Silicon Valley Firms' Operational Tactics and Venture Performance in Greater China.
This study examines the process by which U.s. "high-tech" firms choose to enter into the markets of Greater China (1). Specifically, we examine the linkage between a firm's market entry choice and its venture performance. We also look closely at certain microstrategies that were undertaken to improve the likelihood of venture success. To identify these issues we conduct a case analysis of 24 Silicon Valley high-tech manufacturers and their investments into China, Taiwan, and Hong Kong. We build upon the market entry framework that we developed in a 2000 study that analyzed 15 market entries into China.' That study developed a contingency framework that was based on a replication case analysis methodology. (2) There we found that some market entry modes were higher performing given certain market conditions, proprietary technologies, and governmental constraints. This study looks beyond the contingent market entry model and explores the micro-strategies that firms used to enhance their venture performance.
First, we review the market entry literature that focuses on China. Then we review the theoretical foundations of our market entry model. Finally, we discuss the micro-strategies that were employed by our 24 firms as they pursued the Greater China market.
Reviewing the Scholarship
A firm's entry mode choice generally determines its amount of control over a new venture as well as the amount of resources it needs to commit. (3) With unlimited resources and free from external constraints, a firm would rationally choose the operating mode that gave it the most control possible over venture operations. Because firms have finite resources to commit to foreign operations, a choice is forced upon them, and a tradeoff must be established between the amount of resources (capital, know-how, etc.) it can spare and the amount of control it deems necessary to succeed in the country.
A review of the market entry research on China is crucial to benchmarking our entry mode and venture performance framework. Recent studies that looked at operating modes found that most firms entering China preferred the joint venture method. (4) However, the choice of operating mode was often the result of Chinese governmental constraints. (5) Recent research unveils significant conflicts of interest between the Chinese government and multinational corporations. (6)
However, regardless of the chosen entry mode, investing firms are primarily interested in maximizing venture performance. One research team found that seven of the eight U.S./Chinese joint ventures they studied reported profitable performance. (7) Managers of both sides of the ventures said they were satisfied with the venture although U.S. managers expressed concerns over the lack of control over the venture while Chinese managers would prefer a faster pace of technology transfer to the venture. Using a comparative case study methodology of four U.S./PRC joint ventures, another team found that the bargaining power of joint venture partners influenced control in a joint venture and ultimately venture performance. They found that Chinese managers generally focus on learning from the U.S. partner, while U.S. management desires market share and profitability. (8) Others report an 11.6 percent average ROI of the U.S. companies that they survey in China, (9) and another reports that 11 of the 14 U.S./Chinese join t ventures that they studied report "good ROI." (10)
Another study of over 1,000 foreign enterprises in China finds that the operating modes they examined (wholly foreign-owned enterprises, equity joint ventures and cooperative ventures) did not significantly affect the level of profitability. They also show that enterprises from the United States and Japan are more profitable than those of Hong Kong or Taiwan. (11) A related study of 1066 foreign enterprises in China uses duration analysis to track the time it takes foreign ventures to receive permits, begin production, and earn a profit. These authors report that wholly-owned subsidiaries and cooperative operations with non-state-owned enterprises start manufacturing faster than other forms of business. (12) However, once again, the mode of investment does not seem to be related to the time it takes to earn a profit.
This report examines the relationship between the factors that impact the entry mode choice, and ultimate venture performance. The decision factors we explore include: (1) international strategy, (2) decision context (decision process comprehensiveness and decision team heterogeneity), (3) technology transfer costs, and (4) environmental potential and uncertainty. The entry mode choices include: wholly-owned subsidiary (WOS), joint venture (JV), and exporting.
The linkage between the decision factors, the market entry choice, and the venture performance is determined through a contingency relationship. We examine the theoretical grounding for each of the decision factors to prescribe the appropriate relationship of each decision factor to the entry mode choice and ultimate venture performance. We propose that the "fit" between an optimal profile of the decision factors and the entry mode choice has a positive effect on venture performance.
The market entry mode decision model and contingency matrix were evaluated and modified through an iterative case analysis methodology. (13) In essence, the data from each case are compared with the template framework. Where the template framework adequately explains the findings of two or more cases, replication was shown and support for the template model claimed. Where the results from a case conflict with the framework, the framework was adapted to better explain the case data.
Five theoretical perspectives are applied to the entry model development. 1. International Strategy Variables (Motivations for Foreign Involvement). (14) A firm's international strategy is defined as its choices in acquiring foreign resources, capturing foreign markets, and integrating its operations globally. The international strategy typology (market-seeking, resource-seeking, transnational integration, competitive response) discussed in this article attempts to capture both the venture and corporate level motivations of the firm. This typology is based on the motivations for foreign involvement  and the global strategic considerations. 
2. Decision Context Variables (Dominant Logic Theory of the Firm.  Decision context is defined in terms of both the decision process a firm employs and the makeup of the decision team. Because corporate decisions are often an artifact of a previous time, this article examines the role that the decision context of the firm plays in determining the firm's entry decision. The strategic mentality of the firm,  rooted in the Dominant Logic Theory of the firm, implies that firms will tend to enter new international markets in much the same way that they have entered existing international markets (maintaining the general strategy of the firm).
3. Technology Transfer Costs (Transaction Cost Economics)  defines technology as "a body of knowledge, tools, and techniques, derived from both science and practical experience, that is used in the development, design, production, and application of products, processes, systems, and services." This definition indicates that technology entails both physical machinery and know-how. Technology transfer costs are defined as the costs associated with the transfer of a firm's technology (machinery or know-how) across organizational boundaries.
4. Environmental Variables (Options Theory)  defines the environment as "the totality of physical and social factors that are taken directly into consideration in the decision-making behavior of individuals in the organization." Options theory has proven useful in past organizational research on global expansion and strategic alliances.  It also seems particularly useful for environmental analysis. Some analysts contend that the value of an option increases as the volatility of the underlying asset's value rises, without regard to the direction of the latter's change in value.  This implies that as the perceived environmental uncertainty (PEU) of a potential market increases, the value of keeping an option open increases by allowing the organization potential future gains or by limiting its losses.
