MANAGEMENT GM ETHNICITY (U.S. Rep) LOCATION AGE (Yrs. Mfg.) EMPLOYEES EXPATRIATES TOTAL EQUITY-US$ $8.5 million PROFIT (R.O.S.) INVESTIGATOR CONFIDENCE SALES (1992-05$) $75 EXPORTS (% Sales) JV 5 Pharmaceu- ticals Consumers High Oligopoly D>S No 55% GM - U.S. Euro—American Tianjin 5 500 8 99 Table 4.1 (cont'd) JV 6 Consumer Packaged Foods Consumers Low Oligopoly D=S NO 50% GM - U.S. Hong Kong Chinese Tianjin 3 950 1 $19 million million $56 million 0% 2% 39% 12% Medium Low JV 7 JV 8 Power Consumer Equipment Packaged Foods Organizations Consumers Medium Low Oligopoly Duopoly ? D>S Yes No 50% 50% GM - U.S. GM - U.S. Singapore Hong Kong Chinese Chinese Beijing Guangzhou 6 5 2,400 400 8 1 $37 million $5 million $100 million $12 million 5% 0% 15% o\° 2 Low Medium The from con None of products and hous by organ technolo classifi other to The mostly o and loca c0111petes monopoly for the While de: 0f three as buYer: 1va ope: prodUCti. bodies, The equity i1 China Si¢ —:— 100 ACROSS CASE DESCRIPTION The IJVs operate in six different industries, ranging from consumer packaged foods to electric power equipment. None of the IJVs compete directly with one another. The products from five of the IJVs are consumed by individuals and households; whereas three of the IJVs' products are used by organizations. None of the IJVs market emerging, core technologies. The output from four of the IJVs are classified as low-technology, while the products from the other four are considered medium-to-high technology. The competitive environments of these eight cases are mostly oligopolistic: six of the IJVs market in an industry and location in China with three to twelve players. One competes in a duopoly and one operates in a virtual monopoly. The demand is greater than the supply in China for the number-one selling product of four of the IJVs, while demand and supply are similar for the primary output of three of the cases. None of the markets can be classfied as buyers' markets where supply is greater than demand. Two IJVs operate under direct government 5-year plans, where production levels and prices are set by PRC government bodies. The U.S. partner possesses the majority share of the equity in four cases, ranging from 55% to 67%. The U.S. and China sides have equal shares in three IJVs, and in one of the cases the U.S. parent is the minority partner. (See Figure 4 vhere thl departnel years. .‘ nanager 1 general : company. IJVs. O of the 0 (British Thr Tianjin, Province years: t- four for 4.2). Thr employee of 9131910 include Four hav 2,400, a expatria °f the c wel‘king to 16 ex emPIOYee ’7— 101 Figure 4.1). In JV 2 a dual management system is utilized, where the general manager, and the manager of each department, rotate according to national parent every three years. At the time of the field research, the general manager came from the U.S. In each of the other cases, the general manager of the IJV came from the U.S. parent company. The deputy manager is PRC Chinese in each of these IJVs. Overseas Chinese serve as the general manager in five of the cases, Euro-Americans in two, and a European (British) in one. Three of the IJVs are located in Beijing, three in Tianjin, and the remaining two in Guangzhou (Guangdong province). The age of the IJVs ranges from three to eight years: two have been manufacturing products for 3-4 years, four for 5—6 years, and two for 7—8 years. (See Figure 4.2). Three indicators of size were utilized: number of employees, total equity, and 1992 sales. The total number of employees ranges from 360 to 6,200. These figures include fulltime and temporary workers (See Figure 4.3). our have hired 360 to 500 employees, three employ 950 to ,400, and one IJV claims 6,200 employees. A wide number of xpatriates work for these IJVs. (See Figure 4.4) In three f the cases the general manager is the only expatriate‘ orking for the IJV, while three of the IJVs employ from 8 o 16 expatriates. JV 3 stands out with 80 expatriate mployees. AS ranges f greater that are nillion. $55 lill one reco did not 5% of th sales. Han were pro these pr shows th 10%. Ass data fro (JV 3). "high" ( Confiden JV 7), w primaril these IJ the data and inab the JV l ”1889 UT 77— 102 As revealed in Figure 4.5, the total equity in the IJV ranges from US$5 million to US$60 million. Four cases have greater than $25 million equity, while four have less than that amount. 1992 sales range from US$12 million to $636 million. (See Figure 4.6). Three sold from $12 million to $55 million, four sold from $75 million to $130 million, and one recorded 1992 sales of $636 million. Three of the IJVs did not export any of their output, four exported from 2% to 5% of their total sales, and one IJV exported 20% of its sales. (See Figure 4.7). Managers in all of the cases claimed that their IJVs were profitable in 1992. As a return on sales after taxes, these profit figures ranged from 2% to 39%. Figure 4.8 shows that six of the eight IJVs reported an ROS of at least 10% . Assessments of the investigator's confidence in the data from each case ranged from very high to low. One case (JV 3), received an assessment of "very high," three rated "high" (JV 1, JV 2, JV 4), two garnered a "medium" confidence rating (JV 5, JV 8), two ranked as "low" (JV 6, JV 7), while none rated "very low." The "low" ratings were primarily due to the limited access that was allowed into these IJVs. Although there is no evidence or feeling that he data are inaccurate for JV 6 and 7, the few cross-checks nd inability to interview more than one level and side of he JV limit this researcher's confidence in the data for hese two cases. E JV producir. its only sells ar nonopoli much gre comparal two time a day a1 manufaC‘ larger 1 zone ou‘ equity taking general equal 3 Process the pre were as Th the 13‘ exPatrj this is were 3: f 103 WITHIN CASE DESCRIPTIONS 2* JV 1 operates in the consumer packaged foods industry, producing and marketing one processed food product. Since its only direct competitor is a small local company that sells an inferior imitation product, JV 1 is a virtual monopolist. It enjoys a market in China in which demand is much greater than supply, and in which there is comparatively little government regulation. It produced at two times its planned capacity in 1992, running three shifts a day at what had been one of the Chinese parent company's manufacturing plants. In 1994 JV 1 is scheduled to open a larger greenfield plant in a special economic development zone outside Tianjin. Although it formerly was a 50-50 equity joint venture, the U.S. parent was in the process of taking a 60% majority share at the end of 1992. The U.S. general manager and the U.S. parent both reported that the equal share ownership complicated the decision making process. Conflict was so high in earlier years that both the previous general manager and previous deputy manager were asked to leave the JV. This is a relatively small IJV. 360 employees work for the IJV: only the Hong Kong Chinese general manager is an expatriate. The total equity was US$5 million, although this is being raised to $14 million in 1993. 1992 sales were $31 million, entirely composed of domestic sales. Profit, return c LL; JV Chinese these cc technolc product conpanie U.S. nan industry greater by the g determin Five-yea Share in manageme of each three Ye American Loc this is villicit-is larTest includin. and its 33165 we ——i 104 Profit, as a return on sales, was a relatively high 24%, and return on investment exceeded 100%. gy_; . JV 2 produces vehicles that are primarily purchased by Chinese "companies," for use by the leaders and guests of these communal "work units." The U.S. parent seeks to sell technology to the IJV that is at the decline stage of the product life cycle in the U.S. Although a few Chinese companies sell imitations of their two vehicle types, the U.S. managers View the half-dozen other IJVs in their industry as the primary competitors. Demand has been greater than supply for this IJV that is heavily regulated by the government. Production levels and prices are determined by government agencies as part of the National Five-Year Plans. The U.S. parent holds a minority ownership share in the venture (42%), and is subject to a dual management system where the general manager, and the manager of each function, rotate according to national parent every three years. The present general manager is a Euro- American. Located in Beijing at the center of China's government, this is the oldest IJV in the sample, having manufactured vehicles as an IJV for eight years. JV 2 is also the largest IJV in the sample: it employs 6,200 people, including ten expatriates. Its equity totals $60 million, nd its 1992 sales were $636 million. Fewer than 1% of the ales were from exports. Profit for 1992 was calculated at 10% R05, companv' even hig JV. The conflict M JV products product: high. 2 vholly-< their gj compani: in a di: price). manufaC‘ demand to prod' 0thput. bUSines _7— 105 10% R08, with an ROI of greater than 100%. The U.S. parent company's profits on sales of components to the IJV were‘ even higher than the dividends that they received from the JV. The prices of these components were a major source of conflict in the joint venture. qy_; p JV 3 operates in the competitive consumer personal care products industry. Although the technology involved in the products is relatively low, the quality standards are very high. The U.S. managers view the products from IJVs and wholly-owned enterprises of the other four major MNCs in their global industry as their competitors. Chinese companies that produce similar products are considered to be in a different segment of the market (low-quality, low- ‘ price). With a high-capacity, state-of-the art, multi-plant manufacturing complex, the JV is presently able to meet the demand for this IJV's number-one selling product. In order to produce at full capacity, the JV exports about 20% of its output. JV 3 is a showcase for visiting government and business delegations from China and the rest of the world. Four companies hold an equity position in this IJV, so the American parent's 65% share of the equity is very high. The general manager, an Englishman, and each of the functional and brand managers are expatriates. The total of 80 fulltime and part-time expatriates, among the 1,105 employees, is by far the highest among the eight IJVs in this sample. Since each fulltime expatriate costs about $250,000 relative operated M JV compute] nanufaci IJV rec: also our operatil market element strateg Region , the pro that 3}; Si three c decisic the Jv. manage, only or manage, °Perate ”10mm d0es n, Side 0] ——1— 106 $250,000 per year, the current profitability of the JV is relatively low. For all practical purposes, this IJV is operated as a subsidiary of the U.S. parent company. gy_g JV 4 primarily markets electronic equipment, including computers and testing instruments, that have been manufactured by the U.S. parent in other parts of Asia. The IJV receives a commission for the sale of each item. The JV also owns and manages a manufacturing subsidiary, assembly operations, and sales offices in other parts of China. The market is very competitive, with price becoming a major element in the marketing strategy. To better control the strategy and to limit gray marketing across the Asia—Pacific Region, the U.S. parent company in Hong Kong sets prices for the products sold in China, and for the 5% of total sales that are exported from China. Since the U.S. parent owns 67% of the total equity, and three Chinese partners share the other 33%, the decisionmaking control is in the hands of the U.S. side of the JV. The general manager and most of the product managers are ethnic Chinese expatriates. (This JV is the only one in the sample that does not have functional managers.) To a lesser degree than JV 3, the IJV is Operated as a subsidiary of the U.S. parent company. Even though it is in a high-technology sector, the government does not'include the IJV in its National Plans. The Chinese side of the IJV does, however, seek to develop the capacity to indep been rat China fc JV_5 JV both fin imitated to the I drug, wh 50% of t Chinese ; perceive 910bal p] China. , IJV is a, Plant. IJV this the Sales was aPd 50% j have eXpa functions the JV th Company a building. S‘i‘lal‘ies perceiVe 107 to independently design high-technology products. JV 4 has been rated by a Chinese agency as one of the top ten IJVs in China for each of the last five years. JV 5 JV 5 manufactures pharmaceuticals, promoting drugs to both final consumers and to hospitals. Fearful of being imitated, the U.S. parent company primarily releases drugs to the IJV that are very difficult to counterfeit. One drug, which meets this criterion, accounts for greater than 50% of the total sales of the IJV. Although there are many Chinese pharmaceutical producers, the senior managers perceive their competition as the four or five other major global pharmaceutical companies that are manufacturing in China. Facing a market with demand greater than supply, the IJV is adding capacity to their five-year-old manufacturing plant. IJV participants and experts in the Tianjin area call this the most profitable IJV in the municipality. Return on sales was 39% for 1992. Sales grew at a rate of 70% in 1991 and 50% in 1992. Both sides Of the JV seem satisfied to have expatriates performing all of the major management functions. The U.S. parent appears to be investing more in :he JV than the 55% equity share indicates. The parent :ompany absorbed the costs of constructing the office building, and also pays a large part Of the expatriates' .alaries and housing expenses. Both sides of the JV erceive that the U.S. parent has a long-term commitment to the IJV JV__6 JV narketir This JV company JVs, and Each of appear t price Ha producer million, industry one local Chinese e PIOducer In c Sales. E in the JV other equ o“mel'ship manager 1: Parem; apl businesS 1 and market Orders at 108 the IJV and to the China market. gy_§ JV 6 processes and packages consumer packaged foods, marketing the final products in specified regions of China. This JV is part of a complex strategy by the U.S. parent company that includes a series of contractual JVs, equity JVs, and wholly-owned foreign enterprises within China. Each of the foreign-invested companies in this industry appear to have agreed to "own" certain cities and thus avoid price wars. Yet, their actions have nearly eliminated local producers of similar products. In this city of more than 10 million, there were 10 local companies operating in this industry at the beginning of 1989. By the end of 1992 only one local company and this JV operated in this industry. A Chinese expert in the industry noted that the sole local producer operated at a loss. In contrast, JV 6 was profitable, with 12% return on sales. Each year the U.S. parent has reinvested its profits in the JV, and the Chinese parent has matched these and other equity contributions in order to maintain the 50-50 ownership share. A Hong Kong Chinese who serves as general manager is the only expatriate at the JV. However, the U.S. Jarent appears to control many of the functions of the >usiness through a set of well-defined procedures, policies, nd marketing plans. The large sales force takes daily rders at the wholesale and retail levels, helps deliver the roducts, performs sales promotion tactics, and strictly enforce: the boo] JE;1 JV to gene partner of the heavily manager the cur Nations BEijint in the biddini this J bid to custom Then a the fj l 1992 s emplo] in tn. reCorc Opera Order Combi 109 enforces a resale price maintenance policy, "according to the book." JV 7 JV 7 produces high-priced, heavy equipment that is used to generate electricity. Various government agencies act as partner, buyers, suppliers, regulators, and mediators. Each of the JV's competitors is a State-run company that is heavily subsidized by government funds. The general manager, representing the U.S. parent company, chafes under the current situation of having his JV operate under the National Five-Year Plans. Since the JV is located in Beijing, the number of government entities that get involved in the JV operations is especially high. Instead of open bidding, which exists in the U.S. parent's other markets, this JV faces "negotiated bidding." First the JV submits a bid to build the customized product at a certain price. The customer negotiates the price with the JV and other bidders. Then at least three other government bureaus get involved in the final price decision. The JV is relatively large, with 2,400 employees and 1992 sales of approximately $100 million. In capacity and employees, this is the U.S. parent company's largest plant in the world. Since it began operation in 1986, the JV has recorded profits in only two years. Cumulatively, it has operated at a loss. The future appears brighter: 1992 orders were larger than those of all previous years combined. Increasing the minimal level Of exports to nearby develop revenue JE_§ JV This sc materia company relatix 70%). compete have be total : employ. genera workin Collap their the go 1992 i The ma Capaci I-I age, I Salesl £0110, revea; Studio 110 developing countries also offers the JV hope for increased revenues and profits. JV 8 JV 8 produces consumer packaged foods in Guangzhou. This southern location is strategic, since 70% of the materials are imported from Hong Kong. The U.S. parent company is a market follower in this industry, maintaining a relatively low market share (25% compared to the leader's 70%). Operating in a duopoly, neither company wishes to compete on the basis of price, so comfortable profit margins have been set. This is the smallest JV in the sample, with total sales in 1992 of $12 million, and only 260 fulltime employees (400 total, including seasonal workers). The general manager, a Hong Kong Chinese, is the only expatriate working for the JV. As a small venture, JV 8 almost collapsed during 1989 when its distributors failed to pay their bills to the JV. The tight money supply policies of the government were a primary cause of these problems. In 1992 it tallied a respectable 15% return on sales, though. The managers plan to build a new plant with a much larger capacity, since demand outstrips supply, currently. Histograms of the IJVs' U.S. parent share of equity, age, number of employees, expatriate employees, equity, sales, exports, and profitability are presented in the following figures (Figures 4.1 to 4.8). These histograms reveal, in a graphical manner, the range of IJVs that were studied. 111 s .mjl x aimmmzso aflrwnnaso >sH H.q magmas w>o NE. 02.. m>o .v>_. m>_.. N2. F>_. >5de ....O mmsH N.s acumen m>_.. n2. ©>... m>o v>p m>w NZ. F2. o . N . .......... v n mml ........................... : my ............................................ -. m 2 OZED._.0_ mm m0 mmmSSZ .hl mDCMMDOEF 3 1 1 :38. 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ON s- 118 L, ._ .. .. ................... om ........................ ..q .................................. ow Nmmw - wmjU INTERNAL PROCESS Cooperation 1 1 - - 2 mm OUTPUT ECONOMIC DEVIL INTERNAL PROCE FIRM OUTPUT ECONOMIC DEVI INTERNAL PROC 122 Table 5.2 Performance Model by Type of Manager (Percentge of Responses) PRC PARENT US PARENT PRC JV MGR US JV MGR TOTAL FIRM OUTPUT 50% 88% 75% 88% 78% ECONOMIC DEVELOPMENT 38% 0% 25% 11% 18% INTERNAL PROCESS 13% 13% 0% 0% 4% Table 5.3 Performance Model Used By Chinese and U.S. Managers Qfilflfiéfi HIS; % INFORMANTS % RESPONSES % INFORMANTS % RESPONSES FIRM OUTPUT 83% 67% 100% 88% ECONOMIC DEVELOPMENT 42% 29% 15% 8% INTERNAL PROCESS 8% 4% 8% 4% On a case—by-case basis, the following results were Obtained: PRC CRITERIA Case 1 Pro: (d P Pro Case 2 Case 3 pr 123 Table 5.4 Performance Criteria Within Each Case PRC PARENT US PARENT PRC JV MGR US JV MGR CRITERIA Case 1 Profits Profit Profit Sales Growth (dividends (ROI) (dividends) plus taxes) Productivity Sales Revenue Mgt. Skills Productivity Transfer Case 2 Profit Profit Profit (dividends (dividends) (dividends) plus margins on sales to IJV) Partner Production Product Quality Cooperation Profit (dividends) Product Quality Case 3 Profit Sales Revenue Profit (dividends (dividends) plus taxes) Product Quality Mgt Skills Transfer (Localization of managers) Cooperation Mgt Skills Market Share Transfer Competition in Product Scope China - Product Quality Total Delivered Cost Case 4 Case 5 Case 6 Case 7 Case 8 Case Case Case Case Case Technology Transfer Foreign Exchange Technology Transfer Profit (ROI) 124 Table 5.4 (cont'd) Profit (ROI) Sales Revenue Profit (IRR) Market Share Profit (ROS) Mgt Skills Transfer Quality Image Profit (ROS) Profit (ROS) Sales Revenue Profit (ROI) Sales Growth Sales Revenue Profit (ROS) Profit (ROI) Productivity Market Share Mgt. Skills Transfer The foll similarities participantsc perforlance < managers. '1‘] criteria use-1 provided . CHANGES IN C These 1 Performance similar to ‘ what was re Previous re the Chinese economic de transfer 0 exchange, a 1989; Bend] Council 191 manufactur 1990). Ba Chinese an internal p 125 The following section presents a discussion of similarities in the criteria that are used by IJV participants. Two phenomena are highlighted: changes in the performance criteria used by Chinese managers and U.S. managers. Then, a discussion of differences in performance criteria used by the four categories of managers is provided. DESCRIPTION OF SIMILARITIES IN CRITERIA CHANGES IN CHINESE CRITERIA These research findings suggest that the IJV performance criteria used by Chinese managers are more similar to those used by managers from U.S. companies than what was reported in the literature on IJVs in China. Previous research concluded that managers and officials from the Chinese side primarily evaluate IJVs on the basis of economic development dimensions, including technology transfer (hardware), management skills transfer, foreign exchange, and job creation (Baird et.al. 1990; Campbell 1989: Hendryx 1986; Pearson 1991; U.S.-China Business Council 1990.) Related criteria include exports and manufacturing capability (Shapiro et.al. 1991: Shenkar 1990). Baird et.al. (1990) inferred from their study of Chinese and American MBA students that trust and other internal process criteria are the important dimensions of IJV perforaal In cont: enterprise 0' including pr share, produ measures of and expansic access to 1c 1989; Daniel In this U.S. sides r important d pattern is ' JV managers with dimens in'Pel'tant t The c: b°th Chines (67% of cm teChnique . °Perating 1 with this , the RGT in of means a each manag between pe . not a cc 126 IJV performance to Chinese. In contrast, U.S. managers are thought to use enterprise output measures to evaluate IJV performance, including profitability, sales revenue and growth, market share, productivity, and costs. Many of these criteria are measures of such strategic goals as domestic market entry and expansion, market power vis-a-vis competitors, and access to low-priced factors of production (Campell 1987: 1989: Daniel et.al. 1985; Davidson 1987; Shenkar 1990). In this research managers from both the Chinese and U.S. sides of a JV consider firm output criteria as the most important dimensions of performance of IJVs in China. This pattern is most evident among US parent company managers, US JV managers, and PRC JV managers. Internal process models, with dimensions such as cooperation and trust, are not as important to any set of managers. The criterion of profit is mentioned the most often by both Chinese and U.S. managers, and with similar frequency (67% of Chinese.and 69% of U.S. managers). Repertory grid technique (RGT) interviews with a Chinese and a U.S. operating manager at JV 3 produced data that is consistent with this observation. (See Appendix 2.) Both managers in the RGT interviews perceived performance criteria in terms of means and ends. Profitability was a salient "end" for each manager. Moreover, the U.S. manager distinguished between performance criteria with the construct "common goal - not a common goal." Profitability was the only criterion that this ma goal.ll The is a means t Two has similarity the literati of profits a change in t' the last de managers an profit as a recognize t similaritie central gov to-face int with the I; also 1'9pori interviewer about macr. Personal 0 In-de exPerts fr belief tha officials their focr aPPEars li 127 that this manager placed at the polar extreme of "common goal." The two managers also agreed that "product quality" is a means to "profitability." Two basic reasons can be provided for this finding of similarity in profit-orientation that was not reported in the literature previously. One explanation is that the use of profits as a criterion for performance represents a change in the thinking of Chinese managers and officials in the last decade. Alternatively, it is possible that PRC JV managers and parent company officials have always used profit as a major criterion, but earlier researcher did not recognize this. They may not have uncovered the similarities because earlier researchers relied on official central government documents about IJVs rather than on face- to-face interviews with those who are most directly involved with the IJVs (e.g. Shapiro et.al. 1991). Pearson (1991) also reports her perception that Chinese IJV managers interviewed in her research just repeated the Party line about macro-level concerns rather than revealing their personal or firm-level viewpoints. In—depth discussions with IJV participants and IJV experts from business, government, and academia lead to the belief that, over the last decade, Chinese managers and officials have become more like their U.S. counterparts in their focus on the profitability of IJVs. Although it appears likely that earlier researchers failed to uncover Chinese IJV participants' personal perspectives, the alternative been focused the five cas the IJV, the has become 1 trustworthi: in each of ‘ infomants ' Board meeti position to representat Chinese par, important c PEISpective In an Profit cri1 managers i: interested be explain Chinese pa Moreover, was direct COMunity the perSpe deputy max 19803 to ( EVid. 128 alternative explanation that the Chinese side has always been focused on profits seems less plausible. .In four of the five cases where data were obtained from both sides of the IJV, there is evidence that the Chinese side of the IJVs has become more profit-oriented in the last few years. The trustworthiness of these data is enhanced by the fact that in each of these five cases (JVs 1 to 5) at least two informants have beena member or regular attendee of the IJV Board meetings since its inception; thus, they are in a position to report on changes that may have occurred. U.S. representatives from Cases 7 and 8 also state that their Chinese partners are beginning to use profitability as an important criterion of IJV performance. (No long-term perspectives were acquired from Case 6.) In an exception to this observation of a new use of profit criteria by the Chinese, both Chinese and U.S. managers in JV 4 report that the Chinese have always been interested in the profitability of the JV. This anomoly can be explained from the following circumstances. JV 4 had Chinese parent company leaders who were liberal reformers. Moreover, they were part of a newly—formed corporation that was directly involved in the international business community from its inception in 1980. To further harmonize the perspectives of Chinese and U.S. managers, the Chinese deputy manager of the IJV was sent to the U.S. in the middle 19805 to get an M.B.A. Evidence from Chinese participants in JV 1 richly illustrates thinking ab munese par the IJV sin parent CXNIP of the Chan In the busine and tc as a c now 5: focusi inter: makes. new c1 taxes percel gover1 the m. socie' The V justificat measure of “taxes gen The Vice 1: in both 15 as CQntrik much the ‘ Company V: reported 1 service f. f 129 illustrates the pattern of changes in Chinese managers' thinking about performance. The Vice Director of the Chinese parent company has been on the Board of Directors of the IJV since its inception in 1986 and employed by the parent company for twenty years. He openly discussed some of the changes: In the beginning [1986] we didn't understand this business. We originally sought to gain technology and to have alot of exports. We didn't use profit as a criterion at first...We [the parent company] now see the value in generating dividends and focusing on profits. The government is also more interested in the profits that the joint venture makes. These profits provide tax money. So a new criterion of performance is dividends plus taxes... Specifically, tax receipts as a percentage of the investment is important to the government. The more taxes generated per worker, the more it shows the company is sacrificing for society. The Vice Director seems to be providing a social justification for the new emphasis on profitability. The measure of productivity for the Chinese side of IJVs of "taxes generated per worker" is a new noteworthy criterion. This figure includes corporate taxes and employee taxes. The Vice Director also reported that tax receipts as a percentage of the Chinese investment totaled 100% per annum in both 1991 and 1992 for JV 1. These taxes are described as contributions to society that provide evidence of how much the workers are sacrificing for the nation. The parent company Vice-Director and IJV Deputy Manager also both reported very high satisfaction with the dividends and service fees (2% of profits after tax) that the Chinese side received fr' The G8: the U.S. si it first be this way: Previc were ] latter more 1 inter: highs] similarly, remarked,"< pricing {10‘ Chinese fi: we can‘t k This company ma Criteria w eXperts in. Officer wt Chinese ma C(include 1 chiDQSe mi compaflies 90Vernmen. devel°Pmet 130 received from the IJV. The General Manager of JV 7, a Singaporean representing the U.S. side who served as the controller of the IJV when it first began, related changes in performance criterion in this way: Previously, when evaluations of the joint venture were just made from a macro level, losses didn't matter to the Chinese. But now they're becoming more interested in profits... We're seeing their interest in profits in their desire to charge higher prices for our products. Similarly, a member of the Board of Directors of JV 8 remarked,"0ur Chinese partners are more aggressive in pricing now than we are. They want larger dividends." The Chinese financial director of JV 2 stated, "Without profit we can't keep developing and growing." This empirical observation of Chinese IJV and parent company managers beginning to use profit-based performance criteria was corroborated by both Chinese and U.S. IJV experts in China. For example, a U.S. embassy commercial officer who previously worked for an IJV in China, and a Chinese management professor who consults for IJVs, both conclude that profit is now the most important criterion to Chinese managers at the JV level and to officials at parent companies that receive dividends from the IJV. At the government ministry levels, they both believe that economic development criteria are used in addition to profit and sales criteria. CHANGES IN I There representin beginning t that were 1: This patter more like t Two ca with a Eur< China sinc. This China managers w to him. M had become skills to Positions. aPProxima1 at the jo. white fag] Chinese 0 China. I The criticc.11 manager c China, hi are Part; 131 CHANGES IN U.S. MANAGERS' CRITERIA There is also some evidence that veteran managers representing the U.S. company at the IJV operating level are beginning to evaluate performance of the IJV with criteria that were previously only reported as important to Chinese. This pattern is weaker than the trend of Chinese becoming more like their U.S. counterparts. Two cases are most salient. The first centers on JV 3 with a Euro-American plant manager who has been working in China since the IJV negotiations were concluded in 1987. This China veteran remarked that the percentage of local managers was the most important criterion of IJV performance to him. More than the newer expatriates, this plant manager had become sensitive to the need to transfer management skills to Chinese who could take over critical management positions. With 34 fulltime expatriates on-site and approximately 50 temporary or part-time expatriates working at the joint venture, he complained, "...I see too many white faces... This reduces the impact and influence of Chinese on the operation...There's too much white space in China. I know that we don't know." The transfer of management skills was also viewed as a critical performance criterion by the Hong Kong-born general manager of JV 8. During the ten years that he had worked in China, he has observed that young, college-educated Chinese are particularly "teachable" and able to take on managerial responsibil: effective an managelent Chinese . H general man PRC pi that are 5| managers it developmen foreign ex criteria. economic 6 their 1ng managers 5 dimension: Furt‘; to U.S. m U-S. mana Chinese c performar Similar i A U. USed by 1 function. 