Setting up a joint WFOE in China:
an exploratory case study
____________________________________
Master thesis of Management and Organisation Faculty of Economics
University of Groningen
Student: N. M. Kinderman (S1257412) Supervisor: Dr. H. F. Lanting
June 2007
1. INTRODUCTION AND RESEARCH QUESTIONS ... 2
1.1INTRODUCTION... 2
1.2RESEARCH QUESTION AND INVESTIGATIVE QUESTIONS: ... 4
2. CONCEPTUAL FRAMEWORK AND ENTRY MODE THEORY ... 6
2.1CONCEPTUAL FRAMEWORK... 6
2.2ENTRY MODE THEORIES... 8
3. METHODOLOGY ... 11 3.1MODEL. ... 11 3.2COMPANY SELECTION... 12 3.3DATA COLLECTION... 16 4. BACKGROUND CHINA... 17 4.1HISTORY... 17 4.2WTO IMPACT... 18
4.3GOVERNMENT AND POLICY... 19
5. DATA ANALYSIS AND INTERPRETATION... 20
5.1GENERAL CHARACTERISTICS... 20
5.2.RESULTS AND DISCUSSION OF INTER-CASE ANALYSIS... 21
5.2.1 Organizational concepts ... 22
5.2.2 Locational Concepts... 30
5.2.3 Internalization Concepts... 34
5.2.4 Other concepts ... 39
5.3.COMPARISON OF EMPIRICAL RESULTS WITH INVESTIGATIVE QUESTIONS... 42
6. CONCLUSION ... 43
7. IMPLICATIONS, LIMITATIONS, AND SUGGESTIONS FOR FURTHER RESEARCH... 45
7.1.MANAGERIAL IMPLICATIONS... 45
7.2.LIMITATIONS... 45
7.3.FURTHER RESEARCH... 46
REFERENCES ... 47
1. Introduction and research questions
1.1 Introduction
In an economy that is rapidly getting more and more global, multinational enterprises (MNEs) do not really have a choice anymore whether to enter the Asian market, only how to do it. Especially China has been a major recipient of foreign investors (Teng, 2004). Major entry strategies are exporting, licensing, setting up a joint venture, wholly owned subsidiaries, and acquisitions (Nooteboom, 1999; Teng, 2004; Malhotra et al., 2003). Many theories exist about which mode to choose, each of them using different explanatory factors and behavioural assumptions. Examples are transaction cost theory, resource advantage theory and strategic behaviour theory (Malhotra et al., 2003). This paper will focus on companies entering mainland China. Thus, Hong Kong and Taiwan will not be included. This is due to the very different regulations between the areas concerning foreign investment. The most common forms of China market entry for foreign companies are representative offices and foreign invested enterprises. Although the first is the quickest, cheapest and simplest, there are many restrictions. A representative office is for example not allowed to engage directly in business activities, and is limited to performing liaison, information gathering and market research in China (Johnson, Stokes and Master, 2004).
Three different types of foreign invested enterprises exist:
- an equity joint venture, which is a limited liability company possessing legal person status established by Chinese and foreign investors
- a wholly foreign-owned enterprise, which is a limited liability company possessing legal person status established entirely with foreign capital by one or more foreign investors
- a co-operative joint venture, which may be either a form of partnership, or an entity with limited liability and legal person status, established by Chinese and foreign investors.
Reasons for international collaboration can be quick access to new markets, adapting products to the local market, to share and spread risks, to reinforce each others activities, to set a market standard, to be ahead of competitors, and to obtain access to local market knowledge (Nooteboom, 1998, p172). The Sino-foreign joint venture has been the preferred entry mode in China for years, mainly because of government policy and the need for a local network (Teng, 2004). However, because of Chinese market policy changes, and negative Sino-foreign joint venture experiences, different modes are becoming more popular. China’s accession into the World Trade Organization (WTO) in December 2001 has induced some major changes in the market, and will continue to do so for the coming years. Trade barriers are lowered, foreign firms allowed to distribute, market, wholesale, retail and repair their (imported) products, instead of only distributing and servicing products made in China, and more industries are opened up to foreign participation. And these are only a few of the planned changes (Teng, 2004). Furthermore, MNEs are getting more and more familiar with the Chinese market. Most of them will have been active in the region for a few years now (Teng, 2004). As with these developments the need for the joint venture seems to fade, and the number of them being set up decreases, other forms emerge. Recently, a number of firms have set up a joint WFOE in China, consisting of only non-Chinese firms. Although the research on the Sino-foreign joint venture is extensive, not much attention has been paid to the joint WFOE. The little previous research about foreign cooperative strategies in China is outdated, because the Chinese environment has changed dramatically in the last decade. Many entry mode researchers focused on the large number of state-owned enterprises and high contextual risk (for example Pan and Tse, 1996). Furthermore, in empirical research, the data used was often from companies in the 1980’s and 1990’s. The Chinese market has changed significantly since then however, with the opening up of industries and less regulations. In addition, earlier studies on general foreign cooperation in market entry often used statistical methods. Many variables are however difficult to measure directly, like for example culture and contractual risk, and therefore lead to a large variety of estimates, making it difficult to compare the results of studies and reach consensus. From traditional market entry theory, a joint WFOE does not seem logical, as one of the main aims of international cooperation is to gain quick access to the market by cooperating with a local partner (Nooteboom, 1998).
Furthermore, although the Chinese culture may have become more familiar after some time, this does not automatically mean a company wants to work in an environment strongly influenced by the Chinese way of doing. Maybe it prefers a non-Asian approach, and this would be hard to achieve when cooperating with a Chinese partner. A foreign partner then becomes attractive. Also, a foreign company that does not yet have a lot of experience with the Chinese market can choose to partner up with another foreign company that does have the experience and connections. Especially when they already had a business relation, trust and cultural issues seem less likely to occur in the foreign cooperation mode than when the firm would choose a local partner. Furthermore, by pooling their financial resources through collaboration the companies can possibly better realize the needed investments in the local market, or create barriers like scale advantages against upcoming Chinese competitors. Perhaps the foreign companies find themselves in a certain stage where they wish to give existing products a new impulse by entering the Chinese market together. The environment also plays an important role. In a competitive market, it will be hard to maintain a competitive advantage. When setting up a joint venture with a local partner, the chance of knowledge dissemination is larger, as the local partner may be leaking information to other local parties. By setting up an enterprise with a foreign firm, this risk is much lower. Control of its competitive advantage could therefore be higher. Besides, maybe the quality of the products or operations of the local partner is not as high as required by the foreign firm. Finally, as a result of the changed regulations, it could be that new possibilities have arisen for a joint WFOE, making it more attractive than before. Speed is then important because otherwise others capture the new market. As the Chinese are known for their tendency to copy, time to market can be important, because competitors will try to obtain market share by imitation. The remainder of the paper will be structured as follows. First, the research and investigative questions will be put forward. Next, the conceptual framework and basic entry mode theories will be described. The third section contains the methodology of the research. Then, an overview of China’s background is given, followed by the data analysis and interpretation. In the 6th section, the overall conclusion is presented, and the last section states the limitations, implications, and further research suggestions.
