W49 Child article

Predicting the Performance of International JointVentures: An Investigation in China*

John Child and Yanni YanUniversity of Birmingham; City University of Hong Kong, Hong Kong

Organizational learning, resourcing and control have been identified inthe literature as potential firm-level influences on the performance of internationaljoint ventures (IJVs). The study reported here examines the impact of these factorson the performance of Sino-foreign IJVs. Their performance is assessed in terms ofboth goal and system criteria. The hypothesized performance determinants arefound to be more strongly associated with variance in system performance than ingoal performance. The main performance predictors are the parent companiesexperience with international business and joint ventures, and the quality ofresources they provide to the joint ventures in respect of capital investment, newfacilities and operational inputs. When good quality resourcing is provided, thesharing of control with local partners also predicts higher IJV performance. Theperformance effects of these factors appears to be cumulative, implying that furtherresearch should examine them together rather than singularly.

INTRODUCTION

The performance of international joint ventures [IJVs] continues to be a chal-lenging issue, both from the standpoint of practitioners and of researchers on thesubject. The collaborative nature of joint ventures places constraints upon theactions any one partner can take ( Janger, 1980), and even the sincerity of apartners long-term commitment to the collaboration can be in doubt (Bleeke andErnst, 1995; Hamel, 1991). The influence of different cultures in the case of IJVsadds to the risk of misunderstanding and failure in cooperation. For academicresearchers, the hybrid nature of joint ventures (Borys and Jemison, 1989) and thepossibility of incongruence between the goals of their partners, renders both theevaluation and prediction of performance hazardous (Beamish and Delios, 1997).

Journal of Management Studies 40:2 March 20030022-2380

Address for reprints: John Child, Department of Commerce, Birmingham Business School, Ashley Build-ing, University of Birmingham, Edgbaston, Birmingham B15 2TT, UK ( [email protected]).

Blackwell Publishing Ltd 2003. Published by Blackwell Publishing, 9600 Garsington Road, Oxford, OX4 2DQ,UK and 350 Main Street, Malden, MA 02148, USA.

It is fair to say that there is, as yet, no consensus on the determinants of IJV performance.

The legacy of traditional cultures and the absence of developed institutionalsystems add to the difficulties of achieving IJV success in emerging economies, ofwhich the largest is China (Beamish, 1988; Peng, 2000). Since 1992 China hasranked second only to the United States as a host country for FDI (UNCTAD,2000), most of which has been implemented through IJVs (State Statistical Bureau,2000). China offers a particularly instructive location in which to examine IJV per-formance not only because of the large number of IJVs there but also becausethe performance record of Sino-foreign joint ventures is quite variable (Beamish,1993; Pan and Chi, 1999). While there are examples of highly successful Sino-foreign joint ventures (Shenkar and Nyaw, 1994), more recent surveys suggest thatmany foreign firms are disappointed by the performance they are achieving inChina (EIU, 1997, 1999a, 1999b; Wonacott, 1999).

Various explanations are being offered for the problems of IJV performance inChina. Exogenous factors such as increasingly tough price competition, and anuncertain regulatory and tax environment, tend to be singled out for blame(Yatsko, 1997). Compared to developed countries, and even to some other emerg-ing economies like Brazil, Chinas legal, corporate governance and other institu-tional systems are underdeveloped, as are its infrastructure, resource supply andmanagerial competencies (World Economic Forum, 2000). China is a relativelycomplex and uncertain environment, which presents several performance risks toforeign firms operating there.

Explanations purely in terms of environment, however, refer to the difficult situation facing China-based IJVs as a whole, and do not necessarily account forvariations in performance between them. The ways in which IJV partners mightrespond to risks in the environment point to the potential performance impact ofendogenous (firm-level) factors. These are more likely to account for variations inperformance between IJVs themselves. One response to the risk presented by envi-ronmental complexity and uncertainty is to attempt to reduce it through the exer-cise of greater control, both over the environment (such as through politicallobbying) and over IJVs themselves (Boisot and Child, 1999). Many larger foreigncompanies in China have been adopting this approach. During negotiations forChinas WTO entry, they lobbied their governments to get conditions in Chinaeased. Within China, they have been securing dominant positions in their existingjoint ventures, and establishing new investments as wholly-owned subsidiaries(Vanhonacker, 1997). The alternative approach is to absorb the risk presented bycomplexity by maintaining flexibility of response through developing a range ofoptions, as recommended by real options theory (McGrath, 1999). This places apremium on working with local partners and sharing control with them.

Working with partners is also a way for foreign IJV partners to enhance theirlearning about an opaque local context. The experience of working with IJV part-

284 J. Child and Y. Yan

Blackwell Publishing Ltd 2003

ners, in China or elsewhere, should also enhance the ability to learn from, andadapt to, new and evolving contexts. A further risk for IJV performance arises fromthe resource deficiency that China still experiences, especially in regard to capital,advanced technology, training and sophisticated components. If IJV resource defi-ciencies can be reduced, their performance is expected to benefit.

Thus, learning, quality of resourcing, and control are potential ways of address-ing the risks presented to IJVs by an emerging economy environment like China.Their role as potential predictors of IJV performance is the focus of this paper.Though deriving from China, its findings have implications for other developingand transition countries that present similar risks. The paper begins by addressingthe concept of IJV performance. It then formulates hypotheses on endogenousperformance predictors in the light of available theory and research. The hypotheses are examined and discussed with reference to research in a sample of Sino-foreign joint ventures.

This paper departs from existing work in four significant ways. First, the con-ceptualization of IJV performance adopted is broader than usual and takes intoaccount both goal and system perspectives. Second, it covers a range of firm-levelfactors that are identified by different theoretical perspectives as potential influ-ences on IJV performance. Much previous research has focused either on primarilycontextual factors such as market concentration or has adopted a single theoreti-cal perspective on firm-level factors. There is, however, considerable evidence thatcomplex relationships can usually be better understood when viewed through morethan a single theoretical lens (e.g. Allison, 1991; Gray and Wood, 1991). Third,the present study examines the contribution to IJV performance made by bothmain alliance partners, Chinese and foreign, whereas often the characteristics onlyof MNEs or other foreign-investing firms have been taken into account. Finally,the sample is drawn in a way that permits a control for both sector and foreignparent nationality.[1]

CONCEPTUALIZATION AND ASSESSMENT OF IJVPERFORMANCE

There are two main perspectives on IJV performance, deriving from a distinctionoriginally made by Seashore and Yuchtman (1967). The first takes as its criterionthe extent to which the goals expressed in the parent companies objectives forthe venture are met. Goal performance is therefore defined as the extent to whichthe objectives that each parent company has in forming an IJV are realized inpractice. The second perspective takes as its criterion the health of the IJV inrespect of its viability as an operational system. System performance is there-fore defined as the extent to which an IJV performs well as a business unit. Bleekeand Ernst (1993) consider that an alliance is successful if it passes two tests thatbroadly accord with these two perspectives on IJV performance. The first test is

International Joint Ventures 285


that both partners achieve their in-going strategic objectives; the second that bothrecover their financial costs of capital.

One of the arguments in favour of applying the goal perspective is that jointventures are formed for a variety of reasons, and it is therefore not legitimate toassess their performance by reference to a sole indicator and/or in a way that pre-judges parent company objectives. Some previous studies have examined jointventure performance from the viewpoint of a single partner, normally using per-ceptual measures applied to the attainment of that partners goals (Beamish andDelios, 1997). A lesser number have included performance evaluations in terms ofan assessment of both or all partners goal attainment, arguing that only wheneach partner is satisfied can the joint venture be considered successful (e.g.,Beamish, 1984; Hill and Hellriegel, 1994; Schaan, 1983). A problem is that manyalliances are asymmetric in partner objectives and/or power, which means thatthe partners are unlikely to meet their objectives to a similar extent. This may indi-cate that the alliance has failed in terms of one partners goal attainment, but itdoes not necessarily mean that an IJV established by the alliance has failed eitherin terms of another partners criteria or as a business unit.

