problems of managing jv in china

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Problems of Managing Joint Ventures inChina's Interior: Evidence from ShaanxiYing Qiu, University of Birmingham. United Kingdom

Introduction

As more foreign itivestors have entered theChinese m arket, the managem ent, successes, andfailures of their firms have attracted attention(e.g.. Ahlstrom et al. 2003; Beamish, 1993;Child, 1994; Goodall and Wamer. 1999; Peng,2000). It is well known that in the past 25 yearsmost foreign firms over 85% have been locatedalong China's coastal belt {SSB, various years).Since late 1990s, the Ch inese central state hasfocused on the development of the vast underde-veloped interior areas as a way to bridge regionaldisparities. In 1999, "the Great Western Devel-opment Strategy (xibu da kaifa)" was launched,which is an ambitious top-dow n effort to steerdomestic and foreign investment into the parts ofChina most in need but least likely to attract aid

on their own. Under its influence, more andmore foreign firms and joint ventures havestepped into the unexploited hinterland. By2002, 31,822 foreign enterprises had been estab-lished in China's 18 interior provinces and onemunicipality (SSB, 2003, p.678).

China's interior is important. Under the Sev-enth Five-Year Plan (FYP) (1981 -1985 ), Ch ina'sregional economies were divided into three belts— the Eastern, Middle, and Western regions(Linge and Forbes, 1990, p.68 and Chen, 2000,pp.9 -10 ; Wei. 2000, p. l) . Traditionally, the

Middle and the Western regions have beenregarded as one big area, the interior (Chen,2000, p. 10 and Wei, 2000, p. l). According to thedemarcation in the Seventh Five-Year Plan, thecoastal region consists of nine provinces andthree centrally administrated municipalities;while the interior region co nsists of 18 provincesand one centrally administrated municipality(see Figure 1). It is noteworthy that the interioraccounts for 84% and 56% of the country's landand population, respectively. It also suppliesChina w ith a significant proportion of the raw

materials required to create manufactured prod-ucts. The rapid economic growth of the coastalbelt over the last 20 years has relied heavily onthe interior's energy and mineral supplies (Chen,2000, p. 143). Despite of the impo rtance ofChina's interior, research on the day-to-daymanagement problems faced by foreign firms inthat region and how foreign and Chinese manag-ers have perceived and reacted to these problemsis rather limited. This paper is motivated by theabsence of research into the managing problemsof foreign firms in the region.

China's interior is known for poor physicalinfrastructure, inadequacy of human resources,lack of business philosophy, and an ailing envi-ronment (Sims and Schiff, 2000). Comparedwith the country's coastal belt, it seems likely

that managers will face more obstacles andchallenges in running foreign firms. What arethe major managing problems of foreign firms inthe region? This paper attempts to explore thisquestion.

The focus of this paper is on joint ventures(JVs). including contractual joint ventures(CJVs) and equity joint ventures (EJVs). Thispaper explores the major problems of managingjoint ventures in China's interior by presentingsome evidence from Shaanxi province. Majormanagement problems identified by interviews

with 40 Chinese and 14 foreign business execu-tives in 24 joint v entures in Shaan xi fall intofour areas: recruitment and training, dismissal,energy supply, and development agenda. Theseproblems suggest that relationships with localpartners are important in determining the failureand success of JVs. The majority of these prob-lems result from differences either betweenforeign and Chinese top executives withinjoint ventures or between joint ventures andtheir parent companies. The Shaanxi studyreveals that successful joint ventures are good at



Figure 1. A map of China

Taiwan

500 km

500 miles

Hainan

Division between coastal and interior areas

Note: Chin a's interior areas consist of 18 provinces and 1 centrally administrated municipality including Jilin,

Heilongjiang. Neimenggu (or Inner Mongolia), H enan, Anhui, Hubei, Hunan, Jiangxi, Sichuan, Guizhou, Yunnan,

Shanxi. Shaanxi, Ningxian, Gansu, Qinghai, Xinjiang and Xizang (or Tibet) and Chongqing. The coastal areas

consist of9 provinces and 3 centrally-administrated municipalities including Liaoning, Heibei, Beijing, Tianjin,

Shandong, Jiangsu, Shanghai, Z hejiang, Fujian, Guangdong, Guangxi and Hainan.

choos ing the right partners , maintaining a good

relationship with partners , and making efficient

use of personal networks and political institu-

tions. An investigation of these problems and

recommendations from successful joint ventureson how to solve these problems may inspire

foreign firms that have already established their

presence in China ' s in ter ior or are cons ider ing

entering the market .

After this introduction, a review of the exist-

ing literature on the manag ing p rob lems of JV s

in China is presented, followed by research

methodology. Tben, f indings of the major prob-

lems of manag ing JVs are discussed and ana-

lyzed. Lessons learned from successful JVs in

S haanx i are r ecommended at the end.