132 responsibilities. He views expatriates in IJVs as an effective and necessary means to transfer critical management skills in marketing and human resources to Chinese. He hopes that the IJV will have a local PRC general manager within the next decade. DESCRIPTION OF DIFFERENCES IN CRITERIA PRC parent company officials use performance criteria that are somewhat different from the other three sets of managers in that they also rely heavily on an economic development model of performance. Technology transfer and foreign exchange earnings remain as important performance criteria. In contrast, no US parent company manager used economic deve10pment criteria to evaluate the performance of their IJVs in China in this sample. US parent company managers solely evaluate the JV on enterprise-level dimensions. Furthermore, Chinese managers seem to be moving closer to U.S. managers in the performance criteria they use than U.S. managers are moving toward the use of traditional Chinese criteria. Chinese managers reported that the performance criteria now used by their U.S. partners were similar to what were used when the JVs began. A U.S. manager at JV 3 differentiated between criteria used by the U.S. parent company, the general manager, and functional managers of their large joint venture. For example, re parent coup closely non are more ce This is re! an ilportar and 'produc At a I exist in t1 parent com] investment company ma Chinese JV measure, a Use c multidimen how U.S. a an example in JV 3 a: all in the 0‘5 What dj defines a and Yet (1; 133 example, return on investment is most important to the parent company, while sales volume and market share are closely monitored by general managers. Functional managers are more centered on their specific areas of responsibility. This is reflected in the use of "total delivered costs" as an important performance criterion by the production manager and "product scope" by the marketing/sales manager. At a more detailed level, some differences seem to exist in the measures that managers use for profit. U.S. parent company managers are more likely to use return on investment or internal rate of return, while Chinese parent company managers look at dividends, or dividends plus taxes. Chinese JV managers frequently use return on sales as a measure, as well. Use of the repertory grid technique and l multidimensional scaling reveals additional differences in how U.S. and Chinese managers think about performance. As an example, the dichotomous constructs of a pair of managers in JV 3 are listed below (Table 5.5). These constructs are all in the informants' words, according to their perceptions of what distinguishes elements of performance. Kelly (1955) defines a construct as a way in which two things are alike, and yet different from a third. Perceptual maps of the data are found in Appendices 2 and 3. maIlllfa Chinese Pro Doesn't hel Means - End Reduces cos Doesn ' t imp Not interna U.S. Plant Internal - Qualitative Not Contro] Means - Enc Not manufac Global - L< Not in MRP: Comm“ Goal P2 i: CtUring 134 Table 5.5 Performance Constructs Chinese Production Manager Doesn't help to be more competitive - Helps to be more competitive Means - End Reduces costs - Increases costs Doesn't improve customer satisfaction - Improves customer satisfaction Not international exchange - International exchange U.S. Plant Manager Internal - External Qualitative - Quantitative Not Controllable - Controllable Means - End Not manufacturing measure - Manufacturing measure Global - Local Not in MRP21 process - In MRP2 process Common goal - Not a common goal k 1 .' acronym for a system of MRP2 is a U . S . parent company . 'acturing resource planning that includes performance .ation. The Ct concerned a internatiOI managelent are exchan< 2 that elem from the o U.S. manag think abou partners 0 Althc the JV, (2: goals are cultural e probably 11 Since the JV and Zex does not 1 0f busine: parent co: abOUt the c°mPetiti- t° Zeng. element. perfothan Planned N Smit 135 The Chinese manager, who will be named Zeng, is concerned about whether elements of performance involve an international exchange or not. Culture, technology, and management skills are the three elements that he believes are exchanged between national partners. (Note in Appendix 2 that elements 7, E, and B are all on the opposite pole from the other elements on construct 5). In contrast, the U.S. manager, who will be called Smith, does not apparently think about performance in terms of an exchange between partners or nations. Although both managers possess two similar "ends" for the JV, (profit and customer satisfaction), their other goals are different. .Zeng's goals for the JV also include cultural exchange, financial capital, and survival. Zeng is probably more concerned about the JV's survival than Smith. Since the Chinese parent company has been absorbed into the JV and Zeng was hired out of school to work for the JV, Zeng does not have another job to fall back on if the JV goes out of business. In contrast, Smith can return to work with his parent company in the U.S. Zeng may also be less certain about the company's future under the increasingly O O O 0 O O 0 " I 0 competitive enVironment in China. "Competition is salient to Zeng, since he discussed it as both a construct and an element. Company "survival" is not an element of performance that would be considered under a centrally- planned Marxist economy. Smith's unique goals for the JV are mostly oriented around firs total deliv the percept perforlance goal" consi to be the i l'productio: two elenen by him.’ C but that t about. Sm MRP2 proce managers < implement Procedure: Although Zeng has thinking as import Construct are Only company.1 “niQUe t. 136 around firm-level output: production levels, sales, and total delivered costs (See Appendix 3). Smith also reveals the perception of different partner objectives for certain performance elements with his "common goal - not a common goal" construct. The two elements for which there appears to be the least agreement about the appropriate amount are "production level" and "foreign exchange earnings." These two elements also are viewed by Smith as "not controllable" by him.’ Control is a construct that the American possesses, but that the Chinese manager does not appear to think much about. Smith's construct "not in the MRP2 process - in the MRP2 process" highlights the control-orientation of the U.S. managers of JV3. The U.S. parent company is attempting to implement an entire system of controls through a set of procedures and standards for each management function. ‘ Although Zeng is Smith's counterpart as production manager, Zeng has not apparently internalized this systems control thinking - or at least he does not consciously consider it as important as Smith does. Smith's "global-local" construct also differentiates elements of performance that are only considered by the JV and not from the parent company's worldwide perspective. Two that stand out as unique to the JV are "trust between partners" and "foreign exchange earnings." From ' in Chinese general, e Hi: Learr awareness, organizing interpartz consists 1 side of t] interpart: frame of new insig Chinese p the U.S. transfer" begin to as W811. manageme, t° be mo] ec°n0mic not 1mm that are _fi——'f 137 EXPLANATIONS FOR THE SIMILARITIES AND DIFFERENCES From these observations of similarities and differences in Chinese and U.S. performance criteria, the following general, explanatory hypothesis is derived: Bl: Performance criteria used by IJV participants, including operating and parent company managers, converge as interpartner learning increases. Learning consists of the development of insights or awareness, which is a change in states of knowledge or organizing paradigms (Huber 1991). This becomes interpartner learning when a source of the new knowledge consists of people, processes, and materials from the other side of the venture. For the U.S. IJV participants, interpartner learning seems to occur within in an existing frame of reference and simply involves the acquisition of new insights or skills. Thus, through long-term exposure to Chinese personnel and the Chinese situation, managers from the U.S. side may add the criterion of "management skills transfer" to firm output measures such as profit. They begin to perceive the joint venture from Chinese viewpoints, as well. But the embracing of these "Chinese" criteria of management skill transfer and localization of managers seems to be more for the sake of improved firm output than for economic development for China. The extent of learning has not involved changes in paradigms or frames of reference, that are associated with higher-level learning (Fiol and Lyles 1985. as a criti« level lean capitalist. Marxist de exploitatil to attack attempt to expatriate We se them. no pr profi livin impor The use by Performanc from colle one of ind individual managers a from the c indicate t Economic d °f Profit. for SOCiet and "highs (Fiol and Basec IIIIIIIIIIIIIIIII---::——————_____I 138 Lyles 1985: Hedberg 1981). In contrast, the use of profit as a critical criterion by a Chinese may represent higher- level learning as the Marxist paradigm is "unlearned," and a capitalistic, market economics model replaces it. Under Marxist definitions profit, being surplus value, is pure exploitation of labor. Foreign JV managers do not attempt to attack the Marxist model. Instead, some managers simply attempt to show the value of profits to their partners. One expatriate general manager remarked: We see this venture as an educational process for them. We tell them, "There's no bonus if there's no profit. There's no new housing if there's no profit. Profits enable a better standard of living for you." ...They're slowly realizing the importance of profits. The use by Chinese of profit as a criterion of joint venture performance may, for some of the managers, represent a shift from collective thinking of what is best for the nation to one of individual self-interest. Evidence of this individualistic thinking is most apparent among Chinese managers at the JV operating level. However, the quotations from the Chinese parent company manager involved with JV 1 indicate that he has not replaced his macro-oriented economic development paradigm with an individualistic view of profit. He interpreted profit in terms of what was best for society and what pleased the government. "Unlearning" and "higher-level" learning is rare within organizations (Fiol and Lyles 1985; Hedberg 1981). Based on this exploratory research, the following factors apj learning: * OPP * ICU na * res vi * abi ir * cor b< * co] The . these fac performan Each fact insuffici indicated aPpear tc managers managers, Venture ] mana(Jers more opp, Ventures The U.S. deputy g pr°Vidin market e 139 factors appear to affect the extent of interpartner learning: * opportunity to learn * rewards for learning (personal, corporate, and national) g. respect for the partner and their viewpoints/knowledge *- ability to learn (including education, training, and intelligence) * communication skills (including language skills of both partners and cultural understanding) * commitment to learn The extent of interpartner learning is enhanced with these factors; and, thus, the more similar the choice of performance criteria becomes by both sides of the venture. Each factor appears to represent a necessary, but insufficient condition for interpartner learning. As indicated in Table 5.3 and 5.4 the performance criteria appear to be more similar between Chinese and U.S. JV managers than between Chinese and U.S. parent company managers. More interpartner learning occurs at the joint venture level than at the parent company level, since the managers who are frequently exposed to their partners have more opportunities to learn than those who manage the ventures from a distance at the parent company locations. The U.S. parent company from JV 4 that sent the Chinese deputy general manager to the U.S. to an MBA program was providing him with a special opportunity to learn more about market economics and U.S. management skills. It is not surprising us.gmmr important venture. T as one of rewards fr greater fc company It travel ab] further t1 Thus 82: Indi For examp Similarit are able illustrat ethnic Cl". managers most impc d°eS not h°m°geni: JV manag. Chinese I that PRC 140 surprising that he, the U.S. parent company manager, and the U.S. general manager all stated that profit was the most important criterion with which to evaluate their joint venture. The PRC parent company manager did not use profit as one of the two most important performance criteria. The rewards from interpartner learning are also likely to be greater for individuals at the JV level than at the parent company level. These rewards include higher salaries and travel abroad to U.S. parent company headquarters for further training for Chinese "learners." Thus, the following specific hypothesis is developed: Performance criteria are more similar among host and foreign managers at the joint venture operating level than at the parent company levels. HZ: Individual differences also play an important role. For example, it appears that more learning, and thus more similarities in goals, occur between operating managers who are able to communicate in the others' language. As an illustration, the managers at all four levels in JV 1 are ethnic Chinese whose mother language is Chinese. These managers all agree that profit and/or sales growth are the most important performance criteria. Yet, ethnicity alone does not appear to be the critical factor in the homogenization of performance goals. A few overseas Chinese JV managers were unable to read or write in Chinese. Their Chinese partners and an outside Chinese consultant reported that PRC Chinese had little respect for these managers. Several st who speak evident an These esp: hypothesi: 33: ThrO' learning : Chinese. performan American may accou more comm versa. 2 internati Probing r U-S- mana have more counterpa ChineSe V We CaSes demgatox ”5). Us poliCies ’1— 141 Several stated their preference for Euro-American managers who speak Chinese. Also, within-case harmony of goals is evident when the participants speak English, as in JV 5. These empirical observations lead to the following hypothesis: Performance criteria are more similar among host and foreign managers who speak the same language. H3: Throughout the cases it seemed that Chinese were learning more from the U.S. side than U.S. managers from Chinese. As was mentioned, it seems that Chinese performance goals are becoming more "American-like" than American goals becoming "Chinese-like." Several reasons may account for this observation. It seems that Chinese are more committed to learn from the U.S. managers than vice- appeared more concerned about versa. Zeng, from JV3, international exchanges within the JV that Smith. Further probing revealed that he personally wanted to learn about U.S. management skills and culture. Zeng also seemed to have more respect for U.S. culture and knowledge than his counterpart had for Chinese culture. A lack of respect for Chinese ways by some U.S. managers was especially overt in two cases in which a Euro-American general manager used a derogatory term to refer to his Chinese partners (JV 2 and JV 5). U.S. managers have also influenced the JV personnel policies with incentives for Chinese managers who learn the U.S. BanaG' of corporal ways . Thu: likely to i managers t. hypothesis 3‘: I! Sevel increased interpam IMPLICATII Ther interest bodies. governmen generated more app: The 1suit is enhanc governmer —i— 142 U.S. management systems. However, there is little evidence of corporate rewards for U.S. managers who learn Chinese ways. Thus, due to greater rewards and respect, Chinese are likely to be more committed to learn more from the U.S. managers than vice-versa. For these reasons, the following hypothesis is proposed: H4: The rate of Chinese interpartner learning is greater than U.S. interpartner learning. IMPLICATIONS OF SIMILARITIES AND DIFFERENCES Several theoretical and managerial implications of the increased interest in profits by Chinese managers and of the interpartner learning process are discussed below. IMPLICATIONS OF CHINESE INTEREST IN PROFITS There are several implications of the increased interest in profits by the Chinese parents and government bodies. As Chinese workers, managers, parent companies, and governments enjoy some of the fruits of dividends and taxes I generated by the IJV, the IJV and parent companies become more appreciated by the various Chinese constituent groups. The legitimacy of the IJV and its foreign parent companies is enhanced. As one result, there seems to be less government regulation of the JV structure. The U.S. parent of JV 1 is 50% to 601 have recel bureaucra1 contrast 1 equity po: not worth The . is less p leaders r IJVs to s not eXpor of the IJ output, w amount (2 immediate Plant in Percentag Contractu Thus criterior Structure more Cont higher_pI taxes, V performec JV 5 rep] —’— 143 of JV 1 is presently increasing its share of the IJV from 50% to 60%. Three other profitable IJVs indicated that they have recently increased their share of the JVs with little bureaucratic resistance from the Chinese side. This is in contrast to Campbell's (1989) conclusion that changing equity portions of IJVs in China is so difficult that it is not worth the effort. The Chinese deputy manager of JV 1 indicated that there is less pressure now for IJVs to export, since government leaders recognize that China can make more money by allowing IJVs to sell locally than externally. Presently, JV 1 does not export any of its output - nor does JV 5 or JV 8. Four of the IJVs export minimal amounts of up to 5% of their output, while only one JV (JV 3) exports a significant amount (20%). JV 3 exports so much because they wanted to immediately produce at full capacity in their new (1991) plant in order to keep their costs lower. These low export percentages for 7 of the 8 IJVs in this sample are below the contractually-stipulated levels. Thus, two implications of the use of profits as a new criterion by the Chinese side are less regulation of IJV structure and strategy. The Chinese appear to believe that more control by the foreigners, less pressure to export, and higher-priced products will produce higher dividends and taxes. When asked about the activities in the IJV that are performed by the Chinese side, the U.S. General Manager of JV 5 replied, "They lick their fingers and count their money." Incre may requir based on t the U.S. 5 would prel to keep it IMPLICATI! Anot joint ven' influence JV 3 are highest 1 skills. recruitin rmw va i abilities from the mentioned line Work n°t trair The rewax have beer Chi: [LS' Pari FIIIIIIIIIIIIIIIIIIII-I::_______________—_ 144 money." Increased interest in dividend profits by the Chinese .may require the U.S. side to manage the profits of the IJV based on the expectations of its partners. In JV 3 and JV 8 the U.S. side prices the IJVs products higher than they would prefer in order to produce higher short-term profits to keep its Chinese partners satisfied. IMPLICATIONS OF INTERPARTNER LEARNING Another set of implications are that both sides of a joint venture can use the interpartner learning factors to influence their partners. For example, the U.S. managers in JV 3 are aggressively seeking to employ Chinese who have the highest intelligence levels and best English language skills. They are the first in China to do on-campus recruiting at the top Chinese universities. In starting up new JVs it may be better to hire new employees with proven abilities to learn than to absorb the existing employees from the Chinese partner. Two U.S. managers at JV 3 mentioned that despite their efforts, many of their Chinese line workers they inherited from their Chinese partner were not trainable, due to apparently low intellectual capacity. The rewards for learning and commitment to learn may also have been low. Chinese partners may also attempt to influence their U.S. partners to assign managers to the JV who are able to communicai culture . '. sensitive most usef1 A pru interpart: The succ tech the end the exce comp A fi set of pa research as a mult four prim literatu; Criteria infOrmant tWO most TwentY-nz‘ Moot/ere, all of t1 by the f( 145 communicate in Chinese and who respect Chinese and their culture. These kinds of managers are more likely to be sensitive to Chinese viewpoints and to learn and apply the most useful aspects of Chinese values and methods to the JV. A promotional brochure from JV 3 identifies interpartner learning as a key to its relative success: The company's experience has identified a successful way to intergrade advanced technologies and worldwide experiences with the traditional Chinese approach. By the end of 1990, after 28 months of operation, the total production output of [JV3] has exceeded the total output [the Chinese parent company] had achieved in 35 years. MULTIDIMENSIONALITY OF PERFORMANCE A final note on performance criteria concerns the broad set of performance criteria used by IJV participants. This research supports the literature that describes performance as a multi-dimensional construct. Evidence for each of the four primary models of performance that are discussed in the literature was uncovered in the research. The breadth of criteria was primarily furnished by repertory grid technique informants, who were not limited to a discussion of their two most important criteria (as were the other respondents.) Twenty-nine different IJV performance criteria were uncovered in this study. Table 5.6 presents a summary of all of the performance criteria that were mentioned, listed by the four models of performance. Important implications of the nu] the last < 146 of the multi-dimensionality of performance are discussed in the last chapter of this dissertation. JVOUT‘PUT Financial Profit (RI Sales Rev Sales Gro Mamet Market Sh Efficienc Productiv Total Del Productic Productic Product. Product c Product 5 LDAP‘I'ATIC Customer Customer Parent c: Governmel Survival IIIIIIIIIIIIIIIIIIll-lll--———__________ 147 Table 5.6 Summary of Performance Criteria JV OUTPUT Financial Profit (ROI, dividends, dividends plus taxes, ROS, IRR) Sales Revenue Sales Growth Market Market Share .Effisiensx Productivity ‘ Total Delivered Cost Production Production Volume Product Product Quality Product Scope ADAPTATION Customer Satisfaction Customer Trust Parent Company Satisfaction Government Satisfaction Survival INTERNAL PROCESS Interpartner Cooperation Trust Harmony Cultural Exchange InputséProcesses Working Capital Management Quality Control of Salespeople Stability ECONOMIC DEVELOPMENT Technology Transfer (hardware) Management Skills Transfer Manufacturing Capability Foreign Exchange Capital Competition in China Localization of Parts The performar perceptua involved performar satisfact considers 0f perfo: sales, an outside e included. other meg IJVs. E) the next Prex manageria reStilts. indicate two Sugg¢ 0f metho, APParentj CHAPTER VI IJV PERFORMANCE OUTCOMES The objective of this chapter is to identify performance outcomes of U.S.-China IJVs, highlighting perceptual similarities or differences between managers involved with U.S.-China IJVs. Managers' satisfaction with performance outcomes is evaluated in several ways, including satisfaction with dimensions that each interviewed manager considered to be the most important. "Objective" dimensions of performance are presented, including sales, return on sales, and stability of ownership shares. When obtainable, outside experts' evaluations of an IJV's performance are included. The researcher's and interpreter's judgments are other means of evaluating the performance of U.S.-China. IJVs. Explanations for performance outcomes are provided in the next chapter. Previous assessments of IJV performance in China using managerial satisfaction as a criterion reported mixed results. As discussed in Chapter III, three of the studies indicate managerial "satisfaction" with IJVs in China, while two suggest "dissatisfaction." Due to inadequate reporting of methodologies, the results cannot be compared. Apparently, the researchers combined the data from parent 148 companies numbers a responses canpbell' projected criteria A 19 companies figures 0 average w relativel (Beamish In t measure 0 outcomes Conclusio SATISFACT Sati Venture p duration, industr i e 1991), Satisfact relations effectiVe IIIIIIIIIIIIIIIIIIlllllI---———_________f 149 companies and IJV managers. In each of the studies no numbers are provided that might suggest differences in responses by type of informant. With the exception of Campbell's (1987) study concerning satisfaction with projected financial returns, none of the authors uncover the criteria that are used to indicate relative satisfaction. A 1991 analysis of five-year ROI to U.S. parent companies of IJVs in China revealed that 60% reported figures of 10% or higher (Stelzer et.al. 1992). The overall average was 11.6% ROI. In addition, other authors found relatively stable ownership shares in the IJVs in China (Beamish 1993: National Council on U.S.