High-technology management in China: A case study of the Shanghai success stories

Journal of ENGINEERING AND

TECHNOLOGY MANAGEMENT

JET-M E L S E V I E R J. Eng. Technol. Manage. 12 (1995) 111-137

High-technology management in China: A case study of the Shanghai success stories

Maris G. Martinsons a,b,*, Choo-Sin Tseng ax ~ Faculty of Business, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon Tong, Hong Kong

Pacific Rim lnstitute J~)r Studies of Management, Vancouver, Canada Shanghai Universi~ of Economics and Finance, Shanghai, PR China

Abstract

An Open Door Policy has encouraged foreign direct investment (FDI) into the People's Republic of China (PRC) since the late 1970s. Cultural affinities and geographic proximities help to explain the dominant investment role of the Nanyang Chinese to date. The PRC is now actively seeking greater participation from Western and Japanese firms. Their technology is deemed critical for further modernization in China. Higher-technology firms are being lured to Shanghai, a city with a cosmopolitan past, a solid industrial tradition and a strategic location. In their own cross-cultural research venture, the authors examined seven pioneering higher-technology joint ventures in greater Shanghai. Each has a Western partner and has achieved success by designing, realizing and maintaining a delicate venture-level equilibrium within a dynamic macroenvironment. These exemplars are used to provide high-technology venturers in liberalizing economies with a comprehensive and empirically- based prescription for success.

Keywords: Technology transfer; High-technology management; Quality control; People's Republic of China; Shanghai; Strategic management; Joint ventures

1. Economic growth in China

The People ' s Republic of China (PRC) has experienced very rapid if rather unsteady economic development since the late 1970s. The wor ld ' s most populous country has shifted away from self-reliance and centralized p lanning towards liberalized trade and a market- oriented economy. Foreign trade rose from 11 percent of national output in 1979 to about 37 percent in 1993 ( M O F T E C , 1994). Domestical ly, private ventures have come to com- plement, and compete with traditional state-owned enterprises. With progressively fewer

* Corresponding author. E-mail: [email protected]; Fax: + 852 2788-7220; Tel.: + 852 2788-7958.

0923-4748/95/$09.50 © 1995 Elsevier Science B.V. All rights reserved SSDI0923-4748 ( 95 )00006-2

112 M.G. Martinsons, C.-S. Tseng /J. Eng. Technol. Manage. 12 (1995) 111-137

enterprises being protected from market forces, the state sector now remarkably accounts for less than 50 percent of industrial production (Tanzer, 1992).

As the memories of the 1989 Tiananmen Square massacre fade, economic liberalization has accelerated to an unprecedented rate. The national economy has more than tripled in size during the last fifteen years. From 1992 to 1994, its annualized growth rate exceeded 13 per cent (MOFTEC, 1994). These gains have come, almost exclusively, from the non- state sector. This includes private enterprises, foreign-invested ventures as well as entrepre- neurial village and township companies. Based on the growth rates achieved since 1978, the PRC would become the world's largest economy by the second decade of the twenty- first century (The Economist, 1992). The authors have previously noted that structural and political factors are likely to slow future growth and delay the achievement of such a milestone (Martinsons and Tseng, 1993). Nevertheless, in the absence of shock events, the trade and investment climate will remain attractive as the economic reforms, and their impacts, diffuse across the PRC.

A domestic labour force and a consumer market that constitute one-fifth of the world's population now offer an undeniable abundance of business opportunities. Not surprisingly, major business interests from around the world are finding it increasingly difficult to ignore China in their strategy making processes (Martinsons, 1992). In order to channel foreign direct investment (FDI) and maintain macroeconomic control, the PRC has established a number of special economic zones and coastal cities since 1984. Within them, foreign interests receive preferential treatment for their infusions of financial capital and modern business expertise.

Ventures which export their products, fill critical gaps in the domestic economy or use advanced technologies enjoy considerable tax advantages. Meanwhile, foreign firms are still being pressured to invest in local manufacturing, transfer their industrial technologies or enter into co-production arrangements in order to access the enormous consumer market. By the end of 1993, the cumulative total of contracted FDI in the PRC exceeded US $220 billion. Over US $80 billion of this has already been utilized (MOFTEC, 1994). Signifi- cantly though, by the end of 1993, the U.S. and Europe accounted for only about 17 and 24 percent of utilized and contracted FDI in the PRC, respectively (MOFTEC, 1994). This is reflected in Table 1.

Cultural affinities and geographic proximities account for much of the FDI in China. The major "foreign" investors have been the Nanyang (or South Seas) Chinese, who reside in Hong Kong, Taiwan and Singapore. Many of them are primarily motivated by the desire to contribute to the prosperity and stability of their ancestral home. Business profits, especially in the short term, are frequently a secondary consideration (Park, 1993). Financial capital and industrial expertise from Taiwan as well as the business acumen and commercial infrastructure of Hong Kong have been synergized with the human and natural resources of the PRC.

The Nanyang Chinese have capitalized on their economic complementarities and cultural ties with the mainland, to establish a strong economic presence in the southern provinces and to lay the foundations for business expansion across the PRC. Greater China has even emerged as a new economic force, and a major rival to the United States (or the NAFTA grouping), Japan and the European Union (Baldinger, 1992). Rapid transformations of industry and improved living standards have taken place in the southern and coastal prov-

M. G. Martinsons, C.-S. Tseng / J. Eng. Technol. Manage. 12 (1995)111-137 113

Table 1 Sources of foreign direct investment in the PRC. Investment in US$ billions (percentages in parentheses)

Utilized value Contracted value 1984-1993 1984-1993

TOTAL 62.2 220.6

Hongkong and Macao 39.3 (63) 101.4 (46) United States 5.2 (8) 31.8 (14) Japan 5.0 (8) 37.4 (17) Yaiwan" 4.2 (7) 11.9 (5) Singapore 1.0 (2) 4.2 (2) Germany 0.7 ( 1 ) 4.7 (2) United Kingdom 0.6 ( 1 ) 3.8 (2)

~'Only investment since 1992 is included for Taiwan. Sources: MOFFEC (1994), Business China and City University of Hong Kong.

Table 2 Leading FDI sites in the PRC. Contracted investment in US$ billions

1983-1991 1979-1993 (est.)

Guangdong province 20.2 48 Fujian province 4.9 18 Greater Shanghai 3.5 9.5 Greater Beijing 2.2 4.5

Sources: MOFI'EC (1994) Business China; estimates from Department of Economics and Finance, City University of Hong Kong.

inces of China. The most dramatic changes have taken place in Guangdong and Fujian, which are next to Hong Kong and Taiwan, respectively (see Table 2). Interior cities and rural areas have been less affected.

Remarkably though, as Krugman (1994) and others have argued, economic growth in Greater China and across East Asia has been largely achieved by perspiration rather than inspiration. In contrast to Western patterns of development, most of East Asia ' s economic mirac le has been the result of increasing input levels (such as workers and physical capital investment) rather than rising productivity (which would result from technological progress).

1.1. The t echno logy impera t i ve

The PRC has now broadly achieved the objectives which were set for the first stage of its economic modernization. It has obtained foreign exchange, increased industrial efficiency, developed domestic substitutes for many traditional imports and created higher- quality jobs. Many branded foreign goods are being produced and sold locally even as external social influences have been kept to a minimum. Now, in order to satisfy evolving demands in the domestic market and maintain international competitiveness, Chinese firms


must develop or acquire higher-level technologies. The expenses and difficulties associated with technological innovation are leading increasing numbers to seek technical assistance from Western or Japanese sources. Technological stagnation during a prolonged period of isolation makes outside help crucial for further socioeconomic development in China (Woodward and Liu, 1993).

The acquisition of foreign know-how, to upgrade domestic production capabilities, is favoured over the import of actual production hardware, such as machinery and equipment (Wolff, 1989). With the first approach, the recipient gains knowledge, is able to reduce its dependency on imports, and eventually can compete in the global marketplace (Stewart, 1988). China has attempted to lure high-technology investments since opening its door to foreign investors in the late 1970s. Unlike many other developing countries, it is also emphasizing human resource development. The PRC has recognized that people and technology, rather than inexpensive land and labour or abundant natural resources will be the key to further modernization (Yin, 1990).

Despite steady growth in the rate of technology transfer to the PRC, the primitive nature of its industrial activity sharply contrasts with the technological sophistication in other areas, such as the military. Chinese enterprises have shown a limited ability to assimilate the most advanced imported technologies. As in the former Soviet Union, internal politics have forced many of the most talented and creative individuals into the relatively non-contro- versial environment of science and technology. An overwhelming majority of university graduates are employed in the public sector. The PRC has over half a million scientists and engineers working in 15,000 research institutions and over 1,000 universities and technical colleges (Deng, 1990). Their collective strength is in basic research with a focus on theoretical explorations. Despite the increasing scale and scope of exchange programs and research cooperation with other countries (Hu, 1990), only a few have ever developed products for consumer markets.

