Joint Ventures in China

Why form Joint Ventures or other forms of cooperation with local companies in China?


By Yael Trau

China is now a key area in the global strategic of multinational companies and other national companies. Companies have been accelerating their investments in China on a large scale, in all economic associated activities, i.e. commerce, infrastructure, finance and so on and so forth.

However, prior to commencing business with companies / suppliers in foreign countries in general and in China in particular, one has to ask him/her self the following questions-

1. Do cultural factors have a significant influence on business conduct in China?
2. Are there other factors of greater influence?

We can principally assume that in a host country where cultural, political and economic arrangements significantly differ from those in the home country, such as China, a foreign company is more likely to cooperate with local firms that may posses unique industry or firm specific skills and advantages that are very costly to obtain by a foreign firm. This assumption by and large applies to both sourcing, manufacturing and importing from China, and to selling to entities in China.

There are many forms of cooperation, such as Joint Venture (JV), Wholly Foreign Owned Enterprise (EFOE), Merger, and Limited agreement. Regardless of the chosen form, the reasons for a foreign firm to cooperate with a local firm in China are:

1. Knowledge of local market. Foreign companies that choose to compete in China need to have a full understanding of the market place. Therefore, they will usually search for a local partner that has access to marketing or distribution systems, and has knowledge of target market’s economy and customs.

2. Status. The status and capabilities of the local collaborator in dealing with local authorities and public relations, and likelihood for governmental (local and central) promotion, are perceived to be vital and therefore rationalize a cooperation formation. This subset would also include status defined in terms of general financial and business soundness and standing.

3. History. The foreign firm will choose a local partner because of favourable past association, such as personal connections, licenses, resources, major customers etc’.

4. Economies of scale. Complementary goals and skills For instance, sales and service experience of one partner, and a strong self financed of the other partner, or existing contracts and ordered overseas in one hand, and strong Chinese suppliers and factories on the other hand.


In conclusion, dissimilarities between cultures, political systems and business arenas, can cause serious problems if they are not understood. It is therefore recommended to create some form of cooperation with a local company, for the purpose of generating important opportunities for growth and development