Business Strategy, Market Structure, and Performance of International Joint Ventures: The

Case of Joint Ventures in China

Author(s): Yadong Luo
Reviewed work(s):
Source: MIR: Management International Review, Vol. 35, No. 3 (3rd Quarter, 1995), pp. 241-264
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mirvol.35,1995/3,
pp.241-264 Httft I V

liilju milLuuil RAvintif

© Gabler Verlag 1995

Yadong Luo

Business Strategy,Market Structure,and

Performanceof InternationalJointVentures:
The Case of JointVentures in China 1
Abstract

■ This paperexaminestheinfluenceof businessstrategy

and marketstructure
of international
variableson theperformance jointventures(IJV) operating
in P.R. China.
salesforcemarketing,
■ It was foundthatproductquality,pricing, and flexible
businessdeterminants
termsof paymentare significant of IJVperformance.
■ Industry
growthappearto have a positiveeffecton IJV'saccountingreturn
and domesticsales,and a negativeimpacton venture'sexportgrowth.
■ Industry partnerselectionand timingofentryare significant
structure, mod-
eratorsaffecting betweenbusinessstrategy
therelationship variablesand IJV
performance.

Key Results
■ Althoughextremely promising,the Chinesemarketcan presentdaunting
challengesto theunwaryinvestor.Successin China requiresan understand-
ing of theuniquemarketstructure and theadoptionof a realisticbusiness
strategy.

Author
YadongLuo, AssistantProfessor of Management,
Collegeof BusinessAdministration,
University
of Hawaii at Manoa, HI, U.S.A.
1994,revisedJanuary1995.
receivedSeptember
Manuscript

mirvol. 35, 1995/3 241

Yadong Luo

Introduction

As theworld'slargestdevelopingcountryand fastest-growing economy,China

continuesto attracta greatamountof foreign directinvestment (FDI) and has
now becomethesecondlargestFDI recipient in theworld(surpassedonlyby
theUnitedStates).International jointventures(IJVs)constitute thepredomi-
nantmode of entryintothispromising market.However,theChinesemarket
can presentdauntingchallengesto theunwaryinvestor.Successin China re-
quiresan understanding of theuniqueinvestment environment and theadop-
tionof a realisticorganizationalstrategy.
Theoretical inthebusinesspolicyareahas increasingly
literature emphasized
a cleardistinction betweentwolevelsof organizational strategy:1) industryor
corporate-level strategy,concernedwithquestionsaboutwhatindustry or busi-
nessto competein,and 2) business-level strategy, concernedwithquestionsof
howto competewithina particular industry.Bothbusinessstrategy and market
structure determinants ofcorporatesuccesshavebeenextensively analyzedand
investigated (Calof 1994, Chauvin and Hirschey1993, Hoskisson and Johnson
1992,Levinand Meisel 1992,McWilliamsand Smart1993). In theIJVlitera-
ture,however,previousstudieshave not systematically examinedthesimulta-
neousimpactof businessstrategy variablesand marketstructure elementson
IJV performance. The presentpaper attemptsto fillthisempiricalgap. The
selectionofChinaas theanalyticalcontextseemsparticularly meaningful since
thatcountry, as statedearlier,is a majorFDI recipient in theworld.Moreover,
itstransitionalmarketstructure providesa greatscopeforinvestigatory analy-
sis. This studyis, therefore, designedto researchempirically the underlying
linkagebetweenfirm-and industry-specific variablesand theperformance of
IJVsin China,basedon data collectedinJiangsuprovince, P.R.C. To theextent
thattheChinesesettings are analogousto thosein otherdevelopingcountries,
thefindings ofthisstudyhaveimplications forinternationalfirmsentering these
markets.

LiteratureReview

In recentyears,multinational corporationshave increasinglyused IJV as a

vehicleforforeigndirectinvestment(Beamish and Banks 1987,Geringer1991,
Parkhe 1993). As an alternativeto eitherfullintegrationor simplemarket
exchange,theIJVfacilitates learningand transfer
inter-firm assets
ofintangible
(Buckleyand Casson 1988, Hamel 1991). Moreover,if the benefitsderiving

242 mir vol. 35, 1995/3

 Business Strategy,Market Structure,and Performancesof IJV

fromjoint efforts, minusthe transactioncosts specificto the formation and

operationoftheIJV,remaingreaterthanthesumofthosebenefits fromexploit-
ing firm-specific advantagesseparately,an IJV creates"synergies"and en-
hanceseconomicrentsto thepartners(Hennart1991).These synergies can be
theresultofriskreduction, economiesofscaleand scope,productionrationali-
zation,convergence oftechnologies and betterlocal acceptance(Harrigan1988,
Parkhe1993).
As a corollary,thesynergistic effectsare largerthegreaterthecomplemen-
tarity between foreign and indigenous firms. Hence, in a host countrywith
unfamiliar cultural,political and economic systems, an investing companyis
morelikelyto cooperatewithan indigenousfirm,whichhas uniqueindustry-
or firm-specific skillsand advantagesthatare verycostlyto duplicate(Hamel
1991,Parkhe1991).In lessdevelopedand non-market economiesin transition
(e.g.,China),forming IJVs with local partners constitutes a particularly attrac-
tiveentrystrategy; indeed, in those environments, MNEs confront a higher
intensity of interaction withtheirexternalenvironment and facegreaterdiffi-
cultiesin local adaptationand information collection(Ghoshal and Bartlett
1990). Such difficultiesresult from a host of factors,includingdissimilarcul-
tures, socialand politicalpressures, different economic development stages,and
idiosyncratic business practices.
In recentyears,MNEs' investment flowshave increasingly been directed
towarddeveloping countries wherethemarketstructures areperceived to be less
perfect than those of developed countries. The mainstream of FDI literature
explicitly viewsFDI as a responseto marketimperfections2. Marketimperfec-
are
tions,in general, impediments to the "simple interaction of supplyand
demandto seta marketprice"(Rugman1981).According to industrial organi-
zationeconomics,firms inoligopolistic industries enjoytheadvantagesofecon-
omiesof scale and othercharacteristics thatgivethemmarketpower.In order
to minimizethedisadvantagesof beingforeignand achievesufficient market
powerto compete with local the
competitors, foreign investor needs to integrate
his core competencies and thecharacteristics of a desiredindustry efficiently
(Nohriaand Garcia-Pont1991).
More importantly, in itsbid to succeedin a hostmarket,a foreign investor
has to be concernedwiththe applicationof home-tested business strategy
factorsin a new environment. Previousstudiesin the strategicmanagement
literature have heavilyfocussedon theeffectof businessstrategy variableson
firmperformance. Kobrin(1988)and Hennart(1991)havefoundthattheequity
distribution and subsequentperformance ofjointventures areinfluenced bythe
expectedstrategicimportanceof the foreignfirm'sR&D intensity. Harrigan
(1988) and Kogut and Singh(1988) have demonstrated thatthe size of the
targetedIJVrelatedto thatof theforeignfirmis an important factoraffecting
theentry modeand IJVperformance. and
Phillips Chang(1983) and Dawar and