Problems of Managing Joint Ventures in

ChinaJVs have long been a favored mode for entering

a foreign market (Hill and Jones, 1992) because

they can join complementary skills and know-how (Contractor and Lorange 1988). JVs are the

most popular mode chosen by multinational

enterprises (MNEs) to enter transitional econo-

mies such as China (Luo, 1997; Sanyal and

Guvenli 2{X)1). Since 1978 when China opened

its door to foreign investors, the country has

become one of the most attractive destinations

for foreign direct investment (FDI) in the world.

Throughout the 1980s and 1990s, about 70% of

FDI in China took the form of JVs including

EJVs and CJVs (MOFTEC, various years).



Compared with wholly foreign owned ventures(WFV s), JVs possess two advantages in China.First, when foreign investors enter the market,tbey usually have limited knowledge of Chineseculture, political and legal systems. Cooperativepartners can help compensate for some short-

comings especially during tbe initial stage.Secondly, using JVs as an entry mode can re-duce co sts. A typical form of a sino-foreignproject is that foreign investors provide invest-ment either in the form of cash, machinery, ortechnology, while their Chinese counterpartsoffer factory buildings, land, machinery, andskilled workers. By entering such a partnership,both make use of their advantages and reducetheir costs to a certain d egree (Volhancker,1997).

Despite of these advantages, there are many

obstacles when managing JVs and much hasbeen written about the problems of managingJVs in China (e.g., Bjorkman and Lu, 2001; Luo,1997; O'Conn or and Chalos 1999; Zhang andKeith, 1999). One common theme is that localpartners play a key role in determining thefailure or success of JVs. For example, Luo's(1997) study suggests that both strategic andorganizational traits of local partners are signifi-cantly associated with some individual dimen-sions of JV performance. Zhang and Keith's(1999) research illustrates that working withstate-owned enterprises (SOEs) in China isproblematic for JVs because SOEs are from adifferent cultural background. They are slow andineffective at decision m aking and have toomany employees and too much obsolete equip-ment.

What explains these problems? Comparedwith WFVs, JVs present an additional challengebecause foreign investors have to cooperate withlocal partners, which means there is less man-agement freedom for the foreign partner (Tsang.1994; Luo , 1997). The objective of a foreignpartner is usually different from that of its do-

mestic partner (Wong et al, 1999). The problemsof working with a foreign partner are magnifiedin transitional economies such as China, with itscontextual uncertainty, institutional ho stility, andcontractual risks. The reason is that China'sinvestment environment, with the socialisttradition and strong culture, differs considerablyfrom that of the West (Boisot and Child, 1996;Peng, 2000). Since 1978, China has been mov-ing from a centrally planned economy to amarket-oriented economy. This transformation

involves a power shift from central to localauthorities, which creates arbitrary enforcementof a weak m arket structure, poorly specifiedproperty rights, inconsistent regulations, vagueand unevenly applied laws, and changing taxand fee requirements that can harm businesses

(Ahlstrom, Young, and Nair 2003; Luo, 1997).Within China, economic conditions and policy

environments vary substantially among differentregions, and there are substantial structuraldifferences between coastal and interior prov-inces (Chen, 2000; Wei, 2000). In the coastalareas, economic reforms and an open-doorpolicy were introduced early (tbe late 1970s) sothe economy in these regions has become highlyliberalized and has shifted from centrally-planned to a market approach (Sun, 1999).Given their proximity to foreign markets, it is

not surprising that the coastal provinces aremore comm ercially advanced (Tsai, 2002,p. 167). In contrast, the interior areas experiencedthe preponderance of "socialist construction"and heavy central planning investment duringthe pre-1978 p eriod, which left it with a moreconservative legacy. The interior appears to havea greater stake in preserving its old state-subsi-dized positions and has exhibited more resis-tance to the economic reforms and open-doorpolicy that started in the early 1990s. Tbe inte-rior areas still do not have a liberalized marketeconomy. To a great extent, the central planning

system still governs (Sun. 1999). Tberefore, thebusiness environment seems in the interior likelyto be more problematic and proposes m orechallenges to foreign investors.

MethodologyThe primary data in this paper were obtainedthrough in-depth interviews during my fieldresearch in Shaanxi from February to May 2002and from August to September 2003. Shaanxi,located in the middle of China has a populationof 36.4 million and a land area of 205,600square km. The selection of a single province forthe paper reflects the size of the country; study-ing all 19 interior provincial units in detail wassimply not feasible. Rather than selecting across-section of provinces, it was decided thatconcentrating on a single province would allowthis research to be conducted in far greaterdepth.