Because the value of the firm can be conceived in terms of the sum of the Net Present Value (NPV) of its operations and the value of its options, a firm's involvement in a new market can be predicted based on the perceived value of the market, as measured by each of these indicators. However, they vary in their influence. High NPV implies high involvement (WOS), and moderate NPV implies moderate involvement (JV). However, high options value implies high PEU and the need to keep an option open through low involvement (licensing). The firm can be predicted to respond to the highest contributor to firm value-either the NPV or the Options value. (See Table One.)
5. Performance (Contingency Theory)  Our analysis bases predictions of performance on a contingency "fit" relationship between entry choice and the proposed optimal profile of contingency factors. Performance in this study is measured as objective venture profitability. To ensure superior performance of new international ventures, it is posited that management must ensure an effective alignment between the firm's international strategy, the environment of the new international venture, the technology involved, and the entry mode choice. Because it is posited that each of these entry modes best "fits" a particular profile of the independent factors, it is argued that performance will be enhanced when the entry mode matches the corresponding optimizing profile. This notion of matching a strategy to a contingent set of circumstances forms the essence of contingency theory. 
Fit, here, is defined as adherence to an externally specified profile.  In this investigation, an ideal profile of decision factors is established through the preceding theoretical integration. Adherence to this prescribed profile should lead to enhanced performance, while deviation from this profile should lead to poorer performance. Because it is posited that each of these operating modes best "fits" a particular profile of the independent factors, it is argued that performance will be enhanced when the operating mode matches the corresponding optimizing profile.
The market entry model (Figure One) was developed from the case analysis of 15 U.S. ventures entering the PRC market. The firm's international strategy is shown to be the driving force (bold arrow) for the market entry decision. Within the firm's international strategy, a market-seeking strategy is segmented into high versus low sales integration effort. The high and low integration market-seeking strategies are the primary drivers of the operating mode choices taken by the firms in this sample. The firm's decision context is shown to moderate the international strategy choice and operating mode selection. High decision context often allowed for a better international strategy and mode selection, but did not lead to a particular selection. The environment and technology transfer costs are not completely discounted but are primarily managed in ways other than the operating mode choice. Therefore, their link to the operating mode decision is weaker than that of a firm's international strategy.
Additional moderators are shown to exist in the market entry model. Resource and government constraints and incentives moderate the decision context and the operating mode choice. Firms with more slack resources were able to spend additional time and capital in contemplating an operating mode. This ability led to a higher decision context and often a better decision. Firms also responded to resource incentives or efficiencies in their mode choice. Simply, firms pursued efficiency in their resource expenditures while attempting to satisfy their international strategy or minimize their technology transfer costs. Normally, this resource incentive or efficiency is a function of the scale of involvement. For example, a high level of sales make the fixed costs of a wholly-owned sales office more efficient than the variable costs of a distributor.
External constraints, typically from host government agencies, often restrict the choice of operating mode. This is particularly true for investment in China. These external constraints also impact the decision context, in that firms either spend less time on an operating mode choice because of external constraints or spend increased time looking for ways to maneuver around external constraints. The link to performance is given within the new contingency framework. The contingency framework is adapted from the case findings as displayed in Table Two. Here, performance is predicted to be higher for firms where the operating mode "fits" with the contingency factors. Fit between the operating mode choice and the firm's international strategy is shown to be particularly significant. The order of importance of factor fit with the operating mode is shown from left to right. International strategy is predominant and must be primarily accounted for in fit estimation for high performance. Potential strategies which ma y be pursued by the firm are made somewhat more specific based on the results from the case analysis.
To sum, the data for market entry indicate a strong impact of the firm's international strategy on the operating mode choice of the firm. Further, a link between the fit of the operating mode choice, decision factors and performance is shown to exist. A firm's technology transfer costs do not seem to significantly impact the operating mode decision as these estimated costs are managed in other ways.
Research Design and Data Collection Procedures
1. Interviews -- These are the most important for insightful first-hand information. Three segments of interviews are used for this collection; open ended (unstructured questions), focused semistructured questions, and a structured survey (26)
The research design chosen for this investigation is the multiple-case study approach. The items most pertinent to this investigation include:
2. Archival records -- Company annual reports, 10Ks, press releases, and financial data
3. Direct observation -- Factory floor tours, observation of the condition of the headquarters and the mood of the personnel
4. Documentation -- Company internal administrative notes and outside newspaper articles. (These data mainly serve to corroborate and augment evidence from other sources).
Although much of the theory extension and model adaptation is based on the open-ended discussions with executives from the participating companies, the remarks are validated with structured survey rating questions on many of the same topics. Further, archival records, other documentation, and direct observation are used to triangulate on what appear to be the most important issues to the operating mode decision and venture performance.
The final target sample includes firms from the computer/integrated circuit, telecommunications, and medical equipment industries. All the firms are "high-tech" manufacturers/developers. The range of investment sites studied included those in China, Hong Kong, and Taiwan.
The multiple-case process is performed to provide a more holistic understanding of the market entry decision and its link to performance as well as the supporting strategies and tactics taken by the firms in this sample. Analysis proceeded with the strategy asserted by researchers R.K. Yin and K.M. Eisenhardt respectively. (27) That is, the theoretical framework and propositions were used to guide the data analysis, and (using each case description) to allow more insights to emerge. Within-case analysis is completed by writing up a summary of each interview discussion, as well as the observations and analysis of the discussion. Pertinent background information from each company's annual reports, 10Ks, and press releases is also included in each case summary. Separate files for each company case are maintained and referred to when necessary for additional information. The purpose here is to become intimately familiar with each case as a stand alone entity. (28) This case database allows more coherent analysis and better access for replication or reanalysis, thus increasing the reliability of the findings. (29) Data (qualitative summary, questionnaire responses, and background information) from each company are then triangulated and summarized to a common format to better permit pattern matching to the theoretical template and cross case comparisons.