-China Trade 1987). In this chapter a discussion of satisfaction as a measure of performance is provided first. Then, performance outcomes for each IJV in the sample are examined. Finally, conclusions about performance outcomes are drawn. SATISFACTION Satisfaction is an appropriate measure to assess joint venture performance because, unlike profitability and duration, this variable can be readily compared across industries, settings, and individuals (Geringer and Hebert 1991). Organization behaviorists frequently use satisfaction as the focal consequence of channel partner relationships because it is a close proxy for perceived effectiveness and has been found to lead to the long-term continuatic Frazier, of found to p4 ventures (- correlatio study prob performanc Orgar a global 1 Hebert 19' dimension a separat Specific that he j venture; 0f good j that she this sam she is t transfer informar goals t1 This is IJVs ac: Followi 6180 Co ventlire 150 continuation of relationships (Anderson and Narus 1990; Frazier, Gill, and Kale 1989). Satisfaction has also been found to positively correlate with profitability in joint ventures (Geringer and Hebert 1991). A reason for this correlation is that the North American managers in their study probably used profitability as the key criterion of JV performance. Organization behaviorists generally use satisfaction as a global measure of performance (Frazier 1983; Geringer and Hebert 1991). However, when people utilize different dimensions of performance, or evaluate different activities, a separate measure of satisfaction should be made for each specific dimension or activity. A Chinese manager may say that he is satisfied with the overall performance of a joint venture; but the basis of this feeling may be the creation of good jobs for his family and friends. Another may say that she is dissatisfied with the overall performance of this same venture, because a dimension of performance that she is thinking about is the amount of technology being transferred to China. This research investigates each informant's satisfaction with the particular performance goals that each specified as the most important to him. This is the first known attempt to measure satisfaction in IJVs according to the informants' goals or categories. Following Geringer and Hebert (1991) the present research also collects data on overall satisfaction with the joint venture, and extends this work by obtaining managers' perspect ii Another II of explan: Tabl manager's 'satisfie performan Differenc example, satisfie< managers they usu. expectat Somethin describe The Satisfac second q Partner' Centereg that he bymv. 151 perspectives of how satisfied the partner is with the JV. Another measure of satisfaction is the existence and nature of explansion plans. Table 6.1 presents IJV participants' responses. Each manager's choices were "very dissatisfied," "dissatisfied," "satisfied," or "very satisfied" on four questions about performance. (See Interview Guide in Appendix 1.) Differences between each choice seem important. For example, the difference between "satisfied" and "very satisfied" appeared to be significant to the managers. When managers stated that they were “satisfied" with something, they usually described how the item matched their expectations, but fell short of what it could have been. Something for which a manager was "very satisfied" was often described as exceeding expectations. The first question concerned the manager's overall satisfaction with the performance of the joint venture. The second question asked for the manager's perception of his partner's overall satisfaction. The third and fourth items centered on how satisfied the manager was with the criteria that he stated were most important. The results are listed by IJV and by the four sets of managers in Table 6.1. JV___1 OWN OVERAI SATISFACT. PARTNER'S SATISFACTI CRITERION EVALUATIO CRITERION EVALUATIO M on OVERA SATISFACT pummel s smmrsrmcm CRITERION EVALUATIC CRITERIOh EVALUATIC JV 1 OWN OVERALL SATISFACTION PARTNER'S SATISFACTION CRITERION EVALUATION CRITERION EVALUATION JV 2 OWN OVERALL SATISFACTION PARTNER'S SATISFACTION CRITERION EVALUATION CRITERION EVALUATION 152 Table 6.1 IJV Satisfaction US PARENT PRC PARENT Very satisfied Very satisfied Very satisfied Very satisfied Sales revenue Output/worker Very satisfied Very satisfied Dividends plus taxes Very satisfied ROI Very satisfied Dissatisfied/ Satisfied Dissatisfied Profit (margins) Very satisfied Partner Cooperation Very dissatisfied US JV MGR. Very satisfied Very satisfied Sales Very satisfied Output/worker Very satisfied Dissatisfied/ Satisfied Dissatisfied/ Satisfied Dividends Very satisfied Product Quality Dissatisfied PRC JV MGR Very satisfied Very satisfied Net Profit Very satisfied Mgt technology transfer Very satisfied Satisfied Dissatisfied Dividends Satisfied Product Quality Dissatisfied JV 2 (cont OWN OVERAI SATISFACTI PARTNER'S SATISFACT] CRITERION EVALUATIOI CRITERION EVALUATIO] M OWN OVERA SATISFACT PARTNER'S SATISFACT CRITERION EVALUATIO CRITERION EVALUATIC li_l_lsgr OWN OVER} SATISFAc] SATISFAC'] CRITERIOI EVALUATR CRITERIOI EVALUNTD 153 Table 6.1 (cont'd.) JV 2 (cont'd.) OWN OVERALL SATISFACTION PARTNER'S SATISFACTION CRITERION EVALUATION CRITERION EVALUATION JV 3 § OWN OVERALL Very satisfied Very satisfied SATISFACTION PARTNER'S Very satisfied Very satisfied SATISFACTION CRITERION Profit Localization EVALUATION Satisfied Dissatisfied CRITERION Cooperation Profit EVALUATION Satisfied Very satisfied JV,3 (cont'd.) OWN OVERALL Very satisfied SATISFACTION PARTNER'S Very satisfied SATISFACTION CRITERION Market share EVALUATION Very satisfied CRITERION Product scope EVALUATION Satisfied "Very satisfied Satisfied Dividends Very satisfied Production Output Dissatisfied Very satisfied Very satisfied Product quality Satisfied Sales Satisfied Very satisfied Very satisfied Mgt technology transfer Very satisfied Competition Very satisfied JV 3 (com OWN OVERA SATISFACT. PARTNER ' S SATISFACI‘ CRITERION EVALUATIO CRITERION EVALUATIO M OWN OVERA SATISFAC‘T PARTNER ' S SATISFAC‘I CRITERION EVAIIJATIC CRITERIOF EVALUA‘I‘IC JVS \ OWN OVER} SATISFAc] PARTNER ' : SATIsmcc CRITlmror EVALUATn CRITERIO] EVALUATI: JV 3 (cont'd.) OWN OVERALL SATISFACTION PARTNER'S SATISFACTION CRITERION EVALUATION CRITERION EVALUATION JV 4 OWN OVERALL Satisfied SATISFACTION PARTNER'S SATISFACTION CRITERION Sales EVALUATION CRITERION ROI EVALUATION JV 5 OWN OVERALL SATISFACTION PARTNER'S SATISFACTION CRITERION EVALUATION CRITERION EVALUATION Satisfied Satisfied/ Very satisfied Very satisfied 154 Table 6.1 (cont'd.) Very satisfied Very satisfied Technology transfer Dissatisfied Foreign exchange Satisfied + Very satisfied Very satisfied Technology transfer Satisfied ROI Satisfied Very satisfied Product quality Satisfied Total delivered cost Satisfied Very satisfied Very satisfied Sales growth Very satisfied ROI Very satisfied Very satisfied Very satisfied Sales Very satisfied ROS Very satisfied Very satisfied Very satisfied Very satisfied Market share Dissatisfied/ Very satisfied Technology transfer Very satisfied Very satisfied Very satisfied ROI Very satisfied Quality image Very satisfied J'V6 ——-—- OWN OVERAI SATISFACTI PARTNER ' S SATISFACTI CRITERION EVALUATIO) CRITERION EVAIDATIO] II_1 OWN OVERA SATISFACT PARTNER ' S SATISFRCT CRITERION EVALUATIO CRITERION EVALUATIC JVB \ OWN OVERA smmrsmm SATIsmc] CRITERIO! EVALUATIc CRITERIO] EVALUATI: 155 Table 6.1 (cont'd.) JV 6 _— OWN OVERALL SATISFACTION PARTNER'S SATISFACTION CRITERION EVALUATION CRITERION EVALUATION M OWN OVERALL SATISFACTION PARTNER'S SATISFACTION CRITERION EVALUATION CRITERION EVALUATION JV 8 ~ OWN OVERALL SATISFACTION Very satisfied PARTNER'S Very satisfied SATISFACTION CRITERION IRR EVALUATION Very satisfied CRITERION Market share EVALUATION Satisfied/dissatisfied Satisfied Very satisfied ROI Dissatisfied Productivity Dissatisfied Very satisfied Very satisfied Market share Satisfied Mgt technology transfer Satisfied Satisfied Very satisfied Profit Satisfied Sales revenue Satisfied Per basis, e sides of JV managers were ver and that performa the exis discusse schedule SPecial t0 incre With the IJV from judgment were Vex with the b°th Sic‘ ComPaIIy The Satisfac 156 CASE DISCUSSIONS OF PERFORMANCE OUTCOMES Performance outcomes are discussed on a case-by-case basis, emphasizing the five IJVs where interviews with both sides of the venture were obtained (JV 1 to JV 5). JV 1 JV 1 is the only case in which each of the four sets of managers consistently reported that they and their partner were very satisfied with the overall performance of the IJV, and that each was very satisfied with his two most important performance criteria. Another indicator of satisfaction is the existence of expansion plans. Both partners excitedly discussed the new, high capacity manufacturing plant that is scheduled to begin operation in 1994 in a nearby, low-tax, special economic development area. Both sides have agreed to increase the total amount of equity in the IJV by 280%, with the U.S. parent increasing its equity percentage in the IJV from 50% to 60%. The researcher's post-interview judgment indicated a belief that each of the four parties were very satisfied, also. This case stands out as the one With the most similarity in performance evaluations among both sides of the venture and among the operating and parent company managers. The managers provided several reasons for their high satisfaction. The U.S. parent company manager claimed that the IJV 1 corporat; six year: growing . that is parent c, the larg Using a Bureau r the muni producti "We can' workers] plant wa Mor Company transfer has led manufact Chinese eStablis ProductE alot, P C°nclude Sor Partner, relatio: IIIIIIIIIIIIIIIIIIl---""::I__________—_ 157 the IJV produced an ROI of greater than 100% for his corporation and that it had been profitable in each of the six years that it had been in operation. Sales have been growing about 30% to 40% per year. On a financial measure that is important to the Chinese government and the Chinese parent company, taxes per worker, the IJV rated fifth out of the largest 500 manufacturing entities in the municipality. Using a productivity measure, the Tianjin Light Industry Bureau rated this JV "number one" out of the 1,365 JVs in the municipality in renminbi sales per worker in 1991. In production volume output, the U.S. general manager stated, "We can't ask for any more out of them [the production workers]. We're producing at twice the levels that this plant was designed for." Moreover, representatives from the Chinese parent company were happy because management technology is being transferred to China. The Vice Director reported that this has led to reforms in his factory in marketing, personnel, manufacturing, and accounting. He explained that the Chinese parent company has learned how to create demand, establish brand loyalty, merchandize, and develop new products to better meet customers' needs. "We have learned alot. We can now open up new markets by ourselves," he concluded. Some dissatisfaction with the relationship between partners was evident: yet, the participants did not classify relational, process-oriented dimensions as performance criteria his fist and his over whc In 1988 manager conflict U.S. sic authorit 0f dissatis Sides we Whereas of the s SPECific satisfec U.E evaluatj SatisfiE general tel'ms. Chimese diSSatis In Cont: IIIIIIIIIIIIIIIIIIIIll-ll--:::—————______ 158 criteria. The U.S. (Hong Kong Chinese) general manager hit his fists together to describe the relationship between him and his PRC deputy manager. The conflict seems to exist over who has the authority in certain decisionmaking areas. In 1988 the former general manager and the deputy general manager were asked to leave the IJV because the level of conflict was so high. The change in equity to 60% for the U.S. side is intended to give the general manager more authority in key decisionmaking areas. Of the eight cases JV 2 manifested the most dissatisfaction with performance outcomes, although both sides were satisfied with certain aspects of the JV. Whereas global measures of satisfaction gave an indication of the split feelings in the JV about the performance, specific criteria of performance revealed the sources of satisfaction and dissatisfaction. U.S. managers all hedged in giving an overall evaluation of the JV. They stated that they were both satisfied and dissatisfied with the JV's performance. The general manager described the Chinese evaluation in similar terms. The U.S. parent company director of the JV and one Chinese JV manager both felt that their partner was dissatisfied with the JV performance. In contrast, the two Chinese managers said that, overall, they we: perforla Thi several their pa the Alex Chinese, dissatis concessi American knew the American levels m willing Thi level of with Chi a close, intervie Site and were tru Amb all of t1 multidim. Satisfac. Were "Ve: apprOXim‘ IIIIIIIIIIIIIIIIIIIII-lllI---——________ 159 they were satisfied or very satisfied with the JV performance. This inconsistency in evaluations may be explained in several ways. One, the U.S. managers incorrectly assessed their partners' evaluations of the JV. This may be because the Americans projected their own dissatisfaction to the Chinese, or because the Chinese presented an image of dissatisfaction to their partners in order to gain more concessions in negotiations. It also may be because the Americans focused on dimensions of performance that they knew their partners were not satisfied with. Two, the Americans' evaluations of their partners' satisfaction levels may have been accurate, but Chinese may not have been willing to acknowledge dissatisfaction to a U.S. researcher. This second explanation is rejected because of the level of trust that the researcher and interpreter developed with Chinese at JV 2. The researcher's host in Beijing was a close, personal friend of one of the Chinese managers. We interviewed this JV 2 manager three times: once at the plant site and twice over dinner, and concluded that his responses were trustworthy. Ambivalence about the JV's performance is evident among all of the managers, indicating that performance is a multidimensional construct. All of the managers expressed satisfaction with the profitability of the JV, and three were "very satisfied." Profit as a percentage of sales was approximately 10%. JV 2's 1992 sales increased 25% over 1991 and North A: since 19 side frc dividend was the Chi dissatis is belov certain U.S. ma] product a quality that th. Dissati: PrOduct governm Control Mo Process directo work. OPErate oversee liar if deleted Very (11' 44 _fi—* 160 1991 and totalled $636 million, the highest for any non- North American operation for the U.S. parent. For each year since 1986, even more profits were obtained by the American side from the sales of components to the JV than from dividends. The U.S. parent director bragged that this JV was the "biggest single contributor to corporate profit." Chinese and U.S. managers both expressed dissatisfaction with product quality. Because the quality is below world standards, the JV can only export vehicles to certain developing countries, called "funny markets," by a U.S. manager. Despite agreement among both sides about low product quality, the Americans claimed that their partner's quality standards are still not even close to the levels that they want to maintain for the JV‘s output. Dissatisfaction was also voiced from both sides about production levels. The constraints have been placed by government agencies that maintain production and price controls over the JV's products. Most dissatisfaction from the U.S. side concerned the process of operating the IJV. The U.S. parent company director stated, "This is Ninja turtle life-in-the-sewers work. People don't realize how difficult it really is to operate a JV in China." The man he replaced, who had overseen the operations for five years declared, "I'd be a liar if I told you things were great. It's a [expletives deleted)!" The current U.S. director expressed that he is very dissatisfied about the Chinese partner's cooperation and cont their pa senior I company. and each manager good con Bot Yet, the capacity resource Partners the U.S. American but ackn to take Chi Satisfie that the other IJ iDVestin and in a profit 1 1992,) if 161 and contribution to the JV. (Americans and Chinese perceive their partner as both the official parent company and the senior managers working in the JV who came from the parent company.) Both sides felt that their partner is selfish, and each side lacked respect for their partner. A Chinese manager concluded, "They [the U.S. partner] are not such a good company." Both sides would prefer having a different partner. Yet, they still plan to work together and to increase the capacity of the existing operations. "We don't have the resources to do it alone," admitted a U.S. manager. Both partners have increased the amount of equity in the JV, and the U.S. side has increased its share from 31% to 42%. The Americans would like to increase this percentage beyond 50%, but acknowledged that the PRC government will not allow them to take a majority share of the IJV. Chinese and U.S. participants in JV 3 were highly satisfied with the performance of the IJV, and perceived that their partner was very satisfied, also. Unlike the other IJVs in this sample, in its initial stage this JV is investing heavily in new, high-capacity plant and equipment and in a large contingent of expatriates. Thus, the current profit levels are not high (only 4% return on sales for 1992.) A U.S. JV manager was very satisfied with this profit i "satisf; "The Am venture confide< in orde1 JV as a accept J long-tel The very sat Noting t persona] beachhea the Jv i need to with the Bot Satisfie Parent's StandPOiL U'S~ 80‘ higher q, At the s; the 1°We: °f ASia. that per] —' 162 profit level, whereas a PRC parent manager was merely "satisfied" with this amount. However, this Chinese stated, "The Americans have a longer-term perspective on this joint venture than we Chinese do." Another American manager confided that the Americans are managing the profit levels in order to keep their partners satisfied. Classifying the JV as a "strategic investment," the U.S. side is willing to accept lower short-term profits in order to help maximize long-term profitability. The U.S. marketing/sales manager expressed that he was very satisfied with the market share of JV 3's products. Noting that five large MNCs are competing with them in the personal care products market, JV 3'5 55% value share in the beachhead city of Guangzhou was above expectations. Since the JV is a young organization, he admitted that they still need to expand their categories; thus, he was "satisfied" with their current product scope. Both a U.S. JV manager and PRC JV manager were satisfied with product quality. The JV uses the U.S. parent's global standard, so that from a formulation standpoint the product and packages are the same as in the U.S. However, there was still a perceived need to instill higher quality standards on people on the assembly lines. At the same time the U.S. managers are attempting to attain the lowest total delivered cost for the JV‘s products in all of Asia. More localization and higher volumes may enable that performance goal to be reached. The constraint on cost reducti: Th1 million are plal Instabii has in01 points. existing partner it can 1 China a1 and futL U.S. mar for cons for cons Amc exPorted million Whe with the American and with diSSat is trained [LS' man disSatis traditio ———’i 163 reduction is maintaining the high quality standards. The partners have increased the IJV's equity from $10 million to approximately $33 million. Additional factories are planned in order to increase the JV's product scope. Instability in equity share is evident as the U.S. parent has increased their share of the equity by ten percentage points. Although both sides are satisfied with their existing partner, the U.S. side intends to buy out their partner at the end of the JV contract in ten years so that it can be a wholly-owned enterprise. Other operations in China are being planned. The U.S. managers view the current and future prospects as unparalled in the global economy. A U.S. manager called China, " - the last great battleground for consumer products...It's the largest market in the world for consumer nondurables." Among the eight IJVs JV 3 was the only enterprise that exported more than 5% of its output. In 1992 20% of the $81 million in sales were from exports through Hong Kong. Whereas the Americans in JV 2 expressed dissatisfaction with their partners, the dissatisfaction voiced among Americans in JV 3 was with the U.S. parent company policies and with the Chinese "system." One of the managers was dissatisfied with his parent company and for not having trained and placed enough Chinese managers, yet. Two of the U.S. managers in JV 3 identified their source of dissatisfaction as "the system." One manager identified the traditional Communist system as more of a problematic issue for JV mentionl and sel corrupt The "vi: with su; health . also bl; workers infectev Thi company of the ; increas: has bee: ROI, at Side's g Was alsc electror The because ColleernE ski11s t be doing _7f 164 for JV 3 than task or partner-related variables. He mentioned that for the Chinese side, personnel, sourcing, and selling activities are often subject to cronyism and corrupt practices to "beat the centrally-planned system." The "winners" are those with connections, more than those with superior technical skills or products. Inadequate health care and its negative implications for the JV were also blamed on the system. The JV removed 10% of its workers from the manufacturing plants due to their being infected with hepatitis B. The two IJV general managers and a Chinese parent company manager were all very satisfied with the performance of the IJV. U.S. managers pointed out that sales have been increasing by about 50% per year since 1989, while the JV has been profitable in every year of its eight year history. ROI, at more than 10% for 1991 and 1992, exceeded the U.S. side's goal. A 13% return on sales of $130 million in 1992 was also considered to be very high in the competitive electronics industry. The Chinese parent company manager was very satisfied because "Our four goals are being met." These goals concerned technology transfer, foreign exchange, management skills transfer, and return on investment. This JV seems to be doing the best in acquiring currency from abroad, since most of from com products proudly China: 1 Thus, a Thl merely : could bi disappo manager Product manager the pro his Chi Speed 0 desired mention Which t Th equity 0f the [U.S. c managel parthe] gonrm —7— 165 most of the annual revenue to the JV comes in U.S. dollars from commissions for selling the U.S. parent company's products in China. The Chinese deputy manager of the JV proudly told that this is the only "Three-in-One" IJV in China: the IJV does R&D, manufacturing, and marketing. Thus, a variety of technologies are being transferred to the JV. The U.S. parent company director expressed that he was merely satisfied with the JV's performance, because the IJV could be doing even better. One aspect that he was disappointed with was the loss of some of the best Chinese managers from the JV. In addition, sales of one of the product lines were below his hopes. (The Chinese deputy manager also mentioned disappointing market share for one of the product lines.) The U.S. director stated that he felt his Chinese partners were only "satisfied," because the speed of technology transfer was slower than they had desired. The Chinese parent company manager, in fact, mentioned dissatisfaction with the amount and speed with which technology was being transferred in the JV. The U.S. parent company has increased its share in the equity of the IJV from 50% to 67%. However, the management of the strategy and operations of the IJV has been "100% [U.S. company name] since day one" claimed the U.S. general manager. The U.S. company does not intend to buy out its partner when the IJV contract expires in 2000. Because government agencies are the buyers for the JV's output, the U.S. max provide custone: capacitj governln IJVs in On the mos company and‘of competi 0f the Th company high-qu articul Which e the IJ\ that t} OVera1; Satisf: as W811 IJVs' ‘ —7— 166 U.S. managers say they still need Chinese partners to provide connections and information regarding these customers. Expansion plans include increasing manufacturing capacity and establishing additional IJVs with other government agencies. (Currently the U.S. company has three IJVs in China, and the Beijing IJV has a subsidiary.) One of the leading experts on IJVs in China called JV 4 the most successful in China. He applauded the U.S. company's strategy of maintaining control of decisionmaking and of choosing partners who will not become future competitors. Chinese experts have classified this JV as one of the top ten in China in each of the last five years. The offices at all three levels, IJV, China parent company, and U.S. parent company, portrayed a world-class, high-quality image. Moreover, each of the four managers was articulate and professional. This is the only case for which either of these observations were made. JV 5 A U.S. and a Chinese manager at the operating level of the IJV, and a Chinese parent company manager all reported that they and their partner were very satisfied with the overall performance of the IJV. Each was generally very satisfied with his two most important performance criteria as well. JV 5 had the highest return on sales of the eight IJVs, which at 39% exceeded the expectations of the manager: been a1: additiOl increas: vas als: operati1 become 1 very pl. the man1 the int: being p A . 0f the quality satisfi manager would b exPerts the are A. A“ aPpo Canoell The gen grand e general This di The Ame _7— 167 managers. (In the 19805 an ROS this high would not have been allowed by the government pricing agencies.) In addition, the U.S. general manager reported that sales increased by 70% in 1991 and by more than 50% in 1992. ROI was also high in all five years that the IJV has been operating. Since the U.S. side did not expect the IJV to become profitable until 2000, these financial results were very pleasing to the Americans. A new production line in the manufacturing plant began operation during the week of the interviews and additional manufacturing capacity is being planned. A Chinese IJV manager was very satisfied with the image of the IJV and its products in China, believing that a high- quality impression was being established. Although satisfied with the technology transfer, a Chinese parent manager had hoped that more new pharmaceutical products would be introduced by the American company. Chinese experts in Tianjin called this the most profitable IJV in the area. An undercurrent of dissatisfaction existed, however. An appointment to interview the Chinese deputy manager was cancelled because he had just been removed from the IJV. The general manager said this man "tried to act like the grand emperor." A fourth performance criterion of the general manager was "cooperation between the partners." This did not seem to going as well as both sides desired. The American felt the Chinese parent company did not ‘ contrib% dissati in a ty will co Si intervi data is partner 6. Bot intend Develop in Feb: China c Th were te Tianjir Suffers Tianjir based j the Pr: In an a have s; Outsid£ limits, _f—1 168 contribute enough to the IJV. A Chinese manager stated his dissatisfaction with the relationship between the partners in a typical understated manner, "We still have hope that we will cooperate well." Since only one middle-level Chinese JV manager was interviewed at length in this JV, the reliability of the data is lower than in the previous five IJVs. However, both partners appeared to be satisfied with the performance of JV 6. Both sides have reinvested their dividends in the JV and intend to build a new, larger plant in the Tianjin Economic Development Area. The U.S. parent company announced plans in February of 1993 to invest $150 million in ten plants in China over the next five years. This JV is transforming its industry. In 1989 there were ten local companies operating in this industry in Tianjin. By 1992 only one local firm remained, and it suffered a loss. Surprisingly, the greatest competition in Tianjin to this JV comes from JVs of the U.S. parent company based in other cities. Another MNC with plants outside of the province competes with this JV on a very limited basis. In an attempt to aid local companies, government agencies have set production ceilings on the output of JV 6. But, outside experts believe that the JV ignores these production limits. In approxil revenue: sales 0: ingredic product: brands « the JV, The U.S produce the wor brand a high" f middle Product Al Satisfi Satisfi seven y two Yea money. low prc g°Vernn and the —__——_— 169 In 1992 JV 6 enjoyed a 13% return on sales of approximately $55 million. The U.S. parent received revenues from the JV from the JV dividends, royalties on sales of the global brands, and sales of the basic ingredients of the global brands. However, the best-selling products of the JV were local brands, rather than the global brands of the U.S. parent. Of the eight brands offered by the JV, one Chinese brand accounted for 48% of the sales. The U.S. parent company's best-known global brand only produced 7.7% of the sales. Although mass marketed around the world, Chinese have not embraced the taste of the global brand and have felt that the socioeconomic image is "too high" for them. The JV's marketing department is targeting middle schools in an attempt to get kids to start using the product at an early age. JV 7 Although the U.S. general manager reported that he was satisfied with the JV and that his partners were very satisfied, significant dissatisfaction was apparent. In the seven year history of the IJV, JV 6 was profitable in only two years - 1988 and 1992. Cumulatively, the JV has lost money. The general manager was also dissatisfied with the low productivity of the workers and with the interference of government agencies. Government involvement in the