Experience on specific problems – Joint ventures between Hong Kong company and company from the local government of the People’s Republic of China (developing country)

CONTENTS

INTRODUCTION

AIM / OBJECTIVE

REASONS OF THE INTERNATIONALIZATION

ENTRY MODE TO CHINESE MARKET

SPECIFIC PROBLEMS
Political Environment
Protection Of Business Property Rights
Economic Factors
Technology Transfer
Cultural Factors

CONCLUSION

RECOMMENDATIONS

BIBLIOGRAPHY

EXHIBIT

INTRODUCTION

"During 1978-79 Deng Xiaopeng became the paramount leader of the People's Republic of China (PRC) and launched China's economic reforms as a platform for modernization. The last twenty years have seen dramatic changes as China moved from a centrally controlled communist state towards a socialist market economy…. In instituting the transition from a planned to a market economy with Chinese characteristics, China is on course to producing probably the most remarkable economic transformation in recorder history and is being viewed as the world's next economic superpower.”¹

Since 1978, Deng Xiaoping succeeded to launch his economic reform program “Open Door” policy that encouraged foreign investments. It was the beginning of a new era for China. Deng’s idea was to open China to foreign investments in order to acquire resources, such as technology, expertise knowledge, etc... Deng promoted a socialist market economy with Chinese characteristics. It means that a market economy with decentralized public investment and a socialist framework of the society. However, he changed the political system as well, decentralized economic decision-making, and began legal and bureaucratic reforms. Chinese economy has experienced significant growth. There is no doubt that this economics expansion has been a direct result of Deng Xiaopeng’s “open door” policy. Foreign investments have rapidly increased and more factories were established by offering tax privileges, such as reduced import tariffs or tax exemptions for certain imports amongst others. In fact, among the developing countries, China is currently the one that attracts the most foreign investments. Joining the World Trade Organization (WTO) in 2001, China pushed this development even further.

China attracts many large multinational companies (MNCs) with low labor costs, less production costs, huge local markets, and a work ethic (where overtime is endemic). Joint ventures are frequently used as an entry mode to the Chinese market due to government pressure. In the 1980’s, more than 12,000 equity joint ventures and more than 8,000 contractual joint ventures were established. The difference between equity and contractual joint ventures lies in the distribution of dividends and the levels of capital contributions. The use of equity joint ventures dominated during the 1980’s. Joint ventures could provide an important stimulus to the growth of the Third World Economy and also their multinationals.²

AIM / OBJECTIVE

Why does a company have to go abroad? What kinds of barriers have to be taken into consideration when entering China? How to make their business strategies? These are major questions that affect companies when they plan to expand their businesses into foreign market environment, especially China.

This research paper is to give an outline of the reasons why companies choose to go international. There is not only ONE motive for companies to choose international expansion, but also there is a variety of causes depending on the respective internal and external environment of the different companies.

Joint venture in China suffers from greater instability than in other developed countries.³ A lot of joint ventures are failed because it is not easy to deal with the Chinese. This paper concentrates on equity joint venture between a Hong Kong company (my present employer – Defond Electric Industries Limited, please refer to the Exhibit) and a company from the local government of developing country – the People’s Republic of China. It tries to examine the causes when entering the Chinese market for the first time in order to achieve a win-win situation. This paper is also investigates what kinds of the specific problems and recommendations are considered by this form of joint venture to entering the Chinese market. By knowing of these pitfalls and taking them into account, a company investing in a joint venture is able to avoid mistakes and thereby increase the like-hood of a successful venture.

REASONS OF THE INTERNATIONALIZATION

“Global interdependence is pervasive. It is not only political and military…. also environmental …. Perhaps the most important aspect of interdependence however is economic.”⁴ Nowadays, the changing business environment and dependency on other countries’ goods and services have forced most companies to seek opportunities in foreign markets. Generally speaking, companies decide to invest abroad for a variety of reasons. Often the main reason of internationalization is the need of companies to be able to stay competitive in their respective environment. This “network approach”⁵ is often referred. It is important for companies not to be a “late starter” (a severe disadvantage) compared to their competitors. In my opinion, a good example of this type of internationalization is the Japanese car manufacturer - Honda.

