JOINT VENTURES IN CHINA
Analysis of over 21,000 unlisted Chinese firms shows that joint ventures generally perform better than wholly foreign owned and purely domestic firms. The research by Alessandra Guariglia – presented to the Royal Economics Society’s 2009 Annual Conference at the University of Surrey – suggests that this is because both the domestic and foreign partners bring attributes essential to achieving high performance.
Specifically, the former contribute knowledge of the Chinese market and legal environment, as well as important political connections with local governments. The latter bring modern technologies, capital, better corporate governance through monitoring and market discipline, and managerial and international networking skills.
A vast literature has investigated whether foreign firms perform better than their domestic counterparts. Most studies in this literature have partitioned firms into domestic and foreign owned and compared the two groups, without assessing whether firms with different degrees of foreign ownership perform differently.
This paper fills this gap, by using a panel of 21,582 unlisted Chinese firms over the period 2000-2005 to analyse the exact nature of the relationship between the degree of foreign ownership characterising these firms and their performance.
Focusing on the return on assets, the return on sales, labor productivity, and total factor productivity, this paper finds that joint ventures generally perform better than wholly foreign owned and purely domestic firms. This finding is robust to defining joint ventures on the basis of the capital paid in by foreign agents, and on the basis of registration information.
It can be explained considering that both the domestic and the foreign parties of a joint venture bring in attributes essential to achieving high performance. Specifically, the former contribute knowledge of the Chinese market and legal environment, as well as important political connections with local governments; and the latter, modern technologies, capital, better corporate governance through monitoring and market discipline, and managerial and international networking skills.
The research then investigates the exact nature of the relationship between foreign ownership and corporate performance of the Chinese firms, and finds that the two variables are linked by an inverted U-shaped relationship. Specifically, corporate performance increases as foreign participation rises up to the range 47% to 64%, depending on the measure of performance used, and declines thereafter.
This suggests a certain degree of domestic ownership is necessary to ensure optimal performance. Furthermore, the study shows that it is those firms owned by investors other than those originating from Hong Kong, Macao and Taiwan that benefit most from their foreign ownership.
Finally, the author rationalises these findings with a simple theoretical model of a joint venture, where, under plausible conditions, strategic interactions between the non-contractible inputs contributed by a foreign and a domestic owner may lead to a non-monotonic relationship between a firm’s degree of foreign ownership and its performance similar to that found in the Chinese data.
These findings contribute to understanding the link between FDI and economic growth: in countries where FDI inflows are large and mainly take the form of joint ventures between domestic and foreign firms, the effect of FDI penetration on the performance of recipient firms could be an important channel through which FDI affects economic growth. Attracting more FDI in the form of joint ventures could hence be beneficial to long-run growth.
ENDS
Alessandra Guariglia
Durham Business School
Durham University
Tel: 07990-608235