The main purpose of the investigation is to study the micro strategies and tactics that firms used in addition to their entry mode. Table Three describes the destination of investment for our sample firms.
The market entry modes represented in the sample are fairly diverse. The WOS (sales/service/liaison/hub) offices in the sample serve a variety of functions depending on the parent company's objective and host country constraints. For example, many of the WOS offices in China are liaison offices that cannot sell products directly, but can demonstrate and market their products and delegate sales to third party distributors, usually based in China or Hong Kong. These liaison offices are wholly-owned entities and require higher resource and control than strictly distributor relationships. Therefore, these are grouped with WOS (sales/service). One firm's subsidiary office serves as a regional hub to manage the distribution effort for the region. The balance of the WOS sales offices are typically staffed with between five and ten sales managers and field engineers. They often provide extensive service to regional clients and usually require substantial capital to set up and maintain. Overall, each of the subsidiar y offices are wholly controlled by the parent company and have little if any manufacturing capacity.
The manufacturing subsidiaries all carry out significant manufacturing or development work in the host country. The joint venture manufacturing and sales operations are all conducted with a host country firm and are typically chosen in part to satisfy some host government restrictions to ownership. (One joint venture was a three-way partnership with two U.S. firms and one Chinese firm.) The distributor modes are usually chosen by smaller companies seeking market penetration, and best represent the export option in the sample.
All exporters used intermediaries in the host country. This is most likely because of the complexity of many of the products offered by the sample firms. This complexity normally requires at least some period of set up and training that is performed either by distributors or local support staff. A number of busineses in the sample firms have recently replaced distributors with WOS sales offices as these firms increase focus on their international sales and service effort. No licensing agreements existed in the sample. In the following we provide a summary discussion of two ages from the study.
Case Summaries and Arguments
The first company that was examined in the main field study is a medium-sized manufacturer of components that are inserted into integrated circuits. Essentially, this company is a supplier to integrated circuit fabricators. Its customer supplies PC makers who sell to the general public. In essence, this company is two steps down the value chain from the final customer. Firm 1 chose a distributor in Hong Kong to look for new markets in Hong Kong and China. We classified its strategy as market-seeking. The respondent asserts that resource constraints limit the firm's pursuit of this market to a distributor. This corresponds to the weak cash position of the firm because of its recent acquisitions and extraordinary expenses as stated in its public reports.
Performance is rated as being low. The respondent commented that "There is a pony in China somewhere, but we have not found it yet." This company demonstrates moderate decision comprehensiveness and low decision team heterogeneity. This low decision context probably impacted the strategy and operating mode selection. Technology transfer costs are rated moderate to high. The market entry model suggests that the moderate to high technology transfer costs demand higher internalization, perhaps through a joint venture or subsidiary, and thus do not fit well with the distributor choice.
According to the respondent's discussion and questionnaire items, the assessment of the environment potential is high and the uncertainty moderate. This indicates a moderate NPV for the country. The moderate net present value demands a joint venture and does not fit the distributor choice. Performance is low. The fit between the decision factors and the operating mode choice is low. Predictebly, the firm exhibited low performance.
It seems here that the low decision context is a significant factor in leading to a poor strategy of market-seeking where a more highly integrated sales effort is demanded because of the nature of the technology and need to fit its technology with the potential customer. Thus, decision context is shown to moderate the international strategy choice as well as the operating mode selection.
During the analysis of this case, we developed a new insight. We determined that some companies have the need for a higher integrated sales effort for complex devices. We also developed the notion of a 2-step supplier- two steps away from a final consumer.
This company is a large firm that manufactures integrated circuits for PC makers. It entered China via a wholly-owned sales/service office in Beijing to serve northern China customers. It made this choice only after an exhaustive process over eight years to determine when the market was ready and facilities were available to set up operations. The firm indicates a highly integrated sales strategy of following customers to supply comprehensive direct service. This assessment is made primarily on the respondent comments as no questionnaire items were prepared for this emerging strategy from the study.
The firm also hopes to slowly establish a brand name to attract new customers. Therefore, the WOS fits well with the strategy. This good "fit" between its operating mode choice and strategy is probably the result of the high decision context that the company employs. Although this firm has perceptions of high environmental uncertainty the company has been able to mitigate these fears through establishing an office in a university with a trusted core of people. The respondent commented that the "trigger was a well established core of people and their perception that the market was ready."
A new insight that developed from this case is the importance of a core group of trusted people in the country who can launch operations when the market is ready. Table Four summarizes the perinent case data for all the sample firms.
Analysis Discussion (Micro-Level Strategies)
Providing Better Service to Customers Within the market-seeking international strategy, it has become apparent that a differentiation could be drawn between those firms that provide a highly integrated sales service with those that provide a relatively low level of sales integration. Ten companies indicate that their high integration sales strategy to meet customer needs and service requirements is the primary factor that led to their operating decision.
The high-integration sales strategy emphasizes a higher dedication to servicing customers (often existing customers now operating abroad) versus a concern on finding new customers and markets. This focus often led firms in the study to move from distribution strategies to direct subsidiaries for sales and service offices. This high-integration sales strategy seems to be a function of three factors: the design-in requirement for a company's product as a component in its customer's products, the relative value chain position of the focal company, and the desired level of service differentiation.
A number of companies emphasize the need to design their product into their customer's production system. This design-in requirement meant that a firm's sales force needs to be present at the design facility of their customer. For example, Firm 3, a semiconductor manufacturer, indicated the need to have a presence at their OEM customer's design facility. He stated "We need to design-in our product with the OEM to make the sale, therefore we must be where the design is taking place." Firm 17, a maker of semiconductor fabrication equipment echoes this sentiment, stating that "our product is so integrated into the design of a fabrication facility that it is not important where our product is finally put in place. We must sell at the development stage of a fabrication production system."