mirvol.35, 1995/3 243

Yadong Luo

Parker(1994) have empirically shownthatproductqualityhas a significant

positiveimpact on firm'seconomic performance. Gallegoand VanRyzin(1994)
summarized theirfindings byarguingthatpricingis positively linkedwithfirm's
profitand mediatedby productqualityand marketfactors.Chauvin and
Hirschey(1993)offered evidencethatadvertising createsand maintains product
differentiation and hencepositively relatesto firm'sprofitability.
Parallelly,therelationship betweenfirmperformance and market-structure
or industry characteristics has beenwidelyinvestigated in bothstrategic man-
agementand industrial organizationliteratures.Craigand Douglas (1982) and
Mitchell,Shaver,and Yeung(1993) havefoundthata largemarketshareleads
to highprofitability becauseitgivesa firma productdifferentiation advantage,
enabling it to affect someindustry-wide restrictionof output,increasesitsbar-
gainingpower,and offers theadvantagesofeconomiesofscale.Bass,Cattinand
Wittink(1978) and Willmore(1994) arguedthatindustry sales or profitability
growthand concentration in themarketto influence
interact marketshareand
firmperformance becausein a moderategrowthand concentrated industry, the
effectof marketshareon profitability is strongersincefirmscan coordinate
theirefforts in oligopolisticfashion,and thisoligopolistictendencies enhance
theindustry's rateof returnand betterenabletheadvantagesof economiesof
scale.
It shouldbe notedthattheabove resultsare not acceptedwithoutcontro-
versy.For example,Craig and Douglas (1982) foundthatadvertising, R&D
intensity,and other firm-specificvariables had significanteffects on firm's
market-based performance, but not on accounting-based of
measures perfor-
mance.As Seth (1990) has pointedout, manycontroversies concerningthe
linkagebetweenstrategic determinants and firmperformance are primarily due
to usingdifferent and single(eitheraccounting- or market-based) performance
measures.Giventheinherent weaknessesofsinglemeasuresofperformance and
in orderto captureand probedifferent strategic of
objectives foreign investors
and thecorresponding rolesofIJVs,in thisstudy,IJVperformances is measured
alongtwodimensions: accountingreturn(ROI and ROA), and marketgrowth
(domesticsales and exportgrowth).

The Contextual Setting - IJVs in China:

Background, Market and Policy Factors

Background

opened its door to foreigninvestment

China officially in 1979 throughthe
promulgationof itsjointventurelaw. Sincethenand throughtheend of 1993,

244 mir vol. 35, 1995/3

 Business Strategy,Market Structure,and Performancesof IJV

Chineseauthoritieshave approvedover 167,500foreigninvestedenterprises

involving$ 241.50billionforeigncapital. Over 80,000 venturesrepresenting
$67.2 billioninvestment have commencedoperation{People's Daily 1994a).
The industrialoutputof theseventures has reached11% of nation'stotal,and
about tenmillionChineseare currently employedin theseventures{People's
Daily 1994b). Table 1 revealstheprimary patternsof foreigndirectinvestment
in termsof sources,locations,and industries.
Foreigninvestors are freeto chooseamongthreeentrymodes:equityjoint
ventures, whollyforeign-owned enterprises,and contractual(or cooperative)
joint ventures.Thereis no ceilingon theproportionof foreigncapitalin the
jointventure.In recentyears,althoughtheratioofwhollyforeign-owned ven-
tureshas beengrowing(about 7% priorto 1990and 22% in 1993,in termsof
numberof ventures), theinternational equityjoint ventureis stilla dominant
mode whichaccounts for 64.72% of thetotalnumberof projectsand 55.73%
of thetotalvalue of utilizedcapitalin 1993 {People'sDaily 1994b).

Market Structureand IndustrialPolicy

In recentyears,theproductionand thesales structure of IJVsin China have

beenchangingmarkedly.The percentageof capital-and technology-intensive
projectshas increasedto about 35 percentoftotalnumberofventures in 1994,
and thegrowthrateis muchhigherthantheaverageforinvestments in telecom-
munications, transportation,and electric power{People'sDaily 1995a). It seems
thatforeign investorsintheseindustries relyon theirspecificcompetencies inan
effortto achievemonopolisticcompetitionadvantagesfromChinesemarket
structureimperfections. On theotherhand,thelabor-intensive lightindustrial
products continue to constitutemajorexportitems, and the processing-export-
ingpatternremainsunchanged.Apartfromthe obviousbenefitof low labor
cost, the preferentialtreatment accordedto export-oriented productsby the
authoritiesmayalso contribute to thepattern.
Despite greatimprovements in recentyears,China's industrialstructure
remainsone of bottleneckshamperingeconomicdevelopment.Some major
structuralproblemsinclude(1) inadequatepowersupply;(2) slowergrowthof
rawmaterialsindustry as comparedto themanufacturing industry; (3) obsolete
manufacturing technologies; and (4) poor communication and transportation
infrastructures.
In accordancewiththeChineseindustrialpolicy,foreigninvestorsare en-
couragedtoinvestinthehighexportratioprojectsand innewequipmentornew
materialsconcernsthatcorrespondto domesticneeds,particularly in theener-
gy,transportation,and telecommunications In
industries. other areas,especially
thosethathavealreadybeendevelopeddomestically, thosethatinvolvetheuse

mirvol.35, 1995/3 245

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246 mir vol. 35, 1995/3

 Business Strategy,Market Structure,and Performancesof IJV

ofwidelyavailabletechnology, or industriesassembling importedpartsor pro-

ducing forthedomestic market,foreign investors facemanyrestrictions.
In sum,thereis a twofoldimpactofChinesemarketstructure on theperfor-
mance of foreignventures:First,the profit/sales growthrate of the specific
industrytheinvestor has selectedwillaffect
theventure's and market
accounting
performance; Second, the of as
categorization projects technologically-ad-
vanced,export-oriented, and domestic-oriented willaffecttheventure's
eligibil-
for
ity preferential treatment from the government, thusinfluencingthefirm's
Whetheror nottheseeffects
profitability. are significant
forIJVperformance is
an empiricalquestion.

