Business strategy, market structure, and performance of international joint ventures: the case of joint ventures in China.

Introduction

As the world's largest developing country and fastest-growing economy, China continues to attract a great amount of foreign direct investment (FDI) and has now become the second largest FDI recipient in the world (surpassed only by the United States). International joint ventures (IJVs) constitute the predominant mode of entry into this promising market. However, the Chinese market can present daunting challenges to the unwary investor. Success in China requires an understanding of the unique investment environment and the adoption of a realistic organizational strategy.

Theoretical literature in the business policy area has increasingly emphasized a clear distinction between two levels of organizational strategy: 1) industry or corporate-level strategy, concerned with questions about what industry or business to compete in, and 2) business-level strategy, concerned with questions of how to compete within a particular industry. Both business strategy and market structure determinants of corporate success have been extensively analyzed and investigated (Calof 1994, Chauvin and Hirschey 1993, Hoskisson and Johnson 1992, Levin and Meisel 1992, McWilliams and Smart 1993). In the IJV literature, however, previous studies have not systematically examined the simultaneous impact of business strategy variables and market structure elements on IJV performance. The present paper attempts to fill this empirical gap. The selection of China as the analytical context seems particularly meaningful since that country, as stated earlier, is a major FDI recipient in the world. Moreover, its transitional market structure provides a great scope for investigatory analysis. This study is, therefore, designed to research empirically the underlying linkage between firm- and industry-specific variables and the performance of IJVs in China, based on data collected in Jiangsu province, P.R.C. To the extent that the Chinese settings are analogous to those in other developing countries, the findings of this study have implications for international firms entering these markets.

Literature Review

In recent years, multinational corporations have increasingly used IJV as a vehicle for foreign direct investment (Beamish and Banks 1987, Geringer 1991, Parkhe 1993). As an alternative to either full integration or simple market exchange, the IJV facilitates inter-firm learning and transfer of intangible assets (Buckley and Casson 1988, Hamel 1991). Moreover, if the benefits deriving from joint efforts, minus the transaction costs specific to the formation and operation of the IJV, remain greater than the sum of those benefits from exploiting firm-specific advantages separately, an IJV creates "synergies" and enhances economic rents to the partners (Hennart 1991). These synergies can be the result of risk reduction, economies of scale and scope, production rationalization, convergence of technologies and better local acceptance (Harrigan 1988, Parkhe 1993).

As a corollary, the synergistic effects are larger the greater the complementarity between foreign and indigenous firms. Hence, in a host country with unfamiliar cultural, political and economic systems, an investing company is more likely to cooperate with an indigenous firm, which has unique industry- or firm-specific skills and advantages that are very costly to duplicate (Hamel 1991, Parkhe 1991). In less developed and non-market economies in transition (e.g., China), forming IJVs with local partners constitutes a particularly attractive entry strategy; indeed, in those environments, MNEs confront a higher intensity of interaction with their external environment and face greater difficulties in local adaptation and information collection (Ghoshal and Bartlett 1990). Such difficulties result from a host of factors, including dissimilar cultures, social and political pressures, different economic development stages, and idiosyncratic business practices.

In recent years, MNEs' investment flows have increasingly been directed toward developing countries where the market structures are perceived to be less perfect than those of developed countries. The mainstream of FDI literature explicitly views FDI as a response to market imperfections(2). Market imperfections, in general, are impediments to the "simple interaction of supply and demand to set a market price" (Rugman 1981). According to industrial organization economics, firms in oligopolistic industries enjoy the advantages of economies of scale and other characteristics that give them market power. In order to minimize the disadvantages of being foreign and achieve sufficient market power to compete with local competitors, the foreign investor needs to integrate his core competencies and the characteristics of a desired industry efficiently (Nohria and Garcia-Pont 1991).

More importantly, in its bid to succeed in a host market, a foreign investor has to be concerned with the application of home-tested business strategy factors in a new environment. Previous studies in the strategic management literature have heavily focussed on the effect of business strategy variables on firm performance. Kobrin (1988) and Hennart (1991) have found that the equity distribution and subsequent performance of joint ventures are influenced by the expected strategic importance of the foreign firm's R&D intensity. Harrigan (1988) and Kogut and Singh (1988) have demonstrated that the size of the targeted IJV related to that of the foreign firm is an important factor affecting the entry mode and IJV performance. Phillips and Chang (1983) and Dawar and Parker (1994) have empirically shown that product quality has a significant positive impact on firm's economic performance. Gallego and VanRyzin (1994) summarized their findings by arguing that pricing is positively linked with firm's profit and mediated by product quality and market factors. Chauvin and Hirschey (1993) offered evidence that advertising creates and maintains product differentiation and hence positively relates to firm's profitability.

