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Domestic alliance network to attract foreign partners: Evidence from international joint ventures in China

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Abstract

Partner selection is a critical issue in building international joint ventures (IJVs). We argue that foreign firms are more likely to select local firms with unique network structural advantages within a local alliance network. We frame structural advantages as two network position traits: centrality and brokerage. Specifically, network centrality acts as a stronger network trait than brokerage in attracting foreign IJV partners. However, such a relationship may be moderated by foreign firms’ local experience and perceived capabilities. We contend that when foreign firms have a high level of local market experience and perceived capabilities, they may prefer a local broker over a centrally located local firm. Data on the domestic alliance network in China’s electronics and information technology (IT) industries largely support our hypotheses. We conclude that as foreign investors become strategic insiders, they may not only seek a local partner’s capability attributes, but also more critically pay attention to a local partner’s domestic network.

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Notes

  1. While China has been plagued by information credibility historically, the issue has been generally improving over time. For specific information about disclosure requirements for listed companies, check the website of China Securities Regulatory Commission (http://www.csrc.gov.cn/pub/csrc_en/).

  2. Foreign firms can de-code local media through two main mechanisms. First, for the human mechanism, foreign firms can hire someone who understands the local language to de-code media. Many large foreign firms also have a large ethnic group of employees (e.g., overseas Chinese), who can be useful for understanding local media. Second, for the social mechanism, many local medium (e.g., newspapers, trade journals, TV programmers) now have an English version (a global language) of their local content. This is particularly true in China where the force of globalization makes such an endeavor necessary to attract FDI.

  3. For example, Japan’s Hitachi, which entered China earlier, had more local market experience than the United States’ Corning did. Hitachi chose the Fujian Electric Group in Fuzhou as the partner to build a digital media JV company in 2001, and Corning selected SEG as the partner to build a JV for manufacturing color cathode ray tubes and monitor bulbs. Fujian Electric Group was a local broker, while SEG was a centrally located firm in the local alliance network.

  4. The central element here would be that the foreign firm’s choice (local broker vs centrally located firm) is not exclusively determined by the foreign firm’s capability level. The capability level is one factor that our theory proposes adds explanatory power – we do not claim that it will exhaustively predict the foreign firm’s choice. Rather, what capability level does is to predispose the foreign firm in some ways, not force that choice. In other words, the model is not a “causal-deterministic” one but an “associative-likelihood” one.

  5. For three reasons, we focused on the FDI policy during the study period (2001–2005). First, China’s People’s Parliament Committee revised the Foreign Joint Venture Law and Foreign Direct Investment Law in 2000 to be more consistent with the WTO agreement. Second, the new FDI policy eliminates those restrictions that are incompatible with the WTO agreement. Third, the Chinese government also revised industry policies in order to attract FDI toward strategic industries such as electronics and IT.

  6. One IJV event may engage two or more partners, since some foreign entrants (e.g., Microsoft) have two or more IJVs with multiple local partners in China.

  7. We accessed http://search.sipo.gov.cn/sipo/zljs/. In summary, China’s patent law divides patents into three categories: invention, utility model, and external design. Invention patents are regarded as major innovations. To obtain a patent for invention, an application must meet the requirements of “novelty, inventiveness, and practical applicability.” Usually, it takes about 1–1.5 years for the State Patent Office to process an invention patent application. The processing time for patent applications for a utility model is about 6 months, and it is even shorter for design patent. Today’s patent law in China is mostly in line with the international standard. Up till now, China has acceded to all the international patent treaties in order to meet the requirements of the WTO’s Agreement on Trade-Related Intellectual Properties (Cheung & Lin, 2004).

  8. This approach generates similar results. Results are available upon request.

  9. We thank one reviewer for pointing this out.

  10. We also conducted the Proportional Odds Assumption test, which tests whether our one-equation model is valid (the ordered logit model estimates one equation over all levels of the dependent variable). If we were to reject the null hypothesis, we would conclude that ordered logit coefficients are not equal across the levels of the outcome and we would fit a less restrictive model. If we fail to reject the null hypothesis, we conclude that the assumption holds. We first download a user-written command in Stata called omodel. We then conduct likelihood ratio test (Long & Freese, 2006). The results (Prob>χ 2=0.3427) indicate that we cannot reject the null hypothesis, which suggests that there is no difference in the coefficients among models.

  11. We take the following form to calculate the Odds ratio.

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Acknowledgements

We thank Yadong Luo and three reviewers for editorial guidance, John Prescott and Ravindranath Madhavan for helpful comments, and Lily Dong for discussion of industry insights. We also appreciate helpful comments from the seminar participants at Weissman Center for International Business at City University of New York, the management departments at Zicklin School of Business, Baruch College, City University of New York, and China Europe International Business School. Earlier version of this manuscript was presented at the Academy of Management (Boston, August 2012). This research was supported by the PSC-CUNY Award (63173-00-41), jointly funded by the Professional Staff Congress and the City University of New York, the Weissman Center International Business Research Grant, Kemper Summer Research Grant, funded by Bloch School of Management, University of Missouri, Kansas City, the Jindal Chair at University of Texas, Dallas, and the National Natural Science Foundation of China (71132006). All views are those of the authors and not necessarily those of the NSFC.

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Authors and Affiliations

  1. Zicklin School of Business, Baruch College, City University of New York, New York, USA

    Weilei (Stone) Shi

  2. Institute for Entrepreneurship and Innovation, Bloch School of Business and Administration, University of Missouri, Kansas City, USA

    Sunny Li Sun

  3. Ivey Business School, Western University, London, Canada

    Brian C Pinkham

  4. School of Management, University of Texas at Dallas, Richardson, USA

    Mike W Peng

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  1. Weilei (Stone) Shi
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  2. Sunny Li Sun
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Correspondence to Weilei (Stone) Shi.

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Accepted by Yadong Luo, Consulting Editor, 5 December 2013. This article has been with the authors for four revisions.

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Shi, W., Sun, S., Pinkham, B. et al. Domestic alliance network to attract foreign partners: Evidence from international joint ventures in China. J Int Bus Stud 45, 338–362 (2014). https://doi.org/10.1057/jibs.2013.71

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