Critically evaluate the hypothesis "Joint ventures are the ideal entry strategy to use when entering the Chinese market for the first time; it is a win-win situation"

The People’s Republic of China (PRC) is the last Communist State in the world (Roberts and Kynge, 2003). Mao Zedong, the leader from 1949 until 1976, pursued a radical politics-orientated and self-sustained policy, which “had China’s door closed in front of the foreign countries” (Yahoo! Inc., 2003). Deng Xiaoping succeeded Mao Zedong and launched his economic reform programme, called the “Open Door” policy, in 1978, which encouraged foreign investment (Yahoo! Inc., 2003). This was the beginning of a new era for China. A great deal of international investors tried to gain a foothold in China’s fast growing markets in the form of joint ventures or direct investment.

This paper is devoted to the joint venture (JV), and investigates whether or not this form of enterprise is the ideal strategy to enter the Chinese market. After a short survey of the Chinese economy, JV’s will be defined. The explanation of JV’s is made under consideration of the distinctive features of the Chinese culture. A lot of enterprises and JV’s as well failed because it is not easy to deal with the Chinese. This essay reports about failures of a Western JV and tries to examine the causes. Examples of successful JV’s are described as well before concluding whether or not “Joint ventures are the ideal entry strategy to use when entering the Chinese market for the first time; it is a win-win situation”.

As a result of Deng Xiaoping’s open door policy foreign investment was encouraged and new factories were established by offering tax privileges such as reduced import tariffs or tax exemptions for certain imports amongst others (Yahoo! Inc., 2003). Deng’s idea was to open China to foreign investment in order to acquire resources, for example technology and expertise knowledge. He promoted a socialist market economy with ‘Chinese characteristics’ (Warner, 1996). This means a market economy with decentralised public investment and a socialist framework of the society (ERCIM, 1997). However, he changed the political system as well, decentralised economic decision making, and began legal and bureaucratic reforms (Bader, 1997). But the political changes have been slower than the economic reforms and the PRC of is still far from being a democratic society. The Communist Party is still orientated towards “maintaining stability by silencing public dissent and opposition” (Bader, 1997).

As results of Deng’s policy the living standards improved, foreign trade and investments have steadily been increased in the last two decades, China was moved out of its isolation, and the economy has experienced rapid growth, for example the GDP growth was 7.3% in 2001, which contrasted with other Asian countries where the GDP growth was far lower (BBC, 2001). The total exports of China grew by 21% in 2002 and have doubled in just over five years (Roberts and Kynge, 2003). The structure of the Chinese economy changed in favour of the tertiary sector (Xinxin, 2000). But there were also negative impacts, such as industrial wastes and environmental pollution (Yahoo! Inc., 2003). The Chinese infrastructure is underdeveloped and there are considerable differences between the developed costal areas and the rural areas. The population is spread across a huge territory where lifestyles, habits and customs as well as economic development vary (Xinxin, 2000).

China attracts large multinational enterprises (MNE’s) with low labour costs and thus production costs, huge local markets, and a work ethic, where overtime is endemic (Roberts and Kynge, 2003).

JV’s are frequently used as entry mode to the Chinese market due to government pressure (Beamish, 1993). In the 1980’s more than 12,000 equity JV’s and more than 8,000 contractual JV’s were established. The difference between an equity and a contractual JV lies in the distribution of dividends and the level of capital contribution. The use of equity JV’s dominated during the 1980’s but the government attitude changed in the 1990’s towards permitting wholly owned subsidiaries (Beamish, 1993).

A joint venture (JV) is defined as a contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking. All parties agree to share in the profits and losses of the enterprise. JV’s are for one specific project only rather than for a continuing business relationship (BusinessFinance.com, 2003). Schillaci (1987) argued that a JV is a cooperative business agreement between firms, who want to achieve similar objectives and this usually involves the establishment of a new corporate entity. She also named reasons for creating a JV as “raise complementary resources and attain attributes available from the potential partner” (Schillaci, 1987, p. 60), for example gain market information, use knowledge that is not generally available, obtain external capital, or as strategy to enter in developing countries. This list can be extended by other benefits such as political connections and distributions channel access that depends on these relationships (ICMBA, 2003).

JV’s can be distinguished in many different ways. They may be either domestic or international, first level or second level, specialise or shared value-added, or intrafirm, cross-national domestic, traditional international or trinational international. (Albaum et al., 2002; Schillaci, 1987).

Generally said, a JV is a foreign market entry mode and sometimes the only way to gain market entry when governments place restrictions to foreign ownership. It may also be the best way for companies with limited capital and labour resources to get started in overseas markets (Albaum et al., 2002). Schillaci (1987) stated that it is preferable to internal expansion because the costs and risks (business risks and technological risks) are shared amongst the partners, and access to resources or knowledge not internally available is provided. In comparison to acquisition JV are more preferable because the autonomy and independence can more easily be maintained, and it requires less commitment by the parent company (Schillaci, 1987). But there also exist limitations such as lack of trust between partners, different management styles, changes in partner’s objectives, or limited information (Schillaci, 1987).

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