Parallelly, the relationship between firm performance and market-structure or industry characteristics has been widely investigated in both strategic management and industrial organization literatures. Craig and Douglas (1982) and Mitchell, Shaver, and Yeung (1993) have found that a large market share leads to high profitability because it gives a firm a product differentiation advantage, enabling it to affect some industry-wide restriction of output, increases its bargaining power, and offers the advantages of economies of scale. Bass, Cattin and Wittink (1978) and Willmore (1994) argued that industry sales or profitability growth and concentration interact in the market to influence market share and firm performance because in a moderate growth and concentrated industry, the effect of market share on profitability is stronger since firms can coordinate their efforts in oligopolistic fashion, and this oligopolistic tendencies enhance the industry's rate of return and better enable the advantages of economies of scale.

It should be noted that the above results are not accepted without controversy. For example, Craig and Douglas (1982) found that advertising, R&D intensity, and other firm-specific variables had significant effects on firm's market-based performance, but not on accounting-based measures of performance. As Seth (1990) has pointed out, many controversies concerning the linkage between strategic determinants and firm performance are primarily due to using different and single (either accounting- or market-based) performance measures. Given the inherent weaknesses of single measures of performance and in order to capture and probe different strategic objectives of foreign investors and the corresponding roles of IJVs, in this study, IJV performances is measured along two dimensions: accounting return (ROI and ROA), and market growth (domestic sales and export growth).

The Contextual Setting - IJVs in China: Background, Market and Policy Factors

Background

China officially opened its door to foreign investment in 1979 through the promulgation of its joint venture law. Since then and through the end of 1993, Chinese authorities have approved over 167,500 foreign invested enterprises involving $ 241.50 billion foreign capital. Over 80,000 ventures representing $ 67.2 billion investment have commenced operation (People's Daily 1994a). The industrial output of these ventures has reached 11% of nation's total, and about ten million Chinese are currently employed in these ventures (People's Daily 1994b). Table 1 reveals the primary patterns of foreign direct investment in terms of sources, locations, and industries.

Foreign investors are free to choose among three entry modes: equity joint ventures, wholly foreign-owned enterprises, and contractual (or cooperative) joint ventures. There is no ceiling on the proportion of foreign capital in the joint venture. In recent years, although the ratio of wholly foreign-owned ventures has been growing (about 7% prior to 1990 and 22% in 1993, in terms of number of ventures), the international equity joint venture is still a dominant mode which accounts for 64.72% of the total number of projects and 55.73% of the total value of utilized capital in 1993 (People's Daily 1994b).

Market Structure and Industrial Policy

In recent years, the production and the sales structure of IJVs in China have been changing markedly. The percentage of capital- and technology-intensive projects has increased to about 35 percent of total number of ventures in 1994, and the growth rate is much higher than the average for investments in telecommunications, transportation, and electric power (People's Daily 1995a). It seems that foreign investors in these industries rely on their specific competencies in an effort to achieve monopolistic competition advantages from chinese market structure imperfections. On the other hand, the labor-intensive light industrial products continue to constitute major export items, and the processing-exporting pattern remains unchanged. Apart from the obvious benefit of low labor cost, the preferential treatment accorded to export-oriented products by the authorities may also contribute to the pattern.

Despite great improvements in recent years, China's industrial structure remains one of bottlenecks hampering economic development. Some major structural problems include (1) inadequate power supply; (2) slower growth of raw materials industry as compared to the manufacturing industry; (3) obsolete manufacturing technologies; and (4) poor communication and transportation infrastructures.

In accordance with the Chinese industrial policy, foreign investors are encouraged to invest in the high export ratio projects and in new equipment or new materials concerns that correspond to domestic needs, particularly in the energy, transportation, and telecommunications industries. In other areas, especially those that have already been developed domestically, those that involve the use [TABULAR DATA FOR TABLE 1 OMITTED] of widely available technology, or industries assembling imported parts or producing for the domestic market, foreign investors face many restrictions.

In sum, there is a twofold impact of Chinese market structure on the performance of foreign ventures: First, the profit/sales growth rate of the specific industry the investor has selected will affect the venture's accounting and market performance; Second, the categorization of projects as technologically-advanced, export-oriented, and domestic-oriented will affect the venture's eligibility for preferential treatment from the government, thus influencing the firm's profitability. Whether or not these effects are significant for IJV performance is an empirical question.

The Context of Business Strategy Variables

Foreign ventures face less government intervention at the business unit level, compared to the corporate operation level. Nevertheless, there still exist certain restrictions, on product quality, pricing and advertising in particular.

According to China's product quality law, producers are prohibited from manufacturing products that are deemed by the state to be obsolete. Producers that fail to comply with this provision may be ordered to cease production, and have their business license revoked and sales proceeds confiscated. At a minimum, all products must meet the standard product quality requirements, which are determined by either the State Council quality supervision and control departments or industry custom and practice. China has also established a spot-check system whereby central or local authorities examine the quality of major industrial products. Results of these spot checks are to be made public.