industry and the JV make it very difficult to operate the JV profita often I to menu The gen and won located De the Chi largest The des in 1992 levels should Current world f increas. Al‘ Chinese to incr. hard cu: leVel f: We The general _7 170 profitably. Its competitors are highly subsidized, and often receive preferential treatment in the bidding process to manufacture customized electricity generating equipment. The general manager was not happy with the Chinese partner, and would prefer working with a larger company that were located further away from the central government in Beijing. Despite the dissatisfaction, the size and potential of the China market gives the U.S. company hope. China is the largest market in the world for the products sold by the JV. The desire and need for its products was especially evident in 1992, as the orders exceeded the combined production levels of the previous six years. Actual sales in 1993 should far exceed the $100 million level of 1992. Currently, this is the largest manufacturing site in the world for the U.S. parent company. Plans are in place to increase the capacity even more. Although the GM would not allow interviews with the Chinese side, he reported that the Chinese side would like to increase the exports of the JV in order to acquire more hard currency. The JV has a goal to increase the export level from 5% of sales to 20% of sales. JV 8 The U.S. parent company director and the U.S. JV general manager both reported that they and their partner Were very satisfied with the JV performance. The internal IIIIIIIIIIIIIIIIIII-llll---———_______l 171 rate of return exceeded the U.S. parent's goals, and the 15% return on sales of $13 million seemed very good to them. The JV is scheduled to build a new manufacturing facility in the Guangzhou Economic Development Area that would expand the productive capacity ten times. The 25% market share of one of the main product items of the JV was dissatisfactory; however, the 55% market share of another item was satisfactory. Overall, the GM was satisfied with the market share position of "number two" in a duopoly of friendly MNCs. The GM called the other company in the industry a "good competitor" since they do not compete on the basis of price. The general manager was also satisfied with the management training occurring for Chinese in the JV. One of his goals is to install a local GM by 2002. Both managers reported that the Chinese partner was very satisfied with the dividends they have received from the JV. These profits are essential to the Chinese company since they must use the funds to pay off the loans for the initial capital that they contributed to the JV. The U.S. side prices the products higher than it would prefer in order to increase the short—term profits for its partner. CONCLUSIONS There is evidence in every IJV that both sides of the JV are satisfied with the performance of the IJV. _fi— 172 Similarities, rather than differences, characterize the levels of satisfaction among the U.S. side and the Chinese side, and among operating managers and parent company managers. According to these managers, most of their goals for the IJV are being met. Profit is a dominant goal and source of satisfaction that has been important to U.S. managers and that is becoming more important to the Chinese. In 1992 each IJV appears to have been profitable. In most of the cases the profit levels throughout the history of the JV exceeded both sides' expectations. (The notable exception is JV 7). Managers in each IJV also express positive expectations about future outcomes: every one of the eight IJVs intends to expand its manufacturing capacity and increase the total equity in the IJV. These results suggest that Beamish's (1993) research in 1989 and 1990 reporting general dissatisfaction with the IJVs may have been a time-dependent reflection of the 1989 Tiananmen Square Incident and the tight money supply of that period. However, this research found that the level of satisfaction varies between the participants for a few specific performance criteria. U.S. managers generally feel that the product quality is less than desired. In JV 2 some Chinese feel similarly; although in this and the other JVs, the U.S. side has higher quality standards than the Chinese. Chinese appear to seek a faster pace of technology transfer than the U.S. managers. The U.S. sides prefers to provide the JV with older technology, and with types that are not r 173 easily counterfeited. Chinese seem less satisfied about the level of exports than are their partners. But, the issue of export levels is diminishing as Chinese managers realize they can make more profits in the domestic market and that exports often compete with the U.S. parent's other enterprises in territories outside of China. Contrary to earlier research, the equity shares have not been stable recently. A pattern of U.S. parent companies increasing their ownership shares is apparent. The only three IJVs that lack evidence of instability since the JV's inception are JVs 6, 7, and 8. These JVs each began operation with a split 50-50 equity share. The lower reliability of the data for these cases produces some uncertainty about the actual current equity shares and future plans of these IJVs. Because JV 7 is a part of the National Five-Year Plan it appears that the U.S. side will not be allowed to become the majority partner. Yet, Chinese authorities now seem willing to allow foreign companies to acquire majority share of IJVs that are not under the National Five-Year Plans. Several U.S. managers mentioned the need to increase the U.S. share of the equity so that the total contributions of the American side can be more justly rewarded with a greater share of the JV's profits. Chinese partners seem less concerned about percentages as about absolute monetary amounts. If their cash flow from the IJV keeps increasing, they seem willing to allow the U.S. side to have a larger ii 174 stake in the IJV. Moreover, the Chinese side in three of the most successful JV's (3, 4, and 5) seems content to have the Americans manage the JV. It appears that large U.S. MNCs have used relatively small capitalized joint ventures as a means to enter the China market. When these IJVs become profitable, the parents attempt to acquire a larger share of the operation. Based on the empirical observations and just-discussed rationale, it is hypothesized that: HS: American partners are increasing their equity share in manufacturing IJVs that are profitable. In IJVs that are under the National Plan, the foreign shares do not increase above the 50% level. PROFIT PERCEPTIONS Discussions about profitability revealed differences in perceptions of profits for Chinese and U.S. parents. U.S. managers perceive that their partners, as distinct corporations, receive profits in the form of dividends that are based on their percentage of equity in the IJV, and also in the form of management fees. As an example of these fees, the Chinese parent company of JV 1 receives 2% of the JV's profits for its services in providing connections with the government and in managing personnel in the IJV. Some U.S. managers also view their partners as "China Inc." that receives profits in the form of taxes on the IJVs' profits and workers' salaries. Another source of profit for the 175 Chinese side, as perceived by U.S. managers, is the currency exchange "fee" in the swap markets. U. S. companies receive 25% less for renminbi that is exchanged into hard currency than what they get from selling or buying foreign exchange certificates. (Domestic sales to Chinese are usually in the form of renminbi - a non-convertible currency.) Chinese partners do not view the swap market differentials as a source of profit for them. They also perceive management fees as comparable to royalty fees that some U.S. parents receive for their technology or brand. Chinese believe that multinational companies receive profits in at least three forms: transfer prices, royalty/technology fees, and dividends. Sales to the IJV appear to constitute important sources of profits for the U.S. companies in JV 1, JV 2, JV 4, JV 5, and JV 6 in particular. However, U.S. managers rarely acknowledge the reception of profits from transfer prices. Although JV 3 and 8 also source from the U.S. parents, the prices seem to be near or at cost to the U.S. parent, or constitute only small levels of sales. U.S. parents also receive a royalty or technology fee for tangible products, formulas, and/or brands that are released to the JV that Chinese view as "pure profit" for the partners. However, U.S. companies have rarely placed a value on "soft" technologies such as marketing and management know-how that is provided to the JV, and do not receive compensation for these transfers. Assuming that this management technology is being 176 transferred without compensation to the U.S. side, it can be argued that U.S. companies have underpriced their contributions to the IJVs. This would reduce the ROI for the parent companies. To the extent that ROI is a criterion of performance, their satisfaction would also be lower. However, both Chinese and U.S. managers were satisfied with the performance of their IJVs at the end of 1992. Benefits were being received by both sides and future prospects appeared positive. Further theoretical explanations for IJV performance outcomes are examined in the following chapter. CHAPTER VII A MODEL OF U.S.-CHINA IJV PERFORMANCE The objective of this chapter is to develop a framework that provides explanatory constructs and hypotheses concerning the performance of U.S-China joint ventures. This chapter emphasizes the linkages between structure, decisionmaking control, and performance. First, the underlying structure—strategy-performance paradigm is discussed, distinguishing between several types of analyses in previous research. Then, each of the major dimensions of the model are examined, identifying, describing, and relating important factors within the model. Rich details are provided, drawing on a strength of the case study method. STRUCTURE-STRATEGY-PERFORMANCE PARADIGMS Three paradigms using similar words, but different concepts, have appeared in the business literature in the last three decades. Chandler's (1962) strategy-structure- performance paradigm, Bain's (1968) structure-strategy- performance paradigm, and another structure-strategy- performance framework discussed by Thorelli (1977) and 177 178 others are examined below. STRATEGY-STRUCTURE-PERFORMANCE The firm-level, strategy-structure-performance paradigm was introduced to the management/organization theory literature by Alfred Chandler (1962). Surveys and longitudinal case studies of large industrial corporations in the U.S. led to his induction that "structure follows strategy." Strategy is defined as the plan for allocation of resources to anticipated demand. In Chandler's view it includes the determination of long-term goals and courses of action. Structure concerns the organizational design of lines of authority and communication flows that knit together the resources and organizational skills. Performance includes measures such as return on investment, productivity, and unit costs (Chandler 1962). Chandler concluded that as the strategies of a firm evolve, organizational structures change, since the previous types prove to be inadequate for the new strategic direction of the firm. In its initial form this paradigm views organizations as rational systems. The specification of positions, role definitions and procedural regulations serves to circumscribe behavior to accomplish predetermined goals (Scott 1987). Behavior is purposeful and actions are coordinated. Thus, constructs such as control, —’— 179 centralization, and goal compatibility are emphasized. Much of the theoretical basis of this paradigm is rooted in the work of Weber (1947 trans.), who, at the turn of the Century, identified structural characteristics of bureaucracies. Several empirical studies have supported the basic strategy-structure-performance paradigm (e.g. Rumelt 1974). Researchers have also extended the model to include effects of the larger social, political, cultural, and economic context on the strategies and structures of the organizations (e.g Thompson 1967). Closed system models that restrict attention to the internal characteristics of organizations are being replaced by open system models that explicitly consider the influences of the environment on organizational behavior and outcomes (e.g. Achrol, Reve, and Stern 1983). Organizations are dependent upon the resources of their environment for their survival (Pfeffer and Salancik 1978). For example, governments as buyers and policy makers play significant roles in the structures and strategies of organizations (Huszagh et.al. 1992; Karakaya and Stahl 1989). INDUSTRIAL STRUCTURE-STRATEGY-PERFORMANCE Economists have been sensitive to some factors that are external to the firm. However, they have used different definitions of strategy, structure, and performance. Bain _7— 18d (1968) articulated an industry-level, structure-strategy- performance paradigm in the industrial organization literature. He centered on structural features of an industry, such as barriers to entry, concentration, and elasticity of demand. Strategy or conduct of the firms in the industry is viewed as deterministic, so that industry structure basically leads to performance. Performance is viewed from a social viewpoint with indicators such as efficiency and fairness; industry level ROI is also evaluated. Porter (1980) extends Bain's work to the firm level, showing that although industry—level structure affects firm-level strategy, individual firms can change industry-level structure. Marketers with an economics mindset also utilize the structure-strategy-performance paradigm of industrial organization (e.g. Buzzell et.al. 1975; Kotabe 1990). ORGANIZATIONAL STRUCTURE-STRATEGY-PERFORMANCE Other the last fifteen years, researchers from organization behavior and strategic management disciplines have found empirical evidence that at the firm level, structures influence strategies (Burgelman 1983; Fahey 1981). Marketers (e.g. Thorelli 1977; 1990) have also argued that strategy follows organizational structure. Structures may limit and influence strategies in both a cognitive and resource sense. Mintzberg (1979) developed a 181 taxonomy of five types of organizational structure, from simple to professional, and suggested ways that the differences may influence strategy. Frederickson (1986) built upon Mintzberg's work by hypothesizing relationships between the organizational types, three organizational characteristics (centralization, formalization, and complexity), and strategy decision making. He found a dominant characteristic in each organizational type, and concluded, for example, that while simple structure organizations are less formalized and less complex, their centralized decision making dominates their strategy decisions. INTEGRATED MODEL An integration of these research streams is needed, where the results and perspectives can be viewed as complementary, rather than as contradictory. One way to do this is to utilize the contingency theory, a term first articulated by Lawrence and Lorsch (1967), but discussed in its essence by earlier researchers (e.g. Galbraith 1973). Combining the rational and open systems perspectives, this "theory" is guided by the View that organizations whose internal features best match the demands of their environments will achieve the best adaptation (Scott 1987). Galbraith (1973, p.2) states two assumptions of the contingent theorist: 182 1. There is no best way to organize. 2. Any way of organizing is not equally effective. In the first assumption the great variety of tasks, forms, and environments are recognized. Thus, contingency advocates dispute those who attempt to develop general principles applicable to organizations in all times and places. At the same time Galbraith (1973) disagrees with relativists who believe that it is futile to search for any underlying principles. In contrast to advocates of population ecology models, contingency theorists do not View organizations as entirely passive, nor as incapable of affecting their own fate. Administrators are able to influence actors and forces that are outside of their firm, as well as those within their organizations. Those who use a contingency approach attempt to identify characteristics of the environment, organizational structure and strategy that are most relevant in a particular situation (e.g. Cavusgil 1980), including individual managers' characteristics. Structural characteristics of the organization may include size, scope of business, and extent of internationalization (Hu et.al. 1992). However, researchers utilizing a contingency perspective are skeptical that international marketers are primarily engaged in the systematic, proactive decision making processes that are implicit in Chandler's strategy- structure-performance (SSP) paradigm (e.g. Cavusgil and 183 Godiwalla 1982). Reactive, intuitive aspects of decision making are acknowledged, as managers respond to existing structures and environmental factors. A reformulation of the SSP paradigm integrates the economic and organization behavior perspectives and the rational and open system approaches. The open system approach indicates the bidirectional nature of several of the elements. Data from interviews with forty managers, government officials, and experts, combined with a review of the literature, led to the formulation of this basic model. Figure 7.1 identifies the primary variables and their relationships. Eight important linkages, indicated by solid lines, are examined in the following sections. Less important linkages, portrayed with broken lines, are acknowledged in the model, but not discussed separately. 184 GOVERNMENT l I OPERATING STRATEGY ORGANIZATIONAL r ‘ PERFORMANCE STRUCTURE ; INDUSTRY STRUCTURE Figure 7.1 Integrated Model of IJV Performance 185 GOVERNMENT - ORGANIZATIONAL STRUCTURE QQXEEEEQQE Performance of IJVs in China begins with a discussion of the role of government. Governments are more than a contextual variable in this model: they can function as policy-makers, buyers, suppliers, and partners, directly and indirectly affecting structure, strategy, and performance. The important role of government on IJVs is not unique to a Communist nation. Governments in developing countries typically place restrictions on ownership by foreign corporations, production capacity, imports, and price increases (Frazier, Gill, and Kale 1989; Laljani 1981). Because IJVs involve companies from two or more nations, at least two national governments may influence the actions of IJV parents and organizations. The policies and activities of China's government Obviously have a more direct role on IJVs in China than those Of other nations. China's open- door policy and Joint Venture Law of 1979 legalized and encouraged partnerships between foreign and domestic firms in order to help develop China's backward economy. Wholly- Owned foreign enterprises were not allowed into China until the mid-19805. A list Of important government variables is presented in Table 7.1. 186 Table 7.1 Government Variables PRC GOVERNMENT VARIABLES * Importance of the Industry * Monetary Policy * Relative Bargaining Power - Commitment to Join GATT — Size of Domestic Market - Reliance on U.S. market * Tax and Repatriation Policies US GOVERNMENT VARIABLES * Relative Bargaining Power - Most-Favored-Naticn Status for China — Influence in GATT re: China's Admission Importance of the Industry Since IJVs began operation in the early 19805, the role of government on IJV structure has diminished somewhat, as economic reforms transform the Chinese economy from centrally-planned to mixed planned/market-regulated. In late 1992 and 1993 the term "socialist market economy" is used by Chinese officials and top Chinese managers to describe the attempts to blend economic systems, while maintaining the political leadership of the Communist Party. Within mixed economies, certain sectors of the economy face more government influence. Government leaders' perceptions Of a particular industry are a key to understanding whether an IJV may be formed, parent company characteristics, the IJV's size, equity shares, and other structural features. In China the defense, transportation, communication, energy, and "heavy" industries are directly controlled by 187 central government ministries, with production levels included in the Five Year Plans. A list Of government regulations Of foreign-capital enterprises was published in 1991 (Ministry of Economic Relations and Foreign Trade 1991). The regulations did not allow foreign direct investment in telecommunications and publishing. These two industries are important to China's government as means with which to control communication. The media are still viewed as tools with which to propagandize the masses. Thus, foreign influence has not been allowed in these industries. U.So laws restrict the types Of technologies that can be transferred to China. A director of a U.S.-based pharmaceutical company claimed that U.S. laws prevented them from investing in China in earlier periods. COCOM (The Coordinating Committee for EXport Controls) limits the kinds of technology from U.S.-based companies that may be sold to China or used in the PRC. High-technology industries, including telecommunication and computers, are most affected (Massey 1992). COCOM seeks to restrict technology transfer to nations where the technology may be used for military purposes that are not in the United States' best interests. JVs 2 and 7 Operate in two Of the highly-controlled industries, transportation and electricity generation, and as such, their production levels and organizational sizes are controlled by government bodies. In contrast "light industry," (consumer products), is much less regulated by Chinese governments. The distinguishing feature is how —’— 188 important the particular industry is to the government leaders. For example, personal care products and canned beverages are not considered tO be as important to China's modernization and national goals as are electricity generation and vehicle production. Examples of effects Of government regulations and policies on IJV equity shares, production levels, China parent company characteristics, and manager characteristics are providied in the following section. U.S. managers from JV 2 report that they believe the Chinese government will never allow their company to take a majority share in the IJV. For one reason, as majority owner the Chinese side maintains the power tO appoint the Chairperson Of the IJV and the Chinese general manager without any input from the American partners. The permissible production levels for JV 2, which manufactures vehicles, are linked to the percentage Of local content used in the final products. In 1992 the IJV was allowed to increase their production levels from 1991 because a goal Of 60% local content was reached in that year. Thus, government policy is being used tO create and maintain domestic suppliers' production. But even the value of imported materials is subject tO government actions. Reductions in the tariffs on vehicle material imports from 80% tO 50% have increased the percentage value Of locally- sourced components. At the same time frequent exchange rate devaluations Of the renminbi relative tO the U.S. dollar 189 have increased the value of imported components, and indirectly put limits on the amount Of vehicles that the IJV can manufacture, due to the local content policies. In contrast, local content regulations were not fixed nor significant in the IJVs marketing consumer products. Production levels are also limited through indirect means. One of these governmental tools is import license requirements for imported components and materials. Another control is limiting the access of IJVs to allocations Of critical domestic inputs at State-controlled prices. In some situations IJVs may purchase government-controlled inputs, but at prices far higher than State-run enterprises pay. At other times, IJVs are entirely excluded from purchasing certain local inputs. The computer industry is one in which China has sought tO gain technologies from foreigners. But this decision tO draw on the capital, technology, management skills, and market connections Of foreign firms occasionally has required the formation Of new Chinese organizations that could serve as appropriate partners for foreign corporations. Creation of a parent company directly affects the structure of the IJV. One Of the Chinese parent companies for JV 4, an electronics and computer company, was created by the Central Government in 1980 tO serve as a JV partner for high-technology companies and to function as an importer/exporter for high-technology products. The senior managers for the company were transferred from leading 190 positions in one Of the central ministries of the PRC. Throughout the seven year history Of this joint venture, the Chairman of the Board Of Directors, and the Deputy General Manager of the JV have come from this organization. The Chinese parent company is now a powerful foreign trade corporation, directly supervised by the central government's Ministry of Machinery and Electronics Industry. Since its founding in 1980, it has set up 35 subsidiary companies in China, 54 joint ventures with foreign companies, 60 domestic partnership enterprises, and 20 overseas representative offices. Government also has significant influence in determining the kinds Of managers who represent the Chinese side of the IJVs. For example, after the Tiananmen Square incident in 1989, a new Deputy Manager was sent to JV 1. This manager is a graduate from a Communist Party cadres college, and has demonstrated strict loyalty tO Communist Party principles while working at the IJV. However, in 1993 the government is allowing the U.S. parent company to take majority ownership and more decision making control Of this consumer foods-producing IJV. Based on the previous discussion, the following hypothesis is induced: BS: The more important the industry to the government leaders, the more that government influences the structure Of the IJVs in the industry. 191 Monetary Policy One of the effects Of monetary policy on IJV structure and performance is the ability Of Chinese organizations to pay for purchases from IJVs. In 1989 the money supply in China was reduced dramatically, resulting in large account receivables for most IJVs. JV 8, the smallest IJV in the sample, nearly went out Of business in early 1990 because of this triangulated debt problem. Relative Bargaining Power Another important variable is the relative bargaining power Of the two governments. Since 1989 it appears that the relative bargaining power Of the Chinese government has diminished. China's government has loosened some Of its restrictions on IJVs and made a series of concessions to foreign investors, in an attempt tO keep foreign capital flowing into China, to prevent existing firms from leaving the China, and to maintain access to theU.S. market. One Of the structural variables that has changed is fewer nationality restrictions on JV parent companies. South Korean and Taiwanese companies may now become joint venture parents in China. Equity ownership restrictions have diminished - evidenced by five Of the eight JVs in the sample increasing their share Of equity, recently. IJV contracts are no longer limited tO fifteen years. Moreover, some contracts are being renewed. Industries that had been closed to foreign investment are now opening, including service industries, such as accounting and banking, and the 192 telecommunication industry, where in 1993 AT&T is attempting to set up several large Operations in China. Reasons for China's diminished bargaining power are many. Foreign companies have more new alternative investment opportunities than in the 19805. The set Of markets that are opening up in Central and Eastern Europe, as well as several bright markets in Latin America are a salient option. (If, in the future, these markets grow at a much slower pace than China's, China's bargaining power may increase.) Importantly, China wishes tO enhance its reputation and become integrated into the world economy by joining GATT. In order to be admitted into this economic body, China must reduce the role Of its government on the economy and open up its markets. Recognizing the importance Of U.S. support in the admission process, China's government has been more willing tO make concessions tO U.S. government negotiators and to U.S. IJVs (Massey 1992). Its bargaining power vis-a—vis the U.S. has further decreased as China's dependence on U.S. imports Of Chinese goods has increased. In 1992 37 percent Of China's GDP came from exports, with 25 percent Of these exports going to the U.S. (The Economist Intelligence Unit 1993). The most-favored-nation status Of China, reviewed by the U.S. government each year, remains as a powerful "stick" that the U.S. can use tO gain important concessions by China. The Memorandum Of Understanding on market access signed between the United States and China on October 10, 1992 193 resolved several issues from Section 301 of the Omnibus Trade Act of 1988 and prevented the U.S. from taking punitive actions against China (Massey 1992; U.S. Department of Commerce 1992). China agreed tO be more transparent about trade-related rules and regulations. They will also eliminate about 75 percent Of all import licenses, bans, and quotas by the end Of 1994. A benefit to U.S. vehicle manufacturers is the permission to import an unlimited quantity of parts into China. This provision does not apply to other nations' firms, such as Japan and Germany. The U.S. agreed to facilitate the transfer Of telecommunications and computer technology to China for civilian use. A second hypothesis follows: H7: As China's bargaining power vis-a-vis the U.S. diminishes, U.S.