The Context of Business Strategy Variables

Foreignventuresfaceless government intervention at thebusinessunitlevel,

compared to thecorporate operation level.Nevertheless,therestillexistcertain
on
restrictions, productquality,pricing and in
advertising particular.
Accordingto China's productqualitylaw, producersare prohibitedfrom
manufacturing productsthatare deemedbythestateto be obsolete.Producers
thatfailto complywiththisprovisionmaybe orderedto cease production, and
have theirbusinesslicenserevokedand sales proceedsconfiscated. At a mini-
mum,all productsmustmeetthestandardproductqualityrequirements, which
are determined by either the State Council qualitysupervision and control
departments or industrycustomand practice.China has also establisheda
spot-checksystemwherebycentralor local authorities examinethequalityof
majorindustrial products.Resultsof thesespotchecksare to be madepublic.
The pricingof IJV productsis regulatedby the provisionsof the joint
venture law. Accordingto itsguidelines, venturescan freelysetthepriceoftheir
exports,exceptthosecontrolledby Chineseforeign tradecorporations. As for
productssold on thedomesticmarket,theirpricesdependupontheirclassifica-
tioninto one of the threecategoriesdetermined by law. These includefixed
pricing,managedpricing and freepricing. practice,IJVsdo notproducethe
In
of
type goods thatare controlled
rigorously bytheChinesegovernment. Indeed,
it is highlyunlikelythat the authoritieswill be forthcoming in gratingthe
necessaryapprovalsfora productionprojectof thisnature.
In China,advertising fordomesticand foreign productswas reinstituted in
1979aftera ban instituted during the Cultural Revolution.Advertising volume
is now growingat about 30% annually.A varietyof mediahave beenused by
theforeignventuresto advertisetheirproductsand servicesin China. Despite
thepositivefunction ofadvertising, theChinesegovernment does,in fact,have
regulations in place designedto controladvertising practices.The regulations
stipulatethatadvertising mustbe clearand truthful and maynot"hoodwinkor

mirvol. 35, 1995/3 247

Yadong Luo

deceiveend-usersand consumers."Nor may advertisements includecontents

thatcontradictstatepolicies,divulgestatesecrets,be harmful to thedignityof
China's nationalities.
In theprocessesof implementing theirbusinessstrategies, foreignventures
haveto faceChinesebusinesspracticesoftensharplydissimilar to thosepreva-
lentin theirhomecountries.As a result,sensitivity to local Chinesebusiness
conditions,suchas theimportance attachedto personalrelations(guanxi)with
customers,or the practiceof extendingcredittermsin marketingmustbe
developed.In particular, and extendingfirm'sguanxishouldbe a
cultivating
preoccupation forbusinesssuccess.Giventhepervasiveinfluence of Guanxiin
Chinesesocieties,salesforcemarketing is a crucialsellingtoolforfirmsoperat-
ing in theseenvironments. Likewise,the provisionof preferential termsof
payment forcustomers is common acrossfirmsand ineveryeconomicsectorin
China.

Variables and Research Hypotheses

Business StrategyVariables

Variables Analyzed in the Market Economy Context

As discussedin the literaturereview,much researchhas been done in the

identificationof the significantand positiveeffectsof businessstrategy vari-
ables,suchas R & D intensity, and
size,productquality,advertising, pricing,
on firmperformance. However,since thesestudiesoftenassume a market
economycontext,theirfindingsmay not be applicablein China. As noted
earlier,theimpactof thesevariableson IJVperformance is likelyto be influ-
encedbytheChinesegovernment policiesand local businessconditions.Since,
in theabsenceof theoretical grounding or empiricalsupport,conclusionsfrom
previous studiescannot be extended to FDI in a transitional
non-market econ-
omy, the followingrelationship is presentedhere tentatively, and only as a
researchquestion:
Do thebusinessstrategy variables,
commonly analyzedin thecontextofmar-
keteconomies, havesimilarinfluences on theperformance of IJVsoperating in
China?

248 mir vol. 35, 1995/3

 Business Strategy,Market Structure,and Performancesof IJV

China-Specific Variables

Sales Force Marketing

As mentionedearlier,Chinesenationalstendto relyheavilyon personalrela-
tionships{guanxi)in businessdealings(Chen 1994).In China'snew,fast-paced
businessenvironment, guanxihas becomeextremely important.It has in large
part filledthe vacuum and is more entrenched than ever,heavilyinfluencing
Chinesesocial behaviorand businesspractices(Punnettand Yu 1990). Guanxi
providesthelubricantfortheChineseto getthroughlife.It is a formof social
investment. No companyin theChinesebusinessworldcan succeedunlessit
benefitsfroman extensiveguanxi.Guanxibindsliterallymillionsof Chinese
firms intoa socialand businesswebthatcan be particularly usefulforIJVswith
littlebusinessexperienceor lackingthe core competencies thatare scarcein
China. Sales forcemarketing, an activityheavilydependenton guanxi,has
becomean increasingly popularand effective marketing means.In additionto
marketing personneldispatchedbyheadoffice, companiesin Chinaoftensetup
regionalsales officesin majortargetareas.
Althoughguanxibringsobligationsand costs (renjing)to its beneficiary,
theseare mainlysocial obligationsratherthaneconomicones,moreover,the
marginalcoststo developand nurture guanxi,comparedto thecorresponding
marginalbenefits, are exceedingly low. Therefore,themarginalcontribution of
sales forceexpenditure to accountingreturnis normallyhigh(> 1). In viewof
theabove,thefirsthypothesis statesthatsalesforceexpenditure is significantly
andpositively relatedto both accountingreturn and domesticsales growth.

