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1 6 th International Scientific Conference May 13 14, 2010, Vilnius, Lithuania BUSINESS AND MANAGEMENT 2010 Selected papers. Vilnius, 2010 ISSN print / ISSN X CD doi: /bm Vilnius Gediminas Technical University, 2010 IDENTIFYING KEY SUCCESS FACTORS FOR INTERNATIONAL JOINT VENTURES IN CHINA: A FOREIGN PARENT PERSPECTIVE FROM FINNISH FIRMS Xiaosong Zheng 1, Jorma Larimo 2 1,2 Department of Marketing, University of Vaasa, FI Vaasa, Finland 1 xiaosong.zheng@uwasa.fi; 2 jorma.larimo@uwasa.fi 1 Sydney Institute of Language and Commerce, Shanghai University, Shanghai, China xiaosong.zheng@shu.edu.cn Abstract. International Joint Venture (I) has been one of the main foreign market entry approaches in the last decade and this is particularly true for entry to the huge Chinese market. Although Is have been a very commonly used entry form several studies have indicated that the Is have in several cases not reached the goals set for them or they have clearly failed. Recently there has been also a growing interest to examine the performance and determinants of successful Is in China from major developed countries. The studies have so far mainly focused on Is where the foreign are either from Asian countries or from big western economies like from the USA whereas research focused on Is established by firms from small developed European economies like from various Nordic countries has been extremely limited. This paper tries to shed some light on this gap by analyzing the performance and key success factors of Finnish-Chinese Is from a Finnish parent perspective. In the paper a conceptual model to examine key I performance determinants is first built up and then we apply this model in the analysis of nine Finnish-Chinese Is. The results of the study show that I performance depends on the measure of the performance. Focusing on management evaluation of performance the parent firm size and year of investment are found to be the key success factors at I formation stage while commitment is the key success factor at I operation stage. At the end of the paper, conclusions are made and limitations are discussed together with an outline of future research directions. Keywords: determinant, I, performance, China, Finland. 1. Introduction International Joint Ventures (Is) have been in a central role of global expansion by several companies (UNCTAD 2004). Is are formed between two or more firms with different organizational and cultural characteristics. There are several advantages related to the I entry mode like the possibility for the local and parent firms to exploit complementary resources, innovative capacities and core competencies (Kogut 1988; Geringer, Hebert 1991; Lyles, Salk 1996; Mathews 2002; Lu, Shiang 2006; Duan, Shuai 2007). Is are superior when firms face uncertainty about the foreign market and future development or when information is inadequate (Balakrishnan, Koza 1993). Therefore Is are often used as a market entry approach by developed countries aiming to enter emerging markets where foreign firms usually face an uncertainty in economic and opportunistic behaviours. In spite of the high popularity of Is especially in emerging markets results in several studies have indicated that the goals set for the Is have not been reached and that there has been high rates of instability and failures in I operations (e.g. Gomes-Casseres 1987; Beamish 1998; Hennart et al. 1998; Park, Ungason 2001). Thus there has been growing interest to study in more details the performance of Is and to study the key factors and drivers behind successful and unsuccessful Is. In the literature the research on Sino-Foreign Is has been clearly growing, but the results have been partly mixed and the studies have mainly focused on the I operations by Asian, especially Taiwan-based companies, as well as companies based in big Western countries, mainly from the USA, whereas research focusing on I (and FDIs) by firms from smaller developed European economies like from Nordic countries, has been extremely limited so far. Furthermore, as in the decade award winning article of Journal of International Business Studies (JIBS) Madhok (2006) argues that most existing research on I performance tends to focus on a few single separate factors such as ownership and a shift focus to detailed case studies to examine relational dynamics is encouraged. In this study we will use nine Finnish-Chinese Is to do detailed case studies to identify key factors for I success. Therefore this study contributes to the existing I literature by attempting to identify key success 294

