Structural and Social Dimensions of an International Joint Venture: The Case of Hypor Canada By
Sylvain Charlebois Assistant Professor Faculty of Business Administration University of Regina
Please send correspondence to Sylvain Charlebois Assistant Professor Faculty of Business Administration University of Regina (CANADA) 3737 Wascana Parkway Regina, Saskatchewan (CANADA) S4S 0A2 telephone (306) 337-2695 fax (306) 585-4805
[email protected]
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Structural and Social Dimensions of an International Joint Venture: The Case of Hypor Canada
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Structural and Social Dimensions of an International Joint Venture: The Case of Hypor Canada Abstract For various reasons, many joint ventures between North American and Chinese companies fail. On April 26 2006, however, Hypor Canada, a leader in swine genetics headquartered in Regina, Saskatchewan signed what would prove to be a successful joint venture with China-based New Hope (Sichuan South Hope Company Ltd.). The agreements with Sichuan South Hope Company Ltd. (New Hope) and Shandong Liu He Group Company Ltd. (Liu He) aimed towards the production and distribution of breeding pigs in China. By analyzing this case, this study intends to advance our knowledge in the area of international joint ventures. Firms need to look beyond the virtues of guanxi, as the strategic significance of this predominant business concept has been diminished by recent studies on the subject. The findings suggest that strategic intents and resources need to be aligned between parties involved, and that foreign-based North American firms should cultivate both the structural and social dimensions of a relationship with a Chinesebased company. Implications for managers and marketers in the hog industry responsible for sustaining relationships in China are discussed and directions for future research are offered.
Keywords:
Joint Ventures, China, Guanxi, Structural and Social Dimensions, Hog Industry.
3 Introduction
The popularity of international joint ventures is rising alongside dissatisfaction with their performance (Madhok, 2006). Many international joint venture failures, according to previous research, are explained by factors such as contrasting human resources practices and cultural incompatibility. China’s burgeoning private sector is a growing economic force, yet foreignowned firms have made only limited inroads. Very few entrepreneurs can claim a full appreciation of the complexities of dealing with Chinese-based companies. The private sector in China has adopted an approach that serves primarily to cultivate special relationships with a few very wealthy individuals or families. One of these firms is Nan Cunhui from Sichuan province which built a vast agricultural conglomerate, New Hope, and the country’s largest private lender, China Minsheng Banking Corporation, in less than a decade.
On April 26, 2006, Hypor Canada, a leader in swine genetics headquartered in Regina, Saskatchewan, signed what would prove to be a successful joint venture with China-based New Hope (Sichuan South Hope Company Ltd.). The agreements with Sichuan South Hope Company Ltd. (New Hope) and Shandong Liu He Group Company Ltd. (Liu He) aimed towards the production and distribution of breeding pigs in China. JBS United, a nutrition company based in Sheridan, Indiana, USA also has a minority share in the Liu He joint venture. New Hope and Liu He are linked by equity holdings.
Hypor Canada devoted time and resources to quick start this relationship, which has been dubbed a triumph by media and industry alike (Hypor, 2007). Hypor was able prevail where many others failed in the Chinese hog industry. China has a weak capital market, poorly specified property rights, and industrial instability (Li, 1998). Most of the state-owned enterprises (SOEs) still receive special protection from the government even though corporation reform has been implemented for many years (Lin, 2004).
In order to understand the success of Hypor with New Hope in creating a joint venture in China, we should answer the following questions: What was the context of the hog industry in China at the time of the agreement? What were the strategic elements and factors that were considered to
4 draw a Chinese-based company into a joint venture? And specifically, what were the main factors that prompted the accord between Hypor Canada and New Hope?
This paper is intended to focus on the period prior to the start of the joint venture between Hypor Canada and New Hope (China). Our research not only will help us to understand what made Hypor Canada successful in its strategy in China, but also will explain how foreign-based firms can utilize the dimensions outlined in this paper to weigh their strategic position in a potential joint venture in China. Firstly, we present the research setting and methodology used for the present case study. Secondly, some key factors of the hog industry in China are outlined. Thirdly, we describe the strategic intent to enter China and justify the choice of a joint venture. Fourthly, based on the literature on international joint ventures and the current business situation in China, a conceptual model is developed. Finally, the research implications are discussed.