Shaanxi was chosen for two reasons. Thefirst is because the province possesses typicalcharacteristics of China's interior — historical



importance, rich resources, and slowness inimplementing reforms. As such, the Shaanxicase can provide insights to some of the majorproblems of managing joint ventures faced byforeign firms. The second reason is the compara-tively large pool of foreign firms in the province.

By the end of 2002, the province had 2.993foreign invested projects, with the accumulatedvolume reaching $6.4 billion and $3.8 billion intenns of planned and actual values, respectively(SPPG. 2003). This placed the province at 18'"among China's 31 provincial units and 6'"among the 19 interior provincial units(MO FTEC , 2003). In the province, 79% ofrealized FDl took the form of CJVs and EJVs in2002 (SPPG, 2003), providing a reasonablylarge pool to study the problems of managingJVs in the region.

According to a well-known scholar in Shaanxi(interview in Xi'an, February 28, 2002), obtain-ing interviews in the province is difficult be-cause people are more conservative in sharingtheir opinions and inside information than tho.sein the coastal regions such as Guangdong,Shanghai, and Beijing. But, with the help of oneof the most important think-tanks in the prov-ince, 54 interviews (40 Chinese and 14 foreignbusiness executives) were conducted with 24joint-ventures — maximum number feasiblewithin a limited period. Although this smallsample creates questions of validity, the detailed

information derived is adequate for insights intothe major problems of managing JVs in theprovince.

The 24 joint ventures represented 14 sourcecountries and regions: Hong Kong , Macao,Taiwan, Japan, Singapore, Thailand, Indonesia,U.S.. Canada, United Kingdom, Germany.Belgium, France, and Italy. In terms of sectors,they ranged from primary industry (agriculture)to secondary (machinery manufacturing andconstruction) to tertiary (transport, post andtelecommunication, real estate, heahh care,

catering, sports and social welfare and tourism).The sizes of firms varied from the smallest with19 people to the largest with about 2.600 em-ployees. The tlrms' year of establishment variedfrom one of the earliest foreign firms in Shaanxiestablished in 1984 to newly created firms in2002. The names of companies and individualsare disguised to ensure confidentiality.

Although questions were prepared in advance,interviews were, to a large extent, open-ended.The argument for this is that an open approach

can reduce the interviewer's impact on theresearch process to a minimum and allow theinvestigation of unexpected topics (Bouma andAtkinson, 1995, p.207). The interviews inquiredabout development and operation, managementproblems, and strategies to overcome these

problems. Because the researcher was intro-duced by someone that the interviewees trusted,the majority were quite open and candid, fur-nishing valuable primary data.

Results

Operating a foreign firm, in particular a jointventure, in a foreign environment is a challeng-ing task for managers. Many things can gowrong. The major and most common problemsin the daily management of JVs in Shaanxi canbe summarized in the following four categories:

recruitment and training, dismissal, energysupply, and development agenda.

• Recruitment and trainingThe comprehensive science and technologycapacity of Shaanxi places it third nationwide;the province has more military enterpri.ses thananywhere in China. These lead to a perceptionthat Shaanxi is blessed with intellectual andskilled workers and employers so that jointventures are spoiled for choice. In practice, thisis only true for the availability of an .skilled andsemi-skilled workers. Experienced technicians,professional workers, and managers are scarce.Twenty out of the 24 interviewed JVs said it wasvery difficult to find the appropriate personnel.The Chinese manager of the personnel depart-ment of a Sino-French joint venture noted asfollow (interviews in Xi'an, July 25, 2003):

My feeling is that it is very difficult to findthe appropriate people that we need inShaanxi's labor market. Our requirement isnot high. We are looking for people whohold a Bachelor degree, know some tech-

nological knowledge and can communicatein English. That is all. But, our choices areso limited.

Similar sentiments were expressed by theHong Kong general manager of a Sino-HongKong firm. He stated that usually after advertis-ing a job vacancy, they received several hundredapplications. Many applicants were profession-als or intellectuals, but most w ere not the kind ofpeople they were looking for.

SUMMER 2005 49



Joint ventures use two channels to recruit newstaff. The first is recruitment from local Chinesepartners. Most state-owned enterprises (SOEs)in Shaanxi lose money and are overstaffed.Providing new johs for redundant workers is abig challenge for local enterprises. One way is to

persuade newly established joint ventures toabsorb as many redundant workers as possible.Some Chinese state enterprises have been verysuccessful at this. A medium -sized SO E, forexample, which used to be a leading machinerymanufacturing company in Shaanxi, had been indebt since the mid-1980s and many employeeshad to be laid-off. During the late 1980s, thecompany cooperated with two foreign investorsand established two separate joint ventures thatabsorbed over 90% of its original workers.