The counter argument in favour of the system perspective is in fact that IJVsare, in principle, established as separate legal entities to operate as viable businessunits. Over the course of time they may increasingly formulate their own strate-gies as a condition for prospering in their own environments, and this is the basison which they can satisfy parent goals as well. Lyles and Reger (1993) provide acase study of how an IJV developed in this way. The argument that IJVs areexpected to hold their own under competitive conditions speaks in favour of eval-uating their performance on the same basis as unitary firms. This also avoids thecomplication that parent goals for joint ventures can conflict or may become obso-lete. Moreover, parent goals can amount to aspirations that are not expressed interms of resources actually committed to an IJV, and applying indicators of itshealth as a system may reveal this gap. Since each perspective throws light upondifferent aspects of IJV performance, there is a strong case for adopting both. Theconceptual objection to system criteria that they may not adequately reflect parentgoals for an IJV is best addressed through a comparison of both goal and systemcriteria. Only this will indicate whether they provide different interpretations and,if so, to what extent. It is one of the strengths of the study reported in this paperthat it adopts both goal and system performance perspectives.

Early studies of IJV performance used a variety of financial measures typicallyemployed in business research, such as profitability, growth and costs. Other objec-tive measures used include survival and stability of ownership (Geringer andHbert, 1991). These have somewhat fallen out of favour due to their conceptuallimitation in addressing only a limited range of goals, to problems of data unavail-ability, and to distortions associated with transfer pricing and creative accounting.Problems of data access and measurement have led some researchers away from



objective measures and towards subjective alternatives based on managers per-ceptions of performance. Beamish and Delios (1997) conclude from their reviewthat perceptual and objective measures of IJV performance are generally corre-lated. These considerations suggest that perceptual measures of performance aresuitable for research purposes.

THEORY AND HYPOTHESES

Three influential perspectives refer respectively to the impact of organizationallearning, resource-provision and parent control upon IJV performance. They pos-tulate that performance will benefit from a higher quality of learning and resource-provision. However, the arguments regarding the impact of parent control aremixed. The hypotheses derived from these perspectives are in principle generallyapplicable, though the following discussion indicates that some may be expectedto apply with particular force in a developing economy context like China.

Learning

IJVs bring additional dimensions of management into play compared with purelydomestic and unitary enterprises. The relationships to be managed are morecomplex, because of the hybrid nature of joint ventures per se (Borys and Jemison,1989) and the mix of corporate and national cultures in IJVs (Shenkar and Zeira,1992). Extra managerial competencies are required (Barham and Oates, 1991;Beamish et al., 1994), including a broader strategic vision to reflect parentcompany objectives (Yoshino and Rangan, 1995), a capacity to handle culturaland institutional differences (Tung, 1993), and an ability to transfer hard and softtechnologies to the IJV (Child and Faulkner, 1998). The challenge for an interna-tional company is even greater when its IJV is located in a developing countrysuch as China, which has significant resource deficiencies and an unfamiliar envi-ronment (Beamish, 1988; Schaan and Beamish, 1988). These considerations implythat IJV success requires considerable competence and knowledge, some of whichcan be learned from previous or ongoing experience.

The results of studies conducted thus far largely support the thesis that learn-ing by organizations enhances their performance (Luo and Peng, 1999; Moingeonand Edmondson, 1996). Three aspects of learning are likely to have particular relevance for the specific case of IJVs. First, there is learning from experience. This isa transfer to a new IJV of relevant knowledge acquired by parent company per-sonnel from their previous experience of joint ventures and international business.Second, there is formation learning. This takes place in the process of seeking andnegotiating terms with new partners; the more extensive and thorough that processis, the greater the learning opportunity it provides. Third, there is operational learning, which is learning how to work effectively with one or more partners in the



subsequent operation of an IJV. The amount of learning required is likely to begreater when the joint venture partnership crosses national boundaries, especiallyif the host location is a developing transition economy like China in which theenvironment is turbulent and many local partners have had little previous experi-ence of working or trading with foreign counterparts (Boisot and Child, 1999; Luoand Peng, 1999).

Learning from experience. The expectation from organizational learning theory is thatprevious relevant learning eases the acquisition and application of new relatedknowledge (Cohen and Levinthal, 1990). Thus the more that parents have alreadyacquired IJV-related knowledge, and the skills to apply it, the more their subse-quent IJVs are expected to benefit (Barkema et al., 1997; Inkpen, 1995; Lyles,1988). This reasoning helps to explain why previous experience of forming IJVshas been found to increase firms propensity to form new ventures (Gulati, 1998;Madhok, 1997). The implication is that parent companies previous experienceboth of international business and of IJVs has the potential to confer benefits forIJV performance. Previous experience should assist companies to develop realis-tic expectations and avoid gross mistakes when establishing and managing furtherinternational ventures. This experience is potentially relevant both to the realisticsetting of IJV goals, and hence to goal performance and to subsequently managing IJVs effectively as business units (system performance).

However, evidence concerning the impact on performance of previous inter-national business and joint venture experience is mixed. Li (1995) found thatforeign investment experience reduced the risk of failure in subsequent interna-tional expansion. Firms do not, however, always capitalize on previous interna-tional venturing experience, and indeed it may not be always relevant (Simonin,1997). Thus, Harrigan (1988) found that previous venturing experience added littlepredictive power in regression models of joint venture success. Inkpen (1995)reported that previous joint-venture experience by partners of ventures withJapanese companies did not benefit their ability to learn from the collaboration,possibly because cooperation with Japanese partners introduced new conditions(cf. Hamel, 1991). Assessing IJV performance in terms of survival, Barkema et al.(1997) found that previous experience with domestic JVs and international wholly-owned subsidiaries contributed to IJV longevity, but that prior experience withIJVs per se did not.

This last study suggests that the type of previous experience matters. An IJVpartner could have previous experience of JVs with or without experience of inter-national business relations, and vice versa. Moreover, there are various kinds ofinternational business experience, such as trading, technology transfer, jointventure or a wholly-owned subsidiary. While only the latter two imply experienceof managing in a foreign country, international experience across the categoriesmight have a cumulative learning effect. One might therefore expect that both



international business experience and international JV experience will benefit IJVperformance. Moreover, since IJVs are partnerships, it is relevant to take the ex-perience of both partners into account, though many previous studies have notdone so. Luo (1997) examined the performance effects of local partner attributesand found that Sino-foreign IJVs whose local partners had previous internationalbusiness or investment experience performed better. We therefore propose:

Hypothesis 1: IJVs whose parent companies have previous experience of inter-national business and of IJVs will have higher levels of performance than IJVswithout this parent experience.

Formation learning. The normative literature on joint venture partner selectionstresses the importance for subsequent IJV performance of the care each partnertakes to learn about the other and to assess its suitability (Bronder and Pritzel,1992; Tallman and Shenkar, 1994). Suitability may be in terms of both strategicand organizational characteristics, including the complementarity of partnerobjectives and assets (Geringer, 1991), the strength of the business each partnerbrings to the IJV (Lorange and Roos, 1992), and the compatibility of their cul-tures and key managers (Kanter, 1994). A central notion in the literature is that arealization of the potential benefits to a firm from forming an IJV depends on itsfinding a partner who can provide complementary capabilities that match its ownand enable the IJV to meet the firms strategic objectives (Buckley and Casson,1988; Geringer, 1991). Particularly in a developing country, there may be limitedpublic information on the attributes of potential local partners, and this makestheir search and assessment a more critical learning process for foreign compa-nies. IJV performance should also benefit from care by local companies in partnersearch and assessment, since many of them will not be very familiar with foreigncompanies. These considerations suggest that a longer period of search and inves-tigation by the partners before forming an IJV will be conducive to its better performance in both goal and systems terms, as will the effort to assess and discusswith alternative partners before making a final selection (Bjrkman 1996; Grayand Yan, 1997). Therefore:

Hypothesis 2: IJVs whose parent companies spent a longer period of search andinvestigation before formation, will have higher levels of performance.

Hypothesis 3: IJVs whose parent companies assessed alternative partners beforeformation, will have higher levels of performance.

Operational learning. This third type of organizational learning implies that thelonger an IJV has been operating, the more opportunity there will have been forits members to learn how to achieve congruence between partner goals, to estab-



lish a strategic profile for the venture, and to accommodate cultural and otherpartner-related differences. A longer operational history should denote that an IJVhas been able to avoid or resolve severe conflicts over both the attainment ofpartner goals and the way it is going to be managed. Unless it fails in its relativelyearly stages, an IJV is likely to move up a learning curve. In other words, longeroperation should have a positive effect on both goal and system performance.Evidence from US-partnered alliances suggests that a critical period comes atabout two or three years of life, by which time an unsatisfactory relationship shouldhave become evident (Bleeke and Ernst, 1995; Park and Russo, 1997; Troy, 1994).Harrigan (1988) concluded that joint ventures of longer standing tend to achievebetter performance. Luo and Peng (1999) found that the number of years an MNEsub-unit had been operating in China (intensity of experience) was positivelyrelated to its performance. A survey by the Berger consulting group also foundthat the average age of successful German companies in China was greater thanfor less successful ones (Berger and Partner, 1998). Therefore:

Hypothesis 4: The longer the time that an IJV has been in operation, the higherwill be its levels of performance.