The pricing of IJV products is regulated by the provisions of the joint venture law. According to its guidelines, ventures can freely set the price of their exports, except those controlled by Chinese foreign trade corporations. As for products sold on the domestic market, their prices depend upon their classification into one of the three categories determined by law. These include fixed pricing, managed pricing and free pricing. In practice, IJVs do not produce the type of goods that are rigorously controlled by the Chinese government. Indeed, it is highly unlikely that the authorities will be forthcoming in grating the necessary approvals for a production project of this nature.

In China, advertising for domestic and foreign products was reinstituted in 1979 after a ban instituted during the Cultural Revolution. Advertising volume is now growing at about 30% annually. A variety of media have been used by the foreign ventures to advertise their products and services in China. Despite the positive function of advertising, the Chinese government does, in fact, have regulations in place designed to control advertising practices. The regulations stipulate that advertising must be clear and truthful and may not "hoodwink or deceive end-users and consumers." Nor may advertisements include contents that contradict state policies, divulge state secrets, be harmful to the dignity of China's nationalities.

In the processes of implementing their business strategies, foreign ventures have to face Chinese business practices often sharply dissimilar to those prevalent in their home countries. As a result, sensitivity to local Chinese business conditions, such as the importance attached to personal relations (guanxi) with customers, or the practice of extending credit terms in marketing must be developed. In particular, cultivating and extending firm's guanxi should be a preoccupation for business success. Given the pervasive influence of Guanxi in Chinese societies, sales force marketing is a crucial selling tool for firms operating in these environments. Likewise, the provision of preferential terms of payment for customers is common across firms and in every economic sector in China.

Variables and Research Hypotheses

Business Strategy Variables

Variables Analyzed in the Market Economy Context

As discussed in the literature review, much research has been done in the identification of the significant and positive effects of business strategy variables, such as R & D intensity, size, product quality, advertising, and pricing, on firm performance. However, since these studies often assume a market economy context, their findings may not be applicable in China. As noted earlier, the impact of these variables on IJV performance is likely to be influenced by the Chinese government policies and local business conditions. Since, in the absence of theoretical grounding or empirical support, conclusions from previous studies cannot be extended to FDI in a transitional non-market economy, the following relationship is presented here tentatively, and only as a research question:

Do the business strategy variables, commonly analyzed in the context of market economies, have similar influences on the performance of IJVs operating in China?

China-Specific Variables

Sales Force Marketing

As mentioned earlier, Chinese nationals tend to rely heavily on personal relationships (guanxi) in business dealings (Chen 1994). In China's new, fast-paced business environment, guanxi has become extremely important. It has in large part filled the vacuum and is more entrenched than ever, heavily influencing Chinese social behavior and business practices (Punnett and Yu 1990). Guanxi provides the lubricant for the Chinese to get through life. It is a form of social investment. No company in the Chinese business world can succeed unless it benefits from an extensive guanxi. Guanxi binds literally millions of Chinese firms into a social and business web that can be particularly useful for IJVs with little business experience or lacking the core competencies that are scarce in China. Sales force marketing, an activity heavily dependent on guanxi, has become an increasingly popular and effective marketing means. In addition to marketing personnel dispatched by head office, companies in China often set up regional sales offices in major target areas.

Although guanxi brings obligations and costs (renjing) to its beneficiary, these are mainly social obligations rather than economic ones, moreover, the marginal costs to develop and nurture guanxi, compared to the corresponding marginal benefits, are exceedingly low. Therefore, the marginal contribution of sales force expenditure to accounting return is normally high ([greater than] 1). In view of the above, the first hypothesis states that sales force expenditure is significantly and positively related to both accounting return and domestic sales growth.

Credit-Liberalization

According to a recent report of the Chinese State Statistical Bureau, the average age of domestic accounts receivables is growing (People's Daily 1994b). Accounts receivables open more than 90 days are not uncommon, often representing a substantial part of a company's liquid resources in China. This situation can be attributed to two factors: 1. Preferential terms of payment, particularly, temporal extension of payment deadlines, are widely used in China as a primary marketing pool. This credit-granting practice may be, to some extent, a reflection of culture. In a country where personal relations (guanxi) are painstakingly nurtured and the maintenance of harmony is of paramount importance, sellers would do their utmost to avoid embarrassing customers who may be temporarily unable to pay; 2. A sustained tight monetary policy reflected in a increase in interest rates and a reduction in bank lending and money supply (a situation of 'credit crunch'), has resulted in liquidity problems for many businesses, particularly those heavily relying on bank loans. In addition, in a recent step, the government is separating bank functions of policy directing and commercial services. This measure leads the banks to control more strictly their lending to less efficient companies, particularly unprofitable state firms. As a result, many state firms have encountered a "triangular debt" problem, whereby state companies own large sums of money to each other but no cash to settle their accounts. Under these circumstances, the presence of preferential terms of payment is of special significance to firms facing cash flow problems. To sum up, the practice of permitting customers to delay payment for a longer period is a crucial selling tool for Chinese firms. Based on the preceding observations, it is hypothesized that the growth rate of domestic accounts receivable for an IJV in China is positively related to its domestic sales growth.