Research setting and method
This article is meant to identify and explain key managerial principles for the joint venture that occurred between Hypor Canada and New Hope (China) in 2006. The analysis considers events prior to April 26, 2006, the day the joint venture was announced. Organizations involved are considered as units of analysis for the current study. Using Yin’s (1994) methodology for exploratory theory development, this study builds on existing theories through a case study that explores the execution of international joint ventures. This study analyzes holistic data in relation to Hypor Canada, Sichuan South Hope Company Ltd., and Shangdong Liu He Group Ltd. This case study then develops a theoretical perspective through a discussion of international joint ventures in China and links these theoretical constructs with Hypor’s business model. Moreover, this analysis makes use of multiple sources of evidence, including archival data, recorded guest speaking notes, and in-depth personal interviews with officials from Hypor in Canada and from New Hope in China, Sichuan province. Key informants from both Hypor and New Hope answered open-ended questions, and reviewed a draft of the case study report prior to completion.
5 Context
China and the hog industry
China ranks second in the world for economic performance, and competes with the United States for leadership in this area (Lawrence, 2006). Fueled by tremendous economic growth, the Chinese people have, on the whole, become more affluent. Yet, an already considerable income gap between the wealthier Chinese, who tend to live in urban areas, and the poor, who tend to live in rural areas, is increasing (Nayyar, 2006).
In China, any type of foreign investment, be it a joint venture or a wholly foreign owned enterprise (WFOE), requires the approval of the Chinese government (Li and Scullion, 2006). Approval to establish a WFOE is granted much more sparingly when compared to joint ventures. China has a market economy and a centrally planned economy. Since the adoption of the opendoor policy in 1979, China has made significant economic progress. The Chinese government encouraged foreign investors to form export-oriented operations in China and joint venture partnerships with Chinese firms as the preferred entry mode (Jiang, 2006). After joining the WTO in 2001, China adapted its laws and regulations to conform to WTO guidelines. Doing so created suitable conditions for fair competition between domestic and foreign enterprises and generally provided greater opportunities for doing business in China. In 2002, China was ranked ninth in the world in government efficiency (Zhu, Camp and Garg, 2005). Good relationships with Chinese government officials were critical to corporate success, with the level of government support depending largely on the industry and its importance to national interest.
China represents the largest hog market in the world (Brown, 2005). The hog industry in China is entering a new phase of economic growth and is increasingly focused on breeding pigs and developing the genetic process rather than simply importing pigs. Previously, the majority of hog production in China was derived from small backyard farms (Williamson and Zeng, 2005). In 2002, backyard farms accounted for 80 percent of the Chinese market, while specialized farms accounted for 15 percent, and large commercial farms accounted for only 5 percent (Ma, Huang and Rozelle, 2004). Though the pace of growth has been slow, specialized and commercial farms
6 are becoming increasingly important in China, especially in coastal regions (see Figure 1). For example, in the Beijing area, commercial farms account for 60 percent of local production.
Insert Figure 1 In order to ensure a lasting corporate presence in China, and that business expansion is successful in the long run, it is important to understand the concept of guanxi. In the Chinese business world, guanxi is understood as the network of relationships among various parties that cooperate together and support one another (Yang, Van de Vliert and Shi 2005). Many have linked it with western concepts such as relationship marketing (Ambler, 1994; Liu and Roos, 2006). The tight social networks encouraged in China are very different from Western practices, and loyalty to a group is crucial. Due diligence is critical when forming partnerships, in order to be sure one’s company is provided with the business contacts and distribution channels sought through the partnership.