1.2 Research question and investigative questions:
Because of these elements, it is also called the OLI framework. The framework will be explained more in detail later in the paper.
As joint WFOEs in China seem to be a recent and almost unstudied phenomenon, the following research question rises:
Why have companies recently chosen to set up a joint WFOE in mainland China?
Based on the reasoning in the last part of the introduction, and divided into the 3 elements of the framework as mentioned above, the following investigative questions can be put forward in analyzing the choice for a joint WFOE:
Ownership:
Do the companies set up the joint WFOE to - protect their brand name and reputation?
- pool their financial resources in order to be able to make the investments needed to compete in the local market?
- give existing products a new impulse?
Do they already have a local network as a result of the experience of at least one of the companies?
Location:
Is there a first mover advantage in the markets accessible by joint WFOEs (possibly as a result of the government policy changes)?
Is the joint WFOE set up to reduce the risk faced in the host country? Internalization:
Is a joint WFOE set up
- to maintain a high product quality level?
- to lower the risk of knowledge leakage to Chinese competitors?
- to create a front with for example economies of scale against upcoming Chinese competitors?
- because they experience a high degree of time pressure from Chinese copying? - to be able to work in an environment with minimized Chinese cultural influences?
intentions and motivations of setting up a joint WFOE in China. The aim of the paper is to conduct an exploratory study to gain insight in the rationale for foreign companies to opt for a joint WFOE, with a focus on the choice to cooperate with a foreign and not with a local partner, and to construct a number of general propositions.
2. Conceptual framework and entry mode theory
2.1 Conceptual framework
Once a firm has decided it wants to invest in a foreign country, the next critical step is to determine which entry mode will be used. The choice of entry mode determines amongst others the governance structure and the firm’s strategic orientation (Deng, 2003).
activity over the past two decades (Cantwell and Narula, 2001). The framework is used to give the data analysis more structure, and provide a backbone when discussing the link between the results and existing theory. A small adaptation is made however, as not only advantages are considered, but also possible disadvantages and risks.
As stated by Yin, 2003, reliance on theoretical concepts to guide the design and data collection for case studies is one of the most important strategies for completing successful case studies. Theoretical concepts can be useful in conducting exploratory, descriptive, or explanatory case studies. Previous studies, some using (part of) Dunning’s paradigm, in entry mode choice identified a number of concepts. Amongst these are multinational experience, experience with the host country, size, market potential, investment risk, and culture (for example Pan and Li, 1998; Agarwal and Ramaswami, 1992; Deng, 2003). These concepts are included, and others are added based on intuitive reasoning. The resulting concepts were the main focus of the cross-case analysis. They are defined as suitable for this study.
Concepts related to Ownership:
Experience: experience is subdivided in three elements: first, the investing company’s experience with the host country China, second, the experience of the investing company with it’s joint WFOE partner, and third, the general international experience of the firm.
Size: the size of the company is measured as the total revenue in the year previous to the joint WFOE being set up
Life cycle stage: the life cycle stage the company’s core products are in at the moment of the joint WFOE being set up. The stages are: introduction, growth, maturity, and decline (Leeflang, 1999, p.87).
Reputational risk: the risk that producing and / or operating with a Chinese partner decreases the image of the perceived brand and/or quality of the parent company due to the host country’s reputation.
Concepts related to Location:
Market potential: the potential of the market in which the joint WFOE has been set up related to a possible first mover advantage, growth, competitiveness, and the easier access due to less regulations (as a result of the entrance of China to the WTO).
critical to the survival and profitability of a firm’s operations in that country.” (Agarwal, Ramaswami, 1992).
Concepts related to Internalization:
Contractual risk: Contractual risk includes the “costs of making and enforcing contracts in a foreign country, risk of dissipation of proprietary knowledge, and the risk of deterioration in the quality of services if operated jointly with a host country partner or licensee” (Agarwal, Ramaswami, 1992).
Culture: the effect of differences in culture for this paper is related to the possible delaying factor of cultural differences and the preference to make these cultural differences as small as possible
Need for speed: This need for speed relates to the time pressure from possible copying by Chinese competitors.
2.2 Entry mode theories
In order to provide more insight into existing entry mode theories, the main theories relevant for this study are summarized below. One aspect needs to be pointed out about entry mode theories: their main application is in deciding which type of entry mode to choose based on traditional entry mode types, in which a joint venture in general is assumed to be a joint venture between a foreign and a host country firm. They mainly indicate a high (joint venture, WFOE) or a low (exporting, licensing) investment type, distinguishing between equity and non-equity investment.
Transaction Cost Analysis (TCA) theory and Internalization theory
underlying market failure. Internalization theory can be regarded as the TCA theory of the multinational corporation. In deciding on the most efficient government mode it focuses on the market for know-how, while TCA focuses more on micro level transaction characteristics like asset specificity (Madhok, 1997).
Bargaining power theory
Bargaining power theory states that the choice of the entry mode depends on the relative bargaining power of firms and host government (Deng, 2003). An important source of power for the government is the possibility to deter or encourage market entry, and supply or withdraw investment incentives. For the firms the main power comes from their ownership advantages (Lou, 2001). As a result, bargaining power theory assumes that the firms normally try to obtain permission for a high-control mode of entry as this is the preferable mode to sustain market dominance and protect international property rights. The host government on the contrary prefers a low-control mode to be used by the investing firms, as these modes will result in technology, knowledge, and profit transfers to the local firms (Gomes-Casseres, 1990).
Resource based theory
Resource based theory focuses on analyzing the various resources the firm possesses. Many resources are firm-specific and not perfectly mobile or imitable, which makes firms continuously heterogeneous with respect to their resource base. As a result, sustained firm resource heterogeneity becomes a potential source of competitive advantage, leading to economic rents or above normal returns. The resource based view of the firm highlights the value maximization of the firm by means of utilizing and pooling valuable resources. Basically, firms try to find the optimal resource boundary that realizes the value of their resources better than other resource combinations (Das and Teng, 2000).
