Successful Joint Ventures in the

Heart of the Dragon

Maris G. Martinsons and Choo-sin Tseng

I N ANCIENT TIMES, FOREIGNERS WERE attracted to com-

mercial opportunities in China. Confucius is reputed
to have said that it was ‘delightful to have friends
visiting us from distant lands’. The Middle Kingdom
was among the most prosperous and sophisticated
regions in the world throughout much of recorded
history. Over the last five centuries, Western soci-
oeconomic development moved to the forefront and
China became increasingly insular. Now, as a new
millennium approaches, the global business com-
munity is again being drawn to China.
China (the People’s Republic of China) has experi-
enced tremendous changes during the last fifteen
years. Decentralized economic planning and lib-
eralized trade policies have helped to improve
resource allocation efficiency and labour pro-
ductivity. Consumer and capital goods are increas-
ingly available while many private ventures now
operate alongside the traditional state-owned enter-
prises. Although public ownership is still prevalent
in the economy, the role of market forces has rapidly
increased. Social justice and collective prosperity
remain part of a ‘socialist market with Chinese charac-
teristics’, but the non-state sector now accounts for
the majority of output.’
China has become a major player in regional trade
and an engine for growth across Asia. It is likely to
achieve the ambitious national goal set in 1974, quad- our times, ‘they may well conclude that the most sig-
rupling production during the last quarter of the nificant development was the emergence of a vigorous
twentieth century. Based on recent development tra- market economy in the most populous country of the
jectories, China could even surpass the United States world’.4
to become the largest economy within two decades.’ Such rapid progress would have been impossible
During the 199Os, annual growth has averaged more without the Open Door Policy. In 1980, the first four
than 10 per cent. Despite infrastructure bottlenecks, Special Economic Zones were established to attract
social stress from widening class distinctions and the foreign direct investment (FDI). They were beach-
impending transfer of political power to a new gen- heads for international business participation, with
eration, the long-term economic outlook for China foreigners being offered preferential treatment for
remains positive.3 When future historians write about both capital outlays and technology transfer.’ By

Pergamon Long Range Planning, Vol. 28, No. 5, pp. 45 to 58.1995

00X-6301(95)00037-2 Copyright 0 19% Elsevier Science Ltd
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 of modernization. Table 3 adapts a technology stage
model” to contrast these two development stages.
This second stage will shift the spotlight from
1992 1979-1992
Greater Guangdong to Greater Shanghai and the Cen-
tral Provinces. The new focal point will be Shanghai,
Hongkong and Macau 41.5 76.4 located at the mouth of the Yangtze River. Before the
United States 3.1 7.7 1949 revolution, the city was a major Asian com-
Japan 2.2 7.2
mercial and cultural centre, both the Paris of the Far
Taiwan 5.5 6.9
Singapore 1.0 2.0
East and New York in an oriental setting. Shanghai
South Korea 0.4 1.7 accounted for over half of China’s foreign trade and
Total 58.1 114.3
was ‘a place where two civilizations met and neither
prevailed.‘l’ This cosmopolitan tradition is an impor-
Source: published data from the Ministry of Foreign Economic tant facet in the current attempts to attract non-
Relations and Trade (MOFERT); reported in Business China, 28
Chinese. Even today, Shanghai has the largest manu-
June 1993.
facturing base and the biggest trading port in Greater
China. This city of 14 million has a strong industrial
1985, the doors to 14 coastal cities (including Shang- foundation and a large supply of skilled workers. The
hai) and Hainan Island were open. Now, over 300 Shanghainese are also widely characterized as proud,
areas in China can accept FDI. sophisticated, suave and shrewd in business
Foreign businesses have contributed to the Four matters.12 Despite these attributes, foreign interest in
Modernizations (in industry, agriculture, national Shanghai has been limited by infrastructural prob-
defense, and science and technology) while gaining lems, an entrenched state sector and its proximity to
access to abundant resources and, in some cases, a Beijing, the political epicentre.
market of 1.2 billion people. About US $60 billion The national government has now made a major
worth of technology has been imported into China financial commitment to help Shanghai modernize its
since 1979.6 By early 1994, the cumulative contracted infrastructure, and promulgated specific policies to
FDI had surpassed US $250 billion. Nearly half of this attract multinationals. Incentives include initial tax
total was committed during 1993, a year in which holidays and preferential tax rates thereafter, a des-
actual investment exceeded US $26 million.’ Only ignated free trade zone, import duty exemptions and
the United States now receives more FDI than China. accelerated project approvals. Hongqiao, Minhang
The Overseas Chinese in Hong Kong and Taiwan and the Caohejing Hi-Tech Park were designated as
have been the dominant foreign participants (see Economic and Technological Development Zones to
Table 1).They have transferred existing operations in attract FDI.13 Business fever was boosted when the
order to reduce costs and upgraded technologies in local stock market opened in 1990. Due to the limited
basic industries. Their investments in southern China space in downtown Shanghai, the Pudong industrial
are rapidly integrating the economies of Greater zone has become a preferred living and working
Guangdong, Hong Kong and Taiwan (see Figure 1). district. Consistent with the aims of the second mod-
The resulting Greater China growth triangle has ernization stage, Shanghai is giving priority to nine
become a fourth force in the global economy.’ The higher-technology industries over the next decade.
regional distribution of FDI is shown in Table 2. These are listed in Table 4.
Shanghai may now be likened to the heart of the
mainland Chinese economic dragon. The pumping of
The Second Stage-Focus on the heart will energize the rest of the dragon. From
Shanghai, state enterprise reform, new business
Shanghai development and economic vitality are envisioned to
When the aging leader, Deng Xiaoping, visited Guang- spread along the Yangtze River, to cities such as
dong province in early 1992, he praised the economic Wuhan and Chongqing, and throughout the Central
progress made in southern China. This was widely Provinces. Many of these inland provinces already
interpreted as a signal to accelerate and expand the recognize Shanghai as their international gateway,
reform process. Foreign money, technology and and have opened trade offices there. Upgraded port
expertise are now being sought to transform industrial facilities along the Yangtze are to boost water traffic
and commercial structures across China. ‘Upgrading through Shanghai while the hometown airlines,
technology, product quality, and export volume are Shanghai and China Eastern, are leading the national
long-term strategies of China’s economic devel- boom in civil aviation.
opment; foreign investment policies will naturally be During the 198Os, a small group of pioneering fore-
designed to meet these broad national objectives’.g ign businesses set up operations in Greater Shanghai.
Significantly, even as market competition intensifies While many failed, a few are now genuine success
in basic industries, China is moving to a second stage stories. A recent study found that Shanghai ventures