-China JV structures become less regulated and influenced by the Chinese government. Use Of IJVs by U.S. Firms U.S. and Chinese managers report that a primary contribution Of a Chinese partner is tO provide close connections with government. Maintaining gOOd relations with the government enables the Chinese partner to provide information to the IJV on new or proposed government policies that may affect the IJV. Beyond raw information, Chinese partners can help interpret the political trends and implications. Connections formed by the partner can also be critical in enabling the IJV to acquire necessary inputs, ranging from electricity tO qualified laborers tO raw 194 materials. When government bodies are purchasers of IJV output, connections provided by the Chinese partners can be essential. In highly regulated environments, a gOOd Chinese partner also negotiates with the government over certain regulations, tax rates, and requirements. It seems that almost every regulation or law is negotiable, since China does not operate under rule of law, but rather under the rule Of leaders. However, when the government plays a less prominent role in the economy and the IJV, the need for a partner tO provide ties to government decreases. When market forces, rather than government edicts, allocate resources, knowing and understanding government plans becomes less relevant. Nor is it as important tO have connections with government decisionmakers when central planning diminishes. As was evident in the discussion of the diminished bargaining power Of the Chinese government, the regulations on foreign investment and trade are decreasing. In the last few years the use Of wholly-owned enterprises by foreign companies in China has increased significantly (Beamish 1993). Companies with IJVs are reexamining the use Of IJVs, and considering the utilization Of wholly-owned enterprises in the future. The U.S. general manager Of JV 4 Observed that the benefits of using IJVs rather than wholly-owned enterprises are diminishing. Therefore, it is hypothesized that: 195 as: As the involvement Of the Chinese government in the economy and the IJV decreases, the perceived need of U.S. firms for a PRC partner decreases. 38a: As the perceived need for a Chinese partner decreases, the use of the IJV form relative tO wholly-owned enterprises decreases. U.S. managers' perception Of the importance of the Chinese government in the structure, strategy, and performance of the IJV is central to these hypotheses. When a manager believes that the Chinese government plays a critical role in the business, then the manager is likely to perceive a need for a Chinese partner to maintain or develop ties with the government. Managers act according to their beliefs and perceptions more than according tO Objective reality (March and Olson 1976; Weick 1976). However, Objective realities influence perceptions (Scott 1987). The perceived need for a Chinese partner ishighest in IJVs that source and market domestically. If the JV simply manufactures for export, then having a partner with ties to government is not as critical. ORGANIZATIONAL STRUCTURE Several Of the structural characteristics Of the parent companies and Of the IJV may be important factors in the strategies and performances Of IJVs. Table 7.2 identifies numerous structural features Of the foreign parent company, the local parent company, and the IJV. Managers' personal characteristics are also included. 196 Table 7.2 Organizational Structure Variables FOREIGN PARENT COMPANY LOCAL PARENT COMPANY * Nationality * Nationality * Size * Size * International Involvement * International Involvement * Industry * Industry * Type of Ownership * Type Of Ownership (Place in the bureaucracy) * Reputation * Reputation * Importance of JV * Importance Of JV IJV * Equity Shares * Size * Product Type * Contract Duration * Business Scope * Location * Number of Expatriates * Organizational Complexity * Formalization * Age * Importance Of Marketing MANAGERIAL PERSONAL CHARACTERISTICS Position/role in Parent Company Position/role in IJV Years with Parent Company Years with IJV Training/Education Nationality Age *a-a-x-a-a-a- 197 STRATEGY Table 7.3 reveals several important dimensions Of organizational Operating strategy uncovered in the research. Linkages between organizational structure and operating strategy, and between government and strategy are examined in the following sections. At the end of the chapter, other linkages between the major categories and performance are investigated. Table 7.3 Operating Strategy Variables * Performance Goals - Local Parent Company - Foreign Parent Company - IJV Foreign Managers - IJV Local Managers * Decision Making Control * Perceived Dependence * Cooperation -Role Acceptance * Interpartner Learning * Marketing Tasks (Sales Network) ORGANIZATIONAL STRUCTURE - STRATEGY Having discussed some relationships between government and structure, linkages between organizational structure and strategy, and government and strategy are now examined. Since this research centers on IJVs that have been manufacturing for at least three years, organizational structures are already in place. Existing structures are 198 internal tO the organizations and, in large part, determine the range Of Operating strategies which can be exploited in the near term. One critical element Of Operating strategies in U.S.-China IJVs is decision making control. This section centers on how organizational structure affects the decision making control Of the IJV partners. Decision Making Control Control is the ability tO influence systems, methods, and decisions (Anderson and Gatignon 1986). The importance of control on performance increases as organizational size and complexity increases (Anderson and Coughlin 1987). IJVs, as a complex organizational form, require the close attention of managers tO monitor, coordinate, and integrate the activities of the organization. Dominant control is a mechanism for reducing the risks associated with coordination and Opportunistic behavior, and consequently, for minimizing transaction costs (Geringer and Hebert 1989). This research differs from previous conceptualizations Of control by classifying control as a strategy variable, rather than a structural variable, or something else. Three dimensions of control have been identified — mechanisms, extent, and focus (Geringer and Hebert 1989). Share Of ownership of the IJV is perceived as a mechanism of control in this model, and as such, is a part Of the organizational structure. The extent Of control exercised over the IJV is the center Of attention as a strategy variable. The locus 199 Of price decision making is chosen as an indicator Of the extent of control that a particular interest group holds over the IJV. A measure of extent Of control is the determination of who makes the final decisions about prices Of the IJV's output. Pricing is an important strategic variable because it directly affects financial performance measures, which both sides Of the IJV consider as the most important criterion. In addition, the ability to make pricing decisions seems to have an effect on a manager's satisfaction with the IJV. Previous research has failed to address the extent to which foreign or local partners, or the government controls IJV pricing in China, and how this affects performance. A short discussion Of the focus Of control follows the analysis Of extent Of control. Extept Of Control Table 7.4 indicates who sets the prices for the products that are marketed by each Of the joint ventures in the sample. 200 Table 7.4 Loci Of Price Decision Making US JV MKTG MGR US JV GM US PARENT JV BOARD PRC BUREAU 2' 1 X 2 X 21222232 Among the eight IJVs five loci Of price decision making emerge - U.S. JV marketing manager, U.S. JV general manager, U.S. parent company, JV Board Of Directors, and PRC pricing bureau. Although each JV is required to report its prices to a particular pricing bureau, a governmental pricing bureau sets the prices for the JV's output in only two Of these IJVs. In none Of the JVs does a Chinese JV manager make the final price decisions. Several structural elements Of the IJVs, including ownership shares, industry/product type, and size, and at least one managerial characteristic, experience with the parent company, appear tO correlate with particular loci of the decisionmaking. The following elements are hypothesized as necessary, but not individually sufficient conditions in determining who makes the price decisions. Table 7.5 201 reveals the patterns of contingencies that appear to affect the loci of price decision making. When these particular sets of contingencies coexist, a certain locus of price decision making is found. 202 Table 7.5 Loci of Price Decision Making Contingencies Structural Conditions Price Decisionmaker 1: Industry in National Plan ---—> PRC Pricing Bureau For each of the following patterns, the JV products are not a part of a Five—Year National Plan: 2: Small-sized IJV Us JV GM: Little Parent Company Experience -——-> JV Board of Equal Ownership Share Directors 3: U.S. Parent: Equal or Majority Ownership Consumer Product --—-> U.S. JV Manager Large-Sized IJV U.S. Manager: Extensive Parent Company Experience 3a: US Parent: Equal or Majority Ownership Consumer Product —-—-> U.S. JV Large-Sized IJV Marketing Manager U.S. Manager: Extensive Parent Company Experience Large Number of Expatriate Employees 4: Product Subject to Gray Marketing Large—sized IJV ----> U.S. Parent Industry Not in National Plan Company 203 From these patterns several hypotheses are developed: 39: As the importance of the industry to government leaders increases, government control over IJV pricing strategy increases. In each of the following hypotheses, the JV products are not under a Five-Year National Plan: n10: For IJVs with equal ownership shares, the smaller the IJV and less experienced the general manager with the U.S. parent company, the more likely that the JV Board will control the pricing strategy. 311: For IJVs selling consumer products, where the U.S. side owns at least 50% of the equity, the larger the IJV and more experienced the U.S. JV manager with the parent company, the more likely that U.S. JV managers will control the pricing stategy. 312: For large IJVs where the U.S. side owns at least 50% of the equity, the more subject that the product is to gray marketing, the more likely that the U.S. parent company will control the pricing strategy. The rationale for hypothesis nine is similar to the hypothesis concerning government involvement in the JV structure. The Chinese government seeks to maintain control over IJV structure and strategy in those industries that are viewed as critical to the nation. These industries, which include transportation and electrical power generation, are directly managed by government agencies as part of Five-Year National Plans. Thus, IJV participants are not allowed to set prices in these IJVs. IJVs attempt to influence government pricing bureaus to agree to certain price levels, but the government makes the final decisions. Hypothesis ten identifies conditions under which the JV Board makes price decisions. Price is apparently viewed by 204 the parents as an important strategic variable in which the Operating managers are not trusted enough to make the decision. Neither side appears to hold a dominant power position in the JV, therefore neither the Chinese nor the Americans are allowed to make the price decision independently. In both Of the IJVs where the Board decides on prices, the U.S. general manager has less than two years' experience in working for the parent company. These are also small IJVs, with less than $40 million in annual sales and fewer than 400 employees. This hypothesis about organizational size and decision making is consistent with other findings that the smaller the firm, the higher up in the management hierarchy that final price decisions are made (Stephenson et.al. 1979). The rationale and evidence for hypothesis eleven is similar to that for hypothesis ten. In larger IJVs, those with annual sales Of more than $50 million and more than 500 employees, the pricing decisions are more likely to be made by IJV participants, rather than by the Board. This situation appears to occur when the IJV manager is trusted by the more powerful partner. In each case in which the price decision maker is an American IJV manager, the manager has at least six years Of eXperience working for the parent company and the U.S. partner has at least a 50% share Of the equity. The U.S. IJV general manager is the final decision maker in two of the three cases fitting these conditions. In the other case, JV 3, the organization is highly 205 formalized, with a large number Of expatriates (eighty) performing the management functions. Here, the marketing manager has the final authority on pricing decisions. As a larger organization in terms Of personnel, the pricing decision is made at lower levels in the management hierarchy. Hypothesis twelve is drawn from an interesting set Of contingencies in JV 4. In this IJV size is not as important in influencing who makes price decisions as the observation that the computer and electronics products Of this company are subject to gray marketing. Performing arbitrage, shrewd entrepreneurs have exploited national price differences in this U.S. company's products, reselling them for a profit through unauthorized channels. Thus, the U.S. parent of the IJV attempts to limit gray marketing by standardizing prices across the Asia-Pacific region. The U.S. parent company in case the large size Of the IJV, $100 million in annual sales, requires the attention Of the U.S. parent because the extent Of gray marketing had a significant affect on sales in other IJVs and subsidaries in Asia. Focugiof Control Another dimension of control concerns its focus. The results of this research indicate that each side Of a JV attempts to control those activities Of the IJV that it believes are most important. For example, in all Of the Hong Kong sets the prices for the IJV products. In this large IJVs in the sample in which the U.S. managers view 206 marketing as important to the performance of the JV, the JV sales/marketing manager is an expatriate who speaks fluent Chinese (JV 3, 4, and 5). (The marketing manager is an overseas Chinese in JV 4, and European American in JV 3 and JV 5.) Although the Chinese side frequently objected tO spending money on advertising and sales promotions, the Americans' promotion plans have been instituted in the IJVs in this sample. Early in the life cycles Of the IJVs, Chinese viewed promotion expenses as unnecessary costs. Over time they have come tO understand that these costs are a long-term investment in building demand and in maintaining customer loyalty. The Chinese side appears to control most personnel decisions affecting Chinese workers. The social welfare Of the workers is very important tO Chinese, particularly as it relates to the Communist Party's attempts to maintain control over their thinking, and over other issues such as compensation. Even in JV 3, where the American side is supposedly in control of all of the management functions, a U.S. JV manager reported that without his permission or knowledge, his Chinese employees were all at a company Communist Party meeting when the production shift was supposed to begin one day, "...And there was nothing I could do about it." In most Of the IJVs, the Chinese deputy manager appears to hold most of the power in hiring and firing. Particularly irritating to Western managers is the extensive 207 use Of nepotism in hiring Chinese employees. The difficulty in firing Chinese workers whom the Americans believe should be removed is also problematic to the U.S. side. It appears that for all practical purposes, Chinese workers cannot be fired for poor performance; however, employees can be fired for insubordination and stealing. Another example Of Chinese control Of personnel comes from JV 4, where the U.S. side is supposed to control all management activities. The U.S. JV general manager complained that this is the only subsidiary Of his company where they cannot pay their workers as much as they want to. Government regulations on salary, implemented by the Chinese partners, directly affect compensation Of workers. Socialist ideals that discourage income differentials put a cap on the salaries that the IJVs can pay Chinese workers. An extremely progressive income tax structure also limits the ability Of IJVs to use salary as a motivator. Finally, a major governmental influence on IJV strategy in the early 19805 was the limit or barrier on IJVs to sell their output into China's domestic market. Current regulations still require that each foreign-invested enterprise export at least 50 percent Of its total output value (Ministry Of Foreign Economic Relations and Trade '1991). However, this regulation is rarely enforced. None of the IJVs in the sample come even close tO conforming tO this export regulation: seven IJVs export from 0% to 5% Of their output and one IJV exports 20%. Indirect government 208 controls on exporting have encouraged JV 3 to export 20% of their output. These include a requirement to balance foreign exchange accounts and duty rebates on imports that are proportional to the amount Of exports. Since JV 3 sources about 50% Of the value Of their materials from outside of China, exporting enables the JV tO lower the cost Of their final products, in an indirect manner. IJV PERFORMANCE Elements Of IJV performance were discussed at length in chapters five and six. For the purposes Of explaining and predicting performance outcomes, two aspects Of performance are considered: profitability and satisfaction. Effects Of government policies, organizational structure, industrial structure, and IJV Operating strategy on performance are hypothesized. GOVERNMENT - PERFORMANCE Government regulations and policies have a direct effect on IJV performance in China. As in other countries, tax rates directly influence profitability measures, such as dividends. Even though standardized tax policies have been developed, tax rates on U.S.-China IJVs vary from case to case, and even within each case. In 1989 JV 3 paid a tax Of 209 30% in Guangzhou. After a round Of negotiations between the IJV and government agencies, the rate was lowered to 22%. Since moving production to an economic development zone outside of Guangzhou, the IJV has received a tax holiday for their first three profitable years. For the next five years the tax rate is 7.5%. After eight profitable years, the rate goes up to 15%. JV 1, however, pays a 24% tax on its profits currently, and expects to receive a two-year tax holiday when it moves to a special economic development area outside of Tianjin. The general income tax rate on foreign invested corporations, including wholly-owned enterprises, is 30%, with 3% local income tax. Taking the lead from the Central Government, which set up four Special Economic Zones in 1979, provincial and municipal governments have recently established two tO three thousand special economic areas. The tax advantages Of manufacturing in special economic zones have led all but two of the IJVs to locate in, or to make plans to move to, one of these low-tax areas. JV 2 and JV 6, with large capital investments in existing plants, are constrained from relocating. JV 2 has also benefitted from lower than normal tax rates on their profits that lasted through 1992. These low taxes and the higher dividends that resulted, helped the IJV and parent company managers feel some satisfaction with the IJV, despite dissatisfaction with several other issues. In 1992 low IJV tax rates, or the expectations Of lower 210 rates in the future, appear tO have a positive effect on the high overall levels Of satisfaction claimed by U.S. parents and IJV managers. Thus, it is hypothesized that: 313: Low tax rates, resulting from special economic zone policies or particular negotiated agreements, lead to higher U.S. parent company profitability and satisfaction with the IJV. Profits Of the U.S. side are also directly affected by the currency convertibility and profit repatriation policies of the Chinese government. Prior to the late 19805, U.S. parent companies experienced great difficulty in repatriating their profits. However, government-sponsored swap markets have been established at several locations across China in the last few years. These markets enable companies to exchange renminbi (Chinese domestic currency) into hard currencies, if they are willing to receive about 25% less than the "Official" rate for foreign exchange certificates. A U.S. embassy Official mentioned that there is evidence that some IJVs can get significantly better rates Of exchange, however. U.S. managers also report that they receive a tax break for the IJV if they reinvest their profits back into the IJV or other China investments, rather than repatriating the profits. ORGANIZATIONAL STRUCTURE - PERFORMANCE Based on a review Of the literature and the forty interviews in this research, 31 foreign and local parent 211 company characteristics, IJV organizational characteristics, and managers' personal characteristics that may affect IJV performance are identified in Table 7.2. Important, patternistic effects Of foreign parent company nationality, parent company size, and Chinese JV managers' education on performance are examined in the following section. Foreign Parent Company Nationality Discussions with Chinese parent company managers and government Officials uncovered a "country—of-origin“ effect on Chinese managers' satisfaction with the IJV. A leading Chinese business professor suggested that Chinese rank-order -nationalities according to a generally agreed-upon set of national/racial prejudices. McGuinness et.al. (1991) also found evidence Of national biases among Chinese buyers of machinery. In this research several Chinese informants made unsolicited and frank comments about their preference for partnering with U.S. companies rather than with Japanese firms. Pointing out of a window in his Office, a 65-year Old Chinese official in Tianjin declared, "Japan has been bad with China. The U.S.A. has been pretty good...Japanese bombed that entire section Of the city when I was a college student." Distrust, and even hatred, Of Japanese still runs deep among many of those who experienced the Japanese- Chinese War in the 19305 and 405, and who are largely the ones representing Chinese parent companies Of IJVs. Many 212 Chinese still fear economic imperialism from Japan. Yet, the greater levels Of satisfaction in working with Americans go beyond historical reasons. Another Chinese manager Observed that in Chinese culture it is important tO have good feelings between people. But, he perceived: Japanese managers are over strict (sic). They have no harmony and the workers resent them. [Chinese workers] feel that in Japanese joint ventures they are treated as robots...Japanese managers lack respect for the workers. He Observed that in U.S.-China IJVs, the feelings are different: U.S. managers are not so proud. Many seem tO want to have friendships with Chinese. They also treat Chinese with more respect and fairness. A Chinese business professor who has done extensive consulting work for Chinese IJV participants also believed that Chinese are more satisfied with Caucasian managers than with overseas Chinese managers: Overseas Chinese know our weaknesses better and exploit these. We don't like this... Chinese also perceive that Western managers are better at managing than those Of the Chinese race. Accurate or not, these national biases affect peoples' satisfaction with the joint ventures. Although Japanese-Chinese IJVs or Hong Kong-China IJVs were not investigated directly, it is proposed that that Chinese parent company and IJV managers are more satisfied with U.S.-China IJVs than with Japanese or overseas Chinese IJVs. 213 W The relative size Of the U.S. and Chinese parent companies appears to affect U.S. managers' satisfaction with their partner. What appears to be most satisfactory to U.S. IJV participants is having asymmetrically-sized parents. Size is a structural variable that seems to be an indicator in the minds of managers Of their partner's influence. The size of State-owned Chinese firms is difficult to capture, since the boundaries are ill-defined and quantitative data are unavailable or unreliable. U.S. managers use level in the bureaucracy as a rough measure of the size and power Of a Chinese parent company. Chinese companies under the authority of a municipal government are considered to be small, those under provincial authority are medium-sized, and those under a central government authority are large-sized. These differences are important, as they may determine the power of these Chinese enterprises to make decisions, influence regulatory authorities, and have access to critical sources of supplies or to buyers (Shan 1991). Six of the primary Chinese parent companies are under the authority of a local, municipal organization. An example of a small, municipal body is the Guangzhou Bureau of Light Industry, which oversees both JV 3 and JV 8. Two Of the Chinese parents are under the direct supervision of central government authorities: those for JV 2 and JV 4. Annual sales is a frequently-used measure Of the size 214 Of MNCs. Seven Of the eight U.S. parents are very large, well-known global corporations with annual sales from $8 billion to $35 billion. One Of the parents (for JV 6) is much smaller and less well-known, although its annual sales are approximately $1.5 billion. In five of the eight IJVs, the U.S. managers each appear satisfied with their partners and indicate they would select the same partner again. In each Of these five cases, the U.S. side is content with the fact that the U.S. parent company is much larger than the Chinese parent company partner who reports tO a municipal body. A prominent illustration is JV 3, where interviews were taken from both sides Of the JV. Three U.S. managers mentioned that a source of their satisfaction with the IJV and with their partner is the relatively small size Of their Chinese partner. This has allowed the U.S. parent companies to become the dominant partner in the IJV. "We didn't want a big and cocky national partner to work with," revealed a U.S. JV manager. Because Of the small size Of the Chinese company, and the large size Of the U.S. parent, the U.S. side has been able tO take control Of all Of the management .functions. As one Of the largest MNCs in the world and the biggest parent company in the sample, this company did not need a large Chinese company in order to have influence with the government. Also relevant is the fact that the JV absorbed all Of the China parent company employees at its inception. The small size Of the host company made this 215 absorption process easier, and kept the IJV from being overly inefficient. Moreover, the Chinese managers and parent company managers are proud to be associated with the large U.S. company, and express great satisfaction with them. In contrast, the U.S. general manager Of JV 6 reported dissatisfaction with his partner because the Chinese company, related to a municipal authority, is tOO small. If he could do it over again, this manager would select a large partner with a bigger market and better connections with the government. He felt that a larger partner, related directly to a regional or central government body, would give the IJV access to more buyers and be a better negotiator in getting critical concessions from the government. As mentioned, the U.S. parent company for JV 6 is the smallest in the sample. Thus, they feel a greater need for the resources and external influence of a large Chinese partner. In JV 2 both Of the partners would choose a different partner if they could do it over again. Both parents are relatively large: the China parent is linked to the powerful central government and the U.S. parent is a $30 billion company. Neither side is able to take control of the IJV, although each side attempts to do this. The dual structure of the management functions in the IJV reflects the apparently similar size and power of the two partners. Despite the positive financial results Of the IJV, managers from both sides express dissatisfaction with their partner. 