This book reports on foreign investment in transition economies and the corporate governance of international strategic alliances in China. This book sheds new light on the foreign investment process and provides an overview of corporate governance in China.
Introduction
Outlook of the transitional economies
As an illustration of foreign investment in transition economies, this chapter presents the dichotomies faced by most foreign firms in China, which include strategic issues such as technological intensity, investment location, and ownership arrangements. The writer provides a detailed discussion of whether international investment and international production should be closely related to the implementation of foreign firms.
Strategic profile of foreign investment
Thus, the growth of foreign investment in China reflects not only domestic market demand, but also a general industrial ability to meet the needs of international primary markets. Managing foreign investment in a transition economy presents even greater challenges in properly exploiting the strategic benefits that can be derived from FDI in accordance with the determinants of the investment profile of foreign firms and the level of control achieved over their intellectual property rights.
Economic profile of foreign investment
Socio-cultural profile of foreign investment
There is some evidence that investment in China in the manufacturing sector is heavily concentrated on heavy machinery and equipment (with a small portion also going to the specialized food processing industry). The strong performance of China's manufacturing sector reflects the success of specific FDI policies and other measures taken to encourage investment by foreign companies.
Geographical distribution of foreign investment
In addition, there are many important industrial cities with educational, scientific and research centers in the central and western regions. Recently, the Chinese government has adopted policies to encourage foreign investment in the central and western regions, and it is expected that domestic funds will also increase to support foreign firms investing in these regions.
Overview of the Chinese domestic investment profile
The central and western regions in China include 19 provinces, municipalities and autonomous regions, which together offer vast land resources, rich mineral resources, a large population, low labor costs and a large market potential. Improving macro-institutional infrastructure can induce foreign firms to invest or operate in China.
Market entry modes of foreign investment
The costs of technology transfer in licensing are known in advance, thereby reducing the risk borne by the licensor. The duration of the CJV is determined by the agreement of domestic and foreign partners and must be clearly stated in the contract.
Principal issues identified
The most important organizational control gained for these majority owners is related to what has become known as the "three rights": the right to appoint the general manager; the right to determine the organizational structure; and the right to appoint personnel to critical functional areas. Institutionalizing corporate governance and creating a sound institutional environment primarily requires understanding how a country's economic, socio-cultural, and political institutions influence the corporate governance of a strategic alliance.
Plan of the book
The achievement of organizational learning has generated considerable research interest, focusing on identifying factors that influence the business configuration of participating firms. Previous research includes organizational learning activities conducted within operational support systems and strategic contexts by participating firms and identifies factors that may influence each level of strategic alliance management.
The management of corporate culture and organization in transition situations requires the exploration of the development of indigenous approaches that are essential to the understanding of the influence of corporate culture in the management of an international strategic alliance. Traditional Chinese culture relies heavily on relationships, informality, trust in the group and respect for internal hierarchy.
In a transition economy, the foreign investments pursued through international strategic alliances create major challenges for the host government. Specific experiences with international strategic alliances have stimulated research and discussion on a range of issues of wider interest to international business.
Summary
It provides a summary of FDI theory in terms of the explanation of absolute advantage, the theory of comparative advantage, international production, the Heckscher–Ohlin model, the product life cycle, and the competitive advantages of nationals. This chapter presents the theory of FDI, followed by an overview of the Chinese government's investment policies and regulations along with the general application of foreign trade and foreign investment.
The theory of foreign direct investment
Such industrial efficiency is called 'the absolute advantage' for a country recognized as specializing in the production of specific products or services. Porter categorized four main components as 'the diamond of national advantage' that a firm must use to be successful in the market it faces.
The implications of opening Chinese markets
The establishment of SEZs marks the beginning of a new era in which China opens up to the outside world. The State Council approves the suggestions for the implementation of policies and measures related to the development of the western region.
Building Blocks for Corporate Governance
This chapter also highlights how the proper management of foreign investment can improve business opportunities for foreign firms operating overseas. As part of assessing alternative investment opportunities in China, most foreign firms devote considerable resources to calculating the potential profitability of each business.