Economic liberalization and this vast supply of well-educated people make the PRC attractive for high-technology investments. Chinese scientists can be expected to cost- effectively apply their expertise to the engineering, design, manufacture and servicing of technology-based products. Some firms have already relocated their technology-intensive operations into China. About 3 million workers in Guangdong province are now employed by Hong Kong-owned factories (Clifford, 1993). Cathay Pacific Airlines has shifted large parts of its data processing and airline maintenance activities from Hong Kong into southern China in order to increase cost-effectiveness. Typical manufacturing transplants have hun- dreds of local engineers among their thousands of production workers (Kraar, 1993). Meanwhile, co-operation between world-class researchers in Hong Kong and the PRC is increasing, especially in the areas of biotechnology, electronics and information technology management.

Most enterprises within the PRC still use relatively low-level industrial and commercial technology. The introduction of 153 varieties of machine tool technologies and the set up of 10 flexible manufacturing systems (FMS) are among the few exceptions (Jiang et al., 1993). Even in firms with foreign participation, the focus has been on lowering production costs rather than stimulating technological innovation. For example, FDI in China's computer industry has amounted to a mere US $300-400 million (Hui and McKown, 1993).

M.G. Martinsons, C.-S. Tseng/J. Eng. Technol. Manage. 12 (1995) 111-137 115

Light industry, textiles and hotels have attracted far more foreign interest than high technology, energy or transportation and communication projects (Stewart, 1988, p. 168).

1.2. Technology transfer regulations

The Beijing government has exercised care to ensure that the technology transferred into the PRC was both advanced and able to be successfully integrated into the recipient industry. It does not want the country to become a dumping ground for outdated technology. Until the late 1980s, Chinese technology import laws were both complex and bureaucratically cumbersome. However, with the promulgation of the Regulations of the PRC on the Admin- istration of Technology Import Contracts (TICR) and the Detailed Rules and Regulations for the implementation of these regulations, the approval process for technology imports has been both simplified and clarified. There is now a systematic approval process for the following: ( 1 ) contracts for the assignment or licensing of industrial property rights, (2) contracts for the licensing of proprietary technology, (3) technical service contracts, (4) contracts for cooperative production or design, (5) contracts for the importation of complete sets of equipment or production lines.

The Coordinating Committee on Multilateral Export Controls (COCOM) has historically banned the export of advanced technologies with actual or potential military applications to Communist countries, like the PRC (Wemple, 1992). Even shipments of high-end personal computers required special clearance. However, international attitudes towards China are changing. The PRC has made concerted efforts to attract overseas trade and investment since the Tiananmen Square massacre (Selwyn, 1990). COCOM has already granted a General Licence for Intra-COCOM Trade to Hong Kong, which will revert to PRC administration in 1997. Meanwhile, the Clinton administration recently decoupled the PRC's most-favoured-nation trade status from human rights issues, and ended curbs on U.S. high-technology exports to China. The PRC is also likely to join the General Agreement on Trade and Tariffs (GATT), or its successor organization, in the near future.

These developments will enable the PRC to accelerate its technology acquisition efforts. This is consistent with the bolder experimentation of market-oriented practices which paramount leader Deng Xiaoping advocated in 1992 (Jiang, 1992). The National Science and Technology Development Program (NSTDP) has both ambitious goals and detailed prescriptions for achieving them. Significant resources have already been committed to rebuild and upgrade its technological infrastructure. Investments exceeding US $20 billion per year during the 1990s have improved the transportation network and made both facsimile transmissions and electronic data communications commonplace in the coastal provinces (Qin, 1992; Zheng, 1994). This is seen as a solid foundation for the development of a high- technology industrial sector. In effect, a new stage in the modernization of the PRC has commenced. The conceptual framework developed by Martinsons (1988) is adapted to contrast the old and new stages in Fig. 1.

The PRC is likely to continue welcoming an assortment of foreign investors. However, the country is now particularly keen to attract Western and Japanese interests with more

116 M.G. Martinsons. C.-S. Tseng /J. Eng. Technol. Manage. 12 (1995) 111-137

f rom 1979 to 1992 s ince 1992

Who?

Where?

S c o p e

Focus

What?

A c t i v i t y

Success fac to rs

Nanyang Chinese

Southern coastal provinces

Guangdong Province

(north of Hong Kong)

Low technology businesses

Ef f ic iency Good people

Global business commun i ty

Across much of urban China

Yangtze River

(inland from Shanghai)

Higher technology businesses

Qua l i t y Technology management

Fig. 1. Two stages of development in the PRC.

advanced technologies. The transfer of these technologies and attendant skills are imperative for further modernization. Higher value-added products would leverage the energy generating and port handling capacities, which remain as important constraints on short-term economic growth. Although some 2,500 enterprises have moved into the 52 technology development zones created under the High-Technology Research and Development Initia- tive (a subset of NSTDP), there has been little diffusion of advanced technology into the PRC (Business China, 1993a).

1.3. The lure o f Shanghai

The birthplace of the Chinese Communist party, Shanghai, is paradoxically the new focal point for attracting technology-based foreign businesses. This City above the Sea evolved from a prosperous fishing village to a cradle for the cotton trade. Subsequently, it was transformed from an infamous haven for pirates into a well-regarded treaty port, playing host to both Westerners and other Asians. In the first half of the twentieth century, it was a regional centre of business and culture - a Paris of the Far East. Before the revolution of 1949, Shanghai was the second-most modern city in Asia, after Tokyo (Cheng, 1992). Its cosmopolitan past and industrial traditions are perceived to be important factors in luring multinational businesses.

Greater Shanghai is an attractive site for higher-technology operations. There is a partic- ular appeal to organizations from beyond the Nanyang communities as well as those whose management does not have cultural ties to China. In the early 1980s, visitors to Shanghai saw a city which had apparently been frozen in time for nearly half a century. However, after decades of economic stagnation, it has recently regained its status as the commercial and industrial centre of China -the heart of the dragon. The local roots of two top national

M.G. Martinsons, C.-S. Tseng/J. Eng. Technol. Manage. 12 (1995) 111-137

2 5 0 0 r

2000

1500

1000

500

0 1987 1988 1989 1990 1991 1992 1993

(estimate)

m US $ millions

117

Fig. 2. Utilized foreign investment in Shanghai.

government officials, President Jiang Zemin and Executive Vice-Premier Zhu Rongji (who is also the economic czar), have undoubtedly exacerbated the rapid rejuvenation of Shang- hai. The country's aging paramount leader Deng Xiaoping, who has spent recent winters in the city, has symbolically used it as his platform to campaign for accelerated economic development.

Major steps have been taken to develop the tertiary sector in Shanghai, including retailing, tourism, telecommunications, trade services and finance. Stock market fever has swept the city since the Securities Exchange, one of the first two in the country, opened in 1990. By late 1992, nearly one in three Shanghai families already owned equity shares (Kaye, 1992). Meanwhile, the sales of business suits, cellular phones and assorted luxury items have skyrocketed. Retailers from Japan, Hong Kong and many Western countries have opened outlets to capitalize on the growing demands of Shanghai consumers. Even the Peace Hotel, a symbol of pre-revolutionary elegance and indulgence is being modernized and expanded. Most of China's inland provinces see Shanghai as their international gateway; many have already set up trade offices there.

The city is already one of the world's ten largest seaports, and China's largest. It accounts for 25 percent of the PRC's containerized trade volume (Whitcomb, 1992). Shanghai can boast about its quality port services, experienced trade organizations and high concentration of technical institutes, colleges and universities. Massive developments along the Yangtze River are expected to further increase the importance of the city, which is situated at that river's delta. Although Shanghai still trails other international centres in terms of business services and its transportation network, it is rapidly catching up.

Recently enacted preferential policies are helping greater Shanghai to attract technology- based international businesses. Tax holidays for investors have been extended, a designated free trade zone has been created and investment proposals involving higher-technology are receiving fast-track consideration (The Economist, 1993). Among the most visible consequences of this policy to date are the emergence and growth of three suburban industrial zones (Pudong, Minhang and Wuxing) and "Electronics Street". Several Taiwanese corn-

118 M. G. Martinsons, C.-S. Tseng / J. Eng. Technol. Manage. 12 (1995) 111-137

puter manufacturers have collaborated to develop the latter as an industrial site for selling their products in the centre of Shanghai. Fig. 2 shows the utilized FDI in the city during recent years.