Successful Joint Ventures in the Heart of the Dragon

have fared better than those in most other regions trade. Under current laws, wholly-owned foreign ven-
of China.14 Delegates attending a recent management tures are permitted for higher-technology and export-
forum considered Shanghai to be by far ‘the most oriented projects. However, joint ventures are the pre-
preferred destination for foreign investment in dominant form of FDI. They represent a viable
China’.l’ As a new wave of multinational firms eye response in the face of rapid market changes, indus-
Shanghai, it is valuable to look at the problems experi- trial consolidation and reduced heterogeneity across
enced, the solutions used and the lessons learned by national and regional markets.16 The Chinese govern-
the successful ventures in the Heart of the Dragon. ment has welcomed joint ventures as an effective
means of technology transfer. Such encouragement is
Investing in China expected to continue until its modernization enables
total self-reliance, that is the ability to manufacture
Foreign participation in China is possible through
the good or provide the service without any external
licensing or co-operative agreements and counter-
assistance.
A joint venture pools and leverages the resources
of its parents and enables them to share the risks
and rewards. Such partnerships typically operate in
a bounded environment, with restrictions on product
lines, market areas or operational life-span.” They
1992 1983-92
represent a middle road between self-sufficiency and
Guangdong province 18.9 39.1 business merger.18 A joint venture provides a com-
Fujian province 6.4 11.2 paratively better solution than other governance
Greater Shanghai 3.3 6.8 structures for opportunism, small numbers and
Beijing-Tianjin 1.8 4.6 uncertainty in the face of bounded rationa1ity.l” The
Source: published data from MOFERT; reported in Business China, foreign investor commonly takes an equity position
28 June 1993. which ensures significant control. A minority interest

Long Range Planning Vol. 28 October 19%

 The Initial Stage The Second Stage

Time Period from 1979 to 1992 since 1992

Foreign Investors mostly overseas Chinese the global business community
Development Areas provinces neighbouring Hong Kong and Taiwan outwards from the Yangtze River
Focal Point special economic zones Shanghai
Business Activities lower technology higher technology
Success factors 0 efficiency ??quality

0 staff training 0 organizational learning

0 personnel management ??technology management
??incremental change ??radical change

Source: adapted from Martinsons (1988).

can be precarious, unless the venture critically relies
on the products or technical expertise of the foreign
parent. This condition will be satisfied if the local
parent has little knowledge of international business
or modern manufacturing methods.
In China the foreign partner commonly provides
much of the technical and managerial know-how, the
capital and potential access to the international
market. In one study, 90 per cent of local partners
cited the acquisition of technology as a principal
rationale for a joint venture.” Chinese partners typi-
cally contribute land and buildings, access to appro-
priate employees and local market knowledge. They
know where to source raw materials, how to find cus-
tomers, and can act as liaisons with the authorities.
High-level government contacts are invaluable when
official support is needed for critical actions.
The track record of international joint ventures is
mixed. Seven out of ten ventures reportedly fall short
In China, unique economic and pol-
of expectations.‘l
itical systems combine with the local business culture
to provide a formidable challenge.22 Not surprisingly,
most Sino-foreign ventures have experienced major
setbacks or disappointing results.24 This is despite, or
perhaps because of the fact that many of these joint
ventures are essentially ‘a Chinese state enterprise
with foreign senior management and imported tech-
nology’. Nevertheless, the total number of registered
joint ventures has parallelled macroeconomic evol-
Automobiles
Telecommunications Equipment
Computer Products
Petrochemicals
Power Stations and Equipment
Computerized Machinery
Household Electrical Appliances
Iron and Steel
Textile Machinery
ution in China. Impressive overall growth during the
past decade has resulted from cyclical surges and
retrenchment.25
Joint ventures can accelerate the corporate learning
curve and provide an effective foundation for busi-
ness development in an emerging market. They have
become an integral part of China’s unique environ-
ment.2” In 1993 alone, joint ventures accounted for
over US $60 billion in trade, representing over one
quarter of all exports. The Chinese authorities have
also relaxed the restrictions on domestic sales by
these ventures. Most of the branded Western goods
now being snapped up by Chinese consumers are pro-
duced by domestic joint ventures.27
The Research Approach
The authors have extensive track records as man-
agement scholars and business consultants. In recent
years, they have actively studied the economic chan-
ges in Greater China, and have helped to facilitate
the development of both enterprises and individual
managers in China. They have developed good work-
ing relationships with both the academic community
in Greater Shanghai and many of the joint ventures
there. Since 1991, the authors have conducted or par-
ticipated in several multi-day joint venture work-
shops in Shanghai. Between eight and fourteen
Chinese and foreign venture managers attended each
workshop. Most of the participants were senior execu-
tives from technology-intensive ventures which star-
ted up in the 1980s and are now considered successful
by both partners. The problems they have overcome,
and those which continue to linger, were considered
in these interactive sessions. These workshops and
dozens of follow-up discussions with individual
managers serve as the primary data sources for our
study of Shanghai-area joint ventures.
This article uses an interpretive research meth-
odology to leverage previous field workza.‘” and man-
agement experience in Greater China. Such a
methodology enables the contextual conditions (busi-