Quality of Resource Provision

The resource-based view of the firm stresses the contribution that possession ofkey resources and competencies can make to the system performance of firms(Barney, 1991; Rumelt, 1984; Wernerfelt, 1984). This perspective singles out, as asource of economic rent, the strategic value of possessing distinctive resources thatare costly to imitate. The deployment of such resources to an IJV should meanthat its competitive advantage can less easily be duplicated by rivals (Reed andDeFillippi, 1990). Despite the intense interest in the resource-based view of thefirm, the concept of resource lacks an agreed operational definition and its appli-cation to strategic alliances has covered only limited aspects (Conner, 1991; Combsand Ketchen, 1999; Das and Teng, 2000). Barneys definition for example, is comprehensive but not operationally precise: firm resources include all assets,capabilities, organizational processes, firm attributes, information, knowledge, etc.controlled by a firm that enable the firm to conceive of and implement strategiesthat improve its efficiency and effectiveness (1991, p. 101). Grant (1991) classifiesresources as tangible, intangible and personnel-based. Tangible resources includefinancial reserves and physical resources such as plant, equipment, and stocks ofraw materials. Intangible resources include technology, know-how and reputation.Personnel-based resources include the skills, expertise and motivation of em-ployees. Organizational capabilities may also be included within this third cate-gory, since they constitute the prime resource provided by managers (Russo andFouts, 1997). This classification suggests that key resources parent companies can



provide to a joint venture include capital, plant and technology, know-how and tech-nical support, investment in its human resources, and organizational capabilities.

In a developed economy, the partners to an IJV face a relative rather than anabsolute shortage of resources and competencies. Discussions of IJV performancehave therefore tended to be couched in terms of how partners share and controlthe resources they provide, and combine them distinctively, rather than in termsof fundamental resource quality (Hamel, 1991; Mjoen and Tallman, 1997). Devel-oping and transition economies are, however, closer to absolute rather than rela-tive resource deficiency. Thus, although the situation is now easing somewhat,China has been short of the capital, technology and expertise required to sustainits rapid economic development, and has looked to foreign-invested firms toprovide these (Peng, 2000). The production technology, product design, expertiseand training supplied by foreign IJV partners are typically superior in quality andefficiency to those available locally (Pan, 1996). The quality of resourcing by foreignpartners is therefore likely to be particularly critical for IJV performance in thecontext of China and other developing and transition economies, simply to enablethe IJVs to attain international standards. Similarly, Steensma and Lyles (2000)concluded from a study of 121 Hungarian manufacturing IJVs that within tran-sitional economies the support of the foreign parent in terms of technology andmanagerial know-how contributes significantly to IJV performance and survival.Lyles et al. (1999) found similarly that foreign parent assistance in terms of capital,technology and expertise was the main predictor of higher performance among asample of IJVs in Malaysia.

Capital investment in new facilities by foreign joint venture partners shouldenhance the capacity, efficiency and quality of IJV production in a developing tran-sition economy like China. New facilities should further contribute to improved IJVperformance by providing the opportunity to recruit and train employees de novofrom the market, rather than have people allocated to the IJV who are alreadyemployed in existing facilities by the Chinese partner. Existing employees are moreliable to bring with them attitudes and work practices from the old featherbeddediron rice bowl regime (Warner, 1995). Plant and equipment supplied by theChinese partner as a capital contribution is likely to constitute a performance liability because it is generally obsolete and weakens the asset base of the IJV.Training in Sino-foreign IJVs is overwhelmingly organized by the foreign parent orits staff and is expected to facilitate the transfer of technology, improved techniquesand superior management practices. These considerations lead to:

Hypothesis 5: The higher the quality of resources provided by foreign (interna-tional) parent companies, the higher will be IJV performance.

Barney (1991, p. 110) has noted that a firms resources may constitute a verycomplex social phenomenon, which includes external relations with suppliers and



customers, as well as internal relations. External transactions can in China be asource of major uncertainty (Boisot and Child, 1999; Martinsons and Tseng,1995). Parent companies may therefore favour direct supply to their joint venturesso as to ensure quality, technical integrity and reliable delivery. Direct supply can, of course, also provide an opportunity for transfer pricing that is advanta-geous to the parent company, though not to the IJV itself. If parent companiesabsorb a substantial proportion of joint venture output, this can similarly relievethe venture of uncertainties due to underdeveloped local markets and distributionsystems.

The external transactions of Sino-foreign IJVs are in this sense complex socialphenomena that some parent companies may decide to handle directly in orderto reduce uncertainty and in this way enhance the operational performance oftheir IJVs. The integration of input and output transactions between an IJV andits parent companies also offers channels for mutual learning and adjustmentbetween the two parties. Direct supply, in particular, permits knowledge transferfrom parent companies to IJVs through the provision of technical designs andother know-how, as well as through the support of parent company staff that islikely to accompany direct supply arrangements. These are all potential advan-tages of internalization (Buckley and Casson, 1976, 1996; Hymer, 1976) that areexpected to improve IJV performance. There may be variation between sectors inthe inputs and outputs for which parentIJV integration has the most performanceconsequence, in the light of specific technological requirements and market conditions. Nevertheless, the general proposition is that there are performanceadvantages in parents supplying superior inputs and helping IJVs to avoid marketuncertainties. Therefore:

Hypothesis 6: IJVs which transact their inputs and outputs directly with theirparent companies, will have higher levels of performance.

Parent Control

The third perspective is concerned with the ability of IJV parent companies tocontrol IJVs in a manner that is conducive to good performance (Barkema et al.,1997; Geringer and Hbert, 1989; Yan, 2000). There are two main reasons forexpecting that dominant control of IJVs by one parent will contribute to superiorperformance. First, the proposition advanced by Killing (1983) that joint ventureshaving dominant control by one partner will be more successful because theyapproximate to a unitary firm and are easier to manage. Second, control offers anability to determine the most effective use of whatever strategic resources a parentcompany shares with an IJV. This is an argument in favour of leaving IJV controlin the hands of the parent that supplies the most critical resources and has thegreater expertise, an arrangement which should best permit those assets to con-



tribute to IJV performance (Mjoen and Tallman, 1997). Further arguments areadvanced to the effect that benefits will accrue to the IJV parent which exercisesstrong control. Geringer and Hbert (1989) suggest that the exercise by a parentcompany of control over some or all of an IJVs activities helps to protect it fromthe risk of prematurely exposing its technological or other proprietary assets toother partners. A related argument is that the threat of an initially weaker IJVpartner gaining a future competitive advantage through a superior ability to learnfrom collaboration also increases the need to control activities and informationflows in the IJV (Hamel, 1991; Makhija and Ganesh, 1997).

On the other hand, one reason for companies to form joint ventures is that theyhope to remedy a resource deficiency or to take advantage of an opportunity thatthey cannot realize on their own. If this is the case, a policy of dominant controlmay vitiate the contribution a partner can make for two reasons. It may damagethat partners willingness to contribute to what it regards as an unequal partner-ship in which its own goals are not given due weight. The level of trust and qualityof relationship between the partners is likely to suffer. Second, unequal controlmay also limit the dominant partners receptivity to advice and information offeredby the weaker partner. Finding that IJVs with 50/50 ownership achieved superiorgoal and system performance, Bleeke and Ernst (1993) stressed the benefits ofstrong management within an alliance rather than the argument in favour of strongmanagement over an alliance. They concluded that shared IJV ownership andcontrol builds trust by ensuring that each partner is concerned about the otherssuccess (1993, p. 28).

Beamish (1988, 1993) reviewed studies, including his own, on the controlper-formance link in developed and developing country alliances. Several of theseinvestigations concluded that when alliances are formed between developed andless-developed country partners, there tends to be a positive association betweensatisfactory performance and shared control between the foreign and local part-ners. The argument is that a sharing of control with local partners will lead to agreater contribution from them which can assist in coping with circumstances thatare unfamiliar to the foreign partner, and therefore result in a higher return oninvestment.