However, the credit-granting practice results in greater costs (interest expense and bad debt allowance) as well as financial risk (transaction exposure and default risk) for the seller. Therefore, the growth rate of domestic accounts receivable for an IJV in China is expected to be negatively related to its profitability on accrued accounting principle basis.

Market Structure Variables

Industry Sales and Profitability Growth

A widely accepted conceptual framework in international business literature is that foreign direct investment is a response to market imperfection (Brewer, 1993). As discussed in the literature review, some studies have also found that the industry sales and profitability growth rate have a positive impact on firm performance (Bass, Cattin and Wittink 1978, Newfarmer and Marsh 1994, Willmore 1994). In China, the industry and market structures are still far from perfect. Some sectors of the economy are undergoing transition or have been fully privatized, while others have not. In addition, there are incoherences in the price system. For example, the pricing of a few commodities, particularly raw materials, still operates under the so-called "dual-track" pricing system, one set by the government and the other by market forces. As a result, when government-instituted supply and pricing controls are lifted in an industry, a rapid initial development will usually ensue, and is reflected in a surge in industry sales and profit growth.

Perhaps not surprisingly, whenever the Chinese market for a particular industry appears to grow dramatically, IJVs generally tend to concentrate their operational goals on exploring or exploiting the booming local market, rather than on exporting to home or international markets. In view of the above, the following hypothesis states that industry sales and profitability growth is expected to have a positive influence on IJV accounting return and domestic sales growth, and a negative impact on IJV export growth.

Project Category

The category of investment projects is an important market structure variable in China because different project categories are faced with different degree of entry barriers imposed by either the central or local government, and treated with different tax, tariff, financing, and land rent policies.

According to current Chinese policy, foreign investors are encouraged to invest in (1) transportation, energy, and telecommunications projects with new technologies; (2) projects that will introduce technology urgently needed by the State, renovate product functions, save energy and raw materials, reduce pollution, upgrade product quality and expand world market; (3) new equipment and new materials projects that will respond to domestic needs, especially those producing raw materials, spare parts and components accommodating domestic products; (4) new technology and equipment projects that will make a comprehensive use of locally abundant and renewable resources. In contrast, foreign investors face restrictions in investing in projects that have already been developed domestically; that use standard technology; and that merely assemble imported parts to produce goods sold on the domestic market. In sum, there are three categories of projects that are subject to differential governmental treatment: technologically-advanced, export-oriented, and domestic-oriented.

According to the "Provisions to Encourage Foreign Investment" promulgated by the State Council in 1986, the "technologically-advanced" and "export-oriented" type of products benefit from the following preferential treatment: (1) Reduction in corporate income tax. For instance, currently the rate for these privileged projects is 10-24% while the rate for domestic-oriented projects is 33%; (2) Reduction in land-use fees; (3) Exemption from the profit remittance tax; (4) Receipt of "priority" in obtaining water, electricity, transportation, and communication services. Hence, it is proposed that investors in "technologically-advanced" and "export-oriented" projects will outperform others in terms of accounting return.

Control Variables

FDI is an ongoing and dynamic process. In unfamiliar environments, the learning effect for IJVs is likely to be magnified (Shan 1991). Yet, IJVs of shorter duration are more risky, other things being equal, since there is a higher probability that the venture will cease operation before sufficient return can be generated or before the full potential of the IJV can be realized. Even when the venture agreement is renewable, the shorter duration specified in the contract may mean more frequent renegotiation, which introduces uncertainties for the foreign partner. Further, those foreign investors with an earlier timing entering China are likely to gain access to scarce resources and acquire valuable experience. Therefore, it is likely that a positive association exists between the length of IJV operation (a hybrid of timing and duration of investment) and its performance.

In addition, prior research has shown that partner composition is an important variable affecting IJV performance, because the specific partner chosen can influence the overall mix of available skills and resources, the operating policies and procedures, and the short- and long-term variability of an IJV (Geringer 1991).

The empirical testing will require a model where all constructs having an effect on each other are included, because omitting constructs from a model could bias the results and limit the empirical value of the study. Based on the preceding, partner selection and length of operation are incorporated in this study as control variables.

Data and Methodology

Model and Variable Measurement

The generalized multivariate regression model and variable measurement used in the study are provided in the Appendix.