Credit-Liberalization
Accordingto a recentreportoftheChineseStateStatistical Bureau,theaverage
age of domestic accounts receivables is growing{People's Daily 1994b). Ac-
counts receivables open more than 90 daysarenotuncommon, oftenrepresent-
inga substantialpartof a company'sliquidresourcesin China. This situation
can be attributed to twofactors:1. Preferentialtermsofpayment, particularly,
temporal extension ofpayment deadlines, are widelyused in China as a primary
marketing pool. This practicemaybe,
credit-granting to some extent,a reflec-
tionof culture.In a countrywhere personal relations are
{guanxi) painstakingly
nurtured and themaintenance ofharmonyis ofparamountimportance, sellers
woulddo theirutmostto avoidembarrassing customerswhomaybe temporar-
ilyunableto pay;2. A sustainedtightmonetary policyreflectedin a increasein
interestratesand a reduction in banklendingand moneysupply(a situationof
'creditcrunch'),has resultedin liquidityproblemsformanybusinesses,partic-
ularlythoseheavilyrelyingon bank loans. In addition,in a recentstep,the
government is separatingbank functionsof policydirectingand commercial
services.This measureleads thebanksto controlmorestrictly theirlendingto

mirvol. 35, 1995/3 249

YadongLuo

lessefficientcompanies,particularly unprofitable As a result,many

statefirms.
statefirmshaveencountered a "triangular debt"problem,wherebystatecom-
panies own large sums of moneyto each otherbut no cash to settletheir
accounts.Under thesecircumstances, the presenceof preferential termsof
payment is ofspecialsignificanceto firmsfacingcash flow To
problems. sumup,
thepracticeof permitting customersto delaypaymentfora longerperiodis a
crucialsellingtool forChinesefirms.Based on theprecedingobservations, itis
hypothesized thatthegrowthrateofdomesticaccountsreceivable foran IJV in
Chinais positively relatedto itsdomesticsales growth.
However,the credit-granting practiceresultsin greatercosts (interestex-
pense and bad debt allowance) wellas financialrisk(transaction
as exposure
and defaultrisk)fortheseller.Therefore, thegrowthrateofdomesticaccounts
receivableforan IJV inChinais expectedtobe negatively relatedtoitsprofitabil-
ityon accruedaccounting principlebasis.

Market StructureVariables

IndustrySales and Profitability

Growth

A widelyacceptedconceptualframework in international
businessliterature is
thatforeigndirectinvestment is a responseto marketimperfection (Brewer,
1993).As discussedin theliterature review,somestudieshave also foundthat
theindustry sales and profitabilitygrowthratehave a positiveimpacton firm
performance (Bass, Cattin and Wittink 1978, Newfarmerand Marsh 1994,
Willmore1994).In China,theindustry and marketstructures are stillfarfrom
perfect.Some sectorsof the are
economy undergoing transitionor have been
fullyprivatized,whileothershavenot.In addition,thereareincoherences inthe
pricesystem.For example,thepricingof a fewcommodities, particularly raw
materials,stilloperatesundertheso-called"dual-track"pricingsystem, one set
by thegovernment and theotherby marketforces.As a result,whengovern-
ment-instituted supplyand pricingcontrolsare liftedin an industry, a rapid
initialdevelopment ina surgeinindustry
willusuallyensue,and is reflected sales
and profitgrowth.
Perhapsnot surprisingly, wheneverthe Chinesemarketfora particular
industry to
appears growdramatically, IJVsgenerally tendto concentrate their
on or
operationalgoals exploring exploiting booming the local market, rather
thanon exporting to homeor international markets.In viewof theabove,the
following hypothesis statesthatindustry sales andprofitability
growth is expect-
ed tohavea positiveinfluenceonIJVaccounting anddomestic
return salesgrowth,
and a negativeimpacton IJV exportgrowth.

250 mir vol. 35, 1995/3

 Business Strategy,Market Structure,and Performancesof IJV

Project Category

The categoryof investment projectsis an important marketstructure variable

in China becausedifferent projectcategoriesare facedwithdifferent degreeof
entrybarriersimposedby eitherthecentralor local government, and treated
withdifferent tax,tariff,financing, and land rentpolicies.
According to currentChinese policy,foreigninvestorsare encouragedto
investin (1) transportation, energy, and telecommunications projectswithnew
technologies; (2) projectsthat willintroduce technology urgently neededbythe
State,renovateproductfunctions, saveenergyand rawmaterials, reducepollu-
tion,upgradeproductqualityand expandworldmarket;(3) newequipment and
new materialsprojectsthatwill respondto domesticneeds,especiallythose
producing rawmaterials, sparepartsand components accommodating domestic
products;(4) new and
technology equipmentprojects thatwill make a compre-
hensiveuse of locallyabundantand renewableresources.In contrast,foreign
investors facerestrictions in investing in projectsthathave alreadybeendevel-
oped domestically; that use standard technology;and thatmerelyassemble
imported to
parts producegoods sold on thedomesticmarket.In sum,thereare
threecategoriesof projectsthatare subjectto differential governmental treat-
ment:technologically-advanced, export-oriented, and domestic-oriented.
Accordingto the"Provisionsto EncourageForeignInvestment" promul-
gatedby the State Council in 1986, the "technologically-advanced" and "export-
oriented"typeof productsbenefitfromthe followingpreferential treatment:
(1) Reduction in corporate income tax. For instance,currently therate forthese
privileged projectsis 10-24% whiletheratefordomestic-oriented projectsis
33%; (2) Reductionin land-usefees;(3) Exemptionfromtheprofitremittance
tax;(4) Receiptof"priority" inobtainingwater,electricity, transportation, and
communication services.Hence,itisproposedthatinvestors in "technologically-
advanced"and "export-oriented" projectswill outperform othersin termsof
accounting return.