Killings (1983) findings were in a competitive Western context, with relativelytransparent information and rules, where a clear unified approach to IJV man-agement might well have an advantage. China, however, is a developing transitioneconomy that presents complex and unfamiliar conditions for foreign investors(Boisot and Child, 1999). Dominant control by foreign parents who are not fullyinformed of, or networked into, this kind of context might be expected to lead tobelow optimum levels of IJV performance. Chinese partners can help their IJVsto succeed by providing country-specific knowledge, contacts with regulatoryauthorities, and management of the local workforce (Inkpen and Beamish, 1997).Complementarity between foreign and Chinese partners is likely to be achieved



less in the area of tangible resources, where the foreign partner usually has a largeadvantage, than in the management of an unfamiliar and dynamic environmentwhich can appear hostile because its institutional and cultural features are nothighly transparent (Teagarden and Von Glinow, 1990). Moreover, the costs ofemploying expatriate managers to take charge of management in Sino-foreignIJVs can substantially eat into their profits (EIU, 1995).

Nevertheless, some practitioners and writers have recently voiced the opinionthat these uncertainties can be mastered and Chinese partners make such a limitedcontribution by way of resources and managerial competence that they are moretrouble than they are worth. The conclusion is that foreign firms should takecontrol (Vanhonacker, 1997), and there has been a clamour for investment controlby many of the foreign companies in China (Shaw, 1998). To quote a recent comprehensive report by the Economist Intelligence Unit (1999b, Chapter 9,pp. 1011):

Foreign investors now opt for the WFOE [wholly foreign-owned enterprise]option whenever possible, loth to entangle themselves in what will almost cer-tainly be an unhappy union . . . The balance is also changing among existingventures as foreign multinationals aggressively buy out useless joint-venture part-ners to bring their investments toward profitability.

Evidence on the performance consequences of shared IJV control as opposed todominance or whole-ownership is mixed both for China and for other parts of theworld. In the case of China, a large-scale survey using data from the 1995 indus-trial census concluded that while WFOEs on average achieved a higher marketshare than did equity joint ventures, they had an inferior level of profitability (Panet al., 1999). This finding for profitability is supported by more detailed data fromJiangsu Province (Luo, 1996). An EIU/Andersen Consulting study found that themost profitable Sino-foreign joint ventures had a lower average foreign equity share(54 per cent) than did the unprofitable ones (68 per cent) (EIU/Andersen Con-sulting, 1995, p. 24). Beamishs (1993) review of studies also suggested that inChina shared control is conducive to better IJV performance.

On the other hand, Wang et al. (2000) found that foreign partner rights to keymanagerial appointments in joint ventures were associated with greater satisfac-tion with JV performance among both foreign and Chinese managers. Hu and Chen (1994) found from a survey of 382 Hong Kong subsidiaries and ventures operating in China, that wholly-owned subsidiaries were more likely to be successful than equity joint ventures or those based on contractual agree-ments. This again suggests that sole management control has performance advan-tages. The results must, however, be treated with caution since there were only 27wholly-owned subsidiaries in the sample, and very indirect measures of perfor-



mance were employed: duration of the alliance and total partner investment in it. Yan and Gray (1996), in their study of Sino-US joint ventures, assessed performance in terms of the extent to which joint venture general managers ordeputy general managers perceived each parent companys strategic objectives tohave been achieved. Path analysis suggested that the higher the level of opera-tional control a parent company exercises in the joint venture relative to its partner,the greater the extent to which that parent is perceived to be achieving its objectives.

Although evidence on this issue is mixed, the dominant control hypothesis forChina may be formulated as follows:

Hypothesis 7: IJVs in which the foreign parent has dominant control will havehigher levels of performance.

The three perspectives concerning the hypothesized influence of learning, qualityof resourcing and control on IJV performance, and the main variables they iden-tify, are summarized in Figure 1. These variables primarily concern the contribu-tions that parent companies can make to IJV performance.



Quality of Resourcing

H5. Capital, facilities & training

H6. High transactional integration withparents

Learning

H1. Learning fromexperience

H2 & 3. Formation learning

H4. Operational learning

Control

H7. Dominant foreign control

IJV Performance

Goal performance System performance

+

+

+

Figure 1. A summary of hypothesized endogenous influences on IJV performance (H refers to thecorresponding hypothesis)

METHOD

Sample

Table I provides profile information on the sample consisting of 67 manufactur-ing IJVs formed between Chinese and foreign owning companies. It is stratifiedby sector and foreign parent origin to permit these parameters to be controlled inview of the difficulty of achieving this statistically with a field-based methodologythat limits the total number of cases. The IJVs were chosen from two sectors:electronic and telecommunications equipment, and fast-moving consumer goods(FMCG). At the time of the study, these sectors were respectively the first and



Table I. Profile of IJVs

Anglo-Saxon1 Continental European2 Japanese Overseas Chinese3 Total

Electronics4 8 9 8 8 33FMCG5 9 8 8 9 34Total 17 17 16 17 67

Distribution of foreign equity share 2595%6

Foreign MNC parent companies 29 (43%)Number of foreign parent companies

One 57Two 10

Number of Chinese parent companiesOne 44Two 17Three 4Four 2

LocationBeijing/Tianjin7 26Shanghai region 18Guangdong 23

Years of IJV operation 215Average IJV employment 392Distribution of IJV employment 343072Average % expatriates in total IJV employment 2.83Range of % expatriates in total IJV employment 0.1353.3 Persons interviewed: Chinese 139Persons interviewed: expatriate 73

1 USA 11; UK 6.2 France 4, Germany 4, Belgium 2, Netherlands 2, Sweden 2, Switzerland 2, Spain 1.3 Overseas Chinese Hong Kong 10, Taiwan 6, Singapore 1.4 Electronic and telecommunications equipment, excluding consumer electronics.5 Fast-moving consumer goods: includes food processing and manufacturing, beverages, cosmetics and tobacco.6 Ninety per cent of the sample had foreign equity holdings of under 80 per cent.7 Includes one IJV located in Shandong Province.

second largest in terms of output value among foreign-invested companies inChina (State Statistical Bureau, 1995). The foreign parents origins were thosefrom which most FDI into China arises: the USA, Western Europe, Japan andOverseas Chinese territories. These four categories of origin were distributedevenly by sector. The aim of this sample frame was to include two particularlyimportant but contrasting sectors, as well as the main categories of foreign IJVownership in China. This permits a check on whether or not IJV performance isindependent of these parameters.

More specific criteria for case selection were that the IJV should have had aminimum of two years operation and that at least one expatriate manager shouldbe working in it. A list of potentially suitable Sino-foreign joint ventures withinthe chosen sectors was established from published sources, such as the Joint Ven-tures Directory published by Chinas Ministry of Foreign Trade & Economic Co-operation (MOFTEC) and business journals, as well as chambers of commerceand the commercial departments of foreign embassies. A total of 311 companieswere then approached to check on their suitability for inclusion in the sample andwillingness to participate. Some of these companies proved impossible to contact,because they had moved location, been restructured, or gone out of business.Others presented problems, such as firms that had officially been established asequity joint ventures but did not have real foreign partners involved at all. Finally,a total of 67 suitable IJVs agreed to participate within the time period availablefor the study. It had been intended to have 64 cases giving equal numbers of IJVsin the two sectors, distributed equally among the four categories of foreign parentorigin, but the process of contacting a larger number of ventures to gain accessled to a slight overshoot.

Among the 67 IJVs, 57 had one foreign parent and the other ten had two foreignparents. Forty-four of the IJVs had one Chinese parent, 17 had two Chineseparents; there were a further four IJVs with three Chinese parents and two IJVswith four Chinese parents. For purposes of analysis, only the foreign and Chineseparent company respectively with the most active involvement in the IJV will betaken into consideration. Degree of involvement in IJV management was assessedwith reference to equity share, appointment of senior managers by the parent,participation in decision-making and direct operational transacting with the IJV.In almost every case, the other parent companies only had investment stakes ratherthan active involvement in the IJVs. The total foreign share of IJV equity rangedbetween 25 and 95 per cent.

Twenty-nine of the foreign parent companies were MNCs, none of these beingOverseas Chinese. The IJVs were located in open cities and special economiczones, where the great majority of foreign-invested companies are to be found (Panet al., 1999). They had been operating from between 2 and 15 years, with a meanof 4.8 years and a mode of 3 years. Their employment ranged between 34 and3072 people, with an average of 392.