2 IDENTIFYING KEY SUCCESS FACTORS FOR INTERNATIONAL JOINT VENTURES IN CHINA factors in Finnish-Chinese Is through detailed case studies in a comprehensive and logic way. The research results will have implications to academic researchers, firms, professionals and government policy makers. This paper is organized in the following way. In the second section a literature review on determinants of I performance is conducted. The third section is about research method and data collection and in this study comparative case study research method is adopted. In the fourth section a conceptual model is built up as a framework for case studies. Case results are discussed in the fifth section. The final section is summary and conclusions, including also implications of the study, discussion of limitations of this research, together with recommendations for future research directions. 2. Determinants of I performance One of the main challenges in evaluating I success is the measurement of its performance. In the literature different theories have been used to study I performance including transaction cost economies (Hennart 1988, Kogut 1988, Ramanathan et al. 1997), agency theory (Reuer, Miller 1997; Constractor, Kundu 1998; Kumar, Seth 1998), Resource-based view (Eisenhardt, Schoonhoven 1996; Mjoen, Tallman 1997; Das, Teng 2000), social exchange theory (Steensma, Lyles 2000), knowledge-based view (Steensma, Lyles 2000; Dhanaraj et al. 2004), Behaviour perspective (Inkpen, Currall 1997), organizational learning logic (Inkpen, Crossnan 1995; Lyles, Salk 1996; Inkpen, Dinur 1998), bargaining power theory (Yan, Gray 1994), institutional theory (Li et al. 2001), contingency theory (Park, Ungson 1997), and fairness theory (Luo 2008). Among these theories resourcedbased view and knowledge-based view have most commonly been applied in I performance studies. Measures of I performance can be classified to subjective measures (such as overall ) and objective measures (such as return on investment). In this paper we will use both subjective measures and objective measures to evaluate I performance in case studies. In the literature some significant factors influencing I performance have been identified and discussed and these include control, ownership, commitment, culture, etc. (e. g. Geringer, Hebert 1989; Steensma, Lyles 2000; Currall, Inkpen 2002; Inkpen, Currall 2004; Madhok 2006; Li et al. 2008; Dumludag 2009). These important factors are briefly described in the following. Control can be defined as the management process by which a parent s interests are protected. According to Geringer and Hebert (1989), control refers to the process whereby one party influences, to different degrees, the behaviour and output of another party through the use of power, authority, and a wide range of bureaucratic, cultural, and informal mechanisms. These of control are widely regarded as critical for I performance (Geringer, Hebert 1989; Madhok 1995). The share ownership structure is a means of materializing the management control which is determined by the bargaining power (Li et al. 2008). The greater the power one part has, the higher the share of ownership the can obtain (Gomes-Casseres 1987). Commitment refers to the extent to which the are bound to the stability and success of the (Beamish 1998). Mutual commitment creates a feeling of shared identity (Lin, Germain 1999) and facilitates the development of mutual and voluntary cooperation between firms. Trust between has also been revealed as an important factor that contributes to the success of Is (Currall, Inkpen 2002; Inkpen, Currall 2004; Madhok 2006) and it can be easily managed to facilitate the achievement of I objectives (Beamish 1993; Beamish 2006). Finally, culture is bound around Is all the time and culture does affect I performance (Li et al. 2001). The impact of culture on I performance has been the most extensively examined variable in previous research (e.g. Larimo 2007). Because this study focuses on Is from only one single Western European country to China we cannot focus in more details on the impact of cultural distance on I performance. However, it can be stated that Finland and China are relatively far away from all cultural dimensions. In addition to the above important I performance determinants many others are also worth looking into. For this purpose we summarized all main potential I performance determinants and they are presented in the following Table 1. We think that research on I performance determinants theoretically can have three ways. One way is to examine I background information such as cultural, economic, political and technological dimensions from all particularly for the local or target. These factors mostly represent macro 295

3 X. Zheng, J. Larimo level or environmental factors in the local environment where Is are operated. In Table 1 these environmental factors include culture, economy, government policy, technology, infrastructure, labour, market potential, legal system, quality of life. Each factor is furthered explained in more details. For example legal system factor means how efficient the local government can protect Intellectual Property as nowadays many high tech foreign firms are expanding east to China. Legal system also concerns government regulations on Is and the stability of these regulations. Quality of life factor includes cost of living in the target country, safety and social security system in the country. These issues may influence the establishment and operation of Is. Countries having poor quality of life tend to accept more Foreign Direct Investments (FDIs) and their bargaining power in Is tends to be weak. The second way for research on I performance determinants is to look situational factors at I formation stage. These situational factors reflect factual data from all at the time of I establishment. In Table 1 these factors include motivation of