Control Variables

FDI is an ongoingand dynamicprocess.In unfamiliar environments, thelearn-

ing effectforIJVsis likelyto be magnified(Shan 1991). Yet, IJVsof shorter
durationare morerisky,otherthingsbeingequal, sincethereis a higherprob-
abilitythat the venturewill cease operationbeforesufficient returncan be
generated or beforethe full
potentialof theIJV can be Even
realized. whenthe
ventureagreement is renewable,theshorterdurationspecifiedin thecontract
maymeanmorefrequent renegotiation,whichintroduces uncertainties
forthe
foreign Further,
partner. thoseforeigninvestorswith an earliertimingentering

mirvol.35, 1995/3 251

Yadong Luo

Chinaare likelyto gainaccessto scarceresourcesand acquirevaluableexperi-

ence.Therefore, it is likelythata positiveassociationexistsbetweenthelength
ofIJVoperation(a hybridoftimingand durationofinvestment) and itsperfor-
mance.
In addition,priorresearchhas shownthatpartnercomposition is an impor-
tantvariableaffecting IJVperformance, becausethespecificpartnerchosencan
influencetheoverallmixofavailableskillsand resources, theoperatingpolicies
and procedures, and theshort-and long-term of an IJV (Geringer
variability
1991).
The empiricaltestingwillrequirea modelwhereall constructs havingan
effecton each otherare included,because omittingconstructs froma model
could bias theresultsand limittheempiricalvalue of thestudy.Based on the
preceding, partnerselectionand lengthof operationare incorporated in this
studyas controlvariables.

Data and Methodology

Model and VariableMeasurement

The generalizedmultivariate regressionmodeland variablemeasurement used

in thestudyare providedin theAppendix.
The following threeremarksmayhelpin theinterpretation ofthestatistical
model.First,usingstockmarketrelatedmeasuresas market-based dependent
variablesis neitherappropriatenor availablein China becausethenumberof
IJVslistedin the Chinesestockexchangesis exceedingly small,and foreign
portfolioinvestorsare still subject to restrictions in purchasingso-called
"B shares"(commonstockdenominatedin foreigncurrencies) of theexisting
jointstock companies.Second, it wouldhave beenmore desirableto addition-
ally use a nationalconcentration ratio or the Herfindahl-Hirschman Index
(HHI) to measuremarketstructure. However,thesedata are not available.
Moreover,althoughentryand exitbarrierand mobility patterncouldbe coded
as dummyvariables,itmaynotbe advisable,in theChinesesettings, to simply
and subjectively code in thisway.Third,itis widelyrecognizedthattheimpact
ofbusinessstrategy variableson firmperformance couldvaryacrossindustries
(Caves and Mehra 1986)and othercontextualfactors,suchas partnercompo-
sitionand timingofentry(Harrigan1985).Accordingto theearliertheoretical
argument and empiricalfindings, themodelhas two groupsof interactions as
shownin theAppendix.

252 mlr vol. 35, 1995/3

 Business Strategy,Market Structure,and Performancesof IJV

Data and Sampling

A difficultyinconducting researchon businessinChinais thescarcity ofreliable

data. Onlyin recentyearsChina has begunto made data availableon foreign
investment activities.However,currentstatedata bases regardingforeignin-
vestment reflectonlysome aggregatefiguresabout FDI activities.The firm-
specificfinancialdata is availableonlyfromthelocal entities, suchas commis-
sionsofforeign economicrelationsand trade,foreign exchangeadministrations,
and taxationbureaus.Foreignresearchers seekingto accessthisinformation for
surveypurposescan obtainit bycontacting numerouslocal state-owned inter-
nationalconsulting companies.
cross-sectional
Initially, data fora randomsampleof 127IJVsfrom1989up
to 1991in JiangsuProvincewereobtainedfromtheProvincialCommissionof
ForeignEconomicRelationsand Trade,wheretheauthorworkedas a depart-
mentheadat thetime.However,eightofthesefirms (4 fromHong Kong,2 from
Taiwan,1 fromtheU.S., and 1 fromThailand)exporttheirentireoutput.Since
theiroperationswere unrelatedto the Chinesemarketstructure, theywere
deletedfromour samplingdata. Thus,thefinalsamplesize in thisstudyis 119
IJVs.Amongthem,42 areexport-oriented, 36 technologically-advanced, and 41
domestic-oriented3. In addition,data on sevenIJVsincludedin thisstudywere
incomplete. To remedy thislimitation, an empiricalmeasurehas beenutilized,
i.e.,missing values are testedbyusing pairwisedeletionmethod(computethe
a
cov/corr matrix usingpairwiseinformation).
Jiangsunow rankssecondin China in termsof GDP and levelof foreign
investment absorption,as reflected in thenumberof foreigninvestedventures
and the total volume of foreigncapital. The policies,rules and measures
adoptedin theprovincevis-a-visFDI havebeenwidelyappliedelsewhere in the
country.
The timeframeofthisanalysis(1989-1991) is appropriatesincethisperiod
can be consideredas an operatingratherthanstart-upphase as faras foreign
investment is concerned.The government policies,rulesand regulations con-
cerningforeign investment were well established the
during period.
The data is based specifically on a surveyof the sampledIJVs'external
financialstatements (includingrelatednotes)thatall venturesare requiredto
submitto the ProvincialCommissionof ForeignEconomic Relationsand
Trade. These statements are: 01: Balance Sheet;02: Income Statements; 03:
DetailedSheetofExpenseand Expenditure; 04: DetailedSheetofGoods Sold4.
Anothersourceofsecondarydata has beena surveyfromtheAnnualStatistics
Reportof JiangsuProvince(ASRJP) from1989 through1991 publishedby
JiangsuStatisticalBureau.
The distribution of thesample(119 IJVsin total)by industry is as follows:
electronics(23), consumer goods (18), textiles(13), machinery(13), food pro-

mirvol. 35, 1995/3 253

Yadong Luo

cessing(11),constructionmaterials(7), agriculture
(6), engineering (4), medicine
and plastics(3), transportation
(3), petrochemicals (3), chemicals(3), packaging
(3), telecommunications(3) and others(6).

Analysis Procedures

The empiricaltestingof thisstudyis conductedthroughtheuse of Statistical

AnalysisSystem(SAS) software.Given theinteractions betweenthemultiple
dependent this
variables, studyemploys theGeneral LinearModels Procedure
(GLM) to runa multivariate regression. we
Specifically, use the ForwardSelec-
tion(selectionlevel= 0.10) regressionmethodto identify be-
the relationship
tweenindividualdependentvariableand forwardselectedindependent vari-
ables. Based on theresultof theforwardselectionprocess,thoseinsignificant
independent variables(p>0.10) are droppedfromtheregression list.
Considering theneed to examine theaggregatemultivariateeffectfromthe
wholemodel and theinterrelationship betweenbusinessstrategy and market
structure,and betweenbusinessstrategy and controlvariables,theGLM proce-
durealso incorporates a MANOVA test.