The following three remarks may help in the interpretation of the statistical model. First, using stock market related measures as market-based dependent variables is neither appropriate nor available in China because the number of IJVs listed in the Chinese stock exchanges is exceedingly small, and foreign portfolio investors are still subject to restrictions in purchasing so-called "B shares" (common stock denominated in foreign currencies) of the existing joint stock companies. Second, it would have been more desirable to additionally use a national concentration ratio or the Herfindahl-Hirschman Index (HHI) to measure market structure. However, these data are not available. Moreover, although entry and exit barrier and mobility pattern could be coded as dummy variables, it may not be advisable, in the Chinese settings, to simply and subjectively code in this way. Third, it is widely recognized that the impact of business strategy variables on firm performance could vary across industries (Caves and Mehra 1986) and other contextual factors, such as partner composition and timing of entry (Harrigan 1985). According to the earlier theoretical argument and empirical findings, the model has two groups of interactions as shown in the Appendix.

Data and Sampling

A difficulty in conducting research on business in China is the scarcity of reliable data. Only in recent years China has begun to made data available on foreign investment activities. However, current state data bases regarding foreign investment reflect only some aggregate figures about FDI activities. The firm-specific financial data is available only from the local entities, such as commissions of foreign economic relations and trade, foreign exchange administrations, and taxation bureaus. Foreign researchers seeking to access this information for survey purposes can obtain it by contacting numerous local state-owned international consulting companies.

Initially, cross-sectional data for a random sample of 127 IJVs from 1989 up to 1991 in Jiangsu Province were obtained from the Provincial Commission of Foreign Economic Relations and Trade, where the author worked as a department head at the time. However, eight of these firms (4 from Hong Kong, 2 from Taiwan, 1 from the U.S., and 1 from Thailand) export their entire output. Since their operations were unrelated to the Chinese market structure, they were deleted from our sampling data. Thus, the final sample size in this study is 119 IJVs. Among them, 42 are export-oriented, 36 technologically-advanced, and 41 domestic-oriented(3). In addition, data on seven IJVs included in this study were incomplete. To remedy this limitation, an empirical measure has been utilized, i.e., missing values are tested by using a pairwise deletion method (compute the cov/corr matrix using pairwise information).

Jiangsu now ranks second in China in terms of GDP and level of foreign investment absorption, as reflected in the number of foreign invested ventures and the total volume of foreign capital. The policies, rules and measures adopted in the province vis-a-vis FDI have been widely applied elsewhere in the country.

The time frame of this analysis (1989-1991) is appropriate since this period can be considered as an operating rather than start-up phase as far as foreign investment is concerned. The government policies, rules and regulations concerning foreign investment were well established during the period.

The data is based specifically on a survey of the sampled IJVs' external financial statements (including related notes) that all ventures are required to submit to the Provincial Commission of Foreign Economic Relations and Trade. These statements are: 01: Balance Sheet; 02: Income Statements; 03: Detailed Sheet of Expense and Expenditure; 04: Detailed Sheet of Goods Sold(4). Another source of secondary data has been a survey from the Annual Statistics Report of Jiangsu Province (ASRJP) from 1989 through 1991 published by Jiangsu Statistical Bureau.

The distribution of the sample (119 IJVs in total) by industry is as follows: electronics (23), consumer goods (18), textiles (13), machinery (13), food processing (11), construction materials (7), agriculture (6), engineering (4), medicine (3), petrochemicals and plastics (3), transportation (3), chemicals (3), packaging (3), telecommunications (3) and others (6).

Analysis Procedures

The empirical testing of this study is conducted through the use of Statistical Analysis System (SAS) software. Given the interactions between the multiple dependent variables, this study employs the General Linear Models Procedure (GLM) to run a multivariate regression. Specifically, we use the Forward Selection (selection level = 0.10) regression method to identify the relationship between individual dependent variable and forward selected independent variables. Based on the result of the forward selection process, those insignificant independent variables (p [greater than] 0.10) are dropped from the regression list.

Considering the need to examine the aggregate multivariate effect from the whole model and the interrelationship between business strategy and market structure, and between business strategy and control variables, the GLM procedure also incorporates a MANOVA test.

Results and Discussion

Business Strategy Variables

Results of the forward selection regression analysis (Table 2) and the general linear model statistics (Table 3) show the following findings regarding firm-specific business strategy variables.

Product Quality and Pricing

Product quality (QUAL) significantly and positively affects all four performance measures, whereas price is inversely associated with domestic sales growth. The latter relationship supports the view that Chinese consumers tend to value low cost over other product attributes, despite a tremendous growth in real purchasing power (Mahatoo 1990). In addition, there is a significant interaction between pricing strategy and length of operation, suggesting a relationship between linking pricing and the product life cycle in China. Moreover, the IJV's pricing policy may vary across industries.

