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Problems of managing joint ventures in China's interior: evidence from Shaanxi.

For several decades foreign firms have been locating in China, often through joint ventures with indigenous firms and usually in the more developed coastal regions. Now, however, the vast resource-rich interior is beckoning, and the central government is encouraging investment there. Given the interior's poor infrastructure, less educated population, and scant exposure to 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.


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 is usually different from that of its domestic partner (Wong et al, 1999). The problems of working with a foreign partner are magnified in transitional economies such as China, with its contextual uncertainty, institutional hostility, and contractual risks. The reason is that China's investment environment, with the socialist tradition and strong culture, differs considerably from that of the West (Boisot and Child, 1996; Peng, 2000). Since 1978, China has been moving from a centrally planned economy to a market-oriented economy. This transformation involves a power shift from central to local authorities, which creates arbitrary enforcement of a weak market structure, poorly specified property rights, inconsistent regulations, vague and unevenly applied laws, and changing tax and fee requirements that can harm businesses (Ahlstrom, Young, and Nair 2003; Luo, 1997).

Within China, economic conditions and policy environments vary substantially among different regions, and there are substantial structural differences between coastal and interior provinces (Chen, 2000; Wei, 2000). In the coastal areas, economic reforms and an open-door policy were introduced early (the late 1970s) so the economy in these regions has become highly liberalized and has shifted from centrally-planned to a market approach (Sun, 1999). Given their proximity to foreign markets, it is not surprising that the coastal provinces are more commercially advanced (Tsai, 2002, p. 167). In contrast, the interior areas experienced the preponderance of "socialist construction" and heavy central planning investment during the pre-1978 period, which left it with a more conservative legacy. The interior appears to have a greater stake in preserving its old state-subsidized positions and has exhibited more resistance to the economic reforms and open-door policy that started in the early 1990s. The interior areas still do not have a liberalized market economy. To a great extent, the central planning system still governs (Sun, 1999). Therefore, the business environment seems in the interior likely to be more problematic and proposes more challenges to foreign investors.


The primary data in this paper were obtained through in-depth interviews during my field research in Shaanxi from February to May 2002 and from August to September 2003. Shaanxi, located in the middle of China has a population of 36.4 million and a land area of 205,600 square km. The selection of a single province for the paper reflects the size of the country; studying all 19 interior provincial units in detail was simply not feasible. Rather than selecting a cross-section of provinces, it was decided that concentrating on a single province would allow this research to be conducted in far greater depth.

Shaanxi was chosen for two reasons. The first is because the province possesses typical characteristics of China's interior--historical importance, rich resources, and slowness in implementing reforms. As such, the Shaanxi case can provide insights to some of the major problems of managing joint ventures faced by foreign firms. The second reason is the comparatively large pool of foreign firms in the province. By the end of 2002, the province had 2,993 foreign invested projects, with the accumulated volume reaching $6.4 billion and $3.8 billion in terms of planned and actual values, respectively (SPPG, 2003). This placed the province at 18th among China's 31 provincial units and 6th among the 19 interior provincial units (MOFTEC, 2003). In the province, 79% of realized FDI took the form of CJVs and EJVs in 2002 (SPPG, 2003), providing a reasonably large pool to study the problems of managing JVs in the region.

According to a well-known scholar in Shaanxi (interview in Xi'an, February 28, 2002), obtaining interviews in the province is difficult because people are more conservative in sharing their opinions and inside information than those in the coastal regions such as Guangdong, Shanghai, and Beijing. But, with the help of one of the most important think-tanks in the province, 54 interviews (40 Chinese and 14 foreign business executives) were conducted with 24 joint-ventures--maximum number feasible within a limited period. Although this small sample creates questions of validity, the detailed information derived is adequate for insights into the major problems of managing JVs in the province.

