Cultural problems within International Joint- Ventures in China

Diplomarbeit 

zur Erlangung des akademischen Grades
„Diplom-Betriebswirt (FH)“
an der Georg-Simon-Ohm-Fachhochschule Nürnberg
Fachbereich Betriebswirtschaft

eingereicht von: 

Michael Amtmann

Nürnberg, den 20. Juli 2004

Table of contents ... 1

Table of abbreviations and Table of figures  ... 2

1. Introduction  ... 5

2. Structure of the Chinese industry
2.1. Growth and Direct Investments  ... 9
2.2. Qualification and Training  ... 10
2.3. Definition IJV  ... 12

3. Chinese Culture  ... 15
3.1. Language  ... 15
3.2. Religion ... 17
3.3. School of thought  ... 17
3.4. Values  ... 18
3.4.1. Communism and Socialism  ... 18
3.4.2. Confucianism  ... 19
3.4.3. Collectivism and Buddhism  ... 20
3.4.4. Taoism  ... 22
3.5. Legal Culture  ... 23
3.5.1. Laws and contracts  ... 24
3.5.1.1. Possibilities to cope with the current system  ... 25
3.5.2. Socialist planned Economy  ... 26
3.5.3. Democratic centralism  ... 7

4. Intercultural problems during certain stages of the JV process  ... 28
4.1. Partner Selection  ... 28
4.1.1. Cultural Traits  ... 29
4.1.2. Strategic Traits  ... 30
4.1.2.1. Absorptive Capability  ... 30
4.1.2.2. Market Power  ... 31
4.1.2.3. Product Relatedness  ... 31
4.1.2.4. Market Experience  ... 32
4.1.3. Organizational Traits  ... 32
4.1.3.1. Firm Size  ... 32
4.1.3.2. International Business Experience  ... 33
4.1.3.3. Previous Cooperative Experience  ... 34
4.1.3.4. Organizational Skills  ... 34
4.2. Negotiations  ... 37
4.2.1. Personal Connections (Guanxi)  ... 37
4.2.2. The Intermediary  ... 39
4.2.3. Social Status  ... 41
4.2.4. Interpersonal Harmony  ... 42
4.2.5. Holistic Thinking  ... 44
4.2.6. Thrift  ... 45
4.2.7. "Face" or Social Capital  ... 46
4.2.8. Patience, Endurance and Enduring Labour  ... 47

5. Management Process  ... 49
5.1. Control ...  49
5.1.2. Focus of control  ... 50
5.1.3. Extent of control  ... 50
5.1.4. Mechanisms of control ...  50
5.1.5. Input Control  ... 51
5.1.6.. Process Control  ... 53
5.1.7. Output Control  ... 54
5.2. Decision Making  ... 55
5.3. Planning and scheduling  ... 57
5.4. Managerial Pragmatism  ... 59
5.5. Trust  ... 61
5.5.1. Definition of Trust  ... 61
5.5.2. Effects of Trust  ... 62
5.5.3. The significance of trust in China  ... 64
5.5.3.1. Power Distance  ... 65
5.5.3.2. Individualism  ... 66
5.5.3.3. Masculinity  ... 67
5.5.3.4. Uncertainty avoidance  ... 69
5.5.3.5. Long – term versus short – term orientation  ... 70
5.6. Communication  ... 70
5.6.1. Attitudes  ... 71
5.6.2. Social Organization  ... 72
5.6.3. Thought Patterns  ... 74
5.6.4. Language  ... 74
5.6.5. Nonverbal Communication  ... 75
5.6.6. Body language (kinesics)  ... 75
5.6.7. Body distance (Proxemics) and haptics ...  76
5.6.8. Paralanguage  ... 78
5.6.9. Time  ... 78
5.6.10. Communication and its Consequences ...  79
5.7. Human Resource Management  ... 79
5.7.1. Work attitude  ... 81
5.7.1.1. Motivation  ... 82
5.7.2. Quality and Care  ... 85
5.7.3. Conflict Management  ... 88
5.7.4. Lay Offs  ... 89

6. Survey: Opinions and cultural values of Chinese students in Germany  ... 91
6.1. Findings  ... 92
6.2. Possible implementation strategies ...  104
6.2.1. Redesigning the Hierarchy, work organization and communication  ... 104
6.2.2. Transforming the management  ... 105
6.2.3. How to address motivation and quality  ... 106
6.2.4. Improving intercultural competence  ... 107
6.2.5. Developing a common understanding of the firm  ... 108

Bilbliography

Annex : Questionaire

Table of Abreviations:
WTO World Trade Organization
GDP Gross Domestic Product
SOEs State owned enterprises
POE Privately owned enterprises
OEC Overseas ethnic Chinese
FDI Foreign direct investment
R&D Research and Development
WFOE Wholly owned foreign enterprises
MNC Multi-national companies
IJV International joint-ventures
JV Joint-venture
CEO Chief executive officer
GM General Manager
ROI Return on investment
VP Vice President
PRC People’s Republic of China

Table of Figures:
Figure Nr. 1 Four socialist markets in China ... 8
Figure Nr. 2 Typical structure of a joint-venture company ... 14
Figure Nr. 3 Speakers of principal Chinese and Western languages  ... 16
Figure Nr. 4 Basic differences in cultural values  ... 22
Figure Nr. 5 What is a contract?  ... 25
Figure Nr. 6 Power and uncertainty  ... 36
Figure Nr. 7 Chinese societies in comparison to Germany  ... 65
Figure Nr. 8 Communication styles  ... 74
Figure Nr. 9 How the meaning of gestures differs  ... 76
Figure Nr. 10 Typical office spaces  ... 77
Figure Nr. 11 Human Resource problems ...  81