Firm 8, a designer of passive electronic components for various electronic OEMs, also emphasized the need to design its product into its customers' products as well. The failure of its current distributor to do this led to its firing. In sum, many of the supplier firms indicate a need to "design-in" their product into current or potential client firms' products. This design-in requirement seems best satisfied with a direct presence (WOS) at the point of customer product design.
The point of design-in is determined to be a function of the customer company structure. Another semiconductor equipment manufacturer states that "a multi-level sale strategy depends on the customer structure; for a centralized company, design-in and sales take place at the headquarters, then each of the company's fabrication facilities around the world implements that design. In a decentralized company, the design-in and sale are at the site of the facility, to allow modification for each facility." The case analysis indicates that the supplying firm's design-in requirement and the customer company structure influences the operating mode strategy of the firm. Table Five illustrates the impact of this relationship.
Here, the level of design-in matched against the customer company's structure drives the operating mode decision and the disposition of a company's resources and sales effort. High level design-in requirement drives high-integration sales strategies (WOS for sales and service) and the customer structure (centralized to decentralized) determines the point of supplier focus (headquarters or production site). Low design-in requirement can be satisfied with third party distribution efforts at either the customer headquarters (centralized structure) or customer production site (decentralized structure). Typically, supplier firms face this requirement more than OEMs.
The importance of the customer is also seen to drive the level of sales integration. The importance of the customer seems to be associated with the relative point on the value chain of the supplier and the customer. The value chain notion was first brought to light by Michael Porter. It simply discusses the various points of value creation of a product from various suppliers to the final consumer. As shown to emerge from the case arguments, four value chain positions exist in the sample: the OEM (original equipment manufacturer) which sells to the public, the 1-step supplier (one step from the final customer) which sells to the OEM, the 2-step supplier which sells to the 1-step supplier, and the 1-step OEM which sells to a user of the product which sells services to the public.
The general public is seen as the final consumer for any product. Thus, the OEM who makes computers for sale directly to the public is linked to the public. The OEM which makes final products for professionals to create products for the final consumer is seen as one step away from the public (1-step OEM). The 1-step supplier could be the integrated circuit manufacturer who supplies chips to the computer maker, or the computer peripheral manufacturer who sells its product to the computer maker. The 2-step supplier could be the firm that manufacturers equipment needed for the creation of the integrated circuits that are then sold to the computer manufacturer. Here, greater sales-integration seems to be a function of the distance the focal company is away from the final consuming public. Table Six indicates the value chain position of the sample firms.
In this sample of high tech firms investing in Greater China there is a direct relation between the point of the value chain of the focal company and its level of sales integration. Of the six 2-step supplier companies, two emphasize a high-integrated sales strategy as the primary determinant driving their market entry strategy. Both of these companies rate venture performance as moderate to high. (One firm in the sample, without performance data, also judged its high-integration sales strategy as the primary determinant.) Of the other four 2-step suppliers, all indicate a low-integration sales (market-seeking) strategy as the predominant determinant of their operating mode choice and all of these firms judge performance as low.
Of the nine 1-step suppliers, four indicate a high-integration sales strategy as the primary factor impacting their operating mode choice. These four firms indicate moderate or high performance. Three of the four 1-step suppliers that indicate a low-integration market-seeking factor as a primary determinant have low performance. The remaining 1-step supplier indicates resource-seeking as a primary factor determining their operating choice. For 1-step suppliers focusing on sales, there is an indication that a high-integration sales strategy is more effective than a low-integration market-seeking strategy. This relationship is not as strong as for the 2-step suppliers.
Of the five 1-step OEMs, 3 indicate a high-integration sales orientation, all with moderate to high performance. Here, the tendency for high-integration sales is still strong but its necessity to build high performance is not as clear as for the one and 2-step suppliers. Of the 4 OEMs, 2 indicate a low-integration market-seeking focus as the primary factor. All have moderate to high performance. One OEM has a high-integration sales strategy, also with high performance. This data clearly points to both a higher tendency for firms down the value chain to more often exhibit a high-integration sales strategy than OEMs and to profit from that orientation.
Here, the incidence of a high-integration sales strategy in a general market-seeking orientation is clearly highest among 2-step suppliers and most effective for 1 and 2-step suppliers. OEMs seem to be successful with pure market-seeking emphasis. This relationship is shown in Figure Two.
In addition to the design-in requirement and value chain position of the focal firm, sales integration is also seen as a level of service differentiation that can serve as a competitive advantage. Firm 16, a manufacturer of IC fabrication equipment, indicates that a direct presence shows customers more commitment and respect. Another supplier to IC manufacturers states that "in order to get business, we must promise the fab facility that we will be direct on site, even though the design and sale are made in the United States. Fabrication production customers want you to be direct at production site." Another semiconductor equipment manufacturer emphasizes "... integrated circuit fabrication facilities cost at least $3 billion and depreciation is the highest expense over labor and materials; therefore, they must run around the clock. They cannot afford down time. They must have fast competent direct service from the vendor".
To review, the level of sales integration is seen to be a function of (1) design-in requirement/customer structure, (2) value chain position, and (3) desired service level differentiation. The need for a higher sales integration international strategy is shown to increase with increasing design-in requirement, a value chain position further from the final consumer, and a higher level of desired service differentiation. A high integration sales strategy is thus defined as a concentrated effort to anticipate customer needs and to provide timely tailored solutions that meet or exceed customer requirements through highly interactive direct support. This high integration sales effort seems appropriate for many of the firms in this sample which could be considered specialty equipment producers. Researchers have found that "specialty equipment producers usually need to design for and work closely with individual clients." (30)
A high sales-integration strategy normally requires a direct presence (WOS) to bring high venture performance. Of the eight companies in the study that indicate high integration sales effort as the primary factor driving the operating mode choice and report performance data, all have WOSs or JVs--all reporting moderate to high performance. None have an indirect presence of a distribution strategy.
