International pharmaceutical firms’ market entry modes decisions into China: a comparison between Early-Entrants and Late-Entrants
Fuming Jiang
ABSTRACT
Based on an eclectic mode/developed by combining Root (1994), and Mockler and Dologite’s (1997) conventional entry mode theory and Kumar and Subramaniam’s (1997) contingency entry mode theory, this paper aims to investigate the determinant factors that affected international pharmaceutical firms’ decisions in choosing either a joint venture or sole venture entry mode into the Chinese pharmaceutical manufacturing industry. It will also compare the perceptions of senior managers from Early-Entrants who entered into China before 1992 and Late-Entrants who started investment in China since 1992 on the impact of firms’ international and external variables on the firms’ entry mode decisions. The results suggested that China environmental factors and the market factors appeared to be the major determinants of forming joint ventures. Whereas, parent firm’s decision task related factors appeared to be the major determinant of establishing a sole venture. The Early-Entrants paid more attention to the China’s environment factors, whereas the Late-Entrants concerned more about China’s market factors. The importance of foreign investors’ ability to adapt products, cost of working capital, and cost of long-term investment capital has been decreased significantly, whereas foreign investors’ technology availability has become more important to foreign investors since 1992.
1. INTRODUCTION
There are three main entry modes available for a firm to choose from, i.e. exporting, contractual (eg. licensing) and investment (eg. establishing an overseas operation) (Anderson and Gatignon, 1986; Young, Hamill, Wheeler, and Davies, 1989; Root, 1987 and 1994). Where firms choose to establish an overseas operation, they must decide whether to pursue the venture alone or with a joint venture partner. This paper seeks to analyse these decision processes for international pharmaceutical firms’ (IPFs) ventures located in China in the period from 1980 to 1998.
By the end of 1998, there were over 1,500 foreign invested pharmaceutical companies (FIPCs) distributed in almost every part of China. IPFs who entered into China during the period from 1980 to 1998 basically chose either a joint venture (JV) or a sole venture (SV) entry mode, and over 84% of IPFs chose a JV rather than a SV, even though foreign investors have been allowed to set up 100% foreign owned SV operations since the passage of “Law of the people’s Republic of China on Enterprises Operated Exclusively with Foreign Capital” by the Chinese central government in April 1986. “For most manufacturers that want to invest abroad, the first-best entry strategy remains the SV, and JV would be a second-best invest entry strategy” (Root, 1994, p.148). SV is viewed superior because it allows investing firms to maximise the returns on ownership-specific advantages (Caves, 1982) and firms have full control over the business operations. This study attempts to answer why the majority of IPFs selected a JV rather than SV as their entry mode for entering into the Chinese market. The research focussed on the comparison between SV and JV as alternative modes of entry and examined the determinant factors that affected IPFs’ choice between the two entry modes. Since China opened its door to foreign investors in 1978, the year of 1992 was another turning point in China’s political and economic reforms. FDI inflows into China have increased sharply since China’s former leader Deng Xiaoping’s much publicized tour to the southern provinces in early 1992 and his call for accelerating economic reform and opening up of the economy to the outside world (Jiang, Christodoulou, and Wei, 2001). The dramatic changes in Chinese policies and economic development activities may result significant impacts on the investment environment, in turn impacting on international firms’ entry mode decisions into China. The findings of the study are both timely, useful, and contribute to a better understanding of foreign direct investment entry mode theories and practices in general.
2. ENTRY MODE LITERATURE
Most past studies on foreign market entry modes have emphasised “market imperfection (ownership advantage) theory” (Hymer, 1960 and 1976; Kindleberger, 1969), “location specific advantage theory” (Franko, 1971; Stopford and Wells, 1972), “internalization theory” (McManus, 1972; Buckley and Casson, 1976), “transaction cost theory” (Williamson, 1975; Buckley and Casson, 1976; Casson, 1982; Caves, 1982; Anderson and Gatignon, 1986; Kogut, 1988; Erramilli and Rao, 1993), “strategic behaviour approach” (Harrigan 1985; Kogut 1988) and “resource based theory” (Wernerfelt, 1984; Collis, 1991; Peteraf, 1993). Some recent studies have tried to combine a number of theories into one-eclectic framework to explain the entry mode choice decision. Dunning’s (1980, 1988)”eclectic paradigm” denoted that the choice of entry mode decision is influenced by three types of factors: ownership-specific factors of a firm, location-specific factors of a market and internalization advantages of integrating transactions within the firm. Hill, Hwang and Kim (1990) developed their “eclectic theory of the foreign entry mode choice” by combining transaction cost theory, internalization theory and strategic behaviour approach. Bell (1996) created a new eclectic framework to exam Dutch firms’ entry mode decision by adding resource based theory into Hill, Hwang and Kim’s (1990) eclectic mode.