Organizational capability theory
advantage. Internalization should be the choice when the advantage is for example superior knowledge based on tacit information. On the other hand, when a firm is faced with capability constraints in an area of activity the firm is unfamiliar with, it could collaborate as a way for enhancing knowledge (Madhok, 1997).
Internationalization theory
Internationalization theory can be categorised as an establishment chain theory, which is time dependent and incremental. The fundaments of internationalization theory are the related concepts of location-based disadvantages and local knowledge acquisition. It is a theory of incremental international expansion that relates FDI choices to the accumulation of international experience and the associated reduction in location-based disadvantages (Makino and Delios, 1996). The basic idea is that increased local market knowledge leads to increased market commitment, in terms of the amount of resources and the degree of commitment. With the continuation of this developmental process, a firm improves its market knowledge, especially experimental knowledge, and firm-specific skills (Malhotra et al., 2003).
Figure 1: Initial Conceptual Framework
3. Methodology
3.1 Model.
An exploratory multiple case study will be conducted. This type of research is chosen as the subject is a novel, relatively unresearched one. In this situation, theory building from case study research is appropriate because theory building from case studies does not rely on previous literature or prior empirical evidence. (Eisenhardt, 1989). According to Yin, 2003, an exploratory case study, single or multiple case, is aimed at defining the questions and hypothesis of a subsequent study. This subsequent study does not have to be a case study. In an exploratory study, research may follow intuitive paths, which is often perceived as vague
Inter-nalisation
• Market potential • Investment risk • Host country experience
• Partner experience • Multinational experience • Size
• Life cycle stage • Reputational risk Choice for joint WFOE TCA theory Internalization theory Organizational capability theory Location Ownership Resource based theory Bargaining power theory • Contractual risk • Culture • Need for speed
Internationalization theory Inter-nalisation • Market potential • Investment risk • Host country experience
• Partner experience • Multinational experience • Size
• Life cycle stage • Reputational risk Choice for joint WFOE TCA theory Internalization theory Organizational capability theory Location Ownership Resource based theory Bargaining power theory • Contractual risk • Culture • Need for speed
and unreliable. The goal may however justifiably be to discover theory by directly observing a phenomenon in its environment. This study will make use of a questionnaire to obtain data. This influences the selection of possible cases, as explained in the following. A methodological feature of the use of a questionnaire in this study is that it provides direct measures of difficult to measure concepts, like for example the company’s specific market potential, and perception of contractual risk. Furthermore, multiple levels are included: company-, industry-, and country-level concepts. This is done in order to be able to make the exploration as broad as possible, allowing for unexpected elements in many different areas.
3.2 Company selection
e-mail addresses for 9 of the companies. Eventually, 72 companies have been contacted. The 3 companies based in the Netherlands were contacted to request an interview. One agreed, one did not respond, and one was only willing to fill in a questionnaire. It was possible to send the questionnaire directly to 56 companies, as the others only provided an information request field on the website, which made it not possible to attach the questionnaire. After asking for an e-mail address to send my request through these fields, only two gave a positive response. As a result, 58 questionnaires were sent. Of these, 5 are returned filled in almost completely, and 1 half, resulting in a response rate of about 10%. As said above, one Dutch company agreed to give an interview, instead of filling out the questionnaire. These 7 companies are automatically selected for the analysis.
joint WFOE companies will be numbered 1 to 6. A further overview of the joint WFOEs is presented in section 5.1. The case companies are:
Company 1
Company 1 launched its first activities in 1992 in the form of innovative consumer products. It operates as a project management organisation that directs specific innovations all along the various stages to reach their successful commercial operation. Company 1 has two subsidiary companies; a cleaning concepts subsidiary which exploits specialized cleaning systems, and a technologies subsidiary which aims at the development and sales of innovative packaging and packaging technologies with a current focus on mould flow processes. Company 1 also provides legal and general assistance and makes specialist knowledge on the acquisition and licensing of intellectual property available. It has operations in the Netherlands, Germany, the United Kingdom, Canada, and the United States. The company distributes her products to more than twenty-five countries. Company 1 set up a joint WFOE with Company 2 and a Hong Kong based partner in 2006 in Dongguan to produce crates, boxes and other transport packaging. Both companies own 45% of the joint WFOE, and 10% is owned by the Hong Kong partner for providing local knowledge and connections. As no other information is known about this partner, and it has only a small stake, it will be mentioned sporadically in the remainder of the research. The focus is on Company 1 and 2, as they answered the questions with respect to each other. The main contribution of Company 1 is the production technology, and for Company 2 the experience and facilities for the production of plastic packaging.
Company 2
Company 2 came into existence in 2005, as result of a merger between a Dutch and a Swedish firm. Company 2 is one of the global market leaders in plastic packaging solutions for materials handling, offering a broad range of products which improve its customers’ logistics and/or enhance their product branding. It has more than 30 production and sales operation in practically all European countries, on the American continent, and in Asia. With respect to the joint WFOE, this is of course the same as for Company 1.
Company 3
advertising, market research, trade relations, public relations, sales support and online services. It concentrates on the packaging, chemical, plastics, biotechnology, and software industries, and has partner offices in Europe and Asia to provide global solutions. Its home base is in Chicago. In 2005 Company 3 set up a joint WFOE in Shanghai with a Dutch company specialised in international marketing communications. The joint WFOE assists clients in North America and Europe with full in-country research, market development projects, advertising and public relations.
Company 4
Formed in 2001, Company 4 is an important player in laboratory medicine and pathology services in select global markets. With an initial focus on Asia, Company 4’s management provides physicians, its partner labs, patients and institutions with high quality clinical and educational services. The current projects include a lab facility in Malaysia and a set of offerings for India and the Middle East, including a 2nd Opinion service, complete lab medicine and pathology services, and robust information technology systems. In 2005 Company 4 set up its joint WFOE with a USA based company focused on maximizing the potential of emerging healthcare products and services in the U.S. and Asian markets. The joint WFOE assists biotechnology, pharmaceutical and medical device companies in the research, testing and approval process with the SFDA (the China equivalent of the U.S. Food and Drug Administration).
Company 5
company based in France specializing in industrial and medical gases and associated services. Both own 50% of the joint WFOE.
Company 6
Since 1918, Company 6 is headquartered in Tokyo, Japan, listed at Tokyo Stock Exchange, and one of the world’s major manufacturers of carbon and graphite for diverse applications: Carbon Black, Graphite Electrodes, Fine Carbon products, Friction Materials and Industrial Furnaces and Heating Elements. It has overseas affiliated companies in Europe, the US, and Asia, and a representative office in Shanghai. The joint WFOE set up in 2006 in Shanghai is principally involved in developing the graphite business in Asia, through the production and sale of process technology products. The partner company is a German carbon and graphite products manufacturer. Company 6 owns 49% and its partner 51% of the joint WFOE.