To foreign investors, recruitment from local

Chinese partners is a natural and easy source oflabor. However, the danger is that if most of theworkers come from the Chinese partner, the jointventure may inherit the power relations and thesocial structure of the old organization. Thetraditional Chinese employment system is some-times called the "iron rice-bowl" (tiefanwan). Itmeans institutionalized "jobs for life" or "cradle-to-grave" welfare in state-owned enterprise workutiits (danwei). The practice of "iron rice-bowl"dominated the Chinese economy until recently.Combining old-style Chinese danwei practiceswith those of the modern multinational corpora-tion clearly presents difficulties, especially inprovince such as Shaanxi. According to a Chi-nese departmental manager in a Sino-Belgianventure, one of the biggest challenges at thebeginning was staff training. He further ex-plained (interview in Xianyang, April 26, 2002):

Because most of their workers were trans-ferred from one of their local Chinesepartners, a SOE, they had many bad habits(such as poor efficiency and managemenlbased on rule-by-people, not rule-by-

regulations and laws). The conversion ofstaff that had already formed poor workinghabits was more difficult than teachingnew skills in jo b respon sibilities fromscratch.

The second channel is recruitmetit from newlygraduated students who are regarded as "un-spoiled." But this does not mean there are noproblems. They do not have any work or profes-sional experienc e, so joint ventures cannot

deploy them immediately. They require system-atic training, and, depending in part on thenumbers involved, the costs can be very substan-tial. For large firms, training costs may not be abig issue, but for small- and medium-sizedfirms, it can be a different story. A Chinese

manager in charge of human resources for amedium-sized Sino-Japanese firm expressed hisfeelings toward staff training in this way (inter-view in Xi'an, August 5 , 2003);

I heard that many big foreign firms have acomplete and systematic training scheme,which can provide enterprises with neces-sary and appropriate professionals andworkers each year. For enterprises like us,we do not hav e the capability to do that. Itis too costly.

• Dismissal

Locating and hiring the right people is difficult.Nineteen of the 24 interviewed JVs stated thatdismissal is a difficult issue because the Ch ineseand foreign companies perceive it from com-pletely different angles. Prior to recent reforms,the govemment introduced a "fixed" em ploy-ment system in enterprises. The term "fixed"refers to the arrangement whereby an enterprisereceived a fixed quota of labor allocated by alocal labor bureau, and a worker was then per-manently attached to the organization. Underthis system, enterprises were not permitted todischarge workers, so workers were virtuallyimmune from dismissal. Under the reform, thelabor system has been moving away from per-manent employment to a system of contractlabor supplemented by unemployment insuranceand pensions. A joint venture can sign either acollective labor contract with the trade union oruse individual labor contracts with each em-ployee. Managers have been given the freedomto fire staff.

However, the dismissal of personnel remainsa delicate matter in Shaanxi. According to aChinese vice general m anager of a Sino-Ameri-can company (interview in Xianyang, August10, 2003):

Usually the Chinese partner of JVs is veryreluctant to sack workers because a fairlycomplete social welfare scheme has yet tobe established in the province. Sackingworkers means cutting off not only his orher income, but also welfare and social



life. A com prom ise solution is to returndismissed workers to the organization fromwhere they have been recruited. But, it isalmost certain that these factories will havegreat difficulties in finding jobs for thoseaffected. Taking into account the serious

unemployment situation in Shaanxi. theChinese partner is usually reluctant todismiss workers and this is a commonsource of conflict between Chinese andforeign partners.

Foreign investors, in particular those fromnon-Asian countries, cannot understand theChinese labor market. They pay more attentionto economic maximization and think that whenan econom y is in recession, it is natural to layoff workers. They are able to do so because theyhave already signed labor contracts with work-ers. For example, two of the interviewed jointventures invested in the aerospace industry.Following S eptember 11 . 2001. their ordersdecreased by 50% and their foreign managersproposed cutting staff by 40%. Not surprisingly,the proposal met strong opposition from Chinesepartners and their associated political institu-tions. As far as possible, the Chinese wanted toavoid sacking staff and advocated a policy of"stop-working," w hich m eans that unwantedworkers were given a token income to live onand instructed to stay at home until needed. At

the beginning of the negotiation, there wasstrong disagreement between the two parties.After long and tedious debates and negotiations,some mutual understanding was reached, and theside with the weaker bargaining power made aconcession. Because the foreign sides were notthe largest shareholders in the two joint ven-tures, bargaining power tended to favor theChinese. In the end., the foreign sides agreed to"stop-working" and unwanted employees wereoffered basic salaries (20-30% of their fullsalaries). When the economic situation in the

joint ventures improved, employees wouldresume full-time working. By doing this, theChinese side successfully minimized the sideeffects of dismissal.