To be successful in China, a company must understand Chinese culture and how business is conducted in the country (Wong, 2005). However, it takes a long time to cultivate a good guanxi with governments in China. Moreover, the previously undoubted strategic significance of guanxi has been somewhat diminished by recent studies on the subject. Liu and Roos (2006) argue that the traditional business culture is slowly being replaced by a market-driven paradigm of marketing operations, although the guanxi-driven paradigm remains a crucial factor in planning and managing effective relationships in China. Current research on the subject suggests that corporations should enter the Chinese market with caution and display a significant level of cultural sensitivity (Yang, Van de Vliert and Shi 2005).
7 Hypor Canada in China
Hypor is a division of Nutreco, based in the Netherlands. With its head office located in Regina, Saskatchewan, Canada, the company has strategically-located breeding centers in North America, Europe, and Asia. Hypor’s core competencies are the health status and data performance efficiency of their pigs (Hypor Canada, 2006).
In 2004, Hypor was one of the world’s leading suppliers of swine genetics and wanted to expand operations in China. Given that the hog industry is considered to be mature in the industrialized world, China became an attractive ground for growth in the future for swine genetic companies. By the end of 2004, Hypor was articulating a strategy to enter the Chinese market. In order to do so effectively, the development of a distribution model to ensure profitability, sustainability, and to achieve a leadership position in China within the next few years was critical. Hypor also had to overcome the inherent challenges of doing business in China, such as developing business relationships, ensuring protection of their intellectual property, and creating effective channel structures in a highly fragmented market (Ahlawat and Ahlawat, 2006).
Hypor Canada had some legitimate competition in China. PIC Genetics was a market leader in a number of international markets, including China (Carter, 2004). The company had gained market share in China through a combination of successful introduction of new products, with an extension of their business model in that region, and stronger market conditions in China. PIC targets large multiplication and commercial farms and sells directly to the middle of the pyramid (see Figure 1). As well, they utilized first mover advantages, economies of scale, and strong relationships with customers to become the market leader in China.
By targeting breeding farms at the top of the pyramid, Hypor aimed to provide stock to breeding farms. Therefore, to achieve a market leadership position Hypor must serve commercial markets by offering higher performing breeding stock than their competitors and by offering long-term assistance to their customers. In addition, Hypor could achieve first mover advantage by targeting backyard farms. Partnering with a firm could provide easier access to this market, which was not being served by breeding companies.
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The establishment of a joint venture in China for Hypor was an appealing proposition. Joint ventures in China have their own distinctive characteristics since they may involve almost the entire range of business sectors and potential partners from many different foreign countries (Jiang, 2006). Many international corporations choose to establish joint ventures in China to benefit from the relationships and connections provided by Chinese partners.
Hypor felt that their key competitive advantages could only be achieved through a joint venture agreement with a Chinese-owned company. As mentioned earlier, backyard farming comprises 80 percent of the hog market in China and is a market whose needs are not being served by breeding companies. As believed by Hypor, a joint venture would effectively target backyard farming and would provide Hypor with a first mover advantage into this market. Also, by establishing this distribution channel, Hypor would be partnering with a successful local company, helping to build brand awareness through co-branding while developing business relationships. Hypor would also create a competitive advantage by targeting breeding farms at the top of the pyramid and by providing long-term technical support and advice to customers breeding their pigs. While competitors have in the past attempted to provide longer-term support to customers, none were successful.
Hypor’s choice for a partner in a joint venture settled on New Hope. A Chinese-based and owned company, New Hope specialized in the production of animal feed and dairy products (Asiamoney, 2005). They had expertise in swine nutrition, sales, and marketing networks with commercial pig producers, meat processing, and distribution centers with an established retail network across China (New Hope, 2006). New Hope would manufacture and supply pig feeds as well as provide the sales and marketing arm of the joint venture. New Hope would also establish and manage contracts for delivery of production sows and pig feed and purchase back the slaughter pigs for delivery to the slaughter plant. This arrangement seems to fit Hypor’s and New Hope’s needs because it allows for the combination of both companies’ strengths. New Hope gains access to valuable intellectual property whereas Hypor could focus on the nucleus and multiplication while getting feed at a preferred rate. This would dramatically reduce the chance of intellectual property theft and would limit New Hope’s participation in the genetics itself.