The 24 joint ventures represented 14 source countries and regions: Hong Kong, Macao, Taiwan, Japan, Singapore, Thailand, Indonesia, U.S., Canada, United Kingdom, Germany, Belgium, France, and Italy. In terms of sectors, they ranged from primary industry (agriculture) to secondary (machinery manufacturing and construction) to tertiary (transport, post and telecommunication, real estate, health care, catering, sports and social welfare and tourism). The sizes of firms varied from the smallest with 19 people to the largest with about 2,600 employees. The finns' year of establishment varied from one of the earliest foreign firms in Shaanxi established in 1984 to newly created firms in 2002. The names of companies and individuals are disguised to ensure confidentiality.

Although questions were prepared in advance, interviews were, to a large extent, open-ended. The argument for this is that an open approach can reduce the interviewer's impact on the research process to a minimum and allow the investigation of unexpected topics (Bouma and Atkinson, 1995, p.207). The interviews inquired about development and operation, management problems, and strategies to overcome these problems. Because the researcher was introduced by someone that the interviewees trusted, the majority were quite open and candid, furnishing valuable primary data.


Operating a foreign firm, in particular a joint venture, in a foreign environment is a challenging task for managers. Many things can go wrong. The major and most common problems in the daily management of JVs in Shaanxi can be summarized in the following four categories: recruitment and training, dismissal, energy supply, and development agenda.

* Recruitment and training

The comprehensive science and technology capacity of Shaanxi places it third nationwide; the province has more military enterprises than anywhere in China. These lead to a perception that Shaanxi is blessed with intellectual and skilled workers and employers so that joint ventures are spoiled for choice. In practice, this is only true for the availability of an skilled and semi-skilled workers. Experienced technicians, professional workers, and managers are scarce. Twenty out of the 24 interviewed JVs said it was very difficult to find the appropriate personnel. The Chinese manager of the personnel department of a Sino-French joint venture noted as follow (interviews in Xi'an, July 25, 2003):
 My feeling is that it is very difficult to find
 the appropriate people that we need in
 Shaanxi's labor market. Our requirement is
 not high. We are looking for people who
 hold a Bachelor degree, know some technological
 knowledge and can communicate
 in English. That is all. But, our choices are
 so limited.

Similar sentiments were expressed by the Hong Kong general manager of a Sino-Hong Kong firm. He stated that usually after advertising a job vacancy, they received several hundred applications. Many applicants were professionals or intellectuals, but most were not the kind of people they were looking for.

Joint ventures use two channels to recruit new staff. The first is recruitment from local Chinese partners. Most state-owned enterprises (SOEs) in Shaanxi lose money and are overstaffed. Providing new jobs for redundant workers is a big challenge for local enterprises. One way is to persuade newly established joint ventures to absorb as many redundant workers as possible. Some Chinese state enterprises have been very successful at this. A medium-sized SOE, for example, which used to be a leading machinery manufacturing company in Shaanxi, had been in debt since the mid-1980s and many employees had to be laid-off. During the late 1980s, the company cooperated with two foreign investors and established two separate joint ventures that absorbed over 90% of its original workers.

To foreign investors, recruitment from local Chinese partners is a natural and easy source of labor. However, the danger is that if most of the workers come from the Chinese partner, the joint venture may inherit the power relations and the social structure of the old organization. The traditional Chinese employment system is sometimes called the "iron rice-bowl" (tiefanwan). It means institutionalized "jobs for life" or "cradle-to-grave" welfare in state-owned enterprise work units (danwei). The practice of "iron rice-bowl" dominated the Chinese economy until recently. Combining old-style Chinese danwei practices with those of the modern multinational corporation clearly presents difficulties, especially in province such as Shaanxi. According to a Chinese departmental manager in a Sino-Belgian venture, one of the biggest challenges at the beginning was staff training. He further explained (interview in Xianyang, April 26, 2002):
 Because most of their workers were transferred
 from one of their local Chinese
 partners, a SOE, they had many bad habits
 (such as poor efficiency and management
 based on rule-by-people, not rule-by-regulations
 and laws). The conversion of
 staff that had already formed poor working
 habits was more difficult than teaching
 new skills in job responsibilities from

The second channel is recruitment from newly graduated students who are regarded as "unspoiled." But this does not mean there are no problems. They do not have any work or professional experience, so joint ventures cannot deploy them immediately. They require systematic training, and, depending in part on the numbers involved, the costs can be very substantial. For large firms, training costs may not be a big issue, but for small- and medium-sized firms, it can be a different story. A Chinese manager in charge of human resources for a medium-sized Sino-Japanese firm expressed his feelings toward staff training in this way (interview in Xi'an, August 5, 2003):
 I heard that many big foreign firms have a
 complete and systematic training scheme,
 which can provide enterprises with necessary
 and appropriate professionals and
 workers each year. For enterprises like us,
 we do not have the capability to do that. It
 is too costly.