Successful Joint Ventures in the Heart of the Dragon

ness environment) as well as the focal phenomenon The intimate relationship between business and pol-
(joint ventures) to be considered using multiple sour- itical goals must also be recognized. China seeks
ces of both primary and secondary evidence.30 The ‘socialist modernization, the hallmarks of which are
major issues associated with joint venturing are pro- Western science and technology and Chinese phil-
filed, and the often innovative solutions are osophy and culture’.34 Based on this national goal
described. In an environment where reliable infor- and their differing value systems,35.36 the prospective
mation is still scarce, those already on the scene can partners are likely to have conflicting interests, as
offer valuable insights. shown in Table 5. Frank discussions about these aims
Our work extends the literature on joint ventures can help to defuse suspicions. Several managers
in transforming economies. This knowledge will also advised foreigners to be assertive, detailing their spec-
help businesses experiencing problems in their cur- ific goals to their prospective partner. Most successful
rent joint ventures and provide guidance to those con- ventures are based on a small set of simple objectives,
templating such participation in newly liberalizing which enable both sides to allocate appropriate per-
economies, such as China, Eastern Europe, or the for- sonnel and resources.
mer Soviet Union. Relationships are the essence of A prospective local partner may display ethical
Chinese business systems. This paper examines the hubris by conducting simultaneous negotiations with
development and maintenance of the bilateral several foreign firms.37 This may occur despite dec-
relationship between the partners in successful joint larations to the contrary. Some (potential) local par-
ventures as well as the nature of their relationships ents will even set up a plant to compete directly
with government authorities, and their employees, against the joint venture. For example, a US food con-
suppliers, and customers. glomerate created a joint venture to produce a bran-
ded orange drink. It was critically dependent on the
supply of sugar from the local partner. Shortly after
the venture established a local demand for its prod-
Developing the Relationship
uct, the Chinese partner set up another factory to
There is an old Chinese saying that ‘one hand cannot compete against the venture. Its product was similar
clap’. Compatibility between joint venture partners is in content and packaging and had an almost identical
critica1.31,32 Foreigners seeking a partner in China can brand name. The supply of sugar to the venture was
get help from many government and private organ- then severely rationed.
izations. These include the China Council for the Pro- Evaluating respective contributions is a common
motion of International Trade (CCPIT) and the China difficulty. Intensive bilateral negotiations are often
International Trust and Investment Corporation needed to arrive at mutually-agreeable contributions
(CITE). Recently, many troubled state enterprises have and ownership shares. A third-party assessor can help
been passed on to unwitting foreign firms. However, in some situations. Two to three years of direct talks
Shanghai residents contrast their proud sophis- typically preceded an agreement. The Chinese are
tication with the flashy hustling of Guangdong and the thorough and methodical negotiators. They practice
stodgy conservatism in Beijing. Anecdotal evidence consensus decision-making and insist on discussing
suggests that potential partners in Shanghai remain important and sensitive matters face to face. Much
among the most professional in China. time may be spent translating and clarifying novel
Nevertheless, businesses should intensely question and unfamiliar concepts. There is a need to recognize
potential partners, to determine their existing base of cultural differences and an opportunity to gain an
knowledge and future capabilities. Negotiations can improved understanding of Chinese negotiating
then begin with expectations and business forecasts dynamics.
based on worst-case scenarios. Much of the relation- Potential foreign investors should also verify any
ship is a matter of chemistry, with trust being built information which is provided by the Chinese team.
up over time. Although the Chinese believe that all For example, an indication that a certain raw material
problems can be resolved between friends, most will is available will require research to find out if there
initially view a prospective partner as an adversary. is a reliable supply of acceptable quality. Assurances
Some may even consider business partnership to be of a steady electricity supply and adequate access to
a zero-sum game, and worry that foreigners are trying transportation also require independent confir-
to exploit or ‘spiritually pollute’ China.33 Extended mation. Bad initial experiences taught many fore-
get-acquainted periods are invariably used to cul- igners to include quality control requirements in their
tivate the relationship, with social formalities pre- contracts. The protracted negotiations, and a foreign
ceding commercial discussions. partner’s insistence on writing down as much poss-
Even with a good fit between the partners, business ible, will help to reduce the frequency and severity of
co-operation can be complicated by the dynamic Chi- subsequent disputes. Table 6 lists the issues which
nese environment. It lacks a definitive commercial were commonly mentioned as stumbling blocks in
code and has no independent court to settle disputes. the negotiating process.