This solution to dismissal in the two aero-space joint ventures suggests that the Chineseunique employment situation (incomplete trans-formation of its labor market and social securitysystem) and its political institutions constrain themanagement activity of foreign managers. Tokeep joint ventures w orking., they have to cope

with these constraints by compromising withChinese partners and their supporting institu-tions. As Child (1 994, p.l42 ) com ments, thetransition in China from a centrally planned to aregulated market system is partial and has beeninterrupted at intervals due to alarms at the loss

of economic control and reluctance to proceedtoo far with the dismantling of bureaucraticregulatory structures. As a result, China'seconomy is coordinated via dualized bureau-cratic and market modes. The duality, combininginstitutionalized power and market forces, cre-ates a context within which foreign firms have toconduct their transactions.

• Energy supply

Conflicts between foreign and Chinese sides of ajoint venture can originate from minor matters,

such as w ater, electricity, and gas supplies.These may not be so minor if they are essentialfor production. One way that Chinese partnersinvest in new joint ventures is to provide factoryor working space. This is usually located nearthe Chinese parent company that wants to utilizeits underused or idle resources. Fifteen of the 24interviewed JVs indicated that water, electricity,and gas that are shared with the Chinese parentcompany could lead to actual or potential prob-lems. The new joint venture and Chinese parentcompany often share the same premises, onlyseparated by walls. But staff salaries and bo-

nuses are different: workers in the joint venturehave higher salaries and benefits than those inthe Chinese parent company.' These discrepan-cies create discontent among staff in the Chineseparent company because the former "iron wage"system still influences the working culture of theChinese parent company. Breaking the mold ofthe old organizational cultures and work normshas been difficult.

As a result. Chinese companies often havesome unjustified requirements. The most com-mon trick is to raise the price for water, electric-

ity, and gas for the joint v enture. Most Chineseparent companies (e.g., SOEs) are in deficit.They think that joint ventures are like their"children." If the joint ventures make goodprofits, a significant proportion should go tosupplement the parent company. However, fromthe point of view of joint ventures, in particular

' According to Lam (2002), the hourly wage of workers in

foreign-investmenl enterprises is 7.8%, 41.2%. and 53.5%.

higher than that in state-owned enterprises, collectives, and

private firms, respectively.

SUMMER 2005



expatriates, this argument is ridiculous andunjustified. Jo int ventures are not dependent oneither their foreign or Chinese parent companies.They should be treated as independent entities.All financial issues should be settled on theirown without involvement from either side. An

extreme example was an American firm thatused to be a Sino-American joint venture. Ini-tially, the Chinese side was the biggest share-holder (70% ). Consequently, the m anagement ofthe venture was arranged by the Chinese sidewith a Chinese chairman of the board and anAmerican general manager. At the start of theircooperation the American parent companyinvested U.S. $500,000 for the joint venture'sworking capital. Without consulting the Ameri-can general manager, the Chinese chairman andthe financial manager (Chinese) used the work-ing capital to erase the electricity deficit of theirparent company. They planned to return theworking capital when the Chinese parent com-pany borrowed money from other sources. Fromthe perspective of the American side, this wasunacceptable. This issue, together with otherconflicts, caused the foreign side to separatefrom its Chinese partner. In 2001 after six yearsof cooperation, the American side eventuallypurchased the 70% of the Chinese share andbecame a wholly foreign owned firm.

When asking about the reasons behind the

above conflict, the foreign general manager of aSino-U.K. joint venture noted (interview inXi'an, April 2 3. 2002):

The most visible reason behind the aboveconflict is that new joint v entures are notphysically separated from their Chineseparent companies. Their factory buildings,water, electricity and gas tend to be con -trolled by the latter, so that the foreign sideis in a weak bargaining position.

Business operations in China are based onpeople, not on laws and regulations. If the deci-sion-makers in Chinese parent companies arefamiliar with Western business culture andnorms and do things according to the agreementreached with the joint venture (e.g.., how thejoint ventures share water, electricity and gaswith the parent companies), no disputes arise. Ifthe leaders of Chinese parent companies are notopen-minded, they often treat the joint venturesas subordinates and try to influence daily man-agement practices. In this situation, it is easy to

trigger conflicts.One more piece of information revealed by

some foreign managers of interviewed JVs isthat employment, replacement, and dismissal ofChinese managers in JVs are decided by theChinese parent companies. This could lead to

potential problems in managing a JV. Accordingto a foreign vice general manger of a Sino-Japanese venture (interview in Baoji, March 20,2002):

The representatives of Chinese parentcompanies have worked for the Chineseparent companies for years. It is nature thatthey have retained all the "old habits" fromtheir previous working units. Even afterthey have become the senior managers ofthe new joint ventures, their employment,

replacement and dismissal are still decidedby the Chinese parent companies. It is notsurprising that they do not look after theinterests of the joint ventures . In the longterm, this attitude harms the developmentof joint ventures.

