Uncle Sam at the Great Wall

Han Han Vuong
March 01, 1996

Before 1979, foreign interest in China meant tourists pointing cameras at the Great Wall.

Now the attraction is not the longest Great Wonder of the World, but the world's fastest growing economy. According to Penn State doctoral graduate and Shanghai native, Aimin Yan, joint ventures and foreign investment doubled between 1992 and 1993, to reach $25.7 billion.

"American companies, along with companies from other countries, are all scrambling to get into the Chinese market," says Barbara Gray, a professor of organizational behavior who collaborated with Yan on a study of Chinese-American joint ventures. "We were curious about how organizations from different countries with different cultural backgrounds would collaborate, when they had different objectives and reasons for joining together."

From interviews with representatives of four joint ventures, Gray and Yan developed a simple model of the dynamics of such a partnership. Like a three-piece domino chain, their model predicted that bargaining power ("what each party brings to the table," says Gray) would forecast the level of management control ("the influence of each partner over key decisions"), which in turn would determine performance ("the degree to which each partner's objectives are met"). Bargaining power could be any of three types (context-based, capital resource-based, or non-capital resource-based), while management control could be strategic, operational, or structural.

Yet when they surveyed 90 companies in the United States and their partners in China, they found, for the most part, that this domino model "was too simplistic," says Gray.

For instance, although American companies usually had more context-based power (they can choose from several partners), Gray and Yan did not find that this flexibility translated into greater control.

On the other hand, capital resources (usually cash from the American side, land and buildings from the Chinese) determined not only operational control (meaning that everyday operations would most likely be supervised by managers from the top contributor), but also strategic control.

"Strategic control," says Gray, "has to do with appointments to the board of directors, who make the long-term decisions for the venture. This direct relationship makes a lot of intuitive sense. If a company has to put money on the line, it would want to have direct control."

Yet the third form of control—structural—was not proportional to the capital resources invested. "Structural control is the extent to which a joint venture is organized like the parent company," says Gray. "Some American companies basically tried to take the organizational approach they have in the U.S. and replicate it in China. The problem is that people don't necessarily motivate employees in the same way. For example, Chinese companies often provide housing for their employees. That's not part of our reward package in the U.S., but in China it's a very important aspect of employment."

Rather than being tied to capital, structural control was connected to non-capital resource-based power—American technology or Chinese guanxi. Literally "connections," these links to Chinese market and government heads are like the Western system of networking. "Chinese entrepreneurs," Yan notes, "tend to trust people rather than organizations."

In their domino model, Gray and Yan had hypothesized that the higher the level of control exerted by a partner, the more of its goals it would achieve. But their results showed that only the day-to-day operational control affects performance.

"We had thought that the company with the most membership on the board would influence what objectives were put forward. We're coming to understand that it's not simply control that affects performance," says Gray.

"Factors such as whether the companies had mutual trust, whether they shared common goals in the joint venture, and whether these goals were written into the contract played a part in dictating the overal performance of the venture."

Adds Yan, "It's still a competitive relationship."

Gray is now developing an executive program at Penn State to teach the ways of cross-cultural negotiations. "Our work has led me to rethink some research that has been around on cross-cultural negotiations. In particular, to take into account what each partner thinks the other is doing and how culture influences these perceptions."

Barbara Gray, Ph.D., is professor of organizational behavior in the Smeal College of Business Administration, 408 Beam Building, University Park, PA 16802; 814-865-3822. She directs the Center for Research in Conflict and Negotiation. Aimin Yan, Ph.D., is now assistant professor at Boston University. Han Han Vuong is a former R/PS intern.

Last Updated March 01, 1996