2. Foreign participation in the PRC

Foreigners have been able to contribute to (and financially benefit from) economic and technological development in the PRC since 1979. The potential forms of technology transfer include the licensing of patents and know-how, co-production, cooperative agreements, counter-trade as well as wholly-owned operations. However, the predominant transfer vehicle has been the contribution of technology to either a non-equity or an equity joint venture (McGill, 1993). From 1979 through early 1993, more than 20,000 such Sino- foreign contracts were signed, and about one-third of these have commenced operations (MOFTEC, 1994). Such foreign participation has parallelled the evolution of the overall PRC economy in the last decade, with impressive overall growth being the result of periodic surges and occasional retrenchment (Chan, 1991). The latter was most notable after the Tiananmen massacre in June 1989. Sino-foreign joint ventures now account for over 30 percent of the PRC's total trade value. Their contribution was estimated to have exceeded US $70 billion in 1993 (MOFTEC, 1994).

A joint venture "child" is the offspring of an agreement between two "parents", commonly a foreign enterprise and a local agency or business enterprise. It is created to operate in a specified environment and often within defined parameters. There may be restrictions on product lines, market areas or the operational life-span (Killing, 1983). A joint venture may pool and leverage the existing resources of both partners and enable them to share the required investments, risks and profits (Lyons, 1990). Such a partnership represents a middle road between entirely self-sufficient operations and a business merger (Davidson, 1987; Teagarden and Von Glinow, 1990).

Joint ventures have become an effective means of matching the requirements and resources of a developed economy with those of the transforming domestic economy (Newman, 1992). In many developing countries, they are also a necessary evil. Legislation often requires a local business partner. The Chinese are seeking to acquire advanced technology, hard currency and management expertise while gaining access to foreign markets. Increasing numbers of wholly-owned foreign ventures are being permitted. However, the Chinese authorities at all levels continue to encourage Sino-foreign joint ventures by offering incentives and providing intangible assistance. These arrangements enable the domestic partner to retain a significant level of microeconomic authority while the government remains firmly in control of macroeconomic development. Meanwhile, innovative organizational structures give the foreign investor considerable flexibility to shape and control their relationship.

One survey of 81 joint ventures, conducted by the Ministry of Foreign Economic Relations and Trade (MOFERT, 1986), found that the development of market share in China and/ or the region (51 cases) was a far more common goal among foreign partners than profit maximization (15 cases) or low-cost production (11 cases). Meanwhile, the most com-


monly cited goals of local partners were to gain access to technology (54 cases), management skill (42 cases), capital (32 cases) and overseas markets (27 cases).

Despite the enormous potential and rising political value of FDI in the PRC, the obstacles to effective technology transfer and successful business operations remain formidable. They include the national political system as well as local business and social practices (Baird et al., 1990). Foreign businesses have faced more failure and frustration than most will care to admit. Business start-ups remain difficult, even for the largest multinationals. The experiences of those who have gone before remain invaluable. Thus, it is prudent to examine the experiences of the high-technology ventures which have succeeded in Shanghai. The remainder of this case study focuses on the problems they encountered, tile solutions they implemented and the lessons to be learned from their pioneering achievements under the Open Door Policy.

The authors have conducted extensive research on higher-technology joint ventures in Shanghai at the dawn of the PRC's second stage of modernization. This included three days of intensive discussions with senior managers from seven such ventures. Their respective foreign partners are Squibb Pharmaceuticals, Ingersoll-Rand, Xerox, Printronics, Bell Tel- ephone, Johnson Products and Schindler Elevator. Each of the represented ventures has been operating for several years and is considered successful by both partners. The problems that have been overcome, and ones that continue to linger, in both strategic and operational areas were considered. Academic colleagues from Columbia University (in the eastern United States) and the East China University of Chemical Technology participated in these sessions. Follow-up research over a two year period was used to corroborate our tentative conclusions.

Our own cross-cultural research joint venture has resulted in an in-depth examination of a phenomenon which we believe to be of emerging importance: higher-technology management in liberalizing economies. In addition to making substantive contribution, this knowledge will significantly benefit both technology management researchers and profes- sional managers.

3. Designing the equilibrium

The foreign partner in a PRC-based joint venture commonly provides the capital, the potential for access to the international market as well as much of the technical and managerial expertise. In a higher-technology operation, this usually includes know-how related to both production processes and manufacturing equipment. A local partner should be able to contribute land and buildings, access to appropriate employees and knowledge of the domestic business environment. They will know the best sources for raw materials, how to attract domestic customers for finished goods, and how to stick-handle through the regula- tory environment. The Chinese partner can help to bridge the economic, cultural and linguistic differences (Chen, 1993).

The Chinese say that "one hand cannot clap". This certainly applies to a Sino-foreign joint venture. The fit or compatibility between the partners' value systems, management approaches and corporate cultures will be a critical determinant of success (Business China, 1993b). Those seeking a local partner are now able to pursue and choose among an


increasingly sophisticated and experienced pool of enterprises. Growing numbers of Chinese are being exposed to international business practices while government interference is becoming less of a problem.

For higher technology firms, this can be a mixed blessing. Most of the best-connected and well-established firms are already participating in one or more joint ventures. Mean- while, managers and employees in unprofitable state enterprises will welcome the injection of new capital but fear the introduction of international productivity and accountability standards. Finding a partner among a crowd of eager candidates with dubious credentials has replaced the government-arranged partnerships of the 1980s. A relatively small share of the domestic firms have the technological sophistication and business acumen to successfully partner a high-technology venture. The prospective partner need not come from one's own industry, especially when advanced technologies and management techniques will be used.

With economic decentralization, it is increasingly important to ascertain whether the prospective Chinese partner has the authority to negotiate and sign a contract, and to ensure that the government approves of the project. The legal status of the Chinese entity can be determined by reviewing its business license and articles of association. A potential domestic partner should be able to demonstrate that the project is both feasible and acceptable to the relevant government authorities. They should be able to produce a feasibility study report and a project authorization certificate. The former should address the following: financial and sales forecasts, site selection and infrastructure facilities as well as the supply of workers and raw materials.

3.1. Partner selection and negotiations

The formation process for such a strategic alliance usually includes two distinct phases (Lorange et al., 1992). An initial analysis considers the prospective match in broad terms on various dimensions. A subsequent phase sees a more intensive and focused analysis accompanied by some soul-searching questions about long-term compatibility. This process was invariably problematic for pioneering foreign investors. The PRC's relatively primitive and dynamic business environment during the 1980s was far from ideal for high-technology venturing. Shah ( 1991 ) has identified the following common complaints: (a) determining the respective value of each partner's actual contribution, (b) reconciling divergent goals to establish the specific basis for win-win cooperation, (c) fairly accounting for exposure to uncertainties, and (d) structuring the management and control framework.

An increasingly comprehensive and uniform joint venture code in the PRC, accumulated experiences and the knowledge of previous successes are making it progressively easier to successfully conclude business negotiations in the PRC. Among our sample of pioneering ventures, such discussions lasted an average of nearly three years. Xerox and Squibb needed four and seven years of negotiations, respectively. Hard bargaining and the maintenance of a tough but fair stance are critical.

Chinese negotiators can easily frustrate foreign business people who are not used to their tactics. Protracted discussions will test whether the partners are committed to the relationship

M.G. Martinsonx, C.-S. Tseng /J. Eng. Technol. Manage. 12 (1995) 111-137 121

which is to be sealed by a contract, and not merely obliged to the written agreement. The Chinese managers in our discussion group confirmed that they relied on personal integrity far more than any pieces of paper. Nevertheless, the foreign partner's insistence on writing down as much as possible had in retrospect helped to reduce the frequency and severity of disputes once the venture was in operation.

Despite the best efforts of the Shanghai Foreign Investment Commission (SFIC), considerable time was (and still is) needed to get an assortment of government approvals. A prospective foreign partner can use these delays to verify the data provided by the Chinese and conduct its own feasibility study, based on this preliminary information. The managers agreed that maintaining team continuity during the long negotiations was critical to their eventual success. There had been little turnover in the negotiating teams and no change in the strategic objectives of the ventures we studied. A year or more of continuous and concentrated activity within China were common among the foreign firm's representatives.

The strong support and progressive attitude ofZhu Rongji, the former mayor of Shanghai, was critical. He helped to minimize delays and often bridged difficulties between the partners. Other municipal authorities across the PRC can now approve manufacturing projects with total investments of up to US $10 million. For Shanghai, the figure is US $30 million. Zhu's legacy is a local government infrastructure that is highly developed and moderately efficient, even by Western standards. As an example, Shanghai is among the first East Asian cities to draw up a computer-based geographic information system (GIS) to handle problems related to population growth and unruly property development.