• Development agendaAnother major conflict between Chinese andforeign partners involves the developmentagenda of JVs: each tends to have differentobjectives. In the case of a Sino-Hong Kong

joint venture, its predecessor was a Chineseprivate firm specializing in the production ofprinting materials. Because of the lack of accessto banks to raise capital for further expansion, itcooperated with a Hong Kong investor in 1992.The contract for cooperation was 15 years. Afterthree years, the firm was profitable. After 2000,however, the cost of printing raw materials rosesteadily and, consequently, the prices of theirproducts increased substantially. Confrontedwith this, the Chinese partner intended to expandproduction and explore new products, but theHong Kong investor worried about potential

risks. He insisted on retaining the present pro-duction level so that at the end of their coopera-tion he could take back his original investment.Disagreements between the two sides about thefuture development strategy of the firm inevita-bly appeared.

Another case is a Sino-American joint venturein the electronics industry. From the start, theblueprints on how to develop the Joint venturewere different. The Chinese wanted the jointventure to upgrade its existing production line to



produce silicon chips. According to the Chinesegeneral manager (interview in Xi'an, March 20,2003):

Producing silicon chips is a profitablebusiness. If we do not enter this untapped

market., our competitors will. We {the JV)have the technology and equipment toproduce silicon chips. More importantly,the central state has granted a number ofpreferential policies to enterprises in high-tech industries, such as tax deduction andlow interest loan etc. For us, low interestloan is particularly attractive because loansfrom Chinese banks are difficult to obtain.

However, the American side considered theavailable machinery and the level of technology

in the new joint venture unsuitable for upgradingto produce silicon chips. The American vicegeneral manager noted (interview in Xi'an,March 21, 2003):

We fully understand why our Chinesepartner would like to produce the JV toproduce silicon c hips. Obviously, there is alarge market there. But, the fact is that thecurrent technology and machinery of theJV are not suitable for producing high-quality silicon chips. If we go for thesilicon c hips, this would definitely com pro-

mise production quality.

The Chinese blamed the American side forproviding outdated and second-class machinery,which was why the current production line wasunsuitable for upgrading. Disagreements be-tween the two parties emerged.

According to Pan et al. (2003). differences inthe strategic objectives are characteristic of jointventures in China. As partners share the samebed (i.e., joint venture), but have differentdreams (i.e., strategic objectives), their expecta-

tions and approaches to running a business arevery different. This leads to tension in many JVs(Vanhonacker. 1997). Therefore, mutual under-standing is important throughout the period ofcooperation. If the development objectives aredifferent, it is difficult to sustain effective man-agement and cooperation. Taking the previouslydiscussed case studies, the C hinese side in thefirst case signalled a plan to buy the foreignshare and convert the firm into a domestic enter-prise so that the firm could be more effectively

controlled and developed according to theirplans. In the second case, divergent goals anddisparate expectations combined with otherfactors such as incompatible management prac-tices led the American to buy the remainingChinese share in 2001 and turn the firm into a

wholly foreign owned firm.

Lessons Learned From Successful Joint

Ventures

An examination of problems encountered byjoint ventures in Shaanxi suggests that the ma-jority result from differences either betweenforeign and Chinese top executives within jointventures or between joint ventures and theirparent companies. Nevertheless, about one-thirdof Shaanx i's joint ventures are successful to adegree. What lessons can be learned from thesesuccessful experiences? The Shaanxi studyreveals that successful join t ventures are good at:choosing the right partners, m aintaining a goodrelationship with partners, and making efficientuse of personal networks and political institu-tions.

• Choosing the right partnersThe choice of the right partner is one of the keysto the success of future ventures. A foreign firmthat makes an investment and is 10,000 milesaway will not find the Chinese legal system wellequipped to provide much assistance. Even those

that are ultimately successful in pursuing claimshave to deal with a totally foreign legal processthat is time consuming and expensive. Chineselegal remedies may or may not provide adequatecompe nsation. It is particularly important tochoose the right partner since it can be difficultto get out of a partnership. Furtherm ore, a goodpartner can help w ith many of the steps requiredto create a successful joint venture, from gettingapprovals as painlessly as possible, supervisingand smoothing project construction, to runningthe operation profitably and managing it prop-

erly. According to an old Chine.se saying, "Goodbeginning is half done." The choice of the cor-rect partner makes future cooperation mucheasier.