3.3 Data collection
Data is obtained from multiple qualitative sources.
with experience in China was willing to answer some general questions. Furthermore, a company that had not set up a joint WFOE but a letter agreement (thus a contractual joint venture) between its WFOE in China and a non-Chinese company was willing to answer questions about its experiences and intentions in China. This company is called TVI Pacific and its WFOE in China HPGEI. The data from the case companies is mostly collected in one round; it was generally not possible to ask follow up questions. This diminishes the in-depth possibilities and does not allow for an overlap in data collection and analysis.
The following persons provided information:
Table 1: Information providers
Interview Name Function
Company 1 Financial manager
Questionnaires
Company 2 CEO Company 2
Company 3 President Company 3
Company 4 President Company 4
Company 5 Deputy General Manager of the joint WFOE
Company 6 General Manager and CFO Company 6
PWO Mr. K. M. Schmidhuber CEO PWO
Additional information
Mr. R. S. Ybema business lawyer
TVI Pacific Mr. Glenn Sheldon President of HPGEI
4. Background China
In order to understand the environment in which is invested an overview of the developments and background of China with respect to history, the impact of WTO entrance, and government and policy is presented next.
4.1 History
slowly in the 1980s after the relaxation of pervasive and complex import and export controls, but accelerated in the 1990s with broader trade reforms, including significant tariff reductions. In the past, the Chinese government tended to favour joint ventures when approving projected FDI. This was especially the case in restricted industries like automotive. A joint venture form was often insisted upon by regulating agencies if the project would be in competition with local firms. The idea behind promoting joint ventures was the belief that joint ventures would help maintain national control over industries and make technological transfers to Chinese firms possible. Not only the government preferred joint ventures, MNEs also often favoured this investment type. Partnering with an influential local firm provided essential local knowledge, connections, and tangible assets, like distributions channels. Furthermore, the Chinese market was considered to be such a long way from having a mature and free market that help was needed from local companies. As a result the majority of early entrants to China chose the joint venture entry mode, like for example Coca Cola. Given the above, it should be no surprise that joint ventures were the dominant entry mode between the early 1980’s and the late 1990’s. However, the relative importance of exporting and WFOE versus joint ventures increased during the 1990’s, while joint venture investment was decreasing (Teng, 2004). Since 1997, wholly foreign-owned enterprises have begun to outnumber joint ventures.
Table 2: FDI development
Foreign Direct Investment by Vehicle Type, 2004 and 2005
Number of Projects Utilized FDI Value ($ billion) 2005 2004 % Change 2005 2004 % Change Total FDI 44,001 43,664 0.77 $60.33 $60.63 -0.50 EJVs 10,480 11,570 -9.42 $14.61 $16.39 -10.81 CJVs 1,166 1,343 -13.18 $1.83 $3.11 -41.15 WFOEs 32,308 30,708 5.21 $42.96 $40.22 6.81 Foreign-invested shareholding ventures 47 43 9.3 $0.92 $0.78 18.21 Note: FDI=foreign direct investment; EJVs=equity joint ventures; CJVs=cooperative joint ventures; WFOEs=wholly foreign-owned enterprises Source: PRC Ministry of Commerce
www.uschina.org
4.2 WTO impact
furthermore now widely accepts core WTO concepts like accountable governance and transparency. Also, the Chinese Constitution was adjusted in 2004 to include concepts of property and human rights. Moreover, the accession has altered the global economic landscape. Over the last five years the Chinese economy has grown quickly and has recently become the world’s fourth-largest economy, thereby surpassing the United Kingdom. Also, after the United States and Germany, China has become the world’s third-largest trading country. Between 2001 and 2005, trade expanded on average almost 29% annually. Attracting almost $230 billion between 2002 and 2005, it has become one of the most preferred targets for FDI (Yong, 2006). However, some critical problems still remain, and a few will be mentioned here. First of all, the weak intellectual property (IP) protection in China is still criticized, especially with respect to movies and software. The Motion Picture Association for example estimates that in 2005 93 percent of movies sold in China were pirated. A second issue is related to technical barriers to trade. China has begun to set standards of which some differ significantly from standards widely accepted internationally. Finally, there are China’s subsidies to domestic enterprises. These include several forms of preferential tariff and value-added tax treatments. The subsidies help reduce the costs of local products competing against imports (Yong, 2006).
4.3 Government and policy
China is governed by the Chinese Communist Party. The government is organized in two tiers; at the top is the central government, based in Beijing, and directly below are local governments of the provinces, autonomous regions, centrally governed municipalities, and special economic zones. The Chinese legal system, administrative apparatus, policy-making and government organizations charged with approving investment are roughly divided into three levels, namely, the central government level, provincial or municipal government level and county government level. In each case, the higher the level of government, the greater the degree of authority and responsibility.
investors are circumscribed by central government policy. In 1995, the Foreign Investment Industries Guidance Catalogue was published in order to regulate, restrict and direct foreign investors’ participation in the Chinese economy. (Johnson, Stokes, Master) The Foreign Investment Guidance Catalog defines the categories of the proposed investment as Encouraged, Restricted, or Prohibited, any activity not listed therein is classified as Permitted. In certain industries it is mandatory for the foreign investor to have a Chinese partner, or that the Chinese partner must hold a majority interest in the foreign invested enterprise. The new Foreign Investment Industries Guidance Catalogue came into effect on January 2005. It further opens up the Chinese economy to foreign investment in line with China’s WTO commitments. Some industries that are no longer in the Restricted or Prohibited categories include broadcasting and television production and transport agency services. Nevertheless, some industries have been removed from the Encouraged Category due to economic overheating (http://lunaticwisdom.com).
From the above, it can be seen that China has changed significantly in the past few decades, especially economically, and is likely to continue to do so. By providing the short overview of China, a context is given in which the data is collected. Keeping this context in mind, the results of the study are likely to be better understood and interpreted.
5. Data analysis and interpretation
First, each company is studied in- depth in order to get a good profile of its situation.
Next, a cross-case analysis is conducted in order to search for patterns between the companies.