Even so, the pioneering Shanghai managers agreed that the business "rules" had periodically and inexplicably changed. They frequently felt like guinea pigs in China's grand experiment with Western business practices. For example, the government instituted local content rules (between 40 and 60 percent) for joint ventures during 1992. This was apparently an attempt to achieve a macroeconomic foreign exchange balance. Foreign investors also quickly discovered that personal and business relationships are intertwined in the Chinese culture. As a result, local negotiators viewed contractual disagreements in the early stages as cultural rather than legal matters. An insistence on condensed form agreements, rather than the precision and detail of traditional Western-style business contracts, can later complicate the resolution process.

3.2. Joint venture and technology transfer agreements

The tangible result of successful negotiations is a joint venture agreement. Typical contents of this document are shown in Table 3. Stewart ( 1988, p. 170) describes technology transfer as "a costly and difficult business, and made even more difficult if the ultimate aim is to export the high-tech products." The ubiquitous standard-form contract lacks the specificity or flexibility to cover the complex and ongoing nature of most technology- transfer relationships. Higher-technology ventures have commonly augmented it with a technical cooperation contract. This latter contract deals with the transfer of know-how and product technology, the nature and means of compensation and the duration of the agreement (Hendryx, 1986, p. 62). Typical contents are shown in Table 4.

Both of these documents may be complicated by not only capital and personnel consid- erations, but also influenced by cultural and social differences. The prospective partner, and


perhaps more importantly the relevant authorities, must be convinced that the foreign technology satisfies three conditions. It must be advanced, suitable for the Chinese situation, and offer significant economic benefits. The Chinese government will also want to ensure that there is a planned process for the localization of materials and management. Before finalizing these contracts, it is also advisable to get written guarantees for key inputs (like electricity) and rulings on the legal and tax consequences of all foreseeable transactions.

The common forms of compensation for a transferred technology include royalties, profits and fees. Several of the pioneering ventures used on a mixture of these forms to diversify their financial risk. The Chinese will typically attempt to include counter-trade provisions in the partnership agreement. The technology supplier is asked to buy back goods made by the joint venture in order to ease the foreign exchange burden of the local partner. In considering this option, the foreign partner should recognize that the sales of both products and services to the subsidiary can be major profit sources.

Two issues are at the heart of many technology-transfer contracts: Who may use the technology? and When can they use it? The protection of proprietary knowledge remains complex and requires customized contractual solutions rather than general prescriptions (Wolff, 1989, p. 455). Significantly, current Chinese laws allow the recipient to freely use both process and product technologies after the contracted term, unless the agreement explicitly includes the scope and period of confidentiality. Generally, intellectual property remains poorly protected in the PRC.

During the 1980s, some local partners illegally duplicated the imported technology outside of the venture before the contract had lapsed. In the present decade, such activities

Table 3 Contents of a typical joint venture agreement

Scale and scope of venture Project and industry details Partner contributions and conditions for cooperation Terms of operation Market information related to customers, suppliers and competitors Technology needs and transfer/licensing arrangements Estimates of workforce size, composition, compensation and training Environmental impact assessment Land and site requirements Utility and infrastructure needs

Table 4 Contents of a typical technology cooperation

Content, scope and description of the technology to be transferred, including a list of relevant patents and trademarks The amount, form and method of remuneration to the supplier The standards, time periods and measures for acceptance testing of the technology The undertaking or risks and liabilities, and the method for computing compensatory damages for contract breaches The respective obligations related to confidentiality and the post-contract ownership of the technology The dispute settlement mechanism


may also be carried out by enterprising employees. According to the TICR, in cases of unauthorized disclosure, the only recourse for the technology supplier is against the contracted recipient, i.e. the venture partner. Supplier concerns about unauthorized sales or outright thefts of technology together with local expectations that technical assistance will be provided until "specified performance levels have been met" can easily sour a business partnership (Simon, 1988).

Several ventures reached an agreement on confidentiality and the valuation of the technological contribution before the formal contract negotiations. Confidential information should be defined as broadly and clearly as possible. The technology recipient should agree not to disclose or duplicate such information without the supplier's written authorization. Disclosures to employees should be made only on a need-to-know basis. Wolff ( 1989, p. 470) recommends that "each employee to whom such information is disclosed should be required to sign an individual confidentiality agreement." Provisions in the subsequent technology transfer contract may be used to make the local partner liable for confidentiality breaches by employees in the venture.

3.3. Chinese communication networks

The front-line Chinese negotiators served more as information conduits rather than decision-makers. The real authorities with respect to price, project content and formalities were typically behind the scenes. Even with such arrangements, the lack of high-technology business expertise often became evident. Novel or unfamiliar concepts must be translated and clarified for the Chinese negotiating team. Consistent and high-quality interpretation is both scarce and critical. China's unique set of technical standards may also require designs and specifications to be disclosed and translated by indigenous engineers. The foreign partner may have difficulties collecting such data for purchased components from its suppliers and documenting internal expertise. Thus, it is prudent for the supplier to stipulate that documentation will be provided "as readily available". A potential alternative is licensing the technology to local suppliers.

Communication channels within China, both between enterprises and state authorities as well as across government departments, are both weak and inefficient. Our discussion group noted that information commonly lacks timeliness or reliability (and frequently both value elements). Misunderstandings of technical aspects and outdated telecommunication facilities (see Zheng, 1994) contribute to these inefficient flows. However, recent linkages to the Internet and the warm reception received by Microsoft chairman Bill Gates in March 1994 are indicative of the focus on improving the situation. Most of the foreign partners still used ethnic Chinese (from Hong Kong or Singapore) or "old China hands" as information intermediaries. They gathered data about technology, production, marketing and personnel prior to the formal negotiations. They were critical to PRC joint venture success a decade ago and remain so today.

4. Implementing the equilibrium

Gibson and Smilor (1991) found that technology transfer processes can be accelerated by fostering interactive communications and personal motivation while surmounting tech-

124 M.G. Martinsons, C.-S. Tseng/J. Eng. Technol. Manage. 12 (1995) 111-137

nological equivocality and cultural distances. All four were found to be salient factors among the PRC-based ventures. During much of the last half century, managers of Chinese enterprises were expected to implement State-defined plans and meet production quotas. Sourcing and sales were beyond their responsibility. Borganjan and Vanhonacker ( 1992, p. 12) note that modern management is still commonly perceived to be "a body of quan- titative techniques, not as a way of thinking and acting." Although Chinese managers perform the same broad category of activities as their Western counterparts, concepts such as marketing, performance measurement, quality control, production planning, financial and accounting systems are novel to many of them (Chow, 1992). This poses problems when implementing a management system to facilitate technology transfer and meet world- class industrial requirements.

Learning by doing is a necessary supplement to technical documentation and preliminary training for effective technology transfer. This increases the need to precisely define and clearly limit the scope of technology guarantees in any contracts. In order to achieve contract- stipulated objectives, venture employees will have to become thoroughly familiar with the basic technology, accept technical assistance, and use appropriate production resources (such as raw materials and equipment) when applying the technology. The duration of the venture contract length should allow an adequate amount of time for the recipient to master the imported technology.

4.1. Cross -cu l tura l c o m m u n i c a t i o n s

Communication problems between individuals from different cultures lacking a common language are not surprising. Within the joint venture, they can occur on the shop-floor or in the boardroom. Informal dialogue, requiring interaction and often employing "careless use" of both verbal and body language, becomes difficult through an interpreter. Subtle meanings may be missed or misunderstood in communications involving individuals from a low-context Western culture and the high-context Chinese culture. This can later produce over-blown problems.

The language barrier exacerbates the need to verbally communicate on a regular basis, and "keep in touch" using non-verbal communications. This helps to avoid ambiguity and enables informed decisions to be made. A foreign partner who understands the local culture and business practices has a decided advantage. Knowledge about the "recipients" of a new technology or management idea will smooth the transfer process. The high-technology pioneers generally followed a trial and error approach. However, current entrants can clearly draw upon their experiences to develop a more systematic approach.

A break with historic customs can sometimes open up new channels of external communications. One foreign general manager decided to forego the customary "Chinese wall" when building a new plant in the suburbs of Shanghai. The idea of a factory without external barriers would never have been proposed, and certainly not accepted by those familiar with local traditions. The foreign manager conceded that the grass and flowers around the plant may be destroyed, and perhaps even the building would be vandalized. However, he coun- tered that, even if the community came and caused some damage, it was a small price to pay. He would replant the flowers and put in new windows, to replace broken ones. "The community will get to know us ... and in time become our loyal customers".


The need to introduce foreign technology and restructure existing management systems makes the adaptability of those working for the Chinese partner a significant success factor. Each foreign partner recommended the use of international business practices and the development of English language skills among venture employees. Senior staff should be hired not only for their technical or management expertise, but also to mentor junior employees. This reinforces the importance of carefully negotiating the human resource sections of the initial contract.