Long Range Planning Vol. 28 October 19%

 Foreign Partner Local Partner

Planning retain business flexibility maintain congruency between the venture and
the state economic plan
Contracts unambiguous, detailed and enforceable ambiguous, brief and adaptable
Negotiations sequential, issue by issue holistic and heuristic
Staffing maximize productivity; fewest people per employ maximum number of local people
given output level
Technology match technical sophistication to the gain access to the most advanced technology
organization and its environment as quickly as possible
Profits maximize in long term; repatriate over time reinvest for future modernization; maintain
foreign exchange reserves
minimize unpredictability and poor quality of promote domestic sourcing
supplies
Process stress high quality stress high quantity
outputs access and develop domestic market export to generate foreign currency
Control reduce political and economic controls on accept technology and capital but preclude
decision-making foreign authority infringement on
sovereignty and ideology

Long and frustrating delays can also be expected as orbital road and upgrading of the telecommunications
the Chinese government bureaucracy approves fin- network. Unlike their counterparts in Bei’N or in the
ancial and technical feasibility reports and issues special economic zones, the Shanghai joint ventures
necessary permits. This bureaucracy is ‘one of the have experienced little post-negotiation interference
biggest barriers to doing business in China’.38 Despite from either the municipal or regional authorities.
the similarities to a painful chess game, most Shang- Nevertheless, the ‘rules of the game’ can be subject
hai managers were grateful to the city’s former mayor, to periodic change. The Chinese may try to leave con-
‘one-chop’ Zhu Rongji. He helped to create a tracts open for continual renegotiation. Policies that
comparatively efficient administrative structure. are not clearly and explicitly defined will be subjected
Although Zhu was subsequently put in charge of the to interpretation. Many of the longer-term managers
national economy, his progressive policies and sys- recalled feeling like guinea pigs in China’s experi-
tems remain at the core of this exemplary municipal ment with market economics and international busi-
administration. One manager said that the Shanghai ness. The Implementing Regulations (1983),
government ‘deserves considerable credit for its fore- Provisions for the Encouragement of Foreign Invest-
sight in encouraging business development’. Current ment (1986), also known as the 22 Articles, and the
infrastructure projects include expansion of the sub- Cooperative Joint Venture Law (1988) have pro-
way system, construction of a 48 kilometre long gressively provided greater guidance for joint
ventures. Although the investment conditions have
become more favourable and better specified, the pre-
cision of Western-style contracts remains at odds with
the Chinese system.
Responsibilities and operating guidelines in each
functional area should be clarified during the nego-
Financial Investment and Share of Equity
Valuation of In-kind Contributions tiations. In Figure 2, the value chain3’ is used to show
Nature and Division of Corporate Governance a common success formula for dividing management
Decision-Making Responsibilities responsibilities in a joint venture. The foreign partner
Product Pricing assumes authority for technology infusion, training
Salary and Benefits of Expatriate Managers and
and development, as well as general cost control.
Professionals
Focus and Extent of Staff Training and Development Shop-floor production and general personnel matters
Nature and Extent of Access to the Transferred are handled by the local partner. Marketing and pro-
Technology curement require considerable cooperation.
Sources and Required Quality of Supplies The probability of success increases if the partners
Contract Arbitration Mechanisms
have complementary strengths. However, a strong
Sources: synthesis of A.T. Kearney (1987) and the comments of local parent will have entrenched processes and
workshop participants. behaviours. Some of these may be inherited by the

Successful Joint Ventures in the Heart of the Dragon

 Technology development \

? ?Local partner takes primary responsibility

0 Foreign partner takes primary responsibility
0 Shared responsibility

joint venture. In one case, it was difficult
implement a new management style. Many of the
employees and supervisors had been transferred from
the local parent. They resisted change and reverted to
old practices whenever they experienced difficulties
with the new approach. One manager noted that
‘older workers like older methods’. As a result, several
of the pioneering ventures now recruit and hire pri-
marily fresh graduates. Their lack of practical knowl-
edge and work experience is more than offset by a
willingness to accept new work methods.
The tradition of collective decision-making
constrain the scope and speed of organizational chan-
ges. Sustained but incremental transformations have
been effective. With dynamic technology and fluid
markets, the appropriate pace and nature of changes
will vary, but commonly follows four steps. Design
experts will learn about the local environment,
lyse the particular situation, craft a suitable system
(often by adapting that from another site) and finally
implement it.
Both greenfield plants and existing factories have
been used. Leaseholds of up to 70 years are now being
granted in the Shanghai area. Several ventures in the
to Minhang Zone constructed their own factories. A cus-
tom-built plant using modern, imported technology
often justifies the delay in commencing production.
Others have used factories that were pre-built by local
authorities for lease or sale to prospective investors.
The use of existing facilities can involve:
- taking over an entire plant and its local workers
w
(many of whom are difficult to retrain);
?? taking part of the existing plant and select staff
among the existing workers (which has the poten-
can tial of causing rifts between those chosen and those
not chosen); or
occupying a plant which has been abandoned by a
??
state enterprise (a likely possibility around Shang-
hai) or not brought into operation by a previous
venture (a less likely possibility).
ana-
RelationShipS with Employees
Almost all of the established Shanghai ventures have
overcome significant human resource problems.
These range from inabilities to find appropriately skil-