216 Both sides would select a different partner if given the Opportunity. From these contrasting IJV situations, the following hypothesis is developed: 314: U.S. IJV managers in China are more satisfied when their Chinese parent company partner is relatively different in size from their parent company, than when the two are Of similar size. A possible explanation is that when both partners perceive that one Of the partners possesses expert and legitimate power (French and Ravens 1959), the other partner is more willing to accept its role as the less influential partner and to rely on this partner. Thus, both partners are satisfied with their relative roles and positions. Relative size differences may be an indicator Of the power differences. When the size differences and power differences are not great, there is less agreement about each partner's role, and neither partner may be convinced Of their need for the other. As a result, greater dissatisfaction is expressed about the partner. Managers' Personal Characteristics Previous management research on China has identified age of the manager as an important factor in organizational performance (e.g. Adler, et.al. 1989). Older Chinese managers are viewed as less willing or able to implement Western management practices that may be more effective and efficient. However, this research found the type Of 217 education that the manager has received seems to be a better explanatory factor than age. Four cases exemplify the pattern that U.S. managers are more satisfied with their partners when the dominant education of the Chinese manager is not Communist—oriented. In JV 4 the IJV managers and parent company managers from both sides are very satisfied with their partners and the IJV, and claim to be satisfied with almost every aspect of the IJV. The deputy general manager, repreSenting the Chinese side, has been in this position for the last six years. In his sixties, he is relatively Old; but he works very well with the U.S. side, and is eager tO implement the best management practices, no matter what country they come from. He claims that he developed his understanding and appreciation Of modern management practices as an M.B.A. student at a university in California in the mid-1980s. The deputy manager in JV 3 is about 65 years Old, but is highly supportive Of the U.S. management team. He and the other managers are very satisfied with the IJV and each other as partners. Interestingly, he has no formal education or training. Problems do exist within some IJVs where the deputy manager and Chinese management team is rather Old. The dissatisfaction within JV 2 has been discussed in several contexts, previously. The 60-year-old Chinese deputy manager has been involved as a manager in the IJV and/or the Chinese parent company since the JV began operations. His 218 training was in economics from a Chinese university several decades ago. The finance director is similar in age and background. The U.S. general manager remarked, "We work hard to keep them from taking control." The U.S. parent director referred to the Chinese management team in the IJV as, "A big pain... They are tOO entrenched in the Communist ways." Although Chinese managers in their thirties were likely to be satisfied with the IJV and with the partners, not all were perceived by U.S. managers as beneficial to the performance of the IJV. The thirty-eight-year-Old deputy manager Of JV I graduated from a Communist Party Cadres College. A U.S. parent company director, speaking in reference to this man, stated, "When both sides make lots Of money from the joint venture, we're willing to overlook or rationalize some Of the problems." From these Observations it is hypothesized: H15: U.S. managers are more satisfied with Chinese managers whose dominant education does not come from the Communist Party. A reason for this finding is that Chinese managers with Western training or without formal Communist Party training are more likely to be willing tO learn and apply market- oriented management techniques advocated by U.S. managers. Even though the most influential leader, Deng Xiaoping, has directed the country to move toward a more market-oriented system, some Communist Party members, young and Old, still 219 think within the Old paradigm, and are not willing to implement "bourgeois capitalist" management methods. This resistance is a factor in U.S. managers dissatisfaction with them. These traditional Chinese Communists point to the economic and political problems within Russia as a reason to maintain the power and control of the Party in all institutions in China. In addition to these effects of organizational structure on performance, industrial structure also appears to affect IJV performance. As discussed in chapter six, seven of the eight IJVs are clearly profitable, and all of them saw a positive return on sales in 1992. Industrial structure appears to be an important factor in these financial outcomes. INDUSTRIAL STRUCTURE - PERFORMANCE Two of the most important elements Of industrial structure are supply/demand conditions and type Of competition. As a fast-growing developing country, many of the markets in China manifest conditions where the demand is greater than the supply. Four of the IJV's in the sample operate in markets where demand is much greater than supply for their primary product, and competition is limited. Well-established microeconomic principles predict that companies Operating in this kind Of a situation will enjoy profitable outcomes (Baumol and Blinder 1985). 220 JV 1 Operates as a virtual monopoly with a unique food product. JV 8 acknowledges that its only other competitor is a "good" one, who does not compete on price. JV 2 and JV 5 face only a few other companies who market similar products on a national scale. Unsurprisingly, each Of these companies uses a target return method Of pricing, based on their costs, and on their profit Objectives. JV 2, whose prices are set by the government, attained a 10% return on sales. The other three experienced an R.O.S. from 15% to 39% in 1992. Government policies reduce the amount Of imports of similar products and also constrain the numbers and production levels Of local and foreign-invested producers. Demand, however, is growing, as the booming economy enables consumers' income to increase. A liberal monetary policy has also increased the purchasing power Of Chinese organizations and households. Heightened awareness Of the kinds Of lifestyles and products in nations outside Of China fuels consumers' expectations and desires for more and better products. The use Of advertising and other promotional methods by these IJVs further stimulates demand. However, the possibility of government intervention in their pricing policies serves as a deterrent to higher product prices and profits for JV 1, 5, and 8. Three Of the IJVs Operate in markets where demand and supply are fairly balanced. JV 3 competes in the consumer personal care products industry with four other MNCs who 221 have JVs or wholly-owned subsidiaries in China. JV 6, a food products company, eliminated most of its local competitors and now competes primarily with a few other MNCs and with other JVs Of its parent company. JV 4 faces intense competition in the computer and electronics industry from many other global companies, and some small Asian manufacturers, including a few Chinese companies. Only JV 4 is forced to compete on the basis Of price. However, all three JVs set prices based on their costs, competitors' prices, and profit goals. Their financial performance, although still profitable, is lower than the previous four IJVs that have less competitive market situations. The 1992 return on sales for these three ranged from about 4% to 13.5%. These Observations lead to the following hypothesis: 316: IJV profitability is higher in markets where demand is greater than supply and competition is limited, than in competitive markets. A corollary to the preceding hypothesis is that: 316a: U.S. managers prefer Operating in market structures that are protected from outside competition by the Chinese government. Each Of the U.S. companies in this sample is an early- mover in their industry in establishing a manufacturing and marketing operation in China. All of them experience less competition in China than in their developed-country markets. Most Of them are in a seller's market, where they enjoy above-average profits. These market conditions enable 222 the companies tO maintain profitability, in spite Of relatively high costs Of production. All of the U.S. companies remarked that their costs are higher than expected in China. Although several IJVs hope to become a low-cost supplier for the U.S. parent companies in the Asia-Pacific region, the current relatively low volumes and high inefficiencies constrain the attainment of this goal. Competition from companies who would export similar products into China could eliminate existing profit margins and threaten the viability Of several Of the IJVs. Thus, several managers quietly suggested that they hope the Chinese government will continue to Offer some protection to companies that are producing within China. Nor are these pioneers eager to see other MNCs set up production in China. It is likely that the current market condition Of demand exceeding supply is one of the most important factors in IJV profitability and hence, managerial satisfaction. IJV strategies also have an impact on performance. Several strategic variables are discussed in the following section. STRATEGY - PERFORMANCE As is evident from the preceding sections, IJV operating level strategies are constrained by structural variables at the organization and industrial level, and by governmental variables. However, IJV managers are not 223 destined to passivity. Four strategic aspects emerge as salient, likely influencers Of IJV performance. These are controlling decision making, establishing a sales network, retaining interpartner learning, and influencing government Officials. Decision Making Control Analysis Of the eight IJVs in the sample reveals the pattern that the more control that the U.S. side has over functions that it considers to be critical, the more satisfied are the U.S. participants with the IJV. However, a structural variable, size of the IJV, affects the extent Of control that is desired. In two of the IJVs, the Chinese side, including the government, has dominant management control; in three, the U.S. has dominant control; and in three IJVs, the control is split, as each side manages the functions that it views as most important. .Each Of these three categories are discussed separately in the following section, with emphasis on the five IJVs where data was Obtained from both sides Of the IJV. The most dissatisfaction with the IJV occurs in JV 2 and JV 7, where Chinese governmental bodies control the IJV production and pricing as part Of Five-Year National Plans. The U.S. side does not have dominant control Of the IJV. In JV 2, symbolic authority for Chinese dominance of the JV is maintained through the Chinese majority share Of the ownership. The U.S. side has very little influence in 224 pricing decisions, for example. U.S. managers are not even allowed to go before the National Pricing Bureau with cost data and price proposals. The Chinese finance director performs the role Of representing the IJV tO the Chinese government. This director appears to be on the government's side, defending government control Of pricing with the comment, "If [the pricing bureau] did not set the prices, then the joint venture would make excessive profits." Yet, the U.S. managers desperately wish to have the freedom to adjust prices upward or downward in response tO changing market conditions. They also seek pricing Options for accessories; but so far have been unable to do any thing other than sell one basic model for each Of their two vehicle types. The importance to U.S. managers Of maintaining control is particularly obvious in the repertory grid technique interviews. The U.S. executive director Of JV 2 used one construct (low to high control) tO distinguish an extraordinarily high percentage Of the sets Of performance elements (one-third). (See Appendix 3). A U.S. JV manager in JV 3 also used a control construct extensively. In contrast, their Chinese counterparts did not think about performance in terms Of control Of the IJV. Even though JV 2 is profitable, the lack Of control frustrates the U.S. managers, who place a high value on freedom Of action and the opportunity to coordinate the activities within a business. Moreover, they are accustomed 225 to greater latitude in the U.S. and find the lack of control in China disconcerting and somewhat threatening. Gaining decision making control of critical business functions is also important to U.S. managers because Of the perception of a wide gap in experience and ability between Chinese and U.S. parent companies. Chinese managers, unfamiliar with operating a business under competitive market conditions or Of current global business standards, are seen as ill- equipped to compete against global companies who are far more experienced in designing effective marketing strategies and in manufacturing high-quality products efficiently. Moreover, many Of the Chinese parent company partners are government agencies who provide capital, but who have never managed a profit-oriented business. Dissatisfaction with the IJV is one result Of the lack Of control. The U.S. managers' dissatisfaction also affects the Chinese partners in JV 2. In negotiations and discussions, the U.S. side became caustic, and attempted to seize control of at least some aspects of the business. This hardened the positions Of the Chinese and appeared to increase dissatisfaction among the Chinese as well. All Of the Chinese and U.S. managers admitted to high levels Of conflict within this IJV. An extreme example is a Board Of Directors meeting that lasted for 33 hours. Intense arguing over a transfer price dominated the entire meeting: no consensus was reached among the two sides. In contrast, the U.S. side has dominant control over 226 pricing and the other management decisions in JV 3, JV 4, and, apparently, JV 5. Expatriates from the parent companies manage each of the primary value—added chain activities carried out by the JV, plus several support and infrastructure activities. The U.S. parents operate the JVs as subsidiaries and seek to implement their global policies and procedures for every aspect Of the business. The Chinese partners recognize the U.S. side's superior knowledge and experience in management, and allow them tO control the business functions. Moreover, the U.S. possession of a majority share Of the equity was acknowledged by both sides as a basis for the U.S. side tO control the IJV. Thus, the U.S. side holds both expert and legitimate power, enabling it to control the IJV. Managers at all levels are very satisfied with the IJV. In JVs 1, 6, and 8 the management functions are divided among both sides Of the IJV. For example, marketing is viewed as critical to the U.S. side in each Of these consumer foods IJVs; thus, the U.S. manager makes most of the final marketing decisions. Although in a formal sense the Board makes pricing decisions in JVs 1 and 8, in practice the U.S. parent company makes the pricing decisions. In each of the JVs not under a National Plan, the U.S. side also attempts tO control prices outside Of the JV through resale price maintenance. The importance Of setting and maintaining prices to attain targeted profit margins runs strong through the IJVs. Chinese perceive that 227 human resource management is very important; therefore, Chinese control personnel decisions in these split-control IJVs. Satisfaction is also high among the various participants in this category of IJV. Previous literature provides conflicting results about the relative effects of dominant, shared, or split control of IJVs on performance (Beamish 1993; Geringer and Hebert 1991). (Shared control IJVs were not found in this sample.) This research uncovers the pattern that a third variable, size of the IJV, affects the relationship between control- and performance. In each Of the small IJVs, split control is satisfactory to both sides (JVs 1, 6, 8). However, the U.S. side is not satisfied unless it has dominant control in the large IJVs (JVs 2, 3, 4, 5, 7). When more money and personnel are at stake, it becomes more important to the U.S. side to control more functions Of the IJV. (Size is measured in annual sales, equity, and expatriate personnel. See the figures in Chapter IV: Case Profiles.) The plans of the U.S. parent for JV 1 lend further support to this pattern. The U.S. company intends to triple its equity in the IJV, and increase its share of ownership to 60%. Currently, the U.S. side is attempting to gain the contractual right to control more functions in the IJV once this infusion of capital occurs. Thus, it is hypothesized that: 228 317: U.S. managers may be satisfied with the IJV in IJVs with split control, if the IJV is small. If the IJV is large, U.S. dominant control is necessary for the U.S. managers to be satisfied with the IJV. In addition to the importance Of decision making control, several task-oriented critical success factors emerged in the research. The research results provide indications that establishing an effective sales network, retaining interpartner learning, and influencing relevant government Officials will lead to long-run IJV profitability and managerial satisfaction. Since the IJVs are just beginning to implement these factors, descriptive aspects Of these factors are emphasized in the following sections. Sales Network Establishing an effective sales network was viewed as a critical success factor by both U.S. and Chinese managers in IJVs that were not under a National Plan. This appears to be one of the most important marketing tasks for IJVs in China, whether they face intense competition or not. Personal selling and merchandizing were virtually non- existent when China's economy was mostly centrally-planned. If an organization had a sales force, sales representatives mostly acted as on-site order takers. However, IJVs are increasing their sales and profitability by setting up teams of salespeople in the field who visit wholesalers, retailers, and other specific organizational buyers. 229 As the early entrants in their markets, the pioneers in this research are building customer loyalty in order to defend themselves against new competitors. In several industries, marketing innovations are being introduced by the IJVs. JV 5 illustrates this factor. They have set up sales teams to visit hospitals and doctors to sell pharmaceuticals, rather than simply relying on unmotivated distributors to move the products. Similar to other IJVs, JV 5 began selling in the large coastal cities, then moved to large inland cities. Now its teams are moving to smaller cities and the countryside. The sales representatives also provide after-sales service, tracking side effects and ensuring the proper use Of the drugs, handling complaints, and maintaining the manufacturer's prices across wholesalers and retailers. Resale price maintenance, although illegal in the U.S., is the normal business practice by IJVs in China. Effective sales teams use a variety of price maintenance techniques in order to ensure that a consistent image is presented to the customers and that each member Of the channel receives its "fair" margin. The IJVs work hard to prevent any kind Of price war from beginning, so that they may maintain their high profit margins. Sales promotions were previously not used in Communist China. JV 3 was one of the first companies to provide free trial samples and point-Of-purchase materials. Moreover, the sales/marketing manager claims that their superior in- 230 store presence has given them a critical competitive advantage over the other MNCs in their industry. JV 3 is the only one in their industry that has attempted to train retailers and to establish premier positions and space in stores. JV 6 goes one step further, as the sales representatives try to lock in retailers for their products by providing free refrigerators for their products to retailers who promise to only distribute their brand in the store. Retaining Interpartner Learning Most of the U.S. managers are seeking to transfer knowledge and skills to Chinese in their JV. Concurrently, an important Chinese criterion Of JV performance is the pace and extent of this management technology transfer. Many Chinese managers are eager to learn from their partners. However, the IJVs appear to vary in their ability to retain transferred technology within the joint venture. One problematic leakage has been the loss Of "trained" managers to other companies. The U.S. side Of the JVs attempts to help their partners learn how to perform business activities through a variety of methods. These include on-the-job training led by expatriate managers, seminars and Observation at international headquarters and the JV site, formal classes by the parent company, university education in the U.S., and books. As one example, the U.S. parents Of JV 5 sends 10% 231 Of the Chinese workforce to their international headquarters for training each year. Yet for some U.S. parent companies, management technology transfer goes beyond training their partners in how to do certain tasks. JV 3 employs eighty expatriates at the JV to train Chinese in standards, principles, ethics, and decision making. The managers see the interpartner learning process as a long-term commitment from both sides. The intent is to enable PRC Chinese to eventually manage the JV, so as to reduce personnel costs ($250,000 per year per expatriate) and have people in charge who know the local environment the best. However, little evidence of the use of a consultative decision making style as in shared control IJVs was found in this or the other IJVs. This method could help Chinese managers learn some Of the intangible elements of decision making from foreign managers. Interpartner learning is primarily embodied in individuals who may not necessarily stay within the JV or the parent companies. The U.S. parent company director Of JV 4 identified the loss Of newly-trained Chinese managers as the most dissatisfactory aspect of the IJV. He and the general manager of the JV feel that the most significant limiting factor to the JV's long-term profitability is trained Chinese managers. Other U.S. managers also mentioned their frustration with the loss Of "good Chinese managers;" Chinese who acquire management technology from U.S. companies have many opportunities for immediate job 232 advancement at other IJVs and foreign subsidiaries in China, and in their own start-up companies. Their opportunities to move abroad are also enhanced by their involvement with an IJV. Several Chinese managers who were interviewed in this research had worked previously for other IJVs. Recognizing the high-value of these newly-acquired management skills, newly-trained Chinese managers were found to be reluctant to transfer their learning to other Chinese. The lack Of diffusion of the learning among Chinese and the loss of learning from employee departures extends the period Of time that expatriates are needed in the IJVs and increases short- term costs of the IJV. Both sides Of the venture also suffer a loss when U.S. managers leave the IJV. U.S. managers are typically assigned to the JV for periods of two to three years. One parent manager bemoaned the fact that just when a U.S. manager begins to acquire Chinese perspectives and learns how to adjust strategies to the unique Chinese environment, s/he returns to the U.S. or tO another nation. JV 2, for example, has had great difficulty in keeping U.S. employees in China for more than short periods Of time. A fourth critical success factor is the ability to influence relevant government officials. The following section concludes the discussion Of key strategy factors that affect IJV performance. 233 W Earlier in this chapter, the importance of government in U.S.-China IJV structure and performance was examined. Because Of the significant current role Of government in IJVs, the ability to influence relevant government officials to act in the IJV's interests is an important success factor in China. This is a strategic element that is consciously being applied by Chinese and U.S. managers of IJVs. IJVs are using several means to influence Chinese government officials. These include using the connections of Chinese employees and parent company managers, as well as the reputations and power Of U.S. managers and parent companies. U.S. companies Operating in China have also formed the U.S.-China Business Council in an attempt to lobby both the Chinese and the U.S. governments tO act in their behalf. The U.S. Department Of Commerce, in coordination with the U.S. embassy in China, attempts to influence the Chinese government in behalf Of U.S. IJVs, subsidiaries, and exporters. U.S. managers who expressed satisfaction with their Chinese partners Often mentioned the ability Of their partner to influence the Chinese government as a reason for their happiness. "Good" partners have been able to influence government in the following ways: * ensure continuous electricity (when other companies find their electricity cut Off to conserve energy) * acquire necessary raw materials at State-plan prices 234 * get necessary high-quality roads built and maintained * receive lower tax rates than normal (This can come through redefinitions Of "advanced technology" and of "minimum export levels" to gain tax breaks.) * sell IJV output to government buyers * receive permission (or avoid prohibition) to implement innovative marketing techniques * reduce the number and extent Of government regulations on the IJV * gain cooperation Of transportation agencies to distribute IJV output expeditiously and at reasonable rates. A U.S. manager in JV 3 summarized the role of government and the effectiveness Of having a partner working to influence the relevant Officials: The government still acts as if we [the IJV] exist to serve them. But our partner helps to turn this around...I don't even know all Of the ways in which [our partner] helps protect us from Beijing and gets those guys tO act for us. But I know it's a fulltime part Of the business. The U.S.-China Business Council's lobbying efforts led directly to the development Of a new law on IJVs and other forms Of foreign investment in China, entitled "Provisions for the Encouragement of Foreign Investment" (Pearson 1991). This 1986 law exemplifies the strategy and effects of influencing government to improve IJV performance: greater autonomy from external bureaucratic interference was guaranteed, several sets Of local fees were removed, and 235 alternative ways for IJVs to balance foreign exchange were provided. In addition the U.S.-China commercial agreement Of October 1992 further reduced tariffs on IJV imports and led to a promise by China to reveal sales opportunities within the government buying structure that had previously not been publicized (U.S. Department Of Commerce 1992). Based on the preceding discussion Of strategic factors Of performance, it is proposed that those U.S.-China IJVs that establish effective sales networks, retain interpartner learning, and influence relevant government Officials are top performers in long-run profitability and managerial satisfaction. CONCLUSIONS Government plays an important role in the organizational structure, strategy, and performance of U.S.- China IJVs. Existing structural requirements and influences, such as the relative size Of the parent companies, affect the range and character Of the Operating strategies that are implemented by the IJV. These strategies, such as the control Of pricing, influence IJV profitability and managerial satisfaction. Another important factor, characteristics Of the industrial structure, are found to directly affect profitability and satisfaction. Under existing conditions where demand exceeds supply and the IJV is not under the National Plan, 236 companies are able to garner high profits. Key findings in the research, additional contributions, managerial and public policy implications, limitations of the research, and directions for future research are presented next in Chapter VIII - Conclusions. CHAPTER VIII CONCLUSIONS This final chapter begins with a discussion Of the key findings and contributions of the research. Then it turns to managerial and public policy implications. The chapter concludes with a discussion Of limitations of the study, and directions for future research. KEY FINDINGS Four key findings emerge from this exploratory study Of U.S.