Transferring Technology To China By Means of Joint Ventures

Abstract

OVERVIEW: Establishing a venture in the People's Republic of China is complex and time consuming because of the differences between China and the West in managerial philosophy, market systems, industrial infrastructure, and motives for creating the venture. Acquisition of advanced technology is a predominant concern for China. As a result, technology transfer is almost always a key step in running a venture in China However, in practice there are many unexpected problems in the technology transfer process because of the specific Chinese situation. Currently there is increasing interest in building up ventures in China, which leads the authors to discuss the key issues for management in the process of technology transfer to China via ventures. Since the introduction of the open door policy in 1978, Chinese industrial production has increased annually by an average of 12.4 percent (1). After the Joint Venture Law was issued in 1979, China began introducing laws and regulations to establish an institutional and legislative infrastructure to stimulate foreign investment. Institutional changes include the creation of such organizations as the China International Trust and Investment Corporation, the decentralization of decision making powers and the establishment of the Special Economic Zones (2). Between January 1979 and June 1991, there were 34,080 foreign-funded projects in China, involving a total contractual investment of U.S.$ 44,800 million, with U.S.$ 20,568 million actually invested. Among these projects, 18,790 were Chinese-foreign ventures worth U.S.$ 17,470 million, of which a reported U.S.$ 9,940 million has actually been realized (3). Participation in the Chinese market is an important strategy for many multinational firms from the U.S., Japan and Western Europe. Since the beginning of the 1980s, Hong Kong and Japanese firms have invested in the textile, electronics, medicine, food, and motorcycle industries. Subsequently, American and European investments in the Chinese market have increased significantly. Apart from the sectors mentioned above, American and European firms have been active in the automobile, chemical, machinery, and coal industries. In order to produce the required products for its local market and for the international market, Chinese firms have to develop or acquire technology. Also, the application of this technology, or more generally the management of the production system, has to be developed. Because the development of technology is an expensive process which requires specific experience currently not available in China, and which takes a long time to develop, the transfer of technology is a logical route to acquire it. The Chinese desire to create industrial ventures in order to acquire advanced technology, hard currency and management expertise. While there are various vehicles for the transfer of technology (e.g., licensing and contract ventures), the equity venture is often selected because it allows the foreign partners to realize their major objective: participation in the Chinese market while keeping control over the activities (4). The April 4, 1990 amendment to the Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign Investment, concerning nationalization or requisition of ventures, extending the term of the ventures, choosing the chairman of the board of directors and joint ventures bank accounts stresses the importance the authorities nowadays give to the establishment of ventures (5). Previous studies focused on identifying the different types of ventures in China and their internal structures, and less on the practical problems of managing the ventures effectively (6). With these studies as a basis, the aim of this paper is to identify a number of practical management problems foreign firms face in the transfer of technology to their ventures in China. …