Long Range Planning Vol. 28 October 19%

led workers to difficulties in terminating the contracts
of poor performers. Although there is a tendency for
views to moderate after years of collaboration, the
partners will frequently continue to favour different
solutions to personnel problems. This is simply based
on contrasts in business cultures, past experiences
and ideological backgrounds.
There are significant differences between the Chi-
nese and Western management systems.40 Mean-
while, business in China remains ‘a cultural as well
as an economic transaction’.41 Communication prob-
lems between individuals with different cultural and
linguistic backgrounds are inevitable. They will occur
on the shop-floor and in the boardroom. Informal dia-
logue is difficult using interpreters. Subtle meanings
may be missed or misunderstood, leading to over-
blown problems. Frequent communications can min-
imize ambiguity and inform decision-making. A good
understanding of the Chinese business culture is
extremely valuable. However, the local partner must
also be open to new ideas, even if some break with
tradition. The use of international business practices
and the English language as well as the hiring of
senior staff who are not only technical experts but
can also positively influence junior employees are
common among Shanghai ventures.
Partners frequently propose radically different
numbers of employees for the venture. The Chinese
parent will seek to employ as many local people as
possible and underestimate labour costs. This is often
based on the need to maintain good relations with the
government. Productivity levels in China are typi-
cally below international standards. In negotiations
involving one of the authors, the Chinese partner pro-
posed to hire six times the number of staff that were
needed in similar operations elsewhere in Asia.
Motivation and Compensation
Regardless of the appropriate number, people will be
the key to the success of the venture. Local workers
have many of the necessary skills. However, the well-
documented industriousness of the Overseas
Chinese42*4” has rarely been emulated in mainland
China. One manager asked, ‘Why can’t they do it
here?’ Then answered himself, ‘I think it’s a question
of the motivating force’. Problems such as low pro-
ductivity, low quality output, and high rates of absen-
teeism, are widespread and difficult to resolve. They
even persist in some of the most mature joint
ventures.
Traditional Chinese employment contracts have
emphasized punishments rather than rewards and
there has been little incentive to initiate changes.
However, the reforms are removing many of the con-
straints on good business practices. With the rapid
disappearance of the ‘iron rice bowl’, which guaran-
teed life-time employment regardless of performance,
increasing numbers of workers are now motivated by
Successful Joint Ventures in the Heart of the Dragon
the desire to retain their job. The Temporary Regu-
lations have enabled joint ventures to introduce spec-
ific labour contracts, which can be renewed after an
initial term. Employees are explicitly told to work to
the best of their ability, and not to worry about making
mistakes. However, getting staff to make suggestions
or to discuss their problems is an on-going challenge.
In one venture, management only ensures that the
overall business plan is followed. Punishments are
rare. Efforts focus on finding the underlying causes of
mistakes, and working to correct them. Others have
comprehensive disciplinary codes, with punish-
ments based on the severity of the transgression.
Despite the egalitarian tradition in China during the
communist era, employees in several ventures are
now compensated based on individual contribution.
The wages of the best one are four to five times those of
new recruits. Explicit incentives may include higher
salaries and productivity bonuses. Many employees
also view the joint venture as a gateway to the privi-
leges which traditionally were reserved for the Party
elite. These include overseas travel, business or tech-
nical training, and access to foreign currency. Such
privileges, together with non-pay incentives, can be
powerful motivating forces.
State enterprises in China typically pay meagre sal-
aries, but also provide housing and a pension as well
as medical insurance and free schooling to workers
and their dependents. The comparatively young age
of joint venture staff reduces the burden of retirement
and health care benefits. Direct compensation is also
not usually a major source of dispute between joint
venture partners. In fact, the foreign parent is prob-
ably more willing to pay higher salaries (by local stan-
dards) for quality workers. However, many ventures
will not hire those who need company housing.
Others provide accommodation allowances based on
length of service, job level, and performance. Salary
levels and turnover rates for Shanghai joint venture
employees are both lower than their Guangzhou (the
capital of Guangdong province) and Beijing counter-
parts.44
Employee reviews and an emerging labour market
have created some flexibility to deal with poor per-
formers. Meanwhile, workers can compete for pro-
motion and coveted assignments. Even the authority
to hire workers may now be accompanied by the
unpleasant (and often frequent) task of criticizing,
penalizing, and dismissing staff. Advertising and
local sponsorship may be used to recruit job appli-
cants while formal selection procedures can include
interviews, examinations and psychological tests.
These practices give joint ventures a distinct edge
over state enterprises, where administrative allo-
cation and internal recruitment remain prevalent.45
The Shanghai managers characterized local uni-
versity graduates as bright and eager to learn inter-
national business practices. They recognize joint