Checks on the possible impact of sample parameters revealed that IJV perfor-mance is independent of sector, foreign partner nationality, and location in China.However, larger IJVs and those with MNC foreign parents tend to achieve bettersystem performance (p < 0.001 for employment and p < 0.05 for MNC status),and these variables will be included as controls in the analysis. Although IJV equityshare was not related to systems performance overall, the seven IJVs with morethan 80 per cent foreign equity holding registered greater satisfaction with salesgrowth than did the rest of the sample. This contrast is broadly consistent withthe finding by Pan et al. (1999) that wholly-owned foreign subsidiaries in Chinatend to achieve superior market share compared with joint ventures. A higherforeign equity share was associated with lower levels of goal attainment by themain Chinese partner. Certain of the hypothesized relationships vary accordingto sector and these are noted later.

There are two main respects in which the sample is not typical of foreign-invested firms in China. First, the distribution among the four foreign parentcompany origins does not reflect the fact that approximately two-thirds of inwardforeign direct investment has come from overseas Chinese sources (United Nations,1998). Second, the study is confined to IJVs. The IJV remains the most numer-ous governance form for FDI in China, but during the 1990s, wholly-owned sub-sidiaries became increasingly favoured for new investment (State Statistical Bureau,1998). In other respects, however, the IJVs sampled appear to be compatible withprofile indicators from larger data sets regarding: (1) the large number of MNCsubsidiaries worldwide in the two chosen sectors; (2) the greater tendency of MNCsto share equity in Asian affiliates compared to those in other regions; and (3) theproportion of expatriates employed in affiliates (Beamish et al., 1997; Pan et al.,1999).

Procedure

It had been decided that personal visits to each IJV were necessary in order toobtain valid information on variables otherwise difficult to assess, such as goal per-formance and control. These visits were made by one or both of the authors, nor-mally accompanied by a faculty member of the Development Research Centre inBeijing. Mandarin Chinese was the language of interviews with local and Over-seas Chinese respondents, while English was generally used with foreign re-spondents. An interpreter was required in the case of some Japanese managers.Relatively factual information on the IJVs formation and resource provision wereobtained from interviews with a total of 212 managers in the joint ventures, includ-ing general managers, deputy general managers and functional heads. Informa-tion on these issues was checked with at least two respondents. Parent companyobjectives for each IJV and their attainment were assessed separately by respec-tively the most senior Chinese and foreign manager interviewed. Although inter-



views were not conducted with managers located in the parent companies, all ofthe respondents who assessed parent objectives were seconded by the relevantparent. All the Chinese respondents for parent objectives had been with the IJVsfrom the start of operations as had 54 per cent of the expatriate managers. Theirsecondment from the parent companies, plus regular involvement in reporting andother communication with the parent, was deemed to provide a reasonable basisfor them to assess parent company objectives for the IJVs.[2] Perceptual evaluationsof the IJVs system performance and of parent company control were obtainedfrom the most senior available joint venture manager, in order to obtain a broadand authoritative view.[3]

Measures

IJV performance. Achievement of parent company goals was assessed in two stages.First, the most senior Chinese and foreign managers were asked separately to selectthe five most important strategic benefits that their parent company sought informing the IJV from a set of 12 items in the case of foreign parents and 17 itemsfor Chinese parents. Each item was displayed on a card and respondents wereinvited to add further items if appropriate. The objectives most often given pri-ority by the Chinese side were to learn management expertise, to acquire tech-nology, to obtain cash investment from the foreign partner, to provide anopportunity for good long-term profit, and to gain a strategic position vis--viscompetitors. The objectives most often given priority by the foreign side were togain a strategic position in China, to provide an opportunity for good long-termprofit, to access the attractive Chinese market, to establish a strong business presence in China, and to benefit from lower labour costs.

The Chinese and foreign respondents then assessed the extent to which the fivepriority objectives they had selected had been achieved along five-point scalesranging from not achieved at all (score = 1) to fully achieved (score = 5). Thesescores were aggregated to provide indicators respectively of the achievement ofChinese parent objectives and achievement of foreign parent objectives. This pro-cedure permits a high degree of respondent discretion in the selection of parentobjectives that are scored for achievement.

Assessments of system performance were made by the most senior availableIJV manager using five-point (1 to 5) scales relating to the IJVs profitability,growth, market share, technological development, and development of local staffand managers (human resource development).

Learning. (1) Learning from experience: Whether or not parent companies had previ-ous experience of forming IJVs, had any kind of previous international businessexperience, and had previously invested in China (foreign parent) or outside(Chinese parent), were each scored as binary items. (2) Formation learning: Two



indicators are used here: (1) length of search and negotiation is the period of time(months) over which each parent had conducted searches, assessments and nego-tiations before establishing the IJV; (2) whether or not the parent had assessedalternative partners before IJV formation was recorded as a binary measure foreach parent. (3) Operational learning is indicated by the number of years the IJV hadbeen in operation.

Resource provision. A number of indicators were used to assess the resource provi-sion to each IJV by its foreign parents. Total foreign capital invested was measuredin US dollars. Whether new production facilities had been established for the IJV,and whether or not any existing Chinese plant and equipment was incorporatedinto IJV capital, were each measured as binary items. The provision of non-capitalresourcing by Chinese and foreign parents was assessed through ten binary indicators with reference to product design, production technology, managementsystems, management services, and training, provided respectively on a contrac-tual or non-contractual basis. Inspection of internal reliability coefficients sug-gested that it was acceptable to aggregate these indicators into a measure of overallnon-capital resourcing by Chinese parents (KR20 = 0.80), and overall non-capitalresourcing by foreign parents (KR20 = 0.76). The trend of expenditure on train-ing for IJV personnel since formation was coded into a three-point scale (increase,same, decrease). The support provided by the Chinese and foreign parents respec-tively towards the IJVs operational transactions was assessed in terms of the per-centage of total IJV inputs they supplied directly, and the percentage of totaloutputs they took directly from the IJV, all measured by US dollar value.

Parent control. The relative level of foreign parent control over the IJV was assessedby first measuring the extent of control of each parent company over 13 differentaspects of IJV management and then subtracting the score for the Chinese parentfrom the score for the foreign parent, item-by-item. We asked the most senior avail-able IJV manager to indicate the influence of each parent by using a five-pointscale (1 = very little to 5 = considerable). The aspects are: (1) use of profit, (2) re-investment policy, (3) setting strategic priorities, (4) allocating senior managerialpositions, (5) technological innovation, (6) financial control, (7) reward and incen-tive policies, (8) training and development policies, (9) sales and distribution, (10)product pricing, (11) quality control, (12) purchasing policies, and (13) productionplanning. These items were included because they are important areas for controland decision making in China IJVs (Child, 1994; Geringer and Hbert, 1989).When there was more than one Chinese or foreign parent company, the questionson influence were put with reference to the Chinese or foreign parent mostinvolved in the joint ventures management. Coefficient alpha was calculated forthe 13 items of relative parent control and it proved to be acceptable to aggregatethem to produce an overall measure (a = 0.95).



RESULTS

IJV Performance

Table II shows the means, standard deviations and inter-correlations between themain indicators of IJV performance. The means for all indicators are above thescale mid-point, though attainments on developmental criteria are rated somewhatlower than other indicators.[4] There is a significant correlation between the ratingsfor the achievement of Chinese and foreign parent objectives (r = 0.39). However,this correlation only denotes about 15 per cent of common variance, and the sub-stantive basis of the two goal performance measures is sufficiently different as tonot warrant their consolidation. Three measures of IJV system performance (pro-fitability, growth and market share) are inter-correlated at higher levels than theothers. Conceptually these refer to economic aspects of the IJVs system perfor-mance as business units, and they were therefore combined into an indictor calledeconomic system performance (a = 0.73).[5]

All the indicators of IJV performance, excepting the development items, aresignificantly inter-correlated. Chinese goal performance attainment is morestrongly related to IJV profitability whereas foreign goal performance attainmentis more related to IJV growth and market share. This difference reflects the lowerratings generally given to the achievement of profit as a foreign parent objectivecompared to its ratings as a Chinese parent objective. The developmental indica-tors (technological development; HR development) are related to Chinese parentgoal performance, but not to foreign goal performance. They are also not stronglyrelated to the economic aspects of system performance.[6] Foreign goal attainmentis more highly correlated with economic system performance than is Chinese goalattainment, largely because the system performance measure includes both salesand market share.