* Dismissal

Locating and hiring the fight people is difficult. Nineteen of the 24 interviewed JVs stated that dismissal is a difficult issue because the Chinese and foreign companies perceive it from completely different angles. Prior to recent reforms, the government introduced a "fixed" employment system in enterprises. The term "fixed" refers to the arrangement whereby an enterprise received a fixed quota of labor allocated by a local labor bureau, and a worker was then permanently attached to the organization. Under this system, enterprises were not permitted to discharge workers, so workers were virtually immune from dismissal. Under the reform, the labor system has been moving away from permanent employment to a system of contract labor supplemented by unemployment insurance and pensions. A joint venture can sign either a collective labor contract with the trade union or use individual labor contracts with each employee. Managers have been given the freedom to fire staff.

However, the dismissal of personnel remains a delicate matter in Shaanxi. According to a Chinese vice general manager of a Sino-American company (interview in Xianyang, August 10, 2003):
 Usually the Chinese partner of JVs is very
 reluctant to sack workers because a fairly
 complete social welfare scheme has yet to
 be established in the province. Sacking
 workers means cutting off not only his or
 her income, but also welfare and social
 life. A compromise solution is to return
 dismissed workers to the organization from
 where they have been recruited. But, it is
 almost certain that these factories will have
 great difficulties in finding jobs for those
 affected. Taking into account the serious
 unemployment situation in Shaanxi, the
 Chinese partner is usually reluctant to
 dismiss workers and this is a common
 source of conflict between Chinese and
 foreign partners.

Foreign investors, in particular those from non-Asian countries, cannot understand the Chinese labor market. They pay more attention to economic maximization and think that when an economy is in recession, it is natural to lay off workers. They are able to do so because they have already signed labor contracts with workers. For example, two of the interviewed joint ventures invested in the aerospace industry. Following September 11, 2001, their orders decreased by 50% and their foreign managers proposed cutting staff by 40%. Not surprisingly, the proposal met strong opposition from Chinese partners and their associated political institutions. As far as possible, the Chinese wanted to avoid sacking staff and advocated a policy of "stop-working," which means that unwanted workers were given a token income to live on and instructed to stay at home until needed. At the beginning of the negotiation, there was strong disagreement between the two parties. After long and tedious debates and negotiations, some mutual understanding was reached, and the side with the weaker bargaining power made a concession. Because the foreign sides were not the largest shareholders in the two joint ventures, bargaining power tended to favor the Chinese. In the end, the foreign sides agreed to "stop-working" and unwanted employees were offered basic salaries (20-30% of their full salaries). When the economic situation in the joint ventures improved, employees would resume full-time working. By doing this, the Chinese side successfully minimized the side effects of dismissal.

This solution to dismissal in the two aerospace joint ventures suggests that the Chinese unique employment situation (incomplete transformation of its labor market and social security system) and its political institutions constrain the management activity of foreign managers. To keep joint ventures working, they have to cope with these constraints by compromising with Chinese partners and their supporting institutions. As Child (1994, p. 142) comments, the transition in China from a centrally planned to a regulated market system is partial and has been interrupted at intervals due to alarms at the loss of economic control and reluctance to proceed too far with the dismantling of bureaucratic regulatory structures. As a result, China's economy is coordinated via dualized bureaucratic and market modes. The duality, combining institutionalized power and market forces, creates a context within which foreign firms have to conduct their transactions.