Distinguishing a high versus a low sales integration effort within a market-seeking strategy has precedent in the international marketing literature. Maintaining close integration with a customer who is expanding internationally often necessitates following that customer abroad. A pair of researchers, studying U.S. advertising agencies, state that many service firms enter foreign markets to service the foreign subsidiaries of their domestic clients. They assert that this motive by service firms to go abroad is distinct from manufacturing firms because service firms have specific knowledge about their home country clients and can serve them better than host country firms. (31) Another argues that advertising firms go abroad primarily to keep their existing clients. (32) This motive for foreign involvement has also been shown to exist in international banking. (33) Some categorize this "service-oriented" motive as client following versus a market-seeking motive in which the focal firm enters international marke ts to serve foreign customers. (34)
Researchers argue that the motive to follow and serve existing customers differentiates service industry foreign investment motivations from manufacturing industry foreign investment motivations. (35) However, the high integration sales strategy and resulting client following behavior from many of the firms in this study indicate that this motive may be equally critical for high-tech manufacturing firms that depend on system integration. Once again, this client following or high integration behavior appears stronger for firms further down the value chain from the final customer.
Managing Technology Transfer Risk As shown in the entry framework, the firms choice of entry mode was primarily chosen to implement it's strategy rather than as a vehicle to protect technology from appropriation. We found that technology transfer was managed in other ways such as transferring older rather than newer technology, peripheral rather than core technology, and segmented rather than complete technology processes.
For example, a semiconductor equipment manufacturer, ended up transferring 5-year old process technology to a Chinese joint venture to achieve its objective of forming a legal entity, hiring its own people, and better servicing its clients. Firm 22 established an R&D facility in China to conduct basic research on core technology, but research is performed on only segments of that technology that the headquarters farms out to it. This activity meets Chinese government requirements and allows greater sales integration in the region. Firm 19, a semiconductor manufacturer, established a joint venture with a Chinese company to manufacture line cards to facilitate import of its own ICs into China. However, this line card manufacture was peripheral to its core competency and has little long term value to the company. These technology transfer management strategies are illustrated in Table Seven.
Previous studies analyze the costs as well as risks of international technology transfer. (36) The notion behind these studies is that firms should keep technologies that are tacit and valuable within their own organization boundaries (i.e., wholly-owned subsidiary). This is because the costs and risks associated with transferring a tacit or valuable technology to another organization through either a joint venture or licensing arrangement can be high. Researchers, studying 1226 technology transfers, find that firms are more likely to internally transfer technologies that are newer and closer to the core of the firm's business. (37) However, the choice of operating mode or organizational structure is not always available to MNEs that are expanding operations internationally.
This fact is particularly clear for investment in China. Chinese government policy classifies potential inward investments as those that are encouraged, allowed, or prohibited. A preterential status may allow a foreign investor greater latitude in choice of an operating mode. However, this may not always be the case. Investment modes and other issues are often arbitrary in emerging nations without clear investment guidelines. Further, the transfer of a technology to a foreign entity, even if that foreign entity is wholly-owned, is not without risk or cost.
The costs associated with making a firms' current domestic technology operational in a wholly-owned foreign entity can be predicted to be a function of language barriers and cultural differences. However, the risks of technology loss in a wholly-owned foreign entity can also be predicted to be higher than in a domestic subsidiary because of varying legal and regulatory environments. For example, foreign workers may not be bound by the same legal constraints of technology licensing when leaving an MNE's subsidiary for other firms. Host government regulations may also require the eventual sale of a wholly-owned foreign subsidiary to local firms.
Because of government limitations of operating mode, and uncertain legal and regulatory consequences for wholly-owned entities in foreign countries, the MNEs in this sample of firms use finer-grained strategies to manage international technology transfer risks. In particular, MNEs separate technology into pieces, and only transfer those pieces that present minimum risks. By manipulating the nature (core versus peripheral) and the totality (complete versus segment), of a technology transferred to a foreign entity, firms are able to prevent critical technology transfer to foreign operating units.
Dealing with Environmental Uncertainty
As with managing technology, dealing with an uncertain environment seems to have only minor association with the operating mode choice or resulting venture performance. Firm 3, a semiconductor manufacturer, states that it follows customers on a world-wide basis wherever they operate. Firm 20, a provider of manufacturing services to OEMs, maintains an ongoing relationship with central government authorities to mitigate risk and smooth possible operating constraints. The firms in the sample manage environmental risk and uncertainty primarily through relationship building with local governments and industry officials, joint venture partner selection, regional site selection (some sites were owned by local governments or more stable foreign governments), local recruitment activities, and through exercising a high decision context. Importantly, though, the environment was relegated to a task to manage rather than a major issue that drove entry mode choice.
We find that firms entering the markets of Greater China can indeed enhance venture performance by selecting an operating mode that supports their strategic objectives for the market. However, we also find that the firms in our sample utilized micro-strategies distinct from the choice of operating mode to better serve customers, manage technology transfer risk, and minimize the environmental uncertainty of their operations.
Technology transfer costs were dealt with as a secondary issue in the context of meeting a firm's strategic objectives. Only one firm in the sample cites technology transfer costs as the primary factor that needs to be accounted for in the operating mode choice, and this firm suffered poor performance because it never realized the market penetration it had hoped for. Technology transfer costs seem to be better managed through finer-grained strategies such as transferring peripheral rather than core technology, and transferring segmented rather than complete technology processes.
Firms also attempt to transfer old rather than new technologies to appease host government demands and pursue their own objectives. However, most governments, from both developing and advanced countries, recognize superior technology and normally insist on it. Therefore, the firms in this study have, as a group, found more implicit ways to manage the costs and risk of technology transfer.