Following Stopford and Wells’s (1972) pioneering study on entry mode choice decision between SV and JV using the Harvard Multinational Enterprise Database, a number of important empirical studies have been conducted. These empirical studies revealed that the probability of setting up SVs is positively related to the level of the parent firms’ international experience (Gatigon and Anderson, 1988; Erramilli, 1991; Agarwal and Ramaswami, 1992; Benito, 1996; Mutinelli and Piscitello, 1998), host country experience (Stopford and Wells, 1972; Gomes-Casseres, 1989 and 1990; Padmanabhan and Cho, 1996; Mutinelli and Piscitello, 1998), parent firm size (Gomes-Casseres, 1990; Agarwal and Ramaswami, 1992; Erramilli and Rao, 1993; Benito, 1996), marketing intensity of parent firm (Stopford and Wells, 1972; Gatigon and Anderson, 1988; Gomes-Casseres, 1989), research and development intensity of parent firm (Stopford and Wells, 1972), asset specificity of parent firm (Gatigon and Anderson, 1988; Erramilli and Rao, 1993; Padmanabhan and Cho, 1996), and perceived market potential of the host country (Agarwal and Ramaswami, 1992).
JV entry mode would be preferred when cultural distance is large between the host and the home countries (Erramilli and Rao, 1993; Benito, 1996; Barkema, Bell, and Pennings, 1996). The probability of forming JVs is positively related with the level of host country welfare (Gomes-Casseres, 1989 and 1990; Shane, 1993), the level of host government restrictions (Fagre and Wells, 1982; Lecraw, 1984; Gatigon and Anderson, 1988; Gomes-Casseres, 1989 and 1990; Shane, 1993; Padmanabhan and Cho, 1996) and level of competition in the host country (Gomes-Casseres, 1990). Firms would be more likely to establish JVs when the firm enters into a research and development intensive industry (Kogut and Singh, 1988b; Mutinelli and Piscitello, 1998), and a growth industry (Hennart, 1991).
Bell’s (1996) study of 114 Dutch firms’ FDI revealed some distinctive findings. It suggested that firms with host country experience have a positive effect on the likelihood of JVs. The level of competition and the size of the foreign subsidiary turned out to have a negative effect on the likelihood of JVs. A host country policy did not have an effect on the choice between a JV and a SV in the case of Dutch firms’ direct investment in over 40 countries or regions worldwide. Firms’ entry mode decisions may be heavily influenced by a host country’s investment policies. Joint ventures, for instance, are popular in China because there are direct or indirect government rules requiring them in some circumstances (Davidson, 1987; Eiteman, 1990). Tse, Pan and Au (1997) suggested that longer diplomatic ties between China and investing firm’s home country assume more equity-based operations including JV and SV rather than non-equity-based entry modes like exporting or licensing agreements, and firms choosing equity-based entry modes are more likely to work with Chinese municipal governments. Root (1994), and Mockler and Dologite (1997) have elaborated on the factors affecting the decision choice of entry mode. They suggested that an initial concept of an entry mode can be determined by studying host country environmental, market, production, parent firm’s home country, parent firm’s product and resource commitment factors. However, Kumar and Subramaniam (1997) deemed that the existing literature on the choice of entry modes into international markets is based on the assumption that the mode of entry choice is a function of various exogenous factors, but an alternate view could be that certain factors endogenous to the decision task affect the choice of mode of entry. This view holds that a decision made by a manager depends not only on the relevant external factors but also on characteristics of the decision task, characteristics of the manager, and the manager’s expectations about the quality of the information available to reach the decision as managers of multinational corporations may face time and resource constraints when making the decision.
3. CONCEPTUAL FRAMEWORK
This study focuses on FDI entry mode choice between either the JV or SV mode option only. The main reason for this is because JV and SV were the only two entry modes adopted by IPFs in the population from which the sample was drawn. Theories based upon the findings of previous studies are inappropriate for this study for several reasons. The most important of which are: (1) most previous studies on entry mode choice decision cover a wide range of mode options including exporting, licensing, equity-based investment (eg. joint venture and sole venture), etc., whereas the present study focuses on SV and JV entry modes only. (2) As stated earlier, most studies were based on US and European firms and some Japanese firms’ FDI. The present study includes FDI from Non-Japanese Asian countries/regions. (3) The direction of FDI flows in previous studies was “one-to-one” or “one-to-many”; i.e. from one country to one or many destination countries. The present study looks at a “many-to-one” situation.
