Foreign direct investment into China in the first six months of 2007 was $31.89 billion, an increase of 12.2 percent from a year earlier (National Bureau of statistics of China, 2010). According to National Bureau of statistics of China (2010), China has attracted the dominant share of FDI into any single country, with over $60 billion per year in recent years. Most investments are in the form of equity joint ventures or wholly-owned foreign enterprises. About 70 percent of FDI each year is in manufacturing industries, but service-related FDI is growing (National Bureau of statistics of China, 2010).
China is an increasingly attractive market for foreign direct investment. Alliances, joint ventures, partnerships and mergers and acquisitions increase every year. The Western multinational firms and Chinese local firms involve a lot of major complementary assets, resources and capabilities. They both engage in a reciprocal give-and-take in the process of market entry.
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The international joint ventures involve British-Chinese joint ventures, US-Chinese joint ventures and European-Chinese joint ventures. All these multinational firms overcome the challenges to set up successful businesses producing and selling in the world‘s fastest-growing market. These experiences also help them to establish their businesses in other countries.
On the other hand, western managers also know by now, that in the long term Chinese firms will be their competitors. They have to know how to deal with it. Cooperation and competition both exist. Chinese companies will not just manufacture and imitate the Western brand name products; they also transfer the western advanced technology legally or illegally. Chinese firms are learning how to develop their innovative capabilities and how to continuous create new products and services. When Western company try to learn about China, China at the same time learns from the western how to be innovative (Luo, 1997).
According China Ministry of Science and Technology (2009), both Western multinational firms and local Chinese firms are benefiting from joint ventures alliances and partnerships. Firstly, International Joint ventures bring the capital, advanced technology and managerial capabilities into the China economy. Secondly, the scale, scope and speed of economic growth in China overall and specific improvements in the innovation capabilities and competitive advantages of particular Chinese firms have largely benefited from joint ventures alliances and partnerships. Thirdly, Both Western multinational firms and local Chinese firms have benefited from joint ventures, alliance and partnerships. Each side is learning, and accessing complementary assets, capabilities and knowledge. Fourthly, Different forms of partnership, complementarities and learning exist depending on the firm, industry
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and operational management. And the strategies and successful management practices also different. Fifthly, these opportunities, and related threats, are evolving for Western firms currently invested in China or looking to invest (as well as firms elsewhere, as Chinese firms increase exports and expand outward FDI). Sixthly, the most successful firms are the most dynamic. They know collaborators are learning, changing and adapting. They identify the future business and reposition themselves within global value chains in response to the future competitive advantages of Chinese firms. Seventhly, Chinese Government‘s National Development Plan is to improve domestic scientific and technological capabilities and enforce China‘s competitiveness in high-technology based industries (China Ministry of Science and Technology, 2009).
The most dynamic western firms benefit from the cheap labour and growing disposable profits; they establish their company in China and learn about the future threats and opportunities from Chinese firms. They are of course also motivated to access the very large Chinese market. According to Luo (1997), Major reasons for Western Firms to form a joint-venture with local Chinese firms are:
Accessing local business knowledge, including customer and supplier connections
Assistance with local officials and regulations
Financial input from partner
To limit investment risk
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Access to distribution channels
Chinese Firms
FDI firms have played a crucial role both in production and R&D in China since China started to reform 30 years ago. The FDI firms are increasing during these 30 years. According to National Bureau of statistics of China, (2010), the shares of value-added and exports of FDI firms in the Chinese industrial sector separately account for 40% and 70% in 2004, it is very high level. Whereas the shares of R&D expenditure and employment are 29% and 34%, this is not so high (National Bureau of statistics of China, 2010). These figures show that FDI firms‘ production is more capital-intensive than R&D-intensive manufacturing in Chinese industrial sector.
There are manufacturing industries, high-tech industries and service industries. The internationalisation in the high-tech industries is very important; there are some discussions on the characteristics of high-tech industries. On the one hand, there is the high international competitiveness of high-tech industries of China because of increased trade. On the other hand, China‘s high-tech industries relies on FDI firms, imported materials, foreign advanced technology, and foreign brand logo and brands. Information and communication Technologies (ICT) sectors are the most internationalized high-tech industries, FDI firms control value-added, technology imports and exports.
According to Von Zedtwitz (2011), during 1998-2010 R&D intensity across different ownerships has increased. Chinese firms including Stated-owned and private have higher R&D intensity than FDI firms. More R&D investment help Chinese firms build
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up their innovative capabilities. Both State Owned Enterprises (SOEs) and entrepreneurial and S&T-based private firms increase R&D investments. There are two type of lower R&D-intensities FDI firms, one type is the capital intensive or labour intensive manufacturing in the high-tech industries. The other type is that FDI firms which have R&D activities in China, but most R&D is still carrying on in the OECD counties (Von Zedtwitz, 2011).
R&D intensity in the high-tech industries in China has achieved great progress, but it still needs to make a greater effort to catch up with high-tech industries in the OECD countries. China encourages indigenous innovation and there are competitions between Chinese firms and FDI firms, it will help Chinese firms to create more innovative capabilities and close the technology gaps between Chinese firms and FDI firms. Once there is less technology gap, it will also promote more strategic alliances and R&D investments between Chinese firms and FDI firms.
According to Shenkar (1990), Chinese firm‘s previous foreign experience is very important to the success of intercultural and cross-border ventures. Both in the beginning of the joint venture and during the period time of IJV‘s contract, foreign experience affects the organizational fit between partners. The business atmosphere and commercial practices in China is quite different from those in Western countries. According to Luo (1997), The Chinese firms can improve its knowledge, skills and values from its foreign (Western) experience in import business, export business, and strategic alliances with foreign investors. In the international market, the employees can develop their competitive sensitivity through working with foreign firms and employees. The Chinese firm can improve their receptivity toward maintaining quality standards, customer responsiveness, and product innovation
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through long-term cooperation with western firms. As foreign experience is accompanied by exposure to foreign (Western) values, it also increases a Chinese business‘s ability to effectively communicate with its foreign partner. The successful cooperation needs the trust and collaboration between Chinese and western partners. Beamish (1987), Luo (1997), and Shenkar (1990) state the IJV‘s financial return, risk reduction, and sales growth in the domestic as well as export markets can be benefited from a Chinese partner with more international experiences. There are many success stories about Western joint ventures in China; they prove the importance of local partners‘ international experience for IJVs‘ success.
Joint Venture Companies
Child, Faulkner and Tallman (2005) state the investors of Joint Venture Company are its partners. If it is capitalized through the issuing of equity, its partners are also its alliance shareholders. Similar as other investors, partners can accept a certain risk if they could get profit as return. Partners are concerned with how best to govern their alliances, which minimize the risk and maximize the good return.
Beamish (1987) notes Chinese partners are learning technological, innovative and managerial skill from western partners through IJVs. The Chinese partner‘s learning ability, its ability to acquire, assimilate, integrate and exploit knowledge and skills are very crucial to the success of IJV‘s local operation and development in the local market. According to Luo (1997), IJV‘s profitability and sales growth depends on a Chinese partner‘s learning ability and absorptive capacity.
Section 4.1 has discussed the transformation process of the NIS in China. As China‘s political and economic systems are unique, the innovation system and policy making needs to be grounded in this uniqueness. Therefore, the researcher aims to
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give the research emphases on key elements of the NIS in terms of actors and linkages as well as on country-specific factors, which are important