4.2. Personnel management

Large disparities in the partners' estimates for the number of required employees may be expected. The local parent seeks to employ the largest possible number of local people in the joint venture. The traditional (pre- 1980s) productivity of PRC employees, perhaps one- third of international levels, would also be unacceptable to most foreign partners. Interest- ingly, when one of the authors represented a U.S. Fortune 500 company in a negotiation during the 1980s for a new chemical venture in Pudong, the Chinese side suggested sixty employees for the operation. Similar wholly-owned operations in Hongkong, the Philippines and Singapore required no more than 10 people! Fortunately, the growing importance of market mechanisms is reducing the pressure to recruit unqualified or unneeded workers.

The partners will become familiar with each other's capabilities and expectations during a courting period. Once the venture is operating, the steepest learning curve is typically associated with personnel management. In most cases, the partners moderate their contrast- ing views after years of collaboration. Nevertheless, a significant gap in their human resource management approaches commonly persists. This is predictable, based on their respective business cultures, scopes of experience and ideological backgrounds (see Westwood, 1992).

Performance can be considered as the product of motivational forces and ability. The abilities of the ethnic Chinese have been demonstrated throughout the world in both business and scholarship (Hicks, 1989; Mackie, 1992; Redding, 1990). Several managers noted that the basic technical skills needed for entry-level positions in most ventures are plentiful among the labour force in greater Shanghai. The potential of Chinese workers to meet productivity goals is not in question. However, the methods to cost-effectively achieve them have often proved to be elusive. One manager asked "Why couldn't they do it in my factory from the start?" and then offered his own answer: " I think it was a question of the motivating force."

The management of PRC workers is particularly vulnerable to the cultural legacy of political and bureaucratic interference in enterprise affairs (Shenkar, 1990). Task performance in a group setting is influenced by both cultural beliefs and relationships within the group (Earley, 1993). The traditional approach in Chinese enterprises preaches the management of fear and features "hands-off" policies. The contract responsibility system rewarded enterprises which met government-specified targets and penalized those which did not. In traditional labour contracts, far more emphasis was placed on how to punish people than on how to reward them. This often led to dysfunctional employee behaviour (Lockett, 1988).


Not surprisingly, the Shanghai ventures found that their employees were frightened to act on their own. They genuinely feared the consequences. Many of these workers would initially do little unless explicitly directed by their superiors. Even some longer-term staff show little initiative in getting things done or change their approaches to assigned tasks. The creation and regular review of a formal disciplinary code was a high priority in each of the successthl ventures. However, these policies differ from one venture to another.

Shanghai Squibb Pharmaceuticals has three distinct levels of punishment, depending on the severity of the transgression or mistake. In contrast, the Ingersoll-Rand venture has a streamlined disciplinary code and minimal penalties. It has tried to create a comfortable work environment. Efforts focus on probing for the reasons behind a mistake, and addressing the symptoms of the problem. Local managers remain reluctant to exert control over their workers. This is based on a more recent cultural norm; if Chinese workers did not like one of their supervisors, they can force his removal.

Considerable efforts were made to generate on-the-job enthusiasm. This is difficult without the appropriate blend of education levels among the workforce. Despite impressive surroundings and high-technology production lines, a well-educated employee will quickly become frustrated by a monotonous and repetitive activity. Conversely, less educated personnel will lack the understanding and composure to deal with exceptional work situations. Although positive reinforcement was universally practised, there was little consensus about the best reward structure. Different incentives may be used to motivate different levels of workers. Many local employees view the joint venture as a gateway, and sometimes a shortcut, for obtaining privileges which were traditionally reserved for the elite in the Communist Party. These could include travel abroad, training in foreign technological processes and management skills, and access to foreign currency. Each can be used to obtain specific desired outcomes.

Motivation problems appear to be among the most widespread and the most difficult to resolve, judging by their continued existence in many of the mature joint ventures which we studied. Specific problems include low productivity, poor output quality, unenthusiastic employees and high rates of absenteeism. Even China-Schindler Elevator, in operation since 1980, continues to have some ongoing difficulties in this area. Numerous managers men- tioned that once the level of organizational commitment started to decline, it was extremely difficult to regain.

4.3. The emerging labour market

The "iron rice bowl" concept, whereby employees are guaranteed life-time employment regardless of performance, is slowly disappearing. State-run enterprises still form the back- bone of Shanghai industry, but few are competitive. The city's mayor has stated that "we will experiment with bankruptcy for a minority of enterprises which have no hope of stemming their losses and cannot pay their debts." (South China Morning Post, 1994) Factory closures and some unemployment are likely despite general economic development.

As a result, retaining a job is an increasingly important motivating factor in greater Shanghai. The Temporary Regulations, enacted in 1986, enable ventures to introduce specific labour contracts. This agreement is renewable after an initial term only if it is acceptable to both the employer and the employee. Open job-applications and a selection process with


objective standards give venture managers a competitive edge. Several of the long-term expatriate managers in Shanghai have observed the gradual removal of implicit controls and constraints on good business practices. However, many market attributes, such as scarcity pricing and resource allocation, which impact human resource management, remain unrealized. Administrative allocation and internal recruitment remain prevalent in the state sector.

External factors continue to influence the job opportunities for a given person as well as the organizational hiring practices. One manager commented that " i f you don't have the right network, you won't get the right staff." The Chinese enterprise network is a social structure with sophisticated and complicated personnel relations. However, the role of the danwei, the traditional all-controlling work and social group, has diminished dramatically over the past decade. Employee status no longer depends on one's relationship within the danwei. Even so, surplus workers remain in many ventures.

Despite employee reviews and the emerging labour "market", there is little flexibility to deal with poor pertbrming workers. Meanwhile, the better employees can look for other opportunities, and consider switching to other enterprises which require their expertise and experience. Job-hopping and employee poaching have become common since 1992. Young members of the workforce with a university education savour their demand-driven mobility. As a result, the wages for the most coveted workers are now approaching those in the four Asian Dragon economies. However, employment with a high-technology venture is associated with considerable prestige. University graduates from greater Shanghai typically relish the challenge of employment with a well-known multinational.

The residual elements of Confucianism not only explain an almost feudal view of the work unit, but also employee egalitarianism. Equity remains an important consideration in compensation scheme design. Many of the ventures have progressively modified their policy of "equal pay for everyone" into one where compensation varies according to individual (or group) contributions. External incentives may include salary, benefits and productivity recognition, while job challenges may bring a sense of achievement. Foreign partners are usually more willing than their local counterparts to pay high salaries (by local standards) for good quality workers with appropriate expertise. The best will be promoted to decision- making positions in a gradual effort to localize venture management. Empirical evidence suggests that such localization is essential to the ultimate effectiveness of the technology transfer (De Bruijn and Jia, 1993). It is impractical to sustain a high-technology venture with expatriate management.

4.4. Expatriate managers

Initially though, high-technology ventures will have to import their management expertise. The demand for talented expatriate managers in the PRC now far exceeds the available supply. Even with its recent renaissance, Shanghai remains a relatively unattractive posting for senior international executives. Generous compensation packages are needed to attract the best of them. These may include hardship allowances, provided accommodation complete with domestic servants, club membership and extended annual leave. The venture's financial investment and the foreign executive's personal investment make it necessary to exercise great care in selecting individuals suitable to the local environment. Informal,


group-oriented and delegatory management styles are still poorly suited for the PRC. Expatriate management performance and job satisfaction has varied among the Shanghai

success stories. The process of introducing market-oriented production, incentive-based employment and international accounting practices required them to be both patient and tolerant. A few overcame the inevitable obstacles to quickly achieve remarkable results. They relied on business and political expertise to manage the venture and protect the interests of the foreign partner.

Lateral thinking skills and extensive planning for contingencies were considered to be among the most important elements for successful management in the PRC. However, too much emphasis on organizational flexibility and rapid change can conflict with local worker needs. Many still seek to minimize the risk of failure and maintain a great deal of respect for formal authority. A specific initiative to stimulate the social-esteem and basic social needs of workers has proved to be very successful in one venture.

Three ventures were disappointed with at least one of their overseas appointments. In the worst case, there was a complete breakdown in the relationship with the firm's PRC managers. More commonly, employees come to resent the phenomenal (in relative terms) compensation packages of mediocre expatriates. The real and perceived value of expatriate management was strongly related to venture success. It contributes to both business performance and employee morale, via both managerial and psychological factors.