[TABULAR DATA FOR TABLE 2 OMITTED]

[TABULAR DATA FOR TABLE 3 OMITTED]

R & D Intensity

R & D intensity demonstrates a marginally significant influence on IJV performance. While positively associated with market measures, it is negatively related to accounting performance. The relatively short history of the IJVs (most were set up after 1984) may explain this result. Indeed it is argued that the full effect of R & D expenditures on performance is likely to transpire after a longer time lag. However, as shown in Table 3, the interactions of R&D intensity with operation length, industry structure, and partner selection are all statistically significant, thus, R & D intensity seems to vary by industry, local partner selection, and operation length.

Advertising

Advertising (ADVT) is found to have an insignificant influence on firm performance except for a moderate positive effect on sales growth. However, ADVT may be efficient and more effective for marketing products that have had a long presence in the Chinese market, since ADVT interacts significantly with length of operation. Indeed, businesses in China are turning to advertising as a marketing tool as evidenced by increased spending and employment in the industry. On the other hand, given its short history, advertisers in China are facing challenges from consumers' attitude, governmental regulations, higher rates for foreign advertisers (20% higher and payable in foreign currency), and cultural influences. Organizational learning and adaptation in the Chinese advertising environment are important to the success of foreign ventures.

Size

Size is found to have a significant and positive impact on local market performance. Indeed, greater size implies an ability to benefit from economies of scale and scope and invest in advanced equipment and technology (Kogut and Singh 1988). These are among the competencies needed for foreign investors in order to outperform the Chinese local firms (Shan 1991). Besides, this result indicates that greater sized ventures are more likely to concentrate on Chinese domestic market. This evidence is consistent with the fact that most investors from the United States and Europe have been investing in domestic-oriented capital- or technology-intensive industries in China whereas the small-sized investors from Hong Kong and Taiwan tend to process and assemble imported materials and reexport the final products.

In sum, and to answer the research question Q formulated earlier, the present results suggests that previous findings about product quality and firm size in the context of market economies are applicable to China. However, advertising and pricing do not have identical influences in the two type of business environment. In addition, a given variable (e.g., R &D intensity) can have differentiated effects on various aspects of performance, according to the environment. These differences can be traced to several factors, such as economic structure and development stage, cultural and political characteristics.

Sales Force Marketing

Sales force expenditure (SFMK) has a statistically significant and positive impact on profitability and domestic sales growth. Thus, the hypothesis for sales force marketing is supported. Indeed, guanxi, the fertile soil for sales force marketing, binds literally millions of Chinese firms into an expensive network of relations that can be particularly useful when expanding market shares. With the unprecedented economic development and modernization taking place, Chinese will possibly reconcible their guanxi web with the rationale of market mechanisms. But for now, guanxi still plays a crucial role in Chinese business, as it will for years to come. To successfully do business with the Chinese, foreign investors need a basic understanding of guanxi dynamics - even if they don't want to play by Chinese rules.

Credit Granting

The growth rate of domestic accounts receivable is positively associated with accounting return and local market growth. The first prediction for credit-granting is hence supported, but the second prediction is rejected. This rejection could be attributed to three reasons. First, most IJVs are not very dependent on China's bank lending thereby less vulnerable to the credit crunch. Second, most IJVs have their own distribution channels and are less vulnerable to the "triangular debt" problem. Third, IJVs are widely recognized to have been more "conscious" of credit screening and investigation thus have maintained a better customer/buyer network (People's Daily 1994c). Indeed, the quality of a seller's own administration do matter on economics of credit-granting in a material way. IJVs that provide for adequate liquidity are going to have the best chance of survival. Vital to any IJV's long-term financial strategy, liquidity will play a significant role and, in turn, will highlight the importance of accounts receivable management - in addition to overall cash management - as a matter for renewed company attention. To be successful, an IJV must establish clear-cut working policies, both internal and external, that will promote the best turnover of cash possible and the maximum benefits from economics of accounts receivable.

Market Structure Variables

Industry sales growth and profit growth have a moderate positive influence on ROI, ROA and domestic sales growth rate (SGR), but a negative impact on export growth rate (EGR), the hypothesis for industry sales and profit growth is thus supported. As a reflection of the imperfection of industry structure in China, a particular industry may experience a sudden burst of sales growth. When this happens, IJVs may tend to exploit the rapid local expansion rather than turn to exports. Table 3 also shows that industry characteristics have not been independently affecting IJV performance. It apparently interacts with R & D intensity on ROA and SGR, with advertising on SGR, and with pricing on ROI and SGR, indicating that it is, as per the terminology of Sharma et al. (1981)(5), a quasi-moderator which moderates the form of relationship between the aforementioned business strategy variables and IJV's return and sales growth. Overall, these results suggest that IJV strategy and industry structure and their interaction are essential for understanding venture performance.