entry, firm size, selection, I experience, resource, time of entry, ownership structure, sales orientation, and longterm focus. For example resource can be divided to capital and non-capital resources. The resource factor usually determines ownership structure which is a well proven factor that will significantly affect I performance. Timing of entry may also influence I performance. Foreign companies entering a target market earlier usually have first comer advantages over latecomers. Table 1. An Overview of Main Potential Determinants of I Performance Determinants/Drivers Classification/Explanation Determinants/DriversClassification/Explanation Determinants/Drivers Classification/Explanation Culture Economy Organizational culture, national culture, cultural sensitivity Local country GDP, growth rate of GDP, economic policies Determinants of I Performance I Local Environment I Formation Stage I Operation Stage Motivation of entry Firm size Motivation to enter the specific country, motivations to establish Is from both foreign and local ' sides, goal congruity Foreign parent firm size, local firm size Commitment Bargaining power Resources commitment, psychological commitment, level of commitment Resource-based power, context-based power Government policy Stability of government policies, cooperation and efficiency of local government Partner selection How to find a local? How to evaluate and select Control a local? Strategic control, operational control, structure control, output control, process control, social control Technology Technology available, technology and knowledge transfer I experience Prior FDI and I experiences both in the local country and internationally Trust Inter, interpersonal, between and local and foreign governments. Infrastructure Logistics and transportation system, telecommincation capacity Resource Capital resources, noncapital resources Justice Distributive justice, procedure justice, interactional justice Labor Labor skills, labor availability, labor attitude, wage level Time of entry When to establish Is affects I performance, early entry vs. late entry Conflict Task conflict, conflict, conflict resolution Market potential Market size, market type, local competition level, consumer confidence level Ownership structure Percentage of share of ownership, equity and nonequity share of Conflict resolution ownership Joint problem solving, forcing, domination, compromising Legal system IP protection, local government regulations and Sales orientation legal protection Sales directed to a target country or countrties Cooperation Cooperation between, cooperation between and local and foreign governments Quality of life cost of living, safety and social security system Long-term focus Intended duration of Is, short-term vs. long-term focus Age of the I Age of the I unit, age of s 296

4 IDENTIFYING KEY SUCCESS FACTORS FOR INTERNATIONAL JOINT VENTURES IN CHINA The third way for research on I performance determinants is to examine factors related to I operation stage. In Table 1 we have commitment, bargaining power, control,, justice, conflict, conflict resolution, cooperation, and age of the I. These factors are well represented in the literature and they are classified further in explaining their meanings. However, research on factors such as justice is quite new and it deserves further research. Age of the I unit may also influence the I performance. Units having operated longer have reached the stability in operation and s thus leading to better performance. Table 1 gives a comprehensive summary trying to capture all main potential I performance determinants. The table is built from research results in the literature as well as our ongoing research. In a later section we will develop a concept model based on the determinants summarized in Table 1 to carry out case studies. 3. Research method and data collection This paper aims to identify key success factors for Is in China by using nine Finnish-Chinese Is operating in Mainland China. For this comparative case study method is used. The cases are selected from a more extensive study focusing on the I behaviour, strategies and performance of Finnish firms made in late 2006 early In this study we will examine the performance and key success factors of Is in China. Based on the examination and evaluation of the key factors a concept model will be constructed to systematically investigate the key determinants of I performance in China. Case study research method is also used for exploratory theory development and validation (Yin 2002). Case study can enable researchers to generate a rich understanding of the research question from a small number of situations while using a range of data collection methods (Eisenhardt 1989). The nine Is were established during in China. Two of the nine Is had as a minority shareholder also another Finnish (a financing organization agreed to participate to ownership in a short term). Furthermore, in three Is there were two Chinese whereas the rest have only one Chinese. Two of the cases had the first manufacturing FDIs by the Finnish company and five of the cases had first Is by the companies. The Finnish equity share is between %, thus fulfilling the traditional requirement for share. Some researchers regard only % ventures as the real Is. There was only one I of this kind among the nine cases and also in general the % Is seem to be very rare among Is by Finnish companies (Larimo 2007). From the eight other Is three were originally minority and five majority owned by the Finnish. The motives establishing the Is were to increase profits and as well as lower ion and sourcing costs. Except in one case the Is were clearly established to last for longer time period, in several cases at least ten. Fig. 1. A Concept Model for Identifying Key I Performance Determinants 297