5. Maintaining the equilibrium

Creating an equilibrium that satisfies the underlying expectations of both parents is difficult. Maintaining this equilibrium in daily operations can be even harder. An implicit psychological contract accompanies the explicit legal venture agreement. Akin to a court- ship, trust and friendship blossom over time. Violations of the psychological contract will create bad feelings for the aggrieved party. A partner must consider the potential importance of any disappointment to the other parent when dealing with significant management issues. Self-interests will have to be balanced with the continued need for a solid working relationship. With "face keeping" and guanxi (relationships) both integral to the Chinese culture, this facet can not be overestimated.

5.1. Technology assimilation

Complementary strengths usually contribute to overall success. However, the strength of the local partner can sometimes pose a problem. The processes and management techniques of an enterprise like Shanghai Compressor Factory have become deeply entrenched over many decades. Although its Shanghai Ingersoll-Rand joint venture initially adopted a progressive style of operations management, this proved difficult to maintain. The employees, who were transferred from the local parent, displayed a strong resistance to change. They returned to traditional practices and behaviors at the first sign of difficulties with a new approach.

Comparatively few processes in Chinese state enterprises are automated. Moreover, existing plant layouts make it difficult to introduce modern production methods. Some early

M.G. Martinsons, C.-S. Tseng /J. Eng. Technol. Manage. 12 (1995) 111-137 129

joint ventures attempted to transform an entire outdated factory full of unmotivated workers into an internationally competitive manufacturing operation. Such efforts were generally doomed to failure. A greenfield plant built by a single contractor, with newly hired workers offers much better prospects. As a result, the project site, land prices, as well as factory and housing requirements must be explicitly considered during the negotiating process.

One venture initially based its business processes on traditional Chinese policies and procedures. CKD assembly methods were used. These operations are now gradually being re-engineered and raised to international standards. However, with relatively dynamic technology and fluid markets, there is no firm commitment to the pace and nature of changes. Higher-level integration with overseas operations is easier to achieve; information and telecommunication systems and coordinating mechanisms at the general management level are commonly used.

Despite an abundant labour supply in Shanghai ( a metropolis of some 14 million people), job-specific experience for higher-technology ventures will clearly be in short supply. Skilled secretaries and financial professionals are also difficult to find while the shortages of human resource and marketing professionals are particularly acute. Thus, staff development is an imperative. In many lower-technology ventures, corporate trainers may be brought on-site. However, when more advanced technologies are being transferred, key Chinese employees should be sent to the foreign partner's home site, for a first-hand experience. Many local partners will consider this transfer of knowledge and skills to be more important than operational profitability.

Several of the ventures expanded their internal training programmes from the shop floor to the office. Such investments in staff development have increased both productivity and quality. Despite relatively modest incentives, most employees have been eager to learn and shown the ability to quickly grasp new ideas. Workers at all levels are now expected to perform their pre-specified tasks without worrying about any negative consequences. Man- agement only maintains sufficient authority to ensure that overall operations follow general plans and the terms of negotiated venture contract. When upgraded transportation infrastruc- tures make just-in-time production methods feasible in greater Shanghai, there will be further dividends from extensive staff training and close supplier relationships.

Technical assistance from the supplier is inevitably needed to facilitate technology transfer (Zhao, 1991 ). Design experts from the foreign partner should only institute new operating systems after learning about the local environment, analysing the specific situation or problem in the venture and developing a made-for-PRC solution by adapting a foreign system. Most of the successful Shanghai ventures have merged local practices with their o w n .

Experts providing financial, technical or system assistance must resist the temptation to simply clone their operations in more developed economies. Several attempts to force conformance on the "child" were ultimately counterproductive. The timing of on-site visits by foreign technical experts and trips by Chinese employees to foreign operations must be carefully planned. A smooth flow of information to workers can relieve their anxieties. If employees do not clearly understand why someone is visiting their plant, or why they are being sent abroad, their morale can be undermined.

In the nineteenth and early twentieth century, China's international relationships were controlled by, and generally favoured foreigners. As a result, the Chinese now seek to retain


a large measure of self-sufficiency (Rosser, 1990). At the enterprise level, this translates into caution regarding business contracts. Within the venture, it can impede cooperation and even communications. This combines with traditional preferences for collective decision making to limit the pace at which desired organizational changes can be implemented. Newer practices and systems as well as higher levels of process and product technology should be infused into the venture over time. Three stages in technology transfer have been proposed by De Bruijn and Jia ( 1993, p. 22): (1) importing and assembling, (2) assimilating foreign technology and rapidly localizing production, and (3) finally setting up a dynamic process of transfer from the foreign parent.

The industrial infrastructure of the PRC continues to constrain the pace and scope of technology transfer. However, it is important to have an evolutionary plan which matches specific phases of technology assimilation to explicit marketing objectives (Wang, 1993). Many of the successful ventures initially transferred less than state-of-the-art technologies. The equipment and production methods were gradually upgraded to more competitive levels while major inputs were steadily localized. The quality and efficiency levels in all these ventures and their suppliers now enable global exports.

5.2. Product lines

The specific outputs of the venture were typically determined by considering the goals, time horizons and capabilities of the partners as well as environmental factors. The latter included market demand and local government policy. Foreign technology may be used to improve existing Chinese products or introduce new ones. Shanghai Ingersoll-Rand, Xerox of Shanghai and China-Schindler Elevator have followed very different product line paths.

Ingersoll-Rand would like to rapidly introduce its wide-ranging product line into the venture, to capitalize on the growing domestic market. However, its Chinese partner favours steady but slow business progress. It is leery of product diversification because of its narrow product expertise. Thus, the pace for introducing new technologies and producing new products has required delicate negotiations after the venture was up and running.

Xerox of Shanghai is based on a 30-year renewable joint venture contract and a decade long renewable technology licence. The venture is restricted to the production of desk-top photocopiers and must progressively increase its domestic sourcing of components. This narrow business scope and defined supplier policy do not favour long-term planning or new product development within the initial joint venture. Xerox intended this to be the case. Additional joint ventures, going beyond the current product range of engineering copiers, photoreceptors and toners, would each have their own focused objectives, tax advantages, and offer the transfer of a specific technology. The existing venture has already turned one technical difficulty into a major new business opportunity. The feeders on the Xerox machines initially malfunctioned due to the poor quality of locally-used paper. A product redesign to address this problem eventually led to a new low-end copier. This can now be marketed in other emerging markets.

The Shanghai managers agreed that modern technology was necessary to stimulate domestic sales. Those seeking to develop the largest national market in the world must offer

M.G. Martinsons, C.-S. Tseng /J. Eng. Technol. Manage. 12 (1995) 111-137 131

sophisticated and high-quality products. China-Schindler is duplicating its full line of ele- vators and escalators produced by its Swiss parent. The Chinese receive very liberal access to its latest technology. This is possible because of the mutual trust which has been built up during a decade of cooperation and necessary because of increasing competition from Japanese and local rivals.

Those foreign partners' intent on generating short-term profits and protecting their own international markets may find on-going technology transfer to be inappropriate. The local partner and the PRC government certainly wish to absorb new management techniques and leading-edge technology. However, the technology supplier will have many legitimate concerns about the business ethics and primitive patent-protection laws in the PRC. Main- taining control of valuable new technologies may be problematic even though Chinese laws now provide (at least in theory) 15 years protection against such unauthorized use. Some simply refuse to utilize their latest or best technologies in the joint venture. Others have severely restricted their technology transfer until after the terms of the initial contract are fulfilled. Not surprisingly, only one venture had set up its own research and development facilities.

6. Quality control

Among the biggest risks for a higher-technology business is that its output will fail to meet the standards of its sophisticated customers, Although most necessary parts, materials and services are now readily available in this major industrial centre, the Shanghai ventures have placed a high priority on quality control.

Good housekeeping is essential in high-technology plants. Chinese plant managers have a compulsion to hoard plentiful quantities of both raw materials and finished goods, because of the traditional difficulties in obtaining both supplies and equipment. This parallels the former situation in Soviet enterprises (Martinsons and Valdemars, 1992). As a result, it is difficult to maintain the clean operating environment which is needed for high-quality production using advanced technology. The need to store and periodically move massive quantities of inventory is only part of the problem. Occupational hygiene is an alien concept to many in the local workforce. They are asked to keep their work areas cleaner than their own homes.

Shanghai Squibb produces cardiovascular and anti-biotic drugs as well as multi-vitamins. A comprehensive set of standard operating procedures are used to maintain cleanliness in both the process and the outputs. Smoking is prohibited in the plant while eating is allowed only in a designated area. A fine, equal to several days pay, acts as a strong deterrent. Meanwhile, general cleanliness in a work area can constitute up to half of an employee's performance appraisal. Some ventures hired a special workforce simply to keep the work- place clean. Unfortunately, this has been a poor substitute for operating procedures and discipline or worker education. Janitorial services have proven to be counterproductive. If workers believe that someone else will now be cleaning up, they will quickly neglect personal housekeeping.


