Silicon Valley Firms' Operational Tactics and Venture Performance in Greater China

Business Forum, Summer-Fall, 1999 by Mark V. Cannice, John D. Daniels

The factors that influenced the market entry decisions and operational tactics of 24 Silicon Valley "hi-tech" firms in China, Hong Kong, and Taiwan is revealed and examined in this research. First, our study reviews a market entry model developed for China; then we examine the micro-level strategies that our 24 sample firms used to improve venture performance in greater China. It is shown through a case analysis methodology that a contingent link between market entry decision factors and entry mode selection does exist and that creating a good "fit" between these decision factors and the operating mode choice does lead to improved venture performance. Specifically, foreign venture performance is explained in part by choosing an operating mode that meets the requirements of a firm's international strategy. The case analysis also indicates that a firm's emphasis on integrating its marketing efforts closely with its customers requirements, typically with a wholly-owned subsidiary presence, increases venture perf ormance for one-and two-step suppliers. The results also demonstrate that technology transfer costs and environmental concerns are normally managed by more refined means than operating mode selection. Specifically, the high-tech firms in our study use micro-level strategies to protect their technology and minimize environmental uncertainty while meeting host government demands and achieving market access.

This study examines the process by which U.s. "high-tech" firms choose to enter into the markets of Greater China (1). Specifically, we examine the linkage between a firm's market entry choice and its venture performance. We also look closely at certain microstrategies that were undertaken to improve the likelihood of venture success. To identify these issues we conduct a case analysis of 24 Silicon Valley high-tech manufacturers and their investments into China, Taiwan, and Hong Kong. We build upon the market entry framework that we developed in a 2000 study that analyzed 15 market entries into China.' That study developed a contingency framework that was based on a replication case analysis methodology. (2) There we found that some market entry modes were higher performing given certain market conditions, proprietary technologies, and governmental constraints. This study looks beyond the contingent market entry model and explores the micro-strategies that firms used to enhance their venture performance.

First, we review the market entry literature that focuses on China. Then we review the theoretical foundations of our market entry model. Finally, we discuss the micro-strategies that were employed by our 24 firms as they pursued the Greater China market.

Reviewing the Scholarship

A firm's entry mode choice generally determines its amount of control over a new venture as well as the amount of resources it needs to commit. (3) With unlimited resources and free from external constraints, a firm would rationally choose the operating mode that gave it the most control possible over venture operations. Because firms have finite resources to commit to foreign operations, a choice is forced upon them, and a tradeoff must be established between the amount of resources (capital, know-how, etc.) it can spare and the amount of control it deems necessary to succeed in the country.

A review of the market entry research on China is crucial to benchmarking our entry mode and venture performance framework. Recent studies that looked at operating modes found that most firms entering China preferred the joint venture method. (4) However, the choice of operating mode was often the result of Chinese governmental constraints. (5) Recent research unveils significant conflicts of interest between the Chinese government and multinational corporations. (6)

However, regardless of the chosen entry mode, investing firms are primarily interested in maximizing venture performance. One research team found that seven of the eight U.S./Chinese joint ventures they studied reported profitable performance. (7) Managers of both sides of the ventures said they were satisfied with the venture although U.S. managers expressed concerns over the lack of control over the venture while Chinese managers would prefer a faster pace of technology transfer to the venture. Using a comparative case study methodology of four U.S./PRC joint ventures, another team found that the bargaining power of joint venture partners influenced control in a joint venture and ultimately venture performance. They found that Chinese managers generally focus on learning from the U.S. partner, while U.S. management desires market share and profitability. (8) Others report an 11.6 percent average ROI of the U.S. companies that they survey in China, (9) and another reports that 11 of the 14 U.S./Chinese join t ventures that they studied report "good ROI." (10)

Another study of over 1,000 foreign enterprises in China finds that the operating modes they examined (wholly foreign-owned enterprises, equity joint ventures and cooperative ventures) did not significantly affect the level of profitability. They also show that enterprises from the United States and Japan are more profitable than those of Hong Kong or Taiwan. (11) A related study of 1066 foreign enterprises in China uses duration analysis to track the time it takes foreign ventures to receive permits, begin production, and earn a profit. These authors report that wholly-owned subsidiaries and cooperative operations with non-state-owned enterprises start manufacturing faster than other forms of business. (12) However, once again, the mode of investment does not seem to be related to the time it takes to earn a profit.