Results and Discussion

Business Strategy Variables

Resultsof theforwardselectionregression analysis(Table 2) and thegeneral

linearmodel statistics(Table 3) show the followingfindingsregardingfirm-
specificbusinessstrategyvariables.

Product Qualityand Pricing

Productquality(QUAL) significantly and positivelyaffectsall fourperfor-

mance measures,whereasprice is inverselyassociatedwith domesticsales
growth.The latterrelationship
supportstheviewthatChineseconsumerstend
to valuelow costoverotherproductattributes,
despitea tremendous growthin
realpurchasing power(Mahatoo 1990).In addition,thereis a significant
inter-
actionbetweenpricingstrategyand lengthof operation,suggesting a relation-
shipbetweenlinkingpricingand theproductlifecyclein China.Moreover,the
IJV'spricingpolicymayvaryacrossindustries.

254 mir vol. 35, 1995/3

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256 mlr vol. 35, 1995/3

 Business Strategy,Market Structure,and Performancesof IJV

R&D Intensity

R&D intensity demonstratesa marginally influence

significant on IJVperfor-
mance.Whilepositivelyassociatedwithmarketmeasures,itis negatively related
to accountingperformance. The relativelyshorthistoryof theIJVs(mostwere
setup after1984)mayexplainthisresult.Indeeditis arguedthatthefulleffect
of R&D expenditures on performance is likelyto transpire
aftera longertime
lag. However, as shown in Table 3, the interactionsof R&D intensitywith
operationlength,industry structure,and partnerselectionare all statistically
thus,R&D intensity
significant, seemsto varybyindustry, local partnerselec-
tion,and operationlength.

Advertising

Advertising (ADVT) is foundto havean insignificantinfluenceon firmperfor-

manceexceptfora moderatepositiveeffect on sales growth.However,ADVT
maybe efficientand moreeffectiveformarketing productsthathavehad a long
presencein theChinese market,sinceADVT interacts withlength
significantly
ofoperation.Indeed,businessesinChinaareturning to advertising
as a market-
ingtoolas evidencedbyincreasedspendingand employment intheindustry.On
theotherhand,givenitsshorthistory, in Chinaarefacingchallenges
advertisers
fromconsumers'attitude,governmental regulations, higherratesforforeign
advertisers(20% higher and in
payable foreigncurrency), and culturalinflu-
ences.Organizationallearningand adaptationin theChineseadvertising envi-
ronmentare important to thesuccessof foreignventures.

Size

and positiveimpacton local marketperfor-

Size is foundto have a significant
mance.Indeed,greatersizeimpliesan abilityto benefitfromeconomiesofscale
and scopeand investin advancedequipmentand technology (Kogutand Singh
1988). Theseare the
among competencies needed forforeigninvestorsin order
to outperform theChineselocal firms this
(Shan 1991).Besides, result
indicates
thatgreatersizedventuresare morelikelyto concentrate on Chinesedomestic
market.This evidenceis consistent withthefactthatmostinvestorsfromthe
UnitedStatesand Europehave beeninvesting in domestic-orientedcapital-or
technology-intensiveindustriesin Chinawhereas thesmall-sizedinvestorsfrom
to
Hong Kong and Taiwantend process and assembleimported materialsand
reexportthefinalproducts.
In sum, and to answerthe researchquestionQ formulatedearlier,the
presentresultssuggeststhatpreviousfindings about productqualityand firm

mirvol. 35, 1995/3 257

Yadong Luo

size in the contextof marketeconomiesare applicableto China. However,

advertising and pricingdo not have identicalinfluencesin the two typeof
businessenvironment. In addition,a givenvariable(e.g., R&D intensity)can
havedifferentiatedeffectson variousaspectsof performance, according the
to
environment. Thesedifferences
can be tracedto severalfactors,
suchas econom-
ic structureand development stage, cultural
and politicalcharacteristics.

Sales Force Marketing

Sales forceexpenditure (SFMK) has a statistically and positiveim-

significant
on and
pact profitability domesticsales growth.Thus,thehypothesis forsales
forcemarketing is supported.Indeed,guanxi,the fertilesoil forsales force
marketing, bindsliterallymillionsof Chinesefirmsintoan expensivenetwork
ofrelationsthatcan be particularly
usefulwhenexpandingmarketshares.With
theunprecedented economicdevelopment and modernizationtakingplace,Chi-
nese will possiblyreconcibletheirguanxiweb withthe rationaleof market
mechanisms. But fornow,guanxistillplaysa crucialrolein Chinesebusiness,
as itwillforyearsto come.To successfullydo businesswiththeChinese,foreign
investorsneed a basic understanding of guanxidynamics- evenif theydon't
wantto play by Chineserules.

Credit Granting

The growthrateof domesticaccountsreceivableis positively associatedwith

accounting return and local market growth. The firstpredictionforcredit-
grantingis hence supported, but thesecond prediction rejected.Thisrejection
is
couldbe attributed to threereasons.First,mostIJVsare notverydependent on
China'sbanklendingthereby lessvulnerableto thecreditcrunch.Second,most
IJVshavetheirowndistribution channelsand are lessvulnerableto the"trian-
gular debt" problem.Third, IJVsare widelyrecognizedto have been more
"conscious"ofcreditscreening and investigation thushavemaintained a better
customer/buyer the
network(People'sDaily 1994c). Indeed, quality of a seller's
own administration do matteron economicsof credit-granting in a material
way. IJVs that provide for adequate liquidityare going to have the bestchance
of survival.Vitalto anyIJVs long-term financialstrategy, liquiditywillplaya
significant and, turn, highlight importance accountsreceivable
role in will the of
management - inadditionto overallcashmanagement - as a matterforrenewed
companyattention.To be successful, an IJVmustestablishclear-cutworking
both
policies, internaland external,that willpromotethebestturnover ofcash
possibleand the maximum benefitsfrom economics of accounts receivable.