6.1. Supplier relationships

Quality issues extend beyond organizational boundaries. Some ventures have chosen to, and are able to import their essential supplies from developed economies. Others carefully inspect their incoming materials from local suppliers and immediately send back any that are unacceptable. Shanghai Squibb has found that its pharmaceutical inputs often meet the required chemical characteristics, but fail to have acceptable physical properties. Their contingency planning includes large stockpiles of foreign-produced goods. Ultimately though, quality problems consume time, increase costs and bottleneck production.

Many ventures have seen the benefits of developing good relationships with domestic suppliers. Sometimes this results in the de facto vertical integration of their operations. Shanghai Bell went a step further, setting up the Belling Microelectronic manufacturing venture to supply its integrated circuits. Other foreign parents have offered financial incentives for quality improvements and training programs to key suppliers. The common goal is to create an understanding of how important quality goods are, and how such quality can be assured and sustained. The concept of total quality management has become popular across the PRC as increasing numbers of higher-technology ventures are set up.

Problems with poor quality outputs and the delays associated with materials inspection can be reduced by extending the training process to include staff in supplier enterprises. This is especially important when high-technology is being used. The Xerox joint venture has adopted its foreign parent's corporate quality culture and successfully instituted the ISO 9000 quality management system. It has provided a wide-range of technical and managerial training, both within the PRC and overseas. Over 1500 employees in about 60 of its suppliers participated in these programs by the end of 1993. Course topics have included the use of transferred technology and equipment, materials management and handling as well as accounting and financial control. Xerox managers estimate that nearly US $10 million has been spent training, supporting and monitoring Chinese suppliers. This enormous human development effort has led to consistent quality and timely delivery. The firm was proud to receive the local version of the Baldridge Award -the Shanghai Quality Award -from the municipal government in 1991.

The costs of poor quality, in terms of repairing or cleanup messes, remaking equipment, finding alternative suppliers and losing customer goodwill, are all concepts communicated to the supplier. The mutual benefits of doing the job right the first time may be stressed. Even in the PRC, prevention costs are typically much less than field service costs. Some ventures have issued a quality "certificate" when a supplier has met certain conditions. Most do not mind if that supplier subsequently uses this certificate to stimulate sales to third parties in the PRC or begins exporting its own products.

Often, the greatest difficulties arise with the simplest components. Import controls continue to give local suppliers considerable bargaining power. Initially, suppliers may seek high-technology business. Although they can produce acceptable components, their switching costs and the limited demand will usually result in surprisingly high prices. Moreover, they typically are unable to maintain required quality levels together with timely delivery. Domestic enterprises will continue to supply the ventures which complain the least. A true marketplace for many components is only in the embryonic stage in China. With many critical inputs having limited numbers of domestic suppliers, the local procure-

M. G. Martinsons, C.°S. Tseng / J. Eng. Technol. Manage. 12 (1995) 111-137 133

ment of raw materials remains a significant problem for most ventures, even in an industrial centre like Shanghai.

Some ventures have now developed strong alliances with domestic suppliers. The use of monetary incentives, similar to the ones given to the joint venture's own workers, are not always sufficient to maintain this quality. The Shanghai managers noted that advanced process technology and management must accompany this cash infusion. Only then will improvements become an entrenched part of the supplier's operation. Two of the joint ventures sent out technical experts, such as methods engineers and quality control specialists, to each of their major suppliers for one to two weeks. These experts gave technical assistance so that the design and operation of assembly and production processes c~)uld be raised to international standards.

6.2. Market development

The Implementing Regulations for the Joint Venture Law provide that, unless otherwise agreed, there should be no restrictions on the quantity, price or region of sale for locally- produced goods. However, quality issues, typified by the question of "whether products should be acceptable to the foreign parent or only satisfy the standards of the local market?" are intertwined with marketing decisions.

The Chinese partner is often more interested in maximizing sales, rather than worrying about dissatisfied customers or lost export opportunities due to shoddy quality. In the past, many also argued that traditional socialist responsibilities required output prices to be controlled. However, market-based prices are becoming increasingly acceptable. Financial planners should recognize that hard currency shortages remain common. Defaults on accounts payable have also increased in recent years, largely the result of triangular debt problems. The ability to repatriate venture profits since 1986 has added another item which must be resolved between the partners.

Authority for setting both domestic and international prices is an important part of the venture contract. In most Shanghai success stories, the foreign partner had exclusive juris- diction over export prices while being consulted on domestic ones. Local managers tended to have greater worries about potential competitors. Foreign partners were more likely to view them as a natural part of business development. With 1.2 billion people in China, near- term market saturation is unlikely. However, the increasing presence of Chinese military manufacturers in civilian markets can not be ignored, especially by high-technology ventures.

Domestic market development can be quite difficult, even when international quality levels are attained and the products cost less than imported counterparts. Many high- technology products remain too advanced or too expensive for Chinese consumers. It is also easy to overestimate the marketing channels of the local partner. As central government power is devolved to local authorities, markets are becoming fragmented and regional competition is intensifying. Many domestic buyers will purchase foreign goods even when that choice appears to be irrational. As an example, the Shanghai Metro underground project is buying escalators directly from the Schindler parent in Europe, rather than from the local joint venture. In addition to the perquisite of foreign travel for the supplier representative,


there is a perception that the joint venture will not incorporate the latest technology and thus produce inferior outputs.

The Shanghai managers did feel that being outside of the Special Economic Zones and having the strong support of the local mayor had helped them to penetrate the domestic market in the 1980s. The development of product loyalty among PRC customers has been a gradual, difficult and often frustrating process. While the national economy is still viewed as a work-in-progress, the Shanghai pioneers felt that they had established a foothold in the domestic market. This is extremely valuable in a culture which places a high value on the development of relationships (Yau, 1993).

The local partner will typically favour export sales in order to obtain hard currency. The foreign parent may wish to point out that, on a national basis, the reduction of imports is equivalent to exports. Hard currency saved is no different than hard currency earned abroad. Strategic innovation is needed in a dynamic business environment (Martinsons, 1993). A move to enter international markets, where prices may be lower than those domestically, can create the need for more formalized planning. This customer base can be developed while reducing dependence on domestic suppliers who require US dollar payments. It is worth noting that Shanghai Xerox has generated more than ten times its forecasted amount of export sales by the early 1990s.

7. Lessons learned

Each of the Shanghai high-technology ventures overcame significant political, financial and operational hurdles to achieve success. Plenty of hard work, long-term commitments from both partners as well as good communications between them and the employees were critical to their results. Mutual trust formed a solid foundation for collaborative strategic management which in turn promoted harmonious learning and adaptation. In each case, the partners were dedicated to the success of the venture. This was demonstrated from the beginning, with ample time devoted to formal negotiations and informal communications. Responsibilities and management guidelines were clearly defined in the venture agreement. Separate and definitive technology transfer contracts were signed before the higher-technology operations began.

Technology infusion, employee training and general cost control are commonly the responsibility of the foreign partner. The local partner typically focuses on shop-floor production activities and most personnel matters. Both cultural factors and managerial psychology must be well-understood if employees are to be motivated to reach quantity and quality targets.Marketing and procurement decisions require the most cooperation. The foreign partner can implement the marketing techniques for customer research, market segmentation and specific promotion. However, local preferences and traditional selling customs must be understood. Guanxi is helpful, if not essential, for raw material procurement.

The set up and development of the higher-technology ventures entailed considerable frustration. The nature of the technology together with the process and time-scale for its transfer were among the most critical strategic issues. Bureaucracy complicated most negotiations while basic infrastructure inadequacies and lingering logistic problems continue to

M.G. Martinsons, C.-S. Tseng/J. Eng. TechnoL Manage. 12 (1995) 111-137 135

hamper many operations. However, recent business results and improving environmental conditions have justified the often exhausting efforts to develop mutually-beneficial relationships.

Improved macroeconomic planning and the emergence of market mechanisms are alle- viating many of the supply shortages. Good telecommunications, relatively dependable energy supplies, proximity to seaport facilities and high quality labour make greater Shang- hai an increasingly attractive site for high-technology operations. With the rising costs of labour and other major inputs, the city has become a relatively expensive manufacturing site within the PRC. This reflects a high-quality workforce, an emerging pool of high- technology managers, and a local government which is encouraging foreign investment by establishing a comprehensive infrastructure. Shanghai now seriously rivals Hong Kong as a strategic gateway into China.

Even as market competition intensifies for lower-technology products, the era of high- technology is beginning. Early entry into China has positioned the foreign partners to benefit as the domestic high-technology market develops. All of them were planning to increase their corporate commitment in China. Local management capabilities were being developed and business systems were being expanded from basic manufacturing, to include sales, service and product design. A few have even seized first-mover advantages and pre-empted competition. Several were considering wholly-owned ventures. They had learned how to do business in China and were now seeking to leverage their expertise.