5 X. Zheng, J. Larimo. The concept model development In order to systematically study the key determinants of I performance, we developed a conceptual model to investigate determinants of performance in the nine Finnish-Chinese Is. The model is illustrated in the Fig. 1. We will take a topdown approach to explain the model. Those on top of the model represent I local environmental factors and they are expressed as cultural, economic, political and technological dimensions. These are macro level factors rooted in the local parent country that will affect I performance. Next we identified a few most significant I performance determinants at I formation stage and I operation stage respectively. In Table 1 there is a more complete list of determinants at each stage. However, in practice we could select a few most important factors to test their influence on I performance. It would not be feasible to test all factors in small scale case studies. Below I formation and I operation stages, is the I performance. We use both objective performance measures and subjective performance measures. In this study objective measure is financial performance (ROI) and subjective measure is called competitive performance which includes a number of subjective measures such as share of ownership, market position, sales and, and overall. The use of both objective and subjective measures will theoretically enhance the reliability of research results. The last part in the concept model is the conclusion of key success factors or determinants of I performance in China. As we mentioned earlier, these key success factors represent a Finnish parent perspective. 5. Case results In this research we focus on studying the factors associated with I formation and I operation stages. The results on these factors from case studies are presented in Table 2 and Table 3. Table 2. Results of Key Determinants at I Formation Stage Size of the Finnish firm at the time of entry (Meur) Field of industry CASES A B C D E F G H I 240 2, FDI experience I experience 1 10 or more none none none none none Year of investment Investment type Greenfield Greenfield Greenfield Greenfield Acquisition Greenfield Acquisition Greenfield Greenfield Earlier TC experience none exporting other operations activity a wholly-owned manufacturing unit exporting licensing agreement Licensing agreement, exporting, wholly-owned manufacturing unit, manufacturing, other operations exporting, sales subsidiary Earlier experience competitor a licensing competitor competitor Partner size symmetry company bigger 11-49% than 50% bigger than same sized (+/- 10%) 50% smaller than 50% bigger than 50% bigger than 50% smaller than 50% bigger than n.a. Main motivation share, Economies of scale share, Achieve rapid market entry, Access to local distribution channel Develop base for low cost share sourcing, Access to local marketing expertice, Achieve economies of scale, Achieve rapid market entry, Access to local distribution channel share, Establish a base to access other countries share share, Develop base for low cost sourcing, Achieve Quanxirelations Lower ion costs Sales orientation of the I at the entry stage Finnish share of ownership Intended duration of the I 0-4% of the total sales directed to the target country 0-4% of the total sales directed to the target country 5-24% of the 100% of the total sales directed to the target country 51% 49% 25% 25% 85% 60% 55% 50% 55% indefinite 2-5 indefinite

6 IDENTIFYING KEY SUCCESS FACTORS FOR INTERNATIONAL JOINT VENTURES IN CHINA Table 3. Results of Key Determinants at I Operation Stage CASES A B C D E F G H I Level of strategic control control over control over control over control over Level of operational control daily activitites daily activitites daily activitites Partner commitment relatively operation Partners have medium level of commitment to the operation Partners have low commitment to the operation Partners have medium level of commitment to the operation relatively operation Partners have low commitment to the operation relatively operation operation operation Level of level of level of Low level of level of Conflicts between level of conflicts between level of conflicts between Low level of Low level of level of conflicts between Low level of Sales orientation at operation stage 25-49% of the 5-24% of the 5-24% of the 50-74% of the 5-24% of the 100% of the total sales directed to the target country Total sales (Meur) less than 10 less than 10 less than less than n.a. n.a. The nine I companies are numbered alphabetically from A to I. The left column contains a few important factors at I formation stage such as Finnish firm size (in terms of value of assets), FDI and I