-China joint ventures. These concern aspects Of performance, organizational structure, government, and strategy. These variables represent major components Of the model that was explained in the preceding chapter. PERFORMANCE CRITERIA This research discovered that the performance criteria used by IJV participants, including operating and parent company managers, are converging. Although not found in previous research, this study uncovered a pattern that managers from both the Chinese and U.S. sides Of IJVs 237 238 consider firm output criteria as the most important dimensions of performance Of IJVs in China. The criterion Of profit emerged as the most salient criterion by both Chinese and U.S. managers. Moreover, managers at the operating level recognize that profit is now a common goal of IJV partners. The benefits Of profitability at the individual, company, and national levels are becoming more apparent to Chinese managers. This study concludes that the use of profits as a criterion for performance represents a change in the thinking of Chinese managers and Officials in the last decade. A Chinese parent company director, involved with an IJV since its inception, Observed: We [the parent company] now see the value in generating dividends and focusing on profits. The government is also more interested in the profits that the joint venture makes. These profits provide tax money. SO a new criterion Of performance is dividends plus taxes. There is also some evidence that veteran managers representing the U.S. company at the IJV operating level are beginning to evaluate performance Of the IJV with criteria that were previously only reported as important tO Chinese. This pattern is weaker than the trend Of Chinese becoming more like their U.S. counterparts. However, a few U.S. managers are becoming sensitive to the need to evaluate IJV performance on the basis Of the pace and amount Of management technology that is transferred. More than the newer expatriates, U.S. IJV managers with long-term 239 experience in China have recognized the importance Of transferring management skills to Chinese who can take over critical management positions. The generation Of profits and the transfer Of management technology provides mutual benefits to the IJV, parent companies, and the Chinese government. However, important differences in performance criteria used by IJV participants were also uncovered. In addition to profits, hardware technology transfer and foreign exchange earnings remain as important performance criteria to Chinese parent company managers. In contrast, U.S. parent company managers do not use economic development criteria to evaluate the performance Of their IJVs in China in this sample. U.S. parent company managers solely evaluate the IJV on enterprise-level dimensions. A second key finding is that performance criteria are more similar among host and foreign managers at the joint venture Operating level than at the parent company levels. This convergence Of performance criteria, with some persistent differences between parent company managers, can be explained with organizational learning theory. Performance criteria used by IJV operating and parent company managers become more similar as interpartner learning increases. More interpartner learning occurs at the joint venture level than at the parent company level, since the managers who are frequently exposed to their partners have more opportunities to learn from them, than dO 240 those who manage the ventures from a distance at the parent company locations. The rewards from interpartner learning are also likely tO be greater for individuals at the JV level than at the parent company level. These rewards include higher salaries and travel abroad to U.S. parent company headquarters for the best Chinese "learners." The use by Chinese Of profit as a criterion Of joint venture performance may also, for some Of the managers, represent a shift from collective thinking Of what is best for the nation to one of individual self-interest. ORGANIZATIONAL STRUCTURE Although unreported in previous literature, this research uncovered a trend of U.S. parent companies incrementally acquiring larger ownership shares Of their U.S.-China IJVs. Most striking are two IJVs where the equity share shifted from an equal split to a U.S.-majority share. This pattern contrasts with the ownership stability that characterized the early stages of IJVs in China (National Council on U.S.-China Business 1987). Three explanations for this recent phenomenon are provided. First, PRC government requirements and preferences regarding the structure Of IJVs have changed in the last few years. Foreign companies may now become majority owners, or full owners, Of corporations in China. Moreover, the Chinese side seems willing to allow their 241 foreign partners to acquire a larger stake in the IJV as long as the cash flow to the Chinese parent keeps increasing. Relative ownership percentages seem less important to Chinese participants than absolute monetary amounts. There is also some evidence that Chinese IJV participants prefer having expatriate managers making the critical business decisions in IJVs. However, at least onecontingency moderates this explanation. If the IJV is part Of a Five—Year National Plan, and, consequently a component Of an industry that is perceived as critical tO China's national interests, then the foreign side is not allowed to become a majority partner. This research found that the more important the industry to the Chinese government, the more that government influences the structure Of the IJVs in that industry. A second explanation centers on changes in U.S. companies' perceptions. Whereas managers Of U.S. companies initially felt a need for a Chinese partner, this perceived dependence is diminishing. When government plays a major role in IJV structure, strategy, and performance, having a Chinese partner who can provide information and interpretation about government's plans and who can influence government Officials' decisions is perceived as a critical success factor. Connections formed by the partner can be critical in enabling the IJV to acquire necessary inputs, ranging from electricity to qualified laborers tO raw materials. When government bodies are purchasers Of IJV 242 output, connections provided by the Chinese partners can also be essential. In highly regulated environments, a good Chinese partner also negotiates with the government over certain regulations, tax rates, and requirements. However, as China seeks to become a member Of GATT and further integrates into the global economy, the government is playing a less prominent role in the economy and in IJVs. Economic reforms are incrementally introducing more market mechanisms into the economic system. Consequently, the perceived need for a partner to provide ties tO government is decreasing. When market forces, rather than government edicts, allocate resources, knowing and understanding government plans becomes less relevant. Nor is it as important to have connections with government decision makers when central planning diminishes. Several U.S. parent companies are moving toward eventual buyouts Of their Chinese partners in expectation Of a more market-oriented economy. A third explanation for increased U.S. company ownership shares is based on a view Of the IJV mode as a lower-risk, lower-commitment, incremental alternative to wholly-owned enterprises in the internationalization process (Cavusgil 1980). As the IJV demonstrates strong profits and expectations of continued growth, U.S. companies seek a larger share of the equity so that the total contributions Of the U.S. side can be more justly rewarded with a greater share Of the JV's profits. U.S. managers are beginning to 243 recognize that these contributions include management technology, which was rarely considered in initial valuations of U.S.-China IJVs. Whereas U.S. companies were initially uncertain about the profitability Of IJVs in China, each of the IJVs in this research reported a profitable return on sales in 1992 and expectations of continued or greater profits in the near future. Greater ownership shares are justified in this currently favorable economic environment where the Chinese economy has been booming and, with few exceptions, foreign- invested companies are enjoying profits. All Of the U.S. companies in this research intend to expand their investment in their IJVs in China. OPERATING STRATEGY One aspect of Operating strategy that is particularly important to U.S. managers is decision making control. This study found that the more control that the U.S. side has over functions that it considers to be critical, the more satisfied are the U.S. participants with the IJV. However, a structural variable, size Of the IJV, affects the extent of control that is desired. In small IJVs, split control is satisfactory to both sides. However, the U.S. side is not satisfied unless it has dominant control in large IJVs. These findings on the moderating effect Of size and nationality help explain why the literature (Geringer and 244 Hebert 1989) reports mixed results on the performance Of shared-control, dominant-control, and split-control JVs. When split control exists in an IJV, the Chinese side attempts to manage the social welfare and personnel functions Of the IJV to try to maintain Communist ideology. In industries that are competitive, or may soon become competitive, the U.S. side seeks to control the promotion activities to build demand and customer loyalty. However, control of pricing is viewed as important in all Of the IJVs. This research found that the highest amount Of U.S. dissatisfaction with the IJV exists in ventures where the government sets the prices for the IJV's products. Pricing is an important strategic variable because it directly affects financial performance measures. In industries where government plans dominate the IJV, the U.S. side centers on trying to control the manufacturing functions tO improve the efficiency Of the operation and the quality Of the products. U.S. managers feel that they have superior experience and ability to carry out marketing and manufacturing strategies in U.S.-China IJVs; and thus, they need to be able to control these activities to have a successful JV. They perceive that their Chinese partners, accustomed to Operating only in centrally-planned, sellers markets, are unfamiliar with the global standards and modern management techniques necessary to do business in the export markets and in the increasingly competitive markets in China. The positive relationship between decision making 245 control and U.S. managers' satisfaction can be explained in both a social psychological and an economic manner. Analysis of hgy managers think about performance revealed that control is a salient construct for U.S. managers, but not for Chinese. U.S. managers who participated in the repertory grid technique frequently distinguished a large number of performance criteria according to the amount Of control they could establish over the criteria. U.S. managers place a high value on freedom Of action and the Opportunity to coordinate the activities within a business. Having less control over a business in China than they are accustomed to having in the U.S. is a source Of frustration and dissatisfaction to U.S. managers. In contrast, their Chinese counterparts did not use a control construct tO distinguish performance criteria. Instead, Chinese managers thought about performance criteria more in terms of an exchange. Culture, technology, and management skills are three elements that Chinese believe are exchanged between partners. In an economic sense, dominant control can be perceived as more efficient than split control. There is less interpartner conflict in IJVs where one parent makes the business decisions. This minimizes the transaction costs associated with Opportunistic behavior and uncertainty (Williamson 1975). Coordination and monitoring costs are lower when one party manages the business functions. Furthermore, in large IJVs more money and personnel are 246 involved, and hence, the risks of improperly managed activities are greater. Control is a means to reduce the risks associated with the uncertainty Of a relatively unknown, potentially ill-equipped, developing—country partner managing an activity. The key findings in this research have dealt with performance criteria, the role Of government, instability of ownership shares, and decision making control. Additional theoretical and methodological contributions are presented in the following section. ADDITIONAL CONTRIBUTIONS Two additional contributions Of the research include the development of an integrated model of IJV performance and the identification of several effective research methods. INTEGRATED MODEL OF PERFORMANCE Previous research on IJV performance provides narrow explanations, isolating certain aspects of interpartner behavior (Beamish and Banks 1987), human resource management (VonGlinow and Teagarden 1988), and industrial structure (Harrigan 1985). This research contributes to the understanding of IJV performance by synthesizing the major factors in a cohesive framework, and deriving hypotheses 247 about relationships between specific variables based on empirical Observations in China, the literature, and logic. Particularly interesting is this research's findings on the roles of government on structure, strategy, and performance, and the effects Of organizational structure on strategy and performance. Traditionally, the marketing literature identifies government as an amorphous aspect Of the political-legal environment (e.g. McCarthy and Perreault 1993). This research positions government as an active participant and influencer in the performance Of IJVs. Government has both a constraining and enabling effect on IJV structure, strategy, and performance. For example, limits can be placed on modes Of entry, prices, and the repatriation Of profits. At the same time, government can cooperate with IJVs and foreign parent companies by creating partners for foreign parent companies, acting as major customers, and improving financial performance by lowering taxes and facilitating currency exchanges. Strategy is affected by government and by existing organizational structures. When power is skewed in favor Of a government, as was the general situation in China until at least the early 19905, foreign companies are forced into national responsiveness strategies rather than proactive global integration strategies. As several hyptheses indicate, structural characteristics Of the partners and the IJV, with government as a quasi-partner or at least a major stakeholder, affect what an IJV can do at the Operating ”— 248 level in terms of human resource management, marketing, and other task-oriented aspects Of strategy. Moreover, decision making control, perceived dependence, conflict, and other partner-related variables are also affected. The effectiveness Of certain research methods is considered in the following portion of this concluding chapter. RESEARCH METHODS The goals and strengths Of an Open-ended, case study method with an interpretivist approach were attained in this research. Rich, interesting description Of U.S.-China IJVs was provided, incorporating the perspectives Of Chinese and U.S. managers from both the JV Operating and parent company levels. The performance construct was more fully explicated and a large number of factors that affect performance were identified. Moreover, hypotheses were generated that suggest many patterns Of intricate relationships between variables. Progression through the early stages in the theory-building process was apparent. The research was carried out in the informants' environments in a flexible, semi-structured manner, in an attempt to study international joint ventures and their managers on their own terms, according to their categories and meanings, rather than from those of the researcher. These methods produced theory that is grounded in the ’f— 249 context (Glaser and Strauss 1967). Dynamic, unexpected processes were uncovered, such as interpartner learning and incremental acquisition and expansion Of IJVs by U.S. parent companies. The value Of using interpreters and data collectors who are familiar with both cultures and IJVs, and who are trusted by the informants became apparent. Access was granted to eight Of the eleven IJVs that were approached. Chinese parent company managers and Officials cooperated in the research in a manner that was unprecedented in previous research attempts. This is the first known study that researched and compared the perspectives Of complete sets Of IJV participants: Operating JV managers from both sides, and managers from parent companies Of both nationalities. The value of this approach became apparent as some differences in perspectives were identified. Moreover, a much richer analysis was provided by acquiring multiple perspectives from several levels and sides Of the IJV. The Chinese side more willingly discussed financial details and the U.S. side spoke more freely about interpartner cOnflict. Because Of the establishment of trust, sensitive data on expansion plans and pricing were also garnered. The trust was developed by communicating in the informant's language, providing assurances of anonymity, taking notes rather than using tape recordings, offering copies of key research findings, communicating an understanding of the informant's situation from first-hand 250 experience with U.S.-China IJVs, and working through a ‘ complex set of connections with IJV participants. The use of the repertory grid technique produced mixed results. National differences on the relative importance of controlling decision making in IJVs were uncovered. The importance of exchange to the Chinese managers was also revealed. Moreover, a large set of performance criteria in the informant's own words was provided (See Table 5.7). However, the method did not work well with one of the Chinese managers. He only used parts of the scales (3—5, not 1-5), and did not seem to grasp the idea Of what a construct is. Another problem with the technique was that when different numbers of constructs were generated by a pair of managers, the matrices become asymmetric. Thus, the multidimensional scaling algorithm that compares perceptual maps, INDSCAL, could not be used. This study also offers improved means with which to measure satisfaction. Rather than relying on possibly misleading global measures of satisfaction, this research enabled respondents to describe their level Of satisfaction with the particular performance criteria that were most important to each individual. Thus, for example, a manager was very satisfied with the ROI Of the IJV, but dissatisfied with the lack of cooperation between the partners. A response Of overall satisfaction with the IJV fails to uncover the different elements and levels Of satisfaction of this manager. 251 The reliability Of the measure of satisfaction was enhanced with the use Of seven indicators: personal global assessment of satisfaction, personal performance criteria assessment, the existence and nature of expansion plans, a manager's assessment of his partner's overall satisfaction, and researcher's and interpreter's assessment of the manager's satisfaction. MANAGERIAL IMPLICATIONS The results Of this research Offer a number Of managerial implications in the following areas: identifying performance criteria, designing appropriate IJV structure, and identifying and implementing critical IJV tasks. The primary constituent group Of this section is U.S. managers who seek to improve the performance Of IJVs in China. The precepts and prescriptions may prove helpful tO managers Of existing IJVs, as well as those considering the formation Of an IJV. IDENTIFYING PERFORMANCE CRITERIA Performance is a multidimensional construct Of which 29 different criteria for evaluating U.S.-China IJVs were lidentified in this research. A manager's satisfaction with the IJV depends on the particular performance criteria that s/he uses tO evaluate the IJV. IJV participants should seek 252 to identify the specific performance criteria that are used by the key players in the IJV. When partners within the IJV feel differently about the performance Of the IJV due to different criteria and levels of satisfaction, the sense of mutual benefit and gain is diminished. The risk of alienating one or more groups becomes significant (Anderson 1990). Long-term output goals Of the IJV are less likely to be met under conditions of conflict and disharmony. It is likely that IJVs in the formation stage, and those early in their life cycles, manifest greater diversity in criteria than those that are more mature. This research found that performance criteria converge as the partners learn from one another. In the somewhat mature IJVs in this research, profit is an important performance criterion to all four groups of managers. This interpartner goal compatibility reduces some of the difficulty of the work of IJV managers, and enables the managers to focus on a narrower set of criteria. For example, the increased interest of Chinese in IJV profitability has resulted in less pressure from the China side for IJVs to export. A reason is that government leaders recognize that China can make more money from taxes and dividends by allowing IJVs to sell locally than externally. The positive view Of profits by Chinese partners has also led to more willingness by the Chinese to allow expatriates to make business decisions. As long as the IJV is generating a dividend stream and employee bonuses to the Chinese side, there is less resistance to 253 having foreigners control the IJV. Government influence of both strategy and structure is diminished. However, U.S. managers should recognize the likely need to manage profits for their partner's sake. Whereas some U.S. companies take a long-term view Of profitabilty, Chinese are more consistently interested in the annual dividends. Some Of the U.S. managers reported adjusting the prices upward in order tO generate more profits for their partner. One manager acknowledged that he had tO accept lower market share results in order to keep his partner happy with higher dividends. The converging profit-orientation is not an entirely positive trend. Income-based financial measures are better at measuring the consequences Of past decisions than they are at indicating future profits. Internal process criteria, such as cooperation and trust, adaptive measures, such as customer satisfaction, and economic development criteria, including management skills transfer, may be better predictors Of future IJV profitability. Chinese parent company managers utilize criteria such as cooperation and management skills transfer, as well as profitability. Alienating a Chinese partner by failing to meet their performance criteria may also lead to greater problems in the future. U.S. firms and managers are still perceived as guests in China. When Operating in a country that is ruled by the Communist Party and by arbitrary decisions Of Officials, rather than by law, maintaining good 254 relationships with the people in power is critical to long- term success. Another set of implications are that both sides of a joint venture can use the interpartner learning factors discussed in Chapter V tO influence their partners and harmonize performance criteria. U.S. managers should aggressively seek to employ Chinese who have high intelligence levels and good communication skills. If the expatriate influencers only speak English, then having key employees who speak English well is critical. On-campus recruiting at the top Chinese universities is one method to do this. Once hired, providing rewards for learning, such as business/pleasure trips to the U.S., can be a motivator to learning. Managers must be aware of the need to ensure that the employees return to the IJV in China, however. For new IJVs it may be better to hire new employees with proven abilities to learn than to absorb the existing employees from the Chinese partner. Many line workers inherited from a Chinese partner may not be trainable, due to lower intellectual capacity or resistance to learning "Western-ways" from years of Communist training. DESIGNING APPROPRIATE IJV STRUCTURES Relative ownership share of an IJV has great symbolic significance to Chinese. When one partner holds more than 50% of the shares Of the equity, they are perceived to have 255 legitimate authority to lead the IJV. If dominant control is desired, it is important to negotiate a contract that allows majority share Of the ownership. For existing IJVs, incremental increases in equity to garner majority share should also be attempted. Reinvesting profits in the IJV is a method to do this. Current tax laws provide incentives to foreign companies tO reinvest their profits rather than to repatriate them. The type Of partner that is selected is also a critical decision. This research found that the relative size Of the U.S. and Chinese parent companies appears tO affect U.S. managers' satisfaction with their partner. What appears to be most satisfactory to U.S. IJV participants is having asymmetrically-sized parents. Size is a structural variable that seems to be an indicator in the minds Of managers of their partner's influence. U.S. managers can use level in the bureaucracy as a rough measure of the size and power Of a Chinese parent company. Chinese companies under the authority of a municipal government are considered to be small, those under provincial authority are medium-sized, and those under a central government authority are large— sized. These differences are important, as they may determine the power of these Chinese enterprises to make decisions, influence regulatory authorities, and have access to critical sources of supplies or to buyers (Shan 1991). For large U.S. parent companies, a source of satisfaction with the IJV and with their partner is the 256 relatively small size Of their Chinese partner. This has allowed the U.S. parent companies to become the dominant partner in the IJV, taking control Of all of the management functions. Small U.S. companies may do better with a large partner that is related directly to a regional or central . government body. This partner would give the IJV access to more buyers and be a better negotiator in getting critical concessions from the government. Partners Of a similar size appear to have more organizational behavior problems.’ The research shows that neither side is able tO take control of the IJV, although each side attempts to do so. A possible explanation is that when both partners perceive that one of the partners possesses expert and legitimate power (French and Ravens 1959), the other partner is more willing to accept its role as the less influential partner and to rely on this partner. Thus, both partners are satisfied with their relative roles and positions. Relative size differences may be an indicator of the power differences. When the size differences and power differences are not great, there is less agreement about each partner's role, and neither partner may be convinced of their need for the other. Thus, greater dissatisfaction is expressed about the partner. 257 IDENTIFYING AND IMPLEMENTING CRITICAL IJV TASKS Four strategic tasks are particularly critical for effective IJV performance in the current Chinese environment. These are gaining decision making control Of critical business functions, developing an effective sales force, retaining trained IJV managers, and influencing government officials. This section highlights managerial prescriptions. Gaining decision making control Of critical business functions enables one side Of the IJV to be able to coordinate and implement its strategies. Two Of the most successful IJVs in China are managed almost entirely by the U.S. side (JV 3, JV 4). China business experts, and this researcher, using a variety Of performance criteria, all concur that these are two Of the best IJVs in China. For each of these two dominant-controlled IJVs, sales are growing strongly, long-term profitability appears solid, hard and soft technologies are being transferred, the relationships between the partners are harmonious, and the stakeholders are very satisfied with the IJVs. Even when one side does not possess a large share Of the equity, a partner may still take actions to gain control of the areas that it feels that it must dominate. Formal and informal control measures can be implemented that help each partner tO fulfill its performance criteria goals. Contracts may stipulate which functions each partner will 258 control, particularly under the ideal situation when the partners possess complementary skills. Informally marketing ideas to the Chinese side was used in every JV in this research, even when the U.S. side had formal decision making authority over an activity. Convincing partners about the effectiveness Of a certain strategy is best done in the context of a good, working relationship. Sponsoring Chinese partners and managers for trips to the U.S. has proven to be effective in demonstrating what works well, and in building friendships. These visits involve formal meetings at corporate headquarters, including board meetings, as well as informal touring and visits to homes Of U.S. managers. Appointing general managers and members Of the board Of directors who are experienced and not chronologically young has been consciously practiced by the U.S. parents who dominate their JVs successfully. Chinese show greater respect for Older personnel and more willingness tO allow them to make key decisions. Credible board members who are empathetic with the partner's culture and situations are best able to influence the other side's board members on important issues. Control can be established by their side in the critical areas, and harmonious relationships can be maintained. Establishing an effective sales force is one critical task that the U.S. side is generally in the best position tO control. Chinese have little experience with principles and methods of personal selling and sales promotion. Providing 259 after-sales service is an effective marketing innovation, especially for high-value products. However, once a sales force is trained and established, the U.S. side should be careful to allow Chinese in the field to adapt the principles they have learned to design tactics that are most appropriate for the local culture. The potential to create barriers to entry through an effective sales force is strong in the current economic and legal environment Of most of the industries represented in this research. Chinese partners attempt to control personnel decisions in each IJV; however, U.S. managers have learned that the U.S. side must take more control of compensation and motivation issues in order to retain the best Chinese managers in the IJV. Most Of the U.S. IJV participants bemoan the loss of outstanding, trained Chinese managers to other organizations. Remaining Chinese managers seem less concerned about the problem, and do not appear eager to take proactive steps. Traditional practices and government policy, based on Communist ideology, lead to similar salaries for all employees. Thus, nonmonetary compensation and motivation methods must be identified and implemented. Ideas for consideration include: provision Of attractive housing, use of chauffeured, prestigious automobiles, large, well-furnished offices, long-term contracts, and restructured job responsibilities that are desired by the individuals. Training programs in the U.S. for high- potential Chinese employees must be reevaluated. One parent 260 company found an unanticipated problem with their training program: of the thirty-five Chinese who were trained in the U.S., only one returned to the IJV. Managers are also realizing that the best place to dO training is in the situation where the learning will be applied. Giving a person more responsibility is not necessarily an effective method Of retention, either. Current Chinese personnel practices and perceptions discourage a manager from accepting more responsibility, since risks exceed rewards. Chinese partners are likely to have close contacts and connections with critical government Officials, and thus should dominate this area for firm-level issues. Furthermore, many government officials are concerned about not allowing foreigners to exploit China, and thus are more trusting Of Chinese representatives. However, the U.S. side may need to work carefully with its partners to help them take a more aggressive stand in influencing government and in develOping coherent strategies. This need is primarily due to the Chinese heritage Of centralized planning and unchallenged adherence tO government policies. Chinese partners in the southern provinces, where businesses and government leaders have a history Of more freedom from Beijing, are better able to control this area Of the IJV by themselves. For issues that extend beyond the firm, such as macroeconomic policies and national laws, cooperative efforts by U.S. investors and nation-to-nation negotiations 261 are necessary. Attention is now centered on public policy implications of the research. PUBLIC POLICY IMPLICATIONS China's government has a significant impact on the structure, strategy, and performance Of U.S.