Since project category (CATE) is not significantly related to performance measures, no causal relationship can be inferred between category of products and firm performance. Thus, the hypothesis for project category is rejected. This result seems to indicate that the incentives offered by the Chinese government may not fundamentally influence foreign investment decisions. It is possible that investors are primarily motivated by market entry rather than production-export concerns. In the technologically-advanced category, it takes a longer time to attain high return and market growth due to the long term nature of these projects and the large amount of fixed costs incurred. In the export-oriented category, it is a common feature of the joint venture agreement to hold the foreign partner responsible for importing materials and distributing exports through its home company. It has become known recently that many investors, particularly those from Hong Kong and Taiwan, inflate the price of imports and artificially lower the price of exports of the IJV so that the book margin for the IJV is quite low but the actual return for its home company is rather high. These facts may contribute the above empirical evidence.

Relative Importance of Business Strategy and Market Structure

According to the incremental [R.sup.2] shown in Table 2, business strategy variables explained over forty percent of variance in profitability and local marketing growth, whereas market structure variables explained only about ten percent. Thus, it can be said that for Chinese IJVs, business strategy determinants are more important for accounting return and domestic sales growth than market structure. However, the effects of market structure become more apparent and important when considering export growth rates.

With regard to the aggregate multivariate effect on the individual dependent variables, Table 3 suggests that the effect on SGR, ROI and ROA is statistically significant, especially for SGR. The aggregate effect on EGR, however, is not significant.

Regarding control variables, length of operation (LEOP) is found to be statistically significant for all four performance measures. This shows the strong effect of a "learning by doing" phenomenon for IJVs in the Chinese environment, thereby lending support to the theory of viewing an IJV as an instrument for organizational learning (Kogut 1988). Second, local partner selection (PART) is found to have a significant impact on IJV's accounting return and market growth. However, PART does not independently affect firm performance, it moderates the form of relationship between such strategic marketing factors as venture size and product innovation and IJV performance.

Conclusion and Implications

To recapitulate and summarize the paper's major findings, it will be recalled that a linkage was established between high market and accounting performance and intensity of sales force marketing. Chinese business people are naturally preoccupied with the task of guanxi construction. They have developed extremely sophisticated skills that facilitate the development of interpersonal relationships. Many have made guanxi cultivation into a fine art. To do business with the Chinese, westerners need a basic understanding of guanxi dynamics - even if they don't want to play by Chinese rules.

It was also found that there is a positive relationship between IJV's accounting and market performance and provision of lenient terms of payment for customers of IJVs in China, that is, the elaborate plan for an extension of credit to buyers is not systematically linked to lower profitability, although the extent to which the seller can go in providing credit facilities without incurring unsustainable costs is very firm- and situation-specific. Flexibility and solicitude toward consumer needs appear to be of utmost importance. We also see that advertising did not affect performance to a great extent, given the fact that commercial advertising is only one and a half decade old in China and consumers may have ambivalent attitudes toward its messages. The impact of lenient terms of payment and advertising on IJV success may be moderated by other factors such as nature of products, management attitude and capacity of foreign partner, and equity status of an IJV. These issues need further investigation.

The present study also demonstrated that product quality is highly correlated with performance, while high pricing policies negatively affected local market growth and accounting return. The Chinese consumers appear to be value-conscious and price-sensitive. Meanwhile, the effects of R & D intensity on performance could not be as easily established. However, it does appear that R & D intensity has a stronger effect on performance for ventures with better local partners and for IJVs with a longer history of operation. Likewise, size and length of operation enable a firm to better manage risk. In an environment where uncertainties are numerous, it can be expected that these variables correlate with performance, and the present analysis does, indeed, confirm this relationship.

China's huge market continues to attract foreign investors. In recent years, IJVs operating in that country benefitted from industry sales and profit growth, participating in the local expansion at the expense of exports, although some small-sized investors lacking a clear competitive advantage oriented their strategy toward cost-minimization, allowing them to focus on exports. Moreover, any investing firm needs to integrate its specific competencies and industry characteristics to achieve maximum advantages from them and their interaction. In sum, the determinants of success in China are complex; the effects of most business variables are amplified when interacting with market structure, partner selection and timing of entry impact differentially the various dimensions of performance. Accordingly, prospective investors must consider the correspondence between their business strategy and market structure, and the fit between their firm-specific objectives and the presence and relative importance of the variables that are likely to produce the desired outcomes.

The present work can be extended in several directions. In particular, the dynamic aspect of business activities in a changing environment provide another avenue for research. Indeed, longitudinal studies of IJV performance may shed additional light on the evolving Chinese situation. Another promising objective for research may be an attempt to duplicate the present results in other developing countries or emerging market economies, especially those that have some commonalities with China along the cultural and economic development dimensions. Comparative studies could help answer a few additional questions in this area.