Bell’s (1996) study is an important contribution to the theoretical framework on entry mode choice decision with only two options either JV or SV. However, Bell’s study was based upon Dutch firms’ FDI into many different countries (one-to-many). Although Tse, Pan & Au’s study revealed some research findings on foreign firms’ entry mode choice into China based on “many-to-one” FDI direction, the study concerned the entry modes choice among exporting, licensing and equity-based investment (SV or/and JV). More importantly, a critical shortcoming of their study is that the study selected investing firms’ external factors only with a total of seven variables included in their conceptual framework for the testing, and it ignored investing firms’ internal factors. How an investing firm responds to external factors in choosing an entry mode depends on internal factors such as investing firms’ product, firms’ financial, management resource and commitment factors (Root, 1994). The archival data were used for their study, an important shortage of archival data is that it ignores the managers’ perceptions on the entry mode decision.
China is a complex society, by virtue of its deeply embedded and multi-layered cultural heritage, its long history, its diverse social and political development, and its vast geographical scale which encompasses both national common characteristics and strong local identities, traditions and distinctive dialects, and so on (Li and Li, 1999). This complexity is one of the critical challenges for most foreign investors when they choose an entry mode for entering into the market. As Bell (1996) noted the real world is so complex, and no single approach can adequately encapsulate and elucidate all the factors that affect the choice of entry mode decision. In this study, the relevance of Kumar and Subramaniam’s (1997) contingency approach is acknowledged. As a result, this approach will be incorporated into Root (1994) and Mockler & Dologite’s (1997) conventional framework, which serves as a basis for the conceptual framework of this study. Root’s (1994) foreign market entry mode framework combined with Mockler & Dologite’s (1997) model of decision making on the selection of international market entry mode does not narrow itself into any specific entry mode approach, but emphasises both a firm’s internal and external factors, which include host country (China) environmental, market and production factors, parent firm’s home country/region, and parent firm’s product and resource factors. It recognises the complexity of the international business environment with multinational cross-cultural management considerations. As a consequence, a more complete framework that incorporates China environmental factors, China market factors, China production factors, a firm’s product factors, a firm’s resource and commitment factors, and a firm’s decision task related factors will be used as the conceptual framework for this study on international pharmaceutical firms’ FDI entry strategies into China. Most independent variables were identified and selected based on Root’s (1994), Mockler & Dologite’s (1997), Kumar & Subramaniam’s (1997) frameworks, and other previous empirical studies and the researcher’s observations based on his extensive experience and knowledge in the industry in China. A couple of variables that were found significant in Tse, Pan and Au’s (1997) study were also added into the framework for the present study. FIGURE 1 is an elaboration of the conceptual framework which explains the hypotheses relationships and seven groups of factors in the decision making process of FDI entry mode choice into China.
[FIGURE 1 OMITTED]
Hypothesis 1 (H1):
China’s environmental factors would have significant impacts on a firm’s FDI entry mode decision. China’s environmental factors were measured by a number of sub-groups of factors including political and economic conditions, social-cultural differences, technology conditions, geographic distance between parent firms’ home country/region and China, and business operation location in China. Political condition variables comprise of political stability in China, government policies and regulations, import restrictions, level of the Chinese government to deal with, the status of political relationships between China and parent firm’s home country/region, and length of diplomatic ties between China and parent firm’s home country/region. Economic condition variables include role of the Chinese government in the economy, size of the economy, size of population, growth rate of population, growth rate of gross national product, growth rate of per capita income, distribution of personal income, changes in employment, relative importance of the pharmaceutical industry in the economy, and the status of economic co-operation between China and parent firm’s country/region. Social-cultural variables consist of employees’ loyalty to company, hardworking characteristics of employees, language, social society structure, Chinese people’s way of life, and way of doing business in China. Technology condition variables concern about availability of infrastructure, quality of infrastructure, availability of qualified scientific and technical personnel, and research and development intensity.
Hypothesis 1: The probability for a firm to choose a JV is positively related to the importance of China’s environmental factors.
Hypothesis 2 (H2):
China’s market factors would have significant impacts on firms’ decisions in choosing a FDI entry mode for entering into the Chinese market. These factors include market size and growth (sales potential) for investment project’s product line, competitive situation in the Chinese market, availability and quality of marketing infrastructure, availability and quality of distribution infrastructure, required cost of marketing effort, and export sales potential of investment project’s product line.
Hypothesis 2: The probability for a firm to choose a JV is positively related to the importance of China’s market factors.
Hypothesis 3 (H3):
Production factors in China would have significant impacts on firms’ decisions in choosing an FDI entry mode for entering into the Chinese market. The production factors consist of availability and cost of plant site, availability and cost of local raw materials, effectiveness of energy supply, labour cost, quantity and quality of products of the Chinese domestic producers, quality and cost of transportation facilities, quality and cost of communication facilities, and quality and cost of port facilities.
Hypothesis 3: The probability for a firm to choose a JV is positively related to the importance of China’s production factors.