experiences, year of investment and investment type, earlier trading company and experiences, size symmetry, main motivation and sales orientation at entry stage, Finnish percentage share of ownership, and intended duration of the I. In Table 3 results of key determinants at I operation stage are summarized. These determinants represent important factors associated with I performance in actual daily operations. These factors have been studied widely in the literature. Therefore we also emphasize these factors in this study. The control factor is divided into strategic control and operational control. Other important factors include commitment,, conflicts, sales orientation at operation stage, and. The results of I performance are presented in Table 4. Results from all nine case studies from company A to company I have been summarized. Table 4 contains both objective and subjective I performance measures. Financial performance is the objective measure. All others are subjective measures and these include Finnish share of ownership later, market position, sales and market share, and overall. The use of both objective and subjective measures will lead to a more reliable analysis and result. For analysis from Table 2 we can see that the size of the Finnish in Is vary considerably. Is B, G, H (G and H were established by the same Finnish firm) were established by larger Finnish multinational corporations (MNCs) while other Finnish companies are small and medium enterprises (SMEs). These Finnish MNCs have relatively more FDI, I and TC experience than SMEs and they all have a long term focus (intended duration of the I). These MNCs are also significantly larger than their Chinese. They have a number of motivations to enter China and they have a higher ownership share than their Chinese (majority owned Is). As a result in Table 4 both Is B and G were evaluated to have excellent financial performance and the two companies showed relatively high. Company B had an ownership share of 100% later and company G, H had a share of 55% and 50% respectively. All of them had a leading market position partly due to its large size scale effect. All of them also showed high level of with the level of sales and. For overall company B showed relatively high while company G(H) showed medium level of. We argue that overall is one of the subjective performance 299

7 X. Zheng, J. Larimo measures and it should be combined with other subjective measures to give a more solid result. Therefore by the combination of all the performance measures we think firm size is an important factor in I performance. For the factor year of investment (or timing of entry), four companies had investment after year 2000 i.e. companies A, E, G(H), I. Among them companies A, E, G showed relatively high financial performance and companies H and I showed medium level of. They also showed either relatively high or medium level measures of sales,, and overall. From this analysis we can also say year of investment also affects I performance and early movers tend to outperform latecomers in a foreign market. All other factors are either associated with the identified key factors firm size and year of investment, or they didn t show a consistent result. Factors at I operation stage also affect performance. For commitment, companies C and F have low commitment and the corresponding financial performances are medium level and relatively low respectively. Sales and for both companies also showed medium level of. For overall company C had relatively high and company F had medium level. From the analysis we can conclude low commitment tends to lead to low level of in I performance. All other factors at this stage including strategic control, operational control,, conflicts, and sales orientation didn t show a consistent result. From the above case studies and analyses we find that firm size and year of investment (timing of entry) are the key success factors at I formation stage and commitment is the key success factor at I operation stage. Other factors either did not affect I performance or did not show a consistent result. 6. Conclusions Is are commonly used to enter the Chinese market and Is have received a great academic and managerial interest. Accordingly, there is an increasing interest to study the key factors or determinants underlying I performance. However, in the existing I performance research the foreign parent firms are mainly from major developed countries such as USA. There is very little research on firms from small developed European countries such as Finland. This paper extends current I performance research by studying nine Finnish- Chinese Is operating in Mainland China. In the literature review an overview of I theories, determinants of I performance and the pros and cons of objective and subjective I performance measures, was made. Based on the literature review and our ongoing research an overview of potential determinants of I performance were presented grouped into three main categories: I local environment, I formation stage, and I operation stage. A conceptual model for the investigation of I performance determinants was presented. The empirical part of the paper consisted of nine Finnish- Chinese I case studies. The results show that