Notes

1 The author would like to thank Dr. Richard D. Robinson, Paul W. Beamish, Farid Sadrieh and the two mir reviews for their comments.

2 There are two closely related and overlapping types of market imperfection. One emphasizes industry structure as a source of market power (Hymer 1976); the other focuses on transaction costs as barriers to international trade and licensing (Dunning and Rugman 1985). This study examines the effect of the former on IJV performance.

3 These definitions are based on the Chinese government guidelines. The IJV belong to export-oriented if it exports more than 70% of its output, otherwise it is a domestic-oriented venture. Due to no clear explanation of "advanced technology" in the Chinese law and rules, inclusion in the name list of technologically-advanced foreign invested-enterprises in Jiangsu province, P.R.C., obtained from the Provincial Commission of Foreign Economic Relations and Trade, Jiangsu, determines whether an IJV in the sample is technologically-advanced or not.

4 In conformity with government rules, these statements have been officially audited by the independent certified public accountants before they were submitted. In China, all the foreign ventures must comply with the accounting standards regulated by the State Council. These standards are quite similar to the generally accepted accounting principles (GAAP) of the United States.

5 According to Sharma et al. (1981), the variable is referred to as an intervening, exogenous, antecedent, suppressor if it is significantly related to the criterion but not to the predictor; if it is not significantly related to the criterion, nor interacted with the predictor, it is called homologizer which moderates the strength of relationship; if it is significantly interacting with the predictor and related to the criterion, it is quasi-moderator which affects the form of the relationship.

Appendix: Model and Measurement

Model: [Mathematical Expression Omitted]

where: i-1, 2, . . . 4; m = 1,2 . . . 10; n = 1, 2

Dependent Variables:

Accounting Return

[Y.sub.1] = Return On Investment (ROI); [Y.sub.2] = Return On Asset (ROA)

Market Measure

[Y.sub.3] = Domestic Sales Growth rate (SGR); [Y.sub.4] = Export Growth rate (EGR)

Independent Variables:

Business Strategy Variables

[X.sub.1] = ADVT-advertizing expenditures

[X.sub.2] = SFMK-sales force expenditures

[X.sub.3] = DARL-growth rate of domestic accounts receivable

[X.sub.4] = R & DI-R & D expenditures relative to the industry average(1)

[X.sub.5] = PRIC-pricing, measured by average selling price of product in business relative to industry's average price, weighted by sales percentage of specific goods in total if multiple products(2)

[X.sub.6] = QUAL-product quality, measured by percent of products rated superior, to competitors minus percent rated inferior(3)

[X.sub.7] = SIZE-firm size, measured by total assets relative to the industry average(4)

Market Structure Variables

[X.sub.8] = INPG-industry profitability growth rate

[X.sub.9] = INSG-industry sales growth rate

[X.sub.10] = CATE-category of project, dummy variable, measured by: Technologically-Advanced (TA), Export-Oriented (EO), and Domestic Oriented (DO)

[X.sub.10]A = 1 if TA; O otherwise; [X.sub.10]B = 1 if DO; O otherwise; [X.sub.10]C = 1 if EO; O otherwise

Control Variables

[C.sub.1] = LEOP-length of operation, measured by venture age (years)

[C.sub.2] = PART-partner selection, dummy variable(5)

[C.sub.2]A = 1 if top ten; O otherwise; [C.sub.2]B = 1 if top 50; O otherwise;

Appendix Notes:

1 This index (around unity) measurement has been suggested by one of the anonymous referees. As s/he pointed out, the measurement of R&D intensity in the form of an index relative to the industry average can better capture the cross-industry variations and thereby more accurately reflect the magnitude of firm-specific technology than that relative to firm's total assets. The figure of industry's average R&D expenditures was obtained from the Detailed Report of Jiangsu's Industrial Products, the third section of Jiangsu Statistical Bureau: Annual Statistical Handbook (1989-1991).

2 The industry's average price is based on the same handbooks as above. The firm's average selling price is derived from Financial Statement #04.

3 In quantifying "quality", this research is relied on the Report of Top Ten Enterprises in Each Industry (Jiangsu), and Introduction of Superior and Famous-brand Products in Jiangsu Province, both from Jiangsu Statistics Bureau.

4 This index is also suggested by the referee for the same reason as #1. The industry average of firm size was obtained from the same source as #1.

5 Three categories are incorporated in the variable of local partner: among the top ten, top 50, and other enterprises in each industry, based on the report of above Bureau.

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Yadong Luo, Assistant Professor of Management, College of Business Administration, University of Hawaii at Manoa, HI, U.S.A.