Another important motive for choosing international is the fact that companies are increasingly faced with foreign competitors in their domestic market. In order to keep up with these competitors, it is advisable for domestic companies to focus on international markets. Also, it will give them the opportunity to react more efficiently to foreign competitors (better opportunity to exert retaliation). A very good example for this is the case of Michelin versus Goodyear.⁶

The economic climate in the world is changing. It makes much easier for companies to internationalize their business activities because they do not face strong market entry barriers that used to prevent them from taking global steps. “As the world has become more economically interdependent and it has become obvious that much of the economic success of countries such as South Korea, Singapore and Taiwan are tied to foreign investments, countries are viewing foreign investment as a means of economic growth.”⁷

Today it is often much more profitable for companies to choose international expansion. Especially those countries in Eastern Europe (the European Union – EU) and Asia, frequently offer attractive markets. It is because the market development in these countries is often still in its infancy. International activities in these countries are connected with risks and required thorough planning, but the opportunity for making huge profits and gaining a respectable market share, is better than in their saturated domestic markets.

For some companies, a main motive for internationalization is the factor of cost-effective in production (outsourcing). This enables company to manufacture (buy) their product (material) abroad for much less costs than in their domestic markets. They are able to sell their products at lower prices than competitors and gain higher profits. A very good example that takes advantage of this type of globalization is Nike.

Of course, one other major incentive for domestic companies to pursue international expansion is the chance of achieving huge economies of scale. Selling products internationally is likely to spawn new customers, which are multiple of the domestic consumers. Companies geared to this new reality benefit from enormous economies of scale in production, distribution, marketing and management.⁸ For example, this will create worth billion dollars for P&G and this success is due to the opening of China market.

Internet has created new opportunities for companies to reach a large number of prospective customers all over the world and therefore increase sales. Additionally, the costs of using the Internet as a sales platform are very low and the choice to go international via Internet therefore is connected with quite a low risk. Offering products and services via Internet automatically implicates an international dimension of business activities.⁹ Therefore, today it is possible for nearly every business, even the smallest craftsman shop, to expand its business activities to a global dimension. The Internet has created a new type of businesses.

These are the main factors that I think can be stated to explain international activities of companies. Naturally, these do not claim to be exhaustive and there may well be some other reasons (which could not be covered because of the limited size of this paper), but I believe that those listed are the major motives for most companies. Company decides to direct its activities to international markets just does this for only ONE reason, of course, most companies will have more than one incentive.

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¹. Anthony Walker, Dennis Levett & Roger Flanagan "China - Building for Joint Ventures, 2nd edition”, Hong Kong University Press

². Dr. X.F. Jia, “Joint ventures and wholly owned subsidiaries’, reader p.21

³. Dr. X.F. Jia, “Joint ventures and wholly owned subsidiaries’, reader p.26

⁴. V. Terpstra (1993) “International Dimensions of Marketing, 3rd edition”, Wadsworth Publish

⁵. B.C. Beaudreau (2004) “World Trade: A Network Approach”, iUniverse, Inc.

⁶. Johanson J. & Vahlne J. (1990) “The mechanism of internationalization, International Market Review, 7:4, pp. 11-24

⁷. Kim W.C. & Hwang P. (1992) “Global Strategy and Multinationals’ Entry Mode Choice”, Reprinted in Global Marketing, pp. 73-95, The Dryden Press, London

⁸. Cateora P. & Ghauri P. (2000) “International Marketing”, McGraw-Hill, p. 51

⁹. E. van Heck (2002) “Making Markets: How Firms Can Design and Profit from Online Auctions and Exchanges”, Harvard Business School Press