Reform of national financing
The deregulation of the financial services sector, coupled with technological advances in ownership control, has significantly stimulated investment by foreign firms in China. A growing interest in the economic aspects of fiscal and monetary regulation has also played an important role in China's capital market, international manufacturing, and foreign trade activities.
Reform of political institutions
One motivation for a local company to engage in an international strategic alliance is to improve its performance. In forming an international strategic alliance, the initial investment is unlikely to be the main business cost.
Reform of national taxation
The corporate income tax rate is 24 percent in coastal areas and provincial capitals. Foreign companies in the high-tech sector can enjoy the benefits of an exemption from income tax for the first two years after making a profit, and the income tax is halved for the next six years.
Encouraging foreign investment firms
The development of manufacturing, technology and export-oriented enterprises played a positive role in China's industrial growth. Experience shows that China's economic reform has already brought about rapid changes in manufacturing, technology and export-oriented enterprises.
Theoretical perspectives on corporate governance
Creating a competitive regulatory institution within a country is essential for promoting sound corporate governance. Discussions about the effect of corporate governance on certain economic aspects at national level.
Corporate governance at the national level
Market power is primarily represented by a firm's business background, distribution networks, and host country affordability versus cost (Porter 1990; Mallin and Rong 1998). Market competition is seen to play an intermediary role affecting a firm's corporate governance conditions.
Corporate governance at the organizational level
This is considered to have a direct influence on the bargaining power of each of the strategic alliance partners (Blodgett 1991). The bargaining power perspective offers several contributions to the analysis of relationships between ownership and control of a strategic alliance.
The formation model
Porter and Fuller (1986) emphasize the strategic advantages that can be obtained from an international strategic alliance in the context of the globalization of industries. Strategic management theory focuses on the strategic alliance as an additional means of realizing opportunities in the global business environment.
The ownership investment model
Ownership resources provided on a contractual basis appear to be important in the formation and operation of the international strategic alliance as the contract can limit obligation and responsibility in terms of the realization of such resources. Non-contractual ownership resources in an international strategic alliance context show a commitment through the visible actions and values of key decision makers to the continuation of the joint goals and values of the partnership.
The corporate governance model
Schaan finds that the appointment of members of a joint venture's board of directors and the appointment of the general manager are important control mechanisms. A partner firm may be able to influence the relative allocation of control over a strategic alliance by influencing personnel control over the strategic alliance's senior management positions.
The corporate culture model
The board of directors may also provide certain strategic indicators to the partner firms, which may lead to revisions of their audit policies.
The organizational learning model
Research measure construction
There are pros and cons to using the interview method, as the amount of data that can be collected is limited and the flexibility of using a range of questioning techniques is up to the interviewer. Standardized open-ended interviews allow the interviewer to systematically collect detailed data and facilitate comparability among all respondents.
Pilot study
These interviews allowed clarification of unclear issues that arose during data analysis and also allowed the researchers to explore issues that were not originally included but became important during data collection and analysis. As the primary study involved data collection in China, five pilot studies were conducted in which responses to organizational items were solicited from managers in international strategic alliances.
Interview procedure
The partner firm's objectives for each international strategic alliance and their achievements were assessed separately by most of the domestic and foreign senior managers interviewed. With this possibility in mind, open questions were asked in the last part of the interview.
Sampling
To gain insight into the mutual perceptions of local and foreign managers, a number of open questions were asked, which often led to the interview lasting longer than the pre-agreed duration. Therefore, multiple respondents from one strategic alliance were interviewed, as this would likely strengthen the validity of the information provided.
Choices of industrial sectors
The topic of foreign investment and corporate governance in a strategic alliance made it possible to find external variations across multiple industries and locations. The industries identified in this study have experienced greater technological change and competitive pressures in the marketplace due to substantial foreign investment and market competition, generating a rich set of industry information for comparative research.
Data collection
The second part was to record specific ownership resources provided by partner firms to a strategic alliance. Whenever acceptable, the interviews were tape-recorded and approximately 20 percent of the interviews were recorded.