5.1 General characteristics
Table 3: Company overview
Company 1 Company 2 Company 3 Company 4 Company 5 Company 6 PWO
Nationality Netherlands Netherlands USA USA USA Japan Germany
Start of the
joint WFOE Jan-06 Jan-06 Aug-05 May-05 Aug-03 Jun-06 Sep-06
Joint WFOE Industry Plastic Packaging Plastic Packaging Marketing and Public services Healthcare Services Chemical Graphite Electrodes Automotive Partner nationality Company 2 Netherlands, Hong Kong partner Company 1 Netherlands, Hong Kong partner
Netherlands USA France Germany Korean
Joint WFOE activity
Produce crates, boxes, and other
transport packaging
Produce crates, boxes, and other
transport packaging Provide marketing and in-country research activities Assist medical companies in the research, testing and approval process with the SFDA (China’s Food and Drug administration) Production, storage, distribution, and sale of industrial gases, process gases and compressed air Production and sale of process technology products Manufacture housings for electric motors and assemblies for the automotive
market .
Intended joint WFOE lifetime
3-5 years 3-5 years 8+ years 8+ years 8+ years 8+ years 8+ years
Targeted
market China/Asia China China/Asia Asia
Shanghai Chemical Industry Park
Asia Asia
Location Dongguan Dongguan Shanghai N.A. Shanghai Shanghai Suzhou /
Hong Kong
5.2. Results and discussion of inter-case analysis
For every incorporated concept, the results of the cross case analysis are presented first, followed by a discussion including relevant theory. The discussion with entry mode theory is however not exhaustive, because as explained earlier multiple theories are often applicable to a concept, and the theories may overlap. A trade-off has been made between readability and additional significance. With respect to earlier empirical research, as with entry mode theories explained earlier, entry modes are often classified in a traditional way. The focus is frequently between equity and non-equity based choices, or the traditional foreign local joint venture and a WFOE. The joint WFOE intermingles aspects of the traditional joint venture and WFOE. This makes entry mode theory and previous empirical results often not readily applicable to the joint WFOE. Here lies an interesting area for a re-examination of entry mode research. The concepts discussed below are experience, size, life cycle stage, reputational risk, market potential, investment risk, contractual risk, culture, need for speed, the joint WFOE goal, and the joint WFOE as part of a more general international strategy.
few situations, the answer provided did not seem the most suitable when compared with the other firms. By comparing it with other information, the answer was adjusted in a few cases. One example is the answer by Company 4 about the local network of its partner. Company 4’s questionnaire answer is that its partner’s local network prior to the joint WFOE is limited. However, when reading more about the partner in the press release and on their website, it seemed to have a very well established network, including longstanding relationships with leading healthcare organizations, key members of Chinese governments, and with the regulatory and medical communities. Comparing this network with the partner networks of Company 2 and PWO, which indicated this network to be large, Company 4’s partner’s network definitely also qualified as being large.
5.2.1 Organizational concepts
Experience
This company-level concept consists in this study, as explained in the definition of the concept, of three different types of experience. These types are the company’s experience with the host country China, with the joint WFOE partner, and the level of general multinational experience. These three elements will now be discussed separately.
With China
choosing this partner. As stated by Company 3’s President: We learned years ago that you must have local nationals running offices. It is not just a language issue, rather understanding the business culture. Almost everyone in business speaks English, but not everyone understands local business customs and methods of sales distribution. Company 4 had some experience by licensing, but its partner already had a well established network. For Company 4, this was a very important consideration. As said by the Chairman of its partner: We believe that our relationships and resources in China, coupled with …(Company 4's) reputation within the international medical community, will allow us to achieve our goal (to become a leader in the market). Company 5 has been active in China since 1988, and has an extensive local network. It has more than twelve wholly owned companies and joint ventures, three partnerships, a technology centre and several strategic alliances in China. Company 5’s partner has been in China for a long time as well, as it has started local operations in 1920. Ultimately, Company 6 has been doing business in the host country for more than five years, and its partner’s local network is described as limited. Thus, in this case, Company 6 already had a large local Chinese network prior to the 2006 joint WFOE, and was content with it. The partner’s local network was not a very important consideration in choosing the partner, more important was the similar approach to quality and complementary technology.
Finally, Company 1’s Financial Manager says the following: You need to know the region, the people, and have contacts. This is especially important as contacts develop very slowly. To be able to sell on the Chinese market, you need all kinds of licences, legal, personnel, import, export.. With a partner that is already active in China this goes faster, because of experience and connections. And you need reliable Chinese speaking people.
Proposition 1: When foreign companies set up a joint WFOE in China, at least one of the partners will have previous experience in doing business in China.
Discussion. Makino and Delios (1996) found an interesting relation in their study of Japanese joint ventures located in Southeast and East Asia. Although they found a strong relationship between the presence of a local partner and higher performance, suggesting that a foreign-local joint venture can be a better strategy than a non-foreign-local joint venture and perhaps a WFOE when investing as a foreign firm in an unfamiliar market, parent experience was found to have a significant negative effect on performance in the presence of a local joint venture partner. Thus, MNEs with experience in Southeast and East Asia may not need a local partner. The local partner’s redundant contribution to the joint venture may hinder the performance of the joint venture, rather than benefit it, as is the case when parent experience is low. Ogasavara and Hoshino (2007) investigated the entry modes of Japanese subsidiaries in Brazil. They found that a joint venture formed between home-country based firms (Japanese–Japanese joint venture) on average achieved a higher performance than WFOEs (by a single foreign company) and Japanese-local joint ventures. Furthermore, the success of the Japanese–Japanese joint venture was associated with the formation of a joint venture with a Japanese partner that had previous experience accumulated in the local market. Although these results are only performance related, they do provide support for the findings of this study. From internationalization theory it would be expected that as the firm-specific asset of local market knowledge increases, the level of market commitment is higher. In this research in every joint WFOE there is at least one company with a high amount of local knowledge, making a high level commitment mode like a joint WFOE viable.
With joint WFOE partner
in doing business with the Hong Kong partner when it started in China. Company 3 was also familiar with its joint WFOE partner, because they already had a partnership in the Netherlands for over ten years. Company 3 furthermore explicitly indicates that the previous experience with the European partner was an important motivation in choosing this company. Company 5 and its partner had been cooperating for a few years, and Company 6 had already set up a joint WFOE in 2002 with its partner in Shanghai to produce and sale graphite electrodes for the Chinese market. This was the first example of a Euro-Japanese alliance in an increasingly globalized market, according to the 2002 CEO of company 6’s partner. The 2006 joint WFOE is thus a further expansion of their cooperation. Company 4 and its partner present the only joint WFOE in which there appears to be no previous experience between the partners. The choice to cooperate directly on such a high level could be explained by the fact that Company 4 is a young firm, actively seeking strategic partnerships, and an affiliate of the Johns Hopkins International Medical Labs, which makes it a more reliable partner. Thus, except for Company 4, which has recently been founded, all the companies had previous business experience with their partner.