Examination of Hypotheses

Learning. The first half of Table III sets out the correlations between the aspectsof learning and indicators of IJV goal and economic system performance. Regard-ing learning from experience, prior international business experience amongChinese and foreign parent companies is positively associated with the economicsystem performance of the IJVs. However, contrary to expectations, parent experience is not associated with measures of IJV goal performance, except for apositive correlation between the foreign parents previous IJV experience and theachievement of its goals. Foreign parents experience with IJVs was positively asso-ciated with IJV economic system performance. Among the Chinese parents,experience with IJVs was associated with better economic system performance.Contrary to expectations, foreign parents experience of investing in China didnot add to the prediction of their IJVs performance levels. While the quality of





Tab

le I

I.M

eans

,st

anda

rd d

evia

tions

and

cor

rela

tions

bet

wee

n IJ

V p

erfo

rman

ce i

ndic

ator

s (P

ears

on p

rodu

ct-m

omen

t co

rrel

atio

ns.

N =

67 S

ino-

Fore

ign

join

tve

ntur

es)

Mea

n1s.d

.2

34

56

78

1.A

chie

vem

ent

ofC

hine

se p

aren

t go

als

3.56

0.68

0.39

***

0.44

***

0.28

**0.

34**

0.36

**0.

36**

44**

*

2.A

chie

vem

ent

offo

reig

n pa

rent

goa

ls3.

410.

750.

40**

*0.

61**

*0.

49**

*0.

180.

1761

***

3.Pr

ofita

bilit

y3.

341.

170.

49**

*0.

43**

*0.

21*

0.28

*81

***

4.G

row

th3.

481.

070.

51**

*0.

22*

0.26

*82

***

5.M

arke

t sh

are

3.36

1.03

0.30

*0.

1179

***

6.T

echn

olog

ical

dev

elop

men

t3.

250.

960.

39**

30*

7.H

uman

res

ourc

e de

velo

pmen

t3.

110.

9827

*

8.E

cono

mic

sys

tem

per

form

ance

210

.18

2.64

One

-tai

l tes

t:**

*p

0.00

1,**

p

0.01

,*p

0.

05.

1.A

ll ite

ms

are

rate

d on

sca

les

betw

een

1 (lo

w) a

nd 5

(hig

h).

2.A

ggre

gate

of

item

s 3,

4 an

d 5.



Table III. Correlations: IJV performance with hypothesized predictors (product-moment correla-tions. Decimal points omitted)

Hypothesized predictors Performance indicators(relevant hypothesis is shown as H1, etc.)

Achievement Achievement Economicof Chinese of foreign systemparent goals parent goals performance

LearningH1:Chinese parents international experience 01 09 20*Foreign parents international experience 07 18 36**Chinese parent experience: IJVs 14 07 22*

investment outside China 00 01 12Foreign parent experience: IJVs 10 29** 34**

investment in China 01 07 07Parent companies combined international experience 06 18 39***Parent companies combined IJV experience 19 28* 44***H2:Length of search and negotiation: Chinese parent -08 -12 10Length of search and negotiation: foreign parent -08 -01 17H3:Alternative partners: Chinese parent 02 10 32**Alternative partners: foreign parent -02 11 -02H4:Years of IJV operation 36** 17 19

Quality of resourcingH5:Foreign capital 09 06 30**New production facilities 19 09 45***Chinese plant and equipment -28* -29** -39**Chinese non-capital resourcing 11 02 11Foreign non-capital resourcing -09 -05 -13Total non-capital resourcing -02 -03 -05Training 30** 18 30**H6:Direct inputs from Chinese parent (%) 21* 11 29*Direct inputs from foreign parent (%) 27* 22* 25*Direct inputs from parents combined (%) 35** 24* 40***Outputs direct to Chinese parent (%) 10 13 25*Outputs direct to foreign parent (%) 07 17 -04Outputs direct to parents combined (%) 13 23* 15

ControlH7:Relative foreign control -16 02 -10

One-tail test: ***p 0.001, **p 0.01, *p 0.05.

foreign partners experience is more significant than that of the Chinese partner,their combined experience predicted IJV economic system performance morestrongly than did their separate experiences. Hypothesis 1 is therefore supportedfor IJV economic system performance but not generally for goal performance.

The hypotheses on formation learning are not generally supported. Length ofparent search and negotiation was not related to the subsequent performance ofthe IJVs, counter to Hypothesis 2. Hypothesis 3, concerning assessment of alter-native partners, was supported only for Chinese parents.

Hypothesis 4 on operational learning is supported with respect to the attain-ment of Chinese parents IJV goals. The longer that IJVs have been in operation,the higher tends to be the evaluation of Chinese goal attainment. The correlationwith economic system performance is significant at the p = 0.06 level and closerexamination of distributions indicates a threshold at around four years of IJVoperation, such that economic system performance tends to be better beyond that age.

Quality of resourcing. Hypothesis 5 is more consistently supported, particularly inrespect of foreign capital resourcing and quality of facilities. Evaluations of IJVeconomic system performance are superior when there is a higher level of foreigncapital investment into the venture, especially when this takes the form of newproduction facilities and avoids the inclusion in capital of plant and equipmentfrom the Chinese parent. Investment in human resource development is also posi-tively associated with higher evaluations of IJV performance. Non-capital resourc-ing, however, does not predict differences in IJV performance. The results suggestthat quality of resourcing contributes more to the performance of IJVs as on-goingsystems than to the perceived attainment of parent goals.

The higher the percentage value of IJV inputs provided directly by the parentcompanies, the more likely is IJV performance to be evaluated positively. Therealso appears to be a performance advantage when Chinese parent companiesprovide a direct outlet for a IJVs products. Transactional integration betweenparent companies and IJVs tends to have a stronger positive impact on the latterseconomic system performance than on parent goal attainment. Direct inputs fromparent companies also appear to have more impact on IJV performance thandirect outputs to them. A higher percentage of direct inputs from parent compa-nies combined predicts better IJV performance on all indicators. Hypothesis 6 istherefore partly supported.

Hypothesis 7 postulates that dominant foreign parent control will lead to betterIJV goal and economic system performance. The hypothesis is not supported. Ahigher level of foreign IJV control relative to that of Chinese partners does notpredict better performance; two of the three insignificant bivariate correlations arein fact negative.



Multivariate Analysis

A number of predictors of IJV performance have been identified, chiefly of eco-nomic system performance. In order to assess their relative and combined effects,ordinary least squares multiple regressions for economic system performance areshown in Table IV. Given the sample size of 67 IJVs, it is necessary to limit thenumber of predictors entered into equations. The selection is guided by two con-siderations. First, potential performance predictors that do not have a significantunivariate relation to IJV performance are excluded.[7] For this reason, length ofsearch and negotiation, foreign parent dealing with alternative partners, non-capital resourcing, and direct output to parent companies are omitted. The excep-tion is relative foreign control, which is included in order to retain the presence ofHypothesis 7. Second, if correlations between predictors themselves exceed r =0.50, the variable with the weaker association with IJV economic system perfor-mance is omitted. There is in fact only one such correlation, that between lengthof search/negotiation and years of IJV operation, indicating that the earlier Sino-foreign IJVs generally took longer to establish.

Equation 1 focuses on indicators of learning opportunities, which togetherpredict 33 per cent of economic system performance variance. The parent com-panies combined previous international business experience has a positive impacton IJV performance. Their combined previous IJV experience has an even greaterpositive performance impact. Assessment of alternative partners by Chineseparent companies also contributes to the prediction of economic system perfor-mance. The years that IJVs have had for operational learning adds further to theprediction of their economic system performance when taken in conjunction withthe other experience factors.

Equation 2 focuses on indicators of resourcing quality, which together predict41 per cent of the variance in IJV economic system performance. The resourcesof key significance are foreign capital, the quality of production facilities and theintegration of the IJVs with their parent companies, both Chinese and foreign,concerning input transactions. When combined with these factors, training nolonger significantly predicts economic system performance. Equation 3 analysesthe combined contribution to explaining performance variance of learning,resourcing and foreign parent control. It indicates that this combination predictsover one half (53 per cent) of the variance in IJV economic system performanceassessments.[8] Parent company learning from experience retains a positive impacton performance, but formation and operational learning are no longer significant.Among the resource indicators, the quality of production facilities and input inte-gration with parent companies remain significant positive predictors. Relativeforeign control is a negative predictor such that greater foreign dominance is asso-ciated with inferior performance. Because IJV employment and MNC status of





Tab

le I

V.R

egre

ssio

ns (o

rdin

ary

leas

t sq

uare

s) of

IJV

per

form

ance

on

pred

icto

r va

riab

les

Pred

ictor

sE

quat

ion

1E

quat

ion

2E

quat

ion

3E

quat

ion

4E

quat

ion

5E

quat

ion

6E

con

Syste

mE

SP &

ESP

&E

SP&

Chi

nese

Goa

lFo

reig

n G

oal

Perf.