Organizational Strategy and Vision
Management Practices
Financial and Cost Accounting
Global Economics
Process and Product Quality
Communication Skills
Information Management Skills
Staff Appraisal and Development
Sources: based on the comments of workshop participants.
venture employment to be an excellent career oppor-
tunity. Nevertheless, staff training is essential in a
successful joint venture operation. Often this is done
by bringing corporate trainers to Shanghai. However,
with the transfer of new technologies, key employees
are usually sent overseas, to experience successful
operations first-hand. The foreign parent must resist
the temptation to clone its home operations. The tim-
ing of on-site visits by foreign technical experts and
trips by Chinese employees to foreign operations
should be carefully planned. A steady flow of infor-
mation to workers is also important. Employee anx-
ieties will be raised if it is unclear why someone is
visiting their plant, or why they are being sent abroad.
The best workers may be given basic management
training after working for two to three years. Table 7
lists the major topics covered in these programmes.
With attractive compensation packages and appro-
priate staff development, they become productive and
dependable employees. They can inform expatriates
about the local environment, provide access to vital
contacts and eventually become competent managers
using a combination of Chinese and Western prac-
tices.
Foreign Managers
Until sufficient numbers of local managers
developed, ventures must rely on expatriate expert-
ise. Unfortunately, international executives are reluc-
tant to work in China. Most of them consider even
Shanghai to be a hardship posting. Schooling for chil-
dren and the cultural adjustment of the spouse are
major concerns. Not surprisingly, expatriate
formance and job satisfaction levels have varied
widely.4” Some overcame considerable adversities to
achieve spectacular results quickly. They often mixed
Western and Chinese management practices
relied on talented local employees.
Almost as often, expatriate performance has been
mediocre at best. Many of them erroneously apply a
purely Western management style. They fail to
account adequately for cultural differences and the
unfamiliarity with market-based production, incen-
tive-based employment and international accounting
practices. Their subordinates then come to resent
their phenomenal salaries and benefits. Although
there is a growing insistence that local and foreign
managers with equivalent levels of responsibility
receive the same salary, the total compensation pack-
age of a single expatriate may still be equal to that of
a hundred local workers. Some ventures pay their
expatriates through an off-payroll agreement or have
their foreign parent pick up part of the cost.
The senior foreign manager in the venture must
have strong business and political skills. The former
satisfy Chinese demands while the latter protect the
interests of the foreign partner.47 Many of the suc-
cessful ventures have brought in ethnic Chinese man-
agers. Many speak Mandarin, are perceived to be
suitably seasoned by their subordinates, and have a
knack for solving difficult problems. They understand
local perspectives and build up connections with
government officials. With the rapid growth of joint
ventures, the demand for such culture spanners now
exceeds the supply. As a result, increasing numbers
of local people with overseas education are being
appointed to junior management positions in these
enterprises. As they gain experience and can be
assigned greater responsibilities, the Shanghai ven-
tures are reducing their reliance on expatriate
managers.
Maintaining the Relationship
Although it is not easy to develop a good relationship
between two firms from very different business
cultures, it is even harder to sustain it. Trust can only
be built up over time. In addition to the legal contract,
the partners are bound by a psychological contract.
On every contentious issue, it is necessary to balance
self-interest with the need to maintain an effective
working relationship. Both ‘face saving’ and guanxi
are an integral part of Chinese culture. Guanxi is the
are name given to both the special kind of relationship in
which long-term mutual benefit is more important
than short-term individual gain4” and the intricate
and pervasive personal network that is the essence
of Chinese business.4g These relationships can bring
cheap and reliable supplies, tax concessions, rapid
per- government approvals and assistance when seem-
ingly insurmountable obstacles must be overcome.
Strategic Focus
and The issue of introducing new technology and prod-
ucts often strains the partnership. One foreign parent
had a wide product line and wanted to expand the
scope of the joint venture in order to seize new busi-
ness opportunities. However, the local partner was
reluctant to change, because of its own limited expert-
ise. In a second case, the foreign partner explicitly
restricted its venture to a single product. This narrow
Long Range Planning Vol. 28 October 19%
scope precludes long-range planning or new product
development. Success has come from cost-effective
labour, the ability to make incremental design chan-
ges and the growing domestic market. Additional ven-
tures may be set up for other products, but each would
have a unique focus and seek specific government
incentives.
Most foreign partners fear that they will not be fairly
compensated for sharing their product and process
know-how. Current patent-protection laws in China
offer little recourse if proprietary knowledge is stolen.
Thus, technology transfer is often restricted until the
terms of the initial contract have been completely
fulfilled. However, one venture has duplicated the
complete product line of its foreign parent and is
receiving very liberal technology transfer. This is
made possible by the mutual trust that has been nur-
tured over the last decade.
Those seeking short-term profits and protection of
their own international markets will have no desire
to share the fruits of their overseas research and devel-
opment. The Foreign parent may be able to profit from
sales and services to its China offspring. However, if
a foreign partner has entered into a long-term joint
venture, market development will require the con-
tinued infusion of technology. Some of the foreign
managers admitted that new technology, such as
advanced product designs or more sophisticated
manufacturing processes, must be incorporated on a
selective basis. It is often used as a carrot to maintain
or renew the commitment of their Chinese partner.
Quality Operations
The economic traditions in China have done little to
cultivate quality. The state has traditionally pur-
chased all output and provided ‘iron rice bowl’
employment guarantees, Customer satisfaction, after-
sales service and product warranties were alien con-
cepts in a centrally-planned, quota-driven production
system.” Many employees still view their work in
terms of completing tasks rather than satisfying cus-
tomer requirements. Government authorities reco-
gnize the need to improve product quality, but are
leery of the social upheaval which a rapid change
could bring.
Internal quality and worker safety are often under-