PWO also already knew its partner for a couple of years in the form of a licensing agreement and an additional alliance form.
Proposition 2: Foreign firms setting up a joint WFOE in China are likely to have previous experience in doing business with each other.
Multinational experience
Results. Multinational experience refers to the international experience of the companies prior to the joint WFOE being set up. Company 1 already had operations in the Netherlands, Germany, the United Kingdom, Canada, and the United States. The company distributed her products to more than twenty-five countries. Company 2 had many production and sales operations in practically all European countries, and on the American continent. Company 3 had offices in the United States and overseas partner offices in Europe, and United States based Company 4 had projects including a lab facility in Malaysia and a set of offerings for India and the Middle East. Company 5 operated in 40 countries, located in North and South America, Europe and Asia. Company 6 already had overseas affiliated companies in Europe, the United States, and Asia, and a representative office in Shanghai. As can be seen, all 6 companies had international experience on at least two continents. Company 4 is still a young company, and has the least international experience. It has put its current focus mainly on Asia.
PWO had production sites in Canada and the Czech Republic. Furthermore, partner companies had production sites in the United Kingdom, Portugal, USA, Argentina, Brazil and India.
Proposition 3: Companies with a high level of multinational experience are likely to enter China with a foreign instead of a local partner.
varying environments, and become more flexible, the need for cooperation with a local partner decreases, and a high level investment mode like a joint WFOE is likely to be chosen.
Size
Results. The companies differ considerably in size, as can be seen below.
Table 4: Company size, measured by revenue
Company 1 €27 million Company 2 €450 million Company 3 €5 million Company 4 n.a. Company 5 €5,8 billion Company 6 €570 million
For Company 4 its revenue in the year prior to the joint WFOE, or any year, was not available. As Company 4 existed only three years when it set up the joint WFOE, it is likely to be one of the smaller companies. The difference in size between the smallest company, Company 3, and the largest, Company 5, is a little over a factor thousand. The large size differences make it unlikely that financial resource pooling in order to be able to make the investments needed to compete with local competitors in China was an important motivation in the choice for a joint WFOE. PWO had a revenue of €220 million.
Proposition 4: The size of a company does not influence the choice for a joint WFOE.
only large companies are able to be a sole direct investor abroad. From a resource based perspective, equity-based cooperation when going abroad seems therefore likely between small companies, as the companies can combine their financial resources (Yasuda, 2005). Although the definition of how large a large company is seems relative, when looking at the results of this study it can be confidently said that both large and small companies have set up a joint WFOE. The results of this study with respect to firm size are thus not fully in line with any of the above previous research and theory.
Life cycle stage
Results. As can be seen in the table below, the life cycle stages of the companies’ core products at the start of the joint WFOE vary significantly.
Table 5: Core product life cycle stage
Company 2’s products are at a mature stage, and by entering the market in China and using the technology of its partner, new opportunities may appear. For company 6, the joint WFOE was an expansion of an already existing joint WFOE, giving it the opportunity to give its mature products an extra impulse. Company 3’s and 5’s products were in the growth phase, and Company 4 is the only one in the introduction phase. International expansion in the introductory stage seems very early. The company indicated however that its strategy is aimed at forming cooperative arrangements, which could influence the timing of market entry. Due to the different stages the companies’ products are in, there appears to be no certain stage that motivates the joint WFOE decision.
Proposition 5: The life cycle stage of the company’s core products does not influence the choice for a joint WFOE.
Discussion. As explained before, the product life cycle can be split into four stages: introduction, growth, maturity, and decline. According to Vernon (1966), one of the pioneers with respect to product life cycle theory, production in a less developed country by a company from a developed country is only likely to take place in a late stage of the product cycle, which is no earlier than the maturity stage. In this study however, only 2 companies’ products were in the maturity stage. Furthermore, the stage of a company’s core products could be related to the developmental phase the company is in. According to Greiner (1998) a company’s development takes place in five phases. There is only one phase in the company development in which market expansion takes place, namely the third phase called delegation. The company should then be about half of its eventual size and mid-age. The companies in this study expanded however during three out of four of the product phases, which would cover several developmental phases. Thus, the empirical results of this study are not in line with the previous theory.
Reputational Risk
Results. Unlike expected, Company 6 is the only company that considers its brand name and reputation to be very much at risk when it would cooperate with a Chinese partner. This could be due to the type of product the company produces: it is an innovative company, dedicating a large amount of resources to research in order to be able to develop the most advanced products in Graphite Electrodes. As their website states: ‘Company 6 is known as the leading supplier of premium quality Graphite Electrodes.’ Today, its electrodes are used by steel makers over the world and have earned a reputation for their high quality and reliability. Maintaining its good reputation is therefore very important for Company 6, and apparently cooperating with a Chinese partner would pose a large threat to it. For the other companies it is not much of an issue. As Company 1’s Financial Manager says: The risk of image loss is not so important, international customers are not really interested in whom your partner is; questions are mainly regarding your quality control system. People do want to see the Chinese factory, so producing in China triggers some doubt, but this is with regard to quality, not to the partner.
Proposition 6: Reputational risk is not an important factor for the choice to cooperate with a foreign instead of a Chinese partner.
Discussion. A firm’s brand name and reputation are firm-specific assets. Usually, firms will have invested large amounts of money to obtain their current image. Therefore, they will try to avoid free-riding by other firms. The danger of cooperating with local partners lies in the fact that they have less to lose from brand degrading than the entering company does. Because IP protection is still an issue in China, Chinese partners are more likely to free-ride on a MNEs international reputation to attract customers, while they do not maintain the level of quality associated with the MNEs name (Deng, 2003). The dilution of the company’s reputation as a result of a local partner’s opportunistic behaviour can be seen as a substantial transaction cost. From TCA theory, this risk would therefore be expected to significantly influence the decision of companies to cooperate with a foreign instead of a local partner. However, as the results in this paper indicate, this is in general not considered to be an important issue.
5.2.2 Locational Concepts
Market potential
Committee, the joint WFOE between Company 5 and its partner was the first joint enterprise to receive approval in the Park. The other companies, except Company 6, partly see a first mover advantage. Company 6 is a little different from the others companies, because it already had a joint WFOE in China since 2002, in the same market. The 2006 joint WFOE is more of an expansion. Only for Company 3 and Company 4 does a joint WFOE partly provide a first mover advantage due to changed regulations. This can be explained by the fact that many service industries have only recently been liberated more in comparison with manufacturing. Keeping in mind the situation for Company 6, the entry mode choice of the companies has been highly influenced by the reduction in regulations as a result of the WTO entrance. For Company 5 this is however to a little lower extend than for the others, which could be explained by the fact that Company 5’s joint WFOE has been set up shortly after the WTO entrance. The changed regulations are likely to have taken some time to be implemented. Company 4 is the only company that considers its joint WFOE market intermediate competitive, the others see it competitive to very competitive. Furthermore, all companies indicated that the Chinese market provides enormous growth potential. To illustrate their expectations, a few comments are presented:
Company 1 and Company 2: the unexplored market in China could grow to a market of about €500 million within 5 years. The two companies have the ambition to obtain a market share of minimum 20%.