In general, the risk of the country environment in which the firm is operating is managed through means other than the selection of an operating mode. Developing relations with government officials, careful site selection and recruitment, and a high decision context seem to help mitigate the perceived risk in the country environments where a firm is operating.
Within the factor of a firm's international strategy, it became clear that a further distinction needs to be made. The notion of a high-integration market-seeking strategy as distinct from a low-integration market-seeking strategy emerged from the case analysis. The high-integration market-seeking strategy appears to be a function of a firm's design-in requirement for its product, its relative value chain placement, and its desired level of differentiation. Here, the high-integration market-seeking strategy is best served by a direct presence of the focal firm.
The notion of relative value chain position and its demand on a firm's strategy and operations warrant close attention by corporate decision makers and further investigation by researchers. In this study, firms further down the value chain from the final consumer normally pursued a high-integration market-seeking strategy and were rewarded for that effort. The predominance of a firm's international strategy in driving its foreign operating mode decision supports the earlier findings of researchers in their assertion of the role of global strategic considerations. (38) However, it calls into question the traditional management literature that focuses on the role of technology in determining appropriate organization structure. (39) Perhaps it is the increasing globalization of industry that relegates the protection of technology to a secondary status. It may also be characteristic of the "high-tech" industry, and, specifically, the computer industry, with its shortening technology life cycles, that makes the p rotection of today's technology less important than selling today's technology as quickly as possible and developing new technologies for tomorrow's markets.
In a short product life cycle industry environment, firms may be well advised to trade access to current technology in order to gain access to current markets as this current technology will be out of date by the time potential joint venture partners learn how to develop it themselves. Thus, it is conceivable that the value of accessing today's markets outweighs the value of today's technology. Firms, therefore, may consider sharing access to today's technology for access to new markets. Firms would be betting on their capacity to continue to develop new technology to again sell in tomorrow's markets. It would then be the capacity to design, not the design itself that is critical to the firm. The value of the capacity to design is found in the human resources and slack capital that allow concentration and focus on this design capacity.
In industries where the rate of technology development is slower, this relation between technology transfer costs and organization structure and operating mode choice may be much different. This notion coincides with the velocity of industry change. High velocity industry change and the inability to protect technology effectively via patents and trademarks increases the value of current market access vis a-vis current technology. Firms in lower velocity industries that can employ patent protection may not envision the same relationship between technology and market access. For example, pharmaceutical companies, which may patent a drug composition, would seemingly be far less likely to trade market access for technology access because of their ability to protect their current design as well as their capacity to design.
The predominance of the high-integration market-seeking strategy at the origin of the value chain among one and two-step suppliers also indicates an increasing appreciation for design-in capability to secure market access. (Market access in this case is with the individual customer rather than the country.) The capacity to design is thus leveraged to gain individual customer access. Ready-to-fit components are becoming less abundant in industries with high velocity technological change. Thus, it is the company with a capacity to design that will capture critical customers. Firms may then leverage their design capacity to keep current customers and pursue new markets. Those firms that do not have custom design capacity or the will to exercise it may lose out.
Of the 15 cases of investment in China, five firms operated with a joint venture. Of the remaining non-mainland China cases, only one firm chose the joint venture investment mode. This tendency to joint venture in China is replete in the literature. It seems clear that the joint venture operating mode is the mode most often favored by the Chinese government. Investing firms also appear to accept this mode in hopes of learning more of the Chinese environment from joint venture partners. Restrictions to other modes of operations clearly drive this tendency. It bears pointing out that none of the five distributorships are within China. China places significant constraint on exporters where the products are not clearly needed or could otherwise be provided internally.
Of the cases studied, 12 firms cite government restrictions to their investment modes. Eleven of these 12 were cases of investment in China. Clearly, government constraints do play a significant role in limiting the operating strategies available to firms pursuing investment in China. This fact makes all the more significant the finer-grained strategies of technology transfer management and environment uncertainty abatement discussed earlier. Still, even with these constraints, venture performance in China does not seem to be greatly diminished. Of the 15 firms operating in China, 11 report high or moderate performance. This rate of success is comparable to the non-mainland Chinese ventures.
The primary factor motivating investment in China is a market-seeking strategy. Twelve of the 15 firms that pursued investment in China indicate either a high or low-integration market-seeking international strategy. The prevalence of market-seeking motivations exists despite the plentiful supply of qualified and inexpensive labor available in China. This predisposition to view China as a potential marketplace rather than a resource base may be specific to "high-tech" manufacturers who hesitate to develop the specific skill base that is necessary to support their sophisticated manufacture processes, but envision large product sales within China's massive market.
In all, the highly complex and restrictive investment environment of China emphasizes the importance of finding the most suitable operating modes available given the nature of the factors which investing firms deem most crucial. Further, while China provides an example of a highly restrictive investing environment, it is certainty not alone among nations that impose significant restrictions on investing firms. Therefore, the generalizability of the findings specific to China should still be substantial.
1. Ensure that the operating mode choice suits the strategy persued for the new vernture
2. Use alternative methods of managing technology transfer/protection issues, such as transferring peripheral rather than core technology and partial rather than complete technological processes
3. To minimize the uncertainty of the environment of operations, pursue relationship building with local officials and partnering with more experienced firms
4. If a high-integration sales effort is called for, a WOS sales/support office is likely to be more effective that other dustribution strategies
5. Employ a comprehensive decision process to ensure all alternatives have been evaluated
MARK V. CANNICE, Ph.D., is an assistant professor at the University of San Francisco School of Business and Management. His research centers on foreign investment and technology management of U.S. high tech firms that enter into the Asia/Pacific Rim. He has presented his research findings in this area to academic and executive audiences. He is the co-founder and director of the USF New Venture Center which supports international and domestic entrepreneurship. He completed his Ph.D. in international business at Indiana University, is a graduate of the U.S. Naval Academy at Annapolis, and is a U.S. Naval Reserve officer.