valued by the Chinese partner. Housekeeping in joint
venture has plants is not a trivial matter. The Chinese
compulsively hoard both raw materials and spare
parts because it has traditionally been difficult to
obtain both supplies and equipment. Meanwhile,
higher-technology production requires a clean opera-
ting environment. This is a decidedly alien concept
to most employees, who must keep their work areas
cleaner than their own living quarters. A phar-
maceutical venture set up rigid procedures to main-
tain process quality. Large fines are imposed for
smoking in the plant and cleanliness is an important
Successful Joint Ventures in the Heart of the Dragon
basis for performance appraisal. One venture hired a
special workforce just to keep the workplace clean.
This was counterproductive: workers no longer per-
ceived housekeeping as their responsibility.
Financial Matters
After the joint venture agreement is implemented,
several of the Chinese partners experienced dif-
ficulties contributing their share of capital on sched-
ule. Shortages of foreign exchange are reported to be
one of the two most common problems across China.”
High inflation, negative real rates of bank interest and
easy credit facilities have combined to create a tri-
angular debt problem. With customers frequently
defaulting on their accounts payable or delaying their
payments, the local partner is frequently squeezed for
working capital. Although the government injected
funds to reduce the triangular debt problem in 1991,
a more recent austerity package has led to a
resurgence of this problem.
Chinese enterprise managers may also find it dif-
ficult to resist the lure of speculative investments in
local property and stock markets. The foreign parent
should carefully examine the accounting records of
the prospective partner, and if possible conduct a
credit analysis of its major customers. For many local
enterprises, money on a balance sheet differs greatly
from money in the bank. In the past, unauthorized
loans and the falling value of the local currency, the
renminbi, complicated financial assessment. The
renminbi’s limited convertibility was also a vexatious
issue.52 However, the unification of internal exchange
rates at the beginning of 1994,and the relative stab-
ility of the renminbi in the recent past, are both sig-
nificant. Full convertibility of China currency is likely
to be achieved within the next couple of years.
The use of financial indicators and budget forecasts
to guide decision-making has also been problematic.
Traditional Chinese recording and accounting sys-
tems do not produce cash flow or cost accounting
statements. Introducing a system that presents fin-
ancial information to meet reporting and managerial
needs typically requires enormous time and effort.
The Chinese worry that performance information
from cost accounting will be used as the basis for
firing selected workers.53
Relationships with Suppliers
China does not have a competitive marketplace for
most components. The limited choice of domestic
suppliers can make it difficult to get many critical
raw materials. A key to success has been the early
identification of all input material needs, so that sup-
plier alliances can be developed and problems
resolved before operations commence. Some ventures
import their essential production components. Con-
tingency plans which include stockpiles of foreign-
produced goods can be costly and time consuming,
but may be the only way to prevent a production
bottleneck.
Others practice virtual vertical integration. They
visit potential local suppliers to inspect the working
conditions and equipment before signing any
contract. Financial support and quality training may
subsequently be provided to selected suppliers of
essential raw materials. The costs of poor quality,
in terms of reworks, repairs and clean-ups, finding
alternative sources and losing goodwill may be com-
municated. At least two ventures sent their methods
engineer and quality control specialist out to the sup-
plier for at least a week. They provided technical
assistance for the design and operation of assembly
and production processes. This can reduce the prob-
lems with poor quality products and the time required
for inspecting incoming supplies. Nevertheless, most
ventures still examine all delivered merchandise and
order unsatisfactory shipments to be returned to the
supplier.
A quality certificate may be issued when the sup-
plier meets certain conditions. The supplier may sub-
sequently use it to stimulate third-party sales in China
or to export. Some ventures have developed strong
alliances with their domestic suppliers. These
relationships are expected to pay off as just-in-time
production becomes viable in China. The IS0 9000
standards have been a useful foundation for a com-
prehensive quality management system. Guanxi is
also helpful for procuring certain raw materials. In
some cases, even monetary incentives are not suf-
ficient to assure quality and quantity. Production
technology and management control must usually
accompany this cash infusion. Some suppliers will
initially produce acceptable components but find it
difficult to maintain their quality with adequate quan-
tities on a timely basis. They may sever links with
firms that complain too much. The greatest difficulties
frequently arise with the simplest components.
Relationships with Customers
The problems of quality, which are typified by the
question of ‘whether the product should be acceptable
to the foreign parent or need only satisfy the standards
of the local market’, extend to export marketing. The
local partner may want to emphasize foreign sales,
but may not realize that these require a good product,
attractive packaging and delivery flexibility in
addition to competitive pricing. Low productivity
and poor quality often preclude such an approach.
In some ventures, unexpectedly high operating costs
have drained money that was earmarked for overseas
marketing.
The local partner is often more interested in max-
imizing sales, rather than worrying about dissatisfied
customers or lost export opportunities due to shoddy
quality. They may also wish to control the price, with
their sense of social responsibility requiring that it
not be too high. The foreign partner will favour price
increases at least in line with domestic inflation, to
reflect rises in key input costs. Thus, the authority for
setting both domestic and international prices is an
important aspect of a joint venture contract. In most
Shanghai success stories, the foreign partner had
exclusive pricing authority for exports and also con-
siderable influence on domestic prices.
Concerns may also be expressed about the possi-
bility of domestic competition if the price is too high.
Most foreign partners will view such competition as
healthy for their industry and customers. They are
more interested in developing the domestic market.
With 1.2 billion people in China, market saturation is
unlikely in the near future. The local partner may
have to be convinced that reduced imports of a spec-
ific commodity have the same effect as generating
exports; hard currency saved is no different than that
earned abroad. The ability to repatriate venture profits
since 1986 has created one more issue which must be