Hypothesis 4 (H4):
A firm’s home country/region factors would have significant impacts on the firm’s decision in choosing an FDI entry mode for the Chinese market. These factors include the market size and competitive situation in the home market, production costs in the home country/region, government policies on foreign investment and export, and cultural dimension in the home country/region.
Hypothesis 4: The probability for a firm to choose a SV is positively related to the importance of the firm’s home country/region factors.
Hypothesis 5 (H5):
A firm’s product factors including the ability of the firm to differentiate and adapt products, and research and development capacity for new products would have significant impacts on its decision in choosing an FDI entry mode for the Chinese market.
Hypothesis 5: The probability for a firm to choose a SV is positively related to the importance of the firm’s product factors.
Hypothesis 6 (H6):
A firm’s resource commitment factors would have significant impacts on a firm’s decision in choosing an FDI entry mode for the Chinese market. The resource commitment factors are the size of foreign parent firm, availability and cost of working capital, availability and cost of long-term investment capital, availability and value of the Chinese government’s financial incentives, technology availability of foreign parent firms, research and development intensity of foreign parent firms, production skills, management capacity, sales and marketing skills, and foreign parent firm’s international business experience. The incentives provided by the Chinese government could be regarded as indirect resources for an investing firm.
Hypothesis 6: The probability for a firm to choose a SV is positively related to the importance of the firm’s resource commitment factors.
Hypothesis 7 (H7):
A firm’s decision task related factors including characteristics of the decision task, characteristics of the decision-maker, the decision-maker’s expectations about the quality of the information available to reach the decision, attitude of the decision-maker and decision-maker’s previous FDI experience would have significant impacts on the firm’s FDI entry mode choice for the Chinese market.
Hypothesis 7: The probability for a firm to choose a SV is positively related to the importance of the firm’s decision task related factors.
4. METHODOLOGY
4.1. Population Definition
A total of 117 foreign pharmaceutical firm invested pharmaceutical companies (IPFIPCs) in Mainland China were defined as the population for the research based on the following four sources: 1) Catalogue of Chinese Pharmaceutical Enterprises with Foreign Investment which was published by the China Centre for Pharmaceutical International Exchange, an agency of State Pharmaceutical Administration of China. It contains necessary information on over 1,310 FIPCs in China. 2) Market Reports of National Trade Data Bank of the United States of America (1998). 3) M/MS Asia (1998) and the report of Shanghai Pharmaceutical (Group) Corporation (1999). Pharmaceutical companies that had capital investment by non-pharmaceutical firms such as business trading companies, investment development firms, etc. Medical devices or machinery producers were not defined as part of the population for this research.
4.2. Sample Size
Over 84% of IPFIPCs were located in the east China’s 13 provinces and municipalities including Hainan, Guangdong, Fujian, Zhejiang, Shanghai, Jiangsu, Anhui, Shangdong, Hebei, Tianjin, Beijing, Liaoning and Hellongjiang. Less than 16% of IPFIPCs were distributed in China’s middle and west areas. A total of 98 IPFIPCs distributed in the three major regions in east China and which accounted for 83.76% of the population were defined as the sample size for this research. These IPFIPCs in the sample include 29 in South East Region (SER), 38 in Middle East Region (MER) and 31 in North East Region (NER). The SER comprises of Guangdong and Fujian provinces. The MER covers Shanghai municipality, Jiangsu, Anhui and Zhejiang provinces. The NER consists of Beijing and Tianjin municipalities, Liaoning, Shandong and Hebei provinces. The companies in the sample in SER, MER and NER were centred on Guangdong, Shanghai and Beijing, respectively.
4.3. Data Collection
A questionnaire was designed in both English and Chinese versions and was pre-tested with six pre-testing respondents for the data collection. The research fieldwork was mainly conducted in China between early April and late June in 1999. The data was collected through both personal interviews, and a mail questionnaire survey. Personal interviews were conducted with senior executives of foreign business partners in IPFIPCs in China, and the posted questionnaires were addressed to foreign general managers/representatives in IPFIPCs in China. In total 44 companies participated in this research, and 82% of answered questionnaires were obtained through personal interviews. Of the responding firms, 39 firms selected joint venture entry mode including 14 Early-Entrants and 25 Late-Entrants. The rest chose sole venture with 100% share of ownership including 3 Early-Entrants and 2 Late-Entrants. In total, 23 IPFIPCs were invested by western pharmaceutical firms including 9 European and 14 US firms, and 21 IPFIPCs were with Eastern firms’ investment including 4 Japanese and 13 Non-Japanese Asian pharmaceutical firms. 3 companies including 2 in Guangdong and 1 in Jiangsu were found to have ceased operations during the fieldwork. Also 1 company in Guangdong had the foreign partner’s share sold to its Chinese partner before this survey was conducted. Therefore the real sample size was reduced from an estimated 98 to 94 IPFIPCs, which means that a 46.81% response rate was achieved.