JOHN D. DANIELS, Ph.D., holds the Samuel N. Friedland Chair at the University of Miami. Previously, he held the E. Clairborne Robins Chair at the University of Richmond and was director of the Center for International Business Education and Research (CIBER) at Indiana University. He served as president and dean of the Fellows of the Academy of International Business and as chair of the International Division of the Academy of Management. He has published numerous books, of which his co-authored textbook, International Business: Environments and Operations, is in its 9th edition. His articles have appeared in such leading journals as Academy of Management Journal, California Management Review, Columbia Journal of World Business, International Marketing Review, Journal of Business Research, Journal of International Business Studies, Management International Review, Strategic Management Journal, and Weltwirtschftliches Archiv.
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Table One High PEU Low PEU High Strategic Potential High Options Value Low Options Value Moderate NPV High NPV Low Strategic Potential Low Options Value Low Options Value LOW NPV Moderate NPV Table Two Adapted Foreign Operating Mode Contigency Profile International Environment Mode/Factors Strategy Wholly-owned 1) Market-seeking High Net Present Subsidiary (high-integration) Value 2) Market-seeking (low-integration, high volume) 3) Resource-seeking 4) Transnational Integration 5) Competitive Response Joint Venture 1) Market-seeking Moderate NPV (through JV partner or Option Value selection) 2) Less Optimal mode for any strategy listed above, but may be necessay to meet government or resource constraints Distributor 1) Market-seeking (low- High Option Value integration, low volume; or resource constraints) Technology Mode/Factors Transfer Costs Wholly-owned High to Moderate Subsidiary Joint Venture Moderate Distributor Moderate to Low Table Three Destination of Investment Destination of Investment Number of Firms China 15 Hong Kong 7 Taiwan 2 Total 24 Table Four Summary of Pertinent Case Data for the Sample Firms Description Firm 1 Firm 2 Main products Manufacture Manufacture logic Description components devices for for ICs computers and electronics Value Chain 2-step supplier 1-step supplier Placement Operating Mode Distributor Distributor Venture Location Hong Kong Hong Kong Entry Date 1992 1993 Foreign Entity Sales and service Sales and service Activity for Chinese market for Chinese market International Market- seeking Market-seeking Strategy Decision Context Low Low Technology Moderate to high Moderate Transfer Costs Environment Net Mod. NPV Mod. NPV Present Value or Mod. Option Low Option Option Value Primary Factor Market- seeking Market-seeking Constraints Resources None Performance Low Low Insights Notion of 2-step Emphasize need for supplier high-integration sales strategy for 1-step supplier Description Firm 3 Firm 4 Main products Manufacture ICs Manufacture Description communication infra. equipment Value Chain 1-step supplier 1-step OEM Placement Operating Mode WOS (sales) Joint venture (sales) Venture Location China China Entry Date 1994 1995 Foreign Entity Sales and service Sales and service Activity for Chinese market for Chinese market International Market-seeking Market-seeking Strategy (high-integration) (high-integration) Decision Context High Low Technology Moderate Moderate Transfer Costs Environment Net Mod. Option Mod. NPV Present Value or Low NPV Mod. Option Option Value Primary Factor Market-seeking Market-seeking (high-integration) (high-integration) Constraints None Gov. restrictions Performance High Moderate Insights Need core group of Choose JV partner trusted people to aligned with target start operation market Description Firm 5 Firm 6 Main products Manufacture Manufacture Description Computers Computers Value Chain OEM OEM Placement Operating Mode Joint venture WOS (sales) (manf.) Venture Location China China Entry Date 1996 1994 Foreign Entity Manufacture Sales and service Activity computers for China for Chinese & export market International Market-seeking Market-seeking Strategy Decision Context High High Technology Moderate High Transfer Costs Environment Net Mod. NPV Mod. Low NPV; Low Present Value or Option Option Option Value Primary Factor Market-seeking Market-seeking Constraints Resources, Resources, US & government China Gov. Performance Mod. to high Moderate Insights Must increase local Customer resource market share to constraints demand encourage related mix of old and new suppliers technology Description Firm 7 Firm 8 Main products Manufacture Design passive Description Medical electronic Equipment components Value Chain 1-step OEM 2-step supplier Placement Operating Mode WOS (sales) Distributor Venture Location China Hong Kong Entry Date 1994 1994 Foreign Entity Sales and service Sales and local Activity for Chinese customers market International Market-seeking Market-seeking Strategy (high-integration) Decision Context Low Moderate Technology Mod. to high High Transfer Costs Environment Net High NPV; Low Moderate Option; Present Value or Option Low NPV Option Value Primary Factor Market-seeking Market-seeking (high-integration) Constraints None Resources Performance High Low Insights Increasing sales Design-in requirement potential makes fixed makes high-integration costs of sales vital for performance office more efficient than distributor commissions Description Firm 9 Firm 10 Main products Manufacture Manufacture comp. Description computer memory peripheral boards equipment Value Chain 1-step supplier 1-step supplier Placement Operating Mode Joint venture Joint venture (development) (manufacture) Venture Location China Hong Kong Entry Date 1994 1995 Foreign Entity Joint development Manf. and Activity and sales distribute to China International Market-seeking Market-seeking Strategy (high-integration) Decision Context Low High Technology Moderate high Transfer Costs Environment Net Moderate NPV; Moderate NPV; Present Value or Moderate Option Mod. Option Option Value Primary Factor Market-seeking Market-seeking (high-integration) Constraints Gov. restrictions None Performance Low Moderate Insights Use of JV Notion of Design-in of development to product to customer attain market seeking operations objectives Description Firm 11 Firm 12 Main products Manufacture Manufacture ICs Description Medical equipment Value Chain 1-step OEM 1-step supplier Placement Operating Mode WOS (regional Distributor hub & sales support) Venture Location Hong Kong Hong Kong Entry Date 1994 1995 Foreign Entity Support regional Distribute Activity sales effort product