258 mlr vol. 35, 1995/3

 Business Strategy,Market Structure,and Performancesof IJV

Market StructureVariables

Industry salesgrowthand profitgrowthhave a moderatepositiveinfluence on

ROI, ROA and domestic sales growth rate (SGR), but a negativeimpacton
exportgrowthrate(EGR), thehypothesis industry for sales and profitgrowth
is thussupported.As a reflection of theimperfection of industry structure in
China,a particularindustry may experiencea suddenburstof sales growth.
Whenthishappens,IJVsmaytendto exploittherapidlocal expansionrather
thanturnto exports.Table 3 also showsthatindustry characteristics have not
been independently IJV
affecting performance. apparentlyIt interacts with
R&D intensity on ROA and SGR, withadvertising on SGR, and withpricing
on ROI and SGR, indicating thatit is, as pertheterminology of Sharmaetal.
a
(1981)5, quasi-moderator which moderates theform of relationship between
the aforementioned businessstrategyvariablesand IJVs returnand sales
growth.Overall,theseresultssuggestthatIJVstrategy and industry structure
and theirinteraction are essentialforunderstanding ventureperformance.
Sinceprojectcategory(CATE) is not significantly relatedto performance
measures, no causal relationship can be inferredbetween categoryof products
and firmperformance. the for
Thus, hypothesis projectcategory is rejected.This
resultseemsto indicatethat the incentives offered by the Chinese government
maynotfundamentally influence foreign investment decisions.It is possiblethat
investorsare primarily motivatedby marketentryratherthan production-
export concerns. In the technologically-advanced category,it takes a longer
timeto attainhighreturnand marketgrowthdue to thelong termnatureof
theseprojectsand thelargeamountoffixedcostsincurred. In theexport-orient-
ed category, it is a commonfeatureof thejointventureagreement to hold the
foreignpartnerresponsibleforimporting materialsand distributing exports
through its home company. It has become known that
recently many investors,
particularlythosefromHong Kongand Taiwan,inflatethepriceofimportsand
lowerthepriceofexportsoftheIJVso thatthebook marginforthe
artificially
IJVis quitelowbuttheactualreturn foritshomecompanyis ratherhigh.These
factsmaycontribute theabove empiricalevidence.

Relative Importance of Business Strategy and Market Structure

Accordingto theincremental R2 shownin Table 2, businessstrategy variables

explained over fortypercent of variancein and
profitability local marketing
growth,whereasmarketstructure variablesexplainedonlyabout tenpercent.
Thus,it can be said thatforChineseIJVs,businessstrategy determinants are
moreimportant foraccountingreturnand domesticsales growththanmarket
However,theeffects
structure. ofmarketstructure becomemoreapparentand
important when consideringexportgrowth rates.

mlrvol. 35, 1995/3 259

Yadong Luo

Withregardto theaggregate multivariateeffect

on theindividualdependent
variables,Table 3 suggeststhattheeffect on SGR, ROI and ROA is statistically
especiallyforSGR. The aggregateeffecton EGR, however,is not
significant,
significant.
Regardingcontrolvariables,lengthof operation(LEOP) is foundto be
statistically forall fourperformance
significant measures.Thisshowsthestrong
effectof a "learningby doing" phenomenonforIJVsin theChineseenviron-
ment,thereby lendingsupportto thetheoryofviewingan IJVas an instrument
for organizationallearning(Kogut 1988). Second, local partnerselection
(PART) is foundto have a significant impacton IJVs accountingreturnand
marketgrowth.However,PART does not independently affectfirmperfor-
mance, it moderates the form of between
relationship such marketing
strategic
factorsas venturesize and productinnovationand IJVperformance.

Conclusion and Implications

To recapitulate and summarize thepaper'smajorfindings, itwillbe recalledthat

a linkagewas established betweenhighmarketand accounting performance and
intensity of sales forcemarketing. Chinesebusinesspeople are naturallypre-
occupiedwiththetaskofguanxiconstruction. Theyhavedevelopedextremely
sophisticated skillsthat facilitate
the developmentof interpersonal relation-
ships.Many have made guanxi cultivationinto a fineart. To do business with
theChinese,westerners needa basic understanding ofguanxidynamics even -
iftheydon't wantto play by Chineserules.
It was also foundthatthereis a positiverelationship betweenIJVs account-
ing and market and
performance provision of lenient termsof paymentfor
customers ofIJVsin China,thatis,theelaborateplanforan extensionofcredit
to buyersis notsystematically linkedto lowerprofitability, althoughtheextent
to whichthesellercan go in providing creditfacilitieswithoutincurring unsus-
tainablecosts is veryfirm-and situation-specific. Flexibilityand solicitude
towardconsumerneedsappear to be of utmostimportance. We also see that
advertising did not affectperformance greatextent,giventhe factthat
to a
commercialadvertising is onlyone and a halfdecade old in China and con-
sumersmay have ambivalentattitudestowardits messages.The impactof
lenienttermsof paymentand advertising on IJVsuccessmaybe moderatedby
otherfactorssuchas natureofproducts,management attitudeand capacityof
and
foreignpartner, equity statusof an IJV. These issues needfurther investi-
gation.
The presentstudyalso demonstrated thatproductqualityis highlycorrelat-
ed withperformance, whilehighpricingpoliciesnegatively affected localmarket
and
growth accounting return.The Chinese consumers appear to be value-con-