Company 3: The issue is no longer looking at China as a manufacturing location, but rather as a fast developing consuming economy.
As said by the partner of Company 4: We are highly focused on the China market, which is expected to become the largest economy in the world over the next 10 years.
Stated by the president of Company 5’s subsidiary in China: this co-investment not only shows our (both partners’) confidence in our own technological leadership in the global industrial gases industry, but also confidence in the growth prospects of China’s chemical industry.
partnership choice has been highly influenced by the reduction in regulations as a result of the WTO entrance, and it considers the entered market to be very competitive.
When asking TVI Pacific why they would choose China, it responded that the country has great potential, and is very attractive technically and has an improving commercial and legal environment. The legal, bureaucratic, and operational aspects are very frustrating, but the country is making progress in these regards.
Overall, it can be concluded that the Chinese markets provides a high level of market potential.
Proposition 7a: When made possible by a reduction in regulations, foreign companies seize the opportunity to cooperate with a foreign partner in China in order to cope with the competitive markets.
Proposition 7b: To fully exploit and appropriate China’s great market potential, companies adopt a joint WFOE mode.
the MNEs is small, and the government has decreased regulations, indicating a desire for foreign investment.
Investment risk
Results. All six companies have a surprisingly positive view on the development of the political, social, and economic conditions in China for the coming 10 years. They feel that this country-level concept is to be stable, unlike in the past. As said by Company 3’s President: we see it (the development) very stable. The desire for the Chinese government to grow economically is key. Additionally we see the desire of the growing Chinese middle-class to want western goods and style of living as the biggest factor. PWO also indicates a positive outlook.
Proposition 8: a more stable contextual outlook increases the likelihood of companies setting up a joint WFOE.
5.2.3 Internalization Concepts
Contractual risk
Results. Contractual risk is a hot item when related to China. Except for Company 3, all companies indicate that the level of contractual risk in China is higher than in their home country. Company 3 states that the level is about the same. This seems peculiar however, as the USA and China would be expected to have different levels of contractual risk. But possibly due to the specific industry, this is not the case. IP protection is an important element of contractual risk, and especially in China. The Chinese are infamous for their fondness of copying. This could provide a large risk for companies with specific technologies and/or products. However, as Company 1’s Financial Manager says: A lot has changed recently; the Chinese government also wants to be taken seriously on the area of IP protection, also by the WTO. Fact is that it is still a country of copying. I’m convinced that when at the moment you point out a clear infringement of IP, action will be undertaken, because the Chinese government wants to prove the world that she does something about it. This doesn’t mean you should not still be careful with it. However, avoiding the Chinese market because of the IP protection problem would cause more damage by the loss of not entering the market than the damage possibly done by copying.
Table 6: Contractual risk
Company 1 Company 2 Company 3 Company 4 Company 5 Company 6
choice for non-Chinese partner:
to lower risk of knowledge dissemination
to Chinese competitors no partly partly no n.a. partly
to create a front against upcoming Chinese
competitors no no partly no n.a. partly
similar Chinese partner could offer required
level of quality probably not probably not probably not probably probably not probably not
cutting costs. As a western company producing in China you have to specify the quality standards in detail, and then they do it. Good quality control is important.
Because of the needed strict quality control, costs could become significant when operating with a Chinese partner. When operating with a non-Chinese partner, local employees will still have to be monitored, but this is likely to be easier when both partners have the same quality aspirations. PWO indicated a higher level of contractual risk in China than in its home country, and thinks a local Chinese partner could not offer the required level of quality. For TVI Pacific, the motivation for cooperating with a foreign instead of a Chinese company would be amongst others the access to more advanced technology.
Proposition 9a: In the emerging Chinese market, foreign companies can not (yet) find a local partner that can provide the required level of quality to the partnership.
Proposition 9b: Knowledge dissemination risk and protection from Chinese competitors play a less important role in the choice to set up an enterprise with a foreign partner than the lack of qualitatively suitable Chinese companies.
Proposition 9c: In an environment with high contractual risk, companies prefer to cooperate with a foreign instead of a local partner.
Especially because of the low level of IP protection in China, this could be a very large concern (Deng, 2003). A joint WFOE provides the highest level of control (as well as a WFOE). In the results however, dissemination risk plays only a minor role, if any in the choice for a joint WFOE. Taking a broader view, market dominance is generally seen as a motivation for cooperation between companies (Pan and Tse, 1996). The goal of cooperation in this respect is to deter market entry of potential competitors to secure a high level of profitability. Apparently, this is not a main reason for the joint WFOEs. The last remark concerns the quality aspect. This is the most important reason in choosing a non-Chinese partner with relation to contractual risk. Entry mode research has paid attention to the issues in finding a good partner firm, but this has been mainly related to control issues and cultural differences (for example Hanvanich et al., 2003; Ogasavara and Hoshino, 2007). The fact that there may simply not be a firm providing the appropriate level of quality for the partnership has often been overlooked (see Al-Khalifa and Peterson, 1999). It can be concluded that traditional reasons for excluding a local partner are not that important for the companies in this research.
Culture
Results. Culture in this paper is incorporated to see in how far the case companies prefer to minimize cultural differences and therefore do not cooperate with a Chinese company.
Table 7: Culture
Company 1 Company 2 Company 3 Company 4 Company 5 Company 6
Would smaller cultural differences make joint WFOE implementation faster?
yes, a little no yes, a little yes, a little yes, a little yes, very much Do you prefer to work in an
environment with minimized Chinese influences? not very important not very important preferred not very important not very important much preferred
For PWO, Chinese cultural influences are not very important, and implementation is expected to go a little faster with smaller cultural differences. Mr. Ybema says the following about cultural differences: They always play a role, but are often overstated. For example, when a Sino-Foreign joint venture is losing money it is often blamed on cultural differences, while when it is making a profit, it is usually a result of the unbridled talent of the general director…
Proposition 10a: A foreign company’s choice to set up an enterprise in China with a foreign partner is only moderately influenced by the desire to minimize cultural differences.