What is a good partner? Chinese partners thatare economically strong have much highersuccess rates, according to the successful JVs inShaanxi. An important reason is that firms withsound economic strength usually pay attentionto the reputation of the firm and have goodbusiness crede ntials. They also pay attention to

SUMMER 2005 53



long-term rather than short-term economic re-tums, and they do business seriously and seldomviolate laws and principles. On the contrary,where a partner with bad business credentials isselected, sooner or later problems will emerge.Value systems, investment objectives, and the

management philosophy of potential partners arealso important. If a future partner puts hi.s owninterests and political advancement above theseof the joint venture, or his management stylediffers totally or substantially from the foreignside, problems can easily arise. One example is aHong Kong investor in a Sino-Hong Kong hotelproject. He did not have a good business recordbut this was unknown to his Chinese partner.According to the contract, he should have madea financial investment in the project. After anagreement had been signed, he changed the cashinvestment into investment in kind (e.g., kitchenutilities, air-conditioners, elev ators, electronicfans, and telephone). As these items were pur-chased, the Hong Kong investor reported apurchase price higher than the actual price. As aresult, he obtained a 35% retum on the invest-ment. The partnership ended as soon as theChinese partner discovered he had been misled.

How to find a good partner? Reliable informa-tion is important. As many avenues as possibleshould be explored before making a decision.Possible channels include established business

contacts with Chinese central and local politicalinstitutions, home-country foreign embassiesand consulate offices, management consultingcompanies and investment advisors. But, formore inside information, it is necessary to de-velop personal and political ties with key per-sonnel in the host location. Chinese laws andpolicies tend to be ambiguous and even contra-dictory, and important regulations and informa-tion m ay not be available to the public. To relyon public documents and announcements aloneis far from sufficient. Therefore, well-connectedindividuals serve as an important source of

information.

• Maintaining a good relationship withpartnersOnce a sound partner is chosen, maintaining agood relationship also contributes to the successof the venture. A comparison between two Sino-German joint ventures with the same Germanparent com pany illustrates this point. Both are inthe same industry, telecommunications, with onelocated in Shaanxi and the other in Guizhou

province. According to the manager of theShaanxi venture {interview in Xi'an, April 19,2002), their project had been very successfulfrom the start. But the same project in Guizhouwas a failure w ith numerou s di.sputes and con-flicts between the local Chinese partner and

expatriates. When asked to explain the differ-ence, the manag er stated that in his joint venturethe steady support from the local Chinese part-ner was the crucial factor.

Conflicts or disputes are inevitable during theoperation of joint ventures. It is all about theattitudes of decision-makers. For example, forissues such as unjustified charges for electricity,water, and gas, some foreign executives of jointventures in Shaanxi took them very seriouslyand even sued their Chinese parent companies.The result was that disputes and conflicts be-

tween expatriates and Chinese representativesand between joint ventures and their Chineseparent companies were exacerbated. An impor-tant lesson from successful joint ventures is thatdecision-makers should have their eyes on bigissues and not be diverted by trifles as long asthey do not influence the overall development ofthe venture.

Furthermore, building trust is essential formaintaining a long-term cooperative relation-ship. If no mutual understanding is establishedbetween Chinese and foreign parties, even small

issues can quickly become significant and affectthe performance of the joint venture. Westerninvestors tend to trust contracts, but in China,because of weak property rights laws and anuncertain and dynamic institutional environ-ment, informal relationships and the develop-ment of trust between partners may play a moreimportant role than contracts. In this regard,representatives from foreign and Chinese sidescan help with parties to break the cultural barrierto build trust, develop common goals, and con-solidate the presence of joint ventures. Accord-ing to the vice general manager of a Sino-Hong

Kong factory (interview in Tongchuan, August18.2003),

Our cooperation has been pleasant. Thekey is that mutual benefits, respects andtrusts have been established. Leaming tobear with the differences of the cooperativepartner is important. Whenever we meetsome disagreements, both sides pay moreattention to the long-term objective of thejoint venture.



• Making efficient use of personal networksand political institutions

As Yan (1994) described in the Harvard Busi-

ness Review, "Foreign companies seeking to wina piece of this growing market must adapt to'guoqin g', which means 'Chinese characteris-

tics' or 'the special situation in China." Twoways are suggested by successful JVs in Shaanxias an effective way to adapt to the special situa-tion: making efficient use of personal networksand political institutions.