considered.
Until the late 198Os, joint ventures were limited to
export-oriented activities. As these restrictions were
relaxed, some of the Shanghai ventures tried to
develop local markets for their products. This has not
been easy despite international levels of quality and
lower prices than their imported counterparts.
Although the foreign partner can initiate market
research, market segmentation and specific pro-
motion, it is also critical to understand local pref-
erences and traditional selling customs. Many local
buyers still prefer foreign goods even when the choice
appears irrational. For example, the new Shanghai
Metro underground bought its escalators from the
European parent firm rather than its joint venture.
Foreign travel perquisites for the purchaser as well as
misperceptions about the levels of technology and
quality in the venture appeared to be factors in this
decision.
Nevertheless, the strong support of local authorities
and their location outside of the Special Economic
Zones have made it easier for the Greater Shanghai
ventures to penetrate the local market. The devel-
opment of customer loyalty can be a very slow, dif-
ficult and often frustrating process in China.
However, many of the pioneering ventures now feel
that they have a firm foothold in the domestic
market. As an example, a pharmaceutical venture
now sells 90 per cent of its output in China, with the
majority being direct sales to hospitals in Greater
Shanghai. Chinese consumer behaviour makes this
a tremendous advantage for future business develop-
rnents4
Long Range Planning Vol. 28 October 1995
 communications between them and their employees
are critical to surmounting inevitable obstacles and
achieving success. Nothing should be taken for
1. Select a suitable partner. granted. Commitments of any kind should be written
A foreign investor should invest the time to find an down. Vagueness or deferred discussion of con-
appropriate Chinese partner. Complimentary attributes tentious issues will inevitably lead to mistrust and
can be the basis for business synergy. Established major disputes. It is important that actual operations
relationships of the local partner can be instrumental in
begin as smoothly as possible within this dynamic
overcoming bureaucratic hurdles.
environment. Each Shanghai pioneer had con-
2. Bridge cultural differences. siderable frustrations during the set up and devel-
A foreign investor should be knowledgeable about
Chinese cultural values and business systems.Ethnic
opment of their joint venture. Nevertheless, the
Chinese or Westerners who truly are ‘old China hands’ difficult groundwork in being there first and ‘eventu-
can act as a bridge between the partners and help to ally getting things right’ is now bringing healthy fin-
overcome government bureaucracy.Unfottunately, ancial rewards.
there is a current scarcity of such individuals.
The partners must be patient and dedicated to the
3. Develop a relationship before signing the contract. success of the venture. This dedication should be
The two partners should discuss their respective goals demonstrated at the beginning of their collaboration,
and objectives for the prospective joint venture.The
with ample time devoted for formal negotiations and
scope and nature of the business should be clearly
specified and a comprehensive feasibility study conduc- informal communications. As one manager told us,
ted.The contributions and responsibilities of the part- ‘if you want to benefit from the tremendous oppor-
ners should be clarified before the formal contract tunities here, you must show your commitment’. The
negotiations commence.Nothing should be assumed or Chinese are anxious to receive foreign technology and
taken for granted.
capital, but they wish to restrict the import of Western
4. Facilitate technology transfer. ideology.
A structured and systematic approach to the transfer of The Shanghai pioneers are optimistic about busi-
relevant process and/or product technologies must be
jointly planned and implemented by the partners.The
ness prospects in China. Supplies, sales and dis-
foreign partner must be prepared to provide training tribution are increasingly governed by market forces.
which facilitates the effective use of the technology- As economic decision-making is decentralized, fore-
.Boundary spanners and even personnel in major sup- ign firms are increasingly free to find the best joint
pliers as well as employees in rhe focal joint venture
venture deal. However, government interference and
may need to be trained.
macroeconomic instability remain concerns. Mul-
5. Institutionalizequality. tinational firms with plans that include China must
A quality management system, perhaps based on the
IS0 9000 standards, must be institutionalized in the joint
seriously consider the merits of locating in the Heart
venture as well as backwards along its supply chain. of the Dragon. Shanghai is likely to be a bellwether for
the entire country’s economic reform programme.57,58
Source: adapted from Martinsons and Tseng (1993). The presence of a good infrastructure, a strong com-
mercial tradition, an efficient local government and
business incentives distinguish Greater Shanghai
The Bottom Line from other regions in China. The city is now being
re-established as a major international commercial
Business in China has been historically difficult for
centre and the financial capital of China. It is already
foreigners. Among the thousands of large-scale joint
the biggest industrial centre in Greater China. These
ventures set up in China, only a few have been for-
factors favour the effective transfer and management
mally declared failures or abandoned. Many others
of higher-level technologies. As a result, Greater
have been scaled back or are still losing money.
Although the size and complexity of China make it Shanghai offers an attractive environment for busi-
difficult to generalize, poor partner relations and a ness development. Armed with the lessons which
lack of trust are common among this group. Success many of the pioneers have painfully and expensively
requires overcoming significant political, financial learned, other foreign firms can venture into the Heart
and operational hurdles. Table 8 lists the critical fac- of the Dragon with realistic expectations. They can
tors for a successful foreign-Chinese joint venture. then effectively participate in, and benefit from the
Technology management is becoming an increas- second stage of the modernization drive in China.
ingly important facet of a competitive venture.55z56
Our discussions with the Shanghai managers suggest
The authors wish to acknowledge the financial support of a (Hong
that extensive preparation, plenty of hard work and
Kong) University and Polytechnic Grants Council grant for part of
the on-going commitment of both partners are essen- the research which is reported here. They are grateful to the Shang-
tial to deal effectively with monolithic bureaucracies, hai-area joint venture managers who participated in these
motivate workers and balance foreign exchange. Good discussions.

Successful Joint Ventures in the Heart of the Dragon

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Successful Joint Ventures in the Heart of the Dragon