9 Hypor could then sell the pigs to New Hope at a preferred rate for slaughter and packaging and ship out to its established retail network.
Joint ventures and China
A joint venture is an entity fashioned between two or more parties in order to carry out economic activity together. The parties agree to create a new entity by both contributing equity, and they then share in revenues, costs, and control of the entity. International joint venture activity has been escalating in recent years, both in terms of frequency and strategic importance (Geringer and Hebért, 2001; Madhok, 2006). It has been recognized that joint ventures are appropriate vehicles to allow for better knowledge transfers between firms (Harrigan, 1984; Jiang, 2006).
It is also recognized that there is considerable dissatisfaction with the overall performance of joint ventures. However, this dissatisfaction is derived more from the limited way in which joint ventures tend to be evaluated than from a consideration of all the relevant information. That is, many evaluations of joint ventures emphasize the outcome of a collaboration and insufficiently address the inseparability of the desired outcome and the process used to establish a joint venture (Madhok, 2006). Parkhe (1993) argues that core concepts like trust, reciprocity, opportunism, and forbearance bear a great deal of responsibility towards the relational success of joint ventures. The social dimensions governing joint ventures are critical. However, ownershipcentered joint ventures tend to neglect social dimensions.
Conflict may arise in the establishment of a joint venture. Hierarchies clash as a result of shared ownership and divergent interests (Berg and Friedman, 1980; Harrigan, 1985; Porter and Fuller, 1986). Control is another concern for many firms investing in projects abroad. WFOE provides hierarchical fiat and more direct means of control (Williamson, 1975). It often creates a trust vacuum within a relationship. The need for more control is created by lack of information which in turn increases the risk perceived by partners (Ring and Van de Ven, 1992).
Stopford and Wells (1972) and Franko (1971) argue that market or product standardization approaches, which occur in mature markets where there is greater homogeneity of tastes and
10 harsher competition, are affected by pressures to lower both production and administrative costs through rationalization. Yet, these conditions do not necessarily support the viability of successful joint ventures. Product diversification or market expansion results in a higher tolerance for joint ventures since the focus is on resource complementarities. Economies of scope are likely to create favorable synergies between partners. First mover advantage is also enhanced by joint ventures when it is oriented towards markets of limited capacity (Mahoney and Pandian, 1992).
Trust is the belief in the improbability of violation of implicit or explicit agreements amongst partners (Bromiley and Cummings, 1993). A trustful relationship is not instantaneous but occurs over time. Creating a solid foundation of trust is a slow, time-consuming, and costly process (Ouchi, 1980; Jaeger, 1983; Ring and Van de Ven, 1992). Madhok (2006) points out that selfinterested behavior is scarce in a trust-centered relationship. He also argues that trust has two components which are structural and social, each of which strengthens the other. Both offer flexibility and efficiency within a joint venture. The structural dimension to a joint venture is based on resources shared. The structure of the joint venture itself is essential for the creation of the relationship.
Without social values, though, a relationship becomes inherently unstable. The social dimensions of a relationship are comprised of the value and nature of exchange within joint ventures. Social exchanges are at times not economically motivated. In such exchanges, resource swaps are normally not governed by explicit contractual provisions. Rather, resource sharing is conceived as a voluntary process based on principles of reciprocity (Gouldner, 1960). The emphasis is on long-term goals and objectives. At the core of the social dimensions of a joint venture are trust and power, which are often tested in times of uncertainty. Measurable variables are less apparent in uncertain environments and mutual trust becomes critical. Mutually-desired behavior occurs in a trust-centered relationship.