5. DATA ANALYSIS AND RESULTS
The reliability of the scales was tested, and Cronbach’s alpha is used as the indicator. The internal consistency of the scale values for each one of the seven groups of factors (variables) is found to be at an acceptable level. The reliability coefficients (Alpha) for the seven groups of exploratory variables are 0.80 for ‘China environmental factors’ (28 items), 0.78 for ‘China market factors’ (9 items), 0.76 for ‘China production factors’ (14 items), 0.87 for ‘Parent firm’s home country/region factors’ (6 items), 0.66 for ‘Parent firm’s product factors’ (3 items), 0.70 for ‘Parent firm’s resource commitment factors’ (13 items) and 0.60 for ‘Parent firm’s decision task related factors” (5 items).
The dependent variable (DV) is FDI entry mode choice (SV or JV) which was measured at nominal level. SV was coded as “0”, and ‘1’ for JV. The seven independent variables are China’s environmental factors, China’s market factors, China’s production factors, Parent firm’s home country/region factors, Parent firm’s product factors, Parent firm’s resource commitment factors and Parent firm’s decision task related factors. Independent variables were measured at ordinal level. The questions were designed using a six-point Likert scale, ranging from “1” not important to “6” very important, for each of the seven group of factors.
Two levels of analyses were performed by means of logistic regression followed by the t-test. The logistic regression technique was used to test the hypotheses relationship between the dependent variable (FDI entry mode: sole venture or joint venture and the independent variables (seven groups of factors) to detect which group/(s) of factors contributed most to the FDI entry mode decisions. Many recent studies related to entry mode choice have employed logistic regression models (Gatignon and Anderson, 1988; Kogut and Singh, 1988a; Erramilli, 1991; Bell, 1996; Tse, Pan and Au, 1997). Total scores for each of the seven groups of factors that were used for the logistic regression were calculated respectively by summing up all the original scores for each single factor in each one of respective seven groups of factors. Before implementing the logistic regression analysis procedures, the correlation between the seven groups of independent variables, the correlation between dependent variables and independent variables, and descriptive statistics for dependent and independent variables were examined. The results are shown in TABLE 1. The correlation analysis between independent variables showed that a moderate weak correlation (r = 0.314) between parent firm’s home country/region factors and parent firm’s product factors was found at .05 level. A moderate weak correlation (r=.302) was also found between Parent firm’s resource commitment factors and China production factors, which was significant at .05 level. None of the correlation coefficients was greater than 0.50, while a correlation coefficient above 0.60 is considered to be rather high (Churchill, 1991; Bell, 1996).
Logistic regression analysis results
The results of Logistic Regression analysis support hypotheses 1, 2 and 7; i.e. the probability of a firm choosing a JV was positively related to the importance of China’s environmental and market factors, and the probability of a firm choosing a SV was positively related to the importance of the firm’s decision task related factors. There was not sufficient evidence to support Hypotheses 3, 4, 5 and 6 (refer to TABLE 2).
The overall logistic model appeared to be a very good model, as it classifies 95.5% of observations correctly. The -2 log was 10.808 and the model chi-square is 20.349 (with df=7) and was significant at .01 level (p=.005), which indicates a good fit of the model. The Hosmer and Lemeshow Goodness-of-fit Test also indicated that the logistic model was a good fit (df=8, p=.997).
T-test Results
To explore the significant individual variables that differentiated firms that chose a JV or a SV entry mode, and the significant variables that influenced Early-Entrants and Late-Entrants in perceiving the importance of the seven groups of factors to their entry mode decisions, the independent sample t-test (parametric test) was performed by comparing the mean scores for the two independent groups. In addition to the independent sample t-test, since the sample size is relatively small and the data distribution normality may not be exactly met, the Wilcoxon (Mann Whitney) test (non-parametric test) was also used for justifying the level of significance revealed from the t-test. Therefore if the results from both t-test and Wilcoxon test are fairly similar, then the t-test is considered reliable and the preferred technique as it is more powerful than the Wilcoxon test (Kervin, 1992).
Comparison between SV Firms and JV Firms
The variables that significantly differentiated firms that chose a SV or a JV entry mode are shown in TABLE 3. The results suggested that 16 variables, including 3 variables with a marginal level of significance, affected international pharmaceutical firms’ decisions in choosing either a SV or a JV entry mode. The Chinese government policies and regulations, the different level of the Chinese government to deal with, role the Chinese government played in the economy, the Chinese social society structure, availability of infrastructure and quality of infrastructure in China had significant impacts on the international pharmaceutical firms’ entry mode choice towards a JV entry mode.