* Energy supply

Conflicts between foreign and Chinese sides of a joint venture can originate from minor matters, such as water, electricity, and gas supplies. These may not be so minor if they are essential for production. One way that Chinese partners invest in new joint ventures is to provide factory or working space. This is usually located near the Chinese parent company that wants to utilize its underused or idle resources. Fifteen of the 24 interviewed JVs indicated that water, electricity, and gas that are shared with the Chinese parent company could lead to actual or potential problems. The new joint venture and Chinese parent company often share the same premises, only separated by walls. But staff salaries and bonuses are different: workers in the joint venture have higher salaries and benefits than those in the Chinese parent company. (1) These discrepancies create discontent among staff in the Chinese parent company because the former "iron wage" system still influences the working culture of the Chinese parent company. Breaking the mold of the old organizational cultures and work norms has been difficult.

As a result, Chinese companies often have some unjustified requirements. The most common trick is to raise the price for water, electricity, and gas for the joint venture. Most Chinese parent companies (e.g., SOEs) are in deficit. They think that joint ventures are like their "children." If the joint ventures make good profits, a significant proportion should go to supplement the parent company. However, from the point of view of joint ventures, in particular expatriates, this argument is ridiculous and unjustified. Joint ventures are not dependent on either their foreign or Chinese parent companies. They should be treated as independent entities. All financial issues should be settled on their own without involvement from either side. An extreme example was an American firm that used to be a Sino-American joint venture. Initially, the Chinese side was the biggest shareholder (70%). Consequently, the management of the venture was arranged by the Chinese side with a Chinese chairman of the board and an American general manager. At the start of their cooperation the American parent company invested U.S. $500,000 for the joint venture's working capital. Without consulting the American general manager, the Chinese chairman and the financial manager (Chinese) used the working capital to erase the electricity deficit of their parent company. They planned to return the working capital when the Chinese parent company borrowed money from other sources. From the perspective of the American side, this was unacceptable. This issue, together with other conflicts, caused the foreign side to separate from its Chinese partner. In 2001 after six years of cooperation, the American side eventually purchased the 70% of the Chinese share and became a wholly foreign owned firm.

When asking about the reasons behind the above conflict, the foreign general manager of a Sino-U.K. joint venture noted (interview in Xi'an, April 23, 2002):
 The most visible reason behind the above
 conflict is that new joint ventures are not
 physically separated from their Chinese
 parent companies. Their factory buildings,
 water, electricity and gas tend to be controlled
 by the latter, so that the foreign side
 is in a weak bargaining position.

Business operations in China are based on people, not on laws and regulations. If the decision-makers in Chinese parent companies are familiar with Western business culture and norms and do things according to the agreement reached with the joint venture (e.g., how the joint ventures share water, electricity and gas with the parent companies), no disputes arise. If the leaders of Chinese parent companies are not open-minded, they often treat the joint ventures as subordinates and try to influence daily management practices. In this situation, it is easy to trigger conflicts.

One more piece of information revealed by some foreign managers of interviewed JVs is that employment, replacement, and dismissal of Chinese managers in JVs are decided by the Chinese parent companies. This could lead to potential problems in managing a JV. According to a foreign vice general manger of a Sino-Japanese venture (interview in Baoji, March 20, 2002):

The representatives of Chinese parent companies have worked for the Chinese parent companies for years. It is nature that they have retained all the "old habits" from their previous working units. Even after they have become the senior managers of the new joint ventures, their employment, replacement and dismissal are still decided by the Chinese parent companies. It is not surprising that they do not look after the interests of the joint ventures. In the long term, this attitude harms the development of joint ventures.

* Development agenda

Another major conflict between Chinese and foreign partners involves the development agenda of JVs: each tends to have different objectives. In the case of a Sino-Hong Kong joint venture, its predecessor was a Chinese private firm specializing in the production of printing materials. Because of the lack of access to banks to raise capital for further expansion, it cooperated with a Hong Kong investor in 1992. The contract for cooperation was 15 years. After three years, the firm was profitable. After 2000, however, the cost of printing raw materials rose steadily and, consequently, the prices of their products increased substantially. Confronted with this, the Chinese partner intended to expand production and explore new products, but the Hong Kong investor worried about potential risks. He insisted on retaining the present production level so that at the end of their cooperation he could take back his original investment. Disagreements between the two sides about the future development strategy of the firm inevitably appeared.