The Chinese take personal relationships veryseriously (Helms, 1999).' As Bruijn and Jia(1993) point out, "The Chinese style is to firstbuild friendship and connection ." According toHelms (1999), the Taiwanese often make dealson better terms than Westerners by relying onpersonal networks with relatives and friends inChina. In fact, beyond the negotiation stage,many companies continue to rely on personalrelationships to reduce uncertainties and seekprotection of their investment Interests wherelaw falls short. In addition, personal networksconstitute a vital mechanism for conflict preven-tion and resolution. As many successful foreignbusiness executives in Shaanxi reveal, goodrelationships with local partners and officialsreduce opportunities for conflicts to develop.According to the general manager of a Sino-Canadian company (interview in Xianyang,September 2, 2003):

The management of joint-ventures inShaanxi does not only involve mattersassociated with managers and workers, butalso many external bodies, such as politicalinstitutions at various levels, directly andindirectly participating in the managem entof joint ve ntures. In fact, important deci-sions are not made around the negotiationtable, often beyond it and involve a carefulbalancing of the interests of many internaland external actors.

Chinese managers live in a complex, oftenhierarchical business environment. They knowthe importance of dealing carefully with differ-ent and sometimes conflicting interests of politi-cal institutions. As a result, they are better

^ Traditional Chinese firms can be considered as both a

small society and a big family: father and .son often work in

the same department; mother-in-law may share an office

with his or her mother; and a husband and wife may work

in one group.

motivated to try to cultivate the right ties withdifferent shareholders. Foreign manage rs areunfamiliar with the complicated business envi-ronment in China. They do not make sense of,and cannot discern, the motives behind theattitudes of various parties. The pressure or

demands by those external forces can seemunjustified and are likely to have an adverseeffect on business operations. Thus, foreignmanagers tend to adopt an apolitical stance inthe belief that not involving interested agents orparties will ensure no intervention from them.

The fact is that cultivating good relationshipswith political institutions is necessary for thesmooth operation and effective management ofjoint ventures. The experience of successful jointventures is that political interference occurs inany case. It depends on how joint venturesapproach these issues. Connections with govern-ment agents and political institutions in the hostlocation can enhance a firm's abilities to getthings done. A Taiwanese manager operating 20chain restaurants in Shaanxi cited his experienceon how to use political in.stitutions to solvepractical problem s. A customer had propertystolen in one of his restaurants. One local news-paper reported this incident and suggested thathis restaurant was unable to protect its customersfrom thieves, which obviously had a negativeimpact on his business. Within a month of theincident, customer numbers had declined by

30%. He asked for assistance from the Provin-cial Complaint Centre for Foreign businesses.They investigated the case and showed that hisrestaurant was not responsible for the theft. TheCentre also forced the local newspaper to makea public apology to the restaurant chain.

Conclusion

This paper investigates the problems of manag-ing joint ventures in China's interior by present-ing some evidence from Shaanxi province. Theproblems identified by interviewed joint ven-

tures in Shaanxi are by no means representativeof China's interior as a whole, however, theycontribute to a better understanding of the man-agement problems in the dally operation of jointventures in the region. The nature of these prob-lems highlights the importance of the relation-ships between Chinese cooperative partnersand foreign investors and those between jointventures and their parent companies, whichdirectly influence the management and perfor-mance of interviewed firms. Most management

SUMMER 2005 55



problems are the result of inappropriate handlingof these relationships, which reflects differencesin managerial styles.

These problems are not restricted to joint-ventures in Shaanxi. Wong et al's (1999) re-search found partner-related problems in other

parts of China, such as Guangzhou and Shang-hai. However, these problems appear to be moreprevalent and intensive in the interior areas. Thisis because joint ventures and their associatedmodem management practices were introducedinto the interior at a later stage and at a slow erpace than in the coastal areas. Compared withthe coastal provinces, Shaanxi has a time-lag inreceiving innovative ideas and new practices. Itappears to have a greater stake in preserving"old habits" and exhibits more resistance to"good practices." Although reforms have beenintroduced in Shaanxi and some changes havetaken p lace, getting rid of all old habits in a shorttime is difficult. Given China'.s accession to theWorld Trade Organization (WTO ), it is certainthat more foreign firms will establish theirpresence in the interior for its cheap land, labor,and rich resources. Perhaps it would be wise forthese foreign enterprises to be prepared for theproblems they might confront. In this respect,the recommendations made by successful jointventures in Shaanxi can p rovide useful tips tosolve future problems.

Despite some contributions to the literatureand pra ctice, the limitation of this research isthat the sampie of JVs studies here may not befully representative of all JVs in China 's interior.To truly gen eralize future work need s to use alarger sample of firms with a more recent timeframe. The lessons drawn from Shaanxi couldextend to other interior provinces; however, thisneeds to be empirically tested. Little researchhas been undertaken into different interior prov-inces; the present study is mainly a snapshot ofthe managing problems of JVs in one province.In view of the substantial size and diversity of

the interior, there is clearly a need for m oreregionally-based research.

Dr. Ying Qiu's research in terests include fore igtjfirms operating* through vatious kinds of jointventures in China, especially the interior. She

focuses on location decisions and factors affect-ing managem ent and business pe/formance.

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