Comparison between Early-Entrants and Late-Entrants
The variables that significantly differentiated Early-Entrants and Late-Entrant are shown in TABLE 4. The results suggested that 11 variables, including 3 variables with a marginal level of significance differentiated Early-Entrants and Late-Entrants. The variables of political stability in China, role of the Chinese government in the economy, status of economic co-operation between China and parent firm’s country/region, hardworking characteristics of employee, ability of parent firm to adapt products, cost of working capital and cost of long-term investment capital received significant attention from the Early-Entrants. The variables of market growth (sales potential) for investment project’s product line, competitive situation in China, technology availability of parent firm, and parent firm’s international business experience have become more significant concerns by the Late-Entrants.
6. CONCLUSION AND DISCUSSIONS
The majority of international pharmaceutical firms who invested into the pharmaceutical manufacturing industry in China chose to enter via a joint venture with a Chinese partner/(s), even though sole venture, at least on a theoretical basis, appears preferable. In the case of the firms who chose a joint venture, two external factors appeared to be the major determinants of this choice, namely China environmental factors and the market factors. Whereas, in the case of the firms who chose a sole venture, an internal factor appeared to be the major determinant, namely parent firm’s decision task related factors. Although a relatively complete legal system for international investment has been developed and foreign investors have been allowed to establish solely foreign owned ventures in China, the enforcement and interpretation of the laws and regulations may differ significantly depending on the interests of different levels of Chinese governments in different regions. Chinese governments may directly and/or indirectly require foreign firms to joint venture with Chinese local business partner/(s) in order to more effectively absorb advanced technology and management skills from foreign investors into local Chinese companies. The importance of the availability of marketing infrastructure and quality of marketing infrastructure, availability of distribution infrastructure, quality of distribution infrastructure and required cost of marketing efforts in China also played significant roles in international pharmaceutical firms’ entry mode choice towards a SV. The market infrastructure and distribution channel in China could play a crucial role in marketing pharmaceutical products in China’s domestic market, and the primary purpose of international pharmaceutical firms FDI in China is to access the Chinese domestics market. Historically, international pharmaceutical firms’ FDI had been limited to the manufacturing industry, and Chinese local producers had a monopoly role in the pharmaceutical wholesale and retail businesses. International pharmaceutical firms did not have direct control over the distribution channels in China, which made international investors heavily dependent on Chinese partners to market their products in China’s domestic market. The decision-maker’s attitude was a significant factor to firms who chose JV entry mode. Decision makers with previous FDI experience seem to be more likely to choose a SV entry mode.
The results of this study on entry mode decisions between SV-Firms and JV-Firms have partially supported Root (1994) and Mockler and Dologite’s (1997) conventional entry mode theory. Among the six groups of factors suggested by Root (1994), Mockler and Dologite’s (1997) framework, only two groups of factors were found significant. They were China environmental factors and market factors. One of most influential variables of China environmental factors was the Chinese government policies and regulation, which was found significant in the present study. This is in contrast with Bell’s (1996) study which suggested that a host country policy did not have an effect on the choice between a JV and a SV in the case of Dutch firms’ direct investment in over 40 countries or regions worldwide. The results tended to support Kumar and Subramaniam’s (1997) contingency theory on entry mode decision; i.e., an entry mode decision made by a manager also depends on characteristics of the decision task related factors, and the decision maker’s previous FDI experience seems to be an important contributor to a firm’s entry mode choice towards a SV.
The results also suggested that Late-Entrants have paid less attention to the majority of China’s environmental variables, and the most significant variables were political stability in China, and the status of economic co-operation between China and parent firm’s country/region. These findings indicated that the overall environmental conditions have been improving and becoming more favourable to foreign investors, as the importance of the China’s environmental condition variables tended to be less important to Late-Entrants. The political condition in China has been improved for foreign investment and China has become more politically stable since 1992. The Chinese government may continuously play an important role in its economy, while seeing that the effect of the role of the Chinese government in the economy tended to have less importance to foreign investors. The market variables in China have however been attracting more attention from foreign investors since 1992. Most notably the competitive situation, and China’s market size and growth (sales potential) for investment project’s production line have become the most significant concerns to foreign investor who have started investment since 1992.
The importance of international pharmaceutical firms’ ability to adapt products has decreased significantly since 1992. This may due to the increasing competition in the Chinese market which requires foreign investors’ to do more than just adapt products or technology to compete successfully in the market. The importance of cost of working capital and cost of long-term investment capital has also decreased significantly, whereas foreign investor’s technology availability has become more important to foreign investors since 1992.