Another case is a Sino-American joint venture in the electronics industry. From the start, the blueprints on how to develop the joint venture were different. The Chinese wanted the joint venture to upgrade its existing production line to produce silicon chips. According to the Chinese general manager (interview in Xi'an, March 20, 2003):
 Producing silicon chips is a profitable
 business. If we do not enter this untapped
 market, our competitors will. We (the JV)
 have the technology and equipment to
 produce silicon chips. More importantly,
 the central state has granted a number of
 preferential policies to enterprises in high-tech
 industries, such as tax deduction and
 low interest loan etc. For us, low interest
 loan is particularly attractive because loans
 from Chinese banks are difficult to obtain.

However, the American side considered the available machinery and the level of technology in the new joint venture unsuitable for upgrading to produce silicon chips. The American vice general manager noted (interview in Xi'an, March 21, 2003):
 We fully understand why our Chinese
 partner would like to produce the JV to
 produce silicon chips. Obviously, there is a
 large market there. But, the fact is that the
 current technology and machinery of the
 JV are not suitable for producing high-quality
 silicon chips. If we go for the
 silicon chips, this would definitely compromise
 production quality.

The Chinese blamed the American side for providing outdated and second-class machinery, which was why the current production line was unsuitable for upgrading. Disagreements between the two parties emerged.

According to Pan et al. (2003), differences in the strategic objectives are characteristic of joint ventures in China. As partners share the same bed (i.e., joint venture), but have different dreams (i.e., strategic objectives), their expectations and approaches to running a business are very different. This leads to tension in many JVs (Vanhonacker, 1997). Therefore, mutual understanding is important throughout the period of cooperation. If the development objectives are different, it is difficult to sustain effective management and cooperation. Taking the previously discussed case studies, the Chinese side in the first case signalled a plan to buy the foreign share and convert the firm into a domestic enterprise so that the firm could be more effectively controlled and developed according to their plans. In the second case, divergent goals and disparate expectations combined with other factors such as incompatible management practices led the American to buy the remaining Chinese share in 2001 and turn the finn into a wholly foreign owned firm.

Lessons Learned From Successful Joint Ventures

An examination of problems encountered by joint ventures in Shaanxi suggests that the majority result from differences either between foreign and Chinese top executives within joint ventures or between joint ventures and their parent companies. Nevertheless, about one-third of Shaanxi's joint ventures are successful to a degree. What lessons can be learned from these successful experiences? 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.

* Choosing the right partners

The choice of the right partner is one of the keys to the success of future ventures. A foreign firm that makes an investment and is 10,000 miles away will not find the Chinese legal system well equipped to provide much assistance. Even those that are ultimately successful in pursuing claims have to deal with a totally foreign legal process that is time consuming and expensive. Chinese legal remedies may or may not provide adequate compensation. It is particularly important to choose the right partner since it can be difficult to get out of a partnership. Furthermore, a good partner can help with many of the steps required to create a successful joint venture, from getting approvals as painlessly as possible, supervising and smoothing project construction, to running the operation profitably and managing it properly. According to an old Chinese saying, "Good beginning is half done." The choice of the correct partner makes future cooperation much easier.

What is a good partner? Chinese partners that are economically strong have much higher success rates, according to the successful JVs in Shaanxi. An important reason is that finns with sound economic strength usually pay attention to the reputation of the finn and have good business credentials. They also pay attention to long-term rather than short-term economic returns, and they do business seriously and seldom violate laws and principles. On the contrary, where a partner with bad business credentials is selected, sooner or later problems will emerge. Value systems, investment objectives, and the management philosophy of potential partners are also important. If a future partner puts his own interests and political advancement above these of the joint venture, or his management style differs totally or substantially from the foreign side, problems can easily arise. One example is a Hong Kong investor in a Sino-Hong Kong hotel project. He did not have a good business record but this was unknown to his Chinese partner. According to the contract, he should have made a financial investment in the project. After an agreement had been signed, he changed the cash investment into investment in kind (e.g., kitchen utilities, air-conditioners, elevators, electronic fans, and telephone). As these items were purchased, the Hong Kong investor reported a purchase price higher than the actual price. As a result, he obtained a 35% return on the investment. The partnership ended as soon as the Chinese partner discovered he had been misled.