Proposition 10b: Smaller cultural differences between the partner companies speed up enterprise implementation a little.
transfer possible for both partners. In a similar way, an enterprise between two companies that are more alike and with the same goal will be faster in getting their enterprise up and running. This is somewhat in contrast with the often cited advantage of a local partner, namely the easier establishment because of the local knowledge of regulations and less restrictions (Mechem, 2004). From the previous, cultural differences could be seen as a transaction cost, as it appears to hinder the transfer of knowledge and capabilities between companies. This will especially be the case with tacit know-how. According to internalization theory, the companies would try to minimize the transaction cost (Madhok, 1997). In order to make this transfer of know-how as efficient as possible, internalizing the transaction seems the best option. From an organizational capability perspective the cost of deploying and developing essential capabilities in-house is critical because the costs of replicating knowledge within the firm relative to its market transaction influences the choice of entry mode (Lou, 2001). The joint WFOE seems a way to minimize these replication costs. However, the results indicate that cultural differences do not have much influence on the entry mode choice.
Need for speed
Results. This industry-level concept is related to the time pressure experienced by the case companies from the risk of copying in their market by Chinese competitors.
Table 8: Time pressure
Company 1 Company 2 Company 3 Company 4 Company 5 Company 6
Degree of time pressure from
Chinese copying? high high low moderate n.a. high
The level of time pressure from the copying risk is perceived quite differently among the companies. Company 4 and Company 3 operate in the services industry, the others in manufacturing, which could perhaps explain the low and moderate level for Company 3 and 4. PWO however also indicated a low degree of time pressure, although it operates in manufacturing. It specifies the competitive advantage of its partnership as technology. Perhaps this technology is hard to copy for Chinese competitors, therefore not posing a short term time pressure. Overall, there is no clear indication that time pressure significantly influenced the entry mode choice.
Proposition 11b: The time pressure experienced by foreign firms as a result of the risk of copying by Chinese competitors does not influence the choice for a joint WFOE.
Discussion. The Chinese are known to be quick to replicate products, and this can be expected to put pressure on the time to market for a company’s products. Some products are easier to copy than others, and in the services industry it is much more difficult. Howells and Tether (2004) show in their survey study that service firms see ‘ease of copying’ as a low barrier to innovation, as innovations in services are often more indirect and tacit and therefore more difficult to copy. In general, when companies have a high need for speed, in this case due to the risk of copying, exporting and acquisitions seem the more appropriate modes. Exporting as well as acquisitions are fast modes because no new facilities are needed (Teng, 2004). The joint WFOEs set up by the three companies experiencing a high level of time pressure are in contrast with this reasoning.
5.2.4 Other concepts
Two other interesting aspects which emerged during the cross-case analysis were the targeted market and the goal of the joint WFOE.
Targeted market
Results. For most companies, the joint WFOE is part of an Asian expansion strategy and not limited to accessing China. The Chinese market is an important target market, but making use of the joint WFOE for further expansion into Asia is often part of the motivation for China as well. For PWO, the focus is also on Asia.
Table 9: Targeted market
Company Strategy is focussed on:
Proposition 12: Companies with a strategy targeted beyond China are more likely to choose a foreign instead of a local partner to set up an enterprise in China.
Discussion. It appears that the joint WFOE is often not only set up to enter the Chinese market, but also to provide an access point for other Asian countries. As firms assume a regional or global strategy, the choice for the joint venture partner is not confined to the scope of a specific market and therefore no longer based on a single country. It becomes less meaningful to team up with a Chinese or a Malaysian partner when the firm is focussed strategically on Asia as a whole. Apparently, the host country partner role is getting less important, being substituted by a partnership between two, or more, foreign firms that have the same regional and global strategic intentions (Pan and Li, 1998). From bargaining power theory, the foreign firms obtain a stronger position, as the dependence on the local country decreases (Lou, 2001). This makes a high investment mode more likely. The organizational capability perspective indicates that in an environment with intense global competition, and fast, complex technological development, MNEs often perceive themselves to be insufficiently equipped to remain competitive if they rely only on their own capabilities. As a result, these firms feel a stronger need for their knowledge to be reinforced and complemented through collaboration (Madhok, 1997). Combining the above, the choice for a joint WFOE in this situation is supported.
Joint WFOE goal
Results. To better understand the rationale for the joint WFOE, the goals of the joint WFOEs as described by the investing companies are provided below.
Table 10: Joint WFOE goal
Company joint WFOE goal
Company 1 - - good for the relationship with the important licensing partner Company 2 the whole factory will use the company's technology, this will produce royalties - to be able to show third parties in a working factory that Company 1 is able with its
technology to produce crates and big boxes; a business card.
Company 2 Exploit product range in the new Chinese market, obtain 20% market share
Company 4
We are very pleased to enter this new strategic relationship with …( the joint WFOE partner). We believe this joint venture will play a significant role in allowing us to achieve our goal of becoming the leading provider of research and development services in markets outside of the U.S.
Company 5
- to become a solid and reliable industrial gases supplier to all chemical companies in the Park. - The Shanghai Chemical Industry Park has been very successful in attracting world-class chemical companies, many of which are already our (Company 5’s) customers outside China. The implantation of …( the joint WFOE) will allow us to continue to provide high quality service to them in China.
Company 6 The aim of the joint WFOE is to strengthen competitiveness and develop the business in Asia to meet growing demand
For PWO the partnership is part of their international growth strategy, and it wants to capture a substantial higher share of the growth market.
Thinking one step backwards, the case companies apparently felt that they needed a partner in order to achieve the goals they had in mind. As can be seen from the table above the joint WFOE goals are long term oriented and strategic. This may motivate why although, as found earlier, the pooling of financial resources does not seem to be a reason to join forces, the chosen partners do offer complementary activities and knowledge. Company 1 for example brings in the technology and Company 2 the production equipment and experience. Company 5 and its partner each focus on the development of a specific plant, in order to provide a broad range of products and services, and Company 4 combines its good international reputation with the local knowledge and connections of its partner to achieve its goal.
Proposition 13: the choice for a joint WFOE becomes more likely as companies adopt a more long term, strategic focus with respect to China.
companies overall strategy, the intentions of the joint WFOE change. As explained by Dunning (2000) this is related to the emergence of alliance capitalism. In the 1970s, the unique competitive advantage of firms mainly focussed on their ability to produce and organize proprietary assets internally and to find a match between these assets and the needs of the markets. However, since the turn of the millennium, the focus is more on the firms’ capabilities to access and organize knowledge intensive assets from all over the world, and to integrate these with their own existing competitive advantages as well as with those of other firms involved in complementary, value added activities.