Coding
Respondents from both sides also indicated their perceptions of the degree of local and foreign influence in the areas of strategic alliance management. For the data collection, the local and foreign leaders of a strategic alliance were located and interviewed.
Managing an International Strategic Alliance
This chapter assumes that the formation of an international strategic alliance in China is usually associated with bringing together different combinations of participating firms' resources, knowledge and capabilities. An international strategic alliance's exchange of resources, knowledge and skills will depend on the involvement of all participating companies' management to achieve strategic, cultural and operational alignment in the operation of the strategic alliance.
Ownership determinants: resource-based theory
The resource-based view of the firm focuses on differences in performance that are based on a complex bundle of a firm's resources, knowledge and capabilities. Ciborra (1991) suggests that a firm's resource-based advantages must include a complex bundle of resources, knowledge and capabilities.
Ownership leverage: resource dependence theory
It is recognized in the resource dependency literature that there are important competitive advantages that can be derived from resource synergy such as that found in an international strategic alliance. A strategic alliance can build on the possession of a partner company's unique core knowledge and competence to achieve superior performance.
Ownership, localization and internalization theory
The OLI analysis perspective on partner firms' investments and their corporate governance, as applied to an international strategic alliance, has received mixed support. Forming an international strategic alliance facilitates various types of transfers of resources from partner companies to the strategic alliance that can affect its performance.
Developing a checklist for forming a strategic alliance
The goals that each partner will set for the international strategic alliance will initially be based on the knowledge and resources that each party possesses and the organizational system within which they normally operate. There is a great burden on the negotiating teams to optimize the resources and the set goals for the strategic alliance.
Strategic motives
The raw materials available in the local Chinese market can either be used to meet production needs or sold to third markets. Such activities will help foreign companies in their competitive position or simply reduce competition from other companies operating in markets in the same geographic area.
The feasibility study
The strategic characteristics of the partner influence the operational capabilities and resources necessary for the competitive success of the international strategic alliance. Technology is defined as expertise that specifically relates to the product of an international strategic alliance.
Ownership configuration
Strategic alliance partners can provide "non-capital resources" to an international strategic alliance outside of any formal contract. However, the most important corporate governance gained from 'leverage capital' in an international strategic alliance relates to.
International technology
Providing non-contractual resources to a strategic alliance is one way to build a partner's motivation and commitment because they appear in the form of informal goodwill. Non-Contract Resources Its owners, outside of any formal contracts, can provide 'non-contract resources' to an international strategic alliance.
Motivation for technology transfer
The greater the value of a strategic alliance's technology stock, the greater will be its competitiveness in the market in which it operates, and therefore the presence of technology stock is very important. The value of the technology transferred from a foreign firm to a strategic alliance in China is likely to be high if the foreign firm's technology stock is in the form of tacit knowledge due to the competitive advantage created.
Process of technology transfer
Technology transfer in a strategic alliance in China is not without cost because it involves the use of different resources that may have different levels of technological value. Decisions about the type and level of technology transferred in a strategic alliance will be made by a partner firm on the basis that the power derived from the technology depends on its availability.
Absorptive capacity and technology transfer
The benefits of technology transfer can create different types of connections with local suppliers, customers and competing companies. The transferring firm's willingness to engage in technology transfer is determined by a number of factors, including the perceived need to internalize control of proprietary technological know-how, the incentive to exploit knowledge, and the availability of scientifically and technically trained labor in a strategic alliance.
Technology transfer performance
Whether technology transfer is successful or not depends in part on the availability of supporting infrastructure. Where the hedging effectiveness of a technology transfer is unknown, a firm may become more averse to the financial risks of the investment.
Strategic role of the board of directors
Domestic and foreign partners are represented by the board of directors and participate in the management of the strategic link. The introduction of financial controls can help explain the performance of a strategic alliance in terms of achieving its financial goals.
The strategic alliance’s management
Facilitation of a strategic alliance's local supply becomes more focused with increased management competence. The management of a strategic alliance's delivery of technology and relevant service competencies to the supply chain requires.