However, when applying the results, one needs to consider the following limitations of this research. Firstly, the changes and development of environmental, market and other conditions in China are continuing, and reforms are still on the way. This study was conducted in a certain period of time and only gives insights into the situation at one moment in time in the context of FDI in China during the period of 1980-1998. For a future study on entry mode choice into China, the eclectic framework developed for this study needs to be adapted to fit the prevailing situation at that time. Secondly, the number of joint ventures and the number of sole ventures in both the population and the sample were highly disproportionate in nature, and some relationships between dependent and independent variables might exist, but could not be statistically detected. The findings revealed based on the responses from SV should be treated with caution. Thirdly, the population for this research was limited to the international pharmaceutical-firm-invested pharmaceutical companies in China. Therefore the findings of this research can only be applicable to explain the FDI entry mode decision in this particular area. Finally, the study focused on SV and JV modes only. The eclectic framework needs to be adjusted for a study with more entry mode options.
TABLE 1: CORRELATION MATRIX AND DESCRIPTIVE STATISTICS
1 2 3 4
Minimum 0 98 29 45
Maximum 1 135 50 65
Mean 0.89 116.82 41.66 53.23
Standard Deviation 0.32 10.26 4.55 5.62
FDI entry modes 1.000
China environment factors 0.375 * 1.000
China market factors 0.403 ** 0.240 1.000
China production factors 0.028 0.109 0.074 1.000
Parent firm’s home country/ -0.034 0.077 -0.133 0.046
region factors
Parent firm’s product -0.262 -0.216 -0.262 0.225
factors
Parent firm’s resource -0.169 -0.127 -0.096 0.302 *
commitment factors
Parent firm’s decision task -0.235 -0.178 -0.139 0.216
related factors
5 6 7 8
Minimum 7 10 40 18
Maximum 27 16 56 27
Mean 15.32 12.91 49.32 23.00
Standard Deviation 5.08 1.51 3.59 2.47
FDI entry modes
China environment factors
China market factors
China production factors
Parent firm’s home country/ 1.000
region factors
Parent firm’s product 0.314 1.000
factors
Parent firm’s resource -0.034 0.250 1.000
commitment factors
Parent firm’s decision task 0.017 0.156 0.212 1.000
related factors
*: p<.05; **: p<.01; ***: p<.001 (2-tailed)
TABLE 2: LOGISTIC REGRESSION RESULTS (DV: FDI ENTRY MODE)
Factors [beta] S.E. Wald Sig.
Constant -9.500 19.157 .246 .620
China environmental factors * .268 .128 4.363 .037
China market factors * .653 .294 4.925 .026
China production factors .012 .212 .003 .957
Parent firm’s home country/region -.020 .270 .006 .940
factors
Parent firm’s product factors -.187 .730 .065 .798
Parent firm’s resource commitment -.284 .349 .660 .416
factors
Parent firm’s decision task -1.091 .591 3.406 .065
related factors ([dagger])
([dagger]): p < .10; *: p < .05; **: p < .01; ***: p < .001.
TABLE 3: PARAMETRIC AND NON-PARAMETRIC TESTS RESULTS (SV VS. JV)
Mean
SV JV
Variables (n=5) (n=39)
China Environmental Factors:
Government policies & regulations 4.00 5.08
Level of the Chinese government to deal 2.60 4.85
with
Role of the Chinese government in the 4.00 5.26
economy
Changes in employment 3.46 4.40
Social society structure 3.60 4.49
Way of doing business in China 4.40 5.21
Availability of infrastructure 2.60 4.33
Quality of infrastructure 2.80 4.49
China Market Factors:
Availability of marketing infrastructure 4.00 5.05
Quality of marketing infrastructure 4.00 4.79
Availability of distribution 4.20 5.00
infrastructure
Quality of distribution infrastructure 3.40 4.67
Required cost of marketing effort 3.00 4.50
Parent firm’s resource commitment
factors:
Production skills 4.05 4.80
Parent firm’s decision task related
factors:
Attitude of the decision-maker 4.72 5.60
Decision-maker’s previous FDI experience 4.67 5.40
T-test
Sig.
Variables t-value (2-tailed)
China Environmental Factors:
Government policies & regulations -2.9522 .0051 **
Level of the Chinese government to deal -6.4927 .0000 ***
with
Role of the Chinese government in the -3.2726 .0021 **
economy
Changes in employment 2.0022 .0517 ([dagger])
Social society structure -2.1759 .0352 *
Way of doing business in China -1.8421 .0725 ([dagger])
Availability of infrastructure -3.7454 .0005 ***
Quality of infrastructure -3.7077 .0006 ***
China Market Factors:
Availability of marketing infrastructure -2.7155 .0096 **
Quality of marketing infrastructure -2.1123 .0407 *
Availability of distribution -2.1917 .0340 *
infrastructure
Quality of distribution infrastructure -2.8856 .0061 **
Required cost of marketing effort -4.2184 .0001 ***
Parent firm’s resource commitment
factors:
Production skills 2.2453 .0301 *
Parent firm’s decision task related
factors:
Attitude of the decision-maker 2.2309 .0311 **
Decision-maker’s previous FDI experience 1.8953 .0650 ([dagger])
Wilcoxon Test
Sig.