Power also plays a role in how social exchanges between firms in a joint venture act the way they do (Emerson, 1962). A firm is said to have power over its partner if the partner is in need of critical resources, or any other resource possessed by the other firm. Structurally, the ideal is to
11 create a mutual hostage situation between firms. Opportunistic behavior can be discouraged by imposing constraints that create costly alternatives to cooperative activity. From a social standpoint, adding value to the actual relationship should be favored over value depletion of the joint venture as a result of opportunistic behavior. Trust is nurtured through various forms of hard and soft commitments (Madhok, 2006). It is recognized that joint ventures are a mixture of contract and commitment (Cory, 1982). Familiarity is a means to embed communication within an international relationship that may lead to a joint venture. Understanding and heeding cultural variables are critical practices to success in foreign countries. Lack of familiarity with the business practices, social customs, and etiquette of a foreign country can weaken a firm's position in the market, prevent it from accomplishing its objectives, and ultimately lead to failure. Partner commitment and compatibility are key components of any joint venture relationship. Greater compatibility promotes the likelihood of a balance between inducements and contributions with temporary imbalances being mitigated by mutual trust (Madhok, 2006). Trust brings forth more tolerance among partnered firms. The critical initial phases are contractual, but trust and commitments sustain the relationship into the future.
At this point, some elements of a foreign business environment have to be considered. Teece (1998) suggests that knowledge transfer is successful in host countries where joint ventures rely on supporting infrastructures. Those infrastructures may include distribution channels and networks, available technology, information accessibility, local human capital, legal systems, and capacity for the host country to protect intellectual property. For many firms, the lack of intellectual property rights protection ranks as the single most significant threat to international competitiveness (Ilkka, 2001; Bird, 2006).
Research in international business suggests that cultural factors may also have a significant influence on the management styles of joint ventures and performance (Lu, 2006). These dysfunctional factors may lead to conflicting goals and distrust and could dissolve the joint venture. Cultural dimensions can erect significant barriers such as differences in supervision style, role stress, conflict resolution strategies, and decision-making habits (Hofstede, 1991).
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More specifically, China’s political and economical dimensions should also be considered. Central-local government relations are important concerns for any sizeable political and administrative system. In China, these relations are considered to be of tremendous value. They are of particular importance to China because of the country's large size, long administrative tradition, and regional disparities. The historical, geographical, cultural, economical, and language differences in various areas of China make it impossible for China to have "one-sizefits-all" national policies. China is perceived by foreigners as a country with a decentralized government structure and has over one hundred dialects. Based on the dominant role of governments in China, businesses strive to build a close guanxi with governments or officials. The powers granted to local authorities often lead to incessant local competition for special policy favors, more protection of local interests, and eventually more local control. In fact, in considering China's political history, many have suggested that China's five thousand years of civilized history could be described as a history of central-local duels for dominance, political power, and control over resources for economic development (Bo, 1991; Lan, 1998; Sun, 1995; Xin, 1995; Lan, 2003).
Discussion
Various challenges must be overcome when setting up a joint venture in China. Many firms have different strategies and customs when approaching international ventures. Figure 2 summarizes Hypor’s situation with New Hope in China.
Insert Figure 2 As was the case for the joint venture presented in this paper, it is imperative for partners to engage in discussions with strategic intents that are either compatible or complimentary (Madhok, 2006). Both Hypor and New Hope sought product diversification and market expansion and the focus was clearly on resource complementarities. Economies of scope were at the centre point of discussions as well. As mentioned earlier, these are likely to create favorable
13 synergies between partners. Again, as for this case, first mover advantage improved the prospects of the joint ventures since the entity was targeted at markets of limited capacity (Mahoney and Pandian, 1992).
As prescribed by the literature, the internal dimensions of a joint venture are divided between structural and social dimensions (Madhok, 2006). Contracts, information symmetries, control, and structural flexibility were identified as the main components of the structural dimensions of a joint venture. Contracts existed to initiate a transactional relationship. Information asymmetry occurs when all parties to a transaction have the same information. While this situation is improbable, the perception of equality between parties must be maintained to ensure that no power imbalances are perceived. If an uncertain environment triggers imbalances between parties, controls are put forth. With the Hypor and New Hope joint venture, meetings were scheduled on a monthly basis to ensure proper flow of information and knowledge.