[ESP

]Q

ualit

y of

Com

posit

e1C

ompo

site

Perfo

rman

cePe

rform

ance

& L

earn

ing

Res

ourc

ing

with

con

trols2

Beta

pB

etap

Beta

pB

etap

Beta

pB

etap

Pare

nt c

ompa

nies

com

bine

d 0.

230.

040.

210.

050.

180.

09-0

.04

0.77

0.09

0.56

inte

rnat

iona

l bus

ines

s ex

peri

ence

Pare

nt c

ompa

nies

com

bine

d IJ

V0.

350.

003

0.20

0.06

0.20

0.07

0.16

0.26

0.16

0.30

expe

rien

ceA

ltern

ativ

e pa

rtne

rs:C

hine

se p

aren

t30.

240.

030.

090.

360.

060.

59-0

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0.70

0.04

0.76

Year

s of

IJV

ope

ratio

n0.

290.

007

0.12

0.21

0.08

0.44

0.29

0.04

0.11

0.47

Fore

ign

capi

tal

0.25

0.01

0.14

0.17

0.10

0.38

-0.0

50.

72-0

.07

0.65

New

pro

duct

ion

faci

litie

s0.

290.

003

0.29

0.03

0.31

0.00

30.

070.

58-0

.06

0.67

Chi

nese

pla

nt a

nd e

quip

men

t-0

.26

0.01

-0.1

90.

07-0

.18

0.09

-0.2

10.

12-0

.19

0.23

Tra

inin

g0.

080.

420.

060.

500.

050.

600.

230.

070.

070.

65D

irec

t in

puts

from

par

ents

com

bine

d0.

250.

010.

240.

020.

250.

020.

180.

170.

170.

23

Rel

ativ

e fo

reig

n co

ntro

l-0

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0.02

-0.2

20.

02-0

.27

0.02

-0.0

50.

68

IJV

em

ploy

men

t0.

110.

37-0

.05

0.73

0.04

0.81

Fore

ign

pare

nt M

NC

sta

tus

0.01

0.96

0.06

0.65

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0.67

Adj

uste

d m

ultip

le R

20.

330.

410.

530.

520.

240.

02A

NO

VA

*F:

9.12

3F:

10.1

50F:

8.38

0F:

6.91

1F:

2.17

0F:

1.13

0

1If

sect

or is

ent

ered

into

the

equ

atio

n,B

eta

=0.

04,p

=0.

71,m

ultip

le R

2=

0.52

,and

oth

er c

oeffi

cien

ts r

emai

n vi

rtua

lly u

ncha

nged

.2If

sect

or is

ent

ered

into

the

equ

atio

n,B

eta

=0.

04,p

=0.

70,m

ultip

le R

2=

0.51

,and

oth

er c

oeffi

cien

ts r

emai

n vi

rtua

lly u

ncha

nged

.3Fo

r E

quat

ion

6,th

e ite

m is

alte

rnat

ive

part

ners

:for

eign

par

ent.

*For

Equ

atio

ns 1

4,p

=0.

000.

For

Equ

atio

n 5,

p =

0.00

6.Fo

r E

quat

ion

6,p

=0.

36.

the foreign parent are positively related to IJV economic system performance,Equation 4 adds these as control variables to the composite equation. However,they make little difference to the outcome.

We noted earlier that the relationship of learning, resourcing and control factorsto goal performance was considerably weaker. This is borne out by Equations 5and 6 which apply the same model as Equation 4 to Chinese and foreign goal per-formance respectively. Only 24 per cent of the variance in Chinese goal perfor-mance is predicted, with years of IJV operation, lack of dominant foreign controland (marginally) training being significant predictors. Virtually none of the vari-ance in foreign goal performance is predicted by the model, and none of the pos-tulated predictors attains statistical significance.

Closer examination of the two sectors represented in the sample indicates thatprevious parent experience of international business has, on the whole, a greaterimpact on the economic system performance of electronics IJVs, compared tothose located in fast-moving consumer goods (FMCG). Previous experience maybe particularly valuable given the greater technological and logistical complexityof most of the electronics IJV value-chains. The electronics IJVs also took a farhigher percentage of inputs by value, chiefly components, directly from theirforeign parents, and this percentage had a higher positive association with IJV performance in electronics than in the FMCG sector. This suggests a propos ofHypothesis 6, that integration is of greater consequence for IJV performance inthe electronics sector. A further difference is that increased expenditure on train-ing during the history of the IJV was more highly correlated with level of eco-nomic performance in the electronics sector, reflecting its greater technicalrequirements. Nevertheless, if sector is added to Equations 3 or 4, the impact isnegligible, as footnotes to Table IV indicate. Similarly, the inclusion of sector inEquations 5 and 6 has no impact.

DISCUSSION

Contributions and Implications

The findings of this study offer five main contributions to the literature. First, theyconfirm that firm-level variables are consequential for IJV performance. Second,they indicate the value of adopting a broad theoretical approach with respect tosuch variables. Third, they uncover subtleties in the relationship between IJVcontrol and performance. Fourth, they demonstrate the utility of distinguishingbetween goal and system perspectives on IJV performance. Fifth, they suggestqualifications to international business theory as applied to developing and tran-sition economy contexts.

Firm-level factors are found to be consequential for IJV performance even in acomplex and turbulent environment such as China, where the business press and



some academic studies have understandably focused primarily on exogenous influ-ences. The present investigation indicates that factors endogenous to IJV partnersand to the way they constitute IJVs also have a bearing on subsequent perfor-mance. In other words, attention to the strategic factors informing the establish-ment of IJVs deserves to be complemented by attention to the means wherebyinternational business strategies are implemented through them. This is not todeny the theoretical or practical significance of strategic factors such as marketentry policy and complementarity of goals. It is, however, to point out that theviability of IJVs as operational units also depends on the quality of the intangibleand tangible assets provided to them. A parallel observation has been made withrespect to post-acquisition performance. Namely, while the strategic fit of an acqui-sition indicates potential sources of value creation, actual value creation dependson factors other than just strategic ones including the intrinsic resource quality ofthe newly constituted unit (Haspeslagh and Jemison, 1991).

Secondly, our study has adopted a broad theoretical approach with respect tofirm-level influences on IJV performance. It has taken account of perspectives onlearning, resourcing and control, and each has identified variables that impact onIJV performance. This is the first study to have examined this combination ofhypothesized performance predictors and to have identified how they contributeto value-creation in IJVs. Each theoretical perspective has been found to add tothe understanding and prediction of IJV performance in a cumulative manner.This leads to the recommendation that future research continues to take all theperspectives into account, and to explore in more detail how learning, resourcingand control interact as factors conditioning IJV performance.

The findings build upon the insights of researchers such as Lyles (1988) andBarkema et al. (1997) by indicating that the performance of IJVs is affected byseveral aspects of learning. When parents have had the opportunity to learn fromprevious experience of international business, in particular of joint ventures, theirIJV tends to perform better. The combination of parent experiences is a morepowerful performance predictor than that of an individual parent company. Theresults also suggest that previous experience is likely to be of particular significancefor joint venture performance in a developing country context like China, wherecultural differences and a under-developed institutional framework present majorchallenges that can otherwise seriously unsettle a partnership. It appears to behelpful for foreign firms entering developing countries to find as an IJV partneran enterprise that can not only provide local knowledge and connections, but thatalso has some experience of international business and can therefore communi-cate on the same wavelength. The conclusion that a joint venturing firm shoulddraw upon its relevant experience, and evaluate the extent to which that experi-ence needs to be supplemented by a partners local knowledge, is consistent withthe methodical approach to joint venture formation advocated by Tallman andShenkar (1994).



The quality of resourcing that parent companies put into IJVs has an even moresignificant bearing upon their performance. Our findings are consistent withresearch by Lyles and her collaborators in Hungary and Malaysia (Lyles et al.,1999; Steensma and Lyles, 2000). Transition or developing countries such as these,including China, offer high potential opportunities for FDI, but they are stilllimited in their ability to supply the tangible and intangible economic resourcesrequired to achieve international standards of competitiveness. Foremost amongthese scarce resources are modern technology and modern management practices.However, the significance for IJV performance of providing new facilities andavoiding the use of existing Chinese facilities does not just stem from the moderntechnology that this introduces. It also offers the IJV an opportunity to introduceits own forms of work organization and to recruit and train its personnel afreshaccording to its own criteria, rather than inheriting the existing local standards ofa country in transition from socialism (Lu and Bjrkman, 1997). The policy impli-cation is that it is wise to resource a business venture in ways that avoid gettinglocked into the often outmoded technologies and the heavily institutionalizedworking practices of a developing country. This includes provision of adequatecapital to establishing new plant and facilities, and the direct supply of high qualitycomponents and other production inputs where appropriate. Our research indi-cates that the introduction of new production facilities, without reliance on exist-ing Chinese plant or equipment, appears to furnish an important basis forachieving superior economic performance. In other words, the use of IJVs as ameans of internalizing the resourcing of operations by foreign-investing compa-nies appears to be beneficial, in a developing country context.