How to find a good partner? Reliable information is important. As many avenues as possible should be explored before making a decision. Possible channels include established business contacts with Chinese central and local political institutions, home-country foreign embassies and consulate offices, management consulting companies and investment advisors. But, for more inside information, it is necessary to develop personal and political ties with key personnel in the host location. Chinese laws and policies tend to be ambiguous and even contradictory, and important regulations and information may not be available to the public. To rely on public documents and announcements alone is far from sufficient. Therefore, well-connected individuals serve as an important source of information.

* Maintaining a good relationship with partners

Once a sound partner is chosen, maintaining a good relationship also contributes to the success of the venture. A comparison between two Sino-German joint ventures with the same German parent company illustrates this point. Both are in the same industry, telecommunications, with one located in Shaanxi and the other in Guizhou province. According to the manager of the Shaanxi venture (interview in Xi'an, April 19, 2002), their project had been very successful from the start. But the same project in Guizhou was a failure with numerous disputes and conflicts between the local Chinese partner and expatriates. When asked to explain the difference, the manager stated that in his joint venture the steady support from the local Chinese partner was the crucial factor.

Conflicts or disputes are inevitable during the operation of joint ventures. It is all about the attitudes of decision-makers. For example, for issues such as unjustified charges for electricity, water, and gas, some foreign executives of joint ventures in Shaanxi took them very seriously and even sued their Chinese parent companies. The result was that disputes and conflicts between expatriates and Chinese representatives and between joint ventures and their Chinese parent companies were exacerbated. An important lesson from successful joint ventures is that decision-makers should have their eyes on big issues and not be diverted by trifles as long as they do not influence the overall development of the venture.

Furthermore, building trust is essential for maintaining a long-term cooperative relationship. If no mutual understanding is established between Chinese and foreign parties, even small issues can quickly become significant and affect the performance of the joint venture. Western investors tend to trust contracts, but in China, because of weak property rights laws and an uncertain and dynamic institutional environment, informal relationships and the development of trust between partners may play a more important role than contracts. In this regard, representatives from foreign and Chinese sides can help with parties to break the cultural barrier to build trust, develop common goals, and consolidate the presence of joint ventures. According to the vice general manager of a Sino-Hong Kong factory (interview in Tongchuan, August 18, 2003),
 Our cooperation has been pleasant. The
 key is that mutual benefits, respects and
 trusts have been established. Learning to
 bear with the differences of the cooperative
 partner is important. Whenever we meet
 some disagreements, both sides pay more
 attention to the long-term objective of the
 joint venture.

* Making efficient use of personal networks and political institutions

As Yan (1994) described in the Harvard Business Review, "Foreign companies seeking to win a piece of this growing market must adapt to 'guoqing', which means 'Chinese characteristics' or 'the special situation in China." Two ways are suggested by successful JVs in Shaanxi as an effective way to adapt to the special situation: making efficient use of personal networks and political institutions.

The Chinese take personal relationships very seriously (Helms, 1999). (2) As Bruijn and Jia (1993) point out, "The Chinese style is to first build friendship and connection." According to Helms (1999), the Taiwanese often make deals on better terms than Westerners by relying on personal networks with relatives and friends in China. In fact, beyond the negotiation stage, many companies continue to rely on personal relationships to reduce uncertainties and seek protection of their investment interests where law falls short. In addition, personal networks constitute a vital mechanism for conflict prevention and resolution. As many successful foreign business executives in Shaanxi reveal, good relationships with local partners and officials reduce opportunities for conflicts to develop. According to the general manager of a Sino-Canadian company (interview in Xianyang, September 2, 2003):
The management of joint-ventures in
Shaanxi does not only involve matters
associated with managers and workers, but
also many external bodies, such as political
institutions at various levels, directly and
indirectly participating in the management
of joint ventures. In fact, important decisions
are not made around the negotiation
table, often beyond it and involve a careful
balancing of the interests of many internal
and external actors.

