Brian Bleau - week four

Why did China Benefit from a Joint Venture Policy? A Case Study of Shanghai

In Bishop’s (2007) case study, he begins the article by describing ways that the Chinese government promoted the advance of technology and business practices within the country. Government regulations required that “technology introduced by foreign partners should be advanced and ‘fit China’s needs,’” (Bishop, 2007, p. 93) a strategy that echoed Gomes-Casseres’ (1993) counsel that selecting alliances that minimize risk and maximize benefits is key to a successful alliance. An example of this point is Wal-Mart’s joint venture with Bhatri, which introduced the American mega-corporation’s superior IT and supply chain management capabilities to India in exchange for an opportunity to break into the country’s emerging organized retail network (Bose, 2012).

The Chinese government also enacted a law that required that joint ventures had to contribute to “developing the (Chinese) economy and raising technology levels” (Bishop, 2007, p. 93). By implementing these laws and others, the government, in effect, was able to promote developmental, beneficial alliances while decreasing the potential for corruption and foreign “rent seekers,” supporters who were given a chance to own a piece of the market by crooked government officials (Bishop, 2007).

Bishop (2007) asserts that a large number of Chinese firms engage in joint ventures to acquire technology, business and training expertise, and tax incentives, and according to a study that included interviews with 20 joint venture companies, that the Chinese succeeded in doing so. But this was just the beginning of Shanghai reaping the true benefits of joint ventures with foreign partners (Bishop, 2007).

Further-reaching benefits are gained when the knowledge collected by local firms is dispersed throughout the city and eventually the country. This is accomplished in a variety of ways:

·      Involving local suppliers in joint venture operations

·      Joint venture employees leaving for other companies/starting their own firms and bringing their experience with them

·      Local companies learning and imitating the technology and/or processes of the joint venture (Bishop, 2007)

In addition, the Chinese government implemented local content rules, which required that required a specified percentage of joint venture product components were manufactured within the country. These requirements had a profound impact on the economy as companies like Shanghai Volkswagen (automotive industry) and Shanghai Bell (electronics industry) were required to use 80 and 70 percent domestic parts, respectively. Both companies used competitive bid processes, selected one supplier to partner with and provided intensive training to ensure high quality standards. Equipped with a higher level of business, marketing and technological understanding, these suppliers were able to grow their own companies through the resources provided by the joint ventures, sometimes becoming global forces themselves. Eventually, local content rules were abandoned, but not before the positive effects had dissipated throughout the country (Bishop, 2007).

Bishop’s (2007) three main reasons why Shanghai firms have been successful learning from joint venture partners:

1.     “Shanghai has traditionally had considerable exposure to the outside world compared to many other parts of China” (Bishop, 2007, p. 97).

2.     In Shanghai, foreign companies are spread throughout the city, not isolated like other cities, and give locals the chance to observe and learn.

3.     Since Shanghai is a “showcase for China to the rest of the world,” (Bishop, 2007, p. 97) the government has played a large role in ensuring that the city’s infrastructure adheres to world standards.

Although China has since joined the World Trade Organization (WTO) and joint ventures have declined, it has realized its goal of creating more advanced local firms (Bishop, 2007) and achieving self-sufficiency, one of Gomes-Casseres’ (1993) alternatives to collaboration, through heightened training and improved business practices learned from carefully selected foreign partners. These partners serve not only as teachers, but agents for change within the Chinese economy and others like it in exchange for a chance to breach tightly-kept, “sleeping giant” markets capable of transforming their businesses as well.

References

Bishop, B. (2007). Why did China benefit from a joint venture policy? A case study of Shanghai. China & World Economy, 15, 89-103.

Bose, I. (2012). Wal-Mart and Bharti: Transforming retail India. Asia Case Research Center, 1-18.

Gomes-Casseres, B. (1993). Managing international alliances. Harvard Business School, 78-97.