Joint ventures between Swedish & Chinese firms -How to make the marriage work? Författare: Linda Andersson Handledare: Peter Lindelöf Program: Independent course Ämne: Business Administration Nivå och termin: C-level, VT-09 Handelshögskolan BBS Preface This essay is written at Kalmar University during the spring term of 2009 within Business Administration C 76-90 hp at the Baltic Business School. Hereby I would like to express my gratitude to the five company representatives: Anders Liljegren, Bertil Hedsund, Björn Boström, David Jiang and Bo Kylin. I would also like to thank the six respondents acting as experts: Bengt Ohlsson, Per Lindvall, Jay Lian, Ulf Öhrling, Axel Nordegren and Sven-Åke Eriksson. I also want to thank my supervisor Peter Lindelöf for valuable viewpoints. Kalmar 25th May 2009 _______________ Linda Andersson ii Summary Title: Joint ventures between Chinese and Swedish firms - How to make the marriage work? Author: Linda Andersson Supervisor: Peter Lindelöf Course: Business Administration C 76-90 hp, VT-09 Background: China has become one of the most attractive destinations for foreign direct investment (FDI) in the world. The Chinese government is still imposing regulations on certain industries in which foreign firms have to establish through a joint venture. Joint ventures with a Chinese partner are considered to be a great risk due to the environment they operate in and also due to cultural aspects and many joint ventures end with a buyout. Aim & objectives: The aim of this study is to analyze what factors firms need to be aware of when entering into a joint venture and how to avoid or overcome the problems that arise. Methodology: The essay is written using a qualitative method. The study is partly based on a literature study, partly on primary sources. The primary sources consist of five interviews with representatives from companies who are either currently in a joint venture or have previously been in one. Six interviews with experts within the field have also been carried out. iii Theoretical Framework: The essay is strongly influenced by the contingency theory which argues that the performance of a company depends on the environment the company is operating in. The problem has therefore been tackled through describing the specific conditions that a foreign firm will meet in China. Conclusions: Joint ventures with a partner from another country involve risks but can also be of great advantage if they are run in a good way. How to run the joint venture might differ between firms but some factors seem to be common for most firms. It is important to be careful which partner to choose and to do a due diligence in the beginning as well as having a letter of intent written down in the initial stages. Operating in China might bring unusual challenges so it is important for the foreign firm to have knowledge about the Chinese culture and the Chinese laws and regulations before establishing in China. Key words: Joint ventures, FDI, China iv Table of contents 1. INTRODUCTION....................................................................................................................................1 1.1BACKGROUND.......................................................................................................................................1 1.2 PROBLEM DISCUSSION..........................................................................................................................2 1.3 PROBLEM FORMULATION......................................................................................................................3 1.4 AIM AND OBJECTIVES...........................................................................................................................4 2. METHODOLOGY...................................................................................................................................5 2.1 RESEARCH DESIGN................................................................................................................................5 2.2. RESEARCH STRATEGY..........................................................................................................................6 2.3 RESEARCH APPROACH..........................................................................................................................6 2.4 DATA COLLECTION...............................................................................................................................7 2.4.1 Primary data................................................................................................................................7 2.4.2 Secondary data.............................................................................................................................8 2.4.3 Respondents.................................................................................................................................8 2.5 CHOICE OF COMPANIES FOR THE STUDY..............................................................................................10 2.6 TRUSTWORTHINESS OF ESSAY.............................................................................................................10 2.6.1 Credibility..................................................................................................................................10 2.6.2 Transferability............................................................................................................................11 2.6.3 Dependability.............................................................................................................................11 2.6.4 Confirm ability...........................................................................................................................12 2.7 METHODOLOGY AND CRITICISM OF THE SOURCES……………………………………………………12 3. THEORETICAL FRAMEWORK........................................................................................................14 3.1 CHOICE OF THEORETICAL FRAMEWORK..............................................................................................14 3.2 FOREIGN DIRECT INVESTMENT IN CHINA............................................................................................14 3.3 JOINT VENTURES IN CHINA.................................................................................................................15 3.3.1 Laws and regulations.................................................................................................................15 3.3.2 The protection of intellectual property rights (IPR)..................................................................16 3.3.3 China joining the WTO..............................................................................................................16 3.4 INTERNATIONALIZATION THEORY.......................................................................................................17 3.4.1 Choice of entry mode.................................................................................................................17 3.4.2 Motives for joint ventures..........................................................................................................17 3.4.3 Advantages and disadvantages of joint ventures.......................................................................18 3.5 PARTNER SELECTION -CARL SVERNLÖV’S 7 QUESTIONS.....................................................................18 3.5.1 Ability to contribute knowledge or other resources...................................................................19 3.5.2 Mutual dependency....................................................................................................................19 3.5.3 Ability to provide capital............................................................................................................19 3.5.4 The parties’ similarity in size and development.........................................................................20 3.5.5 Company managements’ compatibility......................................................................................20 3.5.6 Similar strategic goals...............................................................................................................21 3.5.7 Cultural and language differences.............................................................................................21 3.6 CONTROL OVER THE ALLIANCE...........................................................................................................21 3.7 CONTINGENCY THEORY......................................................................................................................22 3.7.1 Partner related factors...............................................................................................................23 3.7.2 Culture related factors...............................................................................................................23 3.7.3 Environment related