260 mir vol. 35, 1995/3

 BusinessStrategy,
MarketStructure, of IJV
and Performances

sciousand price-sensitive.Meanwhile,theeffects of R&D intensity on perfor-

mancecould not be as easilyestablished.However,it does appear thatR&D
intensityhas a strongereffecton performance forventureswithbetterlocal
partnersand forIJVswitha longerhistoryof operation.Likewise,size and
lengthof operationenable a firmto bettermanage risk.In an environment
whereuncertainties are numerous,it can be expectedthatthesevariablescor-
relatewithperformance, and the presentanalysisdoes, indeed,confirmthis
relationship.
China'shugemarketcontinuesto attractforeign In recentyears,
investors.
IJVsoperatingin thatcountry benefitted fromindustry salesand profitgrowth,
participatingin thelocal expansionat theexpenseof exports,althoughsome
small-sizedinvestorslackinga clearcompetitive advantageorientedtheirstrat-
egy toward cost-minimization, allowing them to focuson exports.Moreover,
any investingfirmneeds to integrateits specificcompetenciesand industry
to achievemaximumadvantagesfromthemand theirinterac-
characteristics
tion.In sum,thedeterminants of successin China are complex;theeffects of
mostbusinessvariablesare amplifiedwheninteracting withmarketstructure,
partnerselectionand timingof entryimpactdifferentially thevariousdimen-
sions of performance. Accordingly, prospectiveinvestorsmustconsiderthe
correspondence betweentheirbusinessstrategy and marketstructure, and the
fitbetweentheirfirm-specific objectivesand thepresenceand relativeimpor-
tanceof thevariablesthatare likelyto producethedesiredoutcomes.
The presentworkcan be extendedin severaldirections.In particular, the
in
dynamicaspectofbusinessactivities a changingenvironment provideanother
avenueforresearch.Indeed,longitudinal studiesof IJVperformance mayshed
additionallighton theevolvingChinesesituation.Anotherpromising objective
forresearchmaybe an attempt to duplicatethepresentresultsin otherdevelop-
ingcountriesor emerging marketeconomies,especiallythosethathave some
commonalities withChina alongtheculturaland economicdevelopment dimen-
sions.Comparativestudiescouldhelpanswera fewadditionalquestionsin this
area.

Notes

1 Theauthorwouldliketo thankDr. RichardD. Robinson,Paul W.Beamish,FaridSadriehand

thetwomirreviewsfortheircomments.
2 Thereare twocloselyrelatedand overlapping typesof marketimperfection. One emphasizes
industrystructureas a sourceofmarketpower(Hymer1976);theotherfocuseson transaction
costsas barriersto international (Dunningand Rugman1985).Thisstudy
tradeand licensing
examinestheeffect of theformer on IJVperformance.
3 Thesedefinitions are based on theChinesegovernment guidelines. The IJVbelongto export-
oriented ifitexportsmorethan70% of itsoutput,otherwise venture.
it is a domestic-oriented

mirvol. 35, 1995/3 261

Yadong Luo

Due to no clear explanation of "advanced technology"in the Chinese law and rules,inclusion
in the name list of technologically-advancedforeigninvested-enterprises in Jiangsuprovince,
P.R.C., obtained fromthe Provincial Commission of Foreign Economic Relations and Trade,
Jiangsu,determineswhetheran IJV in the sample is technologically-advancedor not.
4 In conformitywith governmentrules, these statementshave been officiallyaudited by the
independentcertifiedpublic accountants beforetheywere submitted.In China, all the foreign
venturesmust comply with the accounting standards regulated by the State Council. These
standardsare quite similarto thegenerallyaccepted accountingprinciples(GAAP) of theUnited
States.
5 Accordingto Sharma et al. (1981), the variable is referredto as an intervening, exogenous, ante-
cedent,suppressorifit is significantly relatedto the criterionbut not to the predictor;ifit is not
significantlyrelated to the criterion,nor interactedwith the predictor,it is called homologizer
which moderates the strengthof relationship;if it is significantly interactingwiththe predictor
and related to the criterion,it is quasi-moderatorwhich affectsthe formof the relationship.

Appendix: Model and Measurement

Model:Yi = Bo + £bmXm+ Zb^ +... +X7)*(X8 + X9+ X10)+ It\Ci(X1 +... + X7) + E
= =
where:i-l,2, ...4;m l,2, ...10;n l,2

DependentVariables:
AccountingReturn
Yj = Return On Investment(ROI); Y2 = Return On Asset (ROA)
Market Measure
Y3= Domestic Sales Growth rate (SGR); Y4 = Export Growth rate (EGR)

IndependentVariables:
Business Strategy Variables
X1 = ADVT-advertizing expenditures
X2 = SFMK-sales forceexpenditures
X3 = DARL-growth rate of domestic accounts receivable
X4 = R&DI-R&D expendituresrelativeto the industryaverage1
X5 = PRIC-pricing, measured by average sellingprice of product in business relativeto industry's
average price,weightedby sales percentageof specificgoods in total ifmultipleproducts2
X6 = QUAL-product quality, measured by percent of products rated superior to competitors
minus percentrated inferior3
X7 = SIZE-flrm size, measured by total assets relativeto the industryaverage4
Market StructureVariables
X8 = INPG-industryprofitabilitygrowthrate
X9 = INSG-industry sales growthrate
X10= CATE-category of project,dummyvariable, measured by: Technologically-Advanced (TA),
Export-Oriented(EO), and Domestic Oriented (DO)
X1OA= 1 if TA; O otherwise;X1OB= 1 if DO; O otherwise;X1OC = 1 if EO; O otherwise
Control Variables
Cx = LEOP-length of operation, measured by venture
5
age (years)
C2 = PART-partner selection,dummyvariable
C2A = 1 if top ten; O otherwise;C2B = 1 if top 50; O otherwise;

Appendix Notes:
1 This index (around unity)measurementhas been suggestedby one of the anonymous referees.
As s/hepointed out, the measurementof R&D intensityin the formof an index relativeto the

262 mir vol. 35, 1995/3

 BusinessStrategy,
MarketStructure,
and Performances
of IJV

industry averagecan bettercapturethecross-industry variationsand therebymoreaccurately

reflectthemagnitudeof firm-specific technology thanthatrelativeto firm'stotalassets.The
figureof industry's averageR&D expenditures was obtainedfromthe Detailed Reportof
Jiangsu'sIndustrial Products,thethirdsectionof JiangsuStatisticalBureau:AnnualStatistical
Handbook(1989-1991).
2 Theindustry's averagepriceis basedon thesamehandbooksas above.The firm's averageselling
priceis derivedfromFinancialStatement#04.
3 In quantifying "quality",thisresearchis reliedon theReportof Top Ten Enterprises in Each
Industry (Jiangsu),and Introduction of Superiorand Famous-brand Productsin JiangsuProv-
ince,bothfromJiangsuStatistics Bureau.
4 Thisindexis also suggested by thereferee forthesamereasonas #1. The industry averageof
firmsize was obtainedfromthesamesourceas #1.
5 Threecategories areincorporated in thevariableoflocalpartner:
amongthetopten,top 50,and
otherenterprises in each industry,based on thereportof above Bureau.

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