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...the interior's poor infrastructure, less educated population, and scant exposure market economy concepts, firms locating there--even through joint ventures--face many challenges. Fifty-four interviews with managers in 24 joint ventures in the interior Shaanxi province reveal the potential pitfalls as well as ways to increase the chances of a successful joint venture.
Introduction
As more foreign investors have entered the Chinese market, the management, successes, and failures of their firms have attracted attention (e.g., Ahlstrom et al. 2003; Beamish, 1993; Child, 1994; Goodall and Warner, 1999; Peng, 2000). It is well known that in the past 25 years most foreign firms over 85% have been located along China's coastal belt (SSB, various years). Since late 1990s, the Chinese central state has focused on the development of the vast underdeveloped interior areas as a way to bridge regional disparities. In 1999, "the Great Western Development Strategy (xibu da kaifa)" was launched, which is an ambitious top-down effort to steer domestic and foreign investment into the parts of China most in need but least likely to attract aid on their own. Under its influence, more and more foreign firms and joint ventures have stepped into the unexploited hinterland. By 2002, 31,822 foreign enterprises had been established in China's 18 interior provinces and one municipality (SSB, 2003, p.678).
China's interior is important. Under the Seventh Five-Year Plan (FYP) (1981-1985), China's regional 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. 1). Traditionally, the Middle and the Western regions have been regarded as one big area, the interior (Chen, 2000, p. 10 and Wei, 2000, p. 1). According to the demarcation in the Seventh Five-Year Plan, the coastal region consists of nine provinces and three centrally administrated municipalities; while the interior region consists of 18 provinces and one centrally administrated municipality (see Figure 1). It is noteworthy that the interior accounts for 84% and 56% of the country's land and population, respectively. It also supplies China with a significant proportion of the raw materials required to create manufactured products. The rapid economic growth of the coastal belt over the last 20 years has relied heavily on the interior's energy and mineral supplies (Chen, 2000, p. 143). Despite of the importance of China's interior, research on the day-to-day management problems faced by foreign firms in that region and how foreign and Chinese managers have perceived and reacted to these problems is rather limited. This paper is motivated by the absence of research into the managing problems of foreign firms in the region.
China's interior is known for poor physical infrastructure, inadequacy of human resources, lack of business philosophy, and an ailing environment (Sims and Schiff, 2000). Compared with the country's coastal belt, it seems likely that managers will face more obstacles and challenges in running foreign firms. What are the major managing problems of foreign firms in the region? This paper attempts to explore this question.
The focus of this paper is on joint ventures (JVs), including contractual joint ventures (CJVs) and equity joint ventures (EJVs). This paper explores the major problems of managing joint ventures in China's interior by presenting some evidence from Shaanxi province. Major management problems identified by interviews with 40 Chinese and 14 foreign business executives in 24 joint ventures in Shaanxi fall into four areas: recruitment and training, dismissal, energy supply, and development agenda. These problems suggest that relationships with local partners are important in determining the failure and success of JVs. The majority of these problems result from differences either between foreign and Chinese top executives within joint ventures or between joint ventures and their parent companies. The Shaanxi study reveals that successful joint ventures are good at choosing the right partners, maintaining a good relationship with partners, and making efficient use of personal networks and political institutions. An investigation of these problems and recommendations from successful joint ventures on how to solve these problems may inspire foreign firms that have already established their presence in China's interior or are considering entering the market.
After this introduction, a review of the existing literature on the managing problems of JVs in China is presented, followed by research methodology. Then, findings of the major problems of managing JVs are discussed and analyzed. Lessons learned from successful JVs in Shaanxi are recommended at the end.
Problems of Managing Joint Ventures in China
JVs have long been a favored mode for entering a foreign market (Hill and Jones, 1992) because they can join complementary skills and knowhow (Contractor and Lorange 1988). JVs are the most popular mode chosen by multinational enterprises (MNEs) to enter transitional economies such as China (Luo, 1997; Sanyal and Guvenli 2001). 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 (WFVs), JVs possess two advantages in China. First, when foreign investors enter the market, they usually have limited knowledge of Chinese culture, political and legal systems. Cooperative partners can help compensate for some short-comings especially during the initial stage.
Secondly, using JVs as an entry mode can reduce costs. A typical form of a sino-foreign project is that foreign investors provide investment either in the form of cash, machinery, or technology, while their Chinese counterparts offer factory buildings, land, machinery, and skilled workers. By entering such a partnership, both make use of their advantages and reduce their costs to a certain degree (Volhancker, 1997).
Despite of these advantages, there are many obstacles when managing JVs and much has been written about the problems of managing JVs in China (e.g., Bjorkman and Lu, 2001; Luo, 1997; O'Connor and Chalos 1999; Zhang and Keith, 1999). One common theme is that local partners play a key role in determining the failure or success of JVs. For example, Luo's (1997) study suggests that both strategic and organizational traits of local partners are significantly associated with some individual dimensions of JV performance. Zhang and Keith's (1999) research illustrates that working with state-owned enterprises (SOEs) in China is problematic for JVs because SOEs are from a different cultural background. They are slow and ineffective at decision making and have too many employees and too much obsolete equipment.
What explains these problems? Compared with WFVs, JVs present an additional challenge because foreign investors have to cooperate with local partners, which means there is less management freedom for the foreign partner (Tsang, 1994; Luo, 1997). The objective of a foreign partner...
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