in S. China International Transnational Market-seeking Strategy Integration Decision Context Low Low Technology Moderate Moderate Transfer Costs Environment Net Low NPV Low Option Present Value or Low Option Low NPV Option Value Primary Factor Transnational Market-seeking Integration Constraints None Resources Performance Moderate Low Insights Need relations with Key to success is local Chinese finding right people companies to reach (honest, committed to markets outside of major profession for cities hit by distributor long term) Description Firm 13 Firm 14 Main products Manufacture semi- Design computer Description conductor processing display chip sets equipment Value Chain 2-step supplier 1-step supplier Placement Operating Mode WOS WOS (sales/support) (sales/support) Venture Location China Taiwan Entry Date 1995 1988 Foreign Entity Sales/support for Sales for Taiwan Activity China customers 'mom and pop' stores International Market-seeking Market-seeking Strategy (high-integration) Decision Context Moderate Low Technology Moderate Moderate Transfer Costs Environment Net Low NPV Moderate NPV Present Value or Low Option Moderate Option Value Option Primary Factor Market-seeking Market-seeking (high-integration) Constraints Government U.S. customers Performance Moderate Moderate Insights Use indirect mode Small company must to enter country go abroad to find and cut ties when customers when large established domestic firms are not interested Description Firm 15 Firm 16 Main products Manufacture Manufacture IC Description medical diagnostic fabrication equipment equipment Value Chain 1-step OEM 2-step supplier Placement Operating Mode WOS (sales/support) WOS (sales/service) Venture Location Hong Kong Taiwan Entry Date 1988 1995 Foreign Entity Sales and service for Sales, service and Activity China * SE Asia product support International Market-seeking Market-seeking Strategy (high-integration) (high-integration) Decision Context Low Low Technology High High Transfer Costs Environment Net High NPV High NPV Present Value or Low Option Low Option Option Value Primary Factor Market-seeking Market-seeking (high-integration) (high-integration) Constraints None None Performance High High Insights Notion of wave effect Direct presence of product adoption from shows customers international experience more commitment of local customers Description Firm 17 Firm 18 Main products Manufacture IC Manufacture IC Description fabrication yield processing management equipment equipment Value Chain 2-step supplier 2-step supplier Placement Operating Mode WOS (service) WOS (liaison) Venture Location China China Entry Date 1996 1980s Foreign Entity Service for China Demonstrate product; Activity fab facilities coordinate country activites International Market-seeking Market-seeking Strategy (high-integration) Decision Context Unclear High Technology High High Transfer Costs Environment Net Moderate NPV Moderate Option Present Value or Moderate Option Low NPV Option Value Primary Factor Market-seeking Tech. Transfer (high-integration) Constraints None Government Performance Unknown Low Insights Sale of high design- Emphasis on tech. in product is often transfer costs may be made at headquarters. misplaced. Use other Should have direct tech. mgmt. strategies presence there Description Firm 19 Firm 20 Main products Manufacture Provide design, Description Integrated Circuits manf. services to OEMs Value Chain 1-step supplier 1-step supplier Placement Operating Mode JV (manufacture) WOS (Manf) Venture Location China China Entry Date 1994 1996 Foreign Entity Manf. line card to Manf./Design Activity use with own ICs servicdes for OEMs International Transnational Market-seeking Strategy (learning) (high-integration) Decision Context Low High Technology Moderate Moderate Transfer Costs Environment Net Low NPV Moderate NPV Present Value or Low Option Low Option Option Value Primary Factor Transnational Market-seeking Integration (high-integration) Constraints Government None Performance Low Moderate Insights Low decision context Develop on-going led to poor partner relation with selection. government to mitigate potential constraints Description Firm 21 Firm 22 Main products Manufacture disk Manufacture range Description drives of computers Value Chain 1-step supplier OEM Placement Operating Mode Joint venture WOS (Research and (Manf) Development) Venture Location China China Entry Date 1992 1995 Foreign Entity Test and Assembly of Do basic and applied Activity Disk Drives research. Consult with potential customers International Resource-seeking Market-seeking Strategy (high-integration) Decision Context Low High Technology Moderate High Transfer Costs Environment Net High NPV Moderate NPV Present Value or Low Option Mod. Option Option Value Primary Factor Resource-seeking Market-seeking (high-integration) Constraints Government Government Performance High High Insights Change strategy from Provide R&D to meet Market-seeking to Gov. demands and use as Resource-seeking as competitive advantage to new information attract customers became available Description Firm 23 Firm 24 Main products Develop design Manufacture video Description software communication equipment Value Chain 1-step OEM OEM Placement Operating Mode WOS (liaison office) WOS (sales/service) Venture Location China China Entry Date 1995 1995 Foreign Entity Work with Gov. Sales and service to Activity officials, coordinate local customers with distributors International Market-seeking Market-seeking Strategy Decision Context High Moderate Technology High Low Transfer Costs Environment Net Moderate NPV High NPV Present Value or Mod. Option Low Option Option Value Primary Factor Market-seeking Market-seeking Constraints Gov. Government Performance High High Insights Develop relationship Upgrade market with Gov. to further seeking strategy product acceptance. with direct Piggyback on related presence suppliers Table Five Operating Mode Choice = F (Design-in Requirement and Customer Structure) Design-in Requirement High Low Customer Cent WOS (HQ) Dist. (HQ) Structure Decent. WOS (site) Dist. (site) Value Chain Position of the Sample Firms Value chain position Number of firms OEM 4 1-step OEM 5 1-step supplier 9 2-step supplier 6 Total 24 Table Seven Technology Transfer Management Strategies Segment Complete Core Partitioned core transfer Significant core transfer Peripheral Minor non-core transfer Complete non-core transfer
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|Author:||Cannice, Mark V.; Daniels, John D.|
|Article Type:||Statistical Data Included|
|Date:||Jun 22, 1999|
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