Social dimensions include reciprocity, trust, opportunism, commitment, familiarity, and longterm focus. The joint venture between Hypor and New Hope was handled by individuals who were familiar with Chinese customs. They were fully aware that the process had to be relationship-focused, and not necessarily centred on outcomes. Based on the principle of reciprocity, trust becomes institutionalised. In Hypor’s case, there is evidence that trust led to reciprocical opportunism against competitors.
In addition to the basic characteristics we have discussed, the joint venture between Hypor Canada and New Hope carries certain advantages and disadvantages. On the one hand, partners enjoy the ability to obtain more capital through several investors instead of one, as in the case of a sole proprietorship, and also have the ability to obtain better management than the individual firm, due to the presence of two or more partners. The existence of two or more owners also reinforces some degree of specialization. Hypor Canada, for example, concentrates its efforts on marketing while New Hope devotes itself to problems of infrastructure and finance.
On the other hand, the disadvantages of the joint venture are related to the difficulty of raising large sums of money outside the partnership and the uncertain duration of the partnership. The
14 agreement will come to an end following the expiry of the term for which the partnership was established, or if the object for which the partnership was established is attained or becomes unattainable.
It is important to note that in the joint venture described in this paper, each partner is entitled to share in the profits of a business on an equal basis. This is true even if the original contributions of the partners were unequal, and the management of the business is in the hands of some partners to a greater extent than others. Hypor Canada furnished only skill and labor. New Hope built barns for the pigs and Hypor leased them. The two partners combined their capital and skills to achieve a common economic purpose.
The key findings of this research partially explain why Hypor Canada was successful in establishing an international joint venture in China. In addition, the findings may provide international managers with valuable inputs for developing a set of key criteria for the selection of a joint venture partner in China.
However, the study has a number of limitations. Firstly, the sample was limited to one case in swine genetics. The findings of this research may only be fully applicable for explaining joint venture operations in this particular area. Therefore, further research on joint ventures of international non-swine genetic firms and a comparison of dimensions presented in our conceptual model would be expedient and informative. The future study may also incorporate the most recent findings on the effectiveness of international joint ventures from a non-Canadian perspective, which should provide a more comprehensive conceptual framework for guiding practice and for further theoretical development in this area of research.
Conclusion
Considering the current economic structure and conditions of the world hog industry, we should expect to see more agreements in China similar to that of Hypor Canada and New Hope. Firms must use their resources and tools effectively and productively in order to address the pressures
15 of globalization in an increasingly competitive environment. In addition, firms must adapt to rapid advances in technology and marketing. Joint ventures are an alluring mode of entry into China but can become disastrous if the proper steps are not taken. Joint ventures are unique in that they are the only form of economic organization that requires maintaining a structural and social relationship in addition to concentrating on performance issues. Both successful and unsuccessful joint ventures show that it is important to know when to collaborate and when to compete. The government plays a key role in the Chinese business environment and actively supports a select group of individuals and officials. Firms seeking market share in China need to be aware of this reality and act to benefit from the possibilities that guanxi practices have to offer, while at the same time realizing that the Chinese paradigm is gradually shifting away from this model towards free market conditions.
While a foreign-based firm’s intent is primarily measured in terms of the extent to which it achieves its short- and long-term goals, two goals need to be worked towards in joint ventures: creating a favorable joint venture structure and maintaining a harmonious social relationship. One is never the substitute of the other, but is rather a necessary compliment of the other. While joint venture goals or purposes may move down in priority when relational problems occur between partners, the firms involved should never lose sight of the ultimate purpose for which they collaborated in the first place. Each need to express structural flexibility, ensure efficient flows of information, and input control measures to address momentary imbalances that could cause power shifts and mistrust. Ironically, the performance yardstick in joint ventures is often the amount of accomplished goals, as opposed to the level of relational harmony. The Hypor and New Hope agreement shows that a project needs to address both at once. Managers and marketers need to be aware of this and to consider both dimensions when assessing situations that may lead to a new joint venture.
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