-China IJVs. Many of the effects have been discussed. This section emphasizes three interrelated public policy issues that emerge from the findings. These are based on discussions with IJV partipants, U.S. Department Of Commerce Officials in Washington, D.C. and in China, and U.S. trade organization representatives. From a United States perspective these interrelated policy issues are: China's regulations on IJVs, China's role in GATT, and most favored nation status for China. CHINA'S REGULATIONS OF IJVs Several of China's current regulations and policies for IJVs have significant effects on U.S.-China IJVs. One important issue is China's foreign exchange balancing requirements. These policies limit the size Of operations that U.S. companies are willing to build. Although the renminbi can be converted into hard currencies in swap markets, these centers often do not have sufficient transaction volumes to support a large operation with 262 extensive domestic sales in renminbi. The use of relatively small production volumes can also prevent the IJV from being a cost-effective source Of output for export markets. Economies of scale cannot be developed to compete with larger operations based in less—regulated nations. Thus, export strategies are limited by this policy. For IJVs and other foreign investors, a freely convertible renminbi would improve the performance of their operations. U.S. parents could efficiently repatriate their profits. Moreover, they would not have to absorb the 25% differentials at the current swap markets. Until China takes that major step, the following three incremental policies are suggested. One, harmonize the Operational rules and regulations Of swap markets. Link these markets so that companies can swap currencies at any location in China. This would improve the availability Of hard currency for any one company. Two, provide hedging Opportunities for companies through the establishment Of futures contracts in foreign exchange. This would enable U.S. companies tO make their financial decisions under conditions Of greater certainty. Three, remove export requirements from IJV contracts. This would allow greater fairness and consistency for all Of the companies. Another structural regulation concerns the types of industries that may invest in China. Allowing more service industries to set up IJVs or wholly-owned enterprises in China would aid existing manufacturing Operations. China's 263 acceptance of foreign banks, insurance companies, accounting firms, shipping companies, and law firms would enable existing IJVs to gain more efficient and effective financial, transportation, and legal support, facilitating the Operation of their businesses. CHINA'S ENTRY INTO GATT A major goal for China is to become a full member Of the General Agreement on Tariffs and Trade (GATT). China seeks to become a fully-accepted and integrated participant in the global economy. The U.S. government appears to be a key influencer in the decision Of whether to accept China into this international body. There are several implications on IJVs Of China's admission into GATT. Most Of these concern economic transformations that China must make in order tO qualify for membership. One provision Of GATT is that only laws and regulations published and readily available tO foreign governments and businesspeople are enforceable (Massey 1992). The lack Of transparency by Chinese Officials about the nature and scope of Official regulations, and the arbitrariness Of regulations that this inspires have been a major source of frustration for foreign investors in China. Greater predictability and certainty should be possible for IJV decision makers, since China has recently promised to be transparent about all business regulations and laws (U.S. 264 Department of Commerce 1992). Another aspect of GATT would require a reduction of duties on imports. Current tariffs range up to 150% for certain imported automobiles. This policy change would affect the strategy and performance of several IJVs in the research. The costs of importing materials into China would decrease. This would lower the cost of production, and in some cases, enable the IJVs to compete in export markets. However, competition with imported products would intensify. Managers of high-cost IJV Operations, where economies of scale are not at global levels, fear this implication Of GATT. One parent company director suggested that China would need to give some special benefits to foreign—invested companies that produce locally, or "We're history." The survival of several IJVs is at stake. In a more competitive environment, heavily subsidized State enterprises that lack modern management skills would face the greatest threats to survival. Believing that more Open markets are coming has been a motivator for State companies to link up with foreign investors. The likelihood Of China's joining GATT thus increases the bargaining power Of foreign parent companies. U.S. policy makers are advised to continue to press for China to open up its markets and to meet the general conditions for its admission into GATT. A belief that competitive markets provide the best long-term results for China's people, the global economy, and for foreign investors drives this recommendation. A means with which ’7— 265 U.S. trade representatives can influence China in this direction is through reviews Of China's most-favored-nation status. MOST-FAVORED-NATION STATUS In 1991 China was designated as one Of three priority foreign countries under the Special 301 provisions of the U.S. Omnibus Trade and Competitiveness Act. One specific area of concern to the United States is the lack Of adequate and effective protection Of intellectual property rights in China for products such as computer software and pharmaceuticals. The designation Of China as a target Of "301" required that China's status as a most-favored-nation trading partner of the U.S. must be reviewed annually. According to a U.S. embassy Official in Beijing, this annual renewal process gave the U.S. leverage in influencing China's economic policies. The U.S. is China's largest trading partner, accounting for 25% Of its annual exports (U.S. Department Of Commerce 1992). As a nation that is attempting to fuel its growth through exports, China needs to maintain its favorable tariff and quota conditions in the U.S. Thus, it has manifested a pattern of making incremental concessions tO the U.S. negotiators to open up its markets and tO improve its system Of commercial law, including copyright protection mechanisms. However, the Memorandum Of Understanding (MOU) signed between the U.S. 266 and China in October 1992 also included a commitment from the U.S. to terminate the annual formal review of China's most-favored—nation status (Massey 1992). The U.S. reserves the right to reinstitute the review process if necessary. U.S. policy makers are advised to monitor China's compliance with MOU, holding the possible reinstitution of a formal review process of most-favored-nation status for leverage. IJVs can contribute by providing the U.S. Department of Commerce with information about violations to the agreement or failure to institute any Of the provisions of the MOU. However, if Congress ever decides to revoke China's special trading status in order to try to change China's political policies, the U.S. faces the loss Of one of its most important bargaining chips. Most of those in the U.S. business and foreign service communities in China feel that the U.S. would lose much Of its leverage with China and would start a mutually-detrimental trade war with China if it removed China's most-favored—nation status. U.S. companies in China fear new, deleterious government regulations and other punitive actions if the U.S. government gets too heavy—handed with China's political policies. An alternative, and likely more effective, method for the U.S. government to influence China's political events is to maintain funding and support for the Voice of America (VOA) broadcasts to China. The recently-proposed elimination of VOA would mean the loss Of one Of the most reliable sources Of timely information and in-depth analysis 267 of China's situation for Chinese households. Continued monitoring Of China's regulations and policies regarding foreign investment and trade is advisable. The U.S. can play a significant role in preparing China's admission into GATT by helping it to comply with the MOU and by serving as an advocate for its admission. Maintaining the most-favored-nation status is a related policy decision that will help reduce the role Of China's government in the structure, strategy, and performance Of U.S.—China IJVs. LIMITATIONS OF THE RESEARCH This research provides results that are accurate in their description: patterns of U.S.-China IJVs were uncovered through triangulation Of methods. However, the accuracy of the results are limited to the particular context in which they are set. Attempts were made to broaden the generalizability of the findings by enfolding the literature and suggesting explanations that may apply across contexts. However, transferring the results to the entire population of U.S.—China IJVs or to other IJV populations is problematic. First, interesting and possibly disconfirming results on performance may have been Obtained from U.S.-China IJVs that did not take part in the research due to termination, or unwillingness or inability to cooperate. Second, other populations Of IJVs in China and 268 other nations may possess different contingencies that influence performance. For example, IJVs from service or natural resource sectors were not included in the research. Thus, the findings are posed as hypothesizes that await future testing on a broader set Of respondents. Several aspects Of reliability constitute other possible limitations of the reSearch. As exploratory, interpretive research, precise measures Of the constructs were not developed. It was not possible to use confirmatory factor analysis to establish reliable measures. Several Of the constructs were uncovered as the research proceeded. The flexibility that was built into the interview guide to pursue unexpected issues and constructs also limits the replicability of the research. However, a presupposition of interpretivist approaches tO research is that the social world is always changing; consequently the concept Of straight replication is problematic (Marshall and Rossman 1989). Another limitation is the nonparsimonious nature Of the resulting theory. The model that is presented in Chapter VII is complex, suggesting bidirectional linkages between five major sets of variables, for which fifty specific factors are identified. The specification Of a limited number Of key hypotheses of relationships between a few Of the factors represents an attempt tO make the findings more communicable and meaningful. Some of these limitations are addressed in the next 269 portion of the chapter - directions for future research. DIRECTIONS FOR FUTURE RESEARCH The topic of this research, performance of international joint ventures, is a relatively unexplored area of research in international business. Therefore, the same topic analyzed with different populations, such as different nationalities and industrial sectors, represents potential areas of research. Specific components Of the model deserve to be explored further, so that additional hypotheses can be developed. Other research questions with variables not included in the model also emerge from the in— depth case study research. Another direction for research is to test statistically the hypotheses generated by this research to further the theory-building process. OTHER POPULATIONS A larger population of U.S.-China IJVs can be 1991, the number of IJVs that meet the age requirement has increased. Moreover, relaxing the geographical, size, and industry sector limitations would produce a population of several hundred IJVs. IJVs with parents from other countries could be investigated, including the large number investigated. Since the time that this research began in of Hong Kong and Taiwanese IJVs in China. Moreover, 270 analysis of the underresearched Korean or Japanese IJVs in China may reveal other interesting aspects of performance, and help support or refute the generalizability Of the findings in this research. IJVs in Taiwan and PRC IJVs in other countries represent two other populations of IJVs for which there is little research, but for which some Of the cultural aspects would be constant. By the end Of 1989 China had established about 400 Operational joint ventures in other nations (U.S. Department ofCommerce 1990). In 1992 there were approximately 200 U.S.-China IJVs located in the U.S.A. Counting all types Of foreign direct investments, including those unsanctioned by the PRC government, Chinese invest several billion dollars abroad each year (Brauchli 1993). OTHER RELATIONSHIPS The relationships between other aspects of structure, strategy, and performance would enable more complete explanations. Strategy factors, such as partner-related effects Of cooperation on IJV performance, Offer promise as significant explanatory relationships. Role acceptance, a possible new dimension of cooperation, awaits further investigation. There appeared to be some important differences in the extent to which IJV parents and other participants accepted their positions and responsibilities in the IJVs that may affect satisfaction with the IJV. 271 The age Of the IJV and the type Of political/economic system may be intervening factors in the structure - strategy relationship. Certainly, this general linkage in IJVs requires further research. Moreover, a comparative analysis of the relative role Of government on IJV performance in different types Of nations may be informative. Nations could be classified by such variables as level of economic development and type Of political/economic system. Another issue outside the Objectives Of this research was mentioned several times by U.S. respondents. This concerns the pricing of parent company technologies provided to the IJV. There appears to be a growing consensus among U.S. experts and IJV participants that the U.S. side has usually undervalued and underpriced its management technologies in negotiations regarding partner contributions to the IJV. If true, this would reduce the return on investment, and perhaps the U.S. participants' satisfaction with the IJV. That partners do not understand the value Of intangible technologies until they have been tranferred is an inherent problem Of the IJV mode. Nor dO transmitters Of soft technologies realize how much it costs to enable a partner to learn until the process has been completed. On a broader theoretical scale, the organizational learning and technology transfer frameworks need to be integrated. At this point they are two separate research streams dealing with similar issues and constructs. 272 As the political/economic situation in China continues to evolve, it would be valuable to document changes in the performance Of IJVs. Longitudinal studies would best capture the dynamic influences Of government, organizational structure, industrial structure, and strategy on performance. The critical success factors likely change at different stages in an IJV's history. The particular criteria used by IJV participants should also be systematically analyzed over the life Of an IJV. Repeated studies of the same set of IJVs would be appropriate to capture dynamic aspects Of performance. STATISTICAL HYPOTHESIS TESTING Another direction for future research is to test statistically the hypotheses that were developed in this study. In order to do this, the important constructs need to be operationalized with multiple indicators to enhance reliable measurement. These constructs include dimensions Of performance uncovered in the research, interpartner learning variables, perceived need, decision making control, IJV size, level of competition, and level Of importance to government. A structured mail survey and/or a telephone survey would then need to be developed. A large sample of respondents must also be found. Locating the IJVs in China, their parent companies, and the relevant managers for each Of the four groups examined in this study constitutes a 273 potentially infeasible task. A test Of some of the hypotheses using U.S. parent company managers is more realistic. New, more complete data bases Of the U.S.-China Business Council should soon be made available to the public that may facilitate testing hypotheses with U.S. managers in IJVs in China, also. This dissertation concludes with appendices containing the interview guide and repertory grid technique data. Following the appendices are the bibliography and general references sections. APPENDICES Appendix A INTERVIEW GUIDE INFORMANT'S NAME: DATE: INFORMANT'S CO.: INFORMANT'S NATIONALITY/ETHNICITY: INTRODUCTION I'd like to discuss several aspects Of U.S.-China joint ventures. This is a confidential interview. Your name and your company's name will not be revealed in any published documents. iFirst, I'd like tO get some .background information. Then, I'd like to discover the criteria that are used to evaluate the performance Of your JV. Also, we'll discuss how you manage marketing activities, such as pricing, with your JV partner. 1. When did this JV begin production? Year: 2. How many employees work for the JV? Chinese: American: 3. What is your role or responsibility in this joint venture? 4. What kind Of professional training or experience have you had? 5. What products are produced by the joint venture? (-List each product as a % Of the JV's total sales.) o\° 6. What percentage Of the sales are from exports? f these exported a. If an ex orts) Who are the buyers O . . produCES? I)probe: destination countries; intrafirm sales 274 275 7. Who does the joint venture sell (#1 product) to in China? 8. Has this joint venture developed as part of a global strategy of your company? (If yes, in what ways? --probes Low cost resources? Low-cost labor? Sales of components from parents tO JV? Royalties? Export base? Competitive reasons? Market entry to China? Market entry to other nations? PERFORMANCE CRITERIA 1. Overall, how satisfied are you with the joint venture? very satisfied satisfied. dissatisfied ‘very dissatisfied a. Why do you say that? 2. How satisfied do you think your partner is the the joint venture? very satisfied satisfied. dissatisfied. very dissatisfied a. Why do you say that? probe: If a difference) Why do you think there is a difference? 276 3. What kinds of criteria do you use tO evaluate the performance Of this joint venture? (What dimensions of performance are important to you?) probe: What dO you mean by that? 4. I have a group Of cards of possible joint venture. performance criteria” You may add others. Including the ones that you add, please select the ten that are most important to you now. --> probes What does mean to you? 5. Of these (ten), which two are most important to you? a. b. 6. What criteria does your partner now use tO evaluate the performance of this joint venture? a --> probe: What do you think they mean by that. ' ' to evaluate the 7. What criteria were used by your company . performance Of this joint venture in its first two years of Operation? . . . --> probe for definitions... . - - to evaluate the . Wh iteria did your partner use. . . 8 peigogiance of this joint venture in its first two years of operation? . . . --> probe for definitions... ((Use repertory grid technique now, if appropriate.)) 277 SATISFACTION 1. How satisfied are you with: a) performance criterion #1 very satisfied satisfied. dissatisfied ‘very dissatisfied Why do you say that? b) How satisfied are you with: performance criterion #2 very satisfied satisfied dissatisfied. very dissatisfied Why do you say that? 2. How compatible were your firm's goals and your partner's goals when the joint venture began production? 3. How compatible are your firm's goals and your partner's goals now? 4. DO you think your partner sees it in the same way? 5. What effects does this goal (in)compatibility have on your overall satisfaction with the JV performance. probe: sources of conflict? 278 Do you think that your partner acts, or attempts to act, more in their own self-interest than the interests of the joint venture? always Often sometimes never a. How have you Observed this? Do you have any plans for expansion Of this JV? What? If your company could do it over again, would it form a joint venture with this partner? --> probes: Why or why not? If no): If your company could do it over again, would it form a'U.S.-China joint venture with a different partner? -->probes: Why or why not? 279 JOINT VENTURE MARKETING ACTIVITIES I'd like you to lOOk over a list Of marketing activities. As I read each activity, please indicate who is responsible for the final decision for the activity. NO USA PRC U.S. CO. PRC CO. PAT- PARENT PARENT JV MGRS JV MGRS SHARED TERN 1. PRODUCT DESIGN 2. PRODUCT MODIFICATION 3. PURCHASING/ SOURCING 4. INBOUND LOGISTICS 5. RESEARCH ON PRC ENVIRONMT 6. RESEARCH ON NON-PRC ENVIR. 7 MARKET SELECTION 8. PRICING IN PRC 9. PRICING EXPORTS 10.TRANSFER PRICING 11.PROMOTION/ ADVERTISING 12.0UTBOUND LOGISTICS 13.AFTER-SALE SERVICE 14.EXPORTING 15.0THER MARKETING ACTIVITY 280 KEY MARKETING ACTIVITIES 1. 7. Which Of the marketing activities are most important tO the performance of this joint venture? What role does the PRC government currently have in determining prices for products sold by JVs in China? FIXED GUIDED HANDS OFF a. Does the PRC or USA government play a role in export pricing Of JV products? (If yes) How? Would you briefly describe the process Of how prices are set for (#1 product)? Are the prices for (the JV's #1 product) negotiated with the customers or announced by the JV? How important are the prices for (product #1) in the competitiveness Of this product? probe about customer's sensitivity tO price What information is used.toldetermine the announced.prices Of sold in China? # 1 product What other factors affect the list price decision? 281 GENERIC QUESTIONS FOR KEY MARKETING ACTIVITIES 1. Who acquires the relevant information needed to determine (list prices)? Who communicates that information tO the others involved in the (list price setting process)? How is information like this communicated in the joint venture? probe: methods and frequency of communication Who makes the final decision about (list prices)? What is done to resolve conflicts when partners disagree? a. Who seems tO be the peace maker in the joint venture? Once a decision about (list prices) has been made, who is responsible for implementing it? 0 . 9 Are (prices) monitored and reViewed. a. How? b. By whom? 10. 11. 12. 13. 282 How is it decided to adjust (prices)? a. Who does this? Which group has the most influence in these (pricing) decisions? Why are they able to exert the most influence? probe: sources of power’ ‘What have been some Of the biggest problems you.have faced in the (pricing) Of the joint venture products? How do (the prices/decision) for the JV's products affect your satisfaction with the overall performance Of the joint venture? How does the way that (prices are set) for products from this joint venture affect your satisfaction With the overall performance Of this jOint venture? 283 ADDITIONAL PRICING QUESTIONS THAT MAY BE USED 1. What kind Of pricing strategy is used by the JV? 2. Does the JV charge different prices to different customers? 3. What factors are considered in making these price segmentation decisions? 4. Is countertrade used by your company or JV in China? (If yes)--probes: In what ways? What situations? Why? 5. Do you lease any Of your products? (If yes), why do you lease? (If yes), how has your leasing program worked out? 6. Does the U.S. parent company buy any Of the JV's output? 7. Does the Chinese partner company buy any of the JV's output? 8. (If yes for either of the above), How are the prices determined for these goods that are bought by 9 9. Does the JV buy anything from either Of the parent companies? (If yes) What? (If yes) How are the prices determined for these things? 284 ADDITIONAL QUESTIONS ABOUT KEY MARKETING ACTIVITIES MARKET SELECTION 1. How do you Obtain information on the Chinese market? 2. What different kinds Of markets exist for your products in China? probe: What variables do you use to segment markets? (product use, geographic, demographic...) 3. What factors do you use in deciding which markets to enter in China? 4. What are your biggest markets in China? 5. How would you describe the level of competition in these markets you have chosen? PROMOTION 1. What kinds Of promotion do you use the most in China? probes: personal selling, advertising, sales promotion, publicity 2. What promotion tactics seem to work best? Why? ' ' ’2 3. What promotion tactics do not seem to work well in China. Why? "Wmm-a.“g_u.l ~ “_ 285 EXPORTING 1. Is this JV required to sell a certain percentage of its O output in export markets? a. How much? b. How well has the JV met this target? 2. How competitive are the JV's products in export markets? 3. Why do you say that? 4. DO you foresee the JV becoming any more export-oriented? '5. Why do you say that? LOGISTICS ' ' ' l 1. How would on describe the state Of the logistica . infrastructure for the distribution Of the JV's products in China? 2. What mode Of transportation does the JV utilize the most? Why? 3. Have the JV or parents done anything to develop the logistical infrastructure? 4. Are there any plans tO develop the logistical infrastructure? 286 Appendix B RGT Perceptual Map: Zeng lS-Feb-93 SPss RELEASE 4.; FOR IBM VH/CHS 16:18:23 MSU COMPUTER LABORATORY -~——aeRTvee—STIMULES-eaMPTSURATTON:———-——--~-—-—-- IBM 3090-180 VF VH XA/SP 2.1 NOT INTERNATIONAL EXCHANGE DIMENSION 1 (HORIZONTAL) VS DIMENSION Z (VERTICAL) '¢ ¢ +-———¢ ¢ —— ¢ ——¢ ¢ §-—--¢..--+. 2.1-l ; i z 6 2 Q . a. Z I 1.0 ‘* 3 4 + : 3 : : f 5\ : i 0.3 -.--.. _ ii“‘~:~=.2x:ffii--7-___ _ . ; . ;\ ; -I.o -; c: E L : : 8 : _ : A : Z : -201 "'; 3 4- E;--——+—-;—:——--0—-——+———-;---—6---+----+---§-—--§; “2.5 -103 '00) 005 105 205 CONSTRUCTS ELEMEEIS 1 DOESN'T HELP To BE MORE COMPETITIVE - 6 PROFIT HELPS TO BE MORE COMPETITIVE 7 CULTURAL EXCHANGE 2 MEANS - END 8 CAPITAL 3 REDUCES COSTS - INCREASES COSTS 9 PRODUCT QUALITY 4 DOESN'T IMPROVE CUSTOMER SATISFACTION - ‘ IMPROVES CUSTOMER SATISFACTION A TRUST OF CUSTOMERS 5 INTERNATIONAL EXCHANGE - B ACQUISITION OF TECHNOLOGY C COMPETITIVE MECHANISMS FROM ABROAD‘ D CUSTOMER SATISFACTION ACQUISITION OF MANAGEMENT SKILLS F SURVIVAL 287 Appendix C RGT Perceptual Map: Smith Ib-Feb-93 SPSS RELEASE 4.1 FOR IBM TIM/CNS ' 10:35:09 MSU COMPUTER LABORATORY ISM 3090’L80 VF VH XA/SP 2.1 “‘_" DERIVED STIHUCUS—CUWFTUURITTUNT' DIMENSION 1 (HORIZONTAL) VS DIMENSION Z (VERTICAL) -o- v v A—«-.—-—+---+-—-+—---+--——§ ¢ 201 "* 3 2 7\ 1.0 "’ \ F 3 2 : 0.0 -.-—..- — —--..---- __=____ A- 3‘ 1"; nun-o... unnugo 00000J00§u 9......oouou l l - Z x ‘100 " 31/ f \ CONSTRUCTS ELEMENTS 1 INTERNAL - EXTERNAL 9 PRODUCT QUALITY 2 QUALITATIVE - QUANTITATIVE A PRODUCTION LEVEL 3 NOT CONTROLLABLE - CONTROLLABLE B TRUST BETWEEN PARTNERS 4 MEANS - END C MANAGEMENT QUALITY 5 NOT A MANUFACTURING MEASURE - D FOREIGN EXCHANGE A MANUFACTURING MEASURE E WORKING CAPITAL 6 GLOBAL - LOCAL F CUSTOMER SATISFACTION 7 NOT IN MRP2 PROCESS - IN MRP2 PROCESS G PROFITABILITY 8 A COMMON GOAL - NOT A COMMON GOAL H SALES I TOTAL DELIVERED COST BIBLIOGRAPHY Abdallah, Wagdy M. 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