Variables W (2-tailed)
China Environmental Factors:
Government policies & regulations 55.50 .0242 *
Level of the Chinese government to deal 21.50 .0002 ***
with
Role of the Chinese government in the 37.00 .0025 **
economy
Changes in employment 826.50 .0493 *
Social society structure 62.00 .0462 *
Way of doing business in China 64.00 .0556 ([dagger])
Availability of infrastructure 25.50 .0030 **
Quality of infrastructure 34.50 .0027 **
China Market Factors:
Availability of marketing infrastructure 56.50 .0237 *
Quality of marketing infrastructure 62.50 .0486 *
Availability of distribution 65.00 .06.09 ([dagger])
infrastructure
Quality of distribution infrastructure 53.00 .0211 *
Required cost of marketing effort 25.00 .0006 ***
Parent firm’s resource commitment
factors:
Production skills 831.00 .0593 ([dagger])
Parent firm’s decision task related
factors:
Attitude of the decision-maker 821.00 .0241 *
Decision-maker’s previous FDI experience 830.00 .0555 ([dagger])
([dagger]): p < 10; *: p < .05; **: p < .01; ***: p < .001.
TABLE 4: PARAMETRIC AND NON-PARAMETRIC TESTS RESULTS (EARLY-ENTRANTS
VS. LATE-ENTRANTS)
Mean
Early-Entrants Late-Entrants
Variables (n=17) (n=27)
China Environmental Factors:
Political stability in China 5.06 4.30
Role of the Chinese government 5.41 4.93
in the economy
Status of economic co-operation 4.41 3.52
between
China and parent firm’s
country/region
Hardworking characteristics of 4.41 3.89
employee
China Market Factors:
Market growth (sales potential) 4.94 5.26
for investment project’s
product line
Competitive situation in the 4.35 5.15
Chinese market
Parent firms product factors:
Ability of parent firm to adapt 5.35 4.96
products
Parent firm’s resource
commitment factors:
Cost of working capital 3.18 2.93
Cost of long-term investment 2.71 2.37
capital
Technology availability of 4.59 5.07
parent firm
Parent firm’s international 4.47 4.81
business experience
T-test
Sig.
Variables t-value (2-tailed)
China Environmental Factors:
Political stability in China 2.9861 .0047 **
Role of the Chinese government 1.7986 .0793 ([dagger])
in the economy
Status of economic co-operation 3.1668 .0029 **
between
China and parent firm’s
country/region
Hardworking characteristics of 2.4007 .0209 *
employee
China Market Factors:
Market growth (sales potential) -1.9120 .0627 ([dagger])
for investment project’s
product line
Competitive situation in the -3.4145 .0023 **
Chinese market
Parent firms product factors:
Ability of parent firm to adapt 2.4787 .0173 *
products
Parent firm’s resource
commitment factors:
Cost of working capital 2.0857 .0431 *
Cost of long-term investment 2.2404 .0304 *
capital
Technology availability of -2.5448 .0147 *
parent firm
Parent firm’s international -2.0309 .0534 ([dagger])
business experience
Wilcoxon Test
Sig.
Variables W (2-tailed)
China Environmental Factors:
Political stability in China 501.00 .0067 **
Role of the Chinese government 534.50 .0572 ([dagger])
in the economy
Status of economic co-operation 495.50 .0048 **
between
China and parent firm’s
country/region
Hardworking characteristics of 521.00 .0219 *
employee
China Market Factors:
Market growth (sales potential) 330.00 .0937 ([dagger])
for investment project’s
product line
Competitive situation in the 271.00 .0014 **
Chinese market
Parent firms product factors:
Ability of parent firm to adapt 530.00 .0197 *
products
Parent firm’s resource
commitment factors:
Cost of working capital 554.50 .0446 *
Cost of long-term investment 530.50 .0322 *
capital
Technology availability of 287.00 .0071 **
parent firm
Parent firm’s international 314.50 .0390 *
business experience
([dagger]): p < 10; *: p < .05; **: p < .01; ***: p < .001.
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Dr. JIANG Fuming earned his Ph.D in The Australian Graduate School of Entrepreneurship at Swinburne University of Technology, Australia in 2002. Currently he is a lecturer and subject convener/coordinator of International Business/Marketing and Strategic Management at Charles Sturt University, Australia.
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