Thirdly, the study also points to subtleties in the link between parent controland performance in IJVs that have not been recognized in previous discussions.These discussions have generally looked to control dominance by one partner ashaving either a positive or negative impact on IJV performance. Rather than therelationship being of this eitheror kind, the present study suggests that anapproach to control permitting the combination of foreign leadership in resourc-ing, through the transfer of technology and expertise, with local participation indecision making will be conducive to better performance. This permits a degreeof leadership by international firms consistent with the effective transfer of whatthey can offer by way of superior resources, but which is not taken to the pointwhere foreign dominance creates a barrier to contributions from the local partneror its ability to learn.

It is instructive to note that parent control only becomes a significant predictorof IJV performance when the quality of parent resourcing is taken into account.This suggests that, in a developing country, it becomes a positive move for IJV per-formance to bring the local partner into its decision making process if and whenthe foreign partner can lay down an adequate resource base. If the resource baseis not adequate, this appears to require compensation by additional foreign man-



agerial intervention. The alternative explanation is that it is a combination at IJVformation of less foreign control with the provision of greater resource quality(coming overwhelmingly from the foreign partner) that leads to better perfor-mance. This is, however, not very plausible since it goes against the prevailingopinion among foreign companies in China that they are more inclined to riskinvestment if they have control over the joint venture. The ways that quality of resourcing and the distribution of control between the partners affect IJV per-formance deserve closer examination in future research, preferably through lon-gitudinal investigation that can observe how these factors interact as an IJVdevelops.

These observations on control in relation to resourcing are clearly specific toIJVs in which, on balance, the technical competencies of one partner are inferiorto those of the other. In such circumstances, a transfer of knowledge and exper-tise is both an objective of the junior partner and a necessity for the effective opera-tion of the IJV itself. While this configuration can be found in IJVs betweendeveloped country partners, it is more characteristic of those between developedcountry firms and partners from developing countries such as China. In thisrespect, our findings extend the conclusion reached by Beamish (1988) that sharedcontrol rather than domination by one partner is likely to lead to superior perfor-mance in developed-developing country IJVs.

The fourth significant contribution of this study derives from its distinctionbetween goal and systems perspectives on performance. This distinction proved tobe consequential. While it was possible to predict a substantial proportion of IJVperformance variance when assessed in terms of system criteria, this was not thecase when either Chinese or foreign parent company goals were adopted as per-formance criteria. The reason is likely to lie in the varied portfolios of goals thatparent companies bring to the establishment of different IJVs. This means thatparent goal attainment is not a stable referent for identifying the predictors of IJVperformance, because what is being measured for each IJV does not refer to thesame set of goals. The lack of consistency in the dependent variable implies thata somewhat different predictive model will be required for different IJVs. Systemvariables, by contrast, provide a more consistent set of IJV performance criteria.They refer to fundamentals for the survival and development of IJVs as businessunits and this provides a superior basis for comparison across different cases. Onthese grounds, reliance on the goal model in future research on IJV performanceis open to question. This is a significant conclusion in view of the widespread useof goal attainment measures for IJV performance assessment.

The contrast between a prediction of 24 per cent of the variance in Chinesegoal performance and near zero prediction of foreign goal performance also posesa question. Further exploration may reveal that different models are required toaccount for the two contrasting sets of goal priorities. Foreign IJV parents quiteuniformly gave priority to strategic positioning in the newly-opened China market,



establishing their credibility there and pursuing the opportunities they envisagedfor long-term profit. By contrast, Chinese IJV parents tended to attach priority tolearning management expertise, technology transfer and obtaining foreign cashinvestment. As noted earlier, foreign goal performance was more oriented tolonger-term IJV development in terms of securing growth and market share,whereas Chinese goal performance was more oriented towards profitability. Appli-cation of the models in Table IV to profitability, growth and market share sepa-rately, indicated that they provided stronger predictions of profitability than of theother two economic criteria. This implies that further more detailed work into the relationship between specific goal and system performance indicators mightprovide additional clarification of the relation between the two performance per-spectives, even though we have urged caution about the status of goal attainmentindicators.

We have not considered developmental criteria of IJV system performance inany detail. The study included indicators of technological and human resourcedevelopment. The results presented in Table II tend to bear out the conceptualdistinctiveness of this aspect of IJV performance. Given its importance to Chinaseconomic development, it is understandable that both of the developmental itemscorrelated more highly with the attainment of Chinese parent company goals thanwith foreign parent goals or with other system performance indicators. Note 8mentions that the models which are predictive of economic system performancefail to account for any significant variance in the developmental criteria. A differ-ent theoretical approach is therefore required for developmental performance in future research, which is likely to focus upon knowledge transfer and post-formation learning.

Fifthly, the findings of this study draw attention to distinctions within the theoryof IJV performance that may be required for developing rather than developedeconomy locations. We have suggested that previous international experience(including that of local partners), foreign parent resource provision, parent inter-nalization of IJV input transactions, and shared IJV control probably have rathermore important positive impacts on IJV performance in developing and transitioneconomies. The prime reason lies in the different context that tends to character-ize those economies. This context is generally deficient in capital, technology andexpertise. Also it usually blends elements of traditionalism and authoritarianismwithin an institutional environment that is not transparent by western standards,the navigation of which can therefore benefit from the assistance of local part-ners. This line of argument carries the obvious, but sometimes neglected, impli-cation that international business theory needs to be sensitive to the economic, socialand political contexts of countries in which IJVs are located even when, as in thispaper, its focus is on firm-level variables (Child and Tse, 2001). This is consistentwith the more expansive view of the subject advocated by Toyne and Nigh (1998).



A final observation also concerns sensitivity to the context. Our research pointedto some sector-based nuances in the weight of experience and resource-provisionas performance predictors. This suggests that future investigations of IJV perfor-mance should be sensitive to the sector context. Sectors operate on the basis ofdifferent factor combinations and with different core competencies, and one wouldexpect these to be reflected in the kind of resource provision that is most criticalfor good IJV performance. While remaining consistent with the thesis that thequality of intangible and tangible resourcing is a significant determinant of IJVperformance, this observation also recalls the point that the ultimate key to high performance lies in matching qualitatively distinctive resources to the contextually-informed strategy of the IJV as a business enterprise (cf. Foss, 1997).

CONCLUSION

Our investigation in China lends support to the view that learning, resourcing andcontrol by parent companies is consequential for IJV performance. These factorsare likely to assume particular importance in a business environment character-ized by resource scarcity and high complexity. The quality of resourcing providedby foreign-investor IJV partners is critical in a developing country context likeChina where inward FDI is a necessary vehicle for the transfer of technology andmanagement expertise. Previous international business experience on the part ofboth partners, including previous IJVs, also helps to ensure better performance,though not to the same extent as the quality of resourcing. If the quality of resourc-ing is poor, it seems to be more critical for the foreign partner to compensate for this through exercising a higher level of control. When resourcing is good,advantages accrue from sharing control with the Chinese partner who can assistin dealing with the complex environment. The findings both on experience andcontrol strongly suggest that local domestic partners can contribute valuably toIJV success. The results of our study suggest that the effects of these factors uponIJV performance are cumulative and that further research should examine themtogether rather than singularly.

NOTES

*Grateful acknowledgment is made of funding provided by the UK Economic & Social ResearchCouncil, the Leverhulme Trust and the Hong Kong Research Grants Council to defray the cost ofthe research from which this paper draws. The authors wish to thank Dr Yuan Lu who joined in theresearch design and fieldwork. Dr Timothy Devinney, Dr Yigang Pan and JMS reviewers offeredvaluable comments on a previous version of this paper. Sally Heavens contributed to the editing ofthe paper.[1] Partners in an IJV become its parent companies once it is formed. The two terms are there-

fore used interchangeably in this paper depending on which best fits the sense of the passage inwhich it occurs.

[2] A recent case-based study of 21 Sino-UK joint ventures reveals little d

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