Companies pursuing business in China and other developing countries should customize their fit with local partners, according to an article in this month's edition of a journal published by the Institute for Operations Research and the Management Sciences (INFORMS).
To increase the chance of success, the study suggests, multinational corporations should pick and choose from potential partners' strategic and organizational abilities. Investors who want to begin operating in a foreign market should search for local partners with rich market experience, superior market position, the capacity to absorb advanced technological or organizational skills of a multinational company, and a diverse line of products in the multinational's specialty. Those seeking profitability and stability should select local firms that have superior international experience, a long record of international collaboration, and greater market power.
Using methods employed in operations research and management science, the study examined data from 116 International Joint Ventures (IJVs) operating in Chinese manufacturing industries from 1988 through 1991. The data was collected in Jiangsu Province, which now ranks second in gross domestic product among all the provinces of the People's Republic of China.
Among the study's findings are -
- Product linkage and market position are critical strategic traits affecting all the major dimensions of International Joint Venture (IJV) performance. Apples and oranges don't mix in IJVs; but the presence of a common product produced by the multinational corporation and the local company is an indicator of high performance, both in financial return and sales growth. Local partners' superior market position is an essential determinant for accomplishing economic efficiency, risk diversification, and market growth.
- The strategic fit between partners depends not only upon the shared resources they contribute, but also on the partners' absorptive abilities. A local partner's high capacity to assimilate its counterpart's knowledge will lead to better overall performance in general and better local sales in particular.
- A local partner's organizational experiences is of utmost importance in facilitating the strategic and organizational fit between partners and hence contributing to the IJV's efficiency and effectiveness. A local firm's market and international experience are both found to have a favorable influence on the IJV's risk reduction, market development, and accounting return.
- Experience with inter-partner collaboration leads to superior overall performance and in particular to risk reduction, export sales, and profitability. Collaboration between experienced partners spurs interfirm trust, which in turn results in a better operational outcome and serves as a stabilizing device for venturing activities in a dynamic and complex environment.
- Organization form and size are not significant to the overall performance of an IJV. Nevertheless, hierarchical state enterprises - like those in China - can assist IJVs greatly in enhancing market power and facilitating market development. Organization size in terms of the number of employees positively influences IJV local sales.
The study, "Partner Selection and Venturing Success: The Case of Joint Ventures with Firms in the People's Republic of China," was written by Dr. Yadong Luo, a management scientist with the College of Business Administration at the University of Hawaii at Manoa. It appears in the current issue of Organization Science, a publication of INFORMS.
The Institute for Operations Research and the Management Sciences (INFORMS) is an international scientific society with 12,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work primarily in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, the stock market, and telecommunications.