Investing in China via Joint Ventures

Author(s): Paul W. Beamish and Hui Y. Wang

Source: Management International Review, Vol. 29, No. 1 (1st Quarter, 1989), pp. 57-64
Published by: Springer
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P. W. Beamish/ H. Y. Wang*

Investing in China via Joint Ventures *

Introduction

During the five years following the institution of the 1979 Joint Venture Law of the
People's Republic of China (PRC), the number of joint venture (JV) agreements signed
in China increased almost exponentially, rising to 640 in 1984 alone. Since then, the
annual rate of growth regarding JVs agreements first slowed, then declined and by 1987
was decreasing in absolute terms. Most observers agree that the last part of the 1980s
will be characterized by a more sober view of what the stakes are for doing business in
China.

Interest in China evolved from a late 1970s -early 1980s period of caution, to the
mid-1980s explosion of involvement, what Pye (1986) called the Westchester County
Syndrome. This syndrome resulted in U.S. and other Western CEOs rushing to China to
"score points at their country clubs or among business associates". Their interest in
China had been as much a rational interest in a newly opening large market as it has been
an almost irrational desire to get in line for a retailer's big sale - even when you weren't
sure what was being offered for sale.
By presenting and analyzing disaggregated data on 840 joint ventures in China, it is

possible to separate some of the fact from fiction about this market. This analysis
provides empirical support for the appropriateness of a more realistic view toward doing
business in China.

In this paper we have taken the description of 840 joint ventures from the China
Investment Guide (1985, 1986), compiled them into a computerized data base, and
statistically analyzed them using a frequencies program. These are presented in nine
tables. This hard data on China - which has been lacking - was then combined in the
analysis with the authors' personal experience in doing business in China.

The Need for 4Hard9 Data on China

Although there has been a steady supply of anecdotal information on China, many of
the "insights" offered by observers have been based on very small samples. Furthermore,
as Walls (1986) notes "they tell more about the observer than about the observed, since

* Paul W. Beamish, Assistant Professor of International Business, School of Business Administration,

University of Western Ontario, London, Canada; Hui Y. Wang, MBA in Business Administration
from the University of Windsor, Ontario, Canada, Administrator in International Business with the
Ministry of Foreign Economic Relations and Trade, People's Republic of China. Manuscript received January 1988, revised March 1988.

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57

most observers tend to see what they expect to see, need to see, or want to see." One
implication of having some larger-sample history regarding JVs in China is that now it
should be possible for foreign investors to make a more informed decision about entering
into a JV in that country. Until recently, most of the information on JVs in China was
of three types. The first type as mentioned, was anecdotal (i.e. "War stories" from the
front line market entrants) and was from the perspective of the foreign firms. The second

type - from the Chinese perspective first but foreign perspective subsequently - was
technical (i.e. the 118 articles of the 1983 "Regulations for the Implementation of the
Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign
Investment"). This technical type of writing from China in turn spawned a large amount
of legal and accounting interpretation within each of the foreign countries which was
contemplating investment in China. (Not surprisingly, due to on-going changes in the

legal and accounting areas in China, much of the published foreign country interpretation was out of date before it was even published.) The third type of information
- from the Chinese perspective - was promotional. As China's modernization program
evolved and gained momentum, China showed no reluctance to advertise the number of
JVs signed, the billions of investment dollars committed, the regulatory changes designed
to improve conditions, and so forth. This promotional material, because it was typically
presented in aggregate form, has contributed to the mid 1980s bandwagon effect for
investment in China.

Analysis

When foreign companies are thinking about where to invest in China, they are typically
pointed in the direction of the 4 Special Economic Zones, Major Municipalities such as
Beijing, Shanghai, Guangzhou or Tianjin or 14 Coastal Cities. As Table 1 indicates, most
investment has taken place in these areas.

Table 1: Region of Investment in China

Frequency Percent

Special Economic Zones 325 38.7

Economic and Technical Development Zones (14 Coastal Cities) 226 26.9
Beijing
42
5.0
Other Regions of China 247 29.4
Total

840

100.0

While
focus
o
investment,
f
lack
of
coordi

officials

in

demand
for
t
The
implicati
investment
in

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degree of decentralized decision making power exists in China - foreign firms must
recognize that there may literally be dozens of regions/groups that can be approached.
One strategy successfully employed by foreign firms wondering if there is a need in China

for the technology they possess has been to write/telex each group several months before
visiting the country. This may seem unnecessarily redundant. However, China, like most
developing countries, does not possess sufficiently coordinated information systems. For
example, it has nothing like the system of the Hong Kong Trade Development Council's
trade enquiry data bank, which contains information on more than 18,000 local manufacturers, exporters and importers and a file on more than 80,000 overseas importers
(south China Morning Post, 1985).
When the aggregate statistics about the thousands of JVs which have been signed are
presented, what is not made clear is who the partners typically were, and in which
industry the investment has occurred. Up to 1984, over three-quarters of the JVs in China
were with partners from Hong Kong (Table 2). This provides support for Hong Kong's
oft-voiced view that it is the "gateway" to China.

Table 2: Source of JV Investment in China

Frequency Percent

Hong Kong and Macao 658 78.3

U.S.A.

59

Japan
55
Europe
31

7.0

6.5
3.7

South
East
Asia
30
3.6
Australia and New Zealand 7 0.8
Total

840

100.0

The

existence
of
H
gone
unnoticed
b

reasonable

appro

technology
which
market
but
lack
t
can,
however,
pro
joint
venture),
wh
third
party's
(Ho
knowledge
can
exc
a
number
of
fore
Most
of
the
JVs
(Table
lar, tourism.

3).