The managers in our study expressed cautious optimism about the long-term future for high-technology ventures in the PRC. The paramount national goal is political stability. Government involvement will also remain a fact of life. However, most of the managers felt that such conditions were compatible with continued economic development, steady technological progress and gradual social change. They concluded that it was both realistic and appropriate for their corporate peers to establish higher-technology operations in the greater Shanghai area.

References

Baird, I.S., Lyles, M.A., Ji, S. and Wharton, R., 1990. Joint venture success: A Sino-U.S. perspective. International Studies of Management & Organization, 20 ( 1-2): 125-134.

Baldinger, P., 1992. The birth of Greater China. China Business Review, 19 (3): 13-17. Borganjan, J. and Vanhonacker, W.R., 1992. Modernizing China's managers. China Business Review, 19 (5):

12-15. Business China, 1993a. Techno-China, December 13: 4-5. Business China, 1993b. Getting hitched, December 13:11-12. Chan, H.L., 1991. China's road to free enterprise. Business and Management, City Polytechnic of Hong Kong. Chen, J., 1993. The environment for foreign direct investment and the characteristics of joint ventures in China.

Det,elopment Policy Review, 11: 167-183. Cheng, E., 1992. Shanghai surprise: Industrial capital responds to call for economic reform. Far Eastern Economic

Rel,iew, 155 (24): 64-65. Chow, I.H.S., 1992. Chinese managerial work. Journal of General Management, 17 (4): 53-67. Clifford, M., 1993. Companies: brains for hire. Far Eastern Economic Review, 156 (38) : 76-77. Davidson, W.H., 1987. Creating and managing joint ventures in China. California Management Review, 29 (4) :

77-94.


De Bruijn, E.J. and Jia, X., 1993. Transferring technology to China by means of joint ventures. Research and Technology Management, 36 ( 1 ): 17-22.

Deng, S.P., 1990. Status and problems of High-tech industries in China (in Chinese). Shuliang Jingji Jishu Jingji Yangiu, 11 : 22-29.

Earley, P.C., 1993. East meets West meets Mideast: Further explorations of collectivistic and individualistic work groups. Academy of Management Journal, 36 (2) : 319-348.

The Economist, 1992. China: The titan stirs, November 28: SS 1-2. The Economist, 1993. Market focus: Taming the tiger, February 20: 73. Gibson, D.V. and Smilor, R.W., 1991. Key variables in technology transfer: A field-based empirical analysis.

Journal of Engineering and Technology Management, 8 (3/4): 287-312. Hendryx, S.R., 1986. Implementation of a technology transfer joint venture in the People's Republic of China.

Columbia Journal of Worm Business, 21 ( 1 ) : 57--66. Hicks, G., 1989. The four little dragons: An enthusiast's reading guide. Asian-Pacific Economic Literature, 3 (2):

35-49. Hu, G.S., 1990. Scientific and technological exchanges with China. International Journal of Technology Man-

agement, 5 (2): 241-243. Hui, S. and McKown, H.B., 1993. Working out the bugs. China Business Review, 20 (5), 21-24. Jiang, W., Wang, Z. and Sun, H., 1993. Manufacturing technology in China. Journal of Manufactaring Systems,

12 (3): 204-208. Jiang, Z.M., 1992. Accelerating reform and opening up. Beijing Review, 35 (43), 9-32. Kaye, L., 1992. Waiting for Godot: Shanghai holds the key to China's stock experiment. Far Eastern Economic

Review, 155 (28): 50-52. Killing, J.P., 1983. Strategiesfi~r Joint Venture Success. Praeger, New York. Kraar, L., 1993. Now comes the hard part for China. Fortune (Asian edition), 128 (2): 86-92. Krugman, P., 1994. The myth of Asia's miracle. Foreign Affairs, 73 (6) : 62-78. Lockett, M., 1988. Culture and the problems of Chinese management. Organization Studies, 9 (4): 475-496. Lorange, P., Roos, J. and Bronn, P.S., 1992. Building successful strategic alliances. Long Range Planning, 25

(6): 10-17. Lyons, M.P., 1990. Joint ventures as strategic choice - A literature review. Long Range Planning, 24 (4): 130-

144. Mackie, J.A.C., 1992. Overseas Chinese entrepreneurship. Asian-Pacific Economic Literature, 6 ( 1 ), 41-64. Martinsons, M.G., 1988. Towards a tenable technology strategy. Journal of Technology Management, 15 (2):

131-140. Martinsons, M.G., 1992. Strategy making in the post-planning era. Pacific Rim Institute for Studies of Management,

Hong Kong. Martinsons, M.G., 1993. Strategic innovation: A lifeboat for planning in turbulent waters. Management Decision,

31 (8) :4-11. Martinsons, M.G. and Tseng, C.S., 1993. Joint venturing in Shanghai: Lessons from the pioneers. Business and

Management, City Polytechnic of Hong Kong. Martinsons, M.G. and Valdemars, K., 1992. Technology and innovation mismanagement in the Soviet enterprise.

International Journal of Technology Management, 7 (4/5): 359-369. McGill, P., 1993. Shanghai bids to become a top financial centre. Euromoney, 41 (4): 57-61. MOFERT, 1986. A survey of eighty-one Chinese-foreign joint ventures in China (in Chinese). Ministry of

Foreign Economic Relations and Trade internal report. MOFTEC, 1994. Various published reports from the Minist~ of Foreign Trade and Economic Cooperation of

the People's Republic of China and its predecessor, the Minist~ of Foreign Economic Relations and Trade. Newman, W.H., 1992. Launching a viable joint venture. California Management Review, 35 ( 1 ): 68-80. Park, J.H., 1993. Impact of China's open-door policy on Pacific Rim trade and investment. Business Economics,

28 (4): 51-56. Qin, S., 1992. High-tech industrialization in China. Asian Survey, 32 (12), 1125-1136. Redding, S.G., 1990. The Spirit of Chinese Capitalism. De Gruyter, Berlin. Rosser, M.V., 1990. East-west joint ventures in the USSR and China: A comparative study. International Journal

of Social Economics, 17 ( 12): 22-33. Selwyn, M., 1990. Hong Kong 97: Hi-tech jitters over COCOM. Asian Business, 26 (7), 31-32.


Shan, W., 1991. Environmental risks and joint venture sharing arrangements. Journal of International Business Studies, 22 (4): 555-578.

Shenkar, O., 1990. International joint ventures' problems in China: risks and remedies. Long Range Planning, 23 (3): 82-90.

Simon, D.F., 1988. Corporate strategy and the changing role of technology transfer: hnplications for the People's Republic of China. Mid-Atlantic Journal of Business, 25 (2/3): 3548

South China Morning Post, 1994. City keeps course for fast-paced economic growth, 19 February: B4. Stewart, S., 1988. The transfer of high technology to China: Problems and prospects. International Journal of

Technology Management, 3 ( 1/2): 167-179. Tanzer, A., 1992. The Chinese way. Forbes, 150 (7): 42-43. Teagarden, M.B. and Von Glinow, M.A., 1990. Sino-foreign strategic alliance types and related operating

characteristics. International Studies of Management and Organization, 20 ( 1/2): 99-108. Wang, X., 1993. Salient features of foreign investment in southern China. Asian Technology Re~,iew, 3 (6) : 145-

159. Wemple, E.C., 1992, An export controls clash. China Business Review, 19 (3): 30-35. Westwood, R.I. (Ed.), 1992. Organizational Behal~iour: Southeast Asian Perspectives. Longman, Hong Kong. Whitcomb, V.L., 1992. Widening the open door. China Business Review, 19 (4), 39-40 +. Wolff, A., 1989. Technology transfer to the People's Republic of China. International Journal of Technology

Management, 4 (4/5) : 449-476. Woodward, D.G. and Liu, B.C.F., 1993. Investing in China: Guidelines for success. Long Range Planning, 26

(3): 83-93. Yau, O.H.Y., 1993. Consumer Behaviour in China: Customer Satisfaction and Cultural Values. Roatledge,

London. Yin, Z.S., 1990. The transfer of foreign technology and the development of indigenous technological capability

in China. Unpublished Ph.D. dissertation, New York University. Zhao, L.M., 1991. The role of the institutional network in the effectiveness of technology transfer: The case of

the U.S.-China joint venture. Unpublished Ph.D. dissertation, Case Western University, USA. Zheng, C. 1994. Open the digital door. Telecommunications Policy, 18 (3): 236-242.

Documents

High-technology management in China: A case study of the Shanghai success stories