1. Introduction

Since the reforms of 1979, the People`s Republic of China`s (PRC) economy has experienced significant growth. There is no doubt that this economic expansion has been a direct result of the opening up of Chinese companies to foreign investors. The number of sino-foreign joint-ventures, which are by the way a privileged form of investment granted by the Chinese government, has been increasing rapidly. According to Chinese statistics, at the end of 1998, Chinese-foreign joint-ventures represented approximately two thirds of about 300 000 foreign investment projects that were approved by Chinese authorities. In fact, among the developing countries, China is currently the one which attracts the most western investments. Joining the World Trade Organization (WTO) in 2001, China pushed this development even further and while other countries were fighting a recession at the same time, it was able to sustain a growth of 7.8% regarding the Gross Domestic Product (GDP), 14.1% with respect to exports and 10.4% regarding imports.¹

Consequently there is steady interest of foreign companies to form joint-ventures in the People′s Republic of China. But whereas in the 1980ies mostly the huge corporations where entering this market, nowadays more and more midsized companies, for instance from Germany, are forming joint-ventures too. From the region “Mittelfranken” for example 320 businesses have developed ties with the People’s Republic – a plus of 60% from 1996.² Many foreign firms are considering entering joint-ventures in China because this seems to offer the most attractive method for gaining access to the huge potential of the labour pool and market of China. Nonetheless, there are many warnings about the problems that have to be faced in order to establish a joint-venture in China. Chief among these is the problem of differing management styles between Foreign and Chinese partners.

Very little accurate information is available about Sino-Foreign joint-ventures.³ An example is the wide disparity in the reports of the numbers of Sino-German jointventures. It is not surprising, therefore, that the majority of research studies have focused on identifying the number and the internal structures of these joint-ventures rather than on the practical problems of managing these businesses effectively. Beyond problems of identifying active ventures, research on Chinese-German jointventures is hampered by other difficulties: collecting data that is accurate, collectingdata from Chinese staff and evaluating their attitudes and answers. This study seeks to overcome these difficulties by assessing the attitudes of Chinese students in Germany about the cultural differences they have experienced during their time in Germany. The cultural values which may be responsible for the existence of the attitudes are discussed at the beginning of this paper. On the other hand a study of the literature, especially of best practice papers on this topic, will be conducted. Subsequently the resulting cultural issues which may interfere with joint venture success are identified and possible solutions to these problems are suggested.⁴

2. The Structure of the Chinese Industry

According to the type of state economic planning China′s market today can be more or less classified into three categories. The enterprise director′s freedom to formulate his own marketing plan is also affected by this classification. The three forms of economic enterprises, permitted in China nowadays, are: Private, collective, and state-owned corporations. These companies are subject to various degrees of state regulations ranging from 0 to 100 percent. Following the introduction of profit-sharing schemes in 1993 and stock offerings to workers in 1997, State owned Enterprises (SOEs) have experienced productivity gains and have been relieved of the burden of social responsibility. Yet the situation of most of the SOEs remains critical.⁵ Studies reveal that Chinese SOEs are competing on the basis of cost rather than quality or new product development, and that such enterprises are susceptible to competition should protectionism cease.⁶

The state began allowing individuals and families to establish their own businesses in 1979. There is no limit to the profit a private enterprise can earn. They are free to select, design, and advertise their products. These privately owned enterprises (POEs) are mostly small enterprises predominantly engaged in the service sector. Owned and controlled by individuals, they possess the freedom and incentives to pursue new business ventures, yet lack professional management and market orientation. In general they have also not the amount of government connections possessed by SOEs and collectives, and being outside of the allocation plan, they are unable to obtain new technology and low-cost finance. Shortage of commodities (especially repair parts) is a common problem. Leasing land rather than buying it from local government, the maintenance of guanxi relations are critical to their survival. Consequently, with the exception of labour intensive industries, POEs have flocked into the service sector rather than entered manufacturing.

Collective enterprises are actually collective entities of several state enterprises to operate side-line businesses and not, as often believed in the West, formed by a group of individuals who petition the state for permission to establish their business. In other words, they are not privately owned collectives and, therefore, have the advantages of material acquisition, technology-sharing, access of information available to state enterprises only, but a lesser degree of state intervention. Since they are mostly set up and controlled by local authorities, they are often referred to as town and village enterprises (TVEs).⁷

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1 http://www.ihk-nuenberg.de/ihk_primnav/wir_ueber_uns/kammergespraeche/canrong.jsp

2 http://www.ihk-nuenberg.de/ihk_primnav/wir_ueber_uns/kammergespraeche/canrong.jsp

3 Markterfolg in China; Physica Verlag; Michael Nippa; P. 6

4 Inga S. Baird/Marjorie A. Lyles/Robert Wharton; Management International Review vol. 30 Special Issue 1990; P. 54

5 Markterfolg in China; Physica Verlag; Michael Nippa; P. 6

6 Erfolgreiches Asienmanagement; Expert Verlag; Sung-Hee Lee; P. 44

7 Production Development within China: Cultural Difference within International Joint Ventures; A. Williams, X. Zhang