Chinese managers live in a complex, often hierarchical business environment. They know the importance of dealing carefully with different and sometimes conflicting interests of political institutions. As a result, they are better motivated to try to cultivate the right ties with different shareholders. Foreign managers are unfamiliar with the complicated business environment in China. They do not make sense of, and cannot discern, the motives behind the attitudes of various parties. The pressure or demands by those external forces can seem unjustified and are likely to have an adverse effect on business operations. Thus, foreign managers tend to adopt an apolitical stance in the belief that not involving interested agents or parties will ensure no intervention from them.

The fact is that cultivating good relationships with political institutions is necessary for the smooth operation and effective management of joint ventures. The experience of successful joint ventures is that political interference occurs in any case. It depends on how joint ventures approach these issues. Connections with government agents and political institutions in the host location can enhance a firm's abilities to get things done. A Taiwanese manager operating 20 chain restaurants in Shaanxi cited his experience on how to use political institutions to solve practical problems. A customer had property stolen in one of his restaurants. One local newspaper reported this incident and suggested that his restaurant was unable to protect its customers from thieves, which obviously had a negative impact on his business. Within a month of the incident, customer numbers had declined by 30%. He asked for assistance from the Provincial Complaint Centre for Foreign businesses. They investigated the case and showed that his restaurant was not responsible for the theft. The Centre also forced the local newspaper to make a public apology to the restaurant chain.


This paper investigates the problems of managing joint ventures in China's interior by presenting some evidence from Shaanxi province. The problems identified by interviewed joint ventures in Shaanxi are by no means representative of China's interior as a whole, however, they contribute to a better understanding of the management problems in the daily operation of joint ventures in the region. The nature of these problems highlights the importance of the relationships between Chinese cooperative partners and foreign investors and those between joint ventures and their parent companies, which directly influence the management and performance of interviewed firms. Most management problems are the result of inappropriate handling of these relationships, which reflects differences in managerial styles.

These problems are not restricted to joint-ventures in Shaanxi. Wong et al's (1999) research found partner-related problems in other parts of China, such as Guangzhou and Shanghai. However, these problems appear to be more prevalent and intensive in the interior areas. This is because joint ventures and their associated modern management practices were introduced into the interior at a later stage and at a slower pace than in the coastal areas. Compared with the coastal provinces, Shaanxi has a time-lag in receiving innovative ideas and new practices. It appears to have a greater stake in preserving "old habits" and exhibits more resistance to "good practices." Although reforms have been introduced in Shaanxi and some changes have taken place, getting rid of all old habits in a short time is difficult. Given China's accession to the World Trade Organization (WTO), it is certain that more foreign firms will establish their presence in the interior for its cheap land, labor, and rich resources. Perhaps it would be wise for these foreign enterprises to be prepared for the problems they might confront. In this respect, the recommendations made by successful joint ventures in Shaanxi can provide useful tips to solve future problems.

Despite some contributions to the literature and practice, the limitation of this research is that the sample of JVs studies here may not be fully representative of all JVs in China's interior. To truly generalize future work needs to use a larger sample of firms with a more recent time frame. The lessons drawn from Shaanxi could extend to other interior provinces; however, this needs to be empirically tested. Little research has been undertaken into different interior provinces; the present study is mainly a snapshot of the managing problems of JVs in one province. In view of the substantial size and diversity of the interior, there is clearly a need for more regionally-based research.


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(1) According to Lam (2002), the hourly wage of workers in foreign-investment enterprises is 7.8%, 41.2%, and 53.5%, higher than that in state-owned enterprises, collectives, and private firms, respectively.

(2) Traditional Chinese firms can be considered as both a small society and a big family: father and son often work in the same department; mother-in-law may share an office with his or her mother; and a husband and wife may work in one group.

Dr. Ying Qiu's research interests include foreign firms operating through various kinds of joint ventures in China, especially the interior. She focuses on location decisions and factors affecting management and business performance.
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Author:Qiu, Ying
Publication:SAM Advanced Management Journal
Geographic Code:9CHIN
Date:Jun 22, 2005
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