factors.......................................................................................................25 4. EMPIRICS..............................................................................................................................................27 4.1 EXPERT INTERVIEW AXEL NORDEGREN..............................................................................................27 4.1.1 Establishing on the Chinese market...........................................................................................27 4.1.2 Potential problems with joint ventures.......................................................................................27 v 4.1.3 Partner selection........................................................................................................................27 4.1.4 Doing business in China............................................................................................................28 4.2 EXPERT INTERVIEW, ULF ÖHRLING....................................................................................................28 4.2.1 Legal aspects..............................................................................................................................28 4.2.2 Doing business in China............................................................................................................29 4.3 EXPERT INTERVIEW JAY LIAN.............................................................................................................29 4.3.1 Legal aspects..............................................................................................................................29 4.4 EXPERT INTERVIEW PER LINDVALL....................................................................................................30 4.4.1 Establishing on the Chinese market...........................................................................................30 4.4.2 Partner selection........................................................................................................................30 4.4.3 Management control..................................................................................................................31 4.4.4 Culture.......................................................................................................................................31 4.4.5 Legal aspects..............................................................................................................................31 4.5 EXPERT INTERVIEW SVEN-ÅKE ERIKSSON..........................................................................................32 4.6 EXPERT INTERVIEW BENGT OHLSSON................................................................................................32 4.6.1 Establishing on the Chinese market...........................................................................................32 4.6.2 The Chinese law.........................................................................................................................33 4.6.3 The Chinese culture...................................................................................................................34 4.7 COMPANY PRESENTATION..................................................................................................................34 4.7.1 Electrolux...................................................................................................................................35 4.7.2 Tetra Pak....................................................................................................................................35 4.7.3 Arenco........................................................................................................................................35 4.7.4 Ericsson.....................................................................................................................................35 4.7.5 Scania.........................................................................................................................................36 4.8 INTERVIEW, BO KYLIN, ELECTROLUX................................................................................................36 4.8.1 Establishment in China..............................................................................................................36 4.8.2 Advantages and disadvantages of joint ventures.......................................................................36 4.8.3 Partner selection........................................................................................................................37 4.8.4 Management control..................................................................................................................37 4.8.5 Culture.......................................................................................................................................37 4.8.6 Legal aspects..............................................................................................................................38 4.9 INTERVIEW, BERTIL HEDSUND, TETRA PAK.......................................................................................39 4.9.1 Establishment in China..............................................................................................................39 4.9.2 Partner selection........................................................................................................................40 4.9.3 Management control..................................................................................................................40 4.9.4 Culture.......................................................................................................................................41 4.9.5 Legal aspects..............................................................................................................................41 4.10 INTERVIEW, ANDERS LILJEGREN, ARENCO.......................................................................................42 4.10.1 Establishment in China............................................................................................................42 4.10.2 Partner selection......................................................................................................................42 4.10.3 Management control................................................................................................................43 4.10.4 Culture.....................................................................................................................................44 4.10.5 Legal aspects............................................................................................................................44 4.11 INTERVIEW, BJÖRN BOSTRÖM, ERICSSON.........................................................................................45 4.11.1 Establishment in China............................................................................................................45 4.11.2 Partner selection......................................................................................................................45 4.11.3 Doing business in China..........................................................................................................45 4.12 INTERVIEW, DAVID JIANG, SCANIA...................................................................................................46 4.12.1 Establishment in China............................................................................................................46 4.12.2 Partner selection......................................................................................................................46 4.12.3 Management control................................................................................................................47 4.12.4 Culture.....................................................................................................................................47 4.12.5 Legal aspects............................................................................................................................47 5. ANALYSIS..............................................................................................................................................48 5.1 ESTABLISHING ON THE CHINESE MARKET...........................................................................................48 vi 5.2 PARTNER SELECTION..........................................................................................................................48 5.2.1 Ability to contribute knowledge or other resources...................................................................48 5.2.2 Mutual dependency....................................................................................................................49 5.2.3 Ability to provide capital............................................................................................................50 5.2.4 The parties’ similarity in size and development.........................................................................50 5.2.5 Company managements’ compatibility......................................................................................51 5.2.6 Similar strategic goals...............................................................................................................51 5.2.7 Cultural and language differences.............................................................................................52 5.3 CONTROL OVER THE ALLIANCE...........................................................................................................52 5.4 CONTINGENCY FACTORS.....................................................................................................................53 5.4.1 Management conflicts................................................................................................................53 5.4.2 Confucianism and Guanxi..........................................................................................................54 5.4.3 Laws and regulations.................................................................................................................55 5.4.4 Government interference............................................................................................................55 5.4.5 The protection of intellectual property rights (IPR)..................................................................56 6. CONCLUSIONS AND REFLECTIONS..............................................................................................57 6.1 CONCLUSIONS.....................................................................................................................................57 6.2 SUGGESTIONS ON CONTINUING RESEARCH..........................................................................................62 GLOSSARY................................................................................................................................................63 SOURCES...................................................................................................................................................64 SCIENTIFIC ARTICLES................................................................................................................................64 BOOKS......................................................................................................................................................64 ELECTRONIC SOURCES..............................................................................................................................65 INTERVIEWS .............................................................................................................................................66 NEWSPAPERS……………………………………………………………………………………………………………………..67 APPENDIX.................................................................................................................................................68 APPENDIX 1 INTERVIEW GUIDE –COMPANIES............................................................................................68 APPENDIX 2 INTERVIEW GUIDE –EXPERTS................................................................................................70 vii 1. Introduction In this chapter the research question will be presented through a problem discussion that leads up to the essay’s question formulation and aim and objective. 1.1 Background China with its emerging economy and huge market potential is for most firms a market that needs to be entered, if they do not exist on the Chinese market, they simply do not exist. During the period of Mao Zedong as party chairman, China was de-linked from the global market system. At that time China was far behind the advanced market economies of the west and also behind the emerging economies like Hong Kong, Singapore, South Korea and Taiwan. It was not until Deng Xiaoping came to power and initiated policy changes that China opened up its doors to the world in 1978. After opening its doors to foreign investors, China has become one of the most attractive destinations for foreign direct investment (FDI) in the world. The Equity Joint Venture Law was issued in 1979 and since then, China has had a rapid economic growth. (Tian 2007) There are foremost three options for a foreign firm to establish on the Chinese market: representation office, joint venture or wholly foreign owned company. Even though the wholly foreign owned form of establishment is increasing, joint venture is still the most common entry mode. (ibid) Joint ventures are generally defined as firms from different countries cooperating across national and cultural boundaries. The most common form of joint venture is an equity joint venture which is a legally and economically separate organizational entity created by two or more parent organizations. Both parts collectively invest financial as well as other resources to pursue certain objectives. (Yan & Luo 2001) The advantage of entering the Chinese market through a joint venture is the knowledge that can be gained from the Chinese partner regarding cultural, political and legal issues. 1 These are areas that foreign investors often have limited knowledge of. A second advantage of entering the market through a joint venture is the possibility of reducing costs. Joint ventures are supposed to be a win-win situation for both partners. Foreign investors usually provide investment like money, technology or machinery while the Chinese partner offers local knowledge, land, factories and workers. (Tian 2007) Even though China joined WTO in 2001, the Chinese authorities play a big part in China and control strategically important industrial and/or state-owned assets. (Qiu 2005) Therefore some branches like the telecom and car industry are still regulated by the state and the companies operating on these markets need to enter joint ventures. The Chinese laws and regulations on FDI seem to both encourage foreign business activities and have a desire to maintain state control over them. (Yanni 2000) According to Yanni (2000), the management of joint ventures in China presents some unusual challenges. These are associated with the intervention of the governmental bureaucracy, highly specific legal frameworks, an important local government role, the impact of traditional Chinese ways of doing business, Chinese management practices, the under-developed state of the Chinese market and the problematic availability of raw materials. Most of the Chinese partners are state-owned or collective enterprises, therefore the foreign investors have to ask the Chinese government for help and support. (ibid) According to Mike Berrell (2007), the success of all business ventures depends on the strength of the relationships underneath them. The problem for foreign firms is how to manage these relationships. Compared to organizations operating under a single ownership structure the life span of a joint venture is limited and therefore its internal and external relationships are naturally unstable and prone to dysfunction. (Berrell 2007) 2 1.2 Problem discussion Even though many firms choose joint ventures as entry mode there are not only advantages. In contradiction, joint ventures with a Chinese partner in China are often considered to be a greater risk than not having a partner at all. Almost all joint ventures in China end with the Swedish partner wanting to stop the partnership or with a buyout. (DN, 2005) Chinese partners often look at foreign firms as outsiders who lack knowledge of doing business in their country and therefore treat them as temporary capital investors with the idea that they sooner or later will be bought out. (Yao 2008) Several multinational corporations such as Otis, Occidental, AT&T, Bethlehem Steel Group, and Caterpillar closed down their offices and left China because of problems with their partners. (ibid) According to Hofstede (1980), cultural conflict is a major problem for the management of transnational enterprises. Cross-national interaction is plagued with problems because the foreigners and the Chinese are unable to resolve differences of various sorts. (Chan & Douw 2006) 1.3 Problem formulation With China joining WTO and increasing deregulations one could argue whether joint venture is the right entry mode for foreign firms wanting to establish on the Chinese market. This essay is not aiming to discuss whether joint venture is a good way to enter China or not, it is merely trying to find the factors behind the success of joint ventures. It focuses on Swedish firms and specifically on the Chinese market with a Chinese partner. Foreign firms who enter the Chinese market through a joint venture, whether they are forced by law or voluntarily do so, are facing potential risks. These risks might very well threaten the foreign firms’ survival and the chance of gaining market share in China. The questions I am asking myself are therefore: 3