The

seco

While the mega-projects such as the Three Gorges Hydro development project and AMC
auto assembly have received the headlines, most of the investments - no matter where
the source - involved a total investment of less than $ 5 million (Table 4). (In fact in only

about 5% of cases (Table 5) did the foreign partner's contribution exceed $ 5 million.)
Since decision-making is decentralized for investments under $ 5 million, this provides
further support for the importance of rigorously investigating across China the various
packages which might be offered to any potential foreign joint venturer.

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59

Table 3: Industry Divisions (According to Sic Code) for JV Investments in China

Frequency Percent

(A) Agriculture and Related Services 5 0.7

(B) Fishing and Trapping 10 1.5
(C)
Mining
19
2.8
(E) Manufacturing 408 59.9
(F) Construction 40 5.9
(G) Transportation and Service 20 2.9
(I) Wholesale Trade 26 3.8
(J)
Retail
Trade
2
0.3
(K) Finance and Insurance 2 0.3
(L)
Real
Estate
3
0.4
(M) Business Service 23 3.4
(O) Educational Service 1 0.1
(Q) Accomodation 66 9.7
(R)
Other
56
8.2
Total

681

100.0

Table 4: Total Investment

Hong Kong U.S.A. Japan Europe Other Total

and Macao

Under $ 5 million 565

$ 5-10 38 8
$10-50 31 5
Over $50 5 4

42
6
3
1

Total

31

639

59

55

Table

5:

45
4
3
1

23
3
6
0

37

28 703 (85.6%)
59 (7.2%)
49 (5.8%)
11 (1.4%)

802(100.0%)

Foreign

Partner

Equ

Frequency Percent
Under $ 5 million 791 94.2
$
5-10
22
2.6
$
10-50
25
3.0
Over
$50
2
0.2
Total

840

100.0

One
considerati
venture
as
oppo
firms
are
no
lon
choose
to
use
it,
practice
the
for
(see
Table
6).
Th
consistent
with
1985).
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Table 6: Foreign Equity Percentage

5-24%= 24
25%= 88
26-48% = 313
49%= 60
50% = 247
51-99%= 73
805

The most frequently observed foreign equity percentage (see Table 7

equal ownership is consistent with the underlying Chinese desire for
Equal ownership does not necessarily require equal control over all de
joint venture. Decision-making may be shared between the partners, o

ple, in the Fujian-Hitachi Television Ltd. joint venture in Fuzhou

Chinese administer and finance housing, medical and welfare costs, th

overseas the technical and production areas, and they jointly oversee h

Table 7: Most Frequently Observed Foreign Equity Percentag

(n = 802)
50% = 247
40%= 97
25%= 88
30%= 71
49%= 60

A great deal of variability exists between the source of investment and the
percentage desired (see Table 8). For example, Hong Kong investors seem
willing to take a minority equity position than investors from Europe, U
Some Chinese officials will privately admit that desire for equal or majori

by European, Japanese and American firms contributed - at least in the e

their lower levels of investment. Yet as Schaan (1983) had pointed out, in

ing countries, control is possible even with a minority equity position. S

control mechanisms available include use of contracts, the ability to set
procedures, staffing, and design of the reporting structure.

Table 8: Foreign Equity % by Country

Hong Kong U.S.A. Japan Europe Other Total
<40% 227 14 12 5 11
40-48% 132 9 5 8 2
49% 44 8 4 2 2
50% 170 19 25 14 19
>50% 55 6 8 1 3

269 (33.4%)
156 (19.4%)
60 (7.4%)
247 (30.6%)
73 (9.1%)

Total 628(78.8%) 56(7.0%) 54(6.7%) 30(3.7%) 37(4.6%) 805(100.0%)

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61

For most Western firms the most unusual element of joint venturing in China is the use
of a fade-out provision. As Table 9 demonstrates, over half of the JVs formed until 1985
were established in such a way that at the end of ten years, the entire business would
become wholly Chinese owned. Thus, many foreign firms were forced to make their

investment decision based on a finite stream of earnings. The fade-out provision has
made some multinationals nervous. They fear that if there are start-up delays or other
unforeseen developments, they will be unable to recoup their total investment. Solutions
do exist; the most frequently observed one has been to extend the fade-out provision
beyond ten years.

Table 9: Predetermined Duration (in Years) of JVs Formed

Length Frequency
2-

10

113
357

11-14

54

16-20

85

21-60

41

Missing or Unspecified 31
840

Conclusion

The joint venture process in China is different from that in developed countries and
different than with joint ventures in developing countries which have market economies.
These differences stem as much from politics as they do from the short time period in
which the regulatory infrastructure has been enacted.
Much progress toward a more realistic joint venture investigation process has been made.

The foreign investor contemplating the establishment of a JV in China now has a

commercial code as a guide, and has historical data - some of which was presented
here - to clarify what common practice has been.
Yet problems also remain. There have been many more joint venture agreements signed
than there are joint ventures in operation. In fact, The Economist (August 16, 1986) notes
that "less than one-third of the 2,600 joint venture companies named so far have actually
gone into business." This is due to many factors including inflexibility (from both
partners), a short term orientation, management problems, and foreign exchange difficulties.

At all times the foreign investors must keep in mind that a long-term, flexible attitude
is needed. To overcome foreign exchange difficulties may require a willingness to consider some form of countertrade, something which many firms consider unwieldy. Multinationals which are patient, which offer China what it needs, and which are willing to
reconsider some of the traditional methods they have used for doing business, can be
successful investors. Such an approach will not be practical for all firms. Where such a
profile does exist, the Chinese market will continue to hold promise.

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Footnote
1 The authors wish to acknowledge the comments of Donald J. Lecraw in the preparation of this
article.

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