parent firm size and year of investment (timing of entry) are the key success factors at I formation stage while commitment is the key factor at I operation stage. This implies that these factors are crucial to I success and should be paid special attention to in the formation of Is and in the operation process thereafter. Table 4. Results of I Performance CASES A B C D E F G H I Financial performance Finnish share of ownership later 51% 100% 93% 25% 100% 60% 55% 50% 55% Market position smaller than 5 of the biggest firms in the market Market leader smaller than 5 of smaller than 5 of the biggest firms the biggest firms in the market in the market Within 2-5 biggest firms smaller than 5 of the biggest firms in the market Market leader Within 2-5 biggest firms n.a. Sales and market share Overall 300

8 IDENTIFYING KEY SUCCESS FACTORS FOR INTERNATIONAL JOINT VENTURES IN CHINA As usual, there are some limitations in this research. First we only managed to have nine cases and they are not enough for more extensive generalisations. Secondly, all the cases were Finnish-Chinese Is, thus one has to be cautious with generalisations of the results to Is established by firms from other smaller developed economies in China. Thirdly, there might be some tradeoffs between the various factors or determinants of I performance. Therefore future research may include more Finnish-Chinese Is to allow for a quantitative analysis of these factors on I performance. Special attention should be paid to the possible tradeoffs between these factors. Moreover, as Madhok (2006) suggests in the decade award winning article of Journal of International Business Studies, current research trend also calls for a shift of focus from separate factors such as ownership to relational dynamics in I performance. Therefore future research directions can also include more embedded case studies to reveal interfirm or inter dynamics that might be fundamental factors underlying successful I performance. Furthermore, the future studies should analyze Is in China established by firms from other smaller developed European economies like from other Nordic countries and e.g. from Austria or from Belgium or Greece. References 1 Beamish, P. W The Characteristics of Joint Ventures in the People s Republic of China, Journal of International Marketing 1: Beamish, P. W Multinational Joint Ventures in Developing Countries. London: Routledge. ISBN- 10: Currall, S. C.; Inkpen, A. C A Multilevel Approach to Trust in Joint Ventures, Journal of International Business Studies 33: doi: /palgrave.jibs Das, T. K.; Teng, B. S A Resource-Based Theory of Strategic Alliances, Journal of Management 26(1): doi: /s (99) Duan, J.; Shuai, C Ownership, Control, and Performance of U.S.-China Joint Ventures: A Longitudinal Study, Journal of Applied Management and Entrepreneurship 12(1): Dumludag, D An Analysis of the Determinants of Foreign Direct Investment in Turkey: the Role of the Institutional Context, Journal of Business Economics and Management 10(1): doi: / Only main references are listed here. The full list of references can be received from authors upon request 301 Eisenhardt, K. M.; Sehoonhoven, C. B Resource- Based View of Strategic Alliance Formation: Strategic And Social Effects in Entrepreneurial Firms, Organizational Science 7(2): doi: /orsc Gomes-Casseres, B Joint Venture Instability: is it a Problem? Columbia Journal of World Business 22(2): Hennart, J. F A Transaction Costs Theory of Equity Joint Ventures, Strategic Management Journal 9: doi: /smj Inkpen, A. C.; Crossnan, M. M Believing in Seeing: Joint Ventures and Organizational Learning, Journal of Management Studies 32: doi: /j tb00790.x Inkpen, A. C.; Dinur, A Knowledge Management Processes and International Joint Ventures, Organization Science 9(4): doi: /orsc Kogut, B Joint Ventures: Theoretical and Empirical Perspectives, Strategic Management Journal 9: doi: /smj Kumar, S.; Seth, A The Design of Coordination and Control Mechanisms for Managing Joint Venture-Parent Relations, Strategic Management Journal 19: doi: /(sici) (199806)19:6<579::aid-smj959>3.0.co;2-8 Larimo, J International Joint Venture Performance: Impact of Performance Measures and Foreign Parent, Target Country and Investment Specific Variables on Performance, in Cliquet, G.; Hendriks, G; Tuunanen, M.; Windsperger, J. (Ed.) Economics and Management of Networks: Franchising, Strategic Alliances and Co-operatives. Springer Verlag, Lin, X.; Germain, R Predicting International joint Venture Interaction Frequency in U.S.-Chinese Ventures, Journal of International Marketing 7(2): Lu, L. T.; Shiang, J Conflict Resolution Strategy Between Foreign and Local Partners in Joint Ventures in China, Journal of American Academy of Business 8(1): Luo, Y Timing of Investment and International Expansion Performance in China, Journal of International Business Studies 29(2): doi: /palgrave.jibs Madhok, A Revisiting Multinational Firms Tolerance for Joint Ventures: A Trust-Based Approach, Journal of International Business Studies 37: doi: /palgrave.jibs Steensma, H. K.; Lyles, M. A Explaining I Survival in a Transitional Economy through Social Exchange and Knowledge-Based Perspectives, Strategic Management Journal 21: doi: / (200